FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

(UNAUDITED)For the Three and Six Months Ended June 30, 2020 and 2019

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

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

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

Accounts Receivable – Trade accounts receivable are recorded at the time product is shipped or services are provided including any shipping and handling fees. Contracts associated with design and development engineering and production generally require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project is completed and accepted by the customer, at which time the entire contract price is billed to the customer and the deposit applied. The Company has established an allowance for bad debts based on a historical experience and an analysis of risk associated with the account balances.  The balance in the allowance account was $102,140$114,991 and $102,140$114,991 in the periods ended SeptemberJune 30, 20172020 and December 31, 2016,2019, 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 six-month period ended June 30, 2020 and during the year ended December 31, 2019.  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 six-month period ended June 30, 2020 and during year ended December 31, 2019.

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

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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 recognized when persuasive evidenceanalyzed to determine if revenue has been earned and can be recognized.  The adoption of an arrangement exists, servicesthe 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 provided or goods delivered,manufactured and shipped.  At the price toship date, the buyer is fixed or determinableCompany has no further obligations under the contract and collectability is reasonably assured. Revenuethe 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 customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contracts

recognized.

are metA part of our customer base is made up of international customers.  The table below allocates revenue between domestic and then recognized as licensing royalty revenue over the remaining term of the contracts.  international customers.  The Company does not provide extended warranties or guarantees on its products.following table presents Flexpoint Sensor Systems revenues disaggregated by region and product type:

Stock-Based Compensation – The Company recognizes 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.   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. For the periods ended September 30, 2017 and 2016, the Company recognized expense for stock-based compensation of $14,916 and $25,295, respectively.

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 SeptemberJune 30, 20172020 and September 30, 2016,2019 there were outstanding common share equivalents (options and convertible notes payable) which amounted to 30,903,56725,196,690 and 24,459,697, respectively,22,248,463 of common stock.stock, respectively. These common share

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equivalents were not included in the computation of diluted lossearnings per share for the six-month periods ended June 30, 2020 and 2019 as their effect would have been anti-dilutive, thereby decreasing loss per common share.

Concentrations and Credit Risk - The Company has a few major customers who represent a significant portion of revenue, accounts receivable and notes receivable.  During the nine-monthsix-month period ended SeptemberJune 30, 2017, a customer who manufacturers gloves containing our sensors2020, four customers represented 18%85% of sales and three other customers represented 16%94% of accounts receivable.  The Company has a strong ongoing relationship with this customerthese 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.realized

Recent Accounting Pronouncements– In August 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815).”  The new standard amends the hedge accounting recognition and presentation requirements in ASC 815.  This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidated financial statements.

- 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 $26,935,740$29,221,211 at SeptemberJune 30, 2017.2020.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.  The Company has relied on raising

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

NOTE 3 – DERIVATIVE INSTRUMENTS

The Company had no derivative liability as of SeptemberJune 30, 2017, in the amount of $126,630 has a Level 3 fair value classification.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September 30, 20172020 and December 31, 2016:

2019.  

During the year ended 2016 and the period ended September 30, 2017,prior years, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares necessary to settle all convertible instruments, in accordance with ASC 815-40-25, the Company determined that the conversion features related to these notes are derivative instruments since we do not have control to increase the number of authorized shares to settle all convertible instruments.  The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

At September 30, 2017, the Company marked to market the fair value of the derivatives and determined a fair value of $126,630. The Company recorded a gain from change in fair value of derivatives of $112,185 for the nine month period ended September 30, 2017. During the nine months ended September 30, 2017, the Company recorded additional interest expense of $63,298 and debt discounts of $99,221 in connection with the recognition of derivative liabilities. The fair value of the embedded derivatives was determined using binomial lattice model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 81.33% to 118.34%, (3) weighted average risk-free interest rate of 1.06% to 1.31% (4) expected life of 0.25 to 1.25 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

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

As of September 30, 2017, liabilities measured at fair value on a recurring basis are summarized as follows:

Convertible Notes Payable

During 2015 the Company secured additional financing to cover its ongoing operations in the amount of $590,000 by issuing various convertible notes bearing 10% annual interest (15% default interest), secured by business assets and carrying exercise prices ranging between $0.025 and $0.07 per share. Additionally, during 2015 the Company issued $51,000 for a non-convertible note payable bearing 10% annual interest (15% default interest) and secured by the $51,157 note receivable held by the Company (see Note 2). During 2015, all of these notes (both convertible and non-convertible issued in 2014 and 2015) and accrued interest were either converted into common stock or extinguished and consolidated into two remaining convertible notes payable to two investors in principal amounts of $684,660 and $123,797 (with respective maturity dates of December 31, 2016 and November 30, 2016). Both notes are convertible at $0.05 per share, bear 10% annual interest rates (15% default interest) and are secured by business assets. During 2016 the Company approved the conversion of the convertible note payable in the amount of $123,797 into 2.7 million shares of common stock. As of September 30, 2017, the principle balance of the convertible note payable in the amount of $684,660 remains outstanding.

The Company entered intofiled an amendment to its Articles of Incorporation during the fourth quarter of 2019, increasing the number of shares authorized, which authorization was approved by a new promissory notevote of its shareholders.  The increased number of authorized shares would enable all convertible notes and stock options to be converted.  Therefore, the treatment of these financial instruments as derivatives is no longer required.

NOTE 4 – NOTES PAYABLE

The Company applied for up to $300,000 fromand received a third partySmall Business Administration loan under the Paycheck Protection Program in the amount of $59,500.  The loan was funded on May 25, 2017.  The note hasApril 30, 2020, bears an annual interest rate of 10%1% per annum and is secured by the Company’s equipment.  The note has a conversion feature for restricted common shares at $0.07 per share and a maturity date of July 31, 2018.April 30, 2025.  Under the terms of the borrowing it is expected that this entire loan amount will be forgiven at such time as the lending institution published the form under which the request for forgiveness of the loan can be filed.  The Company drew $40,000 against that note on June 2, 2017, $40,000 on July 13, 2017, $40,000 on August 14, 2017funds obtained under this loan were used for the payment of salaries, health insurance costs, rent and $40,000 on September 22, 2017.   utilities, all of which expenses qualify for the loan forgiveness under the terms of the loan.

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The Company entered intoNOTE 5 – CONVERTIBLE NOTES PAYABLE

Convertible Note Payable

At June 30, 2020, there are notes outstanding with principal balances which total $930,000. Of the notes, $890,000 are convertible notes bearing a convertible promissory note for up to $300,000 from a third party on July 1, 2016.  The note has an10% annual interest rate of 10%interest (with a 15% default rate) and is secured byare convertible into shares of common stock at the Company’s equipment.  The note has a conversion feature for restricted common shares atrate of $0.05 to $0.07 per share and a maturity date of December 31, 2016.  The Company drew $160,000 against that note during 2016 andshare.  $40,000 on January 6, 2017; $40,000 on January 31, 2017 $40,000 on March 7, 2017 and the balance of $20,000 on April 28, 2017.

On August 8, 2011, the Company entered intois a convertible note payableentered into on August 8, 2011 with a former Company Director, for $40,000. Thisat a rate of $0.20 per share.  That note was due on December 31, 2015, and bears an annuala default interest rate of 10% annual interest and is secured by business equipment..

Convertible Note Payable - Related Party

On September 1, 2017At June 30, 2020, there are notes outstanding with two directors of the Company issued a note for $10,000 towith balances of $164,257 and $54,256, respectively.  The notes bear an officer of the Company.  The note bears interest at the8% annual rate of 8%, hasinterest with a conversion feature for12% default rate, and are convertible into shares of restricted common stock. Of the notes, $114,513 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 DecemberMarch 31, 2018.  The note is secured by all of the Company’s business equipment.

On August 2, 2017 the Company issued a note for $10,000 to an officer of the Company.  The note bears interest at the rate of 8%, has a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2017.  The note is secured by all of the Company’s business equipment.

On July 12, 2017, an officer of the Company provided $7,000 to the Company under a line of credit.  On September 23, 2017 the Company paid $7,000 to fully retire that obligation.

On April 17, 2017 the Company issued a note for $20,000 to an officer of the Company.  The note bears interest at the rate of 8%, has a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2018.  The note is secured by all of the Company’s business equipment.

On July 1, 2016 and September 22, 2016, the Company issued two promissory notes for $10,000 each to an officer of the Company.  The notes bear interest at the rate of 10%, have a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2016.  Since the fair value of the common stock at the date of the July 1, 2016 advance was $0.07, no BCF was recorded.

2021.

NOTE 46 – 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 continuecontinued in effect for ten years, unless terminated.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 daythirty-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 options for shares surrendered shall have immediate vesting terms. Options which are not replacements shall vestvested over a two year four month

period in equal installments on the last day of 2015, 2016 and 2017, respectively.  We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.

Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Company's common stock has limited trading history. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Company's employee stock options.

Between August 25, 2005 and December 31, 2015,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 $0.14$0.15 to $2.07 per share.  The options vest over three yearsall vested by December 31, 2017 and expire 10 years from the date of grant.  The Company used the following assumptions in estimating the fair value

As of the options granted:

·

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

·

Expected term – Range of 3.7 years to 10.0 years

·

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

·

Dividend yield – 0%

·

Expected volatility – 200% to 424%

·

Weighted-average fair value - $0.16 to $2.07

During the nine months ended September 30, 2017,December 31, 2005 through 2019, the Company recognized a total of $14,916$2,443,768 of stock-based compensation expense, which includes charges of $0 in 2019 and $9 in 2018, leaving $3,153$0 in unrecognized expense as of September 30, 2017. During the nine months ended September 30, 2016, the Company recognized $25,295 in stock-based compensation expense.December 31, 2019. There were 2,185,000 and 2,185,000 employee stock options outstanding at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.  

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A summary of all employee options outstanding and exercisable under the plan as of SeptemberJune 30, 2017,2020, and changes during the three months then ended is set forth below:

NOTE 57 – CAPITAL STOCK

Preferred Stock – There are 1,000,000 shares of preferred stock with a par value of $0.001 per share authorized.  At SeptemberJune 30, 20172020 and December 31, 2016,2019, there were no shares of preferred stock issued or outstanding.

Common Stock – There are 100,000,000200,000,000 shares of common stock with a par value of $0.001 per share authorized.  NoAt June 30, 2020 and December 31, 2019, there were 99,713,464 shares of common stock were issued and outstanding.  The Company issued no stock during the ninesix months ended SeptemberJune 30, 2017.  2020.

NOTE 6 -8 – COMMITMENTS AND CONTINGENCIES

The Company currently occupies approximately 12,548 square feet of office and manufacturing space from F.G.B.P. LLC.  The building is located in a manufacturing facilitybusiness park in Draper, Utah.Utah that consists primarily of high tech manufacturing firms and is located adjacent to Utah’s main interstate highway.  The lease on the facility expired on December 31, 2014, at which time the Company entered into a threenew lease in 2019 for this facility.  The lease entered into is a month-to-month lease with a 90-day termination clause and includes a basic lease payment as well as an additional component for building costs and taxes.  The basic lease rate for Year 1 is $12,000 a month; it increases 3% each year extension which will expire on December 31, 2017.  Either party may terminatethereafter.  With the lease upon 90 day written notice.  Under the terms of the leasebasic and additional component, the Company paid $8,950expects to pay a total lease payment of approximately $14,635 per month in 2015 (the same rate as in 2014), $9,300 per month in 20162020.  The Company evaluated the lease under the new lease accounting standard and $9,600 per month in 2017.determined that it was a short-term lease due to the month-to-month provision and the 90-day notice of termination clause.

NOTE 79 – RELATED PARTY TRANSACTIONS

At SeptemberJune 30, 2017 and2020, there was no amount payable to related parties.  At December 31, 2016,2019, the Company had accountsamounts of $2,197 payable of $-0- and $1,420 to its Chief Executive OfficeOfficer for reimbursement of various operating expenses paid by himexpense reports which had been submitted for payment but were unpaid at December 31, 2019.  

In May 2019, the Company converted the amounts payable to officers to convertible notes in the courseamounts of business.$22,000 and $17,000.  The notes bear interest at the rate of 8% per annum with a default rate of 12%, are convertible into shares of common stock at $0.06 per share, and have a maturity date of March 31, 2021.

During the period an Officer ofAt June 30, 2020 and December 31, 2019, the Company and Director of the Company assumed a total of $54,513 in accrued liabilities owed by the Company.  The Company recorded the amount assumed as a duehad outstanding notes payable to related party on the balance sheetan officer in the amount of $54,513 as$164,257 and outstanding notes payable to a director in the amount of September 30, 2017.  The amounts due to both the Officer and Director accrue interest at 8%, have a conversion feature for restricted common shares at $0.07 per share and must be repaid by December 31, 2018.$54,256.

NOTE 8 -10 – SUBSEQUENT EVENTS

On November 1, 2017 the Company received a short-term loan in the amount of $20,000 from an officer of the Company.  The Company intends to repay the loan when funds are available.  No terms have been established for this loan at the date of this filing.  

On November 9, 2017 the Company authorized the conversion of promissory notes totaling $160,000 and accrued interest in the amount of $40,000 through the issuance of 4,000,000 shares of its restricted common stock.  The conversion rate was $0.05 per share,has evaluated subsequent events pursuant to the terms of the convertible note agreements. The stockASC Topic 855 and has not been issueddetermined that there are no events that require disclosure as of the date of this filing.  issuance.

The majority of non-essential businesses are still closed or operating on a limited basis.  It is therefore anticipated that revenue will continue to be negatively impacted through at a minimum the third quarter of 2020.  Our ability to generate revenue will be dependent upon the pace at which businesses are allowed to resume operations.

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

FORWARD LOOKING STATEMENTS

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

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

EXECUTIVE OVERVIEW

Flexpoint Sensor Systems, Inc. is a company engaged principally engaged in improving its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term sustainable manufacturing contracts.  Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing and manufacturing bendselling sensor technology and products usingfeaturing our Bend Sensor^® technology (a flexible potentiometer technology).  We continue to make further improvements to our technologies, manufacturing and developing fully integrated devices and related products that we have been marketing and selling to a variety of companies in diverse industries.  We are negotiating and signing agreements and contracts that have provided some limited revenues and have proven that our sensors are more durable, adaptable and cost effective than any other product currently on the market.  We own five patents, including patents on specific devices that use the Bend Sensor^® and have exclusive rights through licensing agreements to other patents and devices.equipment.

We are continuing to develop and enhanceThe recent COVID 19 Pandemic (“the Pandemic”) has had a dramatic effect on our intellectual properties that will result in additional patents being filed. The Company currently manufactures, and has jointly developed, eighteen products that are being sold and supplied to current customers and we continue to receive orders for custom prototype sensorsbusiness as well as the business of our standard sensors.  During 2017customers.  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 focused our marketing efforts onexperienced a significant slowdown in the size and number of larger domesticorders received and, international companieswhile we cannot predict when the influence of the Pandemic will end, we expect that have applications which have the potentialorders will return to greatlytheir former levels and increase the volume of sensors we are currently manufacturing.following a return to normal business operations.  

At September 30, 2017On August 20, 2019 the Company had at least sixteen global commercial partners covering a variety of different products.  In coordination with its partners, the Company introduced at least eight new products during 2017 and expects to have two to three more commercialized prior to the end of the year; including the product launch of a wearable shoe application expected to take place in Europe and the product launch in North America of a medical orthotics shoe product.  Management believes this growth in sales channels will allow the Company to grow at an increasingly accelerated rate over the next several quarters.  

Our sales and marketing efforts have been targeted towardannounced the development of new relationships with clients while maintaining and strengthening relationships already developed with several Tier 1 (major) suppliersthe world’s first digital bend sensor capable of automatically compensating for changes in the automotive industry.  We have builtenvironment, thus guaranteeing consistent performance across temperature and shipped ordershumidity variables. Easily integrated into multiple applications, the data gathered by the sensor will be digitally converted and transmitted, enhancing performance.

The Bend Sensor has traditionally been offered in analog form, but most engineers prefer sensors with digital interfaces such as accelerometers. More attractive to a number of these companiesonline catalog distributors, Flexpoint’s Digital Bend Sensor (DBS) has an intuitive nature, is more easily integrated with existing products, simplifies design and more importantly, reduces time to enable them to test the utilization of our sensors into their existing and developing product lines.market.  

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

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

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

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

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

During a conference call announcing second quarter 2019 operating results representatives of the Company announced that with the agreements that had been signed and the projects they were pursuing, it was transitioning from a development company to a sales and marketing company.  This represents a significant change for the Company.

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

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

On October 18, 2018, the Company announced it had signed a five year manufacturing and supply agreement with Counted LLC.  Counted LLC conceived of a medication delivery monitoring system and dispensing monitoring system.  Flexpoint designed and produced the monitoring system with Flexpoint features, Flexpoint technology and Flexpoint designed electronics to track and report the dispensing of medications in real time.  The information has the potential to be transmitted to physicians, pharmacists and government agencies.  Prototypes have been built and successfully tested with additional production and testing continuing through 2019 and the first quarter of 2020. Currently Counted has announced that they do not have sufficient funding to continue with the project and the company is pursuing other avenues to provide the funding or transfer the technology to another entity.  

In the rapidly growing and emerging wearables space, Flexpoint has recently received additional purchase orders from multiple glove manufacturers across various market sub-segments, including medical, gaming and virtual reality. The “speed to market” commercialization plans of these companies are driving this increased order volume.  Flexpoint is aggressively going after this evolving market. The recent Pandemic has slowed the orders and, while we announcedcannot predict when the influence of the Pandemic will end, we expect this pattern to continue and increase throughout the remainder of 2020 following a strategic relationship with HTK Safetyreturn to begin offering an integrated safety system utilizing thebusiness.  In aggregate, Bend Sensor^® technology.  In March 2017 we announced a collaborative working arrangement with 11 Health and Technologies Inc.wearables order volumes are expected to develop next generation productsnumber in the medical industry.  Flexpoint has also established relationships with several other medical IoT vendors.  These includetens of thousands in 2020. The wearables market segment is clearly one where our technology is easily adapted and truly illustrates our technological differentiation.  Flexpoint’s willingness and ability to customize sensors for these innovative companies like 11Health, Neofect, Gloreha and YouReHab; all withdeliver them at a focus on medical rehabilitation with a different approach.  Products from these companies range from gloves to prosthetics to virtual reality, all with the intention of improving medical health or medical rehab.  Medical IoT sensor volume is expected to be more than 50,000 sensors in 2017.

In March 2017 we announced a collaborative relationship with CaptoGlove, a company which manufactures a wearable virtual reality gaming motion controller.  Our companies will work togethercompetitive price point allows us to deliver innovative, integrated virtual reality/augmented reality (“VR/AR”) systemsreal value to mass markets.  We completedour customers.  Again the Global Covid 19 Pandemic has had a dramatic impact on the orders we have received, however in this quarter we received a significant purchase order from Manus and shippedfulfilled the initial portion of thefirst sensors from that order before the end of the second quarter and expect to complete and shipquarter.  It is expected that the entirebalance of the purchase order earlywill be fulfilled during the next year. Their ground-breakingquarter.    

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These groundbreaking glove systems, combined with unique, leading edge software applications, also adapt to a wide range orof other applications, including health rehabilitation, unmanned systems control, smartphone interaction and professional training across multiple industries.  

ManusVR, CaptoGlove and Virtual Motion Labs have products that are currently commercially available and feature the FlexpointIn addition to producing an array of Bend Sensor®.   A few other companies in this market are expected to release Bend Sensor® products in 2017. Flexpoint expects the purchase orders that are currently being fulfilled for ManusVR and CaptoGlove to significantly ramp up in volume and frequency throughout 2017 and early 2018.  Flexpoint has received orders for more than 150,000 sensors and related assemblies from multiple development partners around the globe. The Company began to fulfill the orders in the second quarter of 2017 and complete fulfillment is expected by early next year.  Based upon the increased orders, management expects significant revenue growth within the next six to twelve months. Demand continues to grow andSensors^®, the Company expectsis under agreement to receive increasingly larger volume orders before year endsupply integrated assemblies comprised of multiple sensor types and continuing into 2018.

The Company began selling and distributing sensors through two resellers in 2016.  Flexpoint has since greatly increased its relationships with resellers and is currently working with seven resellers across diverse industries. Some of these companies include Amazon, NoDNA, RobotShop, Karlsson Robotics, SPI and Infusion Systems.  We are receiving recurring sales from these resellers with most experiencing a growing number of sensors ordered each time.   We anticipate that sensor volume sold in 2017 through these channels should approach 25,000.

The biggest revenue contributors during the 2017 nine month period were for glove based products and the toy relationship.  Flexpoint, year-to-date, has delivered on approximately 200,000 sensors for its partnership with the toy manufacturer.  The Company expects annualized volumes for 2017 to be approximately a half a million sensors. Sensor volume from glove based applications is expected to exceed 175,000 in 2017.  associated electronics.

In October the Company made announcements relating to twoVR/VA marketspace, orders of its partners.  The first announced the receipt of additional production ordersincreasing size and frequency were received during 2019 from global market virtual reality leader Manus VR which broughtand Neofect as they strive to market the industry’s first fully functional virtual reality glove.  The possibilities and applications for these gloves extend far beyond the virtual reality market, which Goldman Sachs estimates will be an $80 billion market by 2025.

The second October announcement relates to the commercialization by Focal Wellness of wearable devices developed through a collaborative design relationship with the Company.  The initial product offering will be a wearable glove/sleeve targeted to people suffering from carpal tunnel syndrome.  The wearable device measures and monitors the individual’s wrist position using our Bend Sensor®.    

Our patented technology continues to gain recognition in various markets and industries as evidenced by orders from a Fortune 100 automotive maker for our horn system.  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. We expect to receive additionalfulfill production orders.  Flexpoint also received orders from other global VR/AR customers for this sensor as it becomes more recognizable induring 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.quarter.

Finalizing additional long-term, constant revenue generating production contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts.  InThis process has been impacted by the shortrecent Pandemic and we are unable to determine what the long term weeffect of these impacts will be at this time. We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor^® and Bend Sensor^® related technologies and products to the market.  Management believes that even though we are making positive strides forward with our business plan we will become cash flow positive by or before 2018 first quarter; however, it is likely that significant progress may be delayed for the next sixneed to nine 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.

raise additional operating capital.

LIQUIDITY AND CAPITAL RESOURCES

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

The Pandemic negatively impacted our revenue during the first two quarters of 2020, and has extended into the third quarter as well.  At this time it is impossible to accurately predict when this will end.  Many of our clients, to protect their employees, have sharply curtailed operations and have most employees working from home.  The long-term impact of the Pandemic is difficult to assess at this point, as it will be dependent on how rapidly our clients can resume their business operations and place orders with us for the needed sensors incorporated into their products.  Currently our revenue is primarily from product licensing, development, manufacturing and recurring sales with additional contributions to income from design contract, testing and limited production services for prototypes and samples, and limited production and is not tocurrently at a level to support our operations.  ForDepending upon the past twelve months we have relied onworld returning to some form of normalcy following the proceedsend of convertible loans from existing shareholders and private placements of our common stock.  However,the Pandemic, we believe, based upon current orders and projected orders over the next twelve months, that we could be producing sensors under long-term contracts in the future that will help support our existing operations and potential future growth. Management recognizes such contracts usually go through a long negotiation process and there can be no guarantee that we will be successful in our negotiations or that such contracts will be sufficient to support our current operations in the near future.

In 2019, we relied on the proceeds of convertible loans from existing shareholders, private placements of our common stock, and fees obtained under licensing agreements.  The balances of the convertible notes have a combined total of $1,148,513 as of June 30, 2020. The notes have an annual interest rate of 8% to 10% and default rates of 10% to 15%, have various maturity dates, and are secured by the Company’s business assets.

Management believes that our current cash burn rate is approximately $75,000$60,000 per monthmonth.  If the Pandemic ends and thebusiness returns to pre-pandemic levels, with proceeds from theadditional convertible notes and estimated revenues for manufacturing, production, engineering design and prototype products should be sufficient to fund the next twelve months of operations.  Our auditors have expressed doubt about our manufacturing, engineeringability to continue as a going concern and design feesthat we may not realize significant revenue or become profitable within the next twelve months. We will require additional financing to fund our short-term cash needs. We will have to rely on additional debt financing, loans from existing shareholders and private placements of common stock for additional funding. Based upon our anticipated purchase orders over the next twelve months the revenue generated will not totally fundbe sufficient to cover 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 ofoperating expenses, based on our growing product offerings and growing manufacturing opportunities.current burn rate. However, we may notcannot assure you that we will be able to obtain short-term financing, or thethat sources of such financing, if any, may notwill continue to be available, and if available, that they maywill be on terms unfavorablefavorable to us. Nor is there any guarantee that the projected volume of purchase orders will meet the volumes that we anticipate.

We also expect that in the short term we may have to continue to issue common stock to pay for services and agreements rather than use our limited cash resources.  Any issuance of common stock will likely be pursuant to exemptions provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our shareholders may experience dilution in the value per share of their common stock.  

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

FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES

Our principal commitments at SeptemberJune 30, 20172020 consisted of our operating lease of $9,600$14,635 per month, and total liabilities of $2,870,563,$3,252,831, which includes $1,467,488$1,148,513 of convertible notes payable, net of debt discounts.payable.  Accrued liabilities at SeptemberJune 30, 2017,2020, were $1,008,986$1,819,890 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.  

During the nine months ending September 30, 2017, the Company has raised an additional $340,000 in operating capital through the issuance of short-term notes.  The notes have an annual interest rate of 8% to 10% and a default rate of 12% to 15% annually. The notes, which total $1,544,660 (excluding debt discounts), are secured by the Company’s business equipment and have a conversion feature for restricted common shares at $0.05 to $0.07 per share.

On November 1, 2017 the Company received a short-term loan in the amount of $20,000 from an officer of the Company.  The Company intends to repay the loan when funds are available.  No terms have been established for this loan at the date of this filing.

On November 9, 2017 the Company authorized yet to be issued shares of common stock to Empire Fund Managers. The Company will issue 4,000,000 shares of restricted common stock at an average price of $0.05 per share in full settlement of promissory notes and accrued interest totaling $200,000.  

MAJOR CUSTOMER

The Company has a few major customer which is an American-based, Fortune 500, global toy manufacturing company which it supplies through its global assembly partnercustomers who representsrepresent a significant portion of revenue and accounts receivable. During the ninesix months ended SeptemberJune 30, 2017, the customer2020, four customers represented 18%85% of sales and represents 16%three other customers represented 94% of accounts receivable at September 30, 2017.receivable.  The Company has a strong ongoing relationship with

this customer these customers with scheduled product deliveries extending through the year and does not believe this concentration poses a significant risk, as apportion of the control for their products isare based entirely on the Company’s technologies.

OFF-BALANCE SHEET ARRANGEMENTS

Other than our current operating lease, weWe 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 20162019 and for the ninesix months ending Septemberended June 30, 2017,2020, the Company recorded no impairment charge to reduce the carrying value of the goodwill to its estimated fair value. As part of the impairment testing performed at December 31, 2016,2019, the Company considered factors such as the global market volatility, variables in the economy, and the overall uncertainty in the markets whichthat has resulted in a decline in the market price of the Company's stock price and market capitalization for a sustained period, as indicators for potential goodwill impairment.

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

Financial accounting standards require that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest. The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model. Option pricing 

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models require the input of highly sensitive assumptions, including expected stock volatility. Also,In addition, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. For the ninesix month periods ended SeptemberJune 30, 20172020 and 20162019, we recognized $14,916$0 and $25,295,$0, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.

RESULTS OF OPERATIONS

The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and should be read in conjunction with our unaudited financial statements for the three and nine months ended September 30, 2017 and 2016, 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, 2016 and 2015.

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2017:

For the three months ending September 30, 2017 revenue was $40,622, a $63,742 decrease when compared to the same period in 2016. The majority of the revenue for this period came from production of products. The Company continues to concentrate its marketing resources on a limited number of customers that have the greatest potential to generate the most short-term revenue while still building relationships with our larger customers. Management believes this approach has the highest potential to bring long-term commercially viable products to market and will provide sustainable cash flow to fund the Company's operations in the future. Currently, overall revenues are not sufficient to sustain our operations.  The recent Pandemic has had a dramatic effect on our business as well as the business of our customers.  The wide ranging effects on the World Wide business market has led to a general reluctance for businesses to move forward with entering into major commitments until their future markets have been clarified. Because of this, we have experienced a significant slowdown in the size and number of orders received and, while we cannot predict when the influence of the Pandemic will end, we expect that orders will return to their former levels and increase throughout the remainder of 2020 following a return to normal business operations.Following a return to normal business operations in the world, Management anticipates that revenues will increase as we continue to execute our long-term business plan and cultivate larger customer bases with our existing product offering. However, until the Pandemic ends and a long-term production contract is in place there is no guarantee that our current customer base will order in sufficient volumes to sustain our operations. Therefore, management continues to work with larger companies and industries and is hopeful that in the near future we will sign a long-term licensing or manufacturing contract.

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

The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and should be read in conjunction with our unaudited financial statements for the three and six months ended June 30, 2020 and 2019, 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, 2019 and 2018.

THREE MONTH PERIODS ENDED JUNE 30, 2020 AND 2019:

For the three months ending June 30, 2020 revenue was $42,195, a decrease of $530,251 when compared to the same period in 2019. The majority of the revenue variance for this period is from a $450,000 licensing agreement recognized in 2019.  The remaining part of the variance is attributable to the business slowdown created by the Pandemic.

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Of the $258,401$182,021 and $285,885$220,557 total operating costs and expense for the three months ending SeptemberJune 30, 20172020 and 2016,2019, respectively, $79,975$70,280 and $81,715$74,306 were for direct research and development cost, respectively. For the three months ended SeptemberJune 30, 2017,2020, total operating expenses decreased by $27,484$38,536 when compared to the same period in 2016, due primarily to decreased cost of revenues related to lower revenue and2019.  The decrease resulted from a reduction of amortization$43,905 decrease in rent expense due to the fully amortized status of some intellectual property.Company charging rent for customers it has provided both office and warehouse space in their building.  This rent sharing arrangement will continue, which will lower operating expenses going forward.   

Other expense for the three month period ended SeptemberJune 30, 20172020 was $10,179,$39,117, a $254,085$205,287 decrease compared to the same period in 2016.2019.  The decrease is attributable primarily to the difference in beneficial conversion chargesa loss of $254,157 on the convertible noteschange in 2017 versus 2016,fair value of derivative liabilities recorded in addition to2019, offset in part by a $90,325 gain on derivative recordedextinguishment of debt.  No similar gains or losses were incurred in 2017.   2020.

A net loss of $227,958$178,943 was realized for the three months ended SeptemberJune 30, 2017.  A net loss2020.  Net income of $445,785$107,485 was realized for the three month period ended SeptemberJune 30, 2016.2019 due to the other income items previously discussed.

NINESIX MONTH PERIODPERIODS ENDED SEPTEMBERJUNE 30, 2017:2020 AND 2019:

For the ninesix months ending SeptemberJune 30, 20172020 revenue was $256,323,$81,298, a $23,754 increasedecrease of $555,743 when compared to the same period in 2016.2019. The majority of the revenue variance for this period cameis attributable to the $450,000 license agreement revenue recognized in 2019. As earlier discussed, follow on orders from production products.  Management anticipates that revenues will increaseour customers have slowed as we continue to execute our long-term business plan and cultivate larger customer bases with our existing product offering.the economy has been negatively impacted by the current Pandemic.

Of the $842,935$437,380 and $847,179$441,250 total operating costs and expense for the ninesix months ending SeptemberJune 30, 20172020 and 2016,2019, respectively, $244,484$147,619 and $241,055$153,458 were for direct research and development cost, respectively. For the ninesix months ended SeptemberJune 30, 2017,2020, total operating expenses decreased by $4,244$3,870 when compared to the same period in 2016,2019, due primarily to decreasesa reduction in amortization charges on intellectual property.building rent.  

Other expense for the ninesix month period ended SeptemberJune 30, 20172020 was $126,317,$77,524, a $588,714$277,604 decrease compared to the same period in 2016.2019.  The decrease is primarily attributable primarily to the difference in beneficial conversion chargesloss of $288,694 on the convertible noteschange in 2017 versus 2016, offset in part by thefair value of derivative liabilities and a $90,325 gain on derivative valuation.   extinguishment of debt recorded in 2019 while in 2020 interest expense was reduced by $78,990.

A net loss of $712,929$433,606 was realized for the ninesix months ended SeptemberJune 30, 2017.2020.  A net loss of $1,329,641$159,337 was realized for the nineSix month period ended SeptemberJune 30, 2016.2019.

The chart below represents a summary of our condensed consolidated balance sheets at SeptemberJune 30, 20172020 and December 31, 2016.2019.

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Cash and cash equivalents increaseddecreased by $11,061$170,004 at SeptemberJune 30, 20172020 compared to December 31, 2016.2019. The increasedecrease in cash is due to the timing of payment of expenses, collection of accounts receivableoperating costs and the operating loss sustained for the six month period, offset in part by the proceeds from borrowings.the SBA loan obtained.  Our non-current assets decreased at SeptemberJune 30, 20172020 due to the amortizationdepreciation of long-lived assets.property and equipment.

Total liabilities increased by $673,808$307,523 at SeptemberJune 30, 2017.2020.  The increase was due primarily to the funding of operations through the issuance of convertible$59,500 note entered into, coupled with accruals made for marketing services, interest on notes payable, the accrued interest related to those notes, accruals for investor relations and insurance expenses and an increase in the derivative liabilities.payroll accruals.

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.

ITEM 4.  CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report we carried out an evaluation of the effectiveness of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer, andwho also serves as our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures.Officer.  Our controls and procedures are designed to allow information required to be disclosed in our reports to be recorded, processed, summarized and reported within the specified periods, and

accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  Based upon the evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective at that reasonable assurance level as of the end of the six-month period Septemberended June 30, 2017.2020.  

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

(b)

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended September 30, 2017

six months of 2020 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A.  RISK FACTORS

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

We are unable to fund our day-to-day operations from revenuesa smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, the lack of revenues for continued growth may cause us to delay our business development.  For the nine months ending September 30, 2017, we had negative cash flows from operating activities of $312,668. We will require additional financing to fund our short-term cash needs and we may beas such, are not 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 orprovide 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.

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.

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 VR/AR market are Interlink Electronics and manufacturers of accelerometers and IMU’s, (Inertial Measurement Units).  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 atunder 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.Item.

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

On November 9, 2017 the Board of Directors authorized the issuance of 4,000,000 shares of restricted common stock to be issued to Empire Fund Managers in consideration for promissory notes with interest totaling $200,000.  The shares will be issued in reliance on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.None.

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

ITEM 6. EXHIBITS

Part I Exhibits

SIGNATURES

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

FLEXPOINT SENSOR SYSTEMS, INC.

Date:   NovemberAugust 14, 20172020

/s/ Clark M. Mower

Clark M. Mower

President, Chief Executive Officer and Director,

Principal Financial Officer