As filed with the Securities and Exchange Commission on October 10, 2006
Registration No. 333-127192
==============================================================================
United States Securities and Exchange Commission
Washington, DC 20549
Form SB-2
Post-effective Amendment No. 1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FLEXPOINT SENSOR SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 3829 87-0620425
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
106 West Business Park Drive
Draper, Utah 84020
801-568-5111
(Address and telephone number of principal executive offices
and principal place of business)
Clark M. Mower, President
106 West Business Park Drive
Draper, Utah 84020
801-568-5111
(Name and address of agent for service)
Copies to:
Cindy Shy, Attorney
Cindy Shy, P.C.
P.O. Box 380-236
Ivins, Utah 84738
Telephone: 435-674-1282
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of these securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
Flexpoint Sensor Systems, Inc. hereby amends this registration statement on
such date or dates as may be necessary to delay its effective date until we
shall file a further amendment which specifically states that this
registration statement shall become effective in accordance with Section 8(a)
of the Securities Acts of 1933 or until the registration statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
ii
PROSPECTUS
SUBJECT TO COMPLETION
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| The information in this prospectus is not complete and may be changed. We |
| may not sell these securities until the registration statement filed with |
| the Securities and Exchange Commission is effective. This prospectus is |
| not an offer to sell these securities and it is not soliciting an offer to |
| buy these securities in any state where the offer or sale is not permitted.|
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FLEXPOINT SENSOR SYSTEMS, INC.
a Delaware corporation
8,092,670 shares of common stock
par value $0.001
We are registering 8,092,670 shares of our common stock. These shares
are presently owned by the selling stockholders named in this prospectus and
they will be sold by the selling stockholders.
We will not receive the proceeds from the sale of these common shares.
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Trading Symbol: OTC Bulletin Board
"FLXT"
Common stock prices as reported by the OTC Bulletin Board
on October 3, 2006, $1.37 high price and low price of $1.33.
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This investment involves a high degree of risk; you should review
the "Risk Factors" beginning on page 4.
______________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities,
or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
__________________
Prospectus dated October 6, 2006
1
TABLE OF CONTENTS
Prospectus Summary.......................................................3
Risk Factors.............................................................4
Use of Proceeds..........................................................7
Market for Common Equity.................................................7
Description of Business..................................................9
Property................................................................16
Legal Proceedings.......................................................16
Management's Discussion and Analysis....................................17
Management..............................................................23
Executive Compensation..................................................24
Certain Related Transactions............................................25
Principal Stockholders..................................................25
Description of Common Stock.............................................27
Selling Stockholders....................................................27
Plan of Distribution....................................................32
Other Information.......................................................33
Interest of Named Experts and Counsel................................33
SEC's Position on Indemnification for Securities Act Liability.......33
Additional Information...............................................34
Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................34
Financial Statements Index..............................................35
2
PROSPECTUS SUMMARY
Flexpoint Sensor Systems, Inc.
106 West Business Park Drive
Draper, Utah 84020
801-568-5111
THE COMPANY
Flexpoint Sensor Systems, Inc. is a development stage company engaged
principally in designing, engineering and manufacturing Bend Sensor(R)
technology and equipment. Our planned operations have not commenced and our
activities primarily include acquiring equipment and technology, organizing
activities, obtaining financing and seeking manufacturing contracts. We
emerged from Chapter 11 bankruptcy on February 24, 2004 and since that time we
have leased a manufacturing facility, purchased necessary equipment to
establish a production line, negotiated contracts, manufactured Bend Sensor(R)
technology devices and conducted testing on those devices. Our goal is to
qualify this production line and facility as an ISO/TS 16949 production line
and facility by the end of 2006. This qualification will increase the
marketability of our products to automotive parts suppliers.
THE OFFERING
We are registering 8,092,670 shares of common stock to be sold by the selling
stockholders who are listed on page 27. Of these shares, 3,356,335 shares
will be issued to the selling stockholders upon the exercise of warrants at
some future date. The selling stockholders may sell the shares from time to
time in their total discretion. See "Plan of Distribution" starting on page
32 for further details about the possible methods of sale which may be used by
the selling stockholders.
Shares of common stock outstanding as of September 26, 2006 23,292,887
Shares of common stock to be registered 8,092,670
Common stock outstanding after the offering (assuming 26,649,222
the warrants are exercised and the underlying shares
are sold.)
3
In this prospectus references to "Flexpoint Sensor," "we," "us," and "our"
refer to Flexpoint Sensor Systems, Inc. and its subsidiaries.
RISK FACTORS
Potential investors should carefully consider the following risk factors
before deciding to buy our common stock. Each investor should also consider
the other information in this prospectus. Investing in our common stock
involves a high degree of risk and you should not invest in our common stock
unless you can afford to lose your entire investment.
RISKS RELATED TO THE OFFERING AND OUR STOCK PRICE
We have not paid cash or stock dividends on our common stock and this may
discourage potential investors from purchasing our shares.
Potential investors should not anticipate receiving dividends from our common
stock. We intend to retain future earnings to finance our growth and
development and do not plan to pay cash or stock dividends. This lack of
dividend potential may discourage potential investors who are seeking higher
returns on their investments through dividends from purchasing our common
stock. This lack of interest from potential investors seeking dividend
returns may decrease the pool of investors in the market for the common stock
being sold by the selling stockholders.
The liquidity of our common stock may be very limited and affected by its
limited trading market. The OTC Bulletin Board market is an inter-dealer
market much less regulated than the major exchanges, and is subject to abuses
and volatilities and shorting. There is currently no broadly followed and
established trading market for our common stock. An established trading market
may never develop or be maintained. Active trading markets generally result in
lower price volatility and more efficient execution of buy and sell orders.
Absence of an active trading market reduces the liquidity of the shares traded
there.
The trading volume of our common stock may be limited and sporadic. As a
result of such trading activity, the quoted price for our common stock on the
OTC Bulletin Board may not necessarily be a reliable indicator of its fair
market value. In addition, if our shares of common stock cease to be quoted,
holders would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, our common stock and as a result, the
market value of our common stock likely would decline.
The future sale of the registered common stock may negatively affect our
stock price and you may be unable to resell your common stock at or above
the price you paid for it.
The market price of our common stock could drop as a result of sales of the
registered shares in the market, or the perception that such sales could
occur, after the effective date of this registration statement. We are
registering 8,092,670 shares of common stock and if the selling
stockholders attempt to sell their shares into the market at the same time,
this could drive down the market price of our common stock. A drop in the
market price for our common stock may make it more difficult for us to raise
funds through future offerings of our common stock.
Investors may have difficulty selling our common stock due to a limited
market and the "penny stock" rules.
Our common stock is traded on the OTC Bulletin Board and there has not been a
large public market for our common stock. We do not know the extent to which
investor interest in our stock will lead to the development of an active
trading market for our stock, or how liquid that market might be. Also, our
common stock qualifies as a "penny stock" under the Penny Stock Suitability
Reform Act of 1990 based on its market value and our net tangible assets. The
liquidity of penny stock is affected by specific disclosure procedures that
must be followed by all broker and dealers related to a penny stock
transaction. The rules require delivery by brokers and dealers of a
disclosure schedule before any transaction in a penny stock. The broker and
dealers must determine the suitability of the stock for a particular customer
and obtain a written agreement from the customer to purchase the stock. The
SEC recently
4
adopted new regulations which will require a two-business day delay prior to
execution of a trade in a penny stock by a broker and dealer. These
additional requirements affect the timing of purchases and sales by investors.
RISKS RELATED TO OUR BUSINESS
We have a history of losses and may never become profitable.
We are unable to fund our day-to-day operations from revenues and the lack
of revenues for continued growth may cause us to delay our business plans.
For the six months ended June 30, 2006, we incurred a net loss of $1,451,490
and had negative cash flows from operating activities of $800,238. For the
year ended December 31, 2005, we incurred a net loss of $1,770,020 and had a
negative cash flow from operating activities of $1,473,763. However at June
30, 2006 we have net working capital of $1,358,859, primarily from proceeds
from our private placement in March of 2005. We anticipate that revenues will
not increase until early 2007. In addition, if we decide to expand our
business activities outside the automotive market, we anticipate needing more
than approximately $1,000,000 in additional funding.
If our sales do not develop as projected it will be difficult to reduce
expenditures in the short term.
A significant portion of our expenses will be fixed in advance based in large
part on overhead and manufacturing costs. If our actual sales are below
expectations, any shortfall may be magnified by our inability to adjust
spending to compensate for the shortfall. Therefore, a shortfall in sales
revenues would have an immediate adverse affect on our business and financial
condition. In addition, we plan to increase operating expenses to fund
additional sales and marketing, general and administrative activities and
infrastructure. To the extent that these expenses are not accompanied by an
increase in revenues, it may result in the delay or discontinuance of our
business operations due to lack of funding.
We may not have adequate experience to successfully manage anticipated
growth.
In January 2005 we restructured our management team and brought in an
experienced group of executive level management personnel to direct the growth
of our business operations. However, we may not be equipped to successfully
manage any future periods of rapid growth or expansion, which could be
expected to place a significant strain on our managerial, operating, financial
and other resources. Our future performance will depend, in part, on our
ability to manage growth effectively, which will require us to:
.. improve existing and implement new financial controls and systems,
management information systems, operating, administrative, financial and
accounting systems and controls,
.. maintain close coordination between engineering, programming, accounting,
finance, marketing, sales and operations, and
.. attract and retain additional qualified technical and marketing personnel.
There is intense competition for management, technical and marketing personnel
in our industry. The loss of the services of any of our key employees or our
failure to attract and retain additional key employees could have a material
adverse effect on our ability to continue as a going concern.
We may not have adequate manufacturing capacity to meet anticipated
manufacturing contracts.
Based on projected business development, we will need to complete a second
production line and have it installed and approved in 2008. The second
manufacturing line is expected to result in increased manufacturing capacity
and manufacturing efficiencies. We have completed installation of our first
production line and are in the process of qualifying our own manufacturing
facility for ISO/TS-16949 certification. However, we cannot assure you that
we will satisfy ISO/TS-16949 qualification or that the production lines
will produce product in the volumes required or that the production lines will
satisfy the requirements of our customers.
5
Our success is dependent on our intellectual property rights which are
difficult to protect.
Our future success depends on our ability to protect our intellectual
property. We use a combination of patents and other intellectual property
arrangements to protect our intellectual property. There can be no assurance
that the protection provided by our patents will be broad enough to prevent
competitors from introducing similar products or that our patents, if
challenged, will be upheld by courts of any jurisdiction. Patent infringement
litigation, either to enforce our patents or defend ourselves from
infringement suits, would be expensive and, if it occurs, could divert our
resources from other planned uses. Patent applications filed in foreign
countries and patents in these countries are subject to laws and procedures
that differ from those in the U.S. and may not be as favorable to us. We also
attempt to protect our confidential information through the use of
confidentiality agreements and by limiting access to our facilities. There
can be no assurance that our program of patents, confidentiality agreements
and restricted access to our facilities will be sufficient to protect our
confidential information from competitors.
Research and development may result in problems which may become
insurmountable to full implementation of production.
Customers request that we create prototypes and perform pre-production
research and development. As a result, we are exposed to the risk that we may
find problems in our designs that are insurmountable to fulfill production.
In that event, we will be unable to recover the costs of the pre-production
research and development. However, we are currently unaware of any
insurmountable problems with ongoing research and development that may prevent
further development of an application.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss
of investor confidence in our reported financial information.
Pursuant to proposals related to Section 404 of the Sarbanes-Oxley Act of
2002, beginning with our Annual Report on Form 10-KSB for the fiscal year
ending December 31, 2008, we will be required to furnish a report by our
management on our internal control over financial reporting. If we cannot
provide reliable financial reports or prevent fraud, then our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
In order to achieve compliance with Section 404 of the Act within the
prescribed period, we will need to engage in a process to document and
evaluate our internal control over financial reporting, which will be both
costly and challenging. In this regard, management will need to dedicate
internal resources, engage outside consultants and adopt a detailed work plan.
During the course of our testing we may identify deficiencies which we may not
be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404. In
addition, if we fail to achieve and maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue recognition, are
necessary for us to produce reliable financial reports and are important to
helping prevent financial fraud.
RISKS RELATED TO OUR INDUSTRY
Our products must satisfy governmental regulations in order to be
marketable
During the past several years, the automotive industry has been subject to
increased government safety regulation. Among other things, proposed
regulations from the National Highway Transportation and Safety Administration
required automakers to incorporate advanced air bag technology into vehicles
beginning in 2005 with the phase-in to be completed by 2008. Our products may
not meet the proposed National Highway Transportation and Safety
Administration standards or the standards may be modified. These proposals
call for upgraded air bag system performance tests for passenger cars and
light trucks. The new testing requirements are intended to improve the safety
of infants, children and out-of-position adults, and maximize the protection
of properly seated adults. The National Highway Transportation and Safety
Administration tests are similar to conditions that we have already been
6
using to test our Seat Mat System and we believe that our Seat Mat System will
meet the standards as proposed. In addition, automakers may react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments in new technology, including our Bend Sensor(R)
technology, until final regulatory action is taken. We cannot predict what
impact, if any, these proposals or reforms might have on our financial
condition and results of operations.
Because we are significantly smaller than the majority of our
competitors, we may lack the financial resources needed to capture
increased market share.
The market for sensor devices is extremely competitive, and we expect that
competition will intensify in the future. There can be no assurance that we
will be able to compete successfully against current or future competitors or
that competitive pressures we face will not materially adversely affect our
business, operating results or financial condition. Our primary competitors
in the air bag market are International Electronics and Engineering, Siemens,
Robert Bosch GmbH, Denso, Inc., Breed Technologies, TRW Automotive, Delphi
Corporation, Autoliv Inc., Takata and Temic. We believe that none of our
competitors have a product that is superior to our(R) technology at this time.
However, many of our competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships than we do. These competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products and markets
than we can.
Ongoing industry consolidation among worldwide automotive parts suppliers
may limit the market potential for our products.
In the automotive parts industry, there is a trend of consolidation through
business combinations and acquisitions of complementary technologies among
worldwide suppliers as these suppliers seek to build stronger customer
relationships with automobile manufacturers. Automobile manufacturers look to
Tier 1 suppliers (major suppliers) to provide fully engineered systems and
pre-assembled combinations of components rather than individual components.
This trend of consolidation of suppliers may result in fewer Tier 1 suppliers
and thus limit the marketing opportunities for our Bend Sensor(R) technology.
In addition, in recent months large U.S. auto makers have announced plans
to close plants and reduce their work force, some Tier 1 suppliers are in
bankruptcy or in financial difficulty, and two automobile manufacturers have
reported increased financial difficulties. These industry trends may limit
the market for our products.
FORWARD-LOOKING STATEMENT NOTICE
When used in this prospectus, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934 regarding events, conditions, and financial trends that may affect
Flexpoint Sensor's future plans of operations, business strategy, operating
results, and financial position. Persons reviewing this prospectus are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and actual results may
differ materially from those included within the forward-looking statements as
a result of various factors.
USE OF PROCEEDS
We are registering the shares for the benefit of the selling stockholders and
the selling stockholders will receive all of the proceeds from the sales. We
will pay the costs of this offering with the exception of the costs incurred
by the selling stockholders for their legal counsel and the costs they may
incur for brokerage commissions on the sale of their shares.
7
MARKET FOR COMMON EQUITY
MARKET INFORMATION
Our common stock is listed on the National Association of Securities Dealers
(NASD) OTC Bulletin Board under the symbol "FLXT." Pursuant to our bankruptcy
reorganization plan we effected a 7-to-1 reverse split effective March 5,
2004. The following table lists the range for the high and low bid prices of
our common stock for each quarter for the years ended December 31, 2004 and
2005, and the six month period ended June 30, 2006, as reported by the OTC
Bulletin Board. The price ranges prior to March 5, 2004 are adjusted to
account for the reverse. Over-the-counter market bid quotations reflect
inter-dealer prices, without retail mark-up, mark-downs or commissions, and
may not necessarily represent actual transactions.
Fiscal Quarter Ended High Low
--------------------- -------- -------
March 31, 2004 $ 2.20 $ 0.63
June 30, 2004 2.30 1.30
September 30, 2004 1.90 1.30
December 31, 2004 2.00 1.40
March 31, 2005 $ 2.09 $ 1.50
June 30, 2005 1.92 1.40
September 30, 2005 2.52 1.45
December 31, 2005 2.67 1.60
March 31, 2006 $ 2.22 $ 1.54
June 30, 2006 2.31 1.56
Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and
Exchange Act, commonly referred to as the "penny stock" rule. The rule
provides that any equity security is considered to be a penny stock unless
that security is:
.. Registered and traded on a national securities exchange meeting specified
criteria set by the SEC;
.. Issued by a registered investment company; or
.. Excluded from the definition on the basis of share price or the issuer's
net tangible assets.
These rules may restrict the ability of broker or dealers to trade or maintain
a market in our common stock and may affect the ability of shareholders to
sell their shares. Broker or dealers who sell penny stocks to persons other
than established customers and accredited investors must make a special
suitability determination for the purchase of the security. Accredited
investors, in general, include individuals with assets in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 together with their spouse,
and certain institutional investors.
The rules require the broker or dealer to receive the purchaser's written
consent to the transaction prior to the purchase and require the broker or
dealer to deliver a risk disclosure document relating to the penny stock prior
to the first transaction. A broker or dealer also must disclose the
commissions payable to both the broker or dealer and the registered
representative, and current quotations for the security. Finally, monthly
statements must be sent to customers disclosing recent price information for
the penny stocks.
HOLDERS
As of September 26, 2006, we had approximately 471 stockholders of
record of our common stock, which does not include stockholders of "street
accounts" of securities brokers.
DIVIDENDS
We have not paid cash or stock dividends and have no present plan to pay any
dividends. We intend to retain any earnings to finance the operation and
expansion of our business and the payment of any cash dividends on our common
stock is unlikely. However, our board of directors may revisit this matter
from time to time and may determine our earnings, financial condition, capital
requirements and other factors allow the payment of dividends.
8
DESCRIPTION OF BUSINESS
HISTORICAL DEVELOPMENT
Flexpoint Sensor Systems, Inc. was incorporated in the state of Delaware in
June 1992 as Nanotech Corporation. In April 1998, Nanotech acquired
Sensitron, Inc., a Utah corporation ("Sensitron"), as a wholly-owned
subsidiary through a reverse triangular merger. Nanotech also acquired
Sensitron's wholly-owned subsidiary, Flexpoint, Inc. As part of this
acquisition, Nanotech changed the company name to Micropoint, Inc. In July
1999 Micropoint changed its name to Flexpoint Sensor Systems, Inc.
Flexpoint Sensor was forced to seek bankruptcy protection on July 3, 2001, and
we filed a voluntary petition for reorganization pursuant to Chapter 11 of the
United States Bankruptcy Code. (See "Legal Proceedings," below). On
February 24, 2004, the bankruptcy court confirmed our Plan of Reorganization.
As a result of our reorganization, we are now a development stage company with
a date of emergence from bankruptcy of February 24, 2004. We used fresh-start
reporting and all assets of Flexpoint Sensor Systems, Inc. were restated to
reflect their reorganization value, which approximated the fair value at the
date of reorganization.
The bankruptcy reorganization plan resulted in a 7-to-1 reverse stock split
that was effective March 5, 2004. All share and per share amounts presented
in this prospectus reflect the reverse split. The reorganization plan
resulted in discharged debt of $7,123,213, which included the issuance of
13,822,331 shares of stock for creditor claims and conversion of $1,500,000 of
notes payable and the cancellation of 828,571 shares of common stock issued or
issuable to an officer during 2001. Options, warrants or executory contracts
for acquisition of any common shares entered into prior to our petition for
bankruptcy protection were canceled upon confirmation of the reorganization
plan. Outstanding preferred stock and super-voting preferred stock were also
canceled upon confirmation.
On March 31, 2004, Flexpoint Sensor entered into an asset purchase agreement
with Flexpoint Holdings, LLC. The agreement provided that Flexpoint Sensor
acquire substantially all of Flexpoint Holdings' equipment and proprietary
technology. We paid consideration of $963,000, which included $265,000 in
cash and assumption of a $698,000 convertible note payable, and issued common
shares valued at $1,931,309 for assets with a fair value of $4,302,643. (See
"Management's Discussion and Analysis . . . - Asset Purchase," below)
BUSINESS OVERVIEW
We are a development stage company principally engaged in designing,
engineering, and manufacturing sensor technology and equipment using flexible
potentiometer technology. We are actively seeking financing and
manufacturing contracts for the use of design and engineering of Bend
Sensor(R) technology and equipment using a flexible potentiometer technology.
In early 2005 we completed a private placement offering of units and issued
2,836,335 shares of common stock and warrants to purchase 2,836,335 shares of
common stock at $3.00 per share. (See "Management's Discussion and Analysis .
.. . - Liquidity and Capital Resources," below, for information about the
units). We realized net proceeds of approximately $ 3.9 million which we have
used to fund our ongoing operations. In prior years, our operations have
been minimal or limited due to bankruptcy. Since confirmation of our
bankruptcy reorganization plan in March 2004 we have been negotiating
contracts, manufacturing Bend Sensor(R) technology devices and have further
developed our technologies. We have completed installation of our first
production line and plan to begin installation and qualification of a TS-16949
production line and facility in 2006.
PRODUCTS
Bend Sensor(R) Technology
Sensitron owns the rights to our Bend Sensor(R) technology, which is a
flexible potentiometer bend sensor product consisting of a coated substrate,
such as plastic, that changes electrical conductivity as it is bent.
Electronic systems can connect to this sensor and measure with fine detail the
amount of bending or movement that occurs. Certain applications of the Bend
Sensor(R) potentiometer have been patented (See "Patents and Intellectual
Property," below).
9
A typical potentiometer functions through the means of metal contacts swiping
or rubbing across a resistive element. Our Bend Sensor(R) potentiometer is a
single layer with no mechanical assembly that makes it more reliable and
significantly smaller and lighter in weight than mechanical potentiometers.
Management believes many sensor applications can be improved using our
technology and the use of our technology will result in new products and new
sensor applications.
We have developed the following applications for the Bend Sensor(R)
technology:
Pedestrian Detection Sensor
Management's informal survey has estimated that throughout the European Union
Countries more than 6,000 accidental pedestrian deaths and 155,151 injuries
occur annually. In 2003, the European Parliament and the Council of the
European Union published a Directive on pedestrian protection to reduce the
number of pedestrian deaths and injuries. All new 2005 vehicles must comply
with special tests demonstrating they meet standards protecting pedestrians
against head and leg injuries in accidents. In 2010, two additional stringent
tests will be imposed.
We have developed a Pedestrian Impact Detection system that we believe will
meet the requirements for cars in Europe. Four separate automotive
suppliers/original equipment manufacturers are testing the Bend Sensor(R)
device for use in pedestrian impact detection. Thus far, testing has shown
that the Bend Sensor(R) device is able to detect impact with a human leg and
in the event of an accident, trigger a safety response. The device is also
capable of determining the difference between a human leg and a steel post and
can therefore alter the automobile's response based on the appropriate safety
response. The automobile response can include raising the hood or
deploying an external air bag. We believe the Bend Sensor(R) device's
advantages over the competition include reliability, accuracy, and lower
costs. Our sensors have gone through several years of testing for this
application.
In October 2005 we completed the initial stage of testing for the
Pedestrian Impact Detection system with Tier One suppliers and confirmed the
system's ability to distinguish within milliseconds between a human leg and an
inanimate object. The second testing phase will consist of narrowing the
specific materials and applications that will be used in the final
manufacturing process and testing to ensure the system's accuracy and
capabilities.
During the second quarter of 2006 we have focused our efforts on third party
testing of our technology as required in our protocol for Stage II development
of our technology. In June 2006 we announced our Pedestrian Impact Detection
System was tested by MGA Research and this research confirmed results of our
internal testing. This system is placed in the vehicles' front bumper to
detect crash impact. Within milliseconds of contact, the system can
differentiate between a human leg and an inanimate object and trigger a safety
response in accordance with the manufacturer's specifications.
We also announced that we had entered into a cooperative testing agreement
with Faurecia Automotive ("Faurecia") in June 2006. Faurecia is the second
largest automotive supplier in Europe and it supplies components to large
automotive manufacturers, such as BMW, Toyota, Ford, Daimler-Chrysler and
others. This agreement will allow both companies to use their resources,
knowledge and capabilities to develop a working prototype of the Pedestrian
Impact Detection System.
Medical Bed
We currently have working prototypes of beds for use in medical applications.
The electronics of the bed are able to record, based on our Bend Sensor(R)
technology input, the position of the person on the bed and how they are
moved. The bed has the ability to roll the person left or right to remove
pressure areas as well as facilitate dressing changes. Using our sensor
technology on each of the individual chambers of the bed allows an accurate
automatic profile mapping of the position of the person and immediately
identifies the high pressure zones. This allows needed adjustments to be made
to meet the required standards of care and comfort. Adjustments are also
programmable for customized patient care and may be recorded for
administrative use at later dates.
10
Our Bend Sensor(R) Technology allows the medical bed to read all
information by measuring minute changes in surface deflection. These
measurements are correlated and calibrated with intra-compartmental air
pressure changes to determine variances in surface pressure where the
patient's body is in contact with the mattress. Competitors' products use
random adjustments and blindly move pressure zones. Management believes this
application of our technology is sufficiently unique to provide a major source
of revenue.
On September 28, 2005, Flexpoint Sensor Systems, Inc. entered into a
manufacturing agreement with R&D Products, LLC, a Utah limited liability
company, doing business in Midvale, Utah. For the purpose of this contract,
management considers R&D Products to be a related party because a controlling
member of R&D products, LLC is also a non-controlling interest shareholder of
Flexpoint Sensor. R&D Products has developed a mattress with multiple air
chambers that use Bend Sensors(R) and we agreed to manufacture the Bend
Sensors(R) for the mattresses. The initial term of the agreement is for a
period of five years and the term will renew automatically for one or more
successive one-year terms, unless either party provides written notice of
non-renewal. The unit prices will be adjusted on an annual basis to reflect
industry standard price changes. The initial order was for 30,000 Bend
Sensors(R) to be used to begin manufacture of 1,000 mattresses. The
realization of the manufacturing and sales of the Bend Sensors(R) is dependent
upon R&D Products selling either their bed directly to customers or licensing
their technology to a third party. There are no guarantees the R&D Products
will complete sales in such quantities to meet the demands of this contract.
R&D Products will deliver purchase orders for the Bend Sensors(R) to us and
may inspect the production of the Bend Sensors(R). In addition, both parties
have agreed to maintain the confidentiality of proprietary information
obtained from each other. The agreement may be terminated by either party for
breach of the agreement by the other party or dissolution of the other entity.
The rights under the agreement cannot be assigned without prior written
consent from the other party.
In December 2005 R&D Products reached a manufacturing agreement with Powin
Corporation to mass produce the medical "SmartBed." Powin Corportion
dedicated an 80,000 square foot manufacturing facility to manufacture the
SmartBed. The SmartBed is a pressure neutralizing bed using our Bend
Sensor(R) Technology to precisely identify areas of the body where high
pressure skin contact is most vulnerable and redistributing pressure when and
where needed. Our Bend Sensor(R) Technology allows the SmartBed to read all
information by measuring minute change in surface deflection. These
measurements are correlated and calibrated with intra-compartmental air
pressure changes to calculate variances in surface pressure where the
patient's body is in contact with the mattress.
Our production of the medical bed has been delayed as a result of waiting for
a final design and configuration of the medical bed from R&D Products.
Flexpoint is prepared to produce the sensors under the terms of the agreement
as soon as R&D Products determines the final design and configuration of the
bed.
Air Bag Applications
Automakers and regulators agree that smart air bag systems are the solution to
the rising concerns over the deaths of children and small adults by air bags.
Smart air bag systems are those that can detect not only the presence of a
seat occupant, but also the size and positioning of the seat occupant. This
data is used to tailor the speed and force of the air bag deployment to the
seat occupancy conditions at the time of impact. Reliable analog seat sensors
such as our Bend Sensor(R) technology are a key component of a smart air bag
system.
We have developed an Occupant Classification System that uses a series of
sensors in an automobile seat to sense whether an object on a seat is a human
being and whether it is a child or an adult. By automatically sensing and
correctly categorizing a car's passengers, our sensors can distinguish between
an object, an infant car seat, a child or an adult passenger. This
classification system is capable of deactivating an air bag when a person
under 60 pounds or a car seat is in the seat. This allows the air bag to
deploy in a fashion so as to improve the safety of the passenger.
Management's informal survey of this market has found that the market
opportunity for these applications is substantial considering an annual market
of 19,000,000 vehicles in North America and 50,000,000 worldwide. We are in
discussions with a Tier 1 supplier for implementation of this device. We will
continue to work with this Tier 1 supplier to make sure that we meet all
requirements set forth by the government for the device.
11
The Passenger Presence Detection system is used to detect if there is any
object in the front passenger seat. This device could be used widely in the
European market because there are specific requirements for this type of
device in Europe. We are currently working with three Tier 1 suppliers on
this application. This device could also be used as a seat belt reminder with
a potential market of 17,000,000 vehicles per year.
We have developed a crash sensor, which is a series of sensors mounted in
strategic places on the side and door panels to detect an impact, as well as
the speed, direction and force of the impact. This allows an onboard computer
to deploy side air bags where needed.
Flow Control Applications
Our flexible sensor has proven to be an extremely robust and durable flow
control switch. The Bend Sensor(R) product allows for the measurement of
liquid and air flow, and has been tested to over 35 million cycles without
failure. When the Bend Sensor(R) device is placed in a flow stream, it can
measure if flow is occurring, or it can measure the amount of flow that is
occurring. The fact that our design incorporates a single layer design allows
for it to operate in many harsh environments. While other technologies are
affected by dirt, dust, and liquids, the Bend Sensor(R) product is able to
operate under these conditions. We are currently working with a number of
customers on various flow type applications.
Humidity Sensor
We have developed a new version of our patented Bend Sensor(R) technology.
This sensor has proven to function as a very accurate and low cost humidity
sensor. Environmental chamber testing has been performed from 0% relative
humidity to 100% relative humidity at a wide range of temperatures.
Throughout all of the environmental conditions that the sensors have been
exposed to, they have continued to correlate very accurately to humidity
levels. The resistance value of the Bend Sensor(R) changes in direct response
to changes in humidity. We expect to begin marketing this new product upon
completion of qualification testing.
Other Applications
Management believes the potential market for our technology includes using the
technology to replace or upgrade devices used in industrial control systems,
medical equipment and instrumentation, computer peripherals, automotive
transmission equipment, commercial vending equipment and other devices. We
have developed, or are developing:
.. a vibration sensor,
.. a steering wheel position device that communicates to an automobile
onboard computer the amount of rotation of the steering wheel to assist
the computer in stabilizing control over the vehicle, and
.. sensing devices for medical equipment.
We intend to further identify applications of our technology in numerous
fields and industries. A core sales strategy is to seek applications of our
technology for products used by customers that emphasize functionality,
reliability, quality, and user convenience.
BUSINESS STRATEGY
Management believes that our future success will depend upon our ability to
coordinate our product design, manufacturing, distribution and service
strategies in a long-term business model. One sales strategy is to offer a
line of standard sensor products with corresponding hardware and software to
facilitate ease of implementation of our technology into a customer's system.
The standard product line is expected to be sold directly to the customer and
through manufacturer's representatives and distributors. We will seek to
expand our product offering to include substantially complete value-added
assemblies. We will also continue to consider licensing or partnership
arrangements. We anticipate selling primarily to original equipment
manufacturers initially in the United States and eventually worldwide. For
the international customers, we plan to contract, sell and distribute our
products through various manufacturer representatives and distributors.
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Since our intended customers are typically technology companies, the design
phase of the sales cycle is extremely important. We anticipate that the
original equipment manufacturers will typically approach us with a conceptual
product and request that we produce a prototype. The prototype will then be
tested in the environment in which the ultimate product will be placed.
During this process, customer contact with our application engineers and
internal sales support individuals will be critical for a successful design to
result.
In the long term, we will attempt to add value by expanding our sensor product
line through licensing, strategic agreements, and/or acquisition of other
entities. It is anticipated that such diversification of sensor products will
enhance our ability to offer sensor "system" solutions to our customer.
Eventually, by adding circuit boards, enclosures, etc., management expects to
move toward a more extensive product line. These product lines, when
combined, could create a much larger value added profit margin. There is,
however, no assurance that such profit margins will be achieved.
MARKETING AND SALES
We intend to market our products primarily to original equipment manufacturers
("OEM's"), either directly or through Tier 1 suppliers. Our primary marketing
objectives are to generate demand for our products, enhance name recognition
and support OEM's. We believe that the successful use of our products by
OEM's will create additional demand for a higher quantity of existing
products. We also anticipate that the success of our existing products will
allow us to successfully introduce new products to the market.
We intend to support OEM's through our network of sales representatives and
our in-house sales force. We have one in-house sales representative and
intend to develop sales representative networks in the Midwest where the major
industrial controls manufacturers are located. We will also seek to generate
interests and explore additional applications to our technology through
attendance and participation at trade shows and publicity in trade magazines.
We believe that our relationship with OEM's will be an important part of our
overall sales strategy. We believe that the OEM's will initiate purchase
orders for our products. In the early stage of this strategy, we likely will
be dependent on a few OEM's and if we lose their business it will have a
significant adverse effect on our results of operations until alternative
distribution channels can be established. We may consider contractual
commitments to OEM's in exchange for fees and royalties. In addition, because
we do not sell directly to end users, we are dependent, in part, on the OEM's
for information about retail product sales. Accordingly, any rapid cessation
of purchases or a switch to other companies' products by end users may not be
immediately evident to us, and could result in increased product returns.
We intend to develop a field sales force including direct marketing employees
in strategic areas and manufacturer's representatives nationwide to generate
OEM customers. As our market grows in the United States, we anticipate
expanding our distribution network throughout the world. There can be no
assurance that we will be successful in developing such a sales force or in
expanding our distribution network.
License and supply arrangements, such as those discussed above, create certain
risks for us, including:
.. Reliance for sales of products on other parties, and, therefore, reliance
on the other parties' marketing ability, marketing plans and
credit-worthiness;
.. If our 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 Flexpoint Sensor and its subsidiaries;
.. We may have only limited protection from changes in manufacturing costs
and raw materials costs; and
.. If we are reliant on other parties for all or substantially all of our
sales, we may be limited in our ability to negotiate with such other
parties upon any renewals of their agreements.
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MANUFACTURING AND DISTRIBUTION
Automobile manufacturers and Tier 1 suppliers require all manufactured parts
to be used in their automobiles to be manufactured in ISO/TS-16949 certified
facilities. IS0/TS-16949 is a Quality Management System that contains the
particular requirements for the application of ISO 9001:2000 for automotive
production and relevant service part organization. TS-16949 is based on ISO
requirements 9001:2000 , but it contains additional requirements that are
particular to the automotive industry. These additions are considered
automotive "interpretations" by the ISO community of accreditation bodies and
registrars. TS-16949 is a common supplier quality standard for
DaimlerChyrsler Corporation, Ford Motor Company and General Motors
Corporation. TS-16949 applies to suppliers of production materials,
production and service parts, heat treating, painting and plating and other
finishing services. It does not, therefore, apply to all suppliers of the big
three automotive companies.
TS-16949 certification is necessary to assure potential customers that we have
the ability and resources to meet the quantities demanded in a purchase
agreement and that we are able to uphold the quality standards required for
consideration as an automotive supplier. We are in the process of qualifying
our own manufacturing facility for TS-16949, but we determined that it was
necessary that we had the required manufacturing capabilities now. As a
result, in February 2005 we entered into a Cooperative Agreement with The
Bergquist Company, a Minnesota corporation that is a qualified automotive
manufacturer. The agreement provides that the companies will cooperate with
one another to produce Bend Sensor(R)technology applications for the
automotive industry. This cooperative agreement provides us with the means to
deliver a finished product to market.
Under the terms of the Bergquist agreement neither company will grant licenses
to the other for their own intellectual property, nor is either company
obligated to rely on the other for production or technology. Flexpoint Sensor
may produce any production contract or may give Bergquist a reasonable
opportunity to provide a bid for the production contract. Bergquist may offer
Flexpoint a reasonable opportunity to provide a bid for technology for one of
its production contracts. The cooperative agreement has a two year term, but
may be extended for a successive one year period at Flexpoint Sensor's option.
COMPETITION
The sensor business is highly competitive and competition is expected to
continue to increase. We will compete directly with firms that have longer
operating histories, more experience, substantially greater financial
resources, greater size, more substantial research and development and
marketing organizations, established distribution channels and are better
situated in the market. We do not have an established customer base and are
likely to encounter a high degree of competition in developing a customer
base.
To management's knowledge, technology similar to our technology is currently
in production by other competitors. Management believes that our products will
be sufficiently distinguishable from the existing products so that it will not
compete directly with existing sensor products. Certain force transducer
sensors and fiber optic sensors are comparable to our Bend Sensors(R)
technology; however, management believes that the force transducer sensor is
not as reliable as our Bend Sensor(R) technology and that the fiber optic
sensors are not as cost effective as our Bend Sensor(R) technology. As this
new area grows, additional manufacturers may attempt to introduce similar
products and competition could intensify.
In the medical electronics field, our competitors are the numerous
potentiometer manufacturers. In the auto seat field our competitors are the
numerous capacitive, piezo, infrared, fsr and ultrasonic sensor manufacturers.
Such competitors may use their economic strength and relationships to
influence the market to continue to buy their existing products. One or more
of these competitors could use their resources to improve their current
products or develop new products that may compete more effectively with our
products. New competitors may emerge and may develop products and
capabilities which compete directly with our products. No assurance can be
given that we will be successful in competing in this industry.
14
We intend to compete by offering products that have enhanced features, ease of
use, compatibility, reliability, comparable price, quality and support.
Management also believes our intellectual property provides an advantage over
our competitors. Although management believes that our products will be well
received in our markets because of innovative features, performance
characteristics and cost-effective pricing, there can be no assurance that
comparable or superior products incorporating more advanced technology or
other features or having better price or performance characteristics will not
be introduced by competitors.
PATENTS AND INTELLECTUAL PROPERTY
We regard certain of our designs as proprietary and attempt to protect them
with patents and by restricting disclosure of the designs as trade secrets.
We have nine issued patents for our Bend Sensor(R) technology and have filed
five additional patent applications, and are in the process of
preparing two additional patents for new types of sensors using our
technology. Sensitron owns seven United States patents and two foreign
patents related to the Bend Sensor(R) technology. Patents do expire and it
will be necessary for us to file patents for each application we develop so
that it is protected from competition. The earliest patent will expire in
October 2009; however, we have improved these technologies and expect to file
new patents based on the enhancements. We must file patents on any technology
for which we develop enhancements which contain material improvements to the
original technology. We are aware of three potentially conflicting patents
which we believe will not affect our current or planned use of our technology.
There can be no assurance that the protection provided by patents and patent
applications, if issued, will be broad enough to prevent competitors from
introducing similar products or that such patents, if challenged, will be
upheld by the courts of any jurisdiction. Patent infringement litigation,
either to enforce our patents or defend us from infringement suits, are
expensive and could divert resources from other planned uses. For example,
we determined that it was necessary to file a patent encroachment action in
January 2006 (See "Legal Proceedings," below).
Patent applications filed in foreign countries and patents in those countries
are subject to laws and procedures that differ from those in the United
States. Patent protection in foreign countries may be different from patent
protection under United States laws and may not be as favorable to us. We
also attempt to protect our proprietary information through the use of
confidentiality agreements and by limiting access to our facilities. There
can be no assurance that our program of patents, confidentiality agreements
and restricted access to our facilities will be sufficient to protect our
proprietary technology.
Management believes that because of the rapid pace of technological change in
our markets, legal protection of our proprietary information is less
significant to our competitive position than factors such as continuing
product innovation in response to evolving industry standards, technical and
cost-effective manufacturing expertise, effective product marketing strategies
and customer service. Without legal protection; however, it may be possible
for third parties to commercially exploit the proprietary aspects of our
products.
RESEARCH AND DEVELOPMENT
Although we hold the patent to the basic Bend Sensor(R) technology, as well as
other applications, there will be other competitors working to develop
competing technologies. To stay on the forefront of the technology, and to
serve the needs of the customer, we will need to aggressively pursue
improvements to existing systems and develop new systems as well. For the
year ended December 31, 2005 we spent $479,415 on research and development
related to development engineering for the medical bed technology, new product
development resulting in new patents and testing of products for marketable
applications.
Also, we believe that the coatings for the Bend Sensor(R) products are
difficult to duplicate. We must develop new coatings to fit emerging customer
needs and to stay ahead of the competition. There can be no assurance that we
will be successful in developing new coatings. While we expect that future
research and development efforts, if any, will lead to the filing of
additional patent applications, there can be no assurance that any additional
patent filings will be forthcoming.
15
GOVERNMENTAL REGULATION
During the past several years, the automotive industry has been subject to
increased government safety regulation. Among other things, regulations from
the National Highway Transportation and Safety Administration required
automakers to incorporate advanced air bag technology into vehicles beginning
in 2005 with the phase in to be completed by 2008. These proposals call for
upgraded air bag system performance tests for passenger cars and light trucks.
The new testing requirements are intended to improve the safety of infants,
children and out-of-position adults, and maximize the protection of properly
seated adults. The National Highway Transportation and Safety Administration
tests are similar to conditions that we have already been using to test our
Seat Mat System and we believe that our Seat Mat System will meet the
standards as proposed.
EMPLOYEES
As of the date of this filing we have 11 full time employees and employ two
sub-contractors. Our employees are not presently covered by any collective
bargaining agreement. We have not experienced any work stoppages and believe
that our relations with our employees are good.
REPORTS TO SECURITY HOLDERS
We are required to comply with the reporting requirements of Section 12(g) of
the Exchange Act and must file annual, quarterly and other periodic reports
with the SEC, as well as proxy and information statements. The public may
read and copy any materials we file with the SEC, including copies of this
registration statement at the SEC's Public Reference Room at 100 F Street NE,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0300. We are an
electronic filer and copies of our periodic reports and other information
filed with the SEC should be available through the Internet by
using the SEC's EDGAR database which may be found at http://www.sec.gov. We
also have an Internet web site at www.flexpoint.com.
PROPERTY
On September 13, 2004, Flexpoint Sensor finalized the lease agreement with
F.G.B.P., L.L.C. for a five-year lease of approximately 11,639 square feet of
office and manufacturing space. The lease commenced on October 1, 2004 and
terminates on September 30, 2009. This facility has executive offices and
space for research and development, manufacturing and fulfillment. The
average monthly payments over the term of the lease are $8,718, including
common area maintenance and a 2% annual increase. Management is working
toward qualifying this manufacturing facility for TS-16949 certification. The
building is located in a business park in Draper, Utah consisting primarily of
high tech manufacturing firms and it is located adjacent to Utah's main
interstate.
LEGAL PROCEEDINGS
On January 20, 2006, Sensitron, Inc. filed a complaint in the United States
District Court for the District of Utah, Central Division, against Michael W.
Wallace, d/b/a Pure Imagination, seeking patent rights for a patent and patent
application that Mr. Wallace filed with the United State Trademark and Patent
Office. Mr. Wallace assisted Sensitron with the development of certain
software to be used in combination with our Bend Sensor(R) technology related
to the SEAT MAT(TM) system. Mr. Wallace failed to deliver the source code to
Sensitron and failed to list our employees and previous employees as
co-inventors on the patent he obtained and for his pending application for a
patent. Sensitron is seeking a copy of the source code and ownership of the
patent and/or correction of the patent and patent application to add the
appropriate co-inventors. Sensitron is also seeking unspecified damages along
with its costs and attorneys' fees.
On July 3, 2001, Flexpoint Sensor Systems, Inc. filed a voluntary petition for
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.
The petition was filed in the United States Bankruptcy Court for the District
of Utah, File No. 01-29577JAB. On February 24, 2004 the bankruptcy court
confirmed our Plan of Reorganization. In our bankruptcy proceeding we objected
to the $1,700,000 claim made by Delco Electronics, Inc. ("Delphi"). We
believe that Delphi is precluded by the terms of the agreement from any
financial recovery due to its breach of the sponsorship agreement. Other
potential claims are breach of contract, breach of fiduciary duties owed to
Flexpoint, Inc. pursuant to the contract, and intentional and negligent
interference with Flexpoint, Inc.'s contractual and business relationship with
General Motors. We are currently attempting to negotiate a settlement to this
controversy.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
We are a development stage company engaged principally in designing,
engineering and manufacturing Bend Sensor(R) technology and equipment. On
March 5, 2004 we emerged from Chapter 11 bankruptcy and, as a result,
Flexpoint Sensor is considered a new entity for financial reporting purposes
with an inception date of February 24, 2004. Our planned operations have not
commenced and our activities primarily include acquiring equipment and
technology, organizing activities, obtaining financing and seeking
manufacturing contracts.
During 2005 we concentrated our development efforts with customers and
signed a contract to produce Bend Sensors(R) for a bed application. However,
our production of the sensors for the medical bed has been delayed as a result
of waiting for a final design and configuration of the medical bed from R&D
Products. We are prepared to produce the sensors under the terms of the
agreement as soon as R&D Products determines the final design and
configuration of the bed.
Also during 2005, we filed applications for several patents on products
that we developed and development and research on products for several
automotive customers was approved to be advanced to the next stage of testing
in 2005. Negotiations for potential automotive applications using our Bend
Sensor(R) technology are in process, but we have not yet entered into a major
contract for the sale of our automotive products. We are also continuing to
develop new products that we may sell or license to an industrial control
company.
During the second quarter of 2006 we have focused our efforts on third
party testing of our technology as required in our protocol for Stage II
development of our technology. In June 2006 we announced our Pedestrian
Impact Detection System was tested by MGA Research and this research confirmed
results of our internal testing. This system is placed in the vehicles' front
bumper to detect crash impact. Within milliseconds of contact, the system can
differentiate between a human leg and an inanimate object and trigger a safety
response in accordance with the manufacturer's specifications.
We also announced that we had entered into a cooperative testing agreement
with Faurecia Automotive ("Faurecia") in June 2006. Faurecia is the second
largest automotive supplier in Europe and supplies components to large
automotive manufacturers, such as BMW, Toyota, Ford, Daimler-Chrysler and
others. This agreement will allow both companies to use their resources,
knowledge and capabilities to develop a working prototype of the Pedestrian
Impact Detection System and other applications.
Finalizing a major contract with a customer remains our greatest challenge.
We must continue to obtain funding to operate and expand our operations so
that we can deliver our products to the market. Management believes that even
though we are making positive strides forward with our business plan, it is
likely that significant progress may not occur for the next four to six
months. Accordingly, we cannot guarantee that we will realize significant
revenues or that we will become profitable within the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Our revenues are not to a level to support our operations. Net cash used by
operating activities was $800,238 for the six month period ended June 30, 2006
("2006 six month period") compared to $699,346 for the six month period ended
June 30, 2005 ("2005 six month period"). Net cash used by operating
activities was $1,473,763 for the year ended December 31, 2005 ("2005")
compared to net cash used for by operating activities of $535,404 for the
period from February 24, 2004, our emergence from bankruptcy, through December
31, 2004 (the "2004 interim period")
Our revenue for the past two years was primarily from design, contract and
testing services. During the 2004 interim period we relied on a line of
credit for cash. During the 2005 and the 2006 six month periods we relied
primarily on proceeds from a private placement completed in March 2005.
17
During the 2004 interim period we entered into a $1.5 million convertible line
of credit executed as part of our bankruptcy reorganization plan from Broad
Investment Partners to fund our operations after bankruptcy. During March
2004, we drew $1,443,334 from this line of credit, which resulted in a
discount to the note of $56,666. Of the amount drawn from the line of credit,
we assumed debt of $698,000 to acquire the assets of Flexpoint Holdings, LLC
(discussed below), and $102,000 was used to repay a short-term advance from
Flexpoint Holdings, LLC. We borrowed $583,334 from the credit line for
operations and $60,000 was borrowed from the credit line to settle certain
secured and priority claims of the reorganization plan.
Pursuant to the terms of the convertible line of credit, we initially placed
3,000,000 free trading shares in an escrow account for conversion of the
credit line. In March and May 2004 the $1,500,000 amount drawn from the line
of credit was converted into common stock at a rate of $0.50 per share. This
conversion resulted in the issuance of 3,000,000 shares of common stock to
Broad Investment Partners and its assignees.
Since March 2005 we relied on proceeds from a private placement, which is
described in more detail in "Selling Stockholders - Transactions Related to
Selling Stockholders", below. Management believes that our current cash burn
rate is $150,000 per month and that the remaining proceeds from the private
placement will fund our operations for at least the next six months. We
realized net proceeds of $3,907,207 from our private placement. Except for a
"call" provision, the warrant holders have total discretion as to when or if
the warrants are exercised.
Another source of cash for the 2006 six month period was from the exercise
of warrants. On June 27, 2006, Summit Resource Group exercised warrants to
purchase 300,000 common shares at an exercise price of $0.70 per share and we
received $210,000 gross proceeds from the exercise of these warrants. We
issued these warrants to Summit Resource Group on March 3, 2004, as part of a
consulting agreement with that company to provide investor relations services.
We also may receive additional funds in the future from warrants issued in
the private placement. If all 2,976,335 of the warrants issued in the private
placement are exercised, then we may realize an additional $8,929,005, based
on an exercise price of $3.00 per warrant. Except for a "call" provision, the
warrant holders of the private placement have total discretion as to when or
if the warrants are exercised. If the closing bid price of our common stock
is greater than $4.00 per share for five consecutive trading days after
October 1, 2005 and during the exercise term of the warrant, then we have the
right to call the warrant in whole or in part, forcing the investor to
exercise the warrant within fifteen trading days or the warrant is forfeited.
We cannot guarantee that the price of our common stock will reach $4.00 and,
in that case, the warrant holders will determine when and if the warrants are
exercised.
In addition to the warrants issued in the private placement, we have
outstanding warrants to purchase an aggregate of 380,000 shares and may
receive an additional $340,000 if those warrants are exercised. Again, the
warrant holders have total discretion as to if the warrants are exercised.
We will require additional financing to fund our long-term cash needs and
we may be required to rely on debt financing, loans from related parties, and
private placements of our common stock for additional funding. However, we
cannot assure you that we will be able to obtain financing, or that sources of
financing, if any, will continue to be available, and if available, that they
will be on terms favorable to us.
As we enter into new technology agreements in the future, we must ensure
that those agreements provide adequate funding for any pre-production research
and development and manufacturing costs. If we are successful in establishing
agreements with adequate initial funding, management believes that our
operations for the long term will be funded by revenues, licensing fees and
royalties related to these agreements. However, we have formalized only a few
additional agreements during the past year and there can be no assurance that
agreements will come to fruition in the future or that a desired technological
application can be brought to market.
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ASSET PURCHASE
On March 31, 2004, Flexpoint Sensor entered into an asset purchase agreement
with Flexpoint Holdings, LLC, a company owned in part and controlled by a less
than 5% shareholder of Flexpoint Sensor. The owners and manager of Flexpoint
Holdings, LLC were not officers, directors or employees of Flexpoint Sensor,
nor did they hold any controlling relationship in Flexpoint Sensor or retain a
substantial indirect interest in the assets sold as a result of stock
ownership in Flexpoint Sensor. The agreement provided that Flexpoint Sensor
acquire substantially all of Flexpoint Holding's equipment and proprietary
technology. The equipment consisted of manufacturing equipment to produce our
Bend Sensor(R) products and the technology consisted of the software
algorithms that interpret data provided by the sensor technology. Flexpoint
Holdings was a Utah limited liability company formed to acquire and hold the
assets that one of our creditors caused to be seized during 2001 and sold at
public auction during 2002.
To acquire the equipment and technology from Flexpoint Holdings, we paid
$265,000 in cash, we issued 1,600,000 shares of our restricted common stock
valued at $1,931,309, or $1.21 per share, and we assumed a convertible note
payable of $698,000. The equipment and technology had an appraised fair value
of $4,302,643. The cost allocated to the property and equipment was
$1,248,732 and to the proprietary technology was $1,645,577.
COMMITMENTS AND CONTINGENCIES
Our principal commitments consist of total current liabilities of $42,734 at
June 30, 2006, and our operating lease. The operating lease has average
monthly payments of $8,718, including common area maintenance and a 2% annual
increase. The total future minimum payments under this lease as of December
31, 2005 were $395,889.
Our total current liabilities include accounts payable of $4,202 related to
normal operating expenses, including health insurance, utilities, production
supplies and travel expense; also expenses for professional fees regarding
audit fees and legal fees related to the defense of patent rights. Accrued
liabilities at June 30, 2006, were $38,532 and were related to payroll tax
liabilities, accrued audit and tax expenses, accrued lease expense and accrued
Paid Time Off, a combination vacation-sick leave policy.
In January 2006 we initiated a legal action for patent encroachment (See
"Legal Proceedings", above) and we anticipated that this legal action would
result in legal costs of approximately $100,000; however, the cost of this
action has been higher than anticipated and we now estimate that this legal
action will result in legal costs of approximately $200,000. Management
believes it is critical to protect our patents and will divert a portion of
our financial resources to continue this legal matter.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Estimates of
particular significance in our financial statements include goodwill and the
annual tests for impairment of goodwill and valuing stock option compensation.
We annually test goodwill for impairment or when a triggering event occurs.
Impairment is indicated if undiscounted cash flows are less then the carrying
value of the assets. The amount of impairment is measured using a
discounted-cash-flows model considering future revenues, operating costs and
risk-adjusted discount rate and other factors. We performed a goodwill
impairment test during 2005 and concluded there was no impairment of
goodwill.
We account for stock options under Statement of Financial Accounting
Standards No. 123(R), effective January 1, 2006. Statement 123(R) requires
that recognition of the cost of employee services received in exchange for
stock options and awards of equity instruments be based on the grant-date fair
value of such options and awards, over the period they vest. The fair value
of the options we have granted is estimated at the date of grant using the
Black-Scholes American option-pricing model. Option pricing models require
the input of highly sensitive assumptions,
19
including expected stock volatility. Also, our stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair
value estimate. Management believes the best input assumptions available were
used to value the options and that the resulting option values are reasonable.
During 2006, we recognized $529,953 of stock-based compensation expense for
our stock options.
RESULTS OF OPERATIONS
For the Six Month Periods Ended June 30, 2006.
The following discussions are based on the consolidated operations of
Flexpoint Sensor and its subsidiary, Sensitron, and should be read in
conjunction with our unaudited financial statements for the six month periods
ended June 30, 2006 and 2005. These financial statements are included in this
prospectus, starting on page 36.
SUMMARY OF OPERATING RESULTS
Six month period ended
June 30, 2006 June 30, 2005
-------------- -------------
Revenue $ 53,526 $ 18,365
Total operating costs and expenses (1,529,438) (800,696)
Net other income 24,422 18,757
Net loss $ (1,451,490) $ (763,574)
Basic and diluted loss per share $ (0.06) $ (0.03)
Revenue from research and development engineering contracts is recognized
as the services are provided and accepted by the customer. Revenue from
contracts to license technology to others is deferred until all conditions
under the contract are met and then the sale is recognized as licensing
royalty revenue over the remaining term of the contract. Revenue from the
sale of a product is recorded at the time of shipment to the customer.
Our revenue for the 2006 and 2005 comparable periods was from design,
contract and testing services. The increase in revenue for the three month
period ended June 30, 2006 (the "2006 second quarter") and for the 2006 six
month period compared to the 2005 comparable periods was the result of
increases in revenue from design engineering work. Management does not
anticipate that revenues will increase until we finalize a major contract.
Total operating costs and expenses increased for the 2006 six month and
second quarter compared to the 2005 six month and second quarter primarily as
a result of increases in administrative and marketing expenses and research
and development expense. Administrative and marketing expenses increased in
the 2006 periods due to litigation fees and compensation expense recognized
for share-based option compensation according to SFAS No. 123(R), discussed
above. In addition, research and development expense increased in the 2006
periods as we moved forward with the Stage II development of our technology.
Due to a change in account methodology we directly expensed research and
development costs in the 2006 periods, rather than including them in cost of
revenue.
Total other income for the 2006 and 2005 periods was primarily the result
of interest income related to interest on the proceeds of the private
placement offering which were deposited in a savings account. Interest
expense for the 2005 comparable periods was primarily the result of interest
expense related to loans.
20
Due to minimal revenues and increased operating costs and expenses, we
recorded a net loss for both the 2006 and 2005 periods. Management expects
losses to continue in the short term.
SUMMARY OF BALANCE SHEET INFORMATION
The chart below presents a summary of our balance sheets at June 30, 2006, and
December 31, 2005.
June 30, 2006 December 31, 2005
-------------- -----------------
Cash and cash equivalents $ 1,371,987 $ 1,964,487
Total current assets 1,401,593 1,999,148
Total assets 9,550,284 10,304,149
Total current liabilities 42,734 85,062
Deficit accumulated during (7,732,236) (6,280,746)
the development stage
Total stockholders equity $ 9,507,550 $ 10,219,087
Cash and cash equivalents decreased 30.1% at June 30, 2006, compared to
December 31, 2005 because we had minimal revenue in the 2006 six month period
to provide cash. Until our revenue increases, our cash will continue to
decrease.
Our non-current assets decreased at June 30, 2006, due to adjustments for
depreciation and amortization. These assets include property and equipment
valued at $1,158,577, patents and proprietary technology of $1,627,200,
goodwill of $5,356,414, and long-term deposits of $6,500.
Total current liabilities decreased at June 30, 2006, primarily as a result of
decreases in accounts payable and accrued liabilities.
For the Year Ended December 31, 2005 and the Interim Period Ended December 31,
2004.
The following discussions are based on the consolidated operations of
Flexpoint Sensor and its subsidiaries and should be read in conjunction with
our audited financial statements the year ended December 31, 2005 and for the
2004 interim period from emergence from bankruptcy on February 24, 2004
through December 31, 2004. These financial statements are included in this
prospectus, starting on page 44.
SUMMARY OF OPERATING RESULTS
Period from
Feb. 24, 2004
Year ended through
Dec. 31, 2005 Dec. 31, 2004
--------------- ---------------
Revenue $ 12,595 $ 345,433
Total costs and expenses (1,834,816) (3,362,604)
Net other income (expense) 52,201 (1,493,555)
Net profit (loss) (1,770,020) (4,510,726)
Basic and diluted loss per share $ (0.08) $ (0.24)
21
Revenue from the sale of a product is recorded at the time of shipment to
the customer. Revenue from research and development engineering contracts is
recognized as the services are provided and accepted by the customer. Revenue
from contracts to license technology to others is deferred until all
conditions under the contract are met and then the sale is recognized as
licensing royalty revenue over the remaining term of the contract.
For the 2005 year and the 2004 interim period our revenue was primarily
from licensing fees and royalties, and engineering services. Licensing
revenue of $225,000 recorded in the fourth quarter of 2004 resulted from the
early cancellation of a licensing agreement, which accelerated recognition of
the revenues previously deferred to be recognized evenly over the six-year
term of the license agreement. In October 2004 we cancelled the licensing
agreement with a customer and paid the customer $100,000 of the prepayment we
had previously received from the customer. The balance of $225,000 of
deferred revenues that was being amortized over the six-year term was included
as revenue in the 2004 fourth quarter.
Total costs and expense decreased for the 2005 year compared to the 2004
interim period primarily as a result of decreases in general and
administrative and marketing expenses. The 2004 interim period general and
administrative and marketing expense included $1,776,000 related to settlement
of claims by the issuance of 1,200,000 shares of restricted common stock to
Mr. Sindt, an officer and director of the company. In addition $846,008 of
these expenses for the 2004 interim period related to the issuance of 100,000
common shares and the vesting of warrants to purchase 650,000 shares granted
to Summit Resource Group in March 2004 in consideration for public and
investor relations consulting services.
Cost of revenue for 2005 decreased to $7,692 compared to $86,605 for the
2004 year because development engineering labor was allocated to cost of goods
in 2004, but was expensed as research and development in 2005.
Total other income of $52,201 for the 2005 year was primarily the result of
interest income of $59,544 related to interest on the proceeds of the private
placement offering which were deposited in a savings account. Total other
expense for the 2004 interim period was primarily the result of $1,568,823
expense related to the interest on loans and a $1,500,000 beneficial
conversion received by Broad Investment Partners related to the convertible
debt. The principal balance of the $1,500,000 loan from Broad Investment
Partners was convertible into common stock at $0.50 per share; however, the
average market value at February 24, 2004 was $1.00. This resulted in Broad
Investment Partners receiving a beneficial debt conversion option of
$1,500,000 which was amortized and recognized as interest expense through
March 31, 2004 when the note was converted into 3,000,000 shares.
a result of the above, we recorded a net loss for both the 2005 year and
the 2004 interim period, however, our net loss decreased $2,740,706 from the
2004 interim period.
SUMMARY BALANCE SHEET INFORMATION
The chart below presents a summary of our balance sheets at December 31, 2005
and 2004.
December 31, 2005 December 31, 2004
----------------- -----------------
Cash and cash equivalents $ 1,964,487 $ 54,358
Total current assets 1,999,148 55,107
Total assets 10,304,149 8,556,661
Total current liabilities 85,062 547,806
Deficit accumulated during (6,280,746) (4,510,726)
the development stage
Total stockholders equity $ 10,219,087 $ 8,008,855
22
Cash increased at December 31, 2005, compared to December 31, 2004,
primarily as a result of the proceeds from our private placement. However, we
had minimal revenues in the 2005 year and our cash is continuing to decrease.
Our non-current assets increased slightly at December 31, 2005 and include
property and equipment valued at $1,238,404, patents and proprietary
technology of $1,703,683, goodwill of $5,356,414, and a deposit of $6,500.
Total current liabilities decreased at December 31, 2005 primarily as a
result of decreases in accounts payable resulting from our payment of $410,958
of unsecured notes payable outstanding from our bankruptcy
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are listed below, with their respective
ages, positions and biographical information. Our bylaws provide that the
directors shall be divided into three classes. A class of directors shall be
elected for a one-year term, a class of directors for a two-year term and a
class of directors for a three-year term. In November 2005 our stockholders
elected our current board of directors. At each succeeding annual meeting
of stockholders, successors to the class of directors whose term expires at
that meeting shall be elected for a three-year term. Our executive officers
are chosen by our board of directors and serve at its discretion. There are
no family relationships between or among any of our directors and executive
officers.
Name Age Position Held Term of office
----- ---- ------------- --------------
John A. Sindt 62 Chairman of the Board Two year term from Nov. 2005
and Principal Finance
and Accounting Officer
Clark M. Mower 59 President, CEO and One year term from Nov. 2005
Director
Ruland J. Gill, Jr 61 Director Three year term from Nov.2005
B. Fred Atkinson, Jr. 57 Secretary/Treasurer
and Comptroller
John A. Sindt - Mr. Sindt has served as a director of the company since 1999
and served as President and Chief Executive Officer from 2001 to 2004. He
served as Secretary/Treasurer from January 2005 through July 2005. In
November 2005 he was elected to serve a two year term as director. Mr. Sindt
is also the Chairman of the Board of Sensitron, our subsidiary. He has been
employed since 1965 as a Salt Lake County, Utah Constable and he currently
heads that department. He has also served as President, Corporate Secretary
and Director for the National Constables Association. He has owned and
operated a successful chain of retail jewelry stores in Utah.
Clark M. Mower - Mr. Mower was appointed our President and CEO in January
2005. He was appointed as Director, President and CEO of Sensitron in
February 2005. In November 2005 he was elected to serve a one year term as
director. He formerly served as Senior Vice President - Mergers and
Acquisitions - Merchant Energy Group for El Paso Energy Corporation (NYSE:
EP). From August 2002 through 2004 he was the managing member of Polaris
Energy, LLC, a non-affiliated consulting company to energy related mergers and
acquisition. From August 2002 to July 2004 he was a management committee
member for Saguaro Power Company, a non-affiliated company operating a 100
megawatts power plant in Henderson, Nevada. Prior to that he served as
President and Chief Executive Officer of Bonneville Pacific Corporation (a
public company) for eight years until El Paso Corporation acquired Bonneville
Pacific Corporation in October 1999. He is a director on the board of
GeNOsys, Inc., a public reporting company.
23
Ruland J. Gill, Jr. - Mr. Gill is Vice President of Government Affairs and
Senior Attorney for Questar Corporation (NYSE: STR), where he has worked since
1973. He was appointed as a Director of Sensitron in February 2005. In
November 2005 he was elected to serve a three year term as director. In
addition to his professional career, Mr. Gill has held several important
positions including President of the Utah Petroleum Association, and Trustee
of the Rocky Mountain Mineral Law Foundation.
B. Fred Atkinson, Jr. - Mr. Atkinson joined the company in June of 2005 as
Comptroller and was appointed Secretary/Treasurer of the company on July 12,
2005. He has extensive experience in financial, accounting and operational
management for general corporate, retail and ISO 9000 and FDA manufacturing
entities. From 2004 through 2005, he was employed as Corporate Controller for
Wasatch Product Development. From 2001 to 2003 he was Controller and Finance
Manager for RP Sherrer West, Inc. And from 1998 to 2001 he was Controller and
Chief Financial Officer for Sorensen Medical, Inc. He received a Masters of
Business Administration in Finance from Concordia University.
EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers in all capacities during the past three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Securities All
Name and Fiscal underlying Other
Principal Position Year Salary options/SARs (#) Compensation
------------------- ------ ----------- ---------------- ------------
Clark M. Mower 2005 $ 150,557 300,000 $ 0
President, CEO 2004 0 0 0
2003 0 0 0
John A. Sindt 2005 $ 128,660 180,000 $ 0
Sr. VP and Chairman 2004 0 0 1,776,000 (1)
(Former CEO) 2003 0 0 0
B. Fred Atkinson, Jr. 2005 $ 46,382 100,000 $ 0
Sec./Treas. and 2004 0 0 0
comptroller 2003 0 0 0
(1) Represents the value of 1,200,000 common shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
Percent of
Number of total
securities options/SAR's
underlying granted to Exercise or
Options/SARs employees in base price Expiration
Name granted (#) fiscal year ($/sh) date
----- ---------------- --------------- ------------ ----------
Clark M. Mower 300,000 (1) 25.2% $ 1.91 12/31/2015
John A. Sindt 180,000 (2) 15.1% 1.91 12/31/2015
B. Fred Atkinson,
Jr. 100,000 (3) 8.4% 1.91 1/6/2015
24
(1) 100,000 shares vested December 31, 2005; and 100,000 shares vest on
December 31, 2006; and 100,000 shares vest on December 31, 2007.
(2) 60,000 shares vest December 31, 2005; 60,000 vest December 31, 2006; and
60,000 vest December 31, 2007
(3) 30,000 shares vest June 1, 2006; 35,000 vest June 1, 2007; and 35,000
vest June 1, 2008.
We have not entered into employment contracts with our executive officers and
their compensation, if any, will be determined at the discretion of our board
of directors.
COMPENSATION OF DIRECTORS
We do not have any standard arrangement for compensation of our directors
for any services provided as a director, including services for committee
participation or for special assignments. On August 25, 2005 our board of
directors authorized the issuance of 18,350 shares of restricted common stock
to Ruland J. Gill, Jr. in consideration for services rendered as a member of
our board of directors. These shares were valued at $31,745.
CERTAIN RELATED TRANSACTIONS
The following information summarizes transactions we have either engaged in
during the last two years, or propose to engage in, involving our executive
officers, directors, more than 5% stockholders, or immediate family members of
these persons.
In 2004, John A. Sindt, our Chairman of the Board and Secretary/Treasurer
agreed to compromise his claims in bankruptcy by surrendering his right to
receive:
.. Any options granted to him prior to bankruptcy;
.. Any possible minority ownership claim in any subsidiary of Flexpoint
Sensor;
.. 5,000,000 common shares for accrued wages through March 2001;
.. 800,000 super-voting preferred shares that were authorized to be issued
to him in April 2001; and
.. Accrued wages of $300,000 through December 31, 2003.
In February 2004, we emerged from bankruptcy without settling a claim for
compensation by John A. Sindt for services rendered during the period we were
in bankruptcy. At the date we emerged from bankruptcy, we acknowledged that
the claim existed but were unable to determine the range of potential loss
under the claim and did not record a liability at that date. Our board of
directors determined the amount of the claim on November 24, 2004 and on that
date we settled all amounts due under the claim and in payment of services
received after we emerged from bankruptcy, by issuing 1,200,000 shares of our
restricted common stock to Mr. Sindt. We valued the common stock issued at
$1,776,000, or $1.48 per share, based upon the quoted market value of the
common stock and recognized the value as a charge to operations for
compensation during November 2004. These transactions between Flexpoint
Sensor and our officer have been negotiated between related parties without
"arms length" bargaining and, as a result, the terms of these transactions may
be different than transactions negotiated between unrelated persons.
During the period from February 24, 2004 through December 31, 2004, we have
relied on loans from First Equity Holdings Corp., a more than 10% shareholder,
to fund our operations. During that period we borrowed $198,000 from First
Equity Holdings at 12% interest. The initial terms of this note payable
required payment of the principal and interest by December 31, 2004; however,
the terms were amended to extend the due date to March 31, 2005. As of March
31, 2005, we had repaid the $198,000 note, plus interest, to First Equity
Holdings Corp.
PRINCIPAL STOCKHOLDERS
The following table lists the beneficial ownership of our outstanding common
stock by our management and each person or group known to us to own
beneficially more than 5% of our outstanding common stock. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power
25
with respect to securities. Based on these rules, two or more persons may be
deemed to be the beneficial owners of the same securities. Except as
indicated by footnote, the persons named in the table below have sole voting
power and investment power with respect to the shares of common stock shown as
beneficially owned by them. The percentage of beneficial ownership is based
on 23,292,887 shares of common stock outstanding as of September 26, 2006,
plus any shares which each of the following persons may acquire within 60 days
by the exercise of rights, warrants and/or options.
CERTAIN BENEFICIAL OWNERS
-------------------------
Name and address of Percentage
beneficial owners Number of shares of class
------------------- ---------------- ----------
First Equity Holdings Corp. 6,042,144 (1) 25.9%
2157 S. Lincoln Street
Salt Lake City, Utah 84106
(1) Includes 899,286 shares held by an officer of First Equity
Holdings Corp.
MANAGEMENT
-------------
Name and address of Warrants/ Percentage
beneficial owners Number of shares Options (2) of class
--------------------------- ---------------- ----------- ----------
John A. Sindt 1,405,264 (3) 60,000 6.3%
106 West Business Park Drive
Draper, Utah 84020
Clark M. Mower 555,000 250,000 3.4%
106 West Business Park Drive
Draper, Utah 84020
Ruland J. Gill, Jr. 235,017 216,667 1.9%
106 West Business Park Drive
Draper, Utah 84020
Fred Atkinson - 30,000 Less than 1%
106 West Business Park Drive
Draper, Utah 84020
Directors and officers 2,195,281 556,667 11.6%
as a group
(2) Includes warrants and options that have vested or will vest in the
next 60 days.
(3) Represents 1,207,266 held by Mr. Sindt and he has investment power
with respect to 197,998 shares.
26
DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $0.001, and 1,000,000 shares of preferred stock, par value $0.001.
The following description of our equity is a summary and is qualified in its
entirety by the provisions of our Certificate of Incorporation and the
provisions of the Delaware General Corporation Law.
COMMON STOCK
As of September 26, 2006 we had 23,292,887 shares of common stock
issued and outstanding. Holders of common stock are entitled to one vote for
each share on all matters voted on by the stockholders. Holders of common
stock do not have cumulative voting rights, preemptive rights to purchase our
common stock and there are no redemption or sinking fund provisions with
respect to our common stock. Holders of common stock share ratably in
dividends, if any, as may be declared from time to time by the board of
directors in its discretion. In the event of liquidation, dissolution or
winding up, the holders of common stock are entitled to share pro rata all
assets remaining after payment in full of all liabilities and amounts as may
be owed to the preferred stockholders, if any. All of the outstanding shares
of common stock are fully paid and non-assessable.
PREFERRED STOCK
We are authorized to issue 1,000,000 shares of preferred stock and none are
outstanding as of the date of this prospectus. Our board of directors may by
resolution, without further action by stockholders, issue from time to time,
one or more series of preferred stock with designations, rights, preferences
and limitations as the board of directors may determine. The rights,
preferences and limitations of separate series of preferred stock may differ
with respect to these matters among the series as may be determined by the
board, including, without limitation, the rate of dividends, method and nature
of payment of dividends, terms of redemption, amounts payable on liquidation,
sinking fund provisions, conversion rights and voting rights. Some issuances
of preferred stock may give the effect of delaying or preventing changes in
control that stockholders believe is in their interest.
SHARES ELIGIBLE FOR FUTURE SALE
We are registering 8,092,670 shares of common stock with 3,356,335 of those
shares underlying warrants. Of the common shares being registered, 4,736,335
have been issued to the selling stockholders. Assuming the exercise of all of
the warrants we would have 26,649,222 shares of common stock outstanding
after the offering. Sales of substantial amounts of common stock in the
public market could adversely affect the prevailing market prices of our
common stock.
SELLING STOCKHOLDERS
The following table identifies the selling stockholders under this prospectus
and identifies their relationship to Flexpoint Sensor during the past three
years. The table also lists the number of shares of common stock owned by
each selling stockholder prior to the offering, the estimated number of shares
to be offered for the selling stockholder's account and the estimated number
of shares and percentage of outstanding shares to be owned by each selling
stockholder after the completion of the offering. The information as to
ownership prior to the offering is based upon our records as of September 26,
2006; however, the selling stockholders may have sold, transferred or
otherwise disposed of shares in transactions exempt from the registration
requirements of the Securities Act since the date of our records.
Since the selling stockholders may sell all, a portion, or none of their
shares from time to time, no firm estimate can be made of the aggregate number
of shares that will be owned by each selling stockholder upon completion of
the offering. Accordingly, the ownership amount and percentage after the
offering assumes the sale of all of the registered shares by the selling
stockholders, but as of the date of this prospectus these shares have not been
sold and we cannot guarantee that any shares will be sold during this
offering.
27
As used in this prospectus "selling stockholder" includes donees, pledgees,
transferees or other successors-in-interest
Securities Estimated securities
owned Number of owned after
Name and relationship prior to shares being offering
with Flexpoint Sensor offering (1) registered (1) Shares Percent
---------------------- ------------- -------------- --------- --------
Alpine Capital Ventures, LLC 100,000 100,000 0 0
Accredited Investor
Alpine Securities Corporation 280,000 280,000 0 0
Placement agent
William P. Archer 20,000 20,000 0 0
Accredited investor
Asia Orient Enterprises, Ltd 450,000 450,000 0 0
Accredited investor
BNL Family Partners, LTD 20,000 20,000 0 0
Accredited investor
Banyan Investment Company 640,000 640,000 0 0
Accredited investor
Byron B. Barkley 30,000 30,000 0 0
Accredited investor
Eslie O. Barlow 20,000 20,000 0 0
Accredited investor
Blackhawk Properties 140,000 140,000 0 0
Accredited investor
William S. Brugger 20,000 20,000 0 0
Accredited investor
Butternut Partners, LLC 200,000 200,000 0 0
Accredited investor
C.F. Walker Family Trust 33,334 33,334 0 0
Accredited investor
Michael H. Chase 174,000 174,000 0 0
Accredited investor
J. Paul Christensen 46,036 40,000 6,036 *
Accredited investor
John Clayton 899,286 600,000 299,286 1.3
Accredited investor
28
Mark Cowan 53,334 53,334 0 0
Accredited investor
Stanley Cutler 40,000 40,000 0 0
Accredited investor
Eurowest 66,666 66,666 0 0
Accredited investor
Steven B. Evans 20,000 20,000 0 0
Accredited investor
Gary B. Filler 40,000 40,000 0 0
Accredited investor
Ruland J. Gill, Jr. 451,684 433,334 18,350 *
Accredited investor and
director
Barton Gleave 266,668 266,668 0 0
Accredited investor
Gene Gronning 20,000 20,000 0 0
Accredited investor
Kevin A. Howard 340,000 340,000 0 0
Accredited investor
Investors Stock Daily, Inc. 30,000 30,000 0 0
Investor relation firm
W. Reed Jensen 150,000 150,000 0 0
Investor
Jensen Living Trust 80,000 80,000 0 0
Accredited investor
Clark L. Johnston 40,000 40,000 0 0
Accredited investor
Will S. Jones 20,000 20,000 0 0
Accredited investor
Key Investments 40,000 40,000 0 0
Accredited investor
Liberty Capital, LLC 160,000 160,000 0 0
Accredited investor
Don Mayer 130,000 130,000 0 0
Accredited investor
29
Robert L. McOmber 20,000 20,000 0 0
Accredited investor
Gordon Milar 133,334 133,334 0 0
Accredited investor
Richard Kim Miller 52,000 52,000 0 0
Accredited investor
Shawn P. Miller 100,000 100,000 0 0
Accredited investor
Clark M. Mower 1,005,000 700,000 305,000 1.1
Director and officer
Darren Mower 42,000 42,000 0 0
Accredited investor
David E. Nelson 20,000 20,000 0 0
Accredited investor
Kelly Richard Nelson 28,000 28,000 0 0
Accredited investor
Brian Peterson 200,000 200,000 0 0
Accredited investor
Jeffrey Peterson 100,000 100,000 0 0
Accredited investor
Jonathan Peterson 84,000 84,000 0 0
Accredited investor
Mark Peterson 100,000 100,000 0 0
Accredited investor
Nancy Peterson 400,000 400,000 0 0
Accredited investor
Gregory D. Phillips 100,000 100,000 0 0
Accredited investor
Andy Pierce 40,000 40,000 0 0
Accredited investor
PTS Investment Company 60,000 60,000 0 0
Accredited investor
Scott R. Ryther 100,000 100,000 0 0
Accredited investor
S.C.S., Inc. 20,000 20,000 0 0
Accredited investor
30
Mark N. Schneider 20,000 20,000 0 0
Accredited investor
John A. Sindt 1,585,264 300,000 1,285,264 4.8
Director and former
officer
Summit Resource Group 350,000 350,000 0 0
Investor relations firm
Angela P. Torp 26,000 26,000 0 0
Accredited investor
David Ure 160,000 160,000 0 0
Accredited investor
Mike Vetere 20,000 20,000 0 0
Accredited investor
Victor Investments 20,000 20,000 0 0
Accredited investor
Whisper Investment Company 200,000 200,000 0 0
Accredited investor
---------- --------- --------- -----
TOTAL 10,006,606 8,092,670 1,913,936 7.2
(1) Includes underlying shares of warrants and options.
* Less than 1%
TRANSACTIONS RELATED TO THE SELLING STOCKHOLDERS
On March 3, 2004, we issued 100,000 restricted common shares and warrants to
purchase 650,000 common shares to Summit Resource Group in consideration for
investor relations consulting services. Warrants to purchase 150,000 shares
at $0.70 vested at the execution of the agreement, warrants to purchase
150,000 shares at $0.70 per share vested on May 1, 2004, and warrants to
purchase 350,000 shares at $0.80 per share vested on September 1, 2004. The
warrants had a five year term from the date they are awarded and we granted
registration rights to the 650,000 common shares underlying the warrants.
Summit Resource Group exercised warrants to purchase 300,000 common shares
on June 27, 2006. We are registering 350,000 shares related to this
agreement.
In January of 2005 we initiated a private offering pursuant to Rule 506 of
Regulation D and offered up to 3,150,000 units at $1.50 per unit. The maximum
offering price of the private offering was $4,725,000. Each unit consisted of
one share of common stock and one warrant to purchase one additional share of
common stock. The warrants sold as part of the unit have an exercise price of
$3.00 and have a two year exercise term beginning October 1, 2005. The
warrants are also subject to a "call." If the closing bid price of our common
stock is greater than $4.00 per share for five consecutive trading days after
October 1, 2005, then we have the right to call the warrants in whole or in
part, forcing the investor to exercise the warrant within fifteen trading days
or the warrant is forfeited. Also, an investor may not exercise a warrant if
the exercise of the warrant would cause the investor to own more than 4.99% of
our then issued and outstanding common stock.
On March 31, 2005, we closed the private placement offering, selling an
aggregate of 2,836,335 units to 54 accredited investors. As part of this
offering, as a commission, we also issued 140,000 shares and 140,000 warrants
exercisable at $3.00 to the placement agent, Alpine Securities Corporation.
On July 20, 2005, our board of directors approved the registration of the
shares issued in the private placement and the underlying shares of the
warrants. We are registering 5,952,670 shares related to the private
placement.
31
On July 21, 2005, the board of directors authorized the grant of warrants to
purchase 30,000 shares of common stock to Investors Stock Daily, Inc. in
consideration for investor relations services. The warrants have an exercise
price of $2.00 and expire July 20, 2007. We granted registration rights for
these warrants and are registering the 30,000 shares underlying the warrants.
We are also registering an additional 1,760,000 shares for certain
investors, including 150,000 shares held by Asia Orient Enterprises, Ltd.;
600,000 shares held by John Clayton; 400,000 shares held by Clark M. Mower;
160,000 shares held by Brian Petersen; 150,000 shares held by W. Reed
Jensen; and 300,000 shares held by John A. Sindt.
PLAN OF DISTRIBUTION
We have agreed to register these shares for the benefit of the selling
stockholders, but the registration of these shares does not necessarily mean
that any of them will be offered or sold by the selling stockholders. The
selling stockholders will have absolute discretion as to when and if the
registered shares will be sold, and the manner and timing of sales of the
shares. They may sell all or a portion of the shares through public or
private transactions, on or off established markets, or in negotiated
transactions or otherwise. In addition, the selling stockholders are
subject to the prospectus delivery requirements of the Securities Act.
We will not use the services of underwriters or dealers in connection with the
sale of the shares registered under this prospectus. However, the selling
stockholders may sell all or any part of the shares offered in this prospectus
through an underwriter. No selling stockholder has entered into any agreement
with a prospective underwriter as of the date of this filing and there is no
assurance that any agreement will be entered into. If a selling stockholder
enters into an agreement or agreements, the relevant details will be disclosed
in a post-effective amendment to this prospectus.
The shares may be sold by the selling stockholders either directly or through
brokers or dealers, or in a distribution by one or more underwriters on a firm
commitment or best-efforts basis. The methods by which the shares may be sold
may include:
.. a block trade, which may involve crosses, in which the broker or dealer
will attempt to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
.. purchases by a broker or dealer as principal and resale by the broker or
dealer for its own account;
.. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
.. privately negotiated transactions;
.. through the writing of options on the shares;
.. the selling stockholders may deliver all or a portion of the shares to
cover a short sale or sales made after the date of this prospectus, or a
call equivalent position or a put equivalent position entered or
established after the date of this prospectus; and/or
.. the selling stockholders may also sell all or any portion of the shares in
reliance upon Rule 144 or Regulation S.
The sale price to the public may be:
.. the market price prevailing at the time of sale;
.. a price related to the prevailing market price;
.. at negotiated prices; or
.. any other price as the selling stockholders determine from time to time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the selling
stockholders. These broker-dealers may also receive compensation from the
purchasers of shares for who the broker-dealers may act as agents or to whom
they sell as a principal. This compensation might be in excess of customary
commissions as to a particular broker-dealer. Market makers and block
purchasers purchasing the shares will do so for their own account and at their
own risk. It is possible that selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price.
32
The selling stockholders and any broker-dealers participating in the
distribution of the shares may be deemed to be "underwriters" within the
meaning of the Securities Act and any profit on the sale of the shares by the
selling stockholders and any commissions received by any broker-dealers may be
deemed to be underwriting commissions or discounts under the Securities Act.
Underwriters must comply with time and volume restrictions on sales of
stock under Rule 144 of the Securities Act of 1933. Rule 144 restricts sales
by underwriters, brokers, dealers and affiliates of the registrant. Subject to
Rule 144, any selling security holders who are deemed underwriters would be
prevented from selling their shares for a period of one year after the shares
were paid for and would not be able to sell more that 1% of the total
outstanding shares during any ninety day period. These regulations could
impact the ability of the shareholders to sell their shares.
We and the selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations promulgated under it,
including, without limitation, Regulation M. Regulation M restricts certain
activities of the selling stockholders and may limit the timing of purchases
and sales of any of the shares by the selling stockholders or any other
person. Also, Regulation M may restrict the ability of any person engaged in
the distribution of the shares to engage in market-making activities with
respect to the particular shares being distributed for a period of up to five
business days prior to the commencement of a distribution. All of these
limitations may affect the marketability of our shares and the ability of any
person or entity to engage in market-making activities with respect to our
shares.
In the event a block trade or other special offering of these shares is
arranged, then we will distribute a prospectus supplement, if required, that
will identify the name of any dealers or agents and any commissions and other
terms constituting compensation from the selling stockholders and as well as
any other required information.
Some states securities laws may require the shares be sold only through
registered or licensed brokers or dealers. In addition, in some states, these
shares may not be sold unless they have been registered or qualified for sale
in that state or an exemption from the registration or qualification
requirement of that state is available and is complied with.
OTHER INFORMATION
INTEREST OF NAMED EXPERTS AND COUNSEL
We are not aware of any expert or legal counsel named in this prospectus who
will receive a direct or indirect substantial interest in the offering.
Experts
-------
Our consolidated financial statements have been included in the registration
statement on Form SB-2, of which this prospectus forms a part, in reliance on
the reports of Hansen, Barnett & Maxwell, an independent registered public
accounting firm, given on the authority of that firm as experts in auditing
and accounting.
Cindy Shy, P.C. has provided an opinion regarding the validity of the shares
to be registered.
SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or persons controlling Flexpoint
Sensor, we have been informed that in the opinion of the SEC this type of
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
33
In the event that a claim for indemnification against these liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
ADDITIONAL INFORMATION
This prospectus does not contain all of the information in or attached as an
exhibit to the registration statement. Investors should refer to the exhibits
to the registration statement for the complete text. The registration
statement and its exhibits may be inspected at the office of the SEC without
charge. A copy of the registration statement, any post-effective amendment
and exhibits may be accessed through the SEC's EDGAR database located at the
SEC's web site at http://www.sec.gov. Other information can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1580
of the SEC's office at 100 F Street NE, Washington, D.C. 20549. Additional
updating information with respect to the securities covered by this prospectus
may be provided to purchasers in the future by means of amendments to this
prospectus.
In addition, the information incorporated by reference is available to you
without charge upon your written or oral request. Flexpoint Sensor agrees to
respond to your requests for the additional information within one business
day of receipt of the request. Flexpoint Sensor will send the copies of the
document by first class mail or other equally prompt means. You must address
your request to:
Investor Relations
Flexpoint Sensor Systems, Inc.
106 West Business Park Drive
Draper, Utah 84020
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had a change in or disagreement with our independent accountant
during the two most recent fiscal years.
34
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Financial Statements through June 30, 2006:
------------------------------------------------------------
Condensed Consolidated Balance Sheet (Unaudited) June 30, 2006..............36
Condensed Consolidated Statements of Operations (Unaudited)
for the Six Months Ended June 30, 2006 and 2005, and for
the Cumulative period from February 24, 2004,(Date of
Emergence from Bankruptcy) through June 30, 2006...........................37
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited) for the Six Months Ended June 30, 2006.........................38
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2006 and 2005, and for the
Cumulative period from February 24, 2004, (Date of Emergence
from Bankruptcy) through June 30, 2006.....................................39
Notes to Condensed Consolidated Financial Statements........................40
Financial Statements for December 31, 2005 and 2004:
---------------------------------------------------
Report of Independent Registered Public Accounting Firm.....................44
Consolidated Balance Sheets December 31, 2005 and 2004......................45
Consolidated Statements of Operations for the year ended
December 31, 2005 and the Period from February 24, 2004
(date of emergence from bankruptcy) through December 31, 2004
and for the cumulative period from February 24, 2004,(date
of emergence from bankruptcy) through December 31, 2005....................46
Consolidated Statements of Stockholders Equity for the
period from February 24, 2004 (date of emergence from
bankruptcy) through December 31, 2004 and for the year
ended December 31, 2005....................................................47
Consolidated Statements of Cash Flows for the year ended
December 31, 2005 and for the Period from February 24, 2004
(date of emergence from bankruptcy) through December 31, 2004
and for the cumulative period from February 24, 2004 (date of
emergence from bankruptcy) through December 31, 2005.......................48
Notes to Consolidated Financial Statements..................................49
35
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2006
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,371,987
Accounts Receivable 4,550
Prepaid expenses 25,056
----------------------------------------------------------------------------
Total Current Assets 1,401,593
Long-Term deposits 6,500
Property and Equipment, net of accumulated depreciation
of $287,730 1,158,577
Patents and Proprietary Technology, net of accumulated
amortization of $341,151 1,627,200
Goodwill 5,356,414
----------------------------------------------------------------------------
Total Assets $ 9,550,284
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,202
Accrued liabilities 38,532
----------------------------------------------------------------------------
Total Current Liabilities 42,734
----------------------------------------------------------------------------
Stockholders' Equity
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding -
Common stock - $0.001 par value; 100,000,000 shares authorized;
23,292,887 shares issued and outstanding 23,292
Additional paid-in capital 14,324,756
Warrants and options outstanding 2,891,738
Deficit accumulated during the development stage (7,732,236)
----------------------------------------------------------------------------
Total Stockholders' Equity 9,507,550
----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 9,550,284
============================================================================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
36
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
From
February 24, 2004
For the Six Months (Date of Emergence
Ended June 30, from Bankruptcy)
-------------------------- through
2006 2005 June 30, 2006
-----------------------------------------------------------------------------------------------------------------
Design, Contract and Testing Revenue $ 53,526 $ 18,365 $ 411,554
-----------------------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Amortization of patents and proprietary technology (76,483) (64,054) (300,674)
Cost of revenue (2,184) (89,597) (96,481)
Administrative and marketing expense (1,218,994) (647,045) (5,618,511)
Research and development expense (231,777) - (711,192)
-----------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses (1,529,438) (800,696) (6,726,858)
-----------------------------------------------------------------------------------------------------------------
Other Income and Expenses
Interest expense - (7,231) (1,576,054)
Interest income 22,478 29,044 82,022
Sublease rent income 1,944 1,944 5,832
Gain (loss) on forgiveness of debt - (5,000) 71,268
-----------------------------------------------------------------------------------------------------------------
Net Other Income (Expense) 24,422 18,757 (1,416,932)
-----------------------------------------------------------------------------------------------------------------
Net Loss $ (1,451,490) $ (763,574) $ (7,732,236)
=================================================================================================================
Basic and Diluted Loss Per Share $ (0.06) $ (0.03)
==============================================================================================
Basic and Diluted Weighted-Average Common Shares Outstanding 22,997,887 22,208,079
==============================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
37
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
Deficit
Accumulated
Common Stock Additional Warrants During the Total
-------------------------- Paid-in and Options Development Stockholders'
Shares Amount Capital Outstanding Stage Equity
--------------------------------------------------------------------------------------------------------
Balance -
December 31, 2005 22,992,887 22,992 13,777,276 2,699,565 (6,280,746) 10,219,087
Employee compensation
from stock options - - - 529,953 - 529,953
Exercise of 300,000
warrants at $0.70
per share 300,000 300 547,480 (337,780) - 210,000
Net loss - - - - (1,451,490) (1,451,490)
-------------------------------------------------------------------------------------------------------
Balance - June 30, 2006 23,292,887 $ 23,292 $14,324,756 $2,891,738 $(7,732,236) $ 9,507,550
=======================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
38
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Cumulative
Period from
February 24, 2004
For the Six Months (Date of Emergence)
Ended June 30, from Bankruptcy)
--------------------------- through
2006 2005 June 30, 2006
-----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (1,451,490) $ (763,574) $ (7,732,236)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 82,089 80,392 287,729
Amortization of patents and proprietary technology 76,483 75,771 341,150
Issuance of common stock and warrants for services - - 2,695,053
Expenses paid by increase in convertible note payable - - 60,000
Amortization of discount on note payable - - 1,556,666
Stock-based compensation expense for employees 529,953 - 529,953
Changes in operating assets and liabilities:
Accounts receivable (4,550) (6,546) (4,550)
Accounts payable (37,535) (100,370) (203,904)
Accrued liabilities (4,793) 23,379 36,040
Deferred revenue - - (343,750)
Prepaid expenses 9,605 (8,398) (25,056)
Deposits - - (6,500)
-----------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (800,238) (699,346) (2,809,405)
-----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for the purchase of equipment (2,262) (35,600) (197,574)
Payments for patents - (15,658) (43,626)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC - - (265,000)
-----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,262) (51,258) (506,200)
-----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock and warrants 210,000 3,907,207 4,117,207
Principal payments on notes payable - related parties - (409,958) (460,300)
Proceeds from notes payable - related parties - - 445,300
Proceeds from borrowings under convertible note payable - - 583,334
-----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 210,000 3,497,249 4,685,541
-----------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (592,500) 2,746,645 1,369,936
Cash and Cash Equivalents at Beginning of Period 1,964,487 54,358 2,051
-----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,371,987 $ 2,801,003 $ 1,371,987
=====================================================================================================
Supplemental Cash flow Information:
Cash paid for interest $ - $ 7,231 $ 16,888
=====================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
39
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Interim Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of Flexpoint Sensor
Systems, Inc. and its subsidiaries (the "Company"). These financial
statements are condensed and, therefore, do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America. These statements should be read in conjunction with the
most recent annual consolidated financial statements of Flexpoint Sensor
Systems, Inc. and subsidiaries for the years ended December 31, 2005, included
elsewhere herein. In particular, the Company's significant accounting
principles were presented as Note 1 to the Consolidated Financial Statements
in that report. In the opinion of management, all adjustments necessary for a
fair presentation have been included in the accompanying condensed
consolidated financial statements and consist of only normal recurring
adjustments. The results of operations presented in the accompanying condensed
consolidated financial statements are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2006.
Nature of Operations - The Company is located in Salt Lake City, Utah and is a
development stage company engaged principally in designing, engineering and
manufacturing sensor technology and equipment using flexible potentiometer
technology. The Company is in the development stage as planned operations have
not commenced. Development stage activities primarily include acquiring
equipment and technology, organizing activities, obtaining financing and
seeking manufacturing contracts. At June 30, 2006, the Company had not entered
into any manufacturing agreements except as discussed in Note 4. Even though
the Company is making strides forward with its business plan, it is likely
that significant progress may not occur within the next four to six months.
Accordingly, the Company may not realize significant revenues or become
profitable within the next twelve months which would require additional
financing to fund its long-term cash needs. The Company may be required to
rely on debt financing, loans from related parties and private placements of
common stock for additional funding.
Valuation of Long-lived Assets - The carrying values of the Company's
long-lived assets are reviewed for impairment annually and whenever events or
changes in circumstances indicate that they may not be recoverable. When
projections indicate that the carrying value of the long-lived asset is not
recoverable, the carrying value is reduced by the estimated excess of the
carrying value over the projected discounted cash flows. As a result of
management's assessment of the recoverability of long-lived assets at June 30,
2006, no impairment was recognized at that date.
Research and Development - Research and development costs are recognized as
expense during the period incurred until the conceptual formulation, design,
and testing of a process is completed and the process has been determined to
be commercially viable.
Stock-Based Compensation - In December 2004, the FASB issued Statement No. 123
(Revised 2004), "Share-Based Payment" ("SFAS No.123R"). SFAS No. 123R
supersedes APB 25 and requires the recognition of the cost of employee
services received in exchange for stock options and awards of equity
instruments based on the grant-date fair value of such options and awards,
over the period they vest. Under APB 25, no compensation was recorded in
earnings for the Company's stock-based options granted under the 2005 Stock
Incentive Plan (the "Plan"). The pro forma effects on net loss and loss per
share for the awards issued under the Plan were instead disclosed in a note to
the financial statements. Under SFAS No. 123R, all share-based compensation
is measured at the grant date, based on the fair value of the award, and is
recognized as an expense in operations over the requisite service period. On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R, for its
share-based compensations plans and began recognizing the unvested portion of
employee compensation from stock options and awards equal to the unamortized
grant-date fair value over the remaining vesting period. Furthermore,
compensation costs will also be recognized for any awards issued, modified,
repurchased, or canceled after January 1, 2006.
40
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basic and Diluted Loss Per Share - Basic and diluted loss per share is
computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. Diluted loss per share is computed by dividing
net loss by the weighted-average number of common shares and the dilutive
potential of common shares outstanding during the period. At June 30, 2006,
there were outstanding options and warrants to purchase 4,590,335 shares of
common stock. At June 30, 2005, there were outstanding warrants to purchase
3.626,335 of common stock. These options and warrants were not included in
the computation of diluted loss per share as their effect would have been
anti-dilutive, thereby decreasing loss per common share.
NOTE 2 - COMMON STOCK
Exercise of Warrants - On June 27, 2006, Summit Resource Group exercised its
rights in connection with 300,000 warrants (originally issued March 3, 2004)
to purchase 300,000 shares of common stock at an exercise price of $0.70 per
share; or two hundred ten thousand dollars ($210,000), which money the Company
received. These shares were registered in the Company's SB-2 Registration
Statement and declared effective by the Securities and Exchange Commission on
August 18, 2005.
Private Placement of Common Stock and Warrants - From January 25, 2005 through
March 31, 2005, the Company issued 2,836,335 shares of common stock and
warrants to purchase 2,836,335 shares of common stock at $3.00 per share from
October 1, 2005 through September 30, 2007 in a private placement offering.
The Company realized proceeds of $3,907,207, net of $347,294 of cash offering
costs. As part of this private placement, the Company also issued the
placement agent 140,000 shares of common stock and 140,000 warrants
exercisable at $3.00 per share for the agent's services in connection with the
offering. The fair value of the warrants issued was $4,047,816 as estimated by
the Company using the Black-Scholes pricing model with the following
assumptions: risk free interest rate of 4.58%; volatility of 200%; estimated
life of two years; and dividend yield of 0%. The net proceeds were allocated
to the shares of common stock and the warrants based upon their relative fair
values and resulted in allocating $1,980,271 to the shares of common stock and
$1,926,937 to the warrants.
An investor may not exercise their warrants if the exercise of the warrant
would cause the investor to own more than 4.99% of the then issued and
outstanding common stock of the Company. If the closing bid price of the
Company's common stock is greater than $4.00 per share for five consecutive
trading days after October 1, 2005, the Company may call the warrants, in
whole or in part, for no consideration, which would require the investor to
either exercise the warrants within fifteen trading days or forfeit the
warrants.
Compensation to Board Members - On August 25, 2005, the company issued to a
Director 18,350 shares of restricted common stock for director services valued
at $31,745 or $1.73 per share, the quoted market value of the stock on the day
of this transaction.
NOTE 3 - STOCK OPTION PLANS
On August 25, 2005, the Board of Directors of the Company approved and adopted
the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its
adoption by the Board and will continue in effect for ten years, unless
terminated. This plan was approved by the stockholders of the Company on
November 22, 2005. Under the Plan, the exercise price for all options issued
will not be less than the average quoted closing market price of the Company's
trading common stock for the thirty day period immediately preceding the grant
date plus a premium of ten percent. The maximum aggregate number of shares
that may be awarded under the plan is 2,500,000.
41
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company utilized the Black-Scholes model for calculating the fair value
pro forma disclosures under SFAS No. 123 and has continued to use this model,
which is an acceptable valuation approach under SFAS No. 123R. This model
requires the input of subjective assumptions, including the expected price
volatility of the underlying stock. Projected data related to the expected
volatility and expected life of stock options is based upon historical and
other information, and notably, the Company's common stock has limited trading
history. Changes in these subjective assumptions can materially affect the
fair value of the estimate, and therefore, the existing valuation models do
not provide a precise measure of the fair value of the Company's employee
stock options.
On August 25, 2005 the Company granted options to employees to purchase an
aggregate 1,159,000 shares of common stock at an exercise price of $1.91 per
share. These options vest over three years on either the employee's employment
anniversary date or on the anniversary date of the date specified in the
grant, and expire 10 years from date of grant. The Company used the following
assumptions in estimating the fair value of the options issued August 25,
2005: market value at time of issuance - $1.73; expected holding period - 8
years; risk-free interest rate - 4.18%; dividend yield - 0%; expected
volatility - 200%; estimated forfeiture percentage - 0%. Using these
assumptions, the options granted have a weighted average fair value of $1.723
per share.
On February 27, 2006 the Company granted options to employees to purchase an
aggregate 75,000 shares of common stock at an exercise price of $2.07 per
share. The options vest over three years on the employee's employment
anniversary and expire 10 years from date of grant. The Company used the
following assumptions in estimating the fair value of the options issued
February 27, 2006: market value at time of issuance - $2.00; expected holding
period - 7 years; risk-free interest rate - 4.26%; dividend yield - 0%;
expected volatility - 200%; estimated forfeiture percentage - 0%. Using these
assumptions, the options granted have a weighted average fair value of $1.986
per share.
During the six month period ended June 30, 2006, the Company recognized
$529,953 of stock-based compensation expense. The transitional effects of
adoption of SFAS 123R was an increase in net loss and basic and diluted loss
per share for the six months ended June 30, 2006 of $529,953 and $0.02,
respectively. There were no effects on cash flows from operating activities
or financing activities. There were no employee stock options outstanding at
June 30, 2005; therefore, there was no pro forma effect from adoption of SFAS
123R on the net loss for the six months ended June 30, 2005. A summary of all
employee options outstanding and employee options exercisable under the
Company's plan is set forth below:
Weighted
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
For the Period Ending June 30, 2006 Shares Price Life Value
------------------------------------------------------------------------------
Outstanding at beginning of period 1,159,000 $ 1.91 9.16
Granted Jan-Jun 2006 75,000 2.07 9.71
------------------------------------------------------------------------------
Outstanding at end of period 1,234,000 $ 1.92 9.19 $ -
==============================================================================
Exercisable at end of period 347,000 $ 1.91 9.16 $ -
42
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RELATED PARTY MANUFACTURING CONTRACT
In September 2005 the Company entered into a manufacturing agreement with R&D
Products, LLC, a Utah limited liability company, doing business in Midvale,
Utah. For the purpose of this contract, management considers R&D Products to
be a Related Party because a controlling member of R&D Products, LLC is also a
non-controlling interest shareholder of Flexpoint Sensor Systems, Inc. R&D
Products has developed a mattress with multiple air chambers that uses the
Company's Bend Sensors(R) and the Company has agreed to manufacture the Bend
Sensors(R) for the mattresses. The initial order is for 30,000 Bend
Sensors(R) to be used to begin manufacture of 1,000 mattresses. The
realization of the manufacturing and sales of the Bend Sensors(R) is dependent
upon R&D Products selling either their bed directly or licensing their
technology to a third party. There are no guarantees that R&D will make such
sales in such quantities to meet the demands of this contract.
NOTE 5 - LEGAL PROCEEDINGS
On January 20, 2006, Sensitron, Inc., the Company's wholly owned subsidiary,
filed a complaint in the United States District Court for the District of
Utah, Central Division, against Michael W. Wallace, d/b/a Pure Imagination,
seeking patent rights for a patent and patent application that Mr. Wallace
filed with the United State Trademark and Patent Office. Mr. Wallace assisted
Sensitron with the development of certain software to be used in combination
with our Bend Sensor(R) technology related to the SEAT MAT(TM) system. Mr.
Wallace failed to deliver the source code to Sensitron and failed to list our
employees and previous employees as co-inventors on the patent he obtained and
for his pending application for a patent. Sensitron is seeking a copy of the
source code and ownership of the patent and/or correction of the patent and
patent application to add the appropriate co-inventors. Sensitron is also
seeking unspecified damages along with its costs and attorneys' fees.
On July 3, 2001, Flexpoint Sensor Systems, Inc. filed a voluntary petition for
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.
The petition was filed in the United States Bankruptcy Court for the District
of Utah, File No. 01-29577JAB. On February 24, 2004 the bankruptcy court
confirmed our Plan of Reorganization. In our bankruptcy proceeding we objected
to the $1,700,000 claim made by Delco Electronics, Inc (Delphi). We believe
that Delphi is precluded by the terms of the agreement from any financial
recovery due to its breach of the sponsorship agreement. Other potential
claims are breach of contract, breach of fiduciary duties owed to Flexpoint,
Inc. pursuant to the contract, and intentional and negligent interference with
Flexpoint, Inc.'s contractual and business relationship with General Motors.
We are currently attempting to negotiate a settlement to this controversy.
43
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Flexpoint Sensor Systems, Inc.
We have audited the accompanying consolidated balance sheets of Flexpoint
Sensor Systems, Inc. and subsidiaries (a development stage company) (the
Company) as of December 31, 2005 and 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 2005, for the period from February 24, 2004 (date of
emergence from bankruptcy) through December 31, 2004 and for the cumulative
period from February 24, 2004 (date of emergence from bankruptcy) through
December 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Flexpoint Sensor
Systems, Inc. and subsidiaries as of December 31, 2005 and 2004 and the
results of their operations and their cash flows for the year ended December
31, 2005, for the period from February 24, 2004 (date of emergence from
bankruptcy) through December 31, 2004 and for the cumulative period from
February 24, 2004 (date of emergence from bankruptcy) through December 31,
2005 in conformity with U.S. generally accepted accounting principles.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 20, 2006
44
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,964,487 $ 54,358
Accounts receivable - 749
Prepaid expenses 34,661 -
----------------------------------------------------------------------------
Total Current Assets 1,999,148 55,107
Property and equipment, net of accumulated
depreciation of $205,640 and $47,695 1,238,404 1,311,139
Patents and proprietary technology, net of
accumulated amortization of $264,667 and $112,702 1,703,683 1,827,501
Goodwill 5,356,414 5,356,414
Deposits 6,500 6,500
----------------------------------------------------------------------------
Total Assets $ 10,304,149 $ 8,556,661
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 41,737 $ 116,378
Accrued liabilities 43,325 20,470
Notes payable - related parties - 410,958
----------------------------------------------------------------------------
Total Current Liabilities 85,062 547,806
----------------------------------------------------------------------------
Stockholders' Equity
Preferred stock - $0.001 par value; 1,000,000
shares authorized; no shares issued or outstanding - -
Common stock - $0.001 par value; 100,000,000 shares
authorized; 22,992,887 shares and 19,998,202 shares
issued and outstanding respectively 22,992 19,998
Additional paid-in capital 13,777,276 11,768,255
Warrants outstanding 2,699,565 731,328
Deficit accumulated during the development stage (6,280,746) (4,510,726)
----------------------------------------------------------------------------
Total Stockholders' Equity 10,219,087 8,008,855
----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 10,304,149 $ 8,556,661
============================================================================
45
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period For the Cumulative
from Period from
February 24, 2004 February 24, 2004
(Date of Emergence (Date of Emergence)
For the Year from Bankruptcy) from Bankruptcy)
Ended through through
December 31, 2005 December 31, 2004 December 31, 2005
---------------------------------------------------------------------------------------------
Design, Contract and Testing Revenue $ 12,595 $ 345,433 $ 358,028
---------------------------------------------------------------------------------------------
Operating Costs and Expenses
Amortization of patents and
proprietary technology (128,109) (96,082) (224,191)
Cost of revenue (7,692) (86,605) (94,297)
Administrative and marketing expense (1,219,600) (3,179,917) (4,399,517)
Research and development expense (479,415) - (479,415)
---------------------------------------------------------------------------------------------
Total Operating Costs and Expenses (1,834,816) (3,362,604) (5,197,420)
---------------------------------------------------------------------------------------------
Other Income and Expenses
Interest expense (7,231) (1,568,823) (1,576,054)
Interest income 59,544 - 59,544
Sublease rent income 3,888 - 3,888
Gain (loss) on forgiveness of debt (4,000) 75,268 71,268
---------------------------------------------------------------------------------------------
Net Other Income (Expense) 52,201 (1,493,555) (1,441,354)
---------------------------------------------------------------------------------------------
Net Loss $ (1,770,020) $ (4,510,726) $ (6,280,746)
=============================================================================================
Basic and Diluted Loss Per Share $ (0.08) $ (0.24)
==========================================================================
Basic and Diluted Weighted-Average
Common Shares Outstanding 22,596,558 18,503,026
==========================================================================
46
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 24, 2004 (DATE OF EMERGENCE
FROM BANKRUPTCY) THROUGH DECEMBER 31, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2005
Deficit
Accumulated
Common Stock Additional During the Total
-------------------------- Paid-in Warrants Development Stockholders'
Shares Amount Capital Outstanding Stage Equity
------------- ------------ ------------ ----------- ------------ -------------
Balance - February 24,
2004 (Date of Emergence
from Bankruptcy) 14,098,202 $ 14,098 $ 4,952,166 $ - $ - $ 4,966,264
Beneficial debt
conversion option - - 1,500,000 - - 1,500,000
Conversion of note
payable, March 31 and
May 19, 2004, $0.50
per share 3,000,000 3,000 1,497,000 - - 1,500,000
Issuance for consulting
services, March 3, 2004,
$1.15 per share 100,000 100 114,580 - - 114,680
Share-based compensation
from 650,000 warrants
issued on March 3, 2004
for consulting services - - - 731,328 - 731,328
Issuance for acquisition
of equipment and
proprietary technology
from Flexpoint Holdings,
LLC, a company controlled
by a shareholder, March
31, 2004, $1.21 per share 1,600,000 1,600 1,929,709 - - 1,931,309
Issuance for compensation,
November 24, 2004, $1.48
per share 1,200,000 1,200 1,774,800 - - 1,776,000
Net loss - - - - (4,510,726) (4,510,726)
-------------------------------------------------------------------------------------------------------
Balance -
December 31, 2004 19,998,202 19,998 11,768,255 731,328 (4,510,726) 8,008,855
Issuance of common stock
at $ .77 per share and
2,826,335 warrants at
$0.61 per warrant for
cash net of $347,294
cash offering costs and
140,000 common shares
and 140,000 warrants,
January through March
2005 2,976,335 2,976 1,977,294 1,926,937 - 3,907,207
Issuance of 30,000 warrants
at $1.38 per warrant for
services rendered July 2005 - - - 41,300 - 41,300
Issuance of common stock at
$ 1.73 per share, as
compensation to director
of company for services
rendered, August 2005 18,350 18 31,727 - - 31,745
Net loss - - - - (1,770,020) (1,770,020)
-------------------------------------------------------------------------------------------------------
Balance -
December 31, 2005 22,992,887 $ 22,992 $13,777,276 $2,699,565 $(6,280,746) $ 10,219,087
=======================================================================================================
47
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period For the Cumulative
from Period from
February 24, 2004 February 24, 2004
(Date of Emergence (Date of Emergence)
For the Year from Bankruptcy) from Bankruptcy)
Ended through through
December 31, 2005 December 31, 2004 December 31, 2005
--------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (1,770,020) $ (4,510,726) $ (6,280,746)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 157,945 47,695 205,640
Amortization of patents and proprietary technology 151,965 112,702 264,667
Issuance of common stock and warrants for services 73,045 2,622,008 2,695,053
Expenses paid by increase in convertible note payable - 60,000 60,000
Amortization of discount on note payable - 1,556,666 1,556,666
Changes in operating assets and liabilities:
Accounts receivable 749 (749) -
Accounts payable (74,641) (91,728) (166,369)
Accrued liabilities 21,855 18,978 40,833
Deferred revenue - (343,750) (343,750)
Prepaid expenses (34,661) - (34,661)
Deposits - (6,500) (6,500)
------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,473,763) (535,404) (2,009,167)
------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for the purchase of equipment (85,210) (110,102) (195,312)
Payments for patents (28,147) (15,479) (43,626)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC - (265,000) (265,000)
------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (113,357) (390,581) (503,938)
------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock
and warrants 3,907,207 - 3,907,207
Principal payments on notes payable - related parties (409,958) (50,342) (460,300)
Proceeds from notes payable - related parties - 445,300 445,300
Proceeds from borrowings under convertible note payable - 583,334 583,334
------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 3,497,249 978,292 4,475,541
------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 1,910,129 52,307 1,962,436
Cash and Cash Equivalents at Beginning of Period 54,358 2,051 2,051
------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,964,487 $ 54,358 $ 1,964,487
======================================================================================================
Supplemental Cash flow Information:
------------------------------------------------------------------------------------------------------
Cash paid for interest $ 7,231 $ 9,657 $ 16,888
======================================================================================================
48
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Nature of Operations - Flexpoint Sensor Systems, Inc. and its subsidiaries
(the Company), located in Salt Lake City, Utah, is a development stage company
engaged principally in designing, engineering, and manufacturing sensor
technology and equipment using flexible potentiometer technology. On February
24, 2004, the Company's plan of reorganization was confirmed by the U.S.
Bankruptcy Court and the Company emerged from bankruptcy. As discussed
further in Note 3, the emergence from bankruptcy was accounted for using fresh
start accounting and the Company was considered a new entity for financial
reporting purposes. The new entity is in the development stage, as planned
operations have not commenced. Development stage activities primarily include
acquiring equipment and technology, organizing activities, obtaining financing
and seeking manufacturing contracts. To date, these activities have not
resulted in any sustainable source of revenue or sales of the Company's
products or technology. There is no assurance that the Company will be
successful in exploiting its technology or in obtaining profitable operations.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. and its
wholly owned subsidiaries, Sensitron, Inc., Flexpoint, Inc. and Flexpoint
International, LLC. During 2005 a minority interest holder in the
subsidiaries relinquished his interest for no consideration. The interest in
the subsidiaries is carried at no value based on its historical cost.
Intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from these estimates.
Business Condition - The Company had a net operating loss of $1,770,020, and
$4,510,726 and used cash in operating activities of $1,473,763 and $535,404
for the year ended December 31, 2005 and for the period from February 24, 2004
(date of emergence from bankruptcy) through December 31, 2004, respectively.
The Company had accumulated deficits of $6,280,746 and $4,510,726 at December
31, 2005 and December 31, 2004, respectively.
Through December 31, 2004, the Company met its short-term cash needs through
proceeds from related party notes payable and from a convertible note payable.
During 2005, the Company issued common stock and warrants in a private
placement offering for proceeds of $3,980,207. To meet its short-term cash
need, the Company may issue additional equity securities or incur debt should
the Company not be able to generate sufficient revenues from operations with
its current working capital. However, there can be no assurance that plans to
obtain financing will be completed as planned, or that such sources of
financing, if any, will continue to be available, and if available, that they
will be on terms favorable to the Company.
Fair Values of Financial Instruments - The amounts reported as notes payable
to a related party are considered to be reasonable approximations of their
fair value due to their short repayment term.
Property and Equipment - Property and equipment are 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 operations. Depreciation is
computed using the straight-line method and is recognized over the estimated
useful lives of the property and equipment, which are three to ten years.
Depreciation expense was $157,945 and $47,695 for the year ended December 31,
2005 and for the period from February 24, 2004 (date of emergence from
bankruptcy) through December 31, 2004. Property and equipment consists of the
following:
49
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 2004
------------------------------------------------------------------
Machinery and equipment $ 1,250,406 $ 1,190,257
Office equipment 139,397 130,132
Furniture and fixtures 42,712 38,445
Software 11,529 -
------------------------------------------------------------------
Total Property and Equipment 1,444,044 1,358,834
Less: Accumulated depreciation (205,640) (47,695)
------------------------------------------------------------------
Net Property and Equipment $ 1,238,404 $ 1,311,139
==================================================================
Valuation of Long-lived Assets - The carrying values of the Company's
long-lived assets are reviewed for impairment annually and whenever events or
changes in circumstances indicate that they may not be recoverable. When
projections indicate that the carrying value of the long-lived asset is not
recoverable, the carrying value is reduced by the estimated excess of the
carrying value over the projected discounted cash flows.
Intangible Assets - Costs to obtain or develop patents are capitalized and
amortized over the remaining life of the patents, technology rights are
amortized over their estimated useful lives. The Company currently has the
rights to several patents and proprietary technology. Patents and technology
are amortized from the date the Company acquires or is awarded the patent or
technology right, over their estimated useful lives. An impairment charge is
recognized if the carrying amount is not recoverable and the carrying amount
exceeds the fair value of the intangible assets as determined by projected
discounted cash flows of anticipated future company revenues of patent or
technology products or royalties. Upon emergence from bankruptcy, the Company
recognized patents valued at $279,147. Following emergence, the Company
acquired proprietary technology valued at $1,645,577. The recorded fair
values of the Company's intangible assets were established through an
independent appraisal. Amortization of patents and proprietary technology was
$151,965 and $112,702 for the year ended December 31, 2005 and for the period
from February 24, 2004 through December 31, 2004, respectively.
Research and Development - Research and development costs are recognized as
expense during the period incurred until the conceptual formulation, design,
and testing of a process is completed and the process has been determined to
be commercially viable.
Goodwill - Goodwill represents the excess of the reorganization value over the
fair value of net assets of the Company upon emergence from bankruptcy.
Goodwill is not amortized, but is tested for impairment annually or when a
triggering event occurs. When tested, the undiscounted net cash flows of the
asset or entity to which the goodwill relates are evaluated. Impairment is
indicated if undiscounted cash flows are less than the carrying value of the
assets. The amount of the impairment is measured using a discounted-cash-flow
model considering future revenues, operating costs, a risk-adjusted discount
rate and other factors.
Revenue Recognition - Revenue is recognized when persuasive evidence of an
arrangement exists, services have been provided or goods delivered, the price
to the buyer is fixed or determinable and collectibility is reasonably
assured. Revenue from the sale of products is recorded at the time of shipment
to the customers. Revenue from research and development engineering contracts
is recognized as the services are provided and accepted by the customer.
Revenue from contracts to license technology to others is deferred until all
conditions under the contracts are met and then recognized as licensing
royalty revenue over the remaining term of the contracts.
50
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sensitron, Inc., the Company's subsidiary, had deferred revenue of $325,000
through September 2004, which consisted of $250,000 of prepaid licensing
royalties to be deferred and recognized as the related licensing royalty sales
were reported to the Company by the customer over the remaining term of the
agreement, and $75,000 of deferred sales related to software license rights
sold to the customer that were being amortized over the six-year term of the
contract. On October 2, 2004, Sensitron cancelled the licensing agreement by
refunding to the customer $100,000 of the prepayment previously received from
the customer under the license agreement. The balance of $225,000 of the
prepayment was recognized as licensing revenue in the fourth quarter of 2004.
Stock Based Compensation - The Company accounts for stock-based compensation
to employees under the recognition method and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related Interpretations. Under APB 25, compensation related to stock options
is recorded if an option's exercise price on the measurement date is below the
fair value of the Company's common stock, and amortized to expense over the
vesting period. Compensation expense for stock awards or purchases, if any,
is recognized if the award or purchase price on the measurement date is below
the fair value of the Company's common stock, and is recognized on the date of
award or purchase.
The Company accounts for its stock-based compensation issued to non-employees
using the fair value method in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation." Under SFAS No. 123, stock-based compensation is
determined as either the fair value of stock granted as estimated using the
Black-Scholes option pricing method. Stock-based compensation to non-employees
totaled $73,027 for the year ended December 31, 2005 and $846,008 for the
period from February 24, 2004 through December 31, 2004.
During 2005, the Company granted stock options to purchase 1,159,000 common
shares with an exercise price of $1.91 per share, under the newly-adopted 2005
Stock Plan. Because the options granted had no intrinsic value, no
compensation expense was recognized for the grants. The effect on net loss and
net loss per common share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to employee stock-based compensation
for the year ended December 31, 2005 and for the period from February 24, 2004
(date of emergence from bankruptcy) through December 31, 2004 is as follows:
December 31, 2005 2004
-----------------------------------------------------------------------
Net loss, as reported $ (1,770,020) $ (4,510,726)
Add back: total stock-based compensation - -
Deduct: total stock-based employee
compensation determined under fair
value based method for all awards (774,419) -
-----------------------------------------------------------------------
Proforma Net Loss $ (2,544,439) $ (4,510,726)
=======================================================================
Basic and diluted net income (loss) per
common share:
As reported $ (0.08) $ (0.24)
Pro forma $ (0.11) $ (0.24)
=======================================================================
In December 2004, the FASB issued Statement No. 123 (Revised 2004),
"Share-Based Payment" ("Statement 123(R)"). Statement 123(R) supersedes APB
25 and requires the recognition of the cost of employee services received in
exchange for stock options and awards of equity instruments based on the
grant-date fair value of such options and awards, over the period they vest.
Statement 123(R) will be effective beginning January 1, 2006. Beginning
January 1, 2006, the Company will recognize the unvested portion of employee
compensation from stock options and awards equal to the unamortized grant-date
fair value over the remaining vesting period.
51
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and Diluted Loss Per Share - Basic and diluted loss per share is
computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. Diluted loss per share is computed by dividing
net loss by the weighted-average number of common shares and common
equivalents outstanding during the period. At December 31, 2005, there were
warrants outstanding to purchase 3,656,335 shares of common stock, and options
to purchase 1,159,000 shares of common stock, and at December 31, 2004, there
were warrants outstanding to purchase 650,000 shares of common stock. These
warrants and options were not included in the computation of diluted loss per
share as their effect would have been anti-dilutive, thereby decreasing loss
per common share.
NOTE 2 - CONFIRMATION OF PLAN OF REORGANIZATION
On February 24, 2004, the Bankruptcy Court confirmed the Company's plan of
reorganization. The confirmed plan provided for the following:
Reverse Stock Split - The shares of common stock outstanding prior to the
confirmation of the plan were reverse split on a 1-for-7 basis. All share
amounts are presented in the accompanying financial statements on a post-split
basis.
Cancellation of Common Stock - The Company cancelled 828,571 shares of common
stock issued to an officer during 2001, as provided for by the confirmed plan
of reorganization.
Convertible Debentures Payable - Convertible debentures of $3,681,280 were
forgiven in exchange for the Company's agreement not to contest the issuance
of 7,142,087 shares of common stock that were issued to a shareholder for the
exercise of warrants prior to the bankruptcy petition.
Convertible Promissory Note to Former Employee - The Company converted
$194,620 of claims that included accounts payable, accrued wages and a
convertible promissory note to a former employee of $20,000, into 377,682
shares of common stock at a conversion price of $0.5153 per share.
Note Payable to Stockholder - The Company exchanged $1,230,218 of notes
payable to a stockholder for 2,387,382 shares of common stock at a conversion
price of $0.5153 per share.
Lease Obligation - A lease obligation of $574,255 was exchanged for 1,114,410
shares of common stock at a conversion price of $0.5153 per share.
Convertible Note Payable - The plan provided for an investor to provide
$1,500,000 and receive a note payable convertible into 3,000,000 shares of
common stock at $0.50 per share.
Delphi Automotive Systems Supply Agreement - Flexpoint Inc. entered into a
Purchase and Supply Agreement (the Supply Agreement) with Delphi Automotive
Systems (Delphi) in June 1998. Under the terms of the Supply Agreement, the
Company was to supply its proprietary sensor mats to Delphi for integration
into a weight-based suppression system as a critical part of a smart air bag
system. The Supply Agreement provided that such sensor mats were to be
exclusively supplied to General Motors, through Delphi, by the Company through
2002. In May 2000, the Supply Agreement was amended, primarily providing for
Delphi to make loan payments to Flexpoint, Inc. to be used directly for Delphi
programs. As of December 31, 2000, Flexpoint, Inc. had received loan proceeds
of $1,700,000 from Delphi.
In August 2000, Delphi notified the Company of its intent to terminate the
Supply Agreement. The Company believes that Delphi was not entitled to
terminate the agreement or had not followed the appropriate contractual
provisions for termination of the Supply Agreement. As a result of the
termination, the Company was required to significantly reduce its workforce
and its operating costs. In addition, the Company sought protection under the
United States federal bankruptcy laws.
52
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation under the Delphi Supply Agreement remains under the jurisdiction of
the bankruptcy court and the outcome of the future legal proceedings between
the Company and Delphi is uncertain. However, on February 24, 2004, the
Company concluded that the likelihood that this contingency would require that
the Company transfer assets to Delphi was remote, and therefore, the liability
was accounted for as extinguished prior to confirmation of the plan of
reorganization.
NOTE 3 - FRESH START ACCOUNTING
In accordance with the requirements of SOP 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, the Company determined
that a change in control occurred in connection with its reorganization and
therefore the Company accounted for the reorganization using fresh-start
reporting. Accordingly, all assets of Flexpoint Sensor Systems, Inc. have
been restated to reflect their reorganization value, which approximates fair
value at the date of reorganization. Management estimated a reorganization
asset value of $5,637,612 based upon the negotiated price at which certain
creditors were willing to convert their claims into common stock. The Company
obtained an independent valuation, which determined that the reorganization
value consisted of cash of $2,051, patents valued at $279,147 and goodwill
valued at $5,356,414.The patents have a weighted-average remaining life of
13.2 years and are amortized on a straight-line basis with an average yearly
amortization of $21,732. Goodwill is not amortized; rather the Company
evaluates the carrying value of the goodwill to determine whether the carrying
value should reflect any impairment. No impairment was noted at December 31,
2004 and 2005.
The following summarizes the effect of the plan of reorganization on the
Company's consolidated balance sheet, as of February 24, 2004, the date of
confirmation of the plan of reorganization:
53
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reorganized
As of Date of Confirmation of Pre - Debt Exchange of Balance
Plan, February 24, 2004 Confirmation Discharge Stock Fresh Start Sheet
--------------------------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets - Cash $ 2,051 $ - $ - $ - $ 2,051
Patents and technology, net 1,561 - - 277,586 279,147
Goodwill - - - 5,356,414 5,356,414
-------------------------------------------------------------------------------------------------------
Total Assets $ 3,612 $ - $ - $ 5,634,000 $ 5,637,612
=======================================================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Liabilities Not Subject to
Compromise - Current
Accounts payable $ 244,642 $ (36,536) $ - $ - $ 208,106
Accrued liabilities 1,492 - - - 1,492
Deferred revenue 343,750 - - - 343,750
Short-term advance payable 102,000 - - - 102,000
Notes payable - related party 16,000 - - - 16,000
------------------------------------------------------------------------------------------------------
Total Liabilities Not Subject
to Compromise - Current 707,884 (36,536) - - 671,348
------------------------------------------------------------------------------------------------------
Liabilities Subject to Compromise 7,777,379 (7,777,379) - - -
------------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit)
Preferred stock 1,080,426 - (1,080,426) - -
Common stock (old) 76,535 - (76,535) - -
Common stock (new) - 11,022 3,076 - 14,098
Additional paid-in capital 22,078,206 5,669,351 1,153,885 (23,949,276) 4,952,166
Deficit accumulated during the
development stage (31,716,818) 2,133,542 - 29,583,276 -
------------------------------------------------------------------------------------------------------
Total Stockholders'
Equity (Deficit) (8,481,651) 7,813,915 - 5,634,000 4,966,264
------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity (Deficit) $ 3,612 $ - $ - $ 5,634,000 $ 5,637,612
======================================================================================================
NOTE 4 - PROPERTY AND EQUIPMENT ACQUISITION
On March 31, 2004, Flexpoint Sensor Systems, Inc. entered an asset purchase
agreement with Flexpoint Holdings, LLC, a company controlled by a shareholder,
to acquire equipment and proprietary technology with an aggregate fair value
of $4,302,643 in exchange for $265,000, the assumption of a $698,000
convertible note payable, and 1,600,000 shares of restricted common stock
valued at $1,931,309 or $1.21 per share. Flexpoint Holdings, LLC is a holding
company with the primary purpose to acquire and hold assets, which one of the
Company's creditors caused to be seized during 2001 and sold at public auction
during 2002.
The owners and manager of Flexpoint Holdings, LLC were not officers, directors
or employees of the Company nor did they hold any controlling relationship in
the Company or retain an substantial indirect interest in the assets sold as a
result of stock ownership in the Company. Accordingly, the transaction was
recorded at the fair value of the consideration given which was lower than the
fair value of the assets acquired.
The acquisition of the assets of Flexpoint Holdings, LLC was not the purchase
of a business as Flexpoint Holdings, LLC had no operations. Accordingly, pro
forma financial information is not provided. The purchase price and the fair
values of the proprietary technology and equipment were established by
independent appraisals. The Company allocated the purchase price to the
property and equipment acquired and to the proprietary technology based on the
appraised fair values. The $1,408,334 excess of the appraised fair values of
the acquired assets over the fair value of the consideration paid was
allocated pro rata to reduce the values assigned to assets acquired. At March
31, 2004, the allocated value of the assets acquired was as follows:
54
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------
Property and equipment $ 1,248,732
Proprietary technology 1,645,577
-----------------------------------------------------------------
Net assets acquired $ 2,894,309
=================================================================
The equipment consists of manufacturing equipment to produce the Company's
product, and the technology rights consist of software algorithms that
interpret data provided by the Company's flexible sensor technology. The
technology has an estimated weighted-average useful life of 13.2 years.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Intangible Assets - The components of intangible assets at December 31, 2005
and 2004 were as follows:
Gross Carrying Accumulated Net Carrying
December 31, 2005 Amount Amortization Amount
---------------------------------------------------------------------
Patents $ 322,773 $ (40,476) $ 282,297
Proprietary technology 1,645,577 $ (224,191) $ 1,421,386
---------------------------------------------------------------------
Total Amortizing
Intangible Assets $ 1,968,350 $ (264,667) $ 1,703,683
=====================================================================
Gross Carrying Accumulated Net Carrying
December 31, 2004 Amount Amortization Amount
---------------------------------------------------------------------
Patents $ 294,626 $ (16,620) $ 278,006
Proprietary technology 1,645,577 (96,082) 1,549,495
---------------------------------------------------------------------
Total Amortizing
Intangible Assets $ 1,940,203 $ (112,702) $ 1,827,501
=====================================================================
Patent amortization was $23,856 and $16,620 for the year ended December 31,
2005 and for the period from February 24, 2004 through December 31, 2004, and
amortization related to proprietary technology was $128,109 and $96,082 for
the same periods respectively. Patent amortization is charged to general and
administrative expense; amortization expense for the proprietary technology is
charged to cost of revenues.
Estimated aggregate amortization expense for each of the next five years is
$151,991 each year.
Goodwill - Intangible assets not subject to amortization as of December 31,
2005 and 2004 consisted of goodwill with a net carrying value of $5,356,414.
During 2004, the Company engaged Houlihan Valuation Advisors, an independent
valuation firm, to assess the value of the Company's goodwill and patents at
the date of emergence from bankruptcy and the fair value of the proprietary
technology at its purchase date. The appraisal was completed during 2005.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
The Company had unsecured notes payable to shareholders with interest stated
at 12% and repayment terms that required payment of the principal and interest
by December 31, 2004. Under amended terms, payment of the entire principal
and interest was due to the shareholders by the extended due date of March 31,
2005. Principal balance of the note was $16,000 upon emergence from
bankruptcy; The Company borrowed an additional $445,300 and repaid $50,342 on
the notes leaving an aggregate remaining balance of $ 410,958 as of December
31, 2004. During the year ended December 31, 2005, the company repaid the
balance of $410,958 plus interest of $7,231.
55
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - CONVERTIBLE NOTE PAYABLE
Under the plan of reorganization, Broad Investment Partners, LLC (the
"lender") agreed to provide financing to the Company under the terms of a
$1,500,000 convertible promissory note. Under the terms of the note, the
lender advanced $698,000 to Flexpoint Holdings, LLC, which debt was assumed by
the Company as an increase to the promissory note upon the acquisition of
assets from Flexpoint Holdings, LLC in March 2004, and the note was increased
in March 2004 by $102,000 that was used to repay a short-term advance from
Flexpoint Holdings, LLC. The Company borrowed $583,334 under the note and the
note was increased by $60,000 through direct payments by the lender to settle
certain secured and priority claims determined in the reorganization plan and
other operating expenses.
Although the Company received proceeds under the note of $1,443,334 through
March 31, 2004, principal due under the note was $1,500,000, which resulted in
a discount to the note of $56,666. Under the terms of the convertible note
payable provided that interest accrued on the $1,500,000 outstanding balance
accrues at 10% per annum and the principal and accrued interest was due three
years from the date of the agreement. As provided for in the plan of
reorganization, the $1,500,000 principal balance under the note was
convertible into 3,000,000 shares of common stock at $0.50 per share. The
fair value of the common stock at the date of reorganization was $1.00 per
share, based on its average market value for the three-day period before and
after February 24, 2004, and resulted in the lender receiving a $1,500,000
beneficial debt conversion option under the conversion terms of the promissory
note. The original discount on the note and the discount from the beneficial
conversion option were amortized and recognized as interest expense through
March 31, 2004 when the note was converted into 3,000,000 shares of common
stock.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Non Cash Investing And Financing Activities - On March 31, 2004, the Company
issued 1,600,000 shares of common stock valued at $1,931,309, assumed a
$698,000 convertible note payable and paid cash of $265,000 to Flexpoint
Holdings, LLC, a company controlled by a shareholder, in exchange for
equipment valued at $1,248,732 and proprietary technology value at
$1,645,577. On March 31, 2004, a $1,500,000 convertible note payable was
converted into 3,000,000 shares of common stock.
NOTE 9 - INCOME TAXES
There was no provision for, or benefit from, income tax during the period.
The components of the net deferred tax asset as of December 31, 2005 and for
the period from February 24, 2004 (date of emergence from bankruptcy) through
December 31, 2004, including temporary differences and operating loss
carryforwards that arose prior to reorganization from bankruptcy, are as
follows:
December 31 2005 2004
------------------------------------------------------------------
Operating loss carry forwards $ 9,981,842 $ 9,255,417
Goodwill 1,997,942 1,997,942
Property and equipment 461,925 489,055
Patents and proprietary technology 692,157 730,035
------------------------------------------------------------------
Total Deferred Tax Assets 13,133,866 12,472,449
Valuation allowance (13,133,866) (12,472,449)
------------------------------------------------------------------
Net Deferred Tax Asset $ - $ -
==================================================================
56
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the confirmation of the bankruptcy plan, $7,813,915 in debt was
discharged. For tax reporting purposes, net operating loss carry forwards were
reduced to $24,750,611 at December 31, 2004. Net operating loss at December
31, 2005 was $26,760,970. Although net operating losses begin to expire in
the year 2012, those carry forwards will be limited or unavailable, under the
tax laws, due to a change of greater than 50% in ownership of the Company upon
emergence from bankruptcy.
The following is a reconciliation of the amount of 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, 2005 and for the period from
February 24, 2004 (date emergence from bankruptcy) through December 31, 2004:
For the Periods Ended December 31, 2005 2004
-----------------------------------------------------------------------
Tax at statutory rate (34%) $ (601,807) $(1,533,647)
Non-deductible expenses (1,199) (612)
Change in valuation allowance 661,417 1,683,113
State tax benefit, net of federal tax effect (58,411) (148,854)
-----------------------------------------------------------------------
Provision for Income Taxes $ - $ -
=======================================================================
NOTE 10 - COMMON STOCK
Private Placement of Common Stock and Warrants - From January 25, 2005 through
March 31, 2005, the Company issued 2,836,335 shares of common stock and
warrants to purchase 2,836,335 shares of common stock at $3.00 per share from
October 1, 2005 through September 30, 2007 in a private placement offering.
The Company realized proceeds of $3,907,207, net of $347,294 of cash offering
costs. As part of this private placement, the Company also issued the
placement agent 140,000 shares of common stock and 140,000 warrants
exercisable at $3.00 per share for the agent's services in connection with the
offering. The fair value of the warrants issued was $4,047,816 as estimated by
the Company using the Black-Scholes pricing model with the following
assumptions: risk free interest rate of 4.58%; volatility of 200%; estimated
life of two years; and dividend yield of 0%. The net proceeds were allocated
to the shares of common stock and the warrants based upon their relative fair
values and resulted in allocating $1,980,271 to the shares of common stock and
$1,926,937 to the warrants.
An investor may not exercise their warrants if the exercise of the warrant
would cause the investor to own more than 4.99% of the then issued and
outstanding common stock of the Company. If the closing bid price of the
Company's common stock is greater than $4.00 per share for five consecutive
trading days after October 1, 2005, the Company may call the warrants, in
whole or in part, for no consideration, which would require the investor to
either exercise the warrants within fifteen trading days or forfeit the
warrants.
Compensation to Board Members - On August 25, 2005, the company issued to a
Director 18,350 shares of restricted common stock for director services valued
at $31,745 or $1.73 per share, the quoted market value of the stock on the day
of this transaction.
The Company emerged from bankruptcy in 2004 without settling a claim for
compensation by John Sindt, the president and chairman of the board of
directors, for services rendered during the period the Company was in
bankruptcy. At the date the Company emerged from bankruptcy, the Company
acknowledged that the claim existed but was unable to determine the range of
potential loss under the claim and did not record a liability at that date.
The board of directors determined the amount of the claim on November 24,
2004, and the Company settled all amounts due under the claim and in payment
of services received after the Company emerged from bankruptcy the claim was
settled, by issuing 1,200,000 shares of restricted common stock to Mr. John
Sindt. The common stock issued was valued at $1,776,000, or $1.48 per share
based upon the market value of the common stock. The Company recognized the
issuance of the common stock during November 2004 as a charge to operations
for compensation.
57
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS
On April 1, 1995, the Board of Directors and shareholders adopted an Omnibus
Stock Option Plan. Upon emergence from bankruptcy and confirmation of the plan
of reorganization, all previously outstanding stock options were cancelled.
On August 25, 2005, the Board of Directors of the Company approved and adopted
the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its
adoption by the Board and shall continue in effect for ten years, unless
terminated. This plan was approved by the stockholders of the Company on
November 22, 2005, after an affirmative vote by the stockholders at the
Company's Annual Stockholders Meeting. Under the Plan, the exercise price for
all options issued will not be less than the average quoted closing market
price of the Company's trading common stock for the thirty day period
immediately preceding the grant date plus a premium of ten percent. The
maximum aggregate number of shares that may be awarded under the plan is
2,500,000.
On August 25, 2005 the Company granted options to employees to purchase an
aggregate 1,159,000 shares of common stock at an exercise price of $1.91 per
share. The options vest over three years on the employee's employment
anniversary. The options granted had an intrinsic value of $0 since the
exercise price exceeds the fair value of the underlying common stock on the
day of the grants. Information about all employee options outstanding is as
follows:
2005 2004
---------------------- ----------------------
Weighted- Weighted-
Average Average
For the Years Ended Exercise Exercise
December 31 Shares Price Shares Price
---------------------------------------------- ---------------------
Outstanding at beginning
of year - $ - - $ -
Granted 1,159,000 1.91 - -
---------------------------------------------- ----------------------
Outstanding at end
of year 1,159,000 $ 1.91 - $ -
============================================== ======================
A summary of employee options outstanding and employee options exercisable
under the Company's plan is set forth below:
Outstanding Exercisable
-------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Number of Remaining Average Number of Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------------------------------------------------------------------
$ 1.91 1,159,000 9.65 $ 1.91 - $ -
---------------------------------------------------------------------------
1,159,000 9.65 $ 1.91 - $ -
===========================================================================
58
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - LEASE COMMITMENT
Effective March 31, 2004, the Company agreed to sub-lease offices and a
manufacturing facility in which the Company's acquired equipment is located,
with monthly lease payments of $5,500 plus common area maintenance fees. The
lease expired in September 2004. During July 2004, the Company entered into a
new five-year lease agreement with average monthly payments including
prescribed common area fees of $8,718, with a 2% annual increase in lease
payments. Rent expense over the term of the lease is recognized on a
straight-line basis over the term of the lease. Rent expense of $101,821 and
$78,715 was charged to operations for the year ended December 31, 2005, and
for the period from February 24, 2004 through December 31, 2004, respectively.
Total future annual minimum rent payments as of December 31, 2005 are as
follows:
----------------------------
2006 $ 103,388
2007 104,988
2008 106,619
2009 80,894
----------------------------
$ 395,889
============================
NOTE 13 - CONSULTING AGREEMENTS
On March 3, 2004, the Company entered into a twelve-month consulting agreement
with Summit Resource Group ("Summit") whereby Summit agreed to provide
consulting services for the Company related to investor relations, including
dealing with direct investor relations, broker/dealer relations and with the
investing public. A 45-day written notice from either party is required to
terminate the agreement. In consideration for the consulting services, the
Company issued Summit 100,000 common shares and warrants to purchase an
additional 650,000 common shares. The warrants are exercisable for five years
from the date awarded at the following exercise prices: warrants to purchase
300,000 shares are exercisable at $0.70 per share and warrants to purchase
350,000 shares are exercisable at $0.80 per share. In July 2005, the Company
fulfilled its obligation for registration rights with respect to the 650,000
common shares and underlying warrants by including the respective common
shares and warrants in the Company's SB-2 registration.
The Company valued the issuance of 100,000 common shares to Summit at
$114,680, or $1.15 per share, based on the quoted market value of the stock on
the date of the agreement. The Company valued the warrants at $731,328,
estimated on the grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions: risk-free interest rate of 3.06%;
expected dividend yield of 0.0%; expected life of 5 years and estimated
volatility of 200%. Consulting expense was charged to operations recognized
during the period from March 2004 through September 2004, the period over
which the warrants vested.
On July 20, 2005, the Company issued warrants to purchase 30,000 common shares
at $2.00 per share to an investor relations firm for services. The warrants
issued were valued at $41,300, or $1.38 per warrant. The Company estimated the
fair value of the warrants using the Black-Scholes option pricing model with
the following assumptions: risk free interest rate of 4.40%; volatility of
200%; estimated life of two years; and dividend yield of 0%. These warrants
were issued with a callable feature in which the Company has the right to call
the warrants at $2.00 per share if at any time after six months from the date
of issue; the closing price of the common stock is greater than $5.00 per
share for five consecutive trading days. In July 2005, the Company fulfilled
its obligation for registration rights with respect to the 30,000 common
shares and underlying warrants by including the respective common shares and
warrants in the Company's SB-2 registration.
59
FLEXPOINT SENSOR SYSTEMS AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FORGIVENESS OF DEBT
At December 31, 2003, Flexpoint Inc, a subsidiary of the Company, had an
accounts payable balance of $75,049. This balance had not been included in the
bankruptcy proceedings of the Company and the debt was aged beyond the statute
of limitations. There had been no efforts made on the part of the vendors to
obtain payment. In 2004 the vendors were barred from collection under the
Statute of Limitations and the debt was considered forgiven.
NOTE 15 - RELATED PARTY MANUFACTURING CONTRACT
In September 2005 the Company entered into a manufacturing agreement with R&D
Products, LLC, a Utah limited liability company, doing business in Midvale,
Utah. For the purpose of this contract, management considers R&D Products to
be a Related Party because a controlling member of R&D Products, LLC is also a
non-controlling interest shareholder of Flexpoint Sensor Systems, Inc. R&D
Products has developed a mattress with multiple air chambers that use Bend
Sensors and the Company has agreed to manufacture the Bend Sensors for the
mattresses. The initial order is for 300,000 Bend Sensors to be used to
begin manufacture of 10,000 mattresses. The realization of the manufacturing
and sales of the Bend Sensors is dependent upon R&D Products selling either
their bed directly or licensing their technology to a third party. There are
no guarantees that R&D will make such sales in such quantities to meet the
demands of this contract.
NOTE 16 - SUBSEQUENT EVENTS
In January 2006, the Company filed a complaint in the United States District
Court for the District of Utah in Salt Lake City against Michael W. Wallace
for possible Patent encroachment.
60
__________
We have not authorized any dealer, salesman or any
other person to give any information or to make any
representations not contained in this prospectus.
Any information or representation not contained in
this prospectus must not be relied upon as having
been authorized by Flexpoint Sensor System, Inc.
__________
TABLE OF CONTENTS
Prospectus Summary................................3
Risk Factors......................................4
Use of Proceeds...................................7
Market for Common Equity..........................7
Description of Business...........................9
Property.........................................16
Legal Proceedings................................16 __________
Management's Discussion and Analysis.............17
Management.......................................23 PROSPECTUS
Executive Compensation...........................24 __________
Certain Related Transactions.....................25
Principal Stockholders...........................25
Description of Common Stock......................27 FLEXPOINT SENSOR
Selling Stockholders.............................27 SYSTEMS, INC.
Plan of Distribution.............................32
Other Information................................33 8,092,670
Interest of Named Experts and Counsel.........33 Common Shares
SEC's Position on Indemnification for
Securities Act Liability....................33 October 6, 2006
Additional Information........................34
Changes In and Disagreements With Accountants....34
Financial Statements Index.......................35
61
PART II
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
RECENT SALE OF UNREGISTERED SECURITIES
The following discussion describes all securities sold without registration by
Flexpoint Sensor during the past three years.
On February 27, 2006 we authorized the issuance of options to purchase
75,000 shares of common stock to Ryan C. Willard. The options were granted
under our 2005 Stock Incentive Plan, have an exercise price of $2.07 and vest
in 25,000 increments over a three year period. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On August 25, 2005, our Compensation Committee under our 2005 Stock
Incentive Plan authorized the grant of options to purchase an aggregate of
1,159,000 shares of common stock to eleven employees. We relied on an
exemption from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
On August 25, 2005 our board of directors authorized the issuance of 18,350
shares of restricted common stock to Ruland J. Gill, Jr. in consideration for
services rendered as a member of our board of directors. These shares were
valued at $31,746. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On July 21, 2005, we granted warrants to purchase 30,000 shares of common
stock to Investors Stock Daily, Inc. in consideration for investor relations
services. The warrants have an exercise price of $2.00 and expire July 20,
2007. We relied on an exemption from registration for a private transaction
not involving a public distribution provided by Section 4(2) of the Securities
Act.
On March 31, 2005, we closed our private placement offering conducted pursuant
to Rule 506 of Regulation D. We issued 2,836,335 units to 54 accredited
investors and issued 140,000 units to the placement agent, Alpine Securities
Corporation, as a commission. Each unit consisted of one share of common
stock and one warrant to purchase one additional share of common stock. The
maximum aggregate offering price of the private placement was $4,725,000 and
we realized proceeds of $3,907,208, net of $347,294 of cash offering costs.
The warrants sold as part of the unit have an exercise price of $3.00 and have
a two year exercise term beginning October 1, 2005. The warrants are also
subject to a "call." If the closing bid price of our common stock is greater
than $4.00 per share for five consecutive trading days after October 1, 2005,
then we have the right to call the warrants in whole or in part, forcing the
investor to exercise the warrant within fifteen trading days or the warrant is
forfeited. Also, the investor may not exercise a warrant if the exercise of
the warrant would cause the investor to own more than 4.99% of our then issued
and outstanding common stock.
On November 24, 2004, we authorized the issuance of 1,200,000 common shares,
valued at $1,766,000, to John A. Sindt in settlement of claims and for
services. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
On March 31, 2004, we issued 1,600,000 shares valued at approximately
$1,835,000 as partial payment to purchase the assets of Flexpoint Holdings,
LLC. We relied on an exemption from registration for a private transaction
not involving a public distribution provided by Section 4(2) of the Securities
Act.
On March 5, 2004, pursuant to the bankruptcy reorganization plan, our board
authorized the issuance of an aggregate of 6,679,474 shares of common stock to
our creditors in satisfaction of debt valued at $2.0 million and for
conversion of a $1.4 million line of credit. We relied upon an exemption from
registration provided by Section 1145 of the Bankruptcy Code.
II-1
62
On March 3, 2004, we issued 100,000 restricted common shares and warrants to
purchase 650,000 common shares to Summit Resource Group in consideration for
investor relations consulting services. The shares were valued at $114,680,
or $1.15 per share, and the warrants were valued at $731,328 based on the
Black-Scholes option pricing model, or a fair value of $1.13 per share.
Warrants to purchase 150,000 shares at $0.70 vested at the execution of the
agreement, warrants to purchase 150,000 shares at $0.70 per share vest on May
1, 2004, and warrants to purchase 350,000 shares at $0.80 per share vest on
September 1, 2004. The warrants have a five year term from the date they are
awarded. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
In each of the private transactions above we believe that each purchaser was
aware:
.. That the securities had not been registered under federal securities laws;
.. Acquired the securities for his/her/its own account for investment
purposes and not with a view to or for resale in connection with any
distribution for purposes of the federal securities laws;
.. Understood that the securities would need to be held indefinitely unless
registered or an exemption from registration applied to a proposed
disposition; and
.. Was aware that the certificate representing the securities would bear a
legend restricting their transfer.
We believe that, in light of the foregoing, the sale of our securities to the
respective acquirers did not constitute the sale of an unregistered security
in violation of the federal securities laws and regulations by reason of the
exemptions provided under Sections 3(b) and 4(2) of the Securities, and the
rules and regulations promulgated thereunder.
ITEM 27. EXHIBITS
No. Description
---- -----------
2.1 Order Confirming Plan, dated February 24, 2004 (Incorporated by
reference to exhibit 2.1 for Form 8-K filed March 5, 2004)
2.2 Debtor's Plan of Reorganization, dated January 14, 2004 (Incorporated by
reference to exhibit 2.2 for Form 8-K filed March 5, 2004)
2.3 Asset Purchase Agreement between Flexpoint Sensor and Flexpoint
Holdings, LLC, dated March 31, 2004 (Incorporated by reference to
exhibit 2.3 of Form 10-QSB, filed May 3, 2004)
3.1 Certificate of Incorporation of Flexpoint Sensor, as amended
(Incorporated by reference to exhibit 3.1 of Form 10-QSB, filed August
4, 2006)
3.2 Bylaws of Flexpoint Sensor, as amended (Incorporated by reference to
exhibit 3.4 of Form 10-QSB, filed May 3, 2004)
4.1 Common stock purchase warrant of Investors Stock Daily, Inc., dated July
26, 2005 (Incorporated by reference to exhibit 4.1 to Form 10-KSB filed
March 15, 2006)
5.1 Opinion of Cindy Shy, P.C. (Filed August 4, 2005)
10.1 Lease Agreement between Flexpoint Sensor and F.G.B.P., L.L.C., dated
July 12, 2004 (Incorporated by reference to exhibit 10.2 of Form 10-QSB,
filed November 15, 2004, as amended)
10.2 Consulting Agreement between Flexpoint Sensor and Summit Resource Group,
dated March 3, 2004 (Incorporated by reference to exhibit 10.3 of Form
10-QSB, filed May 3, 2004)
10.3 Manufacturing Agreement between Flexpoint Sensor and R&D Products, Inc.,
dated September 28, 2005 (Incorporated by reference to exhibit 10.1 of
Form 8-K, filed October 3, 2005)
20.1 Flexpoint Sensor Systems, Inc. 2005 Stock Incentive Plan (Incorporated
by reference to Schedule 14A, filed October 27, 2005)
20.2 Audit Committee Charter (Incorporated by reference to Schedule 14A,
filed October 27, 2005)
21.1 Subsidiaries of Flexpoint Sensor Systems, Inc. (Incorporated by
reference to exhibit 21.1 to Form 10-KSB filed March 15, 2006)
23.1 Consent of Hansen, Barnett & Maxwell
23.2 Consent of Cindy Shy, P.C.
24.1 Power of Attorney (See signature page)
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63
ITEM 28: UNDERTAKINGS
Pursuant to Rule 415 of the Securities Act of 1933, the undersigned registrant
hereby undertakes to:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement which will
include any prospectus required by Section 10(a)(3) of the Securities
Act; reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and include any additional or changed material
information on the plan of distribution;
(2) for the purpose of determining any liability under the Securities Act, to
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
to be the initial bona fide offering; and
(3) to file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
For determining liability of the undersigned small business issuer under
the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to
this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned small business issuer will be a seller to the purchaser and will
be considered to offer or sell such securities to such purchaser:
(1) Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to
Rule 424;
(2) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by
the undersigned small business issuer;
(3) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(4) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
this indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against these liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether this indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of
Draper, Utah.
FLEXPOINT SENSOR SYSTEMS, INC.
Date: October 9, 2006 By: /s/ Clark M. Mower
---------------------------------------
Clark M. Mower, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clark M. Mower and John A. Sindt, and each of
them, his attorneys-in-fact and agents, each with full power of substitution
and resubstitution, for him in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully as to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that each of said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Date: October 9, 2006 /s/ Clark M. Mower
--------------------------------------
Clark M. Mower
President, Chief Executive Officer
and Director
Date: October 9, 2006 /s/ John A. Sindt
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John A. Sindt
Chairman of the Board, and
Principal Finance and Accounting Officer
Date: October 9, 2006 /s/ B. Fred Atkinson, Jr.
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B. Fred Atkinson, Jr.
Secretary/Treasurer and Comptroller
Date: October 9, 2006 /s/ Ruland J. Gill, Jr.
---------------------------------------
Ruland J. Gill, Jr.
Director
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