Company Quick10K Filing
Flexpoint Sensor Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 100 $7
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-01 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-04-17 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-04-18 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-04-14 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-14 Quarter: 2015-03-31
10-K 2015-03-30 Annual: 2014-12-31
10-Q 2014-11-12 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-K 2014-04-02 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-15 Quarter: 2013-03-31
10-K 2013-04-16 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-04-02 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-16 Quarter: 2011-03-31
10-K 2011-04-15 Annual: 2010-12-31
10-Q 2010-11-15 Quarter: 2010-09-30
10-Q 2010-08-16 Quarter: 2010-06-30
10-Q 2010-05-21 Quarter: 2010-03-31
10-K 2010-04-09 Annual: 2009-12-31
8-K 2019-10-11
8-K 2019-06-20 Enter Agreement
8-K 2019-01-03 Shareholder Vote
8-K 2018-12-13 Other Events, Exhibits
FLXT 2019-09-30
Part I: Financial Information
Part Ii: Other Information
Part I - Financial Information
Item 1. Condensed Financial Statements
Note 1- Summary of Significant Accounting Policies
Note 2 - Going Concern
Note 3 - Derivative Instruments
Note 4 - Convertible Notes Payable
Note 5 - Stock Option Plans
Note 6 - Capital Stock
Note 7 - Commitments and Contingencies
Note 8 - Related Party Transactions
Note 9 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Part I Exhibits
Part II Exhibits
EX-31 ex31-1.htm
EX-31 ex31-2.htm
EX-32 ex32.htm

Flexpoint Sensor Systems Earnings 2019-09-30

FLXT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
GRST 7 23 33 1 0 -8 -6 7 0% -1.2 -32%
FSSN 7 2 5 0 0 -5 -5 8 85% -1.7 -314%
FUSZ 74 1 3 0 0 -11 -8 72 0% -8.8 -1,777%
ISCO 7 8 5 7 4 -2 -1 7 62% -5.0 -19%
FLXT 10 5 4 1 1 -1 -0 10 96% -39.5 -10%
SRGZ 7 1 0 0 0 -0 -0 7 -29.3 -31%
WLB 7 1,468 2,191 1,265 282 -219 -13 973 22% -73.7 -15%
VASO 7 46 43 52 28 -3 -1 6 54% -5.8 -7%
SCND 7 9 3 10 4 0 1 6 43% 6.9 5%
AVDX 7 5 3 0 0 -3 -2 7 -3.1 -52%

10-Q 1 f2019flxt10-q-q3v8.htm QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019 10QSB 1 flx06q3e

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For quarterly period ended September 30, 2019


[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _____ to _____


Commission file number: No. 0-24368


FLEXPOINT SENSOR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

87-0620425

 (State of incorporation)

(I.R.S.  Employer Identification No.)

     

12184 South Business Park Drive, Suite C, Draper, Utah  84020

(Address of principal executive offices)


801-568-5111

(Registrant’s telephone number)


Securities registered pursuant to Section 12(b) of the Act:  

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

     

 


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.

Yes [X]   No [  ]


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                              Yes [ X ]   No [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]


Non-accelerated filer [X]

Accelerated filer [  ]

Smaller reporting company [X]

Emerging growth company [   ]


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                           [   ]





1




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.

            Yes [   ]     No [X]


The number of shares outstanding of the registrant’s common stock was 99,713,464 as of November 14, 2019.



2





TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION


Item 1.

Condensed Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2019 (Unaudited) and

3

 

 

December 31, 2018

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine

4

 

 

Months Ended September 30, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

Condensed Statement of Stockholders’ Equity for the Three and Nine Months

5

 

 

Ended September 30, 2019 and 2018 (Unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months

6

 

 

Ended September 30, 2019 and 2018 (Unaudited)

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

22

 

 

Item 4.

Controls and Procedures

22


PART II: OTHER INFORMATION


Item 1.  

Legal Proceedings

22

 

 

 

Item 1A.

Risk Factors

22

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 3.

Defaults upon Senior Securities

22

 

 

 

Item 4

Mine Safety Disclosures

23

 

 

 

Item 5.

Other Information

23

 

 

 

Item 6.

Exhibits

23

 

 

Signatures

24





3





PART I - FINANCIAL INFORMATION


ITEM 1.  CONDENSED FINANCIAL STATEMENTS

The financial information set forth below with respect to our condensed consolidated financial position as of September 30, 2019, the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. The information presented below for the condensed consolidated financial position as of December 31, 2018 was audited and reported as part of our annual filing of our Form 10-K, filed with Securities and Exchange Commission on April 1, 2019.  The results of operations for the three and nine months ended September 30, 2019 and 2018, respectively, are not necessarily indicative of results to be expected for any subsequent periods.




4





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS


 

 September 30,

2019 (Unaudited)

 

December 31, 2018

ASSETS

 

 

 

Current Assets

 

 

 

Cash and cash equivalents

$         205,699

 

 $        17,798

Accounts receivable, net of allowance for bad debts of $114,991

    and $136,761

39,843

 

            16,153

Deposits and prepaid expenses

16,951

 

            12,451

Total Current Assets

264,493

 

          46,402

Long-Term Deposits

6,550

 

              6,550

Property and Equipment, net of accumulated depreciation

 

 

 

    of $592,924 and $591,246

                4,666

 

             6,344

Patents and Proprietary Technology, net of accumulated

 

 

 

amortization of $973,718 and $957,760

327

 

           16,285

Goodwill

4,896,917

 

        4,896,917

Total Assets

$   5,170,953

 

 $     4,972,498

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

Current Liabilities

 

 

 

Accounts payable

 $      187,791

 

 $       354,422

Accounts payable – related party

1,031

 

20,000

Accrued liabilities

1,530,065

 

         1,369,946

Convertible notes payable, net of discount of $-0- and $27,092

930,000

 

         1,102,908

Convertible notes payable to related party, net of discount of

     $12,019 and $5,032

206,494

 

            174,481

Derivative liabilities

811,551

 

284,857

Total Liabilities

3,666,932

 

    3,306,614

 

 

 

 

Stockholders' Equity

 

 

 

Preferred stock – $0.001 par value; 1,000,000 shares authorized;

 

 

 

no shares issued or outstanding

                  -

 

                  -

Common stock – $0.001 par value; 100,000,000 shares authorized;

 

 

99,713,464 shares and 92,863,464  shares issued and  

outstanding,

99,713

 

            92,863

Additional paid-in capital

30,117,805

 

     29,785,568

Accumulated deficit

(28,713,497)

 

    (28,212,547)

Total Stockholders' Equity

1,504,021

 

        1,665,884

Total Liabilities and Stockholders' Equity

$  5,170,953

 

 $     4,972,498



The accompanying notes are an integral part of these condensed consolidated financial statements



5





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Nine Months

 

 

Ended September 30,

 

Ended September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

Design, Contract and Testing  Revenue

 

$     54,209

 

$        72,208

 

$       691,250

 

$        202,630

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses

 

 

 

 

 

 

 

 

Amortization of patents and       

 

 

 

 

 

 

 

 

    proprietary technology

 

          2,314

 

           7,930

 

           15,958

 

           24,208

 Cost of revenue

 

    8,545

 

    11,102

 

29,206

 

35,015

Administrative and marketing

    expense

 

         150,800

 

         112,141

 

         404,287

 

         345,777

Research and development

    expense

 

           60,498

 

           73,873

 

         213,956

 

         237,678

 

 

 

 

 

 

 

 

 

Total Operating Costs and Expenses

 

         222,157

 

         205,046

 

         663,407

 

         642,678

 

 

 

 

 

 

 

 

 

Net Operating Income (Loss)

 

(167,948)

 

(132,838)

 

27,843

 

(440,048)

 

 

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

 

 

 

Interest expense

 

        (79,324)

 

        (78,383)

 

   (236,106)

 

     (235,891)

Interest income

 

12

 

12

 

35

 

35

Gain on extinguishment of debt

 

-

 

 

 

90,325

 

 

Gain on forgiveness of debt

 

57,320

 

-

 

57,320

 

-

Gain(Loss) on derivative

 

(151,673)

 

88,606

 

         (440,367)

 

            291,446

 

 

 

 

 

 

 

 

 

Net Other Income (Expense)

 

       (173,665)

 

        10,235

 

        (528,793)

 

    55,590

 

 

 

 

 

 

 

 

 

Net Loss

 

$     (341,613)

 

$    (122,603)

 

$    (500,950)

 

$     (384,458)

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Common Share

$          (0.00)

 

$          (0.00)

 

$          (0.01)

 

$           (0.00)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted-Average Common Shares

 

 

 

 

 

 

 

 

Outstanding

 

    99,713,464

 

    92,863,464

 

    95,476,468

 

    92,863,464


 













 The accompanying notes are an integral part of these condensed consolidated financial statements





6





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2019 and 2018



 

 

 

 

 

 

 

 

Common

Stock

Additional

 

 

Total

 

 

 

Paid-in

 

Accumulated

Stockholder

 

Shares

Amount

Capital

 

Deficit

Equity

Balance - December 31, 2018

92,863,464

$ 92,863

$ 29,785,568

 

$  (28,212,547)

$  1,665,884

 

 

 

 

 

 

 

Net loss – three months ended March

    31, 2019

-

-

-

 

(266,822)

(266,822)

 

 

 

 

 

 

 

Balance – March 31, 2019

92,863,464

92,863

29,785,568

 

(28,479,369)

1,399,062

 

 

 

 

 

 

 

Conversion of notes payable to

    common stock

6,850,000

6,850

332,237

 

-

339,087

Net income – three months ended June

    30, 2019

-

-

-

 

107,485

107,485

 

 

 

 

 

 

 

Balance – June 30, 2019

99,713,464

99,713

30,117,805

 

(28,371,884)

1,845,634

 

 

 

 

 

 

 

Net loss – three months ended

    September 30, 2019

-

-

-

 

(341,613)

(341,613)

Balance – September 30, 2019

 99,713,464

$ 99,713

   $30,117,805

 

   $(28,713,497)

      $1,504,021



 

 

 

 

 

 

 

 

Common

Stock

Additional

 

 

Total

 

 

 

Paid-in

 

Accumulated

Stockholder

 

Shares

Amount

Capital

 

Deficit

Equity

Balance - December 31, 2017

92,863,464

$ 92,863

$ 29,785,568

 

$  (27,306,453)

$  2,571,978

 

 

 

 

 

 

 

Net loss – three months ended March

    31, 2018

-

-

-

 

(103,222)

(103,222)

 

 

 

 

 

 

 

Balance – March 31, 2018

92,863,464

92,863

29,785,568

 

(27,409,675)

2,468,756

 

 

 

 

 

 

 

Net loss – three months ended June 30,

    2018

-

-

-

 

(158,633)

(158,633)

 

 

 

 

 

 

 

Balance – June 30, 2018

92,863,464

92,863

29,785,568

 

(27,568,308)

2,310,123

 

 

 

 

 

 

 

Net loss – three months ended

    September 30, 2018

-

-

-

 

(122,603)

(122,603)

Balance – September 30, 2018

 92,863,464

$ 92,863

$29,785,568

 

   $(27,690,911)

      $2,187,520










The accompanying notes are an integral part of these condensed consolidated financial statements



7






FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

 

For the Nine Months

 

Ended September 30,

 

2019

 

2018

 Cash Flows from Operating Activities: 

 

 

 

    Net profit (loss)

$   (500,950)

 

$   (384,458)

    Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

        Amortization of patents and proprietary technology

15,958

 

24,208

        Amortization of discount on note payable

106,432

 

129,269

        Depreciation

1,679

 

1,679

        Gain on extinguishment of debt

(90,325)

 

-

        Gain on forgiveness of debt

(57,320)

 

-

        Change in fair value of derivative liabilities

440,367

 

(291,446)

   Changes in operating assets and liabilities:

 

 

 

        Accounts receivable

(23,690)

 

28,332

        Prepaid expenses and other assets

(4,500)

 

(8,055)

        Accounts payable

           (107,498)

 

       138,184

        Accounts payable – related parties

19,000

 

12,127

        Accrued liabilities

288,748

 

120,390

 Net Cash Provided by (Used) in Operating Activities 

87,901

 

(229,770)

 

 

 

 

 Cash Flows from Investing Activities: 

-

 

-

       Note receivable interest income

-

 

-

 Net Cash Used in Investing Activities 

-

 

-


 Cash Flows from Financing Activities:

 

 

 

        Proceeds from related party payable

-

 

45,000

        Proceeds from borrowings under convertible note payable

100,000

 

175,000

 Net Cash Provided by Financing Activities 

100,000

 

220,000

 

 

 

 

 Net Change in Cash and Cash Equivalents

187,901

 

(9,770)

 Cash and Cash Equivalents at Beginning of Period

17,798

 

12,832

 Cash and Cash Equivalents at End of Period

$      205,699 

 

               $3,062 

 

 

 

 

 Supplemental Cash Flow Information:

 

 

 

    Cash paid for income taxes

$                    -

 

$               - 

    Cash paid for interest

$                    -

 

$               - 

 

 

 

 

 Supplemental Disclosure on Noncash Investing and

   Financing Activities

 

 

 

    Recognition of discounts on convertible notes payable

$          86,327

 

 $     58,956

   Conversion of note payable and accrued interest to common stock

  $        410,574

 

 $              - 

    Conversion of due to related party to convertible notes

   $          39,000

 

$     20,000

    Gain on extinguishment of debt

   $          90,325

 

 $               -

    Gain on forgiveness of debt

  $          57,320

 

 $               -

 

 

 

 





The accompanying notes are an integral part of these condensed consolidated financial statements



8




FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Condensed Consolidated Interim Financial Statements – The accompanying unaudited condensed consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. (the “Company”). These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. for the year ended December 31, 2018 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 1, 2019. In particular, the Company’s significant accounting principles were presented as Note 1 to the Consolidated Financial Statements in that report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.


Nature of Operations – Flexpoint Sensor Systems, Inc. (the Company) is located in Draper, Utah. The Company’s activities to date have included acquiring equipment and enhancing technology, obtaining financing, limited production and seeking long-term manufacturing contracts. The Company’s operations are in designing, engineering, manufacturing and selling sensor technology and equipment using flexible potentiometer technology. Through September 30, 2019 the Company continued to manufacture products and sensors to fill customer orders and provide engineering and design work.


Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.


Cash and Cash Equivalents – Cash and cash equivalents are considered to be cash and highly liquid securities with original maturities of three months or less.


Fair Value MeasurementsThe fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

 

Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value



9




hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

The Company has classified the inputs used in valuing its derivative liabilities as Level 3 inputs. The Company valued its derivatives using the binomial lattice model. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.


Accounts Receivable – Trade accounts receivable are recorded at the time product is shipped or services are provided including any shipping and handling fees. Contracts associated with design and development engineering generally require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project is completed and accepted by the customer, at which time the entire contract price is billed to the customer and the deposit applied. The Company has established an allowance for bad debts based on a historical experience and an analysis of risk associated with the account balances.  The balance in the allowance account was $114,991 and $136,761 in the periods ended September 30, 2019 and December 31, 2018, respectively.  


Inventories – The Company does not currently have inventory.  However, as production levels increase inventories will be carried on the balance sheet.  Inventories will be stated at the lower of cost or market or net realizable value. Cost is determined by using the first in, first out (FIFO) method.  


Property and Equipment Property and equipment are stated at cost.  Additions and major improvements are capitalized while maintenance and repairs are charged to operations.  Upon trade-in, sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Depreciation is computed using the straight-line method and is recognized over the estimated useful lives of the property and equipment, which range from three to ten years.


Valuation of Long-lived Assets – The carrying values of the Company’s long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that they may not be recoverable. When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying value is reduced by the estimated excess of the carrying value over the projected discounted cash flows. Under similar analysis no impairment charge was taken during the nine-month period ended September 30, 2019 and during the period ended December 31, 2018.  Impairment tests will be conducted on an annual basis and, should they indicate a carrying value in excess of fair value, additional impairment charges may be required.


Intangible Assets – Costs to obtain or develop patents are capitalized and amortized over the remaining life of the patents, and technology rights are amortized over their estimated useful lives. The Company currently has the right to several patents and proprietary technology.  Patents and technology are amortized from the date the Company acquires or is awarded the patent or technology right, over their estimated useful lives, which range from 5 to 15 years.  An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined by projected discounted net future cash flows.  Under similar analysis there was no impairment charge taken during the nine-month period ended September 30, 2019 and during year ended December 31, 2018.


Research and Development – Research and development costs are recognized as an expense during the period incurred, which is until the conceptual formulation, design, and testing of a process is completed and the process has been determined to be commercially viable.


Lease Obligations – While the Company has adopted ASC 842 the Company has no leases at the date of this report that are required to be reported under ASC 842.  As the Company enters into such leases it will record obligations under all leases it has entered into pursuant to the reporting requirements under ASC 842, allocating such obligations between current and long term.  The Company also recorded an offsetting right of use asset.  The right of use asset and lease obligation will be amortized over the respective lives of the leases.  




10




Goodwill – Goodwill represents the excess of the Company’s reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually, or at interim periods when a triggering event occurs using a fair value approach. According to Accounting Standards Codification (or “ASC”) 350-20 Intangibles – Goodwill and Other, a fair-value-based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value of the Company is allocated to the Company’s assets and liabilities based upon their fair values with the excess fair value allocated to goodwill. An impairment of goodwill is measured as the excess of the carrying amount of goodwill over the determined fair value.


Revenue Recognition – On January 1, 2018 the Company adopted ASC 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”).  We have applied the new revenue standard to all contracts as of the date of the initial adoption.  The new revenue standard establishes five steps whereby a transaction is analyzed to determine if revenue has been earned and can be recognized.  The adoption of the new revenue standard did not have any effect on our financial statements.  The vast majority of our sales are made to order, for which orders we require a deposit of 50% of the value of the order.  That amount is put in a customer deposit account until the entire order has been manufactured and shipped.  At the ship date the Company has no further obligations under the contract and the revenue from the sale is recognized.


A part of our customer base is made up of international customers.  The table below allocates revenue between domestic and international customers.  The following table presents Flexpoint Sensor Systems revenues disaggregated by region and product type:


 Three months ended:

 

September 30,

 

 

 

September 30,

 

 

 

 

2019

 

 

 

 

 

2018

 

 

 

 

Long-term

 

 

 

Long-term

 

 

 

Consumer

 

 

 

 

 

Consumer

 

 

Segments

 

 

Products

Contract

Total

 

 

 

Products

Contract

Total

Domestic

 

$

27,904

-

27,904

 

 

$

13,405

-

13,405

International

 

 

26,305

-

26,305

 

 

 

58,803

-

58,803

 

 

$

54,209

-

54,209

 

 

$

72,208

-

72,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components

 

 

27,089

-

27,089

 

 

 

68,167

-

68,167

Engineering Services

 

 

27,120

-

27,120

 

 

 

4,041

-

4,041

Licensing fee

 

 

-

-

-

 

 

 

-

-

-

 

 

$

54,209

-

54,209

 

 

$

72,208

-

72,208



 Nine months ended: 

 

September 30,

 

 

 

September 30,

 

 

 

 

2019

 

 

 

 

 

2018

 

 

 

 

Long-term

 

 

 

Long-term

 

 

 

Consumer

 

 

 

 

 

Consumer

 

 

Segments

 

 

Products

Contract

Total

 

 

 

Products

Contract

Total

Domestic

 

$

563,055

-

563,055

 

 

$

76,077

-

76,077

International

 

 

128,195

-

128,195

 

 

 

126,553

-

126,553

 

 

$

691,250

-

691,250

 

 

$

202,630

-

202,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components

 

 

103,907

-

103,907

 

 

 

171,937

-

171,937

Engineering Service

 

 

137,343

-

137,343

 

 

 

30,693

 

30,693

Licensing fee

 

 

450,000

-

450,000

 

 

 

-

-

-

 

 

$

691,250

-

691,250

 

 

$

202,630

-

202,630




11




Basic and Diluted Loss Per Share – Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period.  Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. At September 30, 2019 there were outstanding common share equivalents (options and convertible notes payable) which amounted to 23,492,045 of common stock. These common share equivalents were not included in the computation of diluted earnings per share for the three and nine month periods ended September 30, 2019 as their effect would have been anti-dilutive, thereby decreasing loss per common share.


Concentrations and Credit Risk - The Company has a few major customers who represent a significant portion of revenue, accounts receivable and notes receivable.  During the nine month period ended September 30, 2019, two customers represented 86% of sales and two other customers represented 89% of accounts receivable.  The Company has a strong ongoing relationship with this customer with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.  


Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards Board Accounting Codification (ASC) 740: Income Taxes.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets will be reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized


Recent Accounting Pronouncements - The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position and cash flows.  Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.



NOTE 2 – GOING CONCERN


The Company continues to accumulate significant operating losses and has an accumulated deficit of $28,713,497 at September 30, 2019.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.


Management is seeking additional funding to provide operating capital for its operations until such time as revenues are sufficient to sustain our level of operations.  However, there is no assurance that additional funding will be available on acceptable terms, if at all.



NOTE 3 – DERIVATIVE INSTRUMENTS


The derivative liability as of September 30, 2019, in the amount of $811,551 has a Level 3 fair value classification.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

Total

 

Balance, December 31, 2017

 

 

 

 

363,680

 

Recognition of derivative liabilities upon initial valuation

 

 

 

 

92,404

 

Change in fair value of derivative liabilities

 

 

 

 

(171,227)

 

Conversions of derivative liabilities into equity instruments

 

 

 

 

-

 

Balance, December 31, 2018

 

 

 

 

284,857

 

Recognition of derivative liabilities upon initial valuation

 

 

 

 

86,327

 

Change in fair value of derivative liabilities

 

 

 

 

440,367

 

Conversions of derivative liabilities into equity instruments

 

 

 

 

-

 

Balance, September 30, 2019

 

 

 

 

811,551

 

 

During the year ended 2018 and the nine-month period ended September 30, 2019, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares



12




necessary to settle all convertible instruments, in accordance with ASC 815-40-25, the Company determined that the conversion features related to these notes are derivative to settle all convertible instruments.  The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

 

At September 30, 2019, the Company marked to market the fair value of the derivatives and determined a fair value of $811,551. The Company recorded a loss from change in fair value of derivatives of $440,367 for the nine-month period ended September 30, 2019.  The fair value of the embedded derivatives was determined using binomial lattice model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 112.28% to 155.86%, (3) weighted average risk-free interest rate of 1.88% to 2.50% (4) expected life of 0.50 to 1.50 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

In accordance ASC 840-15-25, the Company has implemented a sequencing policy with respect to all outstanding convertible instruments. The Company evaluates its contracts based upon earliest issuance date.

  

As of September 30, 2019, liabilities measured at fair value on a recurring basis are summarized as follows:


 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Derivative Liabilities

 

 

-

 

 

 

-

 

 

 

811,511

 

 

 

811,511

Total

 

$

-

 

 

$

-

 

 

$

811,511

 

 

$

811,511



NOTE 4 – CONVERTIBLE NOTES PAYABLE


Convertible Note Payable


At September 30, 2019 there are notes outstanding with principal balances which total $930,000. Of the notes, $890,000 are convertible notes bearing a 10% annual rate of interest (with a 15% default rate) and are convertible into shares of common stock at the rate of $0.06 to $0.07 per share.  $40,000 is a convertible note entered into on August 8, 2011 with a former Company Director, at a rate of $0.20 per share.  That note was due on December 31, 2015, and bears a default interest rate of 10%.


On May 28, 2019 the Company issued 3,650,000 shares of restricted common stock to Empire Fund Managers and 3,200,000 shares of restricted common stock to Compass Equity Partners, LLC in consideration for two convertible notes in the amount of $300,000 and $110,574 of accrued but unpaid interest.  The Company recognized a gain on extinguishment of debt of $90,325 as a result of this transaction.  See Note 6.


On January 31, 2019, the Company entered into a convertible note for up to $100,000 from a third party.  The note has an annual interest rate of 10% and is secured by the Company’s equipment.  The note has a conversion feature for restricted common shares at $0.05 per share and a maturity date of August 31, 2018.  At September 30, 2019 the Company had drawn $100,000 against this note.


Convertible Note Payable - Related Party


At September 30, 2019 there are notes outstanding with two directors of the Company with balances of $164,257 and $54,256, respectively.  The notes bear an 8% annual rate of interest with a 12% default rate.  There are $50,000 in notes to the first officer that had due dates of December 31, 2016 and December 31, 2017, and on which interest is being calculated at the default rate.  Notes of $37,257 and $27,256 have due dates of December 31, 2018 and on which interest is being calculated at the default rate.  The remaining $77,000 and $27,000 notes have due dates of December 31, 2019.  


Additionally, in May 2019, the Company converted the $39,000 payable to two directors into convertible notes payable in the amounts of $22,000 and $17,000.  The notes bear interest at the rate of 8%, have a default rate of 12%, are convertible into shares of common stock at a conversion price of $0.06 per share, and have a termination date of December 31, 2019.  There is a debt discount of $12,019 on the balance sheet related to these notes that is being amortized over their respective terms.

 

All of the convertible notes issued to directors are convertible into shares of common stock with notes totaling $114,513 at the rate of $0.07 per share and notes totaling $104,000 at the rate of $0.06 per share.



13




NOTE 5 STOCK OPTION PLANS


On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and will continue in effect for ten years, unless terminated.  This plan was approved by the stockholders of the Company at their annual meeting of shareholders on November 22, 2005. Under the Plan, the exercise price for all options issued will not be less than the average quoted closing market price of the Company’s trading common stock for the thirty day period immediately preceding the grant date plus a premium of ten percent.  The maximum aggregate number of shares that may be awarded under the plan is 2,500,000 shares.  The Company continues to utilize the Black-Scholes option-pricing model for calculating the fair value of the options granted as defined by ASC Topic 718, which is an acceptable valuation approach under ASC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.


On August 24, 2015, the Board of Directors approved the issuance of options to purchase 2,185,000 shares of the Company’s common stock.  Of the total issued, 1,960,000 options were issued to replace options held by directors and employees which were to expire and 225,000 options were issued to new employees.  Of the options issued, 640,000 have an option price of $0.14 per share, 500,000 have an option price of $0.15 per share, 995,000 have an option price of $0.20 per share, and 50,000 have an option price of $0.25 per share.  Options issued as replacement shall have immediate vesting terms. Options which are not replacements shall vest over a two year four month period in equal installments on the last day of 2015, 2016 and 2017, respectively.  We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.


Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Company's common stock has limited trading history. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Company's employee stock options.  Between August 25, 2005 and December 31, 2015, the Company granted options to employees to purchase an aggregate 3,096,000 shares of common stock at exercise prices ranging from $0.14 to $2.07 per share.  The options vest over three years and expire 10 years from the date of grant.  The Company used the following assumptions in estimating the fair value of the options granted:

·

Market value at the time of issuance – Range of $0.14 to 2.07

·

Expected term – Range of 3.7 years to 10.0 years

·

Risk-free interest rate – Range of 1.60% to 4.93%

·

Dividend yield – 0%

·

Expected volatility – 200% to 424%

·

Weighted-average fair value - $0.16 to $2.07


All of the options were fully vested at December 31, 2018. As a result there was no stock-based compensation expenses recorded for the three and nine months ended September 30, 2019.  The Company recognized no stock-based compensation expense for the three and nine month periods ended September 30, 2018. There were 2,185,000 and 2,185,000 employee stock options outstanding at September 30, 2019 and December 31, 2018, respectively.  


A summary of all employee options outstanding and exercisable under the plan as of September 30, 2019, and changes during the three months then ended is set forth below:


Options

Shares

Weighted Average Exercise Price

Weighted Average Remaining Contractual  Life (Years)

Aggregate Intrinsic Value

 

 

 

 

 

Outstanding at the beginning of period

         2,185,000

 $                0.17

             7.16

 $              --   

   Granted

--

--

                   --   

                 --   

   Expired

                     --

                             --

                   --   

                 --   

   Forfeited

--

--

                   --   

                --   

Outstanding at the end of Period

       2,185,000

 $                 0.17

             5.91

$              --   

Exercisable at the end of Period

2,185,000

 $                 0.17

             5.91

   $              --   




14




NOTE 6 – CAPITAL STOCK


Preferred Stock – There are 1,000,000 shares of preferred stock with a par value of $0.001 per share authorized.  At September 30, 2019 and December 31, 2018, there were no shares of preferred stock issued or outstanding.


Common Stock – There are 100,000,000 shares of common stock with a par value of $0.001 per share authorized.  At the annual meeting of stockholders held December 28, 2018, the shareholders approved increasing the number of authorized shares to 200,000,000.  The amendment to the Articles of Incorporation affecting such change was filed with the State of Delaware on October 11, 2019.  During the nine months ended September 30, 2019 the Company issued 6,850,000 shares to fulfill its obligations under two notes which totaled $300,000 and accrued but unpaid interest which totaled $110,574.  The notes had a conversion price of $0.06 per share.  The Company recorded a gain on the extinguishment of debt of $90,325, which amount was accrued interest forgiven by the note holder.  



NOTE 7 – COMMITMENTS AND CONTINGENCIES


The Company currently occupies manufacturing facility in Draper, Utah.  The lease on the facility expired on December 31, 2014, at which time the Company entered into a three year extension which expired on December 31, 2017.  The lease provides that on the expiration of the lease on December 31, 2017 the lease became a month to month lease at a monthly lease rate ($9,600), plus an increase of 10% on the anniversary date of each succeeding year.  The Company is paying a lease rate of $11,520 per month in 2019.  


On July 22, 2019, the Company entered into a settlement agreement with its landlord wherein the Company agreed to pay $55,000 in settlement of all past liabilities, obtaining a full release from the landlord upon the payment being made.  The Company recognized a $57,320 gain on forgiveness of debt related to this settlement agreement.



NOTE 8 – RELATED PARTY TRANSACTIONS


At September 30, 2019 there was $1,031 payable to the Chief Executive Officer of the Company.   At December 31, 2018, the Company had amounts of $10,000 payable to its Chief Executive Officer and $10,000 payable to a director for funds loaned the Company to pay of various operating expenses of the business.


In May 2019, the Company converted the amounts payable to officers to convertible notes issued notes to officers in the amounts of the amount of $22,000 and $17,000.  The notes bear interest at the rate of 8% per annum with a default rate of 12%, are convertible into shares of common stock at $0.06 per share, and have a termination date of December 31, 2019.


At September 30, 2019 and December 31, 2018, the Company had outstanding notes payable to an officer in the amount of $167,257 and $147,257, respectively, and outstanding notes payable to a director in the amount of $54,256 and $32,256 respectively.



NOTE 9 – SUBSEQUENT EVENTS


At the annual meeting of stockholders held December 28, 2018, the shareholders approved increasing the number of authorized shares to 200,000,000.  The amendment to the Articles of Incorporation affecting such change was filed with the State of Delaware on October 11, 2019.



15




In this quarterly report references to “Flexpoint", "the Company," “we,” “us,” and “our” refer to Flexpoint Sensor Systems, Inc. and its subsidiaries.


FORWARD LOOKING STATEMENTS


The U.S. Securities and Exchange Commission (“SEC”) encourages reporting companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.  This report contains these types of statements. Words such as “may,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


EXECUTIVE OVERVIEW


Flexpoint Sensor Systems, Inc. is a company engaged principally in improving its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term sustainable manufacturing contracts.  Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing and selling sensor technology and products featuring our Bend Sensor® technology and equipment.


On August 20, 2019 the Company announced the development of the world’s first digital bend sensor capable of automatically compensating for changes in the environment, thus guaranteeing consistent performance across temperature and humidity variables. Easily integrated into multiple applications, the data gathered by the sensor will be digitally converted and transmitted, enhancing performance.


The Bend Sensor has traditionally been offered in analog form, but most engineers prefer sensors with digital interfaces such as accelerometers. More attractive to online catalog distributors, Flexpoint’s Digital Bend Sensor (DBS) has an intuitive nature, is more easily integrated with existing products, simplifies design and more importantly, reduces time to market.  


The Company feels that with the ease and simplicity of the digital bend sensor technology, the soon to be released product will bring new opportunities and create various additional applications for Flexpoint’s Bend Sensor Technology.


On July 25, 2019  the Company announced that they had filed a provisional patent for the new “Swell Sensor” designed to detect and stop a Lithium ion or Lithium Polymer battery from charging or discharging, preventing a thermal runway; one of the major ways battery fires occur.


Li-ion and Li-polymer batteries are used today in everything from phones to electric cars. Flexpoint’s technology included in the provisional patent provides a method to protect these batteries, their products and those who use them every day, measuring the expansion or swelling of the battery effectively stopping a potentially dangerous state.


Batteries become over heated, over charged, or simply fail due to old age. When this occurs, it’s possible for the inner cells of the battery to outgas a flammable electrolyte mixture, causing the battery to swell. The Flexpoint Sensor addresses the swollen battery effect, as batteries are designed to contain as a failsafe the measure of out gassing. The Flexpoint Swell Sensor detects the condition, effectively shutting down the short circuit.  Without this type of detection, some batteries can eventually reach temperatures over 1000º F. Designed to detect the dangerous expansion and stop a Lithium ion or Lithium polymer battery from charging or discharging, the Flexpoint battery expansion sensor was created to prevent thermal runaway—how most battery fires occur. The battery expansion sensor can detect a swollen battery and take appropriate action, effectively shutting it down and sending a notice to the user that the battery is no longer safe.



16





The Company is currently collaborating with three Fortune 100 companies involving the battery expansion sensor. The overall testing phases range from six to nine months. With confidentiality agreements in place, Flexpoint is now in development with these and other companies to integrate the Battery Expansion Sensor (BXS) into their products.

Flexpoint Sensor Systems, Inc. has designed a low cost, viable solution.


During a conference call announcing second quarter operating results representatives of the Company announced that with the agreements that had been signed and the projects they were pursuing, it was transitioning from a development company to a sales and marketing company.  This represents a significant change for the Company. The Company is now profitable and continues to negotiate additional significant orders with major revenue potential as the bend sensor gains global awareness.


On June 20, 2019 the Company announced our exclusive development and licensing agreement with Audio Technology company subVo, LLC introducing a new wave of near perfect sound reproduction for everyday smart and slim devices. Tracking movement in real time, the Bend Sensor® used in the subVo® system knows the exact position of the cone at any given moment, allowing for the amplifier to calibrate, correct, and produce near-perfect sound reproduction, with zero lag time. The Bend Sensor® provides low distortion, flat frequency response, and fast impulse response. In addition to the licensing agreement the company received income for the previous work for the design and development of the system.


The Flexpoint Bend Sensor® technology will be utilized in subVo’s KlaraT® speaker compensation technology and software algorithm. The sensor, when added to, or printed directly onto the diaphragm of a speaker, enables perfect synergistic motion, sensing precise movements throughout the audible spectrum. The Bend Sensor works with the KlaraT proprietary software, allowing the feedback control and speaker protection algorithms to push speakers to their limits, without distortion or damage. This combined with the auto-calibration algorithm will remove all variability due to tolerances incurred in the manufacturing process, saving time and ultimately cost.  The KlaraT calibration compensates for changes in temperature, humidity, and wear of the speaker itself over time.


On October 18, 2018, the Company announced it had signed a five year manufacturing and supply agreement with Counted LLC.  Counted LLC conceived of a medication delivery monitoring system and dispensing monitoring system.  Flexpoint designed and produced the monitoring system with Flexpoint features, Flexpoint technology and Flexpoint designed electronics to track and report the dispensing of medications in real time.  The information has the potential to be transmitted to physicians, pharmacists and government agencies.  Prototypes have been built and successfully tested with additional production and testing continuing through 2018 and the first quarter of 2019.  The Company expects that commercial production will begin in the late third quarter of 2019, increasing throughout the balance of 2019 and beyond.


In the rapidly growing and emerging wearables space, Flexpoint has recently received additional purchase orders from multiple glove manufacturers across various market sub-segments, including medical, gaming and virtual reality. The “speed to market” commercialization plans of these companies are driving this increased order volume.  Flexpoint is aggressively going after this evolving market, and expects this pattern to continue and dramatically increase throughout 2019.  In aggregate, Bend Sensor® wearables order volumes are expected to number in the tens of thousands in 2019.  The wearables market segment is clearly one where our technology is easily adapted and truly illustrates our technological differentiation.  Flexpoint’s willingness and ability to customize sensors for these innovative companies and deliver them at a competitive price point allows us to deliver real value to our customers.


These ground-breaking glove systems, combined with unique, leading edge software applications, also adapt to a wide range of other applications, including health rehabilitation, unmanned systems control, smartphone interaction and professional training across multiple industries.  In addition to producing an array of Bend Sensors®, the Company is under agreement to supply integrated assemblies comprised of multiple sensor types and associated electronics.


In the VR/VA marketspace, orders of increasing size and frequency were received during the fourth quarter of 2018 and in the first quarter of 2019 from Manus VR and Neofect as they strive to fulfill production orders.  Flexpoint also received orders from other global VR/AR customers during the quarter.


Finalizing long-term, constant revenue generating production contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our



17




ability to attract significant long-term production contracts.  We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor® and Bend Sensor® related technologies and products to the market.  Management believes that even though we are making positive strides forward with our business plan we will need to raise additional operating capital.


LIQUIDITY AND CAPITAL RESOURCES


Currently our revenue is primarily from product licensing, development, manufacturing and recurring sales with additional contributions to income from design contract, testing and limited production services for prototypes and samples, and is currently at a level to support our operations.  We believe, based upon current orders and projected orders over the next twelve months, that we could be producing sensors under long-term contracts in the future that will help support our existing operations and potential future growth. Management recognizes such contracts usually go through a long negotiation process and there can be no guarantee that we will be successful in our negotiations or that such contracts will be sufficient to support our current operations in the near future.


For the twelve months previous to this quarter we have relied on the proceeds of convertible loans from existing shareholders and private placements of our common stock.  During 2018 and the first nine months of 2019, the Company secured additional financing to fund its operations by issuing convertible notes to First Equity Holdings Corp. and officers.  The balances of all notes have a combined total of $1,136,494, net of debt discounts of $12,019, as of September 30, 2019. The notes have an annual interest rate of 8% to 10% and default rates of 12% to 15%, have various maturity dates, and are secured by the Company’s business assets.


Management believes that our current cash burn rate is approximately $60,000 per month and that proceeds from additional convertible notes and estimated revenues for manufacturing, production, engineering design and prototype products will be sufficient to fund the next twelve months of operations.  Our auditors have expressed doubt about our ability to continue as a going concern and that we may not realize significant revenue or become profitable within the next twelve months. We will require additional financing to fund our short-term cash needs. We will have to rely on additional debt financing, loans from existing shareholders and private placements of common stock for additional funding. Based upon our current purchase orders and anticipated purchase orders over the next twelve months our projected revenues by the end of 2019 are anticipated to cover our projected operating expenses, based on our current burn rate. However, we cannot assure you that we will be able to obtain short-term financing, or that sources of such financing, if any, will continue to be available, and if available, that they will be on terms favorable to us. Nor is there any guarantee that the projected volume of purchase orders will meet the volumes that we anticipate.


As we enter into new agreements, we must ensure that those agreements provide adequate funding for any pre-production research and development and manufacturing costs. If we are successful in establishing agreements with adequate initial funding, management believes that our operations for the long term will be funded by revenues, licensing fees and/or royalties related to these agreements. However, we have formalized only a few agreements during the past four years and there can be no assurance that the agreements will generate sufficient revenues or be profitable in the future or that a desired technological application will be successful enough to produce the volumes and profits necessary to fund our operations.  


FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES


Our principal commitments at September 30, 2019 consisted of our operating lease of $11,520 per month, and total liabilities of $3,666,932, which includes $1,136,494 of convertible notes payable, net of discounts of $12,019.  Accrued liabilities at September 30, 2019, were $1,530,065 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.  


During the nine months ending September 30, 2019, the Company has raised an additional $100,000 in operating capital through the issuance of a short-term note.  On January 31, 2019, the Company entered into this convertible note for up to $100,000 from a third party.  The note has an annual interest rate of 10% and a default rate of 15% annually.  The note is secured by the Company’s equipment.  The note has a conversion feature for restricted common shares at $0.05 per share and a maturity date of August 31, 2019. As of September 30, 2019 the Company had drawn the full $100,000 on the note.




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During the year ended 2018 and the nine-month period ended September 30, 2019, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares necessary to settle all convertible instruments, we determined that the conversion features related to these notes are derivative instruments.  At September 30, 2019, the Company determined a fair value of $811,551 for the derivative instruments. The Company recorded a loss from change in fair value of derivatives of $440,367 for the nine-month period ended September 30, 2019.


The Company has a few major customers who represent a significant portion of revenue and accounts receivable. During the nine months ended September 30, 2019, two customers represented 86% of sales and two other customers represented 89% of accounts receivable.  The Company has a strong ongoing relationship with this customer with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.


OFF-BALANCE SHEET ARRANGEMENTS


We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.


CRITICAL ACCOUNTING ESTIMATES


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates of particular significance in our financial statements include goodwill and the annual tests for impairment of goodwill and long-lived assets and valuing stock option compensation.  


The Company's goodwill represents the excess of its reorganization value over the fair value of the net assets upon emergence from bankruptcy. Goodwill is not amortized, therefore we test our goodwill for impairment annually or when a triggering event occur using a fair value approach. A fair value based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its nets assets. The test requires various judgments and estimates. During 2018 and for the nine months ended September 30, 2019, the Company recorded no impairment charge to reduce the carrying value of the goodwill to its estimated fair value. As part of the impairment testing performed at December 31, 2018, the Company considered factors such as the global market volatility, variables in the economy, and the overall uncertainty in the markets which has resulted in a decline in the market price of the Company's stock price and market capitalization for a sustained period, as indicators for potential goodwill impairment.


We test long-lived assets for impairment annually or when a triggering event occurs. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The amount of impairment is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other factors. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. If the carrying values of the long-lived assets exceed the present value of the discounted projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly. Impairment tests are conducted on an annual basis and, should they indicate a carrying value in excess of fair value, a charge may be required.

Financial accounting standards require that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest. The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model. Option pricing models require the input of highly sensitive assumptions, including expected stock volatility. Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. For the nine month periods ended September 30, 2019 and 2018 we recognized $0 and $0, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.




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RESULTS OF OPERATIONS


The Company continues to concentrate its marketing resources on a limited number of customers that have the greatest potential to generate the most short-term revenue while still building relationships with our larger customers. Management believes this approach has the highest potential to bring long-term commercially viable products to market and will provide sustainable cash flow to fund the Company's operations in the future. Currently, overall revenues are not sufficient to sustain our operations.  Management anticipates that revenues will increase as we continue to execute our long-term business plan and cultivate larger customer bases with our existing product offering. However, until a long-term production contract is in place there is no guarantee that our current customer base will order in sufficient volumes to sustain our operations. Therefore, management continues to work with larger companies and industries and is hopeful that in the near future we will sign a long-term licensing or manufacturing contract.


We received revenue from repeat orders from our existing customers, design contract, and development engineering. Revenue is recognized using the ASC 606 five step detailed in Note 1 to the financial statements.  Revenue from the sale of a product is recorded at the time of shipment to the customer.  Revenue from the license agreement was recognized in the period the agreement was concluded, as it is a right of use license and the Company has no further obligations to perform under the terms of the agreement.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer. Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is recognized as licensing royalty revenue over the remaining term of the contract.


The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and should be read in conjunction with our unaudited financial statements for the three and nine months ended September 30, 2019 and 2018, included in Part I, Item 1, above, and the audited financial statements included in the Company’s annual report on Form 10-K for the years ended December 31, 2018 and 2017.


THREE MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018:


SUMMARY OF OPERATING RESULTS

 


Three month period ended

 

September 30, 2019

 

September 30, 2018

Manufacturing, design, licensing and contract   revenue


$            54,209

 


$            72,208

Total operating costs and expenses

222,157

 

205,046

Net other income (expense)

(173,665)

 

10,235

Net loss

(341,613)

 

(122,603)

Basic and diluted loss per common share

$              (0.00)

 

$             (0.00)


For the three months ending September 30, 2019 revenue was $54,209, a decrease of $17,999 when compared to the same period in 2018. A customer who placed $40,000 in orders in 2018 did not place orders in 2019, as their project has not yet moved to commercialization.  The majority of the revenue for this period came from product manufacturing and recurring sales, product engineering services, prototype and pre-production products.


Of the $222,157 and $205,046 total operating costs and expense for the three months ending September 30, 2019 and 2018, respectively, $60,498 and $73,873 were for direct research and development cost, respectively. For the three months ended September 30, 2019, total operating expenses increased by $17,111 when compared to the same period in 2018, due primarily to higher consulting fee expense in 2019.  


Other expense for the three month period ended September 30, 2019 was $173,665, a $183,900 increase compared to the same period in 2018.  The increase is attributable to a loss of $151,673 on the change in fair value of derivative liabilities recorded in 2019, interest expense of $79,324 and a $57,320 gain on forgiveness of debt realized from the settlement of debt with the owner of the building we rent on a month-to-month basis, while in 2018 a gain of $88,606 on derivatives was recognized..


Net loss of $341,613 was realized for the three months ended September 30, 2019.  A net loss of $122,603 was realized for the three month period ended September 30, 2018.




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NINE MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018:


SUMMARY OF OPERATING RESULTS

 


Nine month period ended

 

September 30, 2019

 

September 30, 2018

Manufacturing, design, and contract revenue

$            691,250

 

$            202,630

Total operating costs and expenses

663,407

 

642,678

Net other income (expense)

(528,793)

 

55,590

Net income (loss)

(500,950)

 

(384,458)

Basic and diluted income (loss) per common share

$               (0.01)

 

$               (0.00)


For the nine months ending September 30, 2019 revenue was $691,250, an increase of $488,620 when compared to the same period in 2018. The majority of the revenue for the increase for this period came from the $450,000 revenue recognized for the license agreement entered into.  Production product was $46,955 higher in 2019 than 2018 as we continue to receive reorders in higher quantities from existing customers.


Of the $663,407 and $642,678 total operating costs and expense for the nine months ending September 30, 2019 and 2018, respectively, $213,956 and $237,678 were for direct research and development cost, respectively. For the nine months ended September 30, 2019, total operating expenses increased by $20,724 when compared to the same period in 2018, due primarily to an increase in administrative expense.


Other income (expense) for the nine month period ended September 30, 2019 was $(528,793), a $584,383 decrease compared to the same period in 2018.  The decrease is primarily attributable to the loss of $440,367 on the change in fair value of derivative recorded in 2019 while in 2018 a gain of $291,446 on derivative was recognized.


A net loss of $500,950 was realized for the nine months ended September 30, 2019.  A net loss of $384,458 was realized for the nine month period ended September 30, 2018.


The chart below represents a summary of our condensed consolidated balance sheets at September 30, 2019 and December 31, 2018.


SUMMARY OF BALANCE SHEET INFORMATION

 

 

 

 

 

September 30, 2019

 

December 31, 2018

Cash and cash equivalents

$                205,699 

 

$                17,798 

Total current assets

262,493 

 

46,402 

Total assets

            5,170,953

 

            4,972,498

Total liabilities

              3,666,932

 

              3,306,614

Deficit accumulated

         (28,713,497)

 

         (28,212,547)

Total stockholder’s equity

 $              1,504,021

 

 $           1,665,884


Cash and cash equivalents increased by $187,901 at September 30, 2019 compared to December 31, 2018. The increase in cash is due to the $450,000 payment received under a license agreement, collection of accounts receivable and proceeds of $100,000 from convertible notes. Our non-current assets decreased at September 30, 2019 due to the amortization of long-lived assets.


Total liabilities increased by $360,318 at September 30, 2019.  The increase was due primarily to the increase in derivative liabilities and accrued liabilities, along with $100,000 received from a new convertible note, offset by the conversion of $300,000 of convertible notes and $110,574 of accrued interest into shares of restricted common.


INFLATION


We do not expect the impact of inflation on our operations to be significant for the next twelve months.




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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable to smaller reporting companies.



ITEM 4.  CONTROLS AND PROCEDURES


(a)

Disclosure Controls and Procedures


As of the end of the period covered by this quarterly report we carried out an evaluation of the effectiveness of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer, who also serves as our Principal Financial Officer.  Our controls and procedures are designed to allow information required to be disclosed in our reports to be recorded, processed, summarized and reported within the specified periods, and accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  Based upon the evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were not effective at that reasonable assurance level as of the end of the nine-month period ended September 30, 2019.  


The material weaknesses relate to the limited number of persons responsible for the recording and reporting of financial information, the lack of separation of financial reporting duties, and the limited size of our management team in general. We are in the process of evaluating methods of improving our internal control over financial reporting, including the possible addition of financial reporting staff and the increased separation of financial reporting responsibility, and intend to implement such steps as are necessary and possible to correct these material weaknesses


(b)

Changes in Internal Control over Financial Reporting


There have been no changes in internal control over financial reporting during the nine months of 2019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS


None.



ITEM 1A.  RISK FACTORS


We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


On May 28, 2019 the Company issued 3,650,000 shares of restricted common stock to Empire Fund Managers and 3,200,000 shares of restricted common stock to Compass Equity Partners, LLC in consideration for two convertible notes and accrued but unpaid interest totaling $410,574.   We relied on an exemption from the registration requirements provided by Section 4(a) (2) of the Securities Act.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


None.




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ITEM 4.  MINE SAFETY DISCLOSURES


Not applicable.



ITEM 5.  OTHER INFORMATION


None.



ITEM 6. EXHIBITS


Part I Exhibits


No.

Description

31.1

Certification of Clark M. Mower pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Clark M. Mower pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley


Part II Exhibits


No.

Description

3(i).1

Certificate of Incorporation of Flexpoint Sensor, as amended (Incorporated by reference to exhibit 3.1 for Form 10-QSB, filed August 4, 2006)

3(i).2

Certificate of Amendment to Flexpoint Certificate of Incorporation, dated October 11, 2019

(Incorporated by reference to exhibit 3(i).2 of Form 8-K, filed October 15, 2019)

3(ii)

Bylaws of Flexpoint Sensor, as amended (Incorporated by reference to exhibit 3.4 of Form 10-QSB, filed May 3, 2004)

10.1

Addendum to Lease Agreement between Flexpoint Sensor and Handstands, dated January 1, 2015.  (Incorporated by reference to exhibit 10.3 of Form 10-K, filed April 14, 2016)

10.2

Exclusive License Agreement between Flexpoint Sensor Systems and subVo, LLC, dated June 19, 2019 (Incorporated by reference to exhibit 10.2 of Form 10-Q, filed August 14, 2019)

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Presentation Linkbase Document      





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SIGNATURES


In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, who is duly authorized.


FLEXPOINT SENSOR SYSTEMS, INC.


Date:   November 14, 2019


/s/ Clark M. Mower

Clark M. Mower

President, Chief Executive Officer and Director,

Principal Financial Officer



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