FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-131768
SUPPLEMENT NO. 11 DATED NOVEMBER 14, 2008
TO PROSPECTUS DATED MARCH 28, 2006
INPLAY TECHNOLOGIES, INC.
Quarterly Results
A copy of the quarterly report of InPlay Technologies, Inc on Form 10-Q as of September 30, 2008 is attached.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
Commission File Number: 001-15069
InPlay Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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88-0308867
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.)
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Incorporation or Organization)
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13845 North Northsight Boulevard
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Scottsdale, Arizona
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85260
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(Address of principal executive offices)
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(Zip Code)
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(480) 586-3300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
As of November 7, 2008, the issuer had outstanding 11,622,568 shares of common stock, par value
$0.001 per share.
INPLAY TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
September 30, 2008
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
INPLAY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, 2008
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December 31, 2007
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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423,877
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$
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5,592,412
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Restricted short term investment
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20,000
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Accounts receivable
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359,717
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228,610
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Inventory
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126,619
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108,562
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Prepaid expenses and other current assets
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83,925
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128,932
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Total current assets
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1,014,138
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6,058,516
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PROPERTY AND EQUIPMENT Net
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456,981
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437,248
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GOODWILL
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1,321,240
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1,321,240
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PATENTS Net
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1,119,845
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1,205,977
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OTHER ASSETS
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17,731
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17,731
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TOTAL ASSETS
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$
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3,929,935
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$
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9,040,712
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES:
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Accounts payable
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$
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474,946
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$
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642,781
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Accrued salaries and benefits
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434,295
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777,987
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Accrued purchase commitments
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288,562
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558,000
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Other accrued expenses and other current liabilities
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356,408
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453,108
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Deferred revenue
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15,000
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15,695
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Total current liabilities
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1,569,211
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2,447,571
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LONG-TERM LIABILITIES:
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Other non-current liabilities
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173,228
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Total liabilities
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1,569,211
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2,620,799
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS EQUITY:
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Preferred stock, no par value, 10,000,000 shares authorized,
no shares issued and outstanding as of September 30, 2008
and December 31, 2007
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Common stock, $.001 par value, 40,000,000 shares authorized,
11,622,568 and 11,595,138 shares issued and outstanding as of
September 30, 2008 and December 31, 2007, respectively
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11,623
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11,595
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Additional paid-in capital
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31,902,451
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31,706,458
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Accumulated deficit
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(29,553,350
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(25,298,140
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Total stockholders equity
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2,360,724
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6,419,913
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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3,929,935
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$
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9,040,712
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See notes to consolidated financial statements.
1
INPLAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2008
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2007
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2008
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2007
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NET REVENUE:
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FinePoint
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$
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291,659
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$
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1,019,423
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$
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363,787
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$
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2,591,440
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Duraswitch:
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Related party Delphi
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7,631,250
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Non-related parties
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324,931
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203,780
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939,384
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711,733
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Total net revenue
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616,590
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1,223,203
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1,303,171
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10,934,423
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COST OF GOODS SOLD:
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FinePoint
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26,800
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1,031,169
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40,597
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2,165,138
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Duraswitch
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107,355
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65,596
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312,213
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287,757
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Total cost of goods sold
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134,155
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1,096,765
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352,810
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2,452,895
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Gross profit
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482,435
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126,438
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950,361
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8,481,528
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OPERATING EXPENSES:
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Selling, general and administrative
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801,793
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834,401
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2,444,039
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3,898,332
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Research, development and commercial
application engineering
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963,611
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551,874
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2,809,563
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1,294,596
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Total operating expenses
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1,765,404
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1,386,275
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5,253,602
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5,192,928
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INCOME (LOSS) FROM OPERATIONS
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(1,282,969
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(1,259,837
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(4,303,241
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)
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3,288,600
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OTHER INCOME Net
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4,121
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95,416
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48,031
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222,382
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INCOME (LOSS) BEFORE INCOME TAXES
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$
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(1,278,848
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$
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(1,164,421
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$
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(4,255,210
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$
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3,510,982
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PROVISION FOR (BENEFIT FROM) INCOME
TAXES
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(93,508
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)
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NET INCOME (LOSS)
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$
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(1,278,848
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$
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(1,070,913
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$
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(4,255,210
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)
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$
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3,510,982
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EARNINGS (LOSS) PER SHARE BASIC
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$
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(0.11
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$
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(0.09
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)
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$
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(0.37
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)
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$
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0.30
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EARNINGS (LOSS) PER SHARE DILUTED
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$
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(0.11
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)
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$
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(0.09
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)
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$
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(0.37
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)
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$
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0.30
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WEIGHTED AVERAGE SHARES OUTSTANDING:
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BASIC
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11,622,568
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11,533,236
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11,609,817
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11,513,776
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DILUTED
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11,622,568
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11,533,236
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11,609,817
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11,574,242
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See Notes to Consolidated Financial Statements.
2
INPLAY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30,
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2008
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2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$
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(4,255,210
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)
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$
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3,510,982
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Adjustments to reconcile net income (loss) to net cash
provided by (used in)
operating activities:
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Depreciation and amortization
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206,336
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250,892
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Stock compensation
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198,521
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56,860
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Loss on disposal of equipment
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6,175
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Changes in operating assets and liabilities:
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Accounts receivable
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(131,107
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)
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172,009
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Inventory
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(18,057
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)
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999,188
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Prepaid expenses and other current assets
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45,007
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101,633
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Accounts payable
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(167,835
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)
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(168,413
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)
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Accrued salaries and benefits
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(343,692
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)
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|
108,513
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Other accrued expenses and other current liabilities
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(366,138
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)
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|
113,626
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Other non-current liabilities
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|
(173,228
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)
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249,793
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Deferred revenue
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(695
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)
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Net cash provided by (used in) operating activities
|
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(5,006,098
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)
|
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|
5,401,258
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of restricted investment
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(20,000
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)
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Increase in patents
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|
(20,034
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)
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(38,246
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)
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Proceeds from sales of equipment
|
|
|
|
|
|
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6,819
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Purchases of property and equipment
|
|
|
(119,903
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)
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|
|
(129,453
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)
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|
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|
|
|
|
|
|
|
|
|
|
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Net cash provided by (used in) investing activities
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|
|
(159,937
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)
|
|
|
(160,880
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)
|
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|
|
|
|
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Stock issuance fee to NASDAQ
|
|
|
(2,500
|
)
|
|
|
|
|
Net proceeds from exercise of stock options
|
|
|
|
|
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42,850
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Net cash provided by (used in) financing activities
|
|
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(2,500
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)
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|
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42,850
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
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|
(5,168,535
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)
|
|
|
5,283,228
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
5,592,412
|
|
|
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1,591,312
|
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|
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CASH AND CASH EQUIVALENTS, END OF PERIOD
|
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$
|
423,877
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$
|
6,874,540
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|
|
See notes to consolidated financial statements.
3
INPLAY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Operations
InPlay Technologies, Inc., a Nevada corporation (the Company), develops, patents and markets
innovative human interface devices (HIDs) for electronic products. The Company operates two
business segments: FinePoint digital pen and dual-mode pen and touch technologies; and Duraswitch
®
electronic pushbutton, rotary, and omni-directional switch technologies. On October 28, 2008, the
Company sold all of the assets and rights relating to its Duraswitch segment.
Interim Financial Information
The consolidated balance sheet as of September 30, 2008, the consolidated statements of
operations for the three and nine months ended September 30, 2008 and September 30, 2007, and the
consolidated statements of cash flows for the nine months ended September 30, 2008 and September
30, 2007 have been prepared by the Company and are unaudited. The consolidated balance sheet as of
December 31, 2007 was derived from the audited consolidated financial statements included in the
Companys Annual Report on Form 10-KSB for the year ended December 31, 2007.
Certain information and footnote disclosures normally included in consolidated financial
statements have been condensed or omitted. It is the opinion of management that all adjustments
(which include normal recurring adjustments) necessary for a fair statement of financial results
are reflected in the interim periods presented. Accordingly, these consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes
thereto included in the Companys Annual Report on Form 10-KSB for the year ended December 31,
2007. The results of operations for the three and nine months ended September 30, 2008 are not
indicative of the operating results for the full year.
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as net sales and expenses reported for
the period presented. The Company regularly assesses these estimates and, while actual results may
differ, management believes that the estimates are reasonable.
Going Concern
These financial statements have been prepared assuming that the Company will continue as a
going concern. The Company has experienced recurring operating losses since its inception and its
accumulated deficit is approximately $29.6 million. The Companys revenue in 2007 was dependent on
two customers, from which it does not anticipate any future material revenue. The Company will
continue to incur losses until such time it is successful in obtaining new business in volumes
sufficient to create profitability. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable amount of time. The financial statements do
not include any adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that may be necessary should the Company
be unable to continue as a going concern. The Companys continuation as a going concern is
contingent upon its ability to obtain additional financing and to generate revenue and the cash
flow to meet its obligations on a timely basis. These factors raise substantial doubt about the
Companys ability to continue as a going concern. On October 28, 2008, the Company received $1.6
million in cash upon the sale of the assets and rights relating to its Duraswitch segment.
Notwithstanding this asset sale, the Companys current cash balances are insufficient for it to
continue operating for the next twelve months without additional financing through new debt or
equity or the sale of additional assets. The Company is actively working with several customers
and investment advisors in attempt to mitigate these factors.
4
2. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128 requires the presentation of
basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available
to common stockholders by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all potential dilutive common shares that were outstanding
during the period unless they are antidilutive. Potential dilutive common shares consist of the
incremental common shares that would be issued upon exercise of stock options and warrants.
For the three months ended September 30, 2008 and 2007, the effect of potential dilutive
common shares was antidilutive and no diluted calculation was required.
Options and warrants excluded from the calculation of diluted earnings per share were
1,626,456 for the three months ended September 30, 2008 because they were antidilutive. For the
three months ended September 30, 2007, 1,868,064 options and warrants were excluded from the
calculation because they were antidilutive.
For the nine months ended September 30, 2007, a reconciliation of the numerator and
denominator of the basic and diluted EPS is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
(Loss)
|
|
Shares
|
|
Amount
|
|
Income
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to
common shareholders
|
|
$
|
(4,255,210
|
)
|
|
|
11,609,817
|
|
|
$
|
(0.37
|
)
|
|
$
|
3,510,982
|
|
|
|
11,513,776
|
|
|
$
|
0.30
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,466
|
|
|
|
|
|
Dilutive EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available to
common shareholders
|
|
$
|
(4,255,210
|
)
|
|
|
11,609,817
|
|
|
$
|
(0.37
|
)
|
|
$
|
3,510,982
|
|
|
|
11,574,242
|
|
|
$
|
0.30
|
|
|
|
|
|
|
Options and warrants excluded from the calculation of diluted earnings per share were
1,626,456 for the nine months ended September 30, 2008 because they were antidilutive. For the
nine months ended September 30, 2007, 1,572,764 options and warrants were excluded from the
calculation because the exercise price was greater than the average share price for the period.
3. STOCK BASED COMPENSATION
As of September 30, 2008, the Company had four stock-based employee compensation plans. The
plans provide for the granting of awards in the form of incentive and nonqualified stock options,
stock appreciation rights, shares of restricted common stock, bonus stock in lieu of obligations,
or other stock-based awards to employees, directors and independent contractors who provide
valuable service to the Company. Options are granted at the market price of our common stock on
the date the grant, are approved by the Compensation Committee, and have ten-year terms. The stock
options for directors typically vest within 30 days of grant. The stock options for officers and
employees typically vest over a 30 month period from the date of grant.
At the Companys annual stockholder meeting held on May 31, 2007, stockholders approved the
First Amendment to the Companys 2005 Stock Award Plan which increased the number of shares
authorized under the Plan from 500,000 to 1,000,000. As of September 30, 2008, 107,654 shares of
the Companys common stock were available for grant under the four plans.
The Company accounts for its options in accordance with SFAS No. 123(R),
Share-Based
Payment,
which requires the measurement and recognition of compensation expense in the financial
statements for all share based payment awards made to employees and directors based on estimated
fair values. Under this method, in addition to reflecting compensation expense for new share-based
awards, expense is also recognized to reflect the remaining service period of awards that had been
granted in prior periods.
5
Stock-based compensation cost recognized in the three months ended September 30, 2008 was
$46,441, which consisted of $4,529 of expense relating to stock options issued in 2006 which will
be recognized quarterly through December 2008; $22,206 of expense relating to stock options issued
in 2007 which will be recognized quarterly through December 2009; and $19,706 of expense related to
options issued in 2008 which will be recognized quarterly through September 2010. Stock-based
compensation cost recognized in the three months ended September 30, 2007 was $19,353. This
compensation expense is included in the selling, general and administrative expenses on the
consolidated statements of operations.
Stock-based compensation cost recognized in the nine months ended September 30, 2008 was
$198,521, which consisted of $18,100 of expense relating to stock options issued in 2006 which will
be recognized quarterly through December 2008; $106,615 of expense relating to stock options issued
in 2007 which will be recognized quarterly through December 2009; $55,056 of expense related to
options issued in 2008 which will be recognized quarterly
through September 2010; and $18,750 of board fees paid via stock grants. Stock based
compensation expense for the nine months ended September 30, 2007 totaled $56,860. This
compensation expense is included in the selling, general and administrative expenses on the
consolidated statements of operations.
Option activity under the Companys stock option plans during the nine months ended September
30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Option
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, December 31, 2007
|
|
|
1,775,873
|
|
|
$
|
5.73
|
|
Granted
|
|
|
600,000
|
|
|
$
|
0.51
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Expired or terminated
|
|
|
(571,840
|
)
|
|
$
|
10.60
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2008
|
|
|
1,804,033
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2008
|
|
|
1,117,365
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term and aggregate intrinsic value for options
outstanding at September 30, 2008 was 6.84 years and $0, respectively, and for options exercisable
at September 30, 2008 was 5.20 years and $0, respectively.
As of September 30, 2008, $206,986 of compensation cost related to unvested stock options is
expected to be recognized through fiscal 2011.
The fair value of each option granted during the period was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
2008
|
|
2007
|
Weighted average expected stock price volatility
|
|
|
89 - 98
|
%
|
|
|
90
|
%
|
Weighted average expected option life (years)
|
|
|
3.0
|
|
|
|
3.0
|
|
Risk-free interest rate
|
|
|
2.19 - 2.51
|
%
|
|
|
4.34
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
4. REVENUE CONCENTRATIONS
For the three months ended September 30, 2008, the FinePoint segment of the company recognized
$230,988 of revenue from Quanta, who serves as an ODM supplier to Gateway and the Duraswitch
segment of the Company recognized $131,099 of revenue from sales to Dawar Technologies which
represented 37% and 21% of the total Company revenue, respectively.
As of September 30, 2008, the amounts due from Quanta was $135,000 and Dawar Technologies was
$101,468, which represents 38% and 28% of outstanding accounts receivable.
6
For the three months ended September 30, 2007, the FinePoint segment of the Company recognized
$1.0 million of revenue from sales to Gateway and Quanta, which represented 81% of total Company
revenue.
For the nine months ended September 30, 2008, the FinePoint segment of the company recognized
$231,736 of revenue from Quanta and the Duraswitch segment of the Company recognized $415,615 of
revenue from sales to Dawar Technologies, which represented 18% and 32%, respectively, of the total
Company revenue.
For the nine months ended September 30, 2007, the FinePoint segment of the Company recognized
$2.5 million of revenue from sales to Gateway and Quanta which represented 22% of total Company
revenue.
In January 2007, the Company reached a settlement agreement with Delphi Corporation, relating
to the unpaid minimum royalty commitment of their exclusive license agreement, in which Delphi
agreed to allow a pre-petition general unsecured claim against Delphi Automotive Systems LLC in the
amount of $7.5 million. In March 2007, the Company sold its rights to this claim and received a
cash payment of approximately $7.6 million which was recognized as Duraswitch segment revenue in
the first quarter of 2007. As a result of this settlement and the resulting revenue, the Company
incurred commission and fee expenses of approximately $650,000 based on its existing commission and
fee agreements. Commissions and fees of approximately $190,000 were paid in the first quarter, and
an additional amount of approximately $460,000 was paid in the second quarter of 2007. The $7.6
million of Delphi revenue represented 70% of total Company revenue for the nine months ended
September 30, 2007 and 91% of Duraswitch segment revenue for the nine months ended September 30,
2007.
The Company does not anticipate future material revenue from Delphi or Gateway.
5. INVENTORY
The Companys inventory is primarily comprised of certain raw materials that are used in the
manufacture of digital pens and digitizers and licensed switch components and finished goods.
Inventory consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Raw materials
|
|
$
|
126,619
|
|
|
$
|
99,653
|
|
Finished goods
|
|
|
|
|
|
|
8,909
|
|
|
|
|
|
|
|
|
Inventories net
|
|
$
|
126,619
|
|
|
$
|
108,562
|
|
|
|
|
|
|
|
|
6. PROPERTY AND EQUIPMENT
Depreciation expense for property and equipment was $33,106 and $49,074 for the three months
ended September 30, 2008 and 2007, respectively. Depreciation expense for property and equipment
was $100,170 and $147,277 for the nine months ended September 30, 2008 and 2007, respectively.
7
Property and equipment consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Computer equipment and software
|
|
$
|
549,768
|
|
|
$
|
547,319
|
|
Tooling
|
|
|
258,336
|
|
|
|
142,910
|
|
Other machinery and equipment
|
|
|
100,404
|
|
|
|
98,704
|
|
Leasehold improvements
|
|
|
19,400
|
|
|
|
19,400
|
|
Office furniture and fixtures
|
|
|
151,249
|
|
|
|
150,921
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,079,157
|
|
|
|
959,254
|
|
Accumulated depreciation
|
|
|
(622,176
|
)
|
|
|
(522,006
|
)
|
|
|
|
|
|
|
|
Property and equipment net
|
|
$
|
456,981
|
|
|
$
|
437,248
|
|
|
|
|
|
|
|
|
7. PATENTS
Amortization expense for patents was $35,785 and $35,910 for the three months ended September
30, 2008 and 2007, respectively. Amortization expense for patents was $106,165 and $103,619 for
the nine months ended September 30, 2008 and 2007, respectively. The estimated amortization
expense for existing patents is $143,000 for each of the next five years.
The gross carrying amount and accumulated amortization of patents consisted of the following
amounts at:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Patents
|
|
$
|
1,809,225
|
|
|
$
|
1,789,192
|
|
Accumulated amortization
|
|
|
(689,380
|
)
|
|
|
(583,215
|
)
|
|
|
|
|
|
|
|
Patents net
|
|
$
|
1,119,845
|
|
|
$
|
1,205,977
|
|
|
|
|
|
|
|
|
8. ACCRUED SALARIES AND BENEFITS
Accrued salaries and benefits consisted of the following amounts at:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Termination and severance expenses
|
|
$
|
280,536
|
|
|
$
|
798,141
|
|
Accrued salaries, benefits and payroll taxes
|
|
|
84,789
|
|
|
|
68,621
|
|
Vacation salary accruals
|
|
|
68,970
|
|
|
|
84,453
|
|
|
|
|
|
|
|
|
Total accrued salaries and benefits
|
|
|
434,295
|
|
|
|
951,215
|
|
Long-term portion of accrued salaries and benefits
|
|
|
|
|
|
|
(173,228
|
)
|
|
|
|
|
|
|
|
Current portion of accrued salaries and benefits
|
|
$
|
434,295
|
|
|
$
|
777,987
|
|
|
|
|
|
|
|
|
9. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following amounts at:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Accrued tooling costs
|
|
$
|
|
|
|
$
|
68,238
|
|
Accrued accounting and legal expenses
|
|
|
70,210
|
|
|
|
80,882
|
|
Warranty reserve
|
|
|
59,762
|
|
|
|
78,983
|
|
Accrued commissions
|
|
|
14,267
|
|
|
|
11,616
|
|
Other operating expense accruals
|
|
|
212,169
|
|
|
|
213,389
|
|
|
|
|
|
|
|
|
Total other accrued expenses
|
|
$
|
356,408
|
|
|
$
|
453,108
|
|
|
|
|
|
|
|
|
8
10. INCOME TAXES
As of September 30, 2008, excluding the current year loss, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $20.7 million, which expire in 2019
through 2026, and net operating loss carryforwards for state income tax purposes of approximately
$5.9 million, which expire in 2008 through 2011. The Company has reviewed its deferred tax asset
based on these carryforwards and has provided a full valuation allowance against the asset. The
Company has recorded a valuation allowance for its deferred tax asset due to the historical lack of
profitable operating history. In the event that the Company determines that it will be more likely
than not that the Company will derive profitability and corresponding taxable income, then it will
realize a portion of its fully reserved deferred tax asset. Upon such determination and
corresponding realization, an adjustment to the deferred tax asset would increase net income
through recording a tax benefit in the period when such a determination is made. The Company does
not believe that recognition is likely before the end of fiscal year 2008.
During the three months and nine months ended September 30, 2008, the Company incurred
operating losses. Any potential income tax benefit from those losses has been fully offset by a
valuation allowance.
During the quarter ended March 31, 2007, the Company decreased the valuation allowance by
$2,468,197 against deferred tax assets based on the expected use of $6.3 million of the Companys
net operating loss carryforwards and the corresponding reduction in the operating loss carryforward
tax asset. There was no income effect on the decrease in the valuation allowance. The valuation
allowance reduces deferred tax assets to an amount that represents managements best estimate of
the amount of such deferred tax assets that, more likely than not, will be realized. Realization
of the deferred tax assets is
dependent upon generating sufficient future taxable income in the period that temporary
differences and carryforwards are expected to be available to reduce taxable income.
The Company adopted FASB Interpretation No. 48 (FIN 48) as of January 1, 2007. The adoption
of FIN 48 has not had an impact on the Companys financial position or results of operations for
the three months ended September 30, 2007 and 2008. The Company has no unrecognized tax benefit,
as described in FIN 48, as of September 30, 2008.
It is the Companys policy to recognize interest and penalties related to unrecognized tax
benefits as a component of income tax expense. No interest or penalties were accrued as of
September 30, 2007 and 2008.
The tax years 1996 through 2007 remain open to examination for federal income tax purposes and
from 2002 to 2007 for state taxing jurisdictions to which the Company is subject. As of September
30, 2008, the Company is not undergoing any U.S. federal or state tax audits. The Company does not
anticipate that total unrecognized tax benefits will significantly change prior to December 31,
2008.
There was no current income tax expense for the three months ended September 30, 2008 because
the Company incurred a loss for the period and any benefit that would otherwise be recognized was
fully offset by an equal increase in the valuation allowance. In the quarter ended September 30,
2007, the Company reversed the income tax expense accrual of $93,508 through June 30, 2007, based
on its determination that the Company qualifies for a small corporation exemption that eliminates
the alternative minimum tax in 2007.
11. LINES OF BUSINESS
As of September 30, 2008, the Company had two reportable segments: FinePoint and Duraswitch
®
(See Note 14 regarding the sale of Duraswitch subsequent to September 30, 2008). These segments
are strategic business units that have different products and services. The segments are managed
separately because each is a distinct and different business venture. The FinePoint segment
manufactures and markets its FinePoint digital computing pen technology to computer manufacturers.
The Duraswitch segment licenses its patented electronic switch technologies to switch manufacturers
and original equipment manufacturers.
During the three and nine months ended September 30, 2008, sales to Dawar Technologies
accounted for 21% and 32%, respectively, of total Company revenue and sales to Gateway and Quanta
accounted for 37% and 18%, respectively, of total Company revenue.
9
During the three and nine months ended September 30, 2007, the settlement and sale of our
claim against Delphi Automotive Systems accounted for 0% and 70%, respectively, of total Company
revenue and sales to Gateway accounted for 81% and 22%, respectively, of total Company revenue.
See Note 4 for additional segment revenue information.
10
A summary of results of operations by business segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
$
|
291,659
|
|
|
$
|
1,019,423
|
|
|
$
|
363,787
|
|
|
$
|
2,591,440
|
|
Duraswitch
|
|
|
324,931
|
|
|
|
203,780
|
|
|
|
939,384
|
|
|
|
8,342,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
|
616,590
|
|
|
|
1,223,203
|
|
|
|
1,303,171
|
|
|
|
10,934,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
26,800
|
|
|
|
1,031,169
|
|
|
|
40,597
|
|
|
|
2,165,138
|
|
Duraswitch
|
|
|
107,355
|
|
|
|
65,596
|
|
|
|
312,213
|
|
|
|
287,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Goods Sold
|
|
|
134,155
|
|
|
|
1,096,765
|
|
|
|
352,810
|
|
|
|
2,452,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
264,859
|
|
|
|
(11,746
|
)
|
|
|
323,190
|
|
|
|
426,302
|
|
Duraswitch
|
|
|
217,576
|
|
|
|
138,184
|
|
|
|
627,171
|
|
|
|
8,055,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
|
482,435
|
|
|
|
126,438
|
|
|
|
950,361
|
|
|
|
8,481,528
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
1,055,720
|
|
|
|
672,735
|
|
|
|
3,168,565
|
|
|
|
1,690,275
|
|
Duraswitch
|
|
|
107,449
|
|
|
|
177,657
|
|
|
|
392,106
|
|
|
|
1,147,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,163,169
|
|
|
|
850,392
|
|
|
|
3,560,671
|
|
|
|
2,837,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
(790,861
|
)
|
|
|
(684,481
|
)
|
|
|
(2,845,375
|
)
|
|
|
(1,263,973
|
)
|
Duraswitch
|
|
|
110,127
|
|
|
|
(39,473
|
)
|
|
|
235,065
|
|
|
|
6,907,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Profit (Loss)
|
|
|
(680,734
|
)
|
|
|
(723,954
|
)
|
|
|
(2,610,310
|
)
|
|
|
5,643,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Expenses
|
|
|
602,235
|
|
|
|
535,883
|
|
|
|
1,692,931
|
|
|
|
2,355,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InPlay Income (Loss) from Operations
|
|
$
|
(1,282,969
|
)
|
|
$
|
(1,259,837
|
)
|
|
$
|
(4,303,241
|
)
|
|
$
|
3,288,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Assets by Segment
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
|
|
|
|
|
|
|
$
|
877,366
|
|
|
$
|
877,366
|
|
Duraswitch
|
|
|
|
|
|
|
|
|
|
|
443,874
|
|
|
|
443,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
|
|
|
|
|
|
|
|
$
|
1,321,240
|
|
|
$
|
1,321,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint
|
|
|
|
|
|
|
|
|
|
$
|
1,878,609
|
|
|
$
|
1,843,229
|
|
Duraswitch
|
|
|
|
|
|
|
|
|
|
|
1,428,019
|
|
|
|
1,433,515
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
623,307
|
|
|
|
5,763,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
$
|
3,929,935
|
|
|
$
|
9,040,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
12. COMMITMENTS AND CONTINGENCIES
Purchase Commitments.
During the fourth quarter of 2007, the Company recognized a potential
loss on purchase commitments of approximately $171,000 relating to purchase orders placed with raw
material vendors in which it is probable that the Company will not be able to realize the value of
the raw material in those commitments because of obsolescence factors resulting in a total accrued
liability for purchase commitments of $558,000. During the three and nine months ended September
30, 2008 the Company paid $0 and $269,438, respectively, for partial settlement of the commitments
and estimates the remaining balance of approximately $288,562 will be paid by the end of 2008.
Employment Agreements.
On July 31, 2007, the Company entered into a severance and release
agreement with Robert J. Brilon, the former Chief Executive Officer and Chief Financial Officer.
Pursuant to the settlement and release agreement, Mr. Brilons employment with the Company
terminated effective July 27, 2007, and he resigned from the Board of Directors effective July 27,
2007.
Pursuant to the settlement and release agreement, Mr. Brilon released the Company from, among
other things, any and all claims or liabilities through July 31, 2007 arising out of his employment
agreement and any option agreements with the Company, his employment, or the termination of his
employment. In addition, Mr. Brilon released the Company from claims or charges relating to
violations of certain employment laws.
In consideration for the release and in accordance with the provisions of his employment
agreement, the Company paid, or will pay, Mr. Brilon (a) approximately $541,200, which is equal to
two times his current gross annual salary as a severance benefit, to be paid to Mr. Brilon over a
two-year period in equal installments; (b) approximately $125,500 representing Mr. Brilons unpaid
accrued vacation benefits; (c) $250,000 representing an agreed upon amount relating to a bonus
payment obligation; (d) approximately $6,700 representing one-half of the remaining amount due
under the automobile leased by the Company and Mr. Brilon; and (e) Mr. Brilons and his familys
medical and dental insurance premiums to maintain coverage under the Companys group medical and
dental insurance plans, only to the extent such premiums are not covered by any subsequent employer
during the two-year period following the separation date. In addition, all of Mr. Brilons stock
options or other rights provided to him under any of the Companys long-term incentive plans
immediately vested on the day prior to the effective date of the settlement and release agreement.
Lease Agreement
. In May 2007, the Company entered into a five year lease for new corporate
headquarters located in Scottsdale, Arizona and transferred operations there in June 2007. Rent
expense for the three and nine months ended September 30, 2008 was $98,429 and $216,170,
respectively. Future minimum rental payments will be approximately $63,000 in 2008, $253,000 in
2009 through 2011, and $190,000 in 2012.
Litigation.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Companys financial position, results of
operations, or liquidity.
In May 2007, Stephen Caldwell, the former president of FinePoint Innovations, Inc. filed a
Demand for Arbitration with the American Arbitration Association alleging various claims against
the Company. He alleged that the Company terminated his employment in violation of his employment
agreement and that the Company breached the terms of a 2005 Merger Agreement between the Company,
FinePoint, and him, for which he sought compensatory and other damages. In March 2008, the Company
entered into a Settlement and Release of Claims Agreement whereby the Company paid Mr. Caldwell a
cash settlement of approximately $339,000 to resolve all of his claims and dismiss his case in its
entirety.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 applies to other existing accounting pronouncements that require
or permit fair value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. While SFAS 157 does not
require any new fair value measurements, its application may change the current practice for fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. On February 8,
2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,
Effective Date of FASB Statement
No. 157
, which delays the effective date of SFAS 157 for non-financial assets and liabilities to
fiscal years beginning after November 15, 2008. The adoption of SFAS 157 for financial assets and
liabilities in the first quarter of 2008 had no impact on the Companys consolidated financial
statements. The Company is currently evaluating the impact of SFAS 157 for non-financial assets
and liabilities.
12
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(FAS 141(R)), to
replace FAS 141,
Business Combinations.
FAS 141(R) requires use of the acquisition method of
accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all
transactions and other events in which one entity obtains control over one or more other
businesses. This statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited. While the Company
does not expect that the adoption of FAS 141(R) to have a material impact to its consolidated
financial statements for transactions completed prior to December 31, 2008, the impact of the
accounting change could be material for business combinations which may be consummated subsequent
thereto.
In December 2007, the FASB issued SFAS No. 160,
Non controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51,
(FAS 160). FAS 160 establishes accounting and
reporting standards for the non controlling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial
statements issued for fiscal years beginning on or after December 15, 2008 with earlier adoption
prohibited. The Company currently does not have any non-controlling interests or deconsolidated
subsidiaries and therefore FAS 160 will not have any impact on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162,
Hierarchy of Generally Accepted Accounting
Principles
(SFAS 162). This statement is intended to improve financial reporting by identifying
a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing
financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles. This statement will be effective 60 days following the U.S.
Securities and Exchange Commissions (the SECs) approval of the Public Company Accounting
Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The Company believes that FAS 162 will have no effect on
its financial statements.
14. SUBSEQUENT EVENTS
On October 28, 2008, the Company sold all the assets and rights relating to its Duraswitch
segment to Memtron Technologies Co. for $1.6 million in cash, plus a supplemental payout with the
potential to receive additional cash consideration up to $800,000 if certain revenue targets are
met from the date of sale through December 31, 2009. All liabilities related to the Duraswitch
segment were retained by the Company. If any additional amounts are due under the supplemental
payout clause of the agreement, the amount will be paid by Memtron in March of 2010. The book
value of all assets sold as part of the sale was approximately $1, 400,000, which included accounts
receivable of approximately $185,000, inventory of approximately $50,000, property and equipment of
approximately $3,000, patents net of amortization of approximately $685,000, and goodwill of
approximately $445,000. As a result of substantial net operating losses available to the Company,
the Company does not expect to record any tax expense related to sale of this asset. Because the
criteria for discontinued operations classification, as described in SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS 144), was not met at September 30, 2008, in
that the company was analyzing and investigating an offer, but had not committed to selling the
segment as of September 30, 2008, the operations of the Duraswitch segment have not been presented
as discontinued operations in the accompanying financial statements.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Note Regarding Forward-Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q, including the Managements Discussion and Analysis of
Financial Condition and Results of Operations, and documents incorporated herein by reference,
contains forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). The Private Securities Litigation Reform Act of 1995, as amended, provides a safe harbor
for such forward-looking statements. The words believe, expect, estimate, anticipate,
intend, may, might, will, would, could, project, and predict, or similar words and
phrases regarding expectations, generally identify forward-looking statements.
We intend to qualify both our written or oral forward-looking statements made from time to
time in connection with filings with the SEC or in public news releases for protection under the
safe harbors discussed above. Forward-looking statements are based largely on our expectations and
because they are estimates, such statements are inherently subject to risks and uncertainties, some
of which cannot be predicted or quantified and are beyond our control. Future events and actual
results could differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements, each of which speaks only as of the date the statement is made.
Statements in this Form 10-Q, including those set forth in the Notes to the Consolidated Financial
Statements, the section entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations and the section entitled Risk Factors in our most recent Annual Report on
Form 10-KSB describe factors that could contribute to or cause actual results to differ materially
from our expectations. Some factors that could cause actual results to differ materially from
those expressed in such forward-looking statements include the following:
|
|
|
our ability to successfully raise required cash in a timely manner to fund the business
plan and net working capital requirements on a go forward basis;
|
|
|
|
|
our inability to obtain new business and generate sufficient revenue and profits to cover
our operating expenses;
|
|
|
|
|
any material delay, cancellation or reduction of orders from one or more current or
prospective significant customers;
|
|
|
|
|
our ability to obtain sufficient raw materials at favorable prices;
|
|
|
|
|
our ability to manage risks associated with our contract manufacturing resources, including
quality control, warranty coverage, compliance requirements and other risks associated with
outsourcing, particularly with international manufacturers; and
|
|
|
|
|
increased expenses to protect our intellectual property or development of products by our
competitors that offer significant advantages over our products.
|
In addition, new factors, other than those identified in this Form 10-Q or our most recent
Annual Report on Form 10-KSB, may emerge from time to time and it is not possible for us to predict
all of such factors, nor can we assess the impact of each factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from
forward-looking statements. We do not undertake, and we specifically disclaim, any obligation to
publicly update or review any forward-looking statement contained in this Form 10-Q or in any
document incorporated herein by reference, whether as a result of new information, future events or
otherwise, except as required by applicable law.
Overview of Business
We have operated two business segments, FinePoint and Duraswitch, through which we design,
develop and market innovative human interface devices (HIDs) for electronic products. In October
2008, we sold the assets related to the Duraswitch business. Going forward, we will focus our
efforts on our FinePoint digital computing pen technology. Our mission is to help make complex
products easy and intuitive to use by providing a natural method of interaction. Our integrated
digital pen and touch technologies automatically recognize pen or finger input, allowing the user
to choose the most effective input method. With the only digital-communication based pen input
system, our products offer significant advantages over traditional analog designs. Like the
evolution of cell phones from analog to digital, our roadmap enables an increasing number of useful
features and functionality for computers, Smartphones and other electronic products. Our target
markets include computing and communication devices.
14
Executive Summary
The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of
business. We have experienced recurring operating losses since our inception and our accumulated
deficit is approximately $29.6 million. Our revenue in 2007 was dependent on two customers, from
which we do not anticipate any future material revenue. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that may be necessary should we be unable to continue as
a going concern. In 2007, we initiated several senior management changes which we believe will be
instrumental in driving our efforts to re-engage with existing and new customers worldwide. While
we believe our marketing efforts to generate new customers will ultimately be successful, the
timing and amount of revenue generated from these efforts is uncertain. We do not believe that
available cash resources, together with anticipated revenue from operations will be sufficient to
satisfy our business plan and capital requirements for the next twelve months. We are currently
exploring strategic alternatives if our cash flow from operations is not sufficient to operate our
business. Additional capital may not be available on a timely basis or on acceptable terms, if at
all. If we are unable to maintain or obtain sufficient capital, we may be forced to reduce
operating expenses, sell business assets, or take other actions which could be detrimental to our
business operations. In the event that any future financing is completed, to the extent it
includes equity securities, the holders of our common stock may experience additional dilution.
Our FinePoint business has declined in sales as we completed production for a major customer
using this technology at the end of 2007. We have significantly increased our marketing efforts
aimed at attracting new customers. During 2007, we engaged Japan Entry Corp. and WPG/Rich Power
for on-the-ground sales and marketing support in Japan and Asia, respectively. We expanded our
relationship with WPG in the first quarter 2008, to include North and South America. These
relationships, coupled with our internal resources, have produced a number of new leads and renewed
interest from past prospects.
Additionally, we have invested resources to further develop our technology, in particular our
integrated capacitive touch and digital pen platform. We believe that this investment is an
important step to be able to deliver the products for our key markets.
In 2008, we have shipped multiple fully functional units using our technology for prototyping,
evaluation and pre-production build requirements to prospective customers. Our objective is to
deliver superior, cost-effective technical solutions and excellent customer service.
Duraswitch revenue from non-exclusive licensees for the three and nine months ended September
30, 2008 was $324,931 and $939,384, respectively, up 59% and 32%, respectively, from the comparable
periods in 2007. In October 2008, we sold the assets related to the Duraswitch technology for $1.6
million in cash plus a supplemental payout with the potential to receive additional cash
consideration up to $800,000 if certain revenue targets are met from the date of sale through
December 31, 2009. Continuing revenues from Duraswitch have ceased with the sale of that segment
in October 2008. The historical operating results of Duraswitch will be classified and presented
as discontinued operations. The Company believes that the criteria for discontinued operations
classification for Duraswitch were not met at September 30, 2008, in that the Company was pursuing
and investigating the possibility of disposing of the segment but had not committed to selling the
segment as of September 30, 2008.
We believe the efforts and resources that we have put in place have strengthened our business
and will enable us to grow our business more efficiently and effectively. We have made significant
investment in our internal resources, external partners and development of our technologies. The
lead time for projects currently in queue has been longer than expected and given the current state
of the economy, we do not expect any of our customers to accelerate their timelines. We remain
confident that we are on track to earn design wins at several of these prospective customers in
2008 and 2009.
We used approximately $1.3 million and $5.2 million in cash during the three and nine months
ended September 30, 2008, respectively, and reported $423,877 in cash at the end of the third
quarter. Cash use during the nine months included a one-time payment of approximately $339,000 for
settlement of the Caldwell litigation, payments totaling $338,000 for partial settlement related to
cancellation of purchase order commitments for the Gateway program, and ongoing severance payments
of approximately $188,000 to Mr. Brilon. Subsequent to the end of the quarter, we sold the assets
related to the Duraswitch business for $1.6 million in cash. We will continue to consume cash
throughout 2008 and beyond as we continue to invest in our technologies and continue with our
marketing efforts to earn design wins.
15
As the design to manufacturing cycle time in our industry is much greater than anticipated, it
is apparent that additional cash resources must be secured to execute our plan and provide the
necessary working capital for the growth of the business. We are exploring all possible options
and alternatives available to obtain additional cash resources to fund the business on a go forward
basis. Even though several alternatives are available and we are considering many options, we are
uncertain whether we will be successful in raising the needed cash through either debt, equity or
any combination thereof. While we believe we will be able to obtain additional funding in the next
several months, current financial market conditions may impede our ability to succeed in this
endeavor.
Our overriding goals for 2008 are to win new project designs, manage our cash resources, and
demonstrate a path back to profitability.
Application of Critical Accounting Policies
We have identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks related to these
policies on our business operations are discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations when such policies affect our reported or expected
financial results.
In the ordinary course of business, we have made a number of estimates and assumptions
relating to the reporting of results of operations and financial condition in the preparation of
our financial statements in conformity with accounting principles generally accepted in the United
States. We base our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ significantly from those estimates under different
assumptions and conditions. We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of our financial
condition and results of operations and require our most difficult, subjective, and complex
judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Going Concern Assumption.
The financial statements do not include any adjustments relating to
the recoverability and classification of assets or the amounts and classification of liabilities
that might be necessary should we be unable to continue as a going concern. If the financial
statements were prepared on a liquidation basis, the carrying value of our assets would be adjusted
to net realizable amounts and liabilities would be adjusted to their estimated settlement amounts.
In addition, the classification of the assets and liabilities would be adjusted to reflect the
liquidation basis of accounting which reflects:
|
|
|
a statement of net assets in liquidation whereby the assets are reported at estimated
realizable amounts and the liabilities are reported at settlement amounts;
|
|
|
|
|
a statement of changes in net assets in liquidation, which reports the estimated gains
and losses on liquidation;
|
|
|
|
|
notes to the financial statements describing the plan of liquidation, the basis of
presentation, and applicable disclosures normally required under generally accepted
accounting principles; and
|
|
|
|
|
depending on the extent and significance of operations, the results of operation might
be included in a separate statement or summarized in the footnotes.
|
Revenue Recognition.
Our FinePoint segment manufactures digital pens and digitizers for the
convertible notebook and tablet PC market. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is
probable. Generally, all of these conditions are met at the time we deliver products to our
customers.
Our Duraswitch segment enters into licensing agreements with our customers. Our licensing
agreements require the licensee to pay per-switch royalties and in some cases to purchase licensed
components from us. The purchase price of the licensed components includes the royalty fee. When
the components are shipped, we recognize revenue and cost of goods sold. In cases where no
licensed components are supplied, we are paid a royalty per switch manufactured by the licensee and
we recognize revenue in the period the switch is manufactured. During 2007, we recognized the $7.6
million Delphi settlement as revenue because it related to minimum license fees due under our
agreement with Delphi.
16
Some of our licensees have prepaid royalties to us pursuant to their license agreements.
These prepayments are recorded as deferred licensing revenue. This deferred revenue is recognized
as revenue when earned under the licensing agreement. If a licensee purchases a licensed component
from us, the royalty is earned when the licensed component is shipped. If the licensee directly
manufactures our switches without purchasing licensed components from us, we consider the royalty
earned when the switch is manufactured.
Inventory Valuation.
Our inventory is primarily comprised of certain raw materials that are
used in the manufacture of digital pens and digitizers and Duraswitch licensed components, and
finished goods which are primarily pens and digitizers that are in transit to the customer. We
record inventories at the lower of cost or market value, determined using the first-in, first-out
method. Our policy is to write down our inventory for estimated obsolescence or unmarketable
inventory to the extent the cost exceeds the estimated market value. We base the estimate on our
assumptions about future demand and market conditions. If actual market conditions are less
favorable than those assumed in our estimates, additional inventory write-downs might be required.
We reflect any write-down of inventory in the period in which the facts giving rise to the
inventory write-down become known to us.
Impairment or Disposal of Long-Lived Assets.
We review our long-lived assets and identifiable
intangibles for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Additionally, goodwill is reviewed on an annual basis.
Our intangible assets are primarily our patents and the goodwill associated with the 2005
acquisition of FinePoint Innovations and the 1998 acquisition of Aztec
Industries. If such assets were considered to be impaired, the impairment to be recognized
would be measured by the amount by which the carrying amount of the assets exceeds the fair market
value of the assets.
We evaluate the recoverability of property and equipment and intangibles (excluding goodwill)
not held for sale by comparing the carrying amount of the asset or group of assets against the
estimated undiscounted future net cash flows expected to result from the use of the asset or group
of assets. If the undiscounted estimated cash flows are less than the carrying value of the asset
or group of assets being reviewed, an impairment loss would be recorded. The loss would be
measured based on the estimated fair value of the asset or group of assets compared to its carrying
value. The estimated fair value would be based on the best information available under the
circumstances, including prices for similar assets and the results of valuation techniques,
including the present value of expected future cash flows using a discount rate commensurate with
the risks involved.
We evaluate goodwill and other intangible assets for impairment at least annually, in
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). For goodwill,
we first compare the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of a reporting unit exceeds the fair value of a reporting unit, additional
tests would be used to measure the amount of impairment loss, if any. We use present value and
market value techniques to measure reporting unit fair value. If the carrying amount of any other
intangible asset exceeds its fair value, we would recognize an impairment loss for the difference
between fair value and the carrying amount. If other events occur and circumstances change,
causing the fair value of a reporting unit to fall below its carrying amount, impairment losses may
be recognized in the future. In accordance with SFAS No. 142, we performed our annual impairment
test in December 2007 and found no impairment in our existing goodwill balances.
Income Taxes.
Deferred taxes are provided on temporary differences between the tax basis of
assets and liabilities for financial reporting purposes and income tax purposes. A valuation
allowance reduces deferred tax assets to an amount that represents our best estimate, of the amount
of such deferred tax assets that, more likely than not, will be realized. We regularly review our
deferred tax assets for recoverability and, if necessary, establish a valuation allowance. Based
on our review of the deferred tax assets at September 30, 2008, we have determined that a full
valuation allowance was required against all of our deferred tax assets.
17
Results of Operations
Net Revenue.
The following table summarizes our net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
291,659
|
|
|
$
|
1,019,423
|
|
|
$
|
(727,764
|
)
|
|
|
(71
|
%)
|
Duraswitch Delphi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duraswitch Other
|
|
|
324,931
|
|
|
|
203,780
|
|
|
|
121,151
|
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
616,590
|
|
|
$
|
1,223,203
|
|
|
$
|
(606,613
|
)
|
|
|
(50
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
363,787
|
|
|
$
|
2,591,440
|
|
|
$
|
(2,227,653
|
)
|
|
|
(86
|
%)
|
Duraswitch Delphi
|
|
|
|
|
|
|
7,631,250
|
|
|
|
(7,631,250
|
)
|
|
|
(100
|
%)
|
Duraswitch Other
|
|
|
939,384
|
|
|
|
711,733
|
|
|
|
227,651
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,303,171
|
|
|
$
|
10,934,423
|
|
|
$
|
(9,631,252
|
)
|
|
|
(88
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FinePoint Revenue
. Revenue for the three and nine months ended September 30, 2008
included $230,988 from the sale of our remaining excess pens and digitizers to Quanta for the
Gateway program. The balance of the revenue was primarily for non-recurring engineering that
customers paid for in the customization and development of new products. Revenue for the three
and nine months ended September 30, 2007 was driven primarily by one major
customer who is no longer designing or building new products using FinePoint technology.
Revenue for this one customer for the three month period ended September 30, 2007 was $1.0 million,
or 98% of net FinePoint revenue, and for the nine-month period ended September 30, 2007 was $2.5
million, or 95% of net FinePoint revenue.
We will continue our attempts to win additional business and obtain new customers for
FinePoint products. However, because of lengthy design and product development cycles within the
industry, any significant revenue from new customers would likely not occur until 2009.
Net Duraswitch Revenue.
The increase in net revenue from customers, excluding Delphi, for the
three and nine-month period was primarily due to increased sales across most product lines
including thiNcoder
®
rotary switch licensed components and royalties. For the three months ended
September 30, 2008 and 2007, we did not generate any revenue from the Delphi license agreement.
For the nine months ended September 30, 2008 and 2007, Delphi generated approximately $0 and $7.6
million, respectively, of Duraswitch licensing revenue representing 0% and 94%, respectively, of
Duraswitch licensing revenue. The 2007 Delphi revenue represents a cash payment received in the
first quarter of 2007 from the sale of the rights to our general unsecured claim for licensing fees
against Delphi Automotive Systems, LLC. We do not expect any additional revenue from Delphi in the
future.
In October 2008, we sold the assets related to the Duraswitch segment. Other than revenue
received up to the date of the sale and the potential for revenue as part of the earnout provision
in the asset purchase agreement, we do not expect any future revenue related to Duraswitch.
18
Cost of Goods Sold and Gross Profit.
The following tables summarize our cost of goods sold
(COGS) and gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Cost of Goods Sold
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
26,800
|
|
|
$
|
1,031,169
|
|
|
$
|
(1,004,369
|
)
|
|
|
(97
|
%)
|
Duraswitch
|
|
|
107,355
|
|
|
|
65,596
|
|
|
|
41,759
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total COGS
|
|
$
|
134,155
|
|
|
$
|
1,096,765
|
|
|
$
|
(962,610
|
)
|
|
|
(88
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Gross Profit
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
264,859
|
|
|
$
|
(11,746
|
)
|
|
$
|
276,605
|
|
|
|
(2355
|
%)
|
Duraswitch
|
|
|
217,576
|
|
|
|
138,184
|
|
|
|
79,392
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
$
|
482,435
|
|
|
$
|
126,438
|
|
|
$
|
355,997
|
|
|
|
282
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Cost of Goods Sold
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
40,597
|
|
|
$
|
2,165,138
|
|
|
$
|
(2,124,541
|
)
|
|
|
(98
|
%)
|
Duraswitch
|
|
|
312,213
|
|
|
|
287,757
|
|
|
|
24,456
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total COGS
|
|
$
|
352,810
|
|
|
$
|
2,452,895
|
|
|
$
|
(2,100,085
|
)
|
|
|
(86
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
Gross Profit
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
323,190
|
|
|
$
|
426,302
|
|
|
$
|
(103,112
|
)
|
|
|
(24
|
%)
|
Duraswitch Delphi
|
|
$
|
|
|
|
$
|
7,631,250
|
|
|
$
|
(7,631,250
|
)
|
|
|
(100
|
%)
|
Duraswitch
|
|
|
627,171
|
|
|
|
423,976
|
|
|
|
203,195
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit
|
|
$
|
950,361
|
|
|
$
|
8,481,528
|
|
|
$
|
(7,531,167
|
)
|
|
|
(89
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint.
FinePoint gross profit for the three months ended September 30, 2008 was
positively affected by the sale of approximately $230,000 of pens and digitizers. This excess
inventory had been valued at minimal cost (lower of cost or market) when production for this
customer ended in 2007. The remaining gross profit relates to non-recurring engineering charges in
the development of new products for customers. Gross profit for the three and nine months ended
September 30, 2008 was negatively impacted by unabsorbed tooling depreciation.
Duraswitch.
Gross profit, excluding Delphi, increased for the three and nine months ended
September 30, 2008 from the previous year mainly as a result of increased sales of Duraswitch
products. The revenue received in 2007 from our claim for licensing fees from Delphi of $7.6
million did not have any raw material costs associated with it. Excluding Delphi revenue and a
one-time charge of $90,000 for tooling in the second quarter of 2007, gross profit percentage for
the three months ended September 30, 2008 and 2007 was 67% and 68%, respectively, and 67% and 60%
for the nine months ended September 30, 2008 and 2007, respectively. The percentage variances are
driven primarily by product mix and lower selling prices.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses
consist mainly of salaries, commissions, and other compensation expense for sales and
administrative personnel, sales commissions and fees for external sales representatives, and
corporate administrative expenses. The following table summarizes our selling, general and
administrative expenses (SG&A):
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
145,738
|
|
|
$
|
219,524
|
|
|
$
|
(73,786
|
)
|
|
|
(34
|
%)
|
Duraswitch
|
|
|
53,820
|
|
|
|
78,994
|
|
|
|
(25,174
|
)
|
|
|
(32
|
%)
|
Corporate
|
|
|
602,235
|
|
|
|
535,883
|
|
|
|
66,352
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
801,793
|
|
|
$
|
834,401
|
|
|
$
|
(32,608
|
)
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
557,083
|
|
|
$
|
665,923
|
|
|
$
|
(108,840
|
)
|
|
|
(16
|
%)
|
Duraswitch
|
|
|
194,025
|
|
|
|
877,136
|
|
|
|
(683,111
|
)
|
|
|
(78
|
%)
|
Corporate
|
|
|
1,692,931
|
|
|
|
2,355,273
|
|
|
|
(662,342
|
)
|
|
|
(28
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
2,444,039
|
|
|
$
|
3,898,332
|
|
|
$
|
(1,454,293
|
)
|
|
|
(37
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FinePoint SG&A.
The decrease in expenses for the three and nine months ended September 30,
2008 from the previous year was primarily due to a decrease in legal expense as the comparable 2007
period included unusually higher legal costs relating to severance negotiation and the termination
of a lease in 2007 for a building used solely by FinePoint.
Duraswitch SG&A.
The decrease in expenses for the three months ended September 30, 2008 from
the previous year is primarily due to lower outside consulting fees. The decrease in expenses for
the nine months ended September 30, 2008 from the previous year is primarily due to commissions and
fees of approximately $650,000 related to the Delphi revenue paid during the 2007 period.
Corporate SG&A
. The increase in expenses for the three months ended September 30, 2008 from
the previous period was primarily due to fees paid to financial consultants. The decrease in
expenses for the nine months ended September 30, 2008 from the previous year is primarily due to
higher compensation expense in 2007 relating to employment agreement severance expenses of
approximately $800,000, offset by higher rent expense in 2008 and higher non-cash incentive based
compensation charges in 2008.
Research, Development and Commercial Application Engineering Expenses.
Research and
development expenses consist primarily of compensation for our engineering personnel, consulting
expenses, project materials and patent amortization expenses. The following table summarizes our
research, development, and commercial application engineering expenses (R&D):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
909,982
|
|
|
$
|
453,211
|
|
|
$
|
456,771
|
|
|
|
101
|
%
|
Duraswitch
|
|
|
53,629
|
|
|
|
98,663
|
|
|
|
(45,034
|
)
|
|
|
(46
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total R&D
|
|
$
|
963,611
|
|
|
$
|
551,874
|
|
|
$
|
411,737
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
%
|
|
FinePoint
|
|
$
|
2,611,482
|
|
|
$
|
1,024,352
|
|
|
$
|
1,587,130
|
|
|
|
155
|
%
|
Duraswitch
|
|
|
198,081
|
|
|
|
270,244
|
|
|
|
(72,163
|
)
|
|
|
(27
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total R&D
|
|
$
|
2,809,563
|
|
|
$
|
1,294,596
|
|
|
$
|
1,514,967
|
|
|
|
117
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
FinePoint R&D.
The increase in expenses for the three and nine months ended September 30,
2008 from the previous year was due to higher headcount and increased spending to develop new
products and samples for prospective customers.
Duraswitch R&D.
The decrease in expenses for the three and nine months ended September 30,
2008 from the previous year was primarily the result of lower headcount.
Other Income net.
Other income, which is mainly interest income, was $4,121 for the three
months ended September 30, 2008, compared to $95,416 for the three months ended September 30, 2007.
Other income was $48,031 for the nine months ended September 30, 2008, compared to $222,382 for
the nine months ended September 30, 2007. The decreases were due to fluctuations in interest rates
and lower cash balances than the previous year.
Liquidity and Capital Resources
We had cash and cash equivalents of $423,877 on September 30, 2008. Cash decreased $5,168,535
from December 31, 2007.
Net cash used in operating activities was approximately $5.2 million for the nine months ended
September 30, 2008. The cash used in operating activities consisted primarily of cash used for
ongoing operating activities and expenses, increase in accounts receivable of approximately
$131,000, severance payments of approximately $188,000, payment related to the settlement of the
Caldwell litigation of approximately $339,000, reduction of other accrued liabilities of
approximately $188,000 and payments for outstanding purchase order commitments of approximately
$338,000.
Net cash used in investing activities was $159,937 for the nine months ended September 30,
2008. The net cash used in investing activities was for purchases of tooling and equipment, a
restricted investment and patent costs.
On October 28, 2008, the Company received $1.6 million in cash upon the sale of our assets and
rights relating to its Duraswitch segment. Notwithstanding this asset sale, our current cash
balances are insufficient for us to continue operating for the next twelve months without a
significant infusion of cash through new debt or equity or the sale of certain assets. In
addition, our ability to continue as a going concern depends on our ability to obtain additional
sources of funding, our success in winning new business and beginning production of our
technologies for new product designs. With the assistance of two advisory firms, in U.S. and Asia,
we are pursuing several alternatives for additional funding, including the issuance of equity or
debt, the possible sale of some of our assets, as well as other financing arrangements to improve
our liquidity. However, we cannot assure you that we will be successful in our efforts or that
additional funding will be available to us in a timely manner or under acceptable terms.
21
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to management, including our Chief Executive Officer and our Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of disclosure controls and procedures in applicable securities laws.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this
report to provide reasonable assurance that material information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms.
We are aware that there is a lack of segregation of duties due to the small number of
employees dealing with general administrative and financial matters. However, at this time, we
have decided that considering the employees involved, the control procedures in place, and the
outsourcing of certain financial functions, the risks associated with such lack of segregation are
low and the potential benefits of adding additional employees to clearly segregate duties do not
justify the expenses associated with such increases. We will periodically reevaluate this
situation. If the volume of the business increases and sufficient capital is secured, it is our
intention to increase staffing to mitigate the current lack of segregation of duties within the
general administrative and financial functions.
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Such limitations include the fact
that human judgment in decision-making can be faulty and that breakdowns in internal control can
occur because of human failures, such as simple errors or mistakes or intentional circumvention of
the established process.
There were no changes in our internal control over financial reporting during the three months
ended September 30, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5. Other Information.
On May 12, 2008, the Company received a NASDAQ Staff Deficiency Letter advising that for the
prior 30 consecutive business days, the bid price of its common stock has closed below $1.00 per
share. As a result, the Company fails to comply with the minimum bid price requirement for
continued listing as set forth in Marketplace Rule 4310(c)(4).
In accordance with Marketplace Rule 4310(c)(8)(D), the Company was given 180 calendar days, or
until November 10, 2008, to regain compliance with the minimum bid price requirement. On October
16, 2008, due to depressed prices for companies that remain sustainable for continued listing and
extraordinary market conditions, NASDAQ announced that it was suspending enforcement of the bid
price and market value of publicly held shares requirements through January 16, 2009. On October
22, 2008, the Company received notification from NASDAQ that since the Company had 24 calendar days
remaining in its compliance period as of October 16, it will, upon reinstatement of the rules,
still have 24 more days, or until February 12, 2009, to regain compliance. The Company can regain
compliance, either during the suspension or during the compliance period resuming after the
suspension, by achieving a $1.00 closing bid price for a minimum of 10 consecutive days. As of
the date of this report, the Company has not achieved compliance with the minimum bid price
requirement.
22
Item 6. Exhibits.
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of July 27, 2005, among
InPlay Technologies, Inc., FPI Acquisition, Inc., FinePoint
Innovations, Inc., and Stephen Caldwell (incorporated herein
by reference to Exhibit 2.2 on Form 8-K filed on August 2,
2005)
|
|
|
|
2.3
|
|
Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 27, 2005, among InPlay Technologies, Inc., FPI
Acquisition, Inc., FinePoint Innovations, Inc., and Stephen
Caldwell (incorporated herein by reference to Exhibit 2.3 on
Form 8-K filed on September 8, 2005)
|
|
|
|
2.4
|
|
Asset Purchase Agreement between InPlay Technologies, Inc. and
Memtron Technologies, Co. (incorporated herein by reference
to Exhibit 2.4 on Form 8-K, filed October 29, 2008)
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation (incorporated
herein by reference to Exhibit 3.1 on Form 10-QSB filed August
5, 2005)
|
|
|
|
3.2
|
|
Amended and Restated Bylaws (incorporated herein by reference
to Exhibit 3.2 on Form 10-QSB filed April 2, 2007)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
InPlay Technologies, Inc.
|
|
|
|
(Registrant)
|
|
Date: November 13, 2008
|
By:
|
/s/ Steven P. Hanson
|
|
|
|
Steven P. Hanson
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
Date: November 13, 2008
|
By:
|
/s/ Mark R. Sokolowski
|
|
|
|
Mark R. Sokolowski
|
|
|
|
Chief Financial Officer
|
|
|
24
INDEX TO EXHIBITS
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
2.2
|
|
Agreement and Plan of Merger, dated as of July 27, 2005, among
InPlay Technologies, Inc., FPI Acquisition, Inc., FinePoint
Innovations, Inc., and Stephen Caldwell (incorporated herein
by reference to Exhibit 2.2 on Form 8-K filed on August 2,
2005)
|
|
|
|
2.3
|
|
Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 27, 2005, among InPlay Technologies, Inc., FPI
Acquisition, Inc., FinePoint Innovations, Inc., and Stephen
Caldwell (incorporated herein by reference to Exhibit 2.3 on
Form 8-K filed on September 8, 2005)
|
|
|
|
2.4
|
|
Asset Purchase Agreement between InPlay Technologies, Inc. and
Memtron Technologies, Co. (incorporated herein by reference
to Exhibit 2.4 on Form 8-K, filed October 29, 2008)
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation (incorporated
herein by reference to Exhibit 3.1 on Form 10-QSB filed August
5, 2005)
|
|
|
|
3.2
|
|
Amended and Restated Bylaws (incorporated herein by reference
to Exhibit 3.2 on Form 10-QSB filed April 2, 2007)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a), promulgated under the Securities
Exchange Act of 1934, as amended
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
25
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