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EXCEL - IDEA: XBRL DOCUMENT - FLEXPOINT SENSOR SYSTEMS INCFinancial_Report.xls
EX-31 - 302 CERTIFICATION OF CLARK M. MOWER - FLEXPOINT SENSOR SYSTEMS INCex311.htm
EX-31 - 302 CERTIFICATION OF THOMAS N. STRONG - FLEXPOINT SENSOR SYSTEMS INCex312.htm
EX-32 - SECTION 1350 CERTIFICATION - FLEXPOINT SENSOR SYSTEMS INCex32.htm

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, 2013


[   ]

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.)

     

106 West Business Park Drive, Draper, Utah  84020

(Address of principal executive offices)


801-568-5111

(Registrant’s telephone number)


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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes [ X ]   No [  ]


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


Large accelerated filer  [   ]  

Accelerated filer                    [   ]

Non-accelerated filer    [   ]

Smaller reporting company  [X]


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 49,627,114 as of November 11, 2013.





1



TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION


Item 1.  Financial Statements


              Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2013 and

    December 31, 2012 (Audited)

3


              Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine    

  Months Ended September 30, 2013 and 2012 and for the Cumulative Period from

  February 24, 2004 (Date of Emergence from Bankruptcy) through September 30, 2013

4

             

              Condensed Consolidated Statements of Cash Flows (Unaudited) for the

                Nine Months Ended September 30, 2013 and 2012 and for the Cumulative Period from

                February 24, 2004 (Date of Emergence from Bankruptcy) through September 30, 2013

5


              Notes to Condensed Consolidated Financial Statements (Unaudited)

6


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13


Item 3. Quantitative and Qualitative Disclosures about Market Risk

19


Item 4. Controls and Procedures  

20



PART II: OTHER INFORMATION


Item 1A. Risk Factors

20


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

22


Item 6.  Exhibits

 23


Signatures

24


PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

The financial information set forth below with respect to our condensed consolidated financial position as of September 30, 2013, the condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 2013 and 2012 that are unaudited. The information presented below for the condensed consolidated financial position as of December 31, 2012 was audited and reported as part of our annual filing of our Form 10-K, filed with Securities and Exchange Commission on April 15, 2013. The cumulative financial information from February 24, 2004 (the date of emergence from bankruptcy) through September 30, 2013, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data.  The results of operations for the three and nine months ended September 30, 2013 and 2012, respectively, are not necessarily indicative of results to be expected for any subsequent periods.



2




FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 CONSOLIDATED BALANCE SHEETS


 

SEPT 30, 2013

(Unaudited)

 

DEC 31, 2012

(Audited)

ASSETS

 

 

 

Current Assets

 

 

 

    Cash and cash equivalents

$         46,575

 

$           42,024

    Accounts receivable

11,912

 

7,688

    Inventory    

5,397

 

5,667

    Notes receivable

25,000

 

--

    Deposits and prepaid expenses

11,803

 

13,804

Total Current Assets

100,687

 

69,183

Long-Term Deposits

6,550

 

16,500

Property and Equipment, net of accumulated depreciation

 

 

 

     of $507,794and $450,755

78,600

 

135,639

Patents and Proprietary Technology, net of accumulated

 

 

 

     amortization of  $560,521 and $480,474

400,464

 

480,511

Goodwill

4,896,917

 

4,896,917

Total Assets

$    5,483,218

 

$      5,598,750

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

Current Liabilities

 

 

 

    Accounts payable

$       234,185

 

$        268,512

    Accounts payable – related party

6,034

 

11,194

    Accrued liabilities

169,063

 

183,698

    Deferred revenue

10,000

 

--

    Convertible notes payable, net of discount of $19,062 and $0

693,463

    

287,525

    Convertible notes payable to related party, net of discount of $0 and $0

40,000

 

40,000

Total Current Liabilities

1,152,745

 

790,929

 

 

 

 

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;

 

 

 

         49,627,114 shares and 45,732,214 shares issued and outstanding

49,627

 

45,732

    Additional paid-in capital

24,416,849

 

24,209,909

    Deficit accumulated during the development stage

(20,136,003)

 

(19,447,820)

Total Stockholders' Equity

4,330,473

 

4,807,821

Total Liabilities and Stockholders' Equity

$     5,483,218

 

$     5,598,750



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





3



FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



 

For the Three Months Ended Sept. 30,

 

For the Nine Months

Ended Sept. 30,

 

For the Cumulative Period From February 24, 2004

(Date of Emergence from Bankruptcy) Through Sept. 30,

 

2013

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

Engineering, Contract

and Testing Revenue

$     33,407

$


  13,837

$

75,182

$


40,711

$

1,020,842

 

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses

 

 

 

 

 

 

 

 

 

    Amortization of patents and

      proprietary technology

26,975

 


26,720

 

80,047

 


80,159

 

1,236,397

    Cost of revenue

6,182

 

122

 

14,352

 

2,541

 

189,470

    Administrative and marketing expense

167,576

 

238,142

 

511,040

 

630,706

 

13,491,749

    Research and development expense

71,121

 

60,648

 

176,309

 

192,824

 

3,427,921

    Impairment of long-lived assets

--

 

--

 

--

 

--

 

1,006,059

Total Operating Costs and Expenses

271,854

 

325,632

 

781,748

 

906,230

 

19,351,596

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

    Interest expense

(18,232)

 

(10,009)

 

(50,104)

 

(37,548)

 

(2,427,881)

    Interest income

--

 

15

 

37

 

44

 

131,911

    Sublease rent income

--

 

--

 

--

 

--

 

11,340

    Other income

--

 

--

 

--

 

--

 

218

    Loss on sales of equipment

--

 

--

 

--

 

--

 

(810)

    Gain on stock debt exchange

68,450

 

--

 

68,450

 

323,249

 

479,973

Net Other Expense

50,218

 

(9,994)

 

18,383

 

285,745

 

(1,805,249)

 

 

 

 

 

 

 

 

 

 

Net Loss

$ (188,229)

$

(321,789)

$

(688,183)

$

(579,774)

$

(20,136,003)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

Loss Per Common Share

$       (0.00)

$


(0.01)

 $

   (0.01)

$


(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted-Average

 

 

 

 

 

 

 

 

 

Common Shares Outstanding

49,255,375

 

39,962,534

 

46,955,453

 

38,252,422

 

 

 

 

 

 

 

 

 

 

 

 



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




4



FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

For the Nine Months

Ended Sept. 30,

 

For the Cumulative Period From February 24, 2004 (Date of Emergence from Bankruptcy) Through

Sept. 30,

 

 

 

 

 

 

2013

 

2012

 

2013

 Cash Flows from Operating Activities: 

 

 

 

 

 

    Net loss

$      (688,183)

 

$   (579,774)

 

$  (20,136,003)

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

 

 

 

 

 

        Depreciation

57,039

 

61,776

 

1,154,983

        Amortization of patents and proprietary technology

80,047

 

80,159

 

1,236,397

        Impairment of long-lived assets

--

 

--

 

1,006,059

        Issuance of common stock and warrants for services

250,000

 

70,000

 

4,299,135

        Expenses paid by increase in convertible note payable

--

 

--

 

82,200

        Amortization of discount on note payable

10,223

 

--

 

2,240,877

        Stock-based compensation expense for employees

--

 

--

 

1,874,849

        Loss on asset disposal

--

 

--

 

2,437

        Loss on extinguishment of debt

--

 

--

 

22,966

        Loss (Gain) on conversion of notes payable to common stock

(68,450)

 

81,741

 

(431,671)

        Bad debt expense

--

 

--

 

13,638

   Changes in operating assets and liabilities:

 

 

 

 

 

        Accounts receivable

(4,224)

 

13,888

 

(27,548)

        Notes Receivable

(25,000)

 

--

 

(25,000)

        Inventory

273

 

670

 

(5,394)

        Deposits and prepaid expenses

11,951

 

(44)

 

(18,353)

        Accounts payable

(34,328)

 

6,163

 

28,078

        Accounts payable – related parties

(5,160)

 

(5,073)

 

6,034

        Accrued liabilities

(14,637)

 

(133,561)

 

210,088

        Deferred revenue

10,000

 

--

 

(333,750)

 Net Cash Used in Operating Activities 

(420,449)

 

(404,055)

 

(8,799,978)

 Cash Flows from Investing Activities:

 

 

 

 

 

    Payments for the purchase of equipment

--

 

--

 

(200,119)

    Payments for patents

--  

 

--

 

(45,868)

    Payment for acquisition of equipment and proprietary technology

      from Flexpoint Holdings, LLC

--

 

--

 

(265,000)

 Net Cash Used in Investing Activities 

--

 

--

 

(510,987)

 Cash Flows from Financing Activities:

 

 

 

 

 

    Net proceeds from issuance of common stock, warrants and options

--

 

--

 

5,622,157

    Proceeds from subscriptions receivable

--

 

--

 

50,000

    Principal payments on notes payable - related parties

--

 

(10,000)

 

(520,300)

    Proceeds from notes payable - related parties

--

 

--

 

495,300

    Payments on convertible notes payable

--

 

--

 

(37,475)

    Proceeds from borrowings under convertible note payable

425,000

 

437,525

 

3,745,807

 Net Cash Provided by Financing Activities 

425,000

 

427,525

 

9,355,489

 Net Change in Cash and Cash Equivalents

4,551

 

23,470

 

44,524

Cash and Cash Equivalents at Beginning of Period

42,024

 

7,294

 

2,051

 Cash and Cash Equivalents at End of Period

$        46,575

 

$          30,764

 

$              46,575

 Supplemental Cash Flow Information:

 

 

 

 

 

    Cash paid for income taxes

$                -- 

 

$                 -- 

 

$                      -- 

    Cash paid for interest

   $                -- 

 

$                 -- 

 

$             16,955 

   Supplemental Disclosure on Noncash Investing and Financing Activities

 

 

 

 

 

    Stock issued for debt

$                 --

 

     $       700,000

 

$            507,500

    Outstanding notes payable converted to stock

--

 

--

 

         3,218,599 

    Expiration of warrants outstanding

--

 

--

 

2,361,785 

    Subscription receivable

--

 

--

 

50,000 

    Recognition of discounts on convertible notes payable

--

 

--

 

2,069,003 

    Extinguishment of unamortized discounts on modified convertible notes payable

               --

 

                 --

 

          (17,477)

    Debt discounts on convertible notes

$       (20,000)

 

     $     (548,248)

 

$        (568,248)


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



5





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

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. and its subsidiaries (the “Company”). These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries for the year ended December 31, 2012 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2013. 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, 2013.


Nature of Operations – The Company is located near Salt Lake City, in Draper, Utah and is a development stage company engaged principally in designing, engineering, and manufacturing sensor technology products and equipment using Bend Sensors® flexible potentiometer technology. The Company suffered losses of $688,183 and $579,774 and used cash in operating activities of $420,499 and $404,055 during the nine months ended September 30, 2013 and 2012, respectively. Through September 30, 2013, the Company had an accumulated deficit of $20,136,003. The Company is in the development stage and has not earned any appreciable revenue during the period from February 24, 2004 (date of emergence from bankruptcy) through September 30, 2013. These matters raise doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.


From 2008 through 2012 the Company raised $2,926,391 in additional capital, including accrued interest, through the issuance of long and short-term notes to various entities, including related parties. All of the notes had an annual interest rate of 10% to 12% and were secured by the Company’s business equipment. The notes also had a conversion feature for restricted common shares ranging from $.07 to $.25 per share with maturity dates from March 31, 2008 to December 31, 2012. However, prior to December 31, 2012, all but $327,525 of  the convertible notes were converted to an aggregate of 13,210,663 shares of the Company's restricted common stock at an average share price of about $.17 per share. These totals include the conversion of the Maestro Investment LLC line of credit entered into November 2, 2010 and similar debt instruments issued and converted over the past two years.


During 2013, the Company has raised an additional $425,000 in operating capital through the issuance of short-term notes to Capital Communications LLC.  The notes have an annual interest rate of 10% and a default rate of 18% annually. The notes are secured by the Company’s business equipment and have a conversion feature for restricted common shares ranging from $.05 to $.08 per share with various maturity dates during the year.


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. The cash and equivalents of $46,575 at September 30, 2013 and $42,024 at December 31, 2012 represent cash on deposit in various bank accounts with a financial institution.   


Fair Value of Financial Instruments - The carrying amounts reported in the balance sheets for accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term nature of these financial instruments. The carrying amounts reported for notes payable approximate fair value because the underlying instruments are at interest rates which approximate current market rates.


Accounts Receivable – Trade accounts receivable are recorded at the time product is shipped or services are provided, including any shipping and handling fees. Due to the limited amount of transactions, collectability of the trade receivables is reasonably assured, therefore the Company has not created an allowance for doubtful accounts.





6





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Most contracts associated with design and development engineering require a deposit of up to 50% of the quoted price of the initial phase of such contracts prior to the commencement of work. As the Company completes each phase or milestone of such contracts additional funding is normally required from the customer. These deposits are considered deferred income until each phase or milestone is completed and accepted by the customer, at which time the agreed upon price for that particular phase of the contract is billed to the customer and the deposit applied. As the Company’s revenues and customer base increase, an allowance policy will be established.


Inventories – Inventories are stated at the lower of cost or market. Cost is determined by using the first in, first out (FIFO) method.  Inventories consist of raw materials.


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.


Valuation of Long-lived Assets – The carrying values of the Company’s long-lived assets are reviewed for impairment quarterly 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. The Company’s analysis did not indicate any impairment of assets as of September  30, 2013.


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 rights to several patents and proprietary technology.  Patents and technology are amortized from the date the Company acquires or is awarded the patent or technology rights, 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. The Company’s analysis did not indicate any impairment of intangible assets as of September 30, 2013.


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


Goodwill – Goodwill represents the excess of the Company’s reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually, or when a triggering event occurs. As described in Accounting Standards Codification (“ACS”) 360, the Company has adopted the two step goodwill impairment analysis that includes quantitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. A fair-value-based test is applied at the overall Company level. The test compares the estimated fair value of the Company at the date of the analysis to the carrying value of its net assets. The analysis also requires various judgments and estimates, including general and macroeconomic conditions, industry and the Company’s targeted market conditions, as well as relevant entity-specific events; such as a change in the market for the Company’s products and services. After considering the qualitative factors that would indicate a need for interim impairment of goodwill and applying the two-step process described in ASC 360, management has determined that the value of Company’s assets is not more likely than not less than the carrying value of the Company including goodwill, and that no impairment charge needs be recognized during the reporting periods.


Revenue Recognition – Revenue is recognized when persuasive evidence of an arrangement exists, services have been provided or goods delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenue from the sale of products is recorded at the time of shipment to the customers.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the





7






FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contracts are met and then recognized as licensing royalty revenue over the remaining term of the contracts.


Stock-Based Compensation – Under ASC Topic 718, Stock Compensation, the Company is required to recognize the cost of employee services received in exchange for stock options and awards of equity instruments based on the grant-date fair value of such options and awards, over the period they vest.  Prior to 2006, no compensation was recorded in earnings for the Company’s stock-based options granted under the 2005 Stock Incentive Plan (the “Plan”).  Under ASC 718, all share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in operations over the requisite service period.  On January 1, 2006, the

Company adopted the provisions of ASC 718, for its share-based compensations plans and began recognizing the unvested portion of employee compensation from stock options and awards equal to the unamortized grant-date fair value over the remaining vesting period.  Furthermore, compensation costs will also be recognized for any awards issued, modified, repurchased, or canceled after January 1, 2006.


Basic and Diluted Earnings Per Share – Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. At September 30, 2013, there were outstanding options to purchase 2,024,000 shares of common stock. These options were not included in the computation of diluted earnings because the related exercise prices were greater than the average market price of the common shares.

NOTE 2 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 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 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. 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. The Company uses the simplified method to calculate the expected term. 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.


During the nine month period ended September 30, 2013 the Company recognized $0 of stock-based compensation expense, compared to $0 during the same period in 2012. There were 2,024,000 employee stock options outstanding at September 30, 2013. A summary of all employee options outstanding and exercisable under the plan as of September 30, 2013, and changes during the nine months then ended is set forth below:



8





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)




Options

Shares

Weighted

Average

 Exercise

 Price

Weighted Average Remaining Contractual  Life (Years)

Aggregate Intrinsic Value

 

 

 

 

 

Outstanding at the beginning of period

2,024,000

$           1.10

1.92

$   -   

 

 

 

 

 

Granted

       - 

       - 

-

  -

 

 

 

 

 

Expired

      - 

                  -

-

   -

 

 

                

 

 

Forfeited

-

-

-

    -

 

 

 

 

 

Outstanding at the end of Period

2,024,000

 $           1.10

1.92

$  -

 

 

 

 

 

Exercisable at the end of Period

2,024,000

 $           1.10

1.92

$   -



Based upon the current options issued as of September 30, 2013, there was no additional unrecognized compensation cost related to employee stock options that will be recognized.


NOTE 3 – ISSUANCE OF STOCK


On May 30, 2013 the Company issued 344,900 restricted shares at $.09 per share, in lieu of cash, to a consultant for marketing and consulting services and cancelled $30,000 of Company debt.


On July 5, 2013 the Company issued 1,550,000 restricted shares at $.06 per share, in lieu of cash, for investor relations services and cancelled $100,000 of Company debt.


On July 15, 2013 the Company issued 2,000,000 restricted shares at $.06 per share, in lieu of cash, for investor relations services and cancelled $120,000 of Company debt.


NOTE 4 – RELATED PARTY TRANSACTIONS


The Company has a related party payable to its President, CEO and Director for reimbursement of travel and other related expenses incurred on behalf of the Company. The amount due to the President as of September  30, 2013 and December 31, 2012 is $3,034 and $6,694, respectively.


The Company has a related party payable to its Chief Financial Officer for services provided to the Company. The amount due to the Chief Financial Officer as of September 30, 2013 and December 31, 2012 is $3,000 and $4,500, respectively.


NOTE 5 – NOTES PAYABLE


During 2012, the Company raised $587,525 in additional capital through the issuance of long and short-term notes to SRX Investment and Empire Fund Management. All of the notes had an annual interest rate of 10% and were secured by the Company’s business equipment. The notes also had a conversion feature for restricted common shares ranging from $.08 to $.10 per share with various maturity dates during the year. However prior to December 31, 2012 all but $287,525 of the convertible notes were converted to an aggregate of 3,000,000 shares of the




9





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Company's restricted common stock at a share price of about $.10 per share. Because the conversion price was greater than the fair market value of the stock being traded, the Company recognized a gain of $67,500


On August 8, 2011, the Company issued a promissory note for $40,000 to an existing shareholder. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before July 31, 2012 and has a conversion feature for restricted common shares at $0.20 per share. Management is negotiating to extend this note to December 31, 2013 under similar terms.


On January 15, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due

and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.08 per share.


On January 31, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.07 per share.


On February 19, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.07 per share.


On February 28, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.07 per share.


On March 27, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.07 per share. Due to the fact that the trading price of our stock was greater than the stated conversion rate of this note, a discount of $3,571 for the beneficial conversion was recorded against this note and has been amortized against interest expense through the life of the note. At the time of issue,  an additional charge to interest expense of $3,571 was recorded as part of the amortization of the beneficial conversion feature of this note.

 

On March 27, 2013 the Company issued a promissory note for $15,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $0.07 per share. Due to the fact that the trading price of our stock was greater than the stated conversion rate of this note, a discount of $2,143 for the beneficial conversion was recorded against this note and has been amortized against interest expense through the life of the note. At the time of issue, an additional charge to interest expense of $2,143 was recorded as part of the amortization of the beneficial conversion feature of this note.


On March 31, 2013 the Company issued a promissory note for $10,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note, and all accrued interest is due and payable on or before June 30, 2013, and has a conversion feature for restricted common shares at $0.07 per share.  


On April 17, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $.07 per share.

Due to the fact the trading price of the stock was greater than the stated conversion rate of this note, a discount of $3,571 for the beneficial conversion was recorded against this note and has been amortized against interest expense




10





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


through the life of the note. At the time of issue, an additional charge to interest expense of $3,571 was recorded as part of the amortization of the beneficial conversion feature of this note.


On April 30, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before June 30, 2013 and has a conversion feature for restricted common shares at $.07 per share.


On May 14, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before August 31, 2013 and has a conversion feature for restricted common shares at $.06 per share


On May 24, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before August 31, 2013 and has a conversion feature for restricted common shares at $.06 per share.


On June 25, 2013 the Company issued two promissory notes for $25,000 each for a total of $50,000. The notes have an annual interest rate of 10% and are secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before August 31, 2013 and has a conversion feature for restricted common shares at $.05 per share.


On July 26, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before September 30, 2013 and has a conversion feature for restricted common shares at $.05 per share


On July 31, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before September 30, 2013 and has a conversion feature for restricted common shares at $.05 per share


On August 26, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before September 30, 2013 and has a conversion feature for restricted common shares at $.05 per share


On September 3, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before September 30, 2013 and has a conversion feature for restricted common shares at $.05 per share


On September 27, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before September 30, 2013 and has a conversion feature for restricted common shares at $.05 per share


NOTE 6 - LITIGATION


R&D Products, LLC - On June 23, 2010, the Company, along with David B. Beck, the Company's Director of Engineering, filed a complaint against R&D Products, LLC, Persimmon Investments, Inc. and Jules A. deGreef, the managing member of R&D Products, LLC. The complaint alleged that all of the intellectual properties owned by R&D Products and Mr. deGreef, specifically patented applications using Bend Sensor® technology that were filed jointly by Mr. Beck and Mr. deGreef, and later assigned solely to Mr. deGreef and R&D Products, are the property of the Company. The assignment by Mr. Beck of his rights in the patents and intellectual properties were improperly given and are the property of the Company. The Company believed that since Mr. Beck was an employee of the



11





FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED


Company during the time that he became the primary creative force and inventor of the Bend Sensor® applications for R&D Products and Mr. deGreef, and the inventions and applications were created using Flexpoint resources, the Company claimed that such intellectual properties, patents, etc. filed by deGreef, Persimmon and R&D belong to Flexpoint and therefore is sought financial damages and ownership of all intellectual rights, patents and inventions created by Mr. Beck for deGreef, Persimmon and R&D Products.  

 

On April 9, 2013, the parties of the above referenced litigation reached a favorable universal settlement agreement that reinforces the Company's rights to the intellectual properties and their related products, including the medical bed. In order to secure the Company had exclusive rights to all patents and intellectual properties associated with this litigation the Company advanced to Mr. deGreef $25,000 to bring current all of the filing and maintenance fees for the patents detailed in the law suit. The advance is secured by a promissory note with an annual interest rate of 10% to be paid no later than April 8, 2015.


NOTE 7 - COMMITMENTS AND CONTINGENCIES


On the same date as part of the settlement agreement (see Note 6- Litigation), the Company entered into an exclusive licensing agreement that granted the Company the sole and exclusive rights to all products, devices, and commercial applications of any type or nature that relate to or are derived from the patents and application for patents controlled by Mr. deGreef and his companies. As additional compensation for the settlement the Company also received a note in the amount of $360,000 from the deGreef companies to be paid with accrued interest no later than April 8, 2015 through future royalties generated from the exclusive rights to technology specifically identified in the settlement and licensing agreements. The note has an annual interest rate of 5% and is secured by the intellectual properties of Mr. deGreef and his companies, including patents issued and those currently under application and any and all devices derived from such.


At the time of this filing the Company does not have orders for products or devices; contracts for, or contracts that are currently being negotiated; or any type of existing or negotiated royalty agreement that uses the patents or technology identified in the settlement and licensing agreement. And because the source of repayment of the $360,000 note receivable is from future royalty income from the sales of product, devices or uses of the technology, as stipulated in Accounting Standards Codification ("ACS") 450 the Company is not permitted at this time to recognize a contingent asset.  At such time as royalty income can be reasonably estimated and is "virtually certain", the Company will recognize the note receivable.   


NOTE 8 – NEW ACCOUNTING PRONOUNCEMENTS


After evaluating the recent accounting pronouncements through the date of this filing, the Company has concluded that application of these pronouncements will have no material impact on the Company’s financial results.


NOTE 9 - SUBSEQUENT EVENTS


On October 10, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before November 30, 2013 and has a conversion feature for restricted common shares at $.05 per share. Due to the fact the trading price of the stock was greater than the stated conversion rate of this note, a discount of approximately $14,000 for the beneficial conversion will be recorded against this note and has been amortized against interest expense through the life of the note.





12





 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 development stage company principally engaged in designing, engineering and manufacturing bend sensor technology and devices that use its patented Bend Sensor® technology, (a flexible potentiometer technology). For the past four years we have been making improvements to our technology and proving the versatility and durability of the Bend Sensor® by manufacturing Bend Sensor® devices and related products and introducing these to a variety of industries. We currently own nine patents and through our research and development efforts are in the process of filing for more that include fully integrated products being sold and supplied to our limited customer base. We have also jointly developing additional commercially viable products, including a universal sensor that will be used in the automotive, medical and industrial industries.

On April 9, 2013 we settled all disputes with R&D Products and their related parties. The settlement agreement gives the Company exclusive rights to over four additional patents, patent applications and related products that we anticipate opening or expanding our current customer base. With the settlement of the litigation with R&D Products and Mr. deGreef, (See Part II, Item I, below), we believe that projects that have been on hold since the litigation started will get to market quickly and greatly enhance our product offerings and will provide additional opportunity to expand our customer base over the next 12 months and improve our revenue opportunities.

Our patented technology continues to gain recognition in various markets and industries as evidenced by the recent receipt of an initial production order from CPS Color Equipment S.p.A Italy and an order from a Fortune 100 automotive maker for our horn system to be installed in a limited number of vehicles that will complete their “in-vehicle-testing” process that is required prior to moving forward with incorporating our system into various platforms of automobiles and trucks. Over the next six to nine months we will concentrate our marketing efforts and limited financial resources on current projects that we believe can be brought to market in the shortest period. We anticipate having additional products featuring our patented Bend Sensor® technology on the market over the next 8 to 10 months including products in the automotive, medical, sport shoe, residential home care and industrial control industries.

Over the past year we have been enhancing our relationships with various automotive Tier 1 suppliers as they have continued testing and proving our patented horn and seat switch reliability. Over the past six months we announced that our steering wheel horn pad received implementation ready status from a U.S. Fortune 100 automaker that has also identified up to four vehicle platforms being considered for the Company’s longer lasting and more cost effective horn switch. We anticipate the in-vehicle testing completed by mid-November 2013.


We have also developed new types of products for our Bend Sensor® technologies and continue to receive small repeat production orders from existing customers. We have made improvements on our initial prototype for a Home Monitoring Presence Detection System using our Bend Sensor® technologies and have received development and design orders from various industries including the military. In addition to the horn switch, we continue working with market makers and Tier 1 automotive suppliers in the U.S. and Europe on numerous other applications for our sensors and devises.




13





Based upon our discussions within the automotive industry in the U.S. and Europe our unique sensor systems meets the requirements for manufactures to have lighter weight more fuel efficient cars. Our Bend Sensor® is lighter in weight, has fewer moving parts than conventional sensing devices, is more versatile and, due to its unique design is more cost effective. Product and design changes in the automotive industry are slow, averaging two to three years before actually being incorporated into a commercially viable automotive platform. Because of our recent work with several Tier 1 suppliers, we have shown the Bend Sensor® to be viable as the next generation of sensing devises to the industry. Due to the advanced technology of the Bend Sensor® and its versatility of applications we anticipate being a part of the changes taking place in the automotive, energy, industrial control and technological industries.


During the past three months we completed phase two of the disposable directional colonoscope for Haemoband Surgical, Ltd, a Northern Ireland based company that specializes in unique medical devices. The estimated volumes quoted for this device are between 500,000 to 1 million sensors annually. The application will use a sensor that is an adaptation of a sensor that we already have commercially available; therefore the cost associated with the development of this medical application has been marginal. With the completion of phase two management believes the Company moves closer to an agreement for a long-term contract with Haemoband.  It is estimated that the annual demand for colonoscopy procedures ranges from 2.21 to 7.96 million in the United States and as the overall population continues to age more procedures will be required. One of the difficulties with the procedure is providing an inexpensive means of locating the exact position of the colonoscopes. With the use of our sensor array and monitoring equipment the initial testing has shown that with the Bend Sensor® technology it is possible to locate the positioning of the colonoscopes. It is anticipated that completion and commercialization of this product will open up significant other markets for additional products that uses similar equipment for other unrelated products in the medical industry.


The Company continues working with HTK Engineering, LLC who is currently marketing their safety mechanism specifically designed for garbage trucks and other large commercial vehicles. Most commercial vehicles have an "air braking system" which can lose pressure and disengage the brakes while the vehicle is still running. Our Bend Sensor® technology is the key component of the HTK system which provides a backup braking system preventing the vehicle from inadvertently rolling into people, buildings or other vehicles. Part of HTK's marketing effort has been to involve insurance companies who have paid claims related to the initial brake failure. Because the HTK system is easily installed and adaptable to most vehicles insurance companies have indicated they would provide a reduction in premiums should their customers install the HTK system. There are over 179,000 garbage and recycling trucks in use in the United States. HTK is also pursuing opportunities for the system throughout Europe and Asia.


Through our relationship with Monnit Corporation, a cutting edge supplier of wireless sensing devices, we have jointly developed a versatile "plug and play" Wireless Flex Sensor that can measure mechanical movement, air flow, water flow, or even vibration. The device transmits this data wirelessly between Monnit's local sensor network gateways and the iMonnit online data monitoring system, which records sensor information and sends notifications via text or email if user-defined conditions are met or exceeded.  In an age of smart phones and web based information Monnit's technology will help expedite development of projects and enable us to pursue applications that traditional wiring would have been costly and time consuming. The new devise can be readily adapted for everything from door hinges to air ducts for motion and flow measurements. The jointly developed Wireless Flex Sensor complements Monnit's existing line of wireless sensors, which are designed to detect and monitor functions that are critical to business or personal life, including temperature, water, humidity, light, motion, movement, distress and much more. Monnit is an established firm with a host of major clients, including Walgreen's, 3M, HP and Accenture among many others.


We continue to receive orders from Intertek Industrial Corp., for their ProTek System Their ProTek System is an automotive seat monitoring device integrated into emergency response vehicles.  This monitoring device places the Company’s Bend Sensors® in each rear passenger seat with a monitor viewable to the vehicle’s driver.  The foolproof system informs the driver if the emergency medical technicians are seated and properly secured prior to departure and while the vehicle is in motion. The system is installed in the seats of the rear compartments of the emergency vehicle and provides the driver with constant feedback as to the “seated and secured” status of passengers and personnel in the rear of the vehicle. The system is currently installed in ambulances and is being tested for use in other types of emergency vehicles. Through its relationship with Intertek the Company has further validated its technology in the automotive and safety industries and  is currently working with other companies on similar systems for buses, cabs and heavy equipment operators to ensure the safety of the their passengers and drivers. A national surge in ambulance accidents has called for increased safety standards for emergency vehicles. Due to the rise in injuries and fatalities that result from these accidents, the National Fire Protection Association (NFPA) has taken on the task of rewriting the ambulance standard. As a result there is currently national legislation



14





proposed that could take effect by the end of 2013. The proposed legislation will require a safety system similar to Intertek's ProTek System, which will give Intertek a significant competitive advantage being first to market with an already proven system that will meet the legislative requirements.


Using our Bend Sensor® technology the Company has developed a patented medical bed and with the settlement with R&D Products and Mr. deGreef we are now able to openly market this unique bed. Because of the Bend Sensor’s® predictability the accompanying electronics of the bed are able to determine the position of the person in the bed and how they are moved. The bed has the ability to roll a patient left or right to relieve pressure areas that can cause bed sores or other life threatening complications for patients that are bed ridden as well as facilitate dressing changes. Needed adjustments can be programmed into the bed to relieve pressure areas to meet the required standards for patient care and comfort. The entire integrated system will also record the movements providing a chronological record of patient care. Our Bend Sensor® technology has many other medical applications that the Company is pursuing.


The Company anticipates marketing a similar bed as part of an in-home specialty mattress. The specialty (non-innerspring) segment of the bedding market has been growing rapidly over the past six to seven years. With the increasing demand of specialty mattresses almost every commercial mattress company has a specialty bed they promote. The Company has had some discussions with mattress companies who have expressed interest in the concept. Mr. deGreef has been intimately involved with the medical matress and other products that have been placed on hold during the law suit, and has successfully marketed these products in prior years. Mr. deGreef is currently in discussions with additional interested clients.   


Through our marketing efforts with Bend Tech, LLC we have reestablished our relationship with Mitch Voges and Maxed Out Golf (http://www.maxedoutgolf.com). Mr. Voges is a recognized expert in the golfing world, and has hands on experience in the development of innovative golf simulators and training devices. He pioneered the modern systems and methods for golf club fitting and developed a number of original concepts resulting in multiple U.S. Patents. In coordination with Maxed Out Golf we are developing a high tech golf training aid that will utilize a series of our Bend Sensors® in golf shoes and shafts and will provide feedback to a smart phone or iPad on weight distribution and club loading and impact. Maxed Out Golf is pushing to have this training devise available by spring of next year. Beyond its sport and recreational value, golf is a major industry that generates jobs, commerce, economic development and tax revenues for communities throughout the country. The total size of the golf economy nationally was estimated at $68.8 billion in 2011, up from $62 billion in 2000 (from http://www.wearegolf.org).     


Although, so far the volumes for our applications and devises have been relatively small we continue to receive follow up orders for the universal sensor that we jointly developed last year. We expect to receive additional orders from other customers for this sensor as it becomes more recognizable in the market. Currently our customers for this type of sensor include companies in the following industries; automobiles, trucking, emergency vehicles, public transportation, military and other governmental entities. As anticipated, the Company is beginning to see the potential for more significant volumes and revenues from the sale of this sensing devise over the next year and beyond.


Finalizing additional long-term revenue generating production contracts with other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts.  In the short term we must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor® and Bend Sensor® related technologies and products to the market.  Management believes that even though we have made positive strides forward with our business plan, it is likely that significant progress may not occur for the next three to six months, primarily due to the time it takes for negotiating such contracts.  Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable over the next six to nine months.


Management believes with the signing of the settlement agreement and receiving the exclusive rights to products that have proven in the past to generate revenue streams, and the recent orders received for its automotive and industrial control devises the Company is on the threshold of growing its customer base that should help in producing long-term production contracts that will be sustainable in the near future.






15





LIQUIDITY AND CAPITAL RESOURCES


Our revenue is primarily from design, contract, testing and limited production services and is not to a level to support our operations.  Management anticipates that we may not realize significant revenue within the next three to nine months.  From 2008 and through the first nine months of 2013 the Company has relied on proceeds from various convertible loans from existing shareholders, and others to fund our operations.


Since emerging from bankruptcy and for the past twelve months we have relied on the proceeds of convertible loans from various sources including existing shareholder and private placements. From 2008 through 2011 the Company secured $2,126,391 in convertible notes with annual interest rates ranging from 10% to 12%. The notes were secured by the Company's assets and had various maturity dates and conversion features ranging from $0.25 to $0.10 per share. During the same time period the Company issued 7,710,663 in restricted common stock to retire $1,798,866 in debt and accrued interest. From 2008 through 2011 the Company issued an additional 3,657,250 restricted common shares to cancel $847,732 in Company debt related to investor relations, marketing to the automotive industry and various insurance related expenses.


During 2012 the Company issued 4,045,700 in restricted common shares of stock in lieu of cash and cancelled $501,622 in Company debt. The shares were issued to satisfy the Company’s obligations for investor relations, sales and marketing expense and insurance expense associated with directors and officers insurance. The Company also issued 5,500,000 in restricted common shares of stock to retire $848,248 of the outstanding convertible notes and accrued interest, including the Maestro line of credit entered into in November 2010.  Due to the difference between the market value of the shares issued and the stated conversion rate of the notes on the date of conversion the Company recognized a net gain on debt conversion of $371,021.


Over the past nine months the Company has issued $425,000, in convertible promissory notes with conversion features ranging from $.05 to $.08 with an annual interest rate of 10%. The loans are secured by the Company's business assets with maturity dates ranging from June 30, 2013 to September 30, 2013. The proceeds of these notes were used to fund operations including the various development projects currently underway. Management is in the process of extending the due dates of the notes to the end of 2013.


Management believes that our current cash burn rate is approximately $50,000 per month and the proceeds from the convertible notes and our engineering and design fees will not totally fund our anticipated growth in operations. We will therefore need to raise additional financing. We believe that this additional financing will provide the needed capital to extend operations to the development and production of our growing product offerings and growing manufacturing opportunities. However, we may not be able to obtain financing, or the sources of financing, if any, may not continue to be available, and if available, they may be on terms unfavorable to us.


As we enter into production and development agreements we must ensure that those agreements provide adequate funding for any pre-production research and manufacturing costs. As we are successful in establishing agreements with adequate initial funding, management believes that our operations for the long term will be funded by revenues, licensing fees and royalties related to these agreements. However, other than the joint marketing agreements, that we believe will provide future revenues, we have not formalized any agreements during the past year and there can be no assurance that the agreements we currently have will come to fruition in the near future or that a desired technological application can be brought to market on a commercially viable basis.


FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES


Our principal commitments at September 30, 2013 consist of our operating lease of $8,450 per month, and total liabilities of $1,152,745, which includes $693,463 of convertible notes payable, net of discounts. Under the terms of our operating lease, the average monthly payments are $8,450, including common area maintenance through December 31, 2014. The total future minimum payments under this lease as of September 30, 2013 are $132,750.


From January 15, 2013 to April 30, 2013, the Company has issued eight promissory notes in the aggregate of $200,000, at 10% interest and are secured by the Company's equipment. The notes are due and payable on or before June 30, 2013 (See Note 5 to the financial statements). The Company has not paid these notes and management is in the process of extending the due dates of the notes to the end of 2013.


From May 14, 2013 to June 25, 2013, the Company has issued four promissory notes in the aggregate of $100,000, at 10% interest and are secured by the Company's equipment. The notes are due and payable on or before August 31,



16





2013 (See Note 5 to the financial statements). The Company has not paid these notes and management is in the process of extending the due dates of the notes to the end of 2013.


From July 3, 2013 to September 27, 2013, the Company has issued five promissory notes in the aggregate of $125,000, at 10% interest and are secured by the Company's equipment. The notes are due and payable on or before August 31, 2013 (See Note 5 to the financial statements). The Company has not paid these notes and management is in the process of extending the due dates of the notes to the end of 2013.


As of September 30, 2013 we had accounts payable of $240,219 related to normal operating expenses, including health insurance, utilities, production supplies, travel expense, and expenses for professional fees.


Accrued liabilities at September 30, 2013, were $169,063 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.  


On October 10, 2013 the Company issued a promissory note for $25,000. The note has an annual interest rate of 10% and is secured by the Company's equipment. The principle amount of the note and all accrued interest is due and payable on or before November 30, 2013 (See Note 9 to the financial statements).


OFF-BALANCE SHEET ARRANGEMENTS


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

 

CRITICAL ACCOUNTING ESTIMATES


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


The Company's goodwill represents the excess of its reorganization value over the fair value of the net assets upon emergence from bankruptcy. Goodwill is not amortized, therefore we test our goodwill for impairment annually or when a triggering event occur using a fair value approach. A fair value based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its nets assets. The test requires various judgments and estimates. During 2013 and 2012, the Company recorded an impairment charge of $0 and $208,747, respectively, to reduce the carrying value of the goodwill to its estimated fair value. As part of the impairment testing, 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. The analysis for the impairment test for the nine months ended September 30, 2013 compared the carrying value of the Company's net assets to the estimated fair value of the overall Company, and the present values of projected net cash flows of the Company over the next four years, based upon our analysis no additional impairment was recognized during the nine months ended September 30, 2013.


We test long-lived assets for impairment quarterly 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 lives 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. Under similar analysis no impairment charge was taken during the nine month period ended September 30, 2013. Impairment tests will be conducted on a quarterly basis and, should they indicate a carrying value in excess of fair value, additional charges 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 



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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 nine month periods ended September 30, 2013 and 2012 we recognized $0.00 and $0.00, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.


RESULTS OF OPERATIONS


The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and its subsidiaries and should be read in conjunction with our unaudited financial statements for the three and nine months ended September 30, 2013 and 2012, 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, 2012 and 2011.  

 


 

Three month period ended

September 30,

 

Nine month period ended

September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

Design, contract and testing revenue

$    33,407

 

$     13,837

 

$      75,182

 

$     40,711

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

271,854

 

325,632

 

781,748

 

906,230

 

 

 

 

 

 

 

 

 

 

Net other income (expense)

50,218

        

(9,994)

 

18,383

 

285,745

 

 

 

 

 

 

 

 

 

 

Net loss

(188,229)

 

(321,789)

 

(688,183)

 

(579,774)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

$     (0.01)

 

$      (0.01)

 

$       (0.01)

 

$      (0.02)

 



For the three and nine months ending September 30, 2013 revenue increased  by $19,570 and $34,471, respectively, when compared to the same interim periods in 2012. The increase in revenue was mostly due to the Company completing a portion of phases one and two of the Haemoband Surgical, Ltd, project. The Company continues to execute on its business plan by concentrating its marketing resources on a limited number of customers that have the potential to generate the most short-run 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 during the balance of 2013 and beyond, 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. But management anticipates that revenues will increase as we continue to execute our long-term business plan and cultivate larger customer base 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 design contract, development engineering, limited production and repeat orders from our existing customers. Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer. Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is recognized as licensing royalty revenue over the remaining term of the contract. Revenue from the sale of a product is recorded at the time of shipment to the customer.  


Of the $271,854 and $325,632 total operating costs and expense for the three months ending September 30, 2013 and 2012, respectively, $71,121 and $60,648 were for direct research and development cost, respectively. For the three months ended September 30, 2013, total operating expenses decreased by $53,778 when compared to the same period in 2012. The three month decrease was primarily due to the decrease in investor relationship expense that was partially offset by an increase in research and development expense to complete phase two of the Heamoband project. Total operating expense decreased by $124,482 for the nine months ending September 30, 2013 when



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compared to the same period in 2012. Of the $781,748 and $906,230 total operating expense for the nine months ending September 30, 2013 and 2012, respectively, $176,309 and $192,824 were for direct research and development cost, respectively. In addition the decrease in operating expense for the 2013 nine month period was partially due to reductions in compensation taken by the President of the Company and other cost cutting measures to preserve cash.


During the three months ending September 30, 2013, the Company recognized a gain of $68,450 from the issuance of stock to retire debt.  $220,000 of debt was converted to 3,550,000 at an aggregate of $0.6 per share when the fair market value at the time of conversion ranged from $0.041 to $0.044 per share on the date of conversion. This difference resulted in the recognition of a gain on conversion of debt of $68,450.


The chart below represents a summary of our condensed consolidated balance sheets at September 30, 2013 and December 31, 2012.



 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

 

Cash and cash equivalents

 

 

$            46,575

 

$            42,024

 

 

 

 

 

 

Total current assets

 

 

 

100,687

 

69,183

 

 

 

 

 

 

 

Total assets

 

 

 

5,483,218

 

5,598,750

 

 

 

 

 

 

 

Total liabilities

1,152,745

 

790,929

 

 

 

 

Deficit accumulated during the development stage

(20,136,003)

 

(19,447,820)

 

 

 

 

Total stockholders' equity

 

 

$        4,330,473

 

$      4,807,821


Cash and cash equivalents increased by $4,551 at September 30, 2013 compared to December 31, 2012. The slight increase in cash is due to the timing of payment of expenses and collection of accounts receivable. Our non-current assets decreased at September 30, 2013 due to the depreciation and amortization of long-lived assets. These assets include property and equipment valued at $78,600, net of depreciation; patents and proprietary technology of $400,464, net of amortization; goodwill of $4,896,917 and long-term deposits of $6,550 associated with the facility operating lease.   


Total liabilities increased by $361,816 at September 30, 2013; the increase was primarily due to the increase in convertible notes payable of $405,938 net of discount, used to fund operations. During the nine months ending September 30, 2013 the Company recognized $13,400 in deferred revenue on the completion of phase two of the Heamoband Surgical project and received an additional $10,000 for development of a sports shoe sensing devise. The $10,000 of deferred revenue will be recognized once the first phase of the sport shoe project is completed. Accrued liabilities and accounts payable decreased by $54,124 during the 2013 nine month period due to the issuance of restricted shares for  investor relations expense from prior periods.


INFLATION


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



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable to smaller reporting companies.



 



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ITEM 4.  CONTROLS AND PROCEDURES


(a)

Disclosure Controls and Procedures


As of the end of the period covered by this quarterly report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer evaluated whether information required to be disclosed is recorded, processed, summarized and reported within the specified periods, and is accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at that reasonable assurance level for the nine month period ending September 30, 2013


(b)

Changes in Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management reviewed our internal controls over financial reporting, and there have been no changes in our internal controls over financial reporting for the quarter ended September 30, 2013 that have materially affected, or are likely to affect, our internal controls over financial reporting.



PART II - OTHER INFORMATION


ITEM 1A.  RISK FACTORS


We have a history of losses and may never become profitable.


We are unable to fund our day-to-day operations from revenues and the lack of revenues for continued growth may cause us to delay our business development.  For the nine months ending September 30, 2013 we had negative cash flows from operating activities of $420,449. We will require additional financing to fund our short-term cash needs and we may be required to rely on debt financing, loans from related parties, and private placements of our common stock for that additional funding. Such funding sources may not be available or the terms of such funding sources may not be acceptable to the company. If the Company is unable to find such funding it could have a material adverse effect on our ability to continue as a going concern.


We may not have adequate resources to successfully manage anticipated growth.


We may not be equipped to successfully manage any possible future periods of rapid growth or expansion, which could be expected to place a significant strain on our managerial, operating, financial and other resources.  Our future performance will depend, in part, on our ability to manage growth effectively, which will require us to:


·

improve existing, and implement new, financial controls and systems, management information systems, operating, administrative, financial and accounting systems and controls,

·

maintain close coordination between engineering, programming, accounting, finance, marketing, sales and operations, and

·

attract and retain additional qualified technical and marketing personnel.


There is intense competition for management, technical and marketing personnel in our business.  The loss of the services of any of our key employees or our failure to attract and retain additional key employees could have a material adverse effect on our ability to continue as a going concern.


We may not have adequate manufacturing capacity to meet anticipated manufacturing contracts.


We have completed installation of our first manufacturing line; however, our agreement with the Walker Group will allow us to delay installation and approval of a second production line. The second manufacturing line will be needed as a result of anticipated increased manufacturing demand and improved manufacturing efficiencies. We anticipate qualifying our manufacturing facility for ISO/TS-16949 certification as the Company successfully obtains additional manufacturing contracts during the coming year. However, we cannot assure you that we will satisfy ISO/TS-16949 qualification or that the production lines will produce product in the volumes required or that the production lines will satisfy the requirements of our automotive customers.




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Our success is dependent on our intellectual property rights which are difficult to protect.


Our future success depends on our ability to protect our intellectual property. We use a combination of patents and other intellectual property arrangements to protect our intellectual property. There can be no assurance that the protection provided by our patents will be broad enough to prevent competitors from introducing similar products or that our patents, if challenged, will be upheld by courts of any jurisdiction. Patent infringement litigation, either to enforce patents or defend ourselves from infringement suits, will be expensive and could divert our resources from other planned uses. Patent applications filed in foreign countries and patents in these countries are subject to laws and procedures that differ from those in the U.S. and may not be as favorable to us. We also attempt to protect our confidential information through the use of confidentiality agreements and by limiting access to our facilities. There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our confidential information and intellectual properties from our competitors.


Research and development may result in problems which may become insurmountable to full implementation of production.

Customers request that we create prototypes and perform pre-production research and development. As a result, we are exposed to the risk that we may find problems in our designs that are insurmountable to fulfill production.  In that event, we would be unable to recover the costs of the pre-production research and development. However, we are currently unaware of any insurmountable problems with ongoing research and development that may prevent further development of an application.


Economic uncertainties will delay or eliminate new technological investments.


Due to the current downturn in the global economy and financial uncertainties, automakers and other potential customers could delay, significantly curtail or altogether eliminate any further investment in new technology including, the Bend Sensor® technology, until the global financial markets and economies stabilize. Due to our limited cash resources any delays in bringing our products and technology to market could have a material adverse effect on our ability to continue as a going concern.


Because we are significantly smaller than the majority of our competitors, we may lack the financial resources needed to capture increased market share.


The market for sensor devices is extremely competitive, and we expect that competition will intensify in the future. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures we face will not materially adversely affect our business, operating results or financial condition. Our primary competitors in the air bag market are International Electronics and Engineering, Siemens, Robert Bosch GmbH, Denso, Inc., Breed Technologies, TRW Automotive, Delphi Corporation, Autoliv Inc., Takata and Temic. We believe that none of our competitors have a product that is superior to our Bend Sensor® technology at this time. However, many of our competitors and potential competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships than we do. These competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products and markets than we can.


Ongoing industry consolidation among worldwide automotive parts suppliers and financial difficulties of U.S. auto makers may limit the market potential for our products.


In the automotive parts industry, there is a trend of consolidation through business combinations and acquisitions of complementary technologies among worldwide suppliers as these suppliers seek to build stronger customer relationships with automobile manufacturers. Automobile manufacturers look to Tier 1 suppliers (major suppliers) to provide fully engineered systems and pre-assembled combinations of components rather than individual components. This trend of consolidation of suppliers may result in fewer Tier 1 suppliers and thus limit the marketing opportunities for our Bend Sensor® technology.  In addition, U.S. automakers have closed plants, reduced their work force and some are emerging from bankruptcy. In addition, some Tier 1 suppliers are in bankruptcy or in financial difficulty. These industry trends may limit the market for our products.





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


On May 30, 2013 the Company issued 344,900 restricted shares of stock at an aggregate of $0.09 per share in lieu of cash, to Sukhminder “Bobby” Bedi for marketing consultant services and cancelled $30,000 of Company debt.  We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.


On July 5, 2013 the Company issued 1,550,000 shares of restricted stock at an aggregate of $0.06 per share to Compass Equity Partners, LLC to settle $100,000 of certain Company debt related to investor relations expense from September to December 2012.  The debt was converted at $0.6 per share and the fair market value was $0.041 per share on the date of conversion. This difference resulted in the recognition of a gain on conversion of debt of $36,450. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.


On July 15, 2013 the Company issued 2,000,000 shares of restricted stock at an aggregate of $0.06 per share to Liberty Partners, LLC to settle $120,000 of certain Company debt related to investor relations expense from January to June 2013.  The debt was converted at $0.6 per share and the fair market value was $0.044 per share on the date of conversion. This difference resulted in the recognition of a gain on conversion of debt of $32,000.We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.




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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 Thomas N. Strong pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

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



Part II Exhibits


No.

Description

3.1

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

3.2

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

10.1

Lease Agreement between Flexpoint Sensor and F.G.B.P., L.L.C., dated July 12, 2004 (Incorporated by reference to exhibit 10.2 of Form 10-QSB, filed November 15, 2004, as amended)

10.2

Addendum to Lease Agreement between Flexpoint Sensor and American Covers, Inc., dated March 29, 2012  (Incorporated by reference to exhibit 10.2 of Form 10-Q, filed May 15, 2012)

10.3

Form of Promissory Notes (Incorporated by reference to exhibit 10.3 of Form 10-Q, filed August 14, 2013)  

101.INS

XBRL Instance Document

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 are duly authorized.


FLEXPOINT SENSOR SYSTEMS, INC.


Date: November 13, 2013


/s/ Clark M. Mower

Clark M. Mower

President, Chief Executive Officer and Director


Date: November 8, 2006

/s/ Thomas N. Strong

Thomas N. Strong

Controller, Chief Financial Officer



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