FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number 0-24368
FLEXPOINT SENSOR SYSTEMS, INC.
(Formerly Micropoint, Inc.)
(Exact name of small business issuer as identified in its charter)
Delaware 87-0620425
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6906 South 300 West, Midvale, Utah 84047
(Address of principal executive offices)
(Zip Code)
(801) 568-5111
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ]No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 12, 1999: 17,238,670.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Current Assets
Cash $ 206,798 $ 657,775
Trade accounts receivable, net of allowance of
$90,721 52,232 298,586
Royalties receivable - 152,570
Receivable from shareholder - 1,573,750
Inventory 194,748 42,691
Prepaid expense 45,167 50,915
------------ ------------
Total Current Assets 498,945 2,776,287
------------ ------------
Property and Equipment 3,326,129 1,273,326
Less accumulated depreciation (486,485) (387,858)
------------ ------------
Net Property and Equipment 2,839,644 885,468
------------ ------------
Goodwill, Net of Accumulated Amortization of
$89,851 and $77,871 29,950 41,931
Deposits 49,549 246,441
Patents, net of accumulated amortization of
$52,218 and $45,018 116,234 101,331
------------ ------------
Total Assets $ 3,534,322 $ 4,051,458
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 631,178 $ 348,473
Related party payable 1,234
Accrued liabilities 577,185 100,290
Income taxes payable 8,314 8,314
Notes payable 310,000 -
------------ ------------
Total Current Liabilities 1,526,677 458,311
------------ ------------
Stockholders' Equity
Preferred stock $0.001 par value; 100,000,000
shares authorized; 526 shares issued and
outstanding; liquidation preference $460,250 1 -
Common stock $0.001 par value; 100,000,000
shares authorized; 17,238,670 and 17,215,446
shares issued and outstanding 17,239 17,215
Additional paid in capital 10,221,885 10,027,475
Less receivable from stockholder - (900,609)
Deficit accumulated during the development stage (8,231,480) (5,550,934)
------------ ------------
Total Stockholders' Equity 2,007,465 3,593,147
------------ ------------
Total Liabilities and Stockholders' Equity $ 3,534,322 $ 4,051,458
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the Period
January 5,
1995
(Date of
Inception)
For the Three Months For the Six Months Through
Ended June 30, Ended June 30, June 30,
1999 1998 1999 1998 1999
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales $ 122,089 $ 297,042 $ 287,950 $ 357,130 $ 3,534,571
Cost of sales 47,968 110,813 80,677 155,539 1,577,116
------------- ------------ ------------ ------------ -------------
Gross profit 74,121 186,229 207,273 201,591 1,957,455
General and administrative
expense 839,811 475,713 1,459,405 770,841 5,378,267
Research and development 793,741 272,117 1,441,241 439,822 4,767,769
------------- ------------ ------------ ------------ -------------
Loss from operations (1,559,431) (561,601) (2,693,373) (1,009,072) (8,188,581)
Interest expense (4,351) - (4,351) (40) (75,552)
Interest income 4,798 13,663 16,643 13,663 62,898
Other income/expense (152) (60) 535 526 (30,245)
------------- ------------ ------------ ------------ -------------
Net Loss Before Income Taxes (1,559,136) (547,998) (2,680,546) (994,923) (8,231,480)
Provision for income taxes - - - 4,043 -
------------- ------------ ------------ ------------ -------------
Net Loss $ (1,559,136) $ (547,988) $(2,680,546) $ (998,966) $ (8,231,480)
============= ============ ============ ============ =============
Basic and Diluted Loss Per
Common Share $ (0.09) $ (0.06) $ (0.16) $ (0.08) $ (0.48)
============= ============ ============ ============ =============
Weighted average number of
common shares used in per
share calculation 17,148,548 9,860,279 17,148,548 12,479,064 17,148,548
============= ============ ============ ============ =============
The accompanying notes are an integral part of these financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the Period
January 5, 1995
(Date of Inception)
For the Six Months Through
Ended June 30, June 30,
1999 1998 1999
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (2,680,546) $ (998,966) $ (8,231,480)
Adjustments to reconcile net loss to
net cash used by operating activities
Gain on Sale of available-for-sale
securities - - (21,225)
Loss on sale of assets - - 9,227
Depreciation and amortization 117,807 69,315 640,890
Stock issued for services - - 268,102
Allowance for doubtful accounts - - 242,288
Write-off of related party receivable - - -
Changes in operating assets and liabilities:
Accounts receivable 398,924 (38,559) (158,479)
Inventory (152,057) (353,489) (194,748)
Accounts payable 282,705 (44,945) 452,364
Accrued liabilities 476,895 (358,493) 508,201
Deferred revenue - (100,000) (6,163)
Other assets 202,122 30,490 (81,103)
--------------- -------------- ----------------
Net Cash Used By Operating Activities (1,354,150) (1,794,647) (6,572,126)
--------------- -------------- ----------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Proceeds from the sale of available-for
sale securities - 153,497 455,082
Net cash received form Nanotech
acquisition - 1,492,906 1,492,907
Payments received from related parties - 3,128 34,661
Collection of receivables from escrow agent - - 64,825
Payments for the purchase of property
and equipment (2,052,803) (268,242) (3,053,600)
Proceeds received from sale of property
and equipment - - 22,682
Investment in patents (22,818) (18,459) (132,142)
--------------- -------------- ----------------
Net Cash Used By Investing Activities (2,075,621) 1,362,830 (1,408,998)
--------------- -------------- ----------------
Cash Flows From Financing Activities
Proceeds from the issuance of stock 1,095,044 8,000 5,185,708
Cash payments to officers to repurchase
stock - - (50,000)
Cash paid for offering costs - - (123,020)
Proceeds from borrowings 310,000 - 613,960
Principal payments of long-term debt - (310,118) (398,751)
Proceeds of bridge loan - 1,000,000 1,000,000
Proceeds from stock subscription
receivable 1,573,750 390,000 1,963,750
Proceeds from related party notes - - 60,208
Principal payments of related party notes - - (63,933)
--------------- -------------- ----------------
Net Cash Provided By Financing
Activities 2,978,794 1,087,882 8,187,922
--------------- -------------- ----------------
Net Change In Cash (450,977) 656,065 206,798
Cash at Beginning of Period 657,775 106,494 -
--------------- -------------- ----------------
Cash at End of Period $ 206,798 $ 762,559 $ 206,798
=============== ============== ================
The accompanying notes are an integral part of these financial statements.
4
</TABLE>
<PAGE>
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation Sensitron, Inc.
("Sensitron") was incorporated under the laws of the State of Utah on January
5, 1995. During 1995, Sensitron acquired Flexpoint, Inc. and Technology and
Manufacturing Company, Inc., Utah corporations On April 11, 1998, Sensitron
was reorganized into a wholly-owned subsidiary of Nanotech Corporation, a
publicly-held Delaware Corporation, and changed its name to Micropoint, Inc.
At the annual stockholders' meeting held on June 16, 1999, its stockholders
authorized Micropoint, Inc. to change its name to Flexpoint Sensor Systems,
Inc.
The accompanying consolidated financial statements include the accounts of
Sensitron for all periods presented, the accounts of its wholly-owned
subsidiaries from their dates of acquisition in 1995 and the accounts of
Flexpoint Sensor Systems, Inc. from April 11, 1998. These entities are
collectively referred to herein as the "Company," except where the context
clearly indicates to the contrary All significant intercompany transactions
and account balances have been eliminated in the consolidation.
Nature of Operations - The Company is a development stage enterprise
engaged principally in designing, engineering, and manufacturing sensor
technology and equipment using flexible potentiometer technology. Flexpoint,
Inc. entered into a Purchase and Supply Agreement (the "Supply Agreement")
with Delphi Automotive Systems ("Delphi") in June 1998. Under the terms of the
Supply Agreement, the Company will supply its proprietary sensor mats to
Delphi for integration into a weight based suppression system as a critical
part of a smart air bag system. The Supply Agreement provides that such sensor
mats will be exclusively supplied to General Motors, through Delphi, by the
Company through 2002. The Company is looking to the Supply Agreement to
provide the bulk of its revenues in the immediate future. The Company could
have over $300,000,000 in sales under the Supply Agreement. The projected
sales figure is forward looking information. Such forward looking information
is subject to many risks and uncertainties, including the fact that Delphi is
not obligated under the terms of the Supply Agreement to purchase any minimum
number of sensor mats and there can be no assurance that the Supply Agreement
will result in any material amount of sales.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Interim Financial Statements - The accompanying consolidated and
condensed balance sheet, statement of operations and cash flows for the three
and six months ended June 30, 1999 and 1998 are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position, results
of operations and cash flows for the periods presented. The financial
statements have been condensed and do not contain all of the disclosure
required by generally accepted accounting principles. Accordingly, these
statements should be read in conjunction with the annual financial statements
included in the annual report on Form 10-KSB, dated December 31, 1988. The
results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the operating results expected for the entire year.
Business Condition - The accompanying financial statements contemplate
continuation of the Company as a going concern. However, the Company has
suffered losses from operations and has had negative cash flows from operating
activities during the years ended December 31, 1998 and 1997 and cumulative
from inception through June 30, 1999, which conditions raise substantial doubt
about the Company's ability to continue as a going concern. With the award of
the Supply Agreement and
5
<PAGE>
subsequent increase in the projected manufacturing output under the agreement,
the Company has needed to materially increase spending for additional
facilities, equipment and personnel. At a minimum, during the remainder of
1999 the Company will need to raise approximately $8,000,000 in additional
funding to support its operations during 1999. The Company estimates that it
will need to raise at least an additional $2,000,000 in 2000 to fully execute
its business plan which includes completing two additional production lines to
fulfill its anticipated manufacturing obligations under the Supply Agreement,
as amended.
The Company is concurrently seeking funding from several sources. The
Company has no material current contractual arrangements with respect to
additional financing and there can be no assurance that additional financing
will be available on commercially reasonable terms or at all. Any inability to
obtain additional financing will have a material adverse effect on the
Company, including possibly requiring the Company to significantly curtail or
cease its operations.
NOTE 2 PROPERTY AND EQUIPMENT
At June 30, 1999 property and equipment consisted of the following:
Furniture and fixtures $ 92,838
Machinery and equipment 1,671,284
Office equipment 219,685
Software 33,354
Leasehold improvements 1,308,968
---------------
Total $ 3,326,129
===============
Of the $1,308,968 of leasehold improvements, $906,502 is for the
infrastructure required by the Supply Agreement. Depreciation expense for the
six months ended June 30, 1999 and 1998 was $50,365 and $32,068 respectively.
NOTE 3 - NOTES PAYABLE
On June 18, 1999, the Company borrowed $310,000 from a non-affiliated
accredited lender to provide the Company necessary funding. Of said amount,
$200,000 bears interest at 20% per annum, payable monthly. The principal is
payable in two equal installments of $100,000 on September 18, 1999 and
December 18, 1999. The remaining principal amount of $110,000 bore interest at
10% per annum and was payable and was repaid on July 15, 1999. These notes are
unsecured and included in total current liabilities. As part of the
consideration for these notes, the Company granted to said lender warrants to
acquire 75,000 shares of the Company's common stock. Said warrants are
exercisable at approximately $4.34 per share for a period expiring in June
2004.
NOTE 4 - PREFERRED STOCK
During the three months ended June 30, 1999, the Company offered and
sold to accredited investors in a private placement 526 Units (defined below)
for gross proceeds of $460,250. Each Unit consisted of one share of Series A
Convertible Preferred Stock (the "Preferred Stock") and Series A Warrants to
purchase 250 shares of the Company's common stock. The Preferred Stock is
convertible, at the option of the holder at any time, into common stock at the
conversion rate of 250 shares of common stock for one share of Preferred
Stock. The Series A Warrants are exercisable at $4.00 per share through
January 1, 2001. Each Unit was sold for $875.
6
<PAGE>
NOTE 5 - SUBSEQUENT EVENTS
On July 30, 1999, the Company borrowed $200,000 from a non-affiliated
lender. The note bore interest at 14% per annum. The note was repaid in August
1999 and all interest payable thereunder was forgiven. As part of the
consideration for the note, the Company granted to said lender warrants to
acquire 160,000 shares of the Company's common stock. Said warrants are
exercisable at $3.15 per share for a period expiring in July 2004.
On August 11, 1999, the Company borrowed $1,000,000 from a non-affiliated
lender. The note bears interest at 14% per annum. The interest was prepaid in
full at funding and the principal is due and payable on February 10, 2000. The
note is secured by Company equipment. As part of the consideration for the
note, the Company granted to said lender warrants to acquire 500,000 shares of
the Company's common stock. Said warrants are exercisable at $3.15 per share
for a period expiring in July 2004.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of Flexpoint Sensor
Systems, Inc. The discussion should be read in conjunction with the condensed
consolidated financial statements, related notes and Management's Discussion
and Analysis or Plan of Operation for the year ended December 31, 1998.
Wherever in this discussion the term "Company" is used, it should be
understood to refer to Flexpoint Sensor Systems, Inc. and its wholly owned
subsidiary, Sensitron, Inc. ("Sensitron"), a Utah corporation, and Sensitron's
wholly owned subsidiaries, Flexpoint, Inc. and Technology and Machine Company,
Inc. ("Tamco"), on a consolidated basis, except where the context clearly
indicates to the contrary. The business operations of the Company are
conducted through Flexpoint, Inc. and Tamco. Prior to the April 1998, merger
wherein Flexpoint Sensor Systems, Inc. acquired Sensitron (the "Acquisition"),
Flexpoint Sensor Systems Inc. had no operations. The Acquisition was accounted
as a reorganization of Sensitron. The historical financial statements prior to
the Acquisition are those of Sensitron and have been restated accordingly.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As of June 30, 1999, the Company had
cumulative net losses totaling $8,231,480. The Company is primarily engaged in
the sensor business and is currently marketing proprietary patented sensor
technology know as the Bend Sensor TM technology (the "Technology"). Sensing
devices can be used to measure or sense changes in deflection and are
typically used to trigger an electronic device when the sensor is activated.
The worldwide market for sensing devices has grown significantly as a result
of better technology and new applications for sensing technology. This growth
has resulted in a corresponding increase in demand for high performance
sensing products. Management believes this worldwide market growth will
continue.
Financial Position
The Company had $206,798 in cash as of June 30, 1999. This represented a
decrease of $450,977 from December 31, 1998. Working capital deficiency as of
June 30, 1999 was $(1,027,732) compared to working capital of $2,317,976 at
December 31, 1998. The decrease is largely due to the acquisition of
$1,090,535 in new equipment, investment of $958,838 in leasehold improvements,
payment of $851,000 in fees and expenses to outside consultants for software
development relating to the Company's sensor mats for use in the smart air bag
system (discussed below) and purchase of $76,451 in office equipment.
Three and Six Months Ended June 30, 1999 and 1998
During the three and six months ended June 30, 1999, the Company had
sales of $122,089 and $287,950, respectively, comprised almost entirely of
development fees; compared with sales of $297,042 and $357,130 for the
comparable periods from the prior year, comprised primarily of product sales
and engineering fees.
Substantially all of the Company's revenues during the three and six
months ended June 30, 1999 were generated under a Purchase and Supply
Agreement (the "Supply Agreement") between the Company and Delphi Automotive
Systems ("Delphi"). Under the Supply Agreement the Company will supply its
proprietary sensor mats to Delphi for integration into a weight based
suppression system as a critical part of a smart air bag system. The Supply
Agreement provides that such sensor mats will be exclusively supplied to
General Motors, through Delphi, by the Company through 2002.
The Company anticipates that its future success will be highly dependent
on Delphi. Although the Supply Agreement has not accounted for substantial
revenue to date, the Company could have over $300,000,000 in sales under that
Supply Agreement and it anticipates that the revenue generated from the Supply
Agreement will become
8
<PAGE>
a significant portion of the Company's revenues. The Company does not expect
significant sales to begin under the Supply Agreement until the second half of
2000. The projected sales and timing thereof is forward looking information
and is subject to many risks and uncertainties, including the fact that
although the Supply Agreement is a multi-year contract, it does not require
Delphi to purchase a specific minimum quantity of products. In addition, with
the award of the Supply Agreement and subsequent increases in the projected
manufacturing output under the agreement, the Company will need to materially
increase spending for additional facilities, equipment and personnel. The
Company presently does not have the funding to make the required expenditure.
See "--Liquidity and Capital Resources." As a result, the Company's business,
financial condition or results of operations could be materially adversely
affected if sufficient additional funding is not timely acquired or if sales
do not materialize as projected under the Supply Agreement, of which there can
be no assurance.
Substantially all of the Company's revenues during the three and six
months ended June 30, 1998 were generated under a license agreement (the
"License Agreement") whereby the Company granted to Ohio Art the exclusive
worldwide right to sell products incorporating the Technology in the toy,
traditional games and video game markets. The License Agreement provided for
certain up front fees and minimum royalties in order for Ohio Art to maintain
such exclusive rights. Certain toy customers of the Company have indicated
that they will be getting out of the plush toy business and/or will not be
manufacturing products using sophisticated sensor systems. In July 1999, the
Company received orders that are expected to result in $136,000 in revenues
under the License Agreement. Ohio Art has not committed to manufacture or sell
any other licensed products during 1999 or thereafter. The toy industry is
cyclical and the Company expects that the bulk of annual royalty revenues will
be greater in the second and third quarters of any given year. As a result,
the Company believes that the revenues under the License Agreement during 1999
will be substantially less than in 1998. There can be no assurance as to what
level of sales, if any, the Company will secure under the License Agreement in
future years.
License and supply arrangements, such as those discussed above, create
certain risks for the Company, including (i) reliance for sales of products on
other parties; (ii) if the Company's products are marketed under other
parties' labels, goodwill associated with use of the products may inure to the
benefit of the other parties rather than the Company; and (iii) the Company
may have only limited protection from changes in manufacturing costs and raw
materials costs.
General and administrative expenses for the three and six months ended
June 30, 1999 were $839,811 and $1,459,405, respectively, compared with
$475,713 and $770,841 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from increases
in salary and wage expenses as a result of hiring additional engineering and
manufacturing employees and increases in advertising and consulting expenses.
The Company does not expect that general and administrative expenses will be
reduced below current levels without reducing the number of employees. Such
reductions may have a material adverse effect on the Supply Agreement and the
commercialization of the Company's other products. Although Management has
liquidity concerns, management does not intend to reduce general and
administrative costs.
Research and development ("R&D") expenses for the three and six months
ended June 30, 1999 were $793,741 and $1,441,241, respectively, compared with
$272,117 and $439,822 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from increases
in R&D spending relating to the Supply Agreement. Specifically, $851,000 of
R&D expenses during 1999 related to consulting expenses for the development of
the software associated with the Supply Agreement. The Company expects that
during 1999 most of such software development will be completed. As a result,
the Company expects software consulting expenses relating to the Supply
Agreement will be significantly reduced in 2000. The Company is, however,
looking to expand into additional markets and R&D efforts associated
therewith, including related software development expenditures, may be
substantial. As a result, the Company does not expect that R&D will be reduced
below current levels unless a lack of funding requires the Company to make
such reductions. Reductions in R&D expenditures would comprise primarily
reductions in R&D staff. Such staff reductions could have a material
9
<PAGE>
adverse effect on product development and on the Company. Although Management
has liquidity concerns, management does not intend to reduce R&D efforts.
Net interest and other income for the three and six months ended June 30,
1999 was $295 and $12,827, respectively, compared with $13,603 and $14,149 for
the comparable periods for the prior year. The net interest and other income
relates mainly to interest earned on funds on deposit.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of debt and equity securities and sales. The Company
generated $8,187,922 in net proceeds through financing activities from
inception through June 30, 1999. The Company used net cash in operating
activities of $1,354,150 during the six months ended June 30, 1999. As of June
30, 1999, the Company's liabilities totaled $1,526,677. The Company had
working capital deficiency as of June 30, 1999 of $(1,027,732).
The Company has committed to spend $233,010 in lease payment for its
physical facilities during the remainder of 1999 and $309,480, $299,550,
$249,900 and $249,900 in physical facilities lease payments for the years 2000
through 2003, respectively. In connection therewith, the Company contracted
for certain improvements to its physical facilities. The Company believes that
approximately $417,000 is owed for the improvements and the contractor is
claiming approximately $487,000 is owing. The Company also has short term loan
obligations in the principal amounts of $100,000, $100,000 and $1,000,000 that
are due in September 1999, December 1999 and February 2000, respectively. Most
of the interest owing on said loans has been paid.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the
costs to expand facilities, complete development and bring the certain product
utilizing the Technology to commercial viability and the level of sales of and
marketing for the Company's products. With the award of the Supply Agreement
and subsequent increase in the projected manufacturing output under the
agreement, the Company has needed to materially increase spending for
additional facilities, equipment and personnel. The Company believes that
existing funds and funds generated from sales will be sufficient to support
the Company's operations through the third quarter of 1999. At a minimum,
during the remainder of 1999 the Company will need to raise approximately
$8,000,000 in additional funding to support its operations during 1999. The
Company estimates that it will need to raise at least an additional $2,000,000
in 2000 to fully execute its business plan which includes completing two
additional production lines to fulfill its anticipated manufacturing
obligations under the Supply Agreement, as amended.
The Company is concurrently seeking additional funding from several
sources. The Company has no material current contractual arrangements with
respect to additional financing and there can be no assurance that additional
financing will be available on commercially reasonable terms or at all. Any
inability to obtain additional financing will have a material adverse effect
on the Company, including possibly requiring the Company to significantly
curtail or cease its operations.
Year 2000
The Company uses computers systems and microprocessors that are embedded
in systems the Company uses. Computers and embedded microprocessors have the
potential for operational problems if they lack the ability to handle the
transition to the Year 2000. Because this issue has the potential to cause
disruption of the Company's business operations, the Company has and is
seeking to identify and remediate potential Year 2000 problems in its business
information systems and other systems embedded in its engineering and
manufacturing operations. In addition, the Company has communicated with its
major suppliers, dealers, distributors and other third parties in order to
assess and reduce the risk that the Company's operations could be adversely
affected by the failure of these third parties to adequately address the Year
2000 issue.
10
<PAGE>
The Company uses computers systems principally for product design, product
prototyping, manufacturing and administrative functions such as
communications, word processing, accounting and management and financial
reporting. The Company uses embedded microprocessors principally in its
manufacturing and engineering operations. The Company's principal computer
systems (including the embedded microprocessors systems) have been purchased
since December 31, 1997 and the vendors supplying such systems have generally
represented that such systems are Year 2000 compliant. The software utilized
by the Company is generally standard "off the shelf" software, typically
available from a number of vendors. The Company has verified with its software
vendors that the services and products provided are, or will be, Year 2000
compliant. In addition, the Company has certain software that has been written
specifically for use by the Company and the suppliers of such software have
warranted that it is Year 2000 compliant. Based on such verification, the
Company believes that its computer systems and software is Year 2000 compliant
in all material respects. The Company estimates that the cost to redevelop,
replace or repair its technology will not be material. The Company is not
using any independent verification or validation procedures. There can be no
assurance, however, that such systems and/or programs are or will be Year 2000
compliant and that the failure of such would not have a material adverse
impact on the Company's business and operations.
In addition to its own computer systems, in connection with its business
activities, the Company interacts with suppliers, customers, and financial
service organizations who use computer systems. The Company has communicated
with such parties regarding their state of Year 2000 readiness. Based on its
assessment activity to date, the Company believes that a majority of the
suppliers, customers and financial service organizations with whom it
interacts are making acceptable progress toward Year 2000 readiness. The
Company currently believes that the most reasonable likely worst case scenario
is that there will be some localized disruptions of supplier, customer and/or
financial services that will affect the Company and its suppliers, and
distribution channels for a short time rather than systemic or long-term
problems affecting its business operations as a whole. In view of the
foregoing, the Company does not currently anticipate that it will experience a
significant disruption of its business as a result of the Year 2000 issue.
However, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect the Company and third parties that are critical to the
Company's operations. For example, lack of readiness by electrical and water
utilities, financial institutions, government agencies or other providers of
general infrastructure could pose significant impediments to the Company's
ability to carry on its normal operations in the area or areas so affected.
The Company is currently evaluating what contingency plans, if any, to make in
the event the Company or parties with whom the Company does business
experience Year 2000 problems.
The statements made herein about the costs expected to be associated with
the Year 2000 compliance and the results that the Company expects to achieve,
constitute forward looking information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to which
the Company will be able to successfully and adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issues as it may affect third parties that are not controlled by the Company.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's operations could vary materially from
those stated herein.
11
<PAGE>
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization, and technology, and other risks. In addition, sales and
other revenues may not commence and/or continue as anticipated due to delays
or otherwise. As a result, the Company's actual results for future periods
could differ materially from those anticipated or projected. Please refer to
the "Management's Discussion and Analysis or Plan of Operation" and
specifically the discussion under "Other Factors" that is found in the
Company's Annual Report on Form 10-KSB for the period ended December 31, 1998,
for more details.
Unless otherwise required by applicable law, the Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
No change from descriptions contained in the Company's annual report on
Form 10-KSB for the period ended December 31, 1998.
Item 2. Changes in Securities.
During the three months ended June 30, 1999, the Company offered and sold
to accredited investors in a private placement 526 Units (defined below) for
gross proceeds of $460,250. Each Unit consisted of one share of Series A
Convertible Preferred Stock (the "Preferred Stock") and Series A Warrants to
purchase 250 shares of the Company's common stock. The Preferred Stock is
convertible, at the option of the holder at any time, into common stock at the
conversion rate of 250 shares of common stock for one share of Preferred
Stock. The Series A Warrants are exercisable at $4.00 per share through
January 1, 2000. Each Unit was sold for $875. The Preferred Stock was issued
under Rule 506 of Regulation D, Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act") and Section 4(6) of the Securities Act. The
Company did not use an underwriter in connection with the private placement.
On June 18, 1999, the Company borrowed $310,000 from a non-affiliated
accredited lender in a private transaction to provide the Company necessary
funding. Of said amount, $200,000 bears interest at 20% per annum, payable
monthly. The principal is payable in two equal installments of $100,000 on
September 18, 1999 and December 18, 1999. The remaining principal amount of
$110,000 bore interest at 10% per annum and was payable and was repaid on July
15, 1999. These notes are unsecured. As part of the consideration for these
notes, the Company granted to said lender warrants to acquire 75,000 shares of
the Company's common stock. Said warrants are exercisable at approximately
3.44 per share for a period expiring in June 2004. The warrants were issued
under Rule 506 of Regulation D, Section 4(2) of the Securities Act and Section
4(6) of the Securities Act. The Company did not use an underwriter in
connection with the transaction.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------
2.1 Agreement and Plan of Reorganization (Schedules are
omitted) (Incorporated by referenced to Exhibit 2.1 of the
Company's Current Report on Form 8-K, dated April 9,
1998).
3(i).1 Restated Certificate of Incorporation of Flexpoint Sensor
Systems, Inc. (Incorporated by reference to Exhibit 3(i).1
of the Company's Quarterly Report on Form 10-QSB, dated
September 30, 1998).
3(i).2 Amended Certificate of Incorporation of Flexpoint Sensor
Systems, Inc.
3(i).3 Certificate of Designation of Series A Convertible
Preferred Stock of Flexpoint Sensor Systems, Inc.
3(i).4 Articles of Incorporation of Sensitron, Inc.
(Incorporatedby referenced to Exhibit 3(i).3 of the
Company's Annual Report on Form 10-KSB, dated March 31,
1998).
3(i).5 Articles of Incorporation of Flexpoint, Inc. (Incorporated
by referenced to Exhibit 3(i).4 of the Company's Annual
Report on Form 10-KSB, dated March 31, 1998).
3(i).6 Articles of Incorporation of Technology and Machine
Company, Inc. (Incorporated by referenced to Exhibit
3(i).5 of the Company's Annual Report on Form 10-KSB,
dated March 31, 1998).
3(ii).1 Restated and Amended Bylaws of Flexpoint Sensor Systems,
Inc. (Incorporated by reference to Exhibit 3(ii).1 of the
Company's Quarterly Report on Form 10-QSB, dated September
30, 1998).
3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by referenced to
Exhibit 3(ii).2 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(ii).3 Bylaws of Flexpoint, Inc. (Incorporated by referenced to
Exhibit 3(ii).3 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(ii).4 Bylaws of Technology and Machine Company, Inc.
(Incorporated by referenced to Exhibit 3(ii).4 of the
Company's Annual Report on Form 10-KSB, dated March 31,
1998).
10.1 Employment Agreement with Douglas M. Odom (Incorporated by
reference to Exhibit 10.1 of the Company's current report
on Form 8-K, dated April 9, 1998).
10.2 Lease Agreement between 72nd South Associates and the
Company (Incorporated by reference to Exhibit 10.2 of the
Company's current report on Form 8-K, dated April 9,1998).
10.3 Agreement between Ohio Art and the Company (certain
portions of the agreement were omitted from the exhibit
pursuant to a grant of confidential treatment)
(Incorporated by reference to Exhibit 10.3 of the
Company's current report on Form 8-K, dated April 9,1998).
10.4 Purchase and Supply Agreement by and among Flexpoint, Inc.
and Delphi Automotive Systems (certain portions of the
agreement were omitted from the exhibit pursuant to a
grant of confidential treatment) (Incorporated by
reference to Exhibit 10.4 to the Company's annual report
on Form 10-KSB, dated December 31, 1998).
10.5 Industrial Space Lease between Prudential Insurance
Company of America and Flexpoint, Inc. (Incorporated by
reference to Exhibit 10.5 to the Company's annual report
on Form 10-KSB, dated December 31, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FLEXPOINT, INC.
Date: August 13, 1999 By /s/ Douglas M. Odom
---------------------------
Douglas M. Odom
President, Chief Executive
Officer, Director
Date: August 13, 1999 By /s/ Thomas N. Strong
-------------------------------
Thomas N. Strong
Chief Accounting Officer
EXHIBIT 3(i).2
(Amended Certificate of Incorporation)CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MICROPOINT, INC.
Micropoint, Inc., a Corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Micropoint, Inc.,
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said Corporation, declaring said amendment to
be advisable and calling a meeting of the stockholders of said Corporation for
consideration thereof. The resolution setting forth the proposed amendment is
as follows:
RESOLVED, that the Certificate of Incorporation of this Corporation be
amended by changing the Article thereof numbered "FIRST" so that, as amended
said Article shall be and read as follows:
FIRST: The name of the corporation is Flexpoint Sensor Systems, Inc."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the annual meeting of the stockholders of said Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation law of the state of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by Douglas M. Odom, its authorized officer, this 16th day of June,
1999.
MICROPOINT, INC.
By: /s/ Douglas M. Odom
Douglas M. Odom
President, Chief Executive Officer, Director
EXHIBIT 3(i).3
(Certificate of Designation of
Series A Convertible Preferred Stock)
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
FLEXPOINT SENSOR SYSTEMS, INC.
The undersigned, Douglas M. Odom and Thomas E. Danielson, hereby certify that:
I. They are the duly elected and acting President and Vice-President,
respectively, of Flexpoint Sensor Systems, Inc., a Delaware corporation (the
"Company").
II.The Certificate of Incorporation of the Company authorizes 1,000,000 shares
of preferred stock, par value $.001 per share, of which no shares are issued
and outstanding.
III.The following is a true and correct copy of resolutions duly adopted by
the Board of Directors on July 1, 1999, which constituted all requisite action
on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of Directors") is
authorized to provide for the issuance of the shares of preferred stock in
series, and by filing a certificate pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby designates
a new series of preferred stock and the number of shares constituting such
series and fixes the rights, preferences, privileges and restrictions relating
to such series as follows:
Section 1. Designation, Amount and Par Value. The series of preferred stock
shall be designated as the Series A Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 4,500. The
par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $875 per share (the "Stated
Value"). The holders of the Preferred Stock will have no preemptive rights
with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Preferred Stock will not be subject to any
sinking fund or other obligations of the Company to redeem or retire the
Preferred Stock. Unless converted, the Preferred Stock will be perpetual. The
Preferred Stock will rank, with respect to rights on liquidation, senior to
all classes of Common Stock and each other class of capital stock or series of
preferred stock established after the date hereof by the Board of Directors
which does not expressly provide that it ranks senior to or on a parity with
the Preferred Stock as to rights on liquidations, winding-up and dissolution.
Section 2. Dividends. No dividends shall be paid or accrue on the Preferred
Stock, unless declared by the Board of Directors.
Section 3. Voting Rights. Except as otherwise required by applicable law, all
voting rights of the Company shall be vested in and exercised by the holders
of the Common and Preferred Stock, voting as a single group, with each share
of Common Stock being entitled to one vote and each share of Preferred Stock
being entitled to 250 votes.
Section 4. Liquidation. Upon dissolution, liquidation or winding up of the
Company, the assets remaining after the payment of all debts and liabilities
of the Company are to be paid to the holders of the Preferred Stock in an
amount equal to the Stated Value, or on a pro rata basis if the remaining
assets of the Company are insufficient therefor. After payment of any such
liquidating payment, the shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Company. Neither
the sale or transfer of all or substantially all the assets of the Company,
nor the merger or consolidation of the Company into or with any other
corporation or a merger of any other corporation with or into the Company,
will be deemed to be a liquidation, dissolution or winding up of the Company
Section 5. Conversion.
(a)Shares of Preferred Stock may be convertible at any time, in whole or in
part, at the option of the holder thereof into Common Stock at a conversion
price of $3.50 per share (i.e., each share of Preferred Stock shall be
convertible into 250 shares of Common Stock) (the "Conversion Price"). The
holder shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as
Exhibit A (the "Holder Conversion Notice") in the manner set forth in Section
5(i). No fractional shares or other consideration will be issued as a result
of a fractional interest upon conversion. No adjustments as to previously
declared or paid cash dividends, if any, will be made upon any conversion of
Preferred Stock.
(b)The outstanding shares of Preferred Stock will automatically be converted
into Common Stock at the applicable Conversion Price if the closing bid price
for the Common Stock for 15 successive trading days is equal to or greater
than $12.00 per share. Notice of such conversion shall be given by mail, not
less than 20 nor more than 60 days after the conversion has occurred, to each
record holder of the shares of Preferred Stock at the address of such holder
in the stock register of the Company. On the date the Preferred Stock are
converted, if any, such shares will no longer be deemed to be outstanding, and
all rights of the holders thereof as preferred stockholders of the Company
will cease and the holder thereof shall be deemed to own the number of shares
of Common Stock into which the Preferred Stock was converted.
(c)As soon as reasonably practicable after the conversion of Preferred Stock
into Common Stock hereunder, the Company will send to the holder (i) a
certificate or certificates representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock and (ii) one
or more certificates representing the number of shares of Preferred Stock not
converted; provided, however that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
any shares of Preferred Stock until certificates evidencing such shares of
Preferred Stock are either delivered for conversion to the Company or any
transfer agent for the Preferred Stock or Common Stock, or the holder notifies
the Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security reasonably acceptable to the
Company) satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith.
(d) (i) If any transaction shall occur, including without limitations (a) any
recapitalization or reclassification of shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value
to par value), (b) any consolidation or merger of the Company with or into
another entity or any merger of another entity into the Company (other than a
merger that does not result in a reclassifications, conversion, exchange or
cancellation of Common Stock), (c) any sale or transfer of all or
substantially all of the assets of the Company, or (d) any compulsory share
exchange, pursuant to which the holders of the Common Stock shall be entitled
to receive other securities, cash or other property, then appropriate
provisions shall be made so that the holder of each share of Preferred Stock
then outstanding shall have the right thereafter to convert the Preferred
Stock into the kind and amount of the securities, cash or other property that
would have been receivable upon such recapitalization, reclassification,
consolidation, merger, sale, transfer, or share exchange by a holders of the
number of shares of Common Stock issuable upon conversion/exercise of such
Preferred Stock immediately prior to such recapitalization, reclassification,
consolidation, merger, sale, transfer or share exchange.
(ii) If at any time the Company issues a convertible security (whether in the
form of debt or equity) with differing conversion and suspension
characteristics from the Preferred Stock, then each stockholder who then holds
outstanding Preferred Stock and Series A Warrants shall have the option to
convert the such securities into the number of subsequently-issued securities
that such stockholder would have received had such stockholder invested the
funds used to acquire the Preferred Stock and Series A Warrants to acquire the
subsequently-issued securities instead. The conversion rights described in
this paragraph shall not apply to any securities issued solely to one or more
strategic partners of the Company that are reasonably expected to generate
revenues for the Company of at least $1 million following the issuance of such
securities. In addition, the conversion rights described in this paragraph
shall not apply to non-convertible notes or debentures with warrant coverage
not in excess of 10% of the face amount of such notes or debentures.
(iii) In the event the Company shall at any time (a) pay a dividend or make a
distribution to holders of Common Stock in shares of capital stock, (b)
subdivide its outstanding shares of Common Stock into a larger number of
shares, (c) combine its outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification or its shares of Common
Stock any shares of the Company, the Conversion Price in effect immediately
prior thereto shall be adjusted so that the holder of any share of Preferred
Stock thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock which such holder would have owned or have
been entitled to receive after the happening of any of the events described
above, had such shares of Preferred Stock been converted immediately prior to
the happening of such event. Any adjustment made pursuant to this subparagraph
(iii) shall become effective retroactively immediately after the record date
after the effective date in the case of a subdivision, combination or
reclassification.
(iv) All calculations under this Section 5 shall be made to the nearest cent
or the nearest 1/100th of a share, as the case may be.
(v) Whenever there is an adjustment pursuant to Section 5(d)(i) or conversion
rights are triggered under Section 5(d)(ii), the Company shall promptly mail
to each holder of Preferred Stock, a notice setting forth the terms of such
adjustment and containing a brief statement of the facts requiring such
adjustment.
(e)The Company covenants that it will at all times reserve and keep available
out of its authorized and unissued Common Stock solely for the purpose of
issuance upon conversion of Preferred Stock as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Preferred Stock, such number of shares of Common
Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(d) hereof) upon the conversion of all outstanding
shares of Preferred Stock. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid and nonassessable.
(f)Upon conversion no fractional shares or other consideration will be issued
as a result of a fractional interest upon conversion and the Company shall
have no obligation to make a cash payment in respect of any fractional share
upon conversion.
(g)The issuance of certificates for shares of Common Stock on conversion of
Preferred Stock shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion
in a name other than that of the holder of such shares of Preferred Stock so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h)Shares of Preferred Stock converted into Common Stock shall be canceled and
shall have the status of authorized but unissued shares of preferred stock.
(i)Each Holder Conversion Notice shall be given by facsimile and mail, postage
prepaid, addressed to the attention of the Chief Financial Officer of the
Company at the facsimile telephone number and address of the principal place
of business of the Company. Any such notice shall be deemed given and
effective upon the earliest to occur of (i) five business days after deposit
in the United States mails or (ii) upon actual receipt by the Company.
RESOLVED FURTHER, that the Douglas M. Odom and Thomas E. Danielson, the
President and a Vice-President of the Company be, and they hereby are,
authorized and directed to prepare, execute, verify, and file in Delaware, a
Certificate of Designation in accordance with these resolutions and as
required by law.
IN WITNESS WHEREOF, Flexpoint Sensor Systems, Inc. has caused this certificate
to be signed by Douglas M. Odom, its President, and attested by Thomas E.
Danielson, its Vice-President, this 1st day of July, 1999.
FLEXPOINT SENSOR SYSTEMS, INC.
By: /s/ Douglas M. Odom
Douglas M. Odom
President
Attest:
By: /s/ Thomas E. Danielson
Thomas E. Danielson
Vice-President
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series A Convertible Preferred Stock indicated below into shares of Common
Stock, par value $.001 per share, (the "Common Stock") of Flexpoint Sensor
Systems, Inc. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
Date to Effect Conversion
Number of shares of Preferred Stock to be Converted
Signature
Name
Address
EXHIBIT 3(i).3
(Certificate of Designation of
Series A Convertible Preferred Stock)
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
FLEXPOINT SENSOR SYSTEMS, INC.
The undersigned, Douglas M. Odom and Thomas E. Danielson, hereby certify that:
I. They are the duly elected and acting President and Vice-President,
respectively, of Flexpoint Sensor Systems, Inc., a Delaware corporation (the
"Company").
II. The Certificate of Incorporation of the Company authorizes 1,000,000
shares of preferred stock, par value $.001 per share, of which no shares are
issued and outstanding.
III. The following is a true and correct copy of resolutions duly adopted
by the Board of Directors on July 1, 1999, which constituted all requisite
action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
is authorized to provide for the issuance of the shares of preferred stock in
series, and by filing a certificate pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges
and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares
constituting such series and fixes the rights, preferences, privileges and
restrictions relating to such series as follows:
Section 1. Designation, Amount and Par Value. The series of preferred
stock shall be designated as the Series A Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 4,500. The
par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $875 per share (the "Stated
Value"). The holders of the Preferred Stock will have no preemptive rights
with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into or carrying rights or options to
purchase any such shares. The Preferred Stock will not be subject to any
sinking fund or other obligations of the Company to redeem or retire the
Preferred Stock. Unless converted, the Preferred Stock will be perpetual. The
Preferred Stock will rank, with respect to rights on liquidation, senior to
all classes of Common Stock and each other class of capital stock or series of
preferred stock established after the date hereof by the Board of Directors
which does not expressly provide that it ranks senior to or on a parity with
the Preferred Stock as to rights on liquidations, winding-up and dissolution.
Section 2. Dividends. No dividends shall be paid or accrue on the
Preferred Stock, unless declared by the Board of Directors.
Section 3. Voting Rights. Except as otherwise required by applicable law,
all voting rights of the Company shall be vested in and exercised by the
holders of the Common and Preferred Stock, voting as a single group, with each
share of Common Stock being entitled to one vote and each share of Preferred
Stock being entitled to 250 votes.
Section 4. Liquidation. Upon dissolution, liquidation or winding up of
the Company, the assets remaining after the payment of all debts and
liabilities of the Company are to be paid to the holders of the Preferred
Stock in an amount equal to the Stated Value, or on a pro rata basis if the
remaining assets of the Company are insufficient therefor. After payment of
any such liquidating payment, the shares of Preferred
<PAGE>
Stock will not be entitled to any further participation in any distribution of
assets by the Company. Neither the sale or transfer of all or substantially
all the assets of the Company, nor the merger or consolidation of the Company
into or with any other corporation or a merger of any other corporation with
or into the Company, will be deemed to be a liquidation, dissolution or
winding up of the Company
Section 5. Conversion.
(a) Shares of Preferred Stock may be convertible at any time, in whole
or in part, at the option of the holder thereof into Common Stock at a
conversion price of $3.50 per share (i.e., each share of Preferred Stock shall
be convertible into 250 shares of Common Stock) (the "Conversion Price"). The
holder shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as
Exhibit A (the "Holder Conversion Notice") in the manner set forth in Section
5(i). No fractional shares or other consideration will be issued as a result
of a fractional interest upon conversion. No adjustments as to previously
declared or paid cash dividends, if any, will be made upon any conversion of
Preferred Stock.
(b) The outstanding shares of Preferred Stock will automatically be
converted into Common Stock at the applicable Conversion Price if the closing
bid price for the Common Stock for 15 successive trading days is equal to or
greater than $12.00 per share. Notice of such conversion shall be given by
mail, not less than 20 nor more than 60 days after the conversion has
occurred, to each record holder of the shares of Preferred Stock at the
address of such holder in the stock register of the Company. On the date the
Preferred Stock are converted, if any, such shares will no longer be deemed to
be outstanding, and all rights of the holders thereof as preferred
stockholders of the Company will cease and the holder thereof shall be deemed
to own the number of shares of Common Stock into which the Preferred Stock was
converted.
(c) As soon as reasonably practicable after the conversion of Preferred
Stock into Common Stock hereunder, the Company will send to the holder (i) a
certificate or certificates representing the number of shares of Common Stock
being acquired upon the conversion of shares of Preferred Stock and (ii) one
or more certificates representing the number of shares of Preferred Stock not
converted; provided, however that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
any shares of Preferred Stock until certificates evidencing such shares of
Preferred Stock are either delivered for conversion to the Company or any
transfer agent for the Preferred Stock or Common Stock, or the holder notifies
the Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security reasonably acceptable to the
Company) satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith.
(d) (I) If any transaction shall occur, including without limitations
(a) any recapitalization or reclassification of shares of Common Stock (other
than a change in par value, or from par value to no par value, or from no par
value to par value), (b) any consolidation or merger of the Company with or
into another entity or any merger of another entity into the Company (other
than a merger that does not result in a reclassifications, conversion,
exchange or cancellation of Common Stock), (c) any sale or transfer of all or
substantially all of the assets of the Company, or (d) any compulsory share
exchange, pursuant to which the holders of the Common Stock shall be entitled
to receive other securities, cash or other property, then appropriate
provisions shall be made so that the holder of each share of Preferred Stock
then outstanding shall have the right thereafter to convert the Preferred
Stock into the kind and amount of the securities, cash or other property that
would have been receivable upon such recapitalization, reclassification,
consolidation, merger, sale, transfer, or share exchange by a holders of the
number of shares of Common Stock issuable upon conversion/exercise of such
Preferred Stock immediately prior to such recapitalization, reclassification,
consolidation, merger, sale, transfer or share exchange.
(ii) If at any time the Company issues a convertible security
(whether in the form of debt or equity) with differing conversion and
suspension characteristics from the Preferred Stock, then each stockholder who
then holds outstanding Preferred Stock and Series A Warrants shall have the
option to convert the such securities into the number of subsequently-issued
securities that such stockholder would have received had such stockholder
invested the funds used to acquire the Preferred Stock and Series A Warrants
to acquire the subsequently-issued securities instead. The conversion rights
described in this paragraph shall not apply to any securities issued solely to
one or more strategic partners of the Company that are reasonably expected to
generate revenues for the Company of at least $1 million following the
issuance of such securities. In addition, the conversion rights described in
this paragraph shall not
<PAGE>
apply to non-convertible notes or debentures with warrant coverage not in
excess of 10% of the face amount of such notes or debentures.
(iii) In the event the Company shall at any time (a) pay a dividend
or make a distribution to holders of Common Stock in shares of capital stock,
(b) subdivide its outstanding shares of Common Stock into a larger number of
shares, (c) combine its outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification or its shares of Common
Stock any shares of the Company, the Conversion Price in effect immediately
prior thereto shall be adjusted so that the holder of any share of Preferred
Stock thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock which such holder would have owned or have
been entitled to receive after the happening of any of the events described
above, had such shares of Preferred Stock been converted immediately prior to
the happening of such event. Any adjustment made pursuant to this subparagraph
(iii) shall become effective retroactively immediately after the record date
after the effective date in the case of a subdivision, combination or
reclassification.
(iv) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(v) Whenever there is an adjustment pursuant to Section 5(d)(i) or
conversion rights are triggered under Section 5(d)(ii), the Company shall
promptly mail to each holder of Preferred Stock, a notice setting forth the
terms of such adjustment and containing a brief statement of the facts
requiring such adjustment.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the
purpose of issuance upon conversion of Preferred Stock as herein provided,
free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of Preferred Stock, such number of shares of
Common Stock as shall be issuable (taking into account the adjustments and
restrictions of Section 5(d) hereof) upon the conversion of all outstanding
shares of Preferred Stock. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid and nonassessable.
(f) Upon conversion no fractional shares or other consideration will be
issued as a result of a fractional interest upon conversion and the Company
shall have no obligation to make a cash payment in respect of any fractional
share upon conversion.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate
upon conversion in a name other than that of the holder of such shares of
Preferred Stock so converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.
(h) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
preferred stock.
(i) Each Holder Conversion Notice shall be given by facsimile and mail,
postage prepaid, addressed to the attention of the Chief Financial Officer of
the Company at the facsimile telephone number and address of the principal
place of business of the Company. Any such notice shall be deemed given and
effective upon the earliest to occur of (i) five business days after deposit
in the United States mails or (ii) upon actual receipt by the Company.
<PAGE>
RESOLVED FURTHER, that the Douglas M. Odom and Thomas E. Danielson, the
President and a Vice-President of the Company be, and they hereby are,
authorized and directed to prepare, execute, verify, and file in Delaware, a
Certificate of Designation in accordance with these resolutions and as
required by law.
IN WITNESS WHEREOF, Flexpoint Sensor Systems, Inc. has caused this
certificate to be signed by Douglas M. Odom, its President, and attested by
Thomas E. Danielson, its Vice-President, this 1st day of July, 1999.
FLEXPOINT SENSOR SYSTEMS, INC.
By: /s/ Douglas M. Odom
Douglas M. Odom
President
Attest:
By: /s/ Thomas E. Danielson
Thomas E. Danielson
Vice-President
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series A Convertible Preferred Stock indicated below into shares of Common
Stock, par value $.001 per share, (the "Common Stock") of Flexpoint Sensor
Systems, Inc. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations:
- -------------------------
Date to Effect Conversion
- ---------------------------------------------------
Number of shares of Preferred Stock to be Converted
- --------------------------
Signature
- --------------------------
Name
- ---------------------------
Address
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 206,798
<SECURITIES> 0
<RECEIVABLES> 142,953
<ALLOWANCES> 90,721
<INVENTORY> 194,748
<CURRENT-ASSETS> 498,945
<PP&E> 3,326,129
<DEPRECIATION> 486,485
<TOTAL-ASSETS> 3,534,322
<CURRENT-LIABILITIES> 1,526,677
<BONDS> 0
0
1
<COMMON> 17,239
<OTHER-SE> 1,990,225
<TOTAL-LIABILITY-AND-EQUITY> 3,534,322
<SALES> 52,339
<TOTAL-REVENUES> 287,950
<CGS> 80,677
<TOTAL-COSTS> 2,981,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,643
<INCOME-PRETAX> (2,680,546)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,680,546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,680,546)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
