The accompanying notes are an integral part of these condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
–
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated 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. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries for the year ended December 31, 2016 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 18, 2017. 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, 2017.
Nature of Operations
– Flexpoint Sensor Systems, Inc. (the Company) is located in Draper, Utah. The Company’s activities to date have included acquiring equipment and enhancing technology, obtaining financing, limited production and seeking long-term manufacturing contracts. The Company’s operations are in designing, engineering, manufacturing and selling sensor technology and equipment using flexible potentiometer technology. Through June 30, 2017 the Company continued to manufacture products and sensors to fill customer orders and provide engineering and design work.
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 of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents –
Cash and cash equivalents are considered to be cash and highly liquid securities with original maturities of three months or less.
Fair Value Measurements
-
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
6
The carrying value of the Company’s cash, accounts payable, short-term borrowings, (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
The Company has classified the inputs used in valuing its derivative liabilities as Level 3 inputs. The Company valued its derivatives using the binomial lattice model. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.
Accounts Receivable –
Trade accounts receivable are recorded at the time product is shipped or services are provided including any shipping and handling fees. Contracts associated with design and development engineering generally require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project is completed and accepted by the customer, at which time the entire contract price is billed to the customer and the deposit applied. The Company has established an allowance for bad debts based on a historical experience and an analysis of risk associated with the account balances. The balance in the allowance account was $102,140 and $102,140 in the periods ended June 30, 2017 and December 31, 2016, respectively.
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 trade-in, sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Depreciation is computed using the straight-line method and is recognized over the estimated useful lives of the property and equipment, which range from three to ten years.
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. Under similar analysis no impairment charge was taken during the period ended June 30, 2017 and during the period ended June 30, 2016. Impairment tests will be conducted on an annual basis and, should they indicate a carrying value in excess of fair value, additional impairment charges may be required.
Intangible Assets
– Costs to obtain or develop patents are capitalized and amortized over the remaining life of the patents, and technology rights are amortized over their estimated useful lives. The Company currently has the right 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, which range from 5 to 15 years. 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 net future cash flows. Under similar analysis there was no impairment charge taken during the period ended June 30, 2017 and during the period ended June 30, 2016.
Research and Development
– Research and development costs are recognized as an expense during the period incurred, which is 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 Company’s 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 at interim periods when a triggering event occurs using a fair value approach. According to Accounting Standards Codification (or “ASC”) 350-20 Intangibles – Goodwill and Other, a fair-value-based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value of the Company is allocated to the Company’s assets and liabilities based upon their fair values with the excess fair value allocated to goodwill. An impairment of goodwill is measured as the excess of the carrying amount of goodwill over the determined fair value.
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 collectability 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
7
are met and then recognized as licensing royalty revenue over the remaining term of the contracts. The Company does not provide extended warranties or guarantees on its products.
Stock-Based Compensation
– The Company recognizes 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. 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. For the periods ended June 30, 2017 and 2016, the Company recognized expense for stock-based compensation of $9,890 and $16,802, respectively.
Basic and Diluted Loss Per Share –
Basic 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 dilutive potential common shares outstanding during the period. At June 30, 2017 and June 30, 2016, there were outstanding common share equivalents (options and convertible notes payable) which amounted to 27,986,602 and 21,648,704, respectively, of common stock. These common share equivalents 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.
Concentrations and Credit Risk -
The Company has a few major customers who represent a significant portion of revenue, accounts receivable and notes receivable. During the six month period ended June 30, 2017, a customer who manufacturers toys represented 45% of sales and represented 11% of accounts receivable. The Company has a strong ongoing relationship with this customer with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.
Income Taxes -
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards Board Accounting Codification (ASC) 740: Income Taxes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets will be reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized
Recent Accounting Pronouncements
- In May 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-09, "Stock Compensation - Scope of Modification Accounting". This ASU requires all modifications to be accounted for as a modification unless the fair value, vesting conditions and classification of the award as equity or liability are the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017 and for interim periods therein. The Company does not believe this ASU will have a material impact on its consolidated financial position, results of operation or cash flows.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position and cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.
NOTE 2 – GOING CONCERN
The Company continues to accumulate significant operating losses and has an accumulated deficit of $26,707,782 at June 30, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has relied on raising additional capital through the issuance of convertible notes payable; however, there is no assurance that additional funding will be available on acceptable terms, if at all.
NOTE 3 – DERIVATIVE INSTRUMENTS
The derivative liability as of June 30, 2017, in the amount of $116,342 has a Level 3 fair value classification.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2017 and December 31, 2016:
8
|
|
|
|
|
|
| |
|
|
|
|
|
Total
|
|
|
Balance, December 31, 2015
|
|
|
|
|
-
|
|
|
Recognition of derivative liabilities upon initial valuation
|
|
|
|
|
40,892
|
|
|
Change in fair value of derivative liabilities
|
|
|
|
|
35,403
|
|
|
Conversions of derivative liabilities into equity instruments
|
|
|
|
|
-
|
|
|
Balance, December 31, 2016
|
|
|
|
|
76,295
|
|
|
Recognition of derivative liabilities upon initial valuation
|
|
|
|
|
89,226-
|
|
|
Change in fair value of derivative liabilities
|
|
|
|
|
(49,179)
|
|
|
Conversions of derivative liabilities into equity instruments
|
|
|
|
|
-
|
|
|
Balance, June 30, 2017
|
|
|
|
|
116,342
|
|
During the year ended 2016 and the period ended June 30, 2017, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares necessary to settle all convertible instruments, in accordance with ASC 815-40-25, the Company determined that the conversion features related to these notes are derivative instruments since we do not have control to increase the number of authorized shares to settle all convertible instruments. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.
At June 30, 2017, the Company marked to market the fair value of the derivatives and determined a fair value of $116,342. The Company recorded a gain from change in fair value of derivatives of $49,179 for the six month period ended June 30, 2017. During the six months ended June 30, 2017, the Company recorded additional interest expense of $63,298 and debt discounts of $25,928 in connection with the recognition of derivative liabilities. The fair value of the embedded derivatives was determined using binomial lattice model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 114.57% to 128.15%, (3) weighted average risk-free interest rate of 0.76% to 1.14% (4) expected life of 0.50 to 1.08 years, and (5) the quoted market price of the Company’s common stock at each valuation date.
In accordance ASC 840-15-25, the Company has implemented a sequencing policy with respect to all outstanding convertible instruments. The Company evaluates its contracts based upon earliest issuance date.
As of June 30, 2017, liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
116,342
|
|
|
|
116,342
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
116,342
|
|
|
$
|
116,342
|
Convertible Notes Payable
The Company entered into a new promissory note for up to $300,000 from a third party on May 25, 2017. The note has an annual interest rate of 10% and is secured by the Company’s equipment. The note has a conversion feature for restricted common shares at $0.07 per share and a maturity date of July 31, 2018. The Company drew $40,000 against that note on June 2, 2017 and $40,000 on July 13, 2017.
The Company entered into a convertible promissory note for up to $300,000 from a third party on July 1, 2016. The note has an annual interest rate of 10% and is secured by the Company’s equipment. The note has a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2016. The Company drew $160,000 against that note during 2016 and $40,000 on January 6, 2017; $40,000 on January 31, 2017 $40,000 on March 7, 2017 and the balance of $20,000 on April 28, 2017.
On August 8, 2011, the Company entered into a convertible note payable with a former Company Director for $40,000. This note was due on December 31, 2015, bears an annual interest rate of 10% annual interest and is secured by business equipment.
9
Convertible Note Payable Related Party
On April 17, 2017 the Company issued a note for $20,000 to an officer of the Company. The note bears interest at the rate of 8%, has a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2017. The note is secured by all of the Company’s business equipment.
On July 1, 2016 and September 22, 2016, the Company issued two promissory notes for $10,000 each to an officer of the Company. The notes bear interest at the rate of 10%, have a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2016. Since the fair value of the common stock at the date of the July 1, 2016 advance was $0.07, no BCF was recorded.
NOTE 4
–
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 at their annual meeting of shareholders 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 shares.
The Company continues to utilize the Black-Scholes option-pricing model for calculating the fair value of the options granted as defined by ASC Topic 718, which is an acceptable valuation approach under
ASC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.
On August 24, 2015, the Board of Directors approved the issuance of options to purchase 2,185,000 shares of the Company’s common stock. Of the total issued, 1,960,000 options were issued to replace options held by directors and employees which were to expire and 225,000 options were issued to new employees. Of the options issued, 640,000 have an option price of $0.14 per share, 500,000 have an option price of $0.15 per share, 995,000 have an option price of $0.20 per share, and 50,000 have an option price of $0.25 per share. Options issued as replacement shall have immediate vesting terms. Options which are not replacements shall vest over a two year four month period in equal installments on the last day of 2015, 2016 and 2017, respectively. We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.
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. Between August 25, 2005 and December 31, 2015, the Company granted options to employees to purchase an aggregate 3,096,000 shares of common stock at exercise prices ranging from $0.14 to $2.07 per share. The options vest over three years and expire 10 years from the date of grant. The Company used the following assumptions in estimating the fair value of the options granted:
·
Market value at the time of issuance – Range of $0.14 to 2.07
·
Expected term – Range of 3.7 years to 10.0 years
·
Risk-free interest rate – Range of 1.60% to 4.93%
·
Dividend yield – 0%
·
Expected volatility – 200% to 424%
·
Weighted-average fair value - $0.16 to $2.07
During the six months ended June 30, 2017, the Company recognized a total of $9,890 of stock-based compensation expense, leaving $10,052 in unrecognized expense as of June 30, 2017. During the six months ended June 30, 2016, the Company recognized $16,802 in stock-based compensation expense. There were 2,185,000 and 2,185,000 employee stock options outstanding at June 30, 2017 and December 31, 2016, respectively.
A summary of all employee options outstanding and exercisable under the plan as of June 30, 2017, and changes during the three months then ended is set forth below:
10
|
|
|
|
| |
|
Options
|
Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life (Years)
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
Outstanding at the beginning of period
|
2,185,000
|
$ 0.16
|
8.66
|
$ --
|
|
Granted
|
--
|
--
|
--
|
--
|
|
Expired
|
--
|
--
|
--
|
--
|
|
Forfeited
|
--
|
--
|
--
|
--
|
|
Outstanding at the end of Period
|
2,185,000
|
$ 0.17
|
8.16
|
$ --
|
|
Exercisable at the end of Period
|
1,836,667
|
$ 0.17
|
8.16
|
$ --
|
NOTE 4 – CAPITAL STOCK
Preferred Stock – There are 1,000,000 shares of preferred stock with a par value of $0.001 per share authorized. At June 30, 2017 and December 31, 2016, there were no shares of preferred stock issued or outstanding.
Common Stock – There are 100,000,000 shares of common stock with a par value of $0.001 per share authorized. No shares of stock were issued during the six months ended June 30, 2017.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company currently occupies a manufacturing facility in Draper, Utah. The lease on the facility expired on December 31, 2014, at which time the Company entered into a three year extension which will expire on December 31, 2017. Either party may terminate the lease upon 90 day written notice. Under the terms of the lease the Company paid $8,950 per month in 2015 (the same rate as in 2014), $9,300 per month in 2016 and $9,600 per month in 2017.
NOTE 6 – RELATED PARTY TRANSACTIONS
At June 30, 2017 and December 31, 2016, the Company had accounts payable of $15,594 and $1,420 to its Chief Executive Office for reimbursement of various operating expenses paid by him in the course of business.
NOTE 7- SUBSEQUENT EVENTS
On July 13, 2017 the Company drew $40,000 against a convertible promissory note for up to $300,000 from a third party, the proceeds of which will be used to fund operating expenses. The note has an annual interest rate of 10% and is secured by the Company’s equipment. The note has a conversion feature for restricted common shares at $.07 per share.
11
In this quarterly report references to “Flexpoint", "the Company," “we,” “us,” and “our” refer to Flexpoint Sensor Systems, Inc. and its
subsidiaries.
FORWARD LOOKING STATEMENTS
The U.S. Securities and Exchange Commission (“SEC”) encourages reporting companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as “may,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Flexpoint Sensor Systems, Inc. is principally engaged in designing, engineering and manufacturing bend sensor technology and products using Bend Sensor
®
technology, (a flexible potentiometer technology). We continue to make further improvements to our technologies, manufacturing and developing fully integrated devices and related products that we have been marketing and selling to a variety of companies in diverse industries. We are negotiating and signing agreements and contracts that have provided some limited revenues and have proven that our sensors are more durable, adaptable and cost effective than any other product currently on the market. We own five patents, including patents on specific devices that use the Bend Sensor
®
and have exclusive rights through licensing agreements to other patents and devices.
We are continuing to develop and enhance our intellectual properties that will result in additional patents being filed. The Company currently manufactures, and has jointly developed, eighteen products that are being sold and supplied to current customers and we continue to receive orders for custom prototype sensors as well as our standard sensors. Our sales and marketing efforts have been targeted toward the development of new relationships with clients while maintaining and strengthening relationships already developed with several Tier 1 (major) suppliers in the automotive industry. We have built and shipped orders to a number of these companies to enable them to test the utilization of our sensors into their existing and developing product lines. During 2017 we plan to focus our marketing efforts on a number of larger domestic and international companies that have applications which have the potential to greatly increase the volume of sensors we are currently manufacturing.
The Company continues to develop relationships in a number of application fields. In July we announced a strategic relationship with HTK Safety to begin offering an integrated safety system utilizing the Bend Sensor
®
technology. In March 2017 we announced a collaborative working arrangement with 11 Health and Technologies Inc. to develop next generation products in the medical industry. Flexpoint has also established relationships with several other medical IoT vendors. These include companies like 11Health, Neofect, Gloreha and YouReHab; all with a focus on medical rehabilitation with a different approach. Products from these companies range from gloves to prosthetics to virtual reality, all with the intention of improving medical health or medical rehab. Medical IoT sensor volume is expected to be more than 50,000 sensors in 2017.
In March 2017 we announced a collaborative relationship with CaptoGlove, a company which manufactures a wearable virtual reality gaming motion controller. Our companies will work together to deliver innovative, integrated virtual reality/augmented reality (“VR/AR”) systems to mass markets. We completed and shipped the initial portion of the order before the end of the second quarter and expect to complete and ship the entire order before the end of the year. Their ground-breaking glove systems, combined with unique, leading edge software applications, also adapt to a wide range or other applications, including health rehabilitation, unmanned systems control, smartphone interaction and professional training across multiple industries.
ManusVR, CaptoGlove and Virtual Motion Labs have products that are currently commercially available and feature the Flexpoint Bend Sensor®. A few other companies in this market are expected to release Bend Sensor®
12
products in 2017. Flexpoint expects the purchase orders that are currently being fulfilled for ManusVR and CaptoGlove to significantly ramp up in volume and frequency throughout 2017. Flexpoint has received orders for more than 150,000 sensors and related assemblies from multiple development partners around the globe. The Company began to fulfill the orders in the second quarter of 2017 and complete fulfillment is expected before year end. Based upon the increased orders, management expects significant revenue growth within the next six to twelve months. Demand continues to grow and the Company expects to receive increasingly larger volume orders before yearend and continuing into 2018.
Purchase orders were also received this quarter from NoDNA GmbH, a new customer who provides advanced robotics solutions. This customer serves an expanding global customer base comprised of professional organizations, governmental entities and their sub-suppliers, as well as hobbyists and entrepreneurs.
The Company began selling and distributing sensors through two resellers in 2016. Flexpoint has since greatly increased its relationships with resellers and is currently working with seven resellers across diverse industries. Some of these companies include Amazon, NoDNA, RobotShop, Karlsson Robotics, SPI and Infusion Systems. We are receiving recurring sales from these resellers with most experiencing a growing number of sensors ordered each time. We anticipate that sensor volume sold in 2017 through these channels should approach 25,000.
The biggest revenue contributors during the 2017 six month period were for glove based products and the toy relationship. Flexpoint, year-to-date, has delivered on approximately 150,000 sensors for its partnership with the toy manufacturer. The Company expects annualized volumes for 2017 to be approximately a half a million sensors. Sensor volume from glove based applications is expected to exceed 175,000 in 2017.
Our patented technology continues to gain recognition in various markets and industries as evidenced by orders from a Fortune 100 automotive maker for our horn system. Although, so far the volumes for our applications and devises have been relatively small we continue to receive follow up orders for the universal sensor that we jointly developed. We expect to receive additional orders from other customers for this sensor as it becomes more recognizable in the market. Currently our customers for this type of sensor include companies in the following industries: automobiles, trucking, emergency vehicles, public transportation, military and other governmental entities. As anticipated, the Company is beginning to see the potential for more significant volumes and revenues from the sale of this sensing devise over the next year and beyond.
Finalizing additional long-term revenue generating production contracts with other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to, and are dependent upon, our ability to attract significant long-term production contracts. In the short term, we must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor
®
and Bend Sensor
®
related technologies and products to the market. Management believes that even though we have made positive strides forward with our business plan, it is likely that significant progress may not occur for the next six to nine months, primarily due to the time it takes for negotiating such contracts. Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable over the next six to nine months.
In May 2017 the Company also announced that initial clinical tests for Haemoband have completed. Haemoband is expected to incorporate the Bend Sensor® in multiple product and device types that will launch beginning in late 2017. We anticipate that production orders for these new products will begin in late 2017 and are expected to significantly increase in 2018.
The product launch of a wearable shoe application is expected to take place in Europe in the second half of 2017. The second half of this year will also see the product launch in North America of a medical orthotics shoe product. Between these two products, sensor volume is estimated to be 175,000.
LIQUIDITY AND CAPITAL RESOURCES
Currently our revenue is primarily from design contract, testing and limited production services for prototypes and samples, and is not to a level to support our operations. For the past twelve months we have relied on the proceeds of convertible loans from existing shareholders and private placements of our common stock. However, we believe, based upon current orders and projected orders over the next twelve months, that we could be producing sensors under long-term contracts that will help support our existing operations and potential future growth. Management recognizes such contracts usually go through a long negotiation process and there can be no guarantee that we will be successful in our negotiations or that such contracts will be sufficient to support our current operations in the near future.
13
Management believes that our current cash burn rate is approximately $75,000 per month and the proceeds from the convertible notes and our manufacturing, engineering and design fees will not totally fund our anticipated growth in operations. We will therefore need to raise additional financing. We believe that this additional financing will provide the needed capital to extend operations to the development and production of our growing product offerings and growing manufacturing opportunities. However, we may not be able to obtain financing, or the sources of financing, if any, may not continue to be available, and if available, they may be on terms unfavorable to us.
We also expect that in the short term we may have to continue to issue common stock to pay for services and agreements rather than use our limited cash resources. Any issuance of common stock will likely be pursuant to exemptions provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock our shareholders may experience dilution in the value per share of their common stock.
As we enter into production and development agreements, we must ensure that those agreements provide adequate funding for any pre-production research and manufacturing costs. As 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/or royalties related to these agreements. However, we have formalized only a few agreements during the past four years and there can be no assurance that the agreements will generate sufficient revenues or be profitable in the future or that a desired technological application will be successful enough to produce the volumes and profits necessary to fund our operations.
FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES
Our principal commitments at June 30, 2017 consisted of our operating lease of $9,600 per month, and total liabilities of $2,675,642, which includes $1,381,978 of convertible notes payable, net of debt discounts. Accrued liabilities at June 30, 2017, were $975,449 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.
During the six months ending June 30, 2017, the Company has raised an additional $200,000 in operating capital through the issuance of short-term notes. The notes have an annual interest rate of 8 to 10% and a default rate of 12 to 15% annually. The notes, which total $1,364,000 (excluding debt discounts), are secured by the Company’s business equipment and have a conversion feature for restricted common shares at $0.05 to $0.07 per share.
The Company has a major customer which is an American-based, Fortune 500, global toy manufacturing company which it supplies through its global assembly partner who represents a significant portion of revenue and accounts receivable. During the six months ended June 30, 2017, the customer represented 45% of sales and represents 11% of accounts receivable at June 30, 2017. The Company has a strong ongoing relationship with this customer with scheduled deliveries extending through the year and does not believe this concentration poses a significant risk, as apportion of the control for their products is based on the Company’s technologies
OFF-BALANCE SHEET ARRANGEMENTS
Other than our current operating lease, we have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
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 long-lived assets and valuing stock option compensation.
The Company's goodwill represents the excess of its reorganization value over the fair value of the net assets upon emergence from bankruptcy. Goodwill is not amortized, therefore we test our goodwill for impairment annually or when a triggering event occur using a fair value approach. A fair value based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its nets assets. The test requires various judgments and estimates. During 2016 and for the six months ending June 30, 2017, the Company recorded
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no impairment charge to reduce the carrying value of the goodwill to its estimated fair value. As part of the impairment testing performed at December 31, 2016, the Company considered factors such as the global market volatility, variables in the economy, and the overall uncertainty in the markets which has resulted in a decline in the market price of the Company's stock price and market capitalization for a sustained period, as indicators for potential goodwill impairment.
We test long-lived assets for impairment annually or when a triggering event occurs. Impairment is indicated if undiscounted cash flows are less than 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. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. If the carrying values of the long-lived assets exceed the present value of the discounted projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly. Impairment tests are conducted on an annual basis and, should they indicate a carrying value in excess of fair value, a charge may be required.
Financial accounting standards require 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 and is recognized as an expense in operations 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, 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. For the six month periods ended June 30, 2017 and 2016 we recognized $9,890 and $16,802, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.
RESULTS OF OPERATIONS
The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and should be read in conjunction with our unaudited financial statements for the three and six months ended June 30, 2017 and 2016, included in Part I, Item 1, above, and the audited financial statements included in the Company’s annual report on Form 10-K for the years ended December 31, 2016 and 2015.
THREE MONTH PERIOD ENDED JUNE 30, 2017:
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|
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SUMMARY OF OPERATING RESULTS
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Three month period ended
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June 30, 2017
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June 30, 2016
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Design, contract and testing revenue
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$ 154,636
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$ 93,039
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Total operating costs and expenses
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317,883
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278,728
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Net other income (expense)
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(30,227)
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(228,792)
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Net loss
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(193,474)
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(414,4815
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Basic and diluted loss per common share
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(0.00)
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(0.01)
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For the three months ending June 30, 2017 revenue was $154,636, a $61,597 increase when compared to the same period in 2016. The majority of the revenue for this period came from production of products. The Company continues to concentrate its marketing resources on a limited number of customers that have the greatest potential to generate the most short-term revenue while still building relationships with our larger customers. Management believes this approach has the highest potential to bring long-term commercially viable products to market and will provide sustainable cash flow to fund the Company's operations in the future. Currently, overall revenues are not sufficient to sustain our operations. Management anticipates that revenues will increase as we continue to execute our long-term business plan and cultivate larger customer bases with our existing product offering. However, until a long-term production contract is in place there is no guarantee that our current customer base will order in sufficient volumes to sustain our operations. Therefore, management continues to work with larger companies and industries and is hopeful that in the near future we will sign a long-term licensing or manufacturing contract.
We received revenue from repeat orders from our existing customers, design contract, and development engineering. Revenue from the sale of a product is recorded at the time of shipment to the customer. Revenue from research and
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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.
Of the $317,883 and $278,728 total operating costs and expense for the three months ending June 30, 2017 and 2016, respectively, $85,143 and $79,281 were for direct research and development cost, respectively. For the three months ended June 30, 2017, total operating expenses increased by $39,155 when compared to the same period in 2016, due primarily to increased costs to meet higher product production and sales levels.
Other expense for the three month period ended June 30, 2017 was $30,227, a $198,565 decrease compared to the same period in 2016. The decrease is attributable primarily to the difference in beneficial conversion charges on the convertible notes in 2017 versus 2016.
A net loss of $193,474 was realized for the three months ended June 30, 2017. A net loss of $414,481 was realized for the three month period ended June 30, 2016.
SIX MONTH PERIOD ENDED JUNE 30, 2017:
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SUMMARY OF OPERATING RESULTS
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Six month period ended
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June 30, 2017
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June 30, 2016
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Design, contract and testing revenue
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$ 215,701
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$ 128,205
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Total operating costs and expenses
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584,534
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561,293
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Net other income (expense)
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(116,138)
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(450,768)
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Net loss
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(484,971)
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(883,856)
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Basic and diluted loss per common share
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(0.01)
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(0.01)
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For the six months ending June 30, 2017 revenue was $215,701, a $87,496 increase when compared to the same period in 2016. The majority of the revenue for this period came from production products. Management anticipates that revenues will increase as we continue to execute our long-term business plan and cultivate larger customer bases with our existing product offering.
Of the $584,534 and $561,293 total operating costs and expense for the six months ending June 30, 2017 and 2016, respectively, $164,509 and $159,340 were for direct research and development cost, respectively. For the six months ended June 30, 2017, total operating expenses increased by $23,241 when compared to the same period in 2016, due primarily to increases in personnel and supplies required to meet higher levels of production.
Other expense for the six month period ended June 30, 2017 was $116,138, a $334,630 decrease compared to the same period in 2016. The decrease is attributable primarily to the difference in beneficial conversion charges on the convertible notes in 2017 versus 2016.
A net loss of $484,971 was realized for the six months ended June 30, 2017. A net loss of $883,856 was realized for the six month period ended June 30, 2016.
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The chart below represents a summary of our condensed consolidated balance sheets at June 30, 2017 and December 31, 2016.