The financial information set forth below with respect to our
condensed consolidated financial position as of September 30, 2022, the condensed consolidated statements of operations for the three
and nine months ended September 30, 2022 and 2021, the condensed consolidated statement of stockholders’ equity for the three and
nine months ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the nine months ended September
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 nine months ended September 30, 2022 and 2021, respectively, are not necessarily indicative
of results to be expected for any subsequent periods.
The accompanying notes are an integral part of these
condensed consolidated financial statements
The accompanying notes are an integral part of
these condensed consolidated financial statements
The accompanying notes are an integral part of these
condensed consolidated financial statements
The accompanying notes are an integral part of
these condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Interim Financial Statements – The
accompanying unaudited condensed consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. (the “Company”).
These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally
accepted in the United States of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated
financial statements of Flexpoint Sensor Systems, Inc. for the year ended December 31, 2021 included in the Company’s Form 10-K
filed with the Securities and Exchange Commission on March 31, 2022. 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, 2022.
Nature of Operations – Flexpoint Sensor Systems,
Inc. (the Company) is located in West Jordan, Utah. The Company’s activities to date have included acquiring equipment and enhancing
technology, obtaining financing, limited production and seeking long-term manufacturing contracts. The Company’s operations are
in designing, engineering, manufacturing and selling sensor technology and equipment using flexible potentiometer technology. Through
September 30, 2022, the Company continued to manufacture products and sensors to fill customer orders and provide engineering and design
work.
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.
Principles of Consolidation – The accompanying
financial statements include the accounts of Flexpoint Sensor Systems, Inc. and its wholly-owned subsidiary, Flexpoint International,
LLC. Intercompany transaction and accounts have been eliminated in consolidation.
Use of Estimates – The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue
and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents
are considered to be cash and highly liquid securities with original maturities of three months or less.
Fair Value Measurements - The fair value of a financial
instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices.
The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including
the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value
hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the
fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy
is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical
assets or liabilities.
Level 2: Observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated
by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that
are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the
fair value 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.
Accounts Receivable – Trade accounts receivable
are recorded at the time product is shipped or services are provided including any shipping and handling fees. Contracts associated with
design, development engineering and manufacturing generally require a deposit of 50%
of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project, or the appropriate
portion of the contract to meet scheduled deliveries is completed and shipped, and accepted by the customer, at which time the entire
contract price, or the appropriate portion of the contract, is billed to the customer and the deposit applied. The Company has established
an allowance for bad debts based on a historical experience and an analysis of risk associated with the account balances. The balance
in the allowance account was $105,790
and $105,790
as of September 30, 2022 and December 31, 2021, respectively.
Inventories – The Company does not currently
have inventory. However, as production levels increase inventories will be carried on the balance sheet. Inventories will be stated at
the lower of cost or market or net realizable value. Cost is determined by using the first in, first out (FIFO) method.
Property and Equipment– Property and equipment
are stated at cost. Additions and major improvements are capitalized while maintenance and repairs are charged to operations. Upon
trade-in, sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is recognized. Depreciation is computed using the straight-line method and is recognized over the estimated useful lives
of the property and equipment, which range from three
to ten
years.
Valuation of Long-lived Assets – The carrying values
of the Company’s long-lived assets are reviewed for impairment annually and whenever events or changes in circumstances indicate
that they may not be recoverable. When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying
value is reduced by the estimated excess of the carrying value over the projected discounted cash flows. Under similar analysis no impairment
charge was taken during the nine-month period ended September 30, 2022 and during the year ended December 31, 2021. Impairment tests will
be conducted on an annual basis and, should they indicate a carrying value in excess of fair value, additional impairment charges may
be required.
Intangible Assets – Costs to obtain or develop
patents are capitalized and amortized over the remaining life of the patents, and technology rights are amortized over their estimated
useful lives. The Company currently has the right to several patents and proprietary technology. Patents and technology are amortized
from the date the Company acquires or is awarded the patent or technology right, over their estimated useful lives, which range from 5
to 15 years.
An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the
intangible assets as determined by projected discounted net future cash flows. Under similar analysis there was no impairment charge taken
during the nine-month period ended September 30, 2022 and during the year ended December 31, 2021.
Research and Development – Research and development
costs are recognized as an expense during the period incurred, which is until the conceptual formulation, design, and testing of a process
is completed and the process has been determined to be commercially viable.
Lease Obligations – While the Company has adopted ASC
842 the Company has no leases at the date of this report that are required to be reported under ASC 842. As the Company enters into such
leases it will record obligations under all leases it has entered into pursuant to the reporting requirements under ASC 842, allocating
such obligations between current and long term.
Goodwill– Goodwill represents the excess of the Company’s
reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is
tested for impairment annually, or at interim periods when a triggering event occurs using a fair value approach. According to Accounting
Standards Codification (or “ASC”) 350-20 Intangibles – Goodwill and Other, a fair-value-based test is applied at the
overall Company level. The test compares the fair value of the Company to the carrying value of its net assets. This test requires various
judgments and estimates. The fair value of the Company is allocated to the Company’s assets and liabilities based upon their fair
values with the excess fair value allocated to goodwill. An impairment of goodwill is measured as the excess of the carrying amount of
goodwill over the determined fair value.
Revenue Recognition – On January 1, 2018, the Company
adopted ASC 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”).
We have applied the new revenue standard to all contracts as of the date of the initial adoption. The new revenue standard establishes
five steps whereby a transaction is analyzed to determine if revenue has been earned and can be recognized. The adoption of the new revenue
standard did not have any effect on our financial statements. The vast majority of our sales are made to order, for which orders we require
a deposit of 50%
of the value of the order. That amount is put in a customer deposit account until the entire order has been manufactured and shipped or
the appropriate portion of the project is completed to meet scheduled deliveries, invoiced and shipped. At the ship date, the Company
has no further obligations under that portion of the contract and the revenue from the sale is recognized.
A part of our customer base is made up of international customers. The
table below allocates revenue between domestic and international customers. The following table presents
Flexpoint Sensor Systems revenues disaggregated by region and product type:
| Three
months ended: |
|
September
30, |
|
|
|
September
30, |
| |
|
|
|
2022 |
|
|
|
|
|
2021 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Consumer |
Long-term |
|
|
|
|
Consumer |
Long-term |
|
| Segments |
|
|
Products |
Contract |
Total |
|
|
|
Products |
Contract |
Total |
| Domestic |
|
$ |
18,454 |
- |
18,454 |
|
|
$ |
631 |
- |
631 |
| International |
|
|
5,503 |
- |
5,503 |
|
|
|
55,192 |
- |
55,192 |
| |
|
$ |
23,957 |
- |
23,957 |
|
|
$ |
55,823 |
- |
55,823 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Components |
|
|
6,968 |
- |
6,968 |
|
|
|
55,823 |
- |
55,823 |
| Engineering Services |
|
|
16,989 |
- |
16,989 |
|
|
|
- |
- |
- |
| |
|
$ |
23,957 |
- |
23,957 |
|
|
$ |
55,823 |
- |
55,823 |
| Nine
months ended: |
|
September
30, |
|
|
|
September
30, |
| |
|
|
|
2022 |
|
|
|
|
|
2021 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Consumer |
Long-term |
|
|
|
|
Consumer |
Long-term |
|
| Segments |
|
|
Products |
Contract |
Total |
|
|
|
Products |
Contract |
Total |
| Domestic |
|
$ |
31,728 |
- |
31,728 |
|
|
$ |
25,953 |
- |
25,953 |
| International |
|
|
89,168 |
- |
89,168 |
|
|
|
129,714 |
- |
129,714 |
| |
|
$ |
120,896 |
- |
120,896 |
|
|
$ |
155,667 |
- |
155,667 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Components |
|
|
91,214 |
- |
91,214 |
|
|
|
154,667 |
- |
154,667 |
| Engineering Services |
|
|
29,682 |
- |
29,682 |
|
|
|
1,000 |
- |
1,000 |
| |
|
$ |
120,896 |
- |
120,896 |
|
|
$ |
155,667 |
- |
155,667 |
Basic and Diluted Loss Per Share – Basic loss per share
is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per
share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding
during the period. At September 30, 2022 and 2021 there were outstanding common share equivalents (options and convertible notes payable)
which amounted to 11,043,870
and 17,497,193
of common stock, respectively. These common share equivalents were not included in the computation of diluted earnings per share for the
three and nine-month periods ended September 30, 2022 and 2021 as their effect would have been anti-dilutive, thereby decreasing loss
per common share.
Concentrations and Credit Risk - The Company has a few major
customers who represent a significant portion of revenue, accounts receivable and notes receivable. During the nine-month period ended
September 30, 2022, four customers represented 81%
of sales and two customers represented 97%
of accounts receivable. The Company has a strong ongoing relationship with these customers with scheduled delivery extending through the
year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.
Income Taxes - The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards Board Accounting Codification (ASC) 740: Income Taxes. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets will
be reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized
Recent Accounting Pronouncements–On August 20, 2020
the FASB released ASU 2020-06 “Simplified Convertible Instrument Framework”. This pronouncement simplifies the convertible
debt accounting framework, eliminating, among other things, the beneficial conversion feature model. The adoption date of this pronouncement
is for fiscal years beginning after December 15, 2023, but allows for earlier adoption for fiscal years beginning after December 31, 2020.
The Company has elected to adopt this accounting treatment effective January 1, 2021. Its adoption will have a beneficial effect on its
financial statements in those instances when the conversion rate set by convertible notes is below the market price on the date the convertible
note is issued, as no beneficial conversion expense will be recorded.
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.
NOTE 2– GOING CONCERN
The Company continues to accumulate significant operating losses and has
an accumulated deficit of $30,736,491
at September 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.
NOTE 3 – NOTES PAYABLE
During the nine months ended September 30, 2022, the Company received
ten payments of $25,000
each, two payments of $20,000
and one payment of $27,776,
for a total of $317,776,
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 $125,000
on notes payable elected to convert the principal and $12,068
of accrued interest into 2,741,385
shares of common stock, resulting in a loss of $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 $612,776
as of September 30, 2022 is unsecured, non-interest bearing and due on demand. At September 30, 2022 there is $48,265
in accrued unpaid interest relating to these notes.
In August 2020 the Company received $50,000
from a large shareholder to meet operating expenses. The shareholder indicated that he would want the $50,000
loan repaid when the Company was in a position to do so. The shareholder subsequently provided an additional $5,000,
for a total loan of $55,000.
The balance is non-interest bearing and due on demand. During the year ended December 31, 2021, payments totaling $20,000
were made, and during the nine-month period ended September 30, 2022, a $5,000
payment was made against the loan, leaving a remaining balance of $30,000
which is non-interest bearing and due on demand.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable
At September 30, 2022, there are notes outstanding with principal
balances which total $180,000.
Of the notes, $140,000
are convertible notes bearing a 10%
annual rate of interest (with a 15%
default rate). Of these notes, $100,000
is convertible into shares of common stock at the rate of $0.05
per share and $40,000
is convertible at $0.07
per share. The remaining $40,000
is a convertible note entered into on August 8, 2011 with a former Company Director, at a conversion rate of $0.20
per share. That note was due on December
31, 2015 and bears a default interest rate of 10%.
The notes are in default and interest is accrued at the default rate. At September 30, 2022 there is $120,088
in accrued unpaid interest relating to these convertible notes.
In March 2022 the holders of $330,000
in convertible notes elected to convert the principal and $90,979
of accrued interest into 8,419,547
shares of restricted common stock. The Company recorded a loss on conversion of debt of $33,034
related to these transactions.
Convertible Note Payable - Related
Party
At September 30, 2022, there are notes outstanding with two directors of
the Company with balances of $164,257
and $54,257,
respectively. The notes bear an 8%
annual rate of interest with a 12%
default rate and are convertible into shares of restricted common stock. Of the notes, $114,514
is convertible into shares of restricted common stock at $0.07
per share and $104,000
of the notes are convertible at $0.06
per share. All of these notes have a maturity date of March
31, 2023. Therefore, the default rate of interest was not used in accruing interest due on these notes. At September 30,
2022 there is $81,238
in accrued unpaid interest relating to these related party convertible notes.
NOTE 5– STOCK OPTION PLANS
On August 25, 2005, the Board of Directors of the Company approved
and adopted the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and continued in effect
for 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 2,500,000
shares. The Company continues to utilize the Black-Scholes option-
pricing model for calculating the
fair value of the options granted as defined by ASC Topic 718, which is an acceptable valuation approach under ASC 718. This model requires
the input of subjective assumptions, including the expected price volatility of the underlying stock.
On August 24, 2015, the Board of Directors approved the issuance
of options to purchase 2,185,000
shares of the Company’s common stock. Of the total issued, 1,960,000
options were issued to replace options held by directors and employees which were to expire and 225,000
options were issued to new employees. Of the options issued, 640,000
have an option price of $0.14
per share, 500,000
have an option price of $0.15
per share, 995,000
have an option price of $0.20
per share, and 50,000
have an option price of $0.25
per share. Options issued as replacement shall have immediate vesting terms. Options which are not replacements shall vest over a two-year,
four-month period in equal installments on the last day of 2015, 2016 and 2017, respectively.
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 3,096,000
shares of common stock at exercise prices ranging from $0.15
to $2.07
per share. The options all vested by December 31, 2017 and expire 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 $0.05
per share. The Company recorded a charge of $8,203
as the result of this change.
As of the years ended December 31, 2005 through 2020, the Company
recognized a total of $2,451,971
of stock-based compensation expense, which includes charges of $8,203
in 2020, leaving $0
in unrecognized expense as of December 31, 2021. There were 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 September 30, 2022 is set forth below:
| Options |
Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life (Years) |
Aggregate
Intrinsic Value |
| |
|
|
|
|
| Outstanding at the beginning of period
|
1,900,000
|
$ 0.05 |
3.65 |
$ -- |
| Granted |
-- |
-- |
-- |
-- |
| Expired |
-- |
-- |
-- |
-- |
| Forfeited |
-- |
-- |
-- |
-- |
| Outstanding at the end of Period |
1,900,000
|
$ 0.05 |
2.90 |
$ -- |
| Exercisable at the end of Period |
1,900,000 |
$ 0.05 |
2.90 |
$
-- |
NOTE 6 – CAPITAL STOCK
Preferred Stock – There are 1,000,000
shares of preferred stock with a par value of $0.001
per share authorized. At September 30, 2022 and December 31, 2021, there were no
shares of preferred stock issued or outstanding.
Common Stock – There are 200,000,000
shares of common stock with a par value of $0.001
per share authorized. At September 30, 2022 and December 31, 2021, there were 125,557,174
and 114,396,242
shares of common stock issued and outstanding, respectively. The Company issued 11,160,932
shares of restricted common stock during the nine months ended September 30, 2022 for the retirement of $445,000
of notes payable and convertible notes, and $103,047
of accrued interest. See also Note 4.
NOTE 7– COMMITMENTS AND CONTINGENCIES
The Company currently occupies approximately 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 original lease was for $6,787 per
month and was 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 $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.
NOTE 8 – RELATED PARTY TRANSACTIONS
At September 30, 2022, there was $40,261
payable to the Chief Executive Officer. During the nine-months ended September 30, 2022 the Chief Executive Officer provided $11,800
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 $40,261
payable to its Chief Executive Officer for funds provided to meet the operating expense obligations of the Company.
At September 30, 2022, there was $1,000
payable to the Chairman of the Board. During the nine-months ended September 30, 2022 the Chairman of the Board provided $1,000
to be used for operating expenses.
NOTE 9 – SUBSEQUENT EVENTS
In October and November, 2022, the Company received
$75,000
in additional funding from holders 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 10%
per annum. The Company is recording the receipt of the funding as on demand notes 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.