UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  i 10-Q

For quarterly period ended  i June 30,  i 2022 / 

 i [   ]         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.  i 0-24368

 i FLEXPOINT SENSOR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 i 5718 W Dannon Way,  i Suite B,  i West Jordan,  i Utah  i 84081

(Address of principal executive offices)

801-568-5111

(Registrant’s telephone number)

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

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.

 i 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).  i 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.

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. [ ]

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

Yes [ ]  i No [X]

The number of shares outstanding of the registrant’s common stock was  i 125,557,174 as of August 15, 2022.

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

PART II: OTHER INFORMATION

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 June 30, 2022, the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021, the condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 are unaudited. The information presented below for the condensed consolidated financial position as of December 31, 2021 was audited and reported as part of our annual filing of our Form 10-K, filed with Securities and Exchange Commission on March 31, 2022. The results of operations for the three and six months ended June 30, 2022 and 2021, respectively, are not necessarily indicative of results to be expected for any subsequent periods.

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS

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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2022 and 2021

(UNAUDITED)

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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(UNAUDITED)

The COVID-19 Pandemic (“the Pandemic”) has had a dramatic effect on our business as well as the business of our customers. The wide-ranging effects on the world-wide business market has led to a general reluctance for businesses to move forward with entering into major commitments until their future markets have been clarified. Because of this, we have experienced a significant slowdown in the size and number of orders received and, while we cannot predict when the influence of the Pandemic will end, we expect that orders will return to their former levels and increase following a return to normal business operations.

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

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

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

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

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

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

The Company continues to accumulate significant operating losses and has an accumulated deficit of $ i 30,532,278 at June 30, 2022.  These factors raise substantial doubt about the Company’s ability to continue as a going concern for

a period of one year from the issuance of these financial statements. 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.

During the six months ended June 30, 2022, the Company received seven payments of $ i 25,000 each and one payment of $ i 20,000, for a total of $ i 195,000, from two of the convertible note holders as working capital loans to enable the Company to meet its obligations for operating expenses. In March 2022 the holders of $ i 125,000 on notes payable elected to convert the principal and $ i 12,068 of accrued interest into  i 2,741,385 shares of common stock, resulting in a loss of $ i 13,060 on conversion. While it is the intent of both parties to enter into a convertible note on the remaining advances, of which these payments will be a part, no terms, either as to conversion rate, interest rate, or maturity date has been agreed upon as of this date. Until such agreement is reached, the balance of $ i 525,000 as of June 30, 2022 is unsecured, non-interest bearing and due on demand.

In August 2020 the Company received $ i 50,000 from a large shareholder to meet operating expenses. The shareholder indicated that he would want the $ i 50,000 loan repaid when the Company was in a position to do so. The shareholder subsequently provided an additional $ i 5,000, for a total loan of $ i 55,000. The balance is non-interest bearing and due on demand. During the six-month period ended June 30, 2022, no payments were made against the loan, leaving a remaining balance of $ i 35,000 which is non-interest bearing and due on demand.

Convertible Notes Payable

At June 30, 2022, there are notes outstanding with principal balances which total $ i 180,000. Of the notes, $ i 140,000 are convertible notes bearing a  i 10% annual rate of interest (with a  i 15% default rate). Of these notes, $ i 100,000 is convertible into shares of common stock at the rate of $ i 0.05 per share and $ i 40,000 is convertible at $ i 0.07 per share. The remaining $ i 40,000 is a convertible note entered into on August 8, 2011 with a former Company Director, at a conversion rate of $ i 0.20 per share. That note was due on  i December 31, 2015 and bears a default interest rate of  i 10%. The notes are in default and interest is accrued at the default rate.

In March 2022 the holders of $ i 330,000 in convertible notes elected to convert the principal and $ i 90,979 of accrued interest into  i 8,419,547 shares of restricted common stock. The Company recorded a loss on conversion of debt of $ i 33,034 related to these transactions.

Convertible Note Payable - Related Party

At June 30, 2022, there are notes outstanding with two directors of the Company with balances of $ i 164,257 and $ i 54,257, respectively. The notes bear an  i 8% annual rate of interest with a  i 12% default rate and are convertible into shares of restricted common stock. Of the notes, $ i 114,514 is convertible into shares of restricted common stock at $ i 0.07 per share and $ i 104,000 of the notes are convertible at $ i 0.06 per share. All of these notes have a maturity date of  i March 31, 2023. Therefore, the default rate of interest was not used in accruing interest due on these notes.

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 continued in effect for  i ten years, terminating on August 25, 2015.  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  i 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  i 2,185,000 shares of the Company’s common stock. Of the total issued,  i 1,960,000 options were issued to replace options held by directors and employees which were to expire and  i 225,000 options were issued to new employees. Of the options issued,  i 640,000 have an option price of $ i 0.14 per share,  i 500,000 have an option price of $ i 0.15 per share,  i 995,000 have an option price of $ i 0.20 per share, and  i 50,000 have an option price of $ i 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.

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 August 25, 2019, the Company granted options to employees to purchase an aggregate  i  i 3,096,000 /  shares of common stock at exercise prices ranging from $ i  i 0.15 /  to $ i  i 2.07 /  per share. The options all vested by December 31, 2017 and expire  i  i 10 /  years from the date of grant.

On December 30, 2020 the Board of Directors approved the revaluation of all outstanding stock options, reducing the option price to $ i 0.05 per share. The Company recorded a charge of $ i 8,203 as the result of this change.

As of the years ended December 31, 2005 through 2020, the Company recognized a total of $ i 2,451,971 of stock-based compensation expense, which includes charges of $ i 8,203 in 2020, leaving $ i 0 in unrecognized expense as of December 31, 2021. There were  i 1,900,000 employee stock options outstanding at June 30, 2022.  

A summary of all employee options outstanding and exercisable under the plan as of June 30, 2022 is set forth below:

Preferred Stock – There are  i 1,000,000 shares of preferred stock with a par value of $ i 0.001 per share authorized. At June 30, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.

Common Stock – There are  i  i 200,000,000 /  shares of common stock with a par value of $ i 0.001 per share authorized. At June 30, 2022 and December 31, 2021, there were  i  i 125,557,174 /  and  i  i 114,396,242 /  shares of common stock issued and outstanding, respectively. The Company issued  i 11,160,932 shares of restricted common stock during the six months ended June 30, 2022 for the retirement of $ i 445,000 of notes payable and convertible notes, and $ i 103,047 of accrued interest. See also Note 4.

The Company currently occupies approximately  i 8,029 square feet of office and manufacturing space leased from D&M Management, Inc. The building is located in a commercial business district in West Jordan, Utah which consists primarily of high-tech manufacturing firms and it is located adjacent to a major intersection, allowing easy access to Utah’s main interstate highway. The lease is for $ i 6,787 per month and is for a period of twelve months, with a termination date of August 31, 2022. A new lease for a period of twelve months to commence September 1, 2022 at a monthly rate of $ i 6,657 was entered into on June 20, 2022. The lease has an expiration date of August 31,

2023 and contains a 90-day notice clause if our intent is to either terminate the lease or renew the lease for one additional three-year term.

The Company evaluated the lease under the new lease accounting standard and determined that it was a short-term lease due to the twelve-month term and the 90-day notice of termination clause.

At June 30, 2022, there was $ i 34,461 payable to the Chief Executive Officer. During the six-months ended June 30, 2022 the Chief Executive Officer provided $ i 6,000 to be used for operating expenses, and also submitted expense reports for company obligations which he paid with his personal credit card. At December 31, 2021, the Company had amounts of $ i 20,481 payable to its Chief Executive Officer for funds provided to meet the operating expense obligations of the Company.

In July 2022, the Company received $ i 50,000 in additional funding from a holder of convertible notes. There has not been a note written on these funds, and no terms have been agreed to. The funding is to bear interest at the rate of  i 10% per annum. The Company is recording the receipt of the funding as an on demand note until such time as terms are agreed upon by the parties.

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, licensing agreements and royalty agreements.  Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing, licensing and selling sensor technology and products featuring our Bend Sensor^® technology and equipment.

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 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.

Worldwide automakers are faced with the challenge of providing a safer, more energy efficient, longer lasting product that consumers can afford. This has required automakers to search new and innovative ways to lower the overall weight of the vehicle and to improve its fuel efficiencies, while lowering the cost. We continue to experience an increased interest regarding automotive and other potential applications for our sensor technology because they meet this criterion. With its versatility, light weight, single layer construction and the fact that it is currently being used in various safety devices the Bend Sensor^® is positioned well to meet the challenges that the automobile industry is facing.

LIQUIDITY AND CAPITAL RESOURCES

The challenges posed by the Pandemic in the United States and global economies increased significantly as the first quarter progressed. Since the onset of the Pandemic, our top priority has been the health and safety of our employees. During this difficult time, we have worked to ensure that our customers continue to receive quality, personalized service.

The Pandemic negatively impacted our revenue during the first six months of 2022. At this time, it is impossible to accurately predict when this will end. Many of our clients, to protect their employees, have sharply curtailed operations and have most employees working from home. The long-term impact of the Pandemic is difficult to assess at this point, as it will be dependent on how rapidly our clients can resume their business operations and place orders with us for the needed sensors incorporated into their products.

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.  Depending upon the world returning to some form of normalcy following the end of the Pandemic, 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.

In 2022, we relied on the proceeds of convertible loans from existing shareholders, which funds are accounted for as demand notes. The balances of the non-related party convertible notes have a combined total of $180,000 as of June 30, 2022. The notes have an annual interest rate of 8% to 10% and default rates of 10% to 15%, have various maturity dates, and are secured by the Company’s business assets. The on-demand notes have a principal balance of $525,000 at June 30, 2022 and no terms have yet been established for these funds.

Management believes that our current cash burn rate is approximately $60,000 per month and expectations are that it will continue at this rate for the foreseeable future. If the Pandemic ends and business returns to pre-Pandemic levels, with proceeds from additional convertible notes and estimated revenues for manufacturing, production, engineering design and prototype products should 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 anticipated purchase orders over the next twelve months the revenue generated will not be sufficient to cover our operating expenses, based on our current burn rate. However, we cannot assure 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 June 30, 2022 consisted of our operating lease of $6,787 per month, and total liabilities of $3,482,340, which includes $398,513 of convertible notes payable. Accrued liabilities at June 30, 2022, were $2,265,604 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.

In August 2020 the Company received $50,000 from John Kelley, a large shareholder, to meet operating expenses. Mr. Kelly indicated that he would want the $50,000 repaid when the Company was in a position to do so. Mr. Kelly subsequently provided an additional $5,000, for a total loan of $55,000. This funding has not formally been documented by a note at the time of this filing, and there is no term or interest on the note. In 2021 payment of $20,000 was made to reduce the balance. During the six-month period ended June 30, 2022, no payments were made to reduce this obligation, leaving a remaining balance of $35,000.

The Company has received $490,000 in funding from holders of our convertible notes. These fundings have not yet been memorialized into convertible notes. The only term agreed upon to date is that all funds advanced will bear interest at the rate of 10% per annum from the date of deposit.

The Company has a few major customers who represent a significant portion of revenue and accounts receivable. During the six months ended June 30, 2022, three customers represented 78% of sales and twocustomers represented 95% of accounts receivable. The Company has a strong ongoing relationship with these customers with scheduled product deliveries extending through the year from one of the customers with an account receivable 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

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)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.

ASC 350-20 “Intangibles – Goodwill and Other: The Company follows the guidance provided by ASC 350-20. 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 net assets. The test requires various judgments and estimates. During 2021 and for the six months ended June 30, 2022, 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, 2021, the Company considered factors such as the global market volatility, variables in the economy, and the overall uncertainty in the markets that 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.

ASC 820 Fair Value Measurement: 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.

ASC 718 “Compensation – Stock Compensation: 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. In addition, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. For the six-month periods ended June 30, 2022 and 2021, 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.

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. The Pandemic has had a dramatic effect on our business as well as the business of our customers. The wide-ranging effects on the world-wide business market has led to a general reluctance for businesses to move forward with entering into major commitments until their future markets have been clarified. Because of this, we have experienced a significant slowdown in the size and number of

orders received and, while we cannot predict when the influence of the Pandemic will end, we expect that orders will return to their former levels and increase throughout the remainder of 2022 following a return to normal business operations. Following a return to normal business operations in the world, 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 the Pandemic ends and 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 recognized 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 agreements 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 six months ended June 30, 2022 and 2021, 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, 2021 and 2020.

THREE MONTH PERIODS ENDED JUNE 30, 2022 AND 2021

For the three months ending June 30, 2022, revenue was $36,015, a decrease of $43,539 when compared to the revenue of $79,554 for the same period in 2021. The majority of the revenue variance for this period is attributable to ordering delays from customers who are beginning to manufacture products incorporating our products.

Of the $213,520 and $213,485 total operating costs and expense for the three months ending June 30, 2022 and 2021, respectively, $56,119 and $74,466 were for direct research and development cost, respectively. For the three months ended June 30, 2022, total operating expenses increased by $35 when compared to the same period in 2021, increases in payroll and professional fees comprising the largest part of the increased expense level, with reductions in building and rent and a number of other accounts resulting in the small net increase.

Other expense for the three-month period ended June 30, 2022 was $16,622, a $54,235 decrease resulting, primarily, from a reduction of interest expense resulting from the conversion of convertible notes into shares of restricted common stock, offset by a $59,000 gain on extinguishment of debt in 2021.

A net loss of $194,127 was realized for the three months ended June 30, 2022. A net loss of $96,318 was realized for the three-month period ended June 30, 2021.

SIX MONTH PERIODS ENDED JUNE 30, 2022 AND 2021

For the six months ending June 30, 2022, revenue was $96,939, a decrease of $2,905 when compared to the same period in 2021. The majority of the revenue variance for these periods is attributable to orders from customers who are beginning to manufacture products incorporating our products.

Of the $463,665 and $421,349 total operating costs and expense for the six months ending June 30, 2022 and 2021, respectively, $116,212 and $149,682 were for direct research and development cost, respectively. The decrease in research and development expense in 2022 results primarily from the lower lease expenses at the facility moved into in September 2021. For the six months ended June 30, 2022, total operating expenses increased by $42,305 when compared to the same period in 2021, increases in payroll and professional fees comprising the largest part of the increased expense level.

Other expense for the six-month period ended June 30, 2022 was $83,190 while there was other income of $13,720 for the six-months ended June 30, 2021, a $96,910 difference resulting, primarily, from a $46,194 loss on note conversion in 2022 and a $59,500 gain on extinguishment of debt in 2021.

A net loss of $449,905 was realized for the six months ended June 30, 2022. A net loss of $307,785 was realized for the six-month period ended June 30, 2021.

The chart below represents a summary of our condensed consolidated balance sheets at June 30, 2022 and December 31, 2021.

Cash at June 30, 2022 was overdrawn by $20,897, which amount is shown as a liability. At December 31, 2021 there was a balance of $402. The negative cash is due to the issuance of checks for operating expenses and the delayed receipt of funds to deposit. Our non-current assets are unchanged, as all property and equipment and patents have been fully depreciated.

Total liabilities decreased by $151,828 at June 30, 2022 due to the issuance of shares of restricted common stock in full satisfaction of obligations, both principal and interest, on convertible notes converted. This decrease was offset in part by additional borrowings received from on-demand notes and the accrual of marketing fees and accrued interest payable.

INFLATION

We do not expect the impact of inflation to have a negative impact on our product sales or our operations for the next twelve months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. 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 six-month period ended June 30, 2022.

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

There have been no changes in internal control over financial reporting during the six months of 2022 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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Part I Exhibits

Part II Exhibits

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: August 15, 2022

/s/ Clark M. Mower

Clark M. Mower

President, Chief Executive Officer and Director,

Principal Financial Officer