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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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, development engineering and productionmanufacturing 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 $102,140$105,790 and $102,140$105,790 in the periods ended SeptemberJune 30, 20172021 and December 31, 2016,2020, 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, 2021 and during the year ended December 31, 2020. 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, 2021 and during the year ended December 31, 2020.

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 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 providedmanufactured and shipped or goods delivered, the priceappropriate portion of the project is completed to meet scheduled deliveries, invoiced and shipped. At the buyer is fixed or determinableship date, the Company has no further obligations under that portion of the contract and collectability is reasonably assured. Revenuethe revenue from the sale is recognized.

A part of productsour customer base is recorded at the timemade up of shipment to theinternational customers. Revenue from researchThe table below allocates revenue between domestic and development engineering contracts is recognized as the services are providedinternational customers. The following table presents Flexpoint Sensor Systems revenues disaggregated by region and accepted by the customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contractsproduct type:

7

are met and then recognized as licensing royalty revenue over the remaining term of the contracts.  The Company does not provide extended warranties or guarantees on its products.

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, 20172021 and September 30, 2016,2020 there were outstanding common share equivalents (options and convertible notes payable) which amounted to 30,903,56717,497,193 and 24,459,697, respectively,25,196,690 of common stock.stock, respectively. These common share equivalents were not included in the computation of diluted lossearnings per share for the six-month periods ended June 30, 2021 and 2020 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 sensors2021, two customers represented 18%65% of sales and one customer represented 16%83% 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.

Recent Accounting Pronouncements– InOn August 2017,20, 2020 the Financial Accounting Standards Board ("FASB") issuedFASB released ASU No. 2017-12, “Derivatives and Hedging (Topic 815)2020-06 “Simplified Convertible Instrument Framework”.” This pronouncement simplifies the convertible debt accounting framework, eliminating, among other things, the beneficial conversion feature model. The new standard amends the hedge accounting recognition and presentation requirements in ASC 815.  This ASUadoption date of this pronouncement is effective for fiscal years beginning after December 15, 2018, including interim periods within those2023, but allows for earlier adoption for fiscal years.  Early adoption is permitted.years beginning after December 31, 2020. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it mayhas elected to adopt this accounting treatment effective January 1, 2021. Its adoption will have a beneficial effect on its consolidated financial statements.

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 $26,935,740$29,702,456 at SeptemberJune 30, 2017.2021. 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

NOTES PAYABLE

The derivative liability as of September 30, 2017,Company applied for and received a Small Business Administration loan under the Paycheck Protection Program in the amount of $126,630 has a Level 3 fair value classification.

$59,500. The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of Septemberloan was funded on April 30, 2017 and December 31, 2016:

During the year ended 2016 and the period ended September 30, 2017, 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-free2020, bears an interest rate of 1.06% to 1.31% (4) expected life1% per annum and has a maturity date of 0.25 to 1.25 years,April 30, 2022. The funds obtained under this loan were used for the payment of salaries, health insurance costs, rent and (5)utilities, all of which expenses qualify for the quoted market priceloan forgiveness under the terms of the Company’s common stock at each valuation date.

In accordance ASC 840-15-25, theloan. The Company has implemented a sequencing policy with respect toapplied for and received notice that both the principal of the note and all outstanding convertible instruments. accrued unpaid interest has been forgiven.

The Company evaluates its contracts based upon earliest issuance date.

As of September 30, 2017, liabilities measured at fair valueapplied for and was granted a second Paycheck Protection Program loan on a recurring basis are summarized as follows:

Convertible Notes Payable

During 2015 the Company secured additional financing to cover its ongoing operationsFebruary 25, 2021, also in the amount of $590,000 by issuing various convertible notes bearing 10% annual$59,500. The agreement provides an interest (15% default interest), secured by business assets and carrying exercise prices ranging between $0.025 and $0.07rate of 1% per share. Additionally, during 2015annum. The Company may begin making monthly payments of $1,017 starting April 5, 2021, or it may elect to defer payments until sixteen months from the date of the loan funding, providing time for the Company issued $51,000to file for forgiveness of the loan and accrued interest. The Company will elect to defer payment for the time specified, anticipating that during that time period the request for forgiveness will be filed, reviewed and approved. As no payments will be made within the coming year the total $59,500 is shown in the long-term liability section of the balance sheet.

During the six months ended June 30, 2021, the Company received eight payments of $25,000 each, 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, alltotal 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$200,000, from one of the convertible note payableholders 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 into a new promissory note for upNote 4, as working capital loans to $300,000 from a third party on May 25, 2017.  The note has an annual interest rate of 10% and is secured by the Company’s equipment.  The note has a conversion feature for restricted common shares at $0.07 per share and a maturity date of July 31, 2018.  The Company drew $40,000 against that note on June 2, 2017, $40,000 on July 13, 2017, $40,000 on August 14, 2017 and $40,000 on September 22, 2017.   

The Company entered into a convertible promissory note for up to $300,000 from a third party on July 1, 2016.  The note has an annual interest rate of 10% and is secured by the Company’s equipment.  The note has a conversion feature for restricted common shares at $0.07 per share and a maturity date of December 31, 2016.  The Company drew $160,000 against that note during 2016 and $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,enable the Company enteredto meet its obligations for operating expenses. While it is the intent of both parties to enter into a convertible note, payableof which these payments will be a part, no terms, either as to conversion rate, interest rate, or maturity date have been agreed upon as of this date. Until such agreement is reached the balance of $200,000 as of June 30, 2021 is unsecured, non-interest bearing and due on demand.

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 six-month period ended June 30, 2021, $20,000 of the loan was repaid to the shareholder, leaving a remaining balance of $35,000 which is non-interest bearing and due on demand.

NOTE 4 – CONVERTIBLE NOTES PAYABLE

Convertible Note Payable

At June 30, 2021, there are notes outstanding with principal balances which total $510,000. Of the notes, $470,000 are convertible notes bearing a 10% annual rate of interest (with a 15% default rate) and are convertible into shares of common stock at the rate of $0.05 to $0.07 per share. $40,000 is a convertible note entered 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. The notes are in default and interest and is secured by business equipment.accrued at the default rate.

Convertible Note Payable - Related Party

On September 1, 2017At June 30, 2021, there are notes outstanding with two directors of the Company issued a note for $10,000 towith balances of $164,257 and $54,257, 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, $114,514 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 DecemberMarch 31, 2018.  The note2021. An amendment is secured by all ofbeing prepared to extend the Company’s business equipment.

On August 2, 2017maturity date. Therefore, the Company issued a note for $10,000 to an officer of the Company.  The note bears interest at thedefault 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 noteinterest is secured by all of the Company’s business equipment.not used in accruing interest due on these notes.

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.

NOTE 4 5 – STOCK OPTION PLANS

On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and will 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 shall have immediate vesting terms. Options which are not replacements shall vest over a two yeartwo-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.

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 usedrecorded a charge of $8,203 as the following assumptions in estimating the fair valueresult of this change.

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 2020, the Company recognized a total of $14,916$2,451,971 of stock-based compensation expense, which includes charges of $8,203 in 2020, 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, 2020. There were 2,185,000 and 2,185,0001,900,000 employee stock options outstanding at SeptemberJune 30, 2017 and December 31, 2016, respectively.  

2021.

A summary of all employee options outstanding and exercisable under the plan as of SeptemberJune 30, 2017, and changes during the three months then ended2021 is set forth below:

NOTE 56 – 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, 20172021 and December 31, 2016,2020, there were no0 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, 2021 and December 31, 2020, there were 114,396,242 and 99,713,464 shares of common stock were issued and outstanding, respectively. The Company issued 14,682,778 shares of restricted common stock during the ninesix months ended SeptemberJune 30, 2017.  2021 for the retirement of convertible notes and accrued interest. The conversion notice was received in 2020 and the appropriate accounting was recorded. However, the certificates were not issued until the first quarter of 2021 in satisfaction of the Common stock to be issued of $385,929 as of December 31, 2020.

NOTE 6 -7 – COMMITMENTS AND CONTINGENCIES

The Company currently occupies approximately 12,548 square feet of office and manufacturing space from Stockyard, 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 basic and additional component, the Company expects to pay a total lease upon 90 daypayment of approximately $14,635 per month in 2021. The Company has filed the required written notice.  Under the termsnotice of termination of the lease and expects to vacate the current location by 30 September, 2021. The Company paid $8,950 per month in 2015 (the same rateis currently negotiating for a lease at a new location and will provide details of the lease as in 2014), $9,300 per month in 2016it is formalized. The Company evaluated the existing 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 78 – RELATED PARTY TRANSACTIONS

At SeptemberJune 30, 2017 and2021, there was $10,000 payable to the Chief Executive Officer. At December 31, 2016,2020, the Company had accountsamounts of $5,200 payable of $-0- and $1,420 to its Chief Executive OfficeOfficer for reimbursementfunds provided to meet the operating expense obligations of various operating expenses paid by himthe Company.

In May 2019, the Company converted the amounts payable to officers to convertible notes in the courseamounts of business.

During the period an Officer of the Company$22,000 and Director of the Company assumed a total of $54,513 in accrued liabilities owed by the Company.$17,000. The Company recorded the amount assumed as a due to related party on the balance sheet in the amount of $54,513 as of September 30, 2017.  The amounts due to both the Officer and Director accruenotes bear interest at the rate of 8% per annum with a default rate of 12%, have a conversion feature for restrictedare convertible into shares of common sharesstock at $0.07$0.06 per share, and must be repaid by Decemberhave a maturity date of March 31, 2018.2021.

See also Note 4 – Convertible Note Payable – Related Party

NOTE 8 -9 – SUBSEQUENT EVENTS

On November 1, 2017June 30, 2021 the Company applied for forgiveness of the second loan secured under the SBA PPP program. On July 7, 2021 the Company received a short-termnotification that the entire 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 haveand all accrued and unpaid interest had been established for this loan at the date of this filing.  forgiven.

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).and equipment.

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 have recently experienced an upturn in orders and we expect that orders will return to their former levels and even increase following a return to normal business operations.

In May 2021, Flexpoint announced that they have formalized a Joint Development and Supply Agreement between Flexpoint Sensor Systems, Inc. and De Amertek Corporation. The companies will work together and collaborate to develop electronics with integrated sensor technologies for an occupant classification system and other automotive products. We continueare currently collaborating on three separate projects with domestic and foreign automotive manufacturers. De Amertek is a leading designer and manufacturer of microelectronics and one of the most specialized sources of custom-made electronic modules. Headquartered in Chicago, IL, its world-class manufacturing facility and supply chain network exceeds customer expectations in quality, delivery, service and time to make further improvements to our technologies, manufacturingmarket. De Amertek is making way for futuristic developments and developing fully integrated devices and related productssetting trends in the technology world.

In July 2021 we announced that we are continuing to work closely with a Fortune 50 automotive company on the integration of a system utilizing Flexpoint’s patented Bend Sensor^® technology which was included in a patent issued to the major automotive manufacturer. By utilizing Flexpoint’s technology, this manufacturer, along with Flexpoint, has created an innovative application for automobiles and trucks which allows them to optimize the ride quality of the vehicle. Flexpoint is actively working with the manufacturer on implementation of this new technology in vehicles.

Additionally, we have been marketingseen significant market interest and selling tothe recent adoption of a variety of sensor applications including the Flexpoint seat occupancy sensor and the companies’ more sophisticated, Occupant Classification System (OCS), along with integration of the Impact Detection System. We are currently working with both North American and foreign automotive manufacturers on these systems. These companies include Fortune 50 automotive manufacturers as well as new, well financed companies in diverse industries.the EV and Autonomous Driving vehicle market spaces. We look forward to announcing production agreements with our partners and their anticipated production schedules as the agreements are formalized. We are negotiatingalso working on entering into an arrangement with a large after-market seller for seat products.

We also announced that Flexpoint continues to work with Resellers/Channel partners such as RobotShop, which has been a steady contributor of purchase orders throughout the past three years. We also receive orders from others such as Shopify, PayPal, Amazon and signingfrom orders placed on our website. Flexpoint is currently in the process of formalizing reseller agreements and contractswith international partners that have provided some limited revenues and have proven thatcommitted to develop markets for our sensors in their countries. We are more durable, adaptableworking to increase this market area as it provides effective and cost effective than any other product currently onsignificant growth and scale.

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. We own five patents, including patents on specific devices that useThe Pandemic has slowed the orders and, while we cannot predict when the influence of the Pandemic will end, we have seen a recent increase in both the size and number of orders and expect this pattern to continue and increase throughout the remainder of 2021 following a return to business. In aggregate, Bend Sensor^® wearables order volumes are expected to number in the tens of thousands in 2021. The wearables market segment is clearly one where our technology is easily adapted and have exclusive rights through licensing agreementstruly illustrates our technological differentiation. Flexpoint’s willingness and ability to other patentscustomize sensors for these innovative companies and devices.

We are continuingdeliver them at a competitive price point allows us to develop and enhancedeliver real value to our intellectual properties that will result in additional patents being filed. The Company currently manufactures, andcustomers. Again, the Global COVID-19 Pandemic has jointly developed, eighteen products that are being sold and supplied to current customers and we continue to receivehad a dramatic impact on the orders for custom prototype sensors as well as our standard sensors.  During 2017 we have focused our marketing efforts on a numberreceived.

On June 15, 2020, Flexpoint announced its largest order from Manus VR https://manus-vr.com/, consisting of larger domestic and international companies that have applications which have the potential to greatly increase the volume1,000 pairs of sensors wefor gloves to be phased into three deliveries. All of the products ordered have been delivered. We have recently received an even larger order for 3,200 sensors from Manus VR. We delivered the first 800 sensors during the second quarter of 2021 and the remaining 2,400 sensors are currently manufacturing.

At September 30, 2017in the Company had at least sixteen global commercial partners covering a varietyprocess of different products.  In coordination with its partners,production. The balance of the Company introduced at least eight new products during 2017 and expectssensor order is scheduled to have two to three more commercialized prior tobe delivered by the end of the year; including the product launchthird quarter 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 toward the development of new relationships with clients while maintaining and strengthening relationships already developed with several Tier 1 (major) suppliers in the automotive industry.  We have built and shipped orders to a number of these companies to enable them to test the utilization of our sensors into their existing and developing product lines.  

2021. The CompanyCompany’s Bend Sensor® continues to develop relationships inbe a numberpart of application fields.  In July we announced a strategic relationship with HTK Safetythe world’s most trending sectors, one being the VR/AR market. The VR/AR industry is predicted to begin offering an integrated safety system utilizing the Bend Sensor^® technology.  In March 2017 we announced a collaborative working arrangement with 11 Health and Technologies Inc. to develop next generation products in the medical industry.  Flexpoint has also established relationships with several other medical IoT vendors.  These include companies like 11Health, Neofect, Gloreha and YouReHab; all with 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 bereach more than 50,000 sensors$25 billion by 2025 and show steady growth, thereafter.

Manus VR has many clients of large industries such as Netflix, Google, and Rolls Royce. Manus VR is widely known for its role in 2017.

In March 2017 we announced a collaborative relationship with CaptoGlove, a company which manufactures a wearable virtual reality gaming and recently announced its newest design, Manus Polygon. Manus Polygon is a tracking system that eliminates the need for any kind of full-body suit, providing a full-body solution for enterprise VR. Manus Polygon is the latest in real-time software to enable fluid full-body motion controller.  Our companies will work together to deliver innovative, integratedwithin any virtual reality/augmented reality (“VR/AR”) systems to mass markets.  We completed and shipped the initial portion of the order before the end of the second quarter and expect to complete and ship the entire order early next year. Their ground-breakingenvironment.

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. In addition to producing an array of Bend Sensors^®, the Company is under agreement to supply integrated assemblies comprised of multiple sensor types and associated electronics.

ManusVR, CaptoGloveIn the VR/VA marketspace, orders of increasing size and Virtual Motion Labs havefrequency were received during 2020 from Manus VR and Neofect as they strive to fulfill production orders. Flexpoint also received orders from other global VR/AR customers during 2021. It is expected those orders will increase as the impact of the Pandemic enables business to resume operations.

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

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

Batteries become over heated, over charged, or simply fail due to old age. When this occurs, it 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 currently commercially availabledesigned 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 featurestop a Lithium ion or Lithium polymer battery from charging or discharging, the Flexpoint Bend Sensor®.   A few other companies in this market are expectedbattery

expansion sensor was created to release Bend Sensor® products in 2017. Flexpoint expectsprevent 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 purchase ordersuser 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 fulfillmentbattery 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 and the Company expects to receive increasingly larger volume orders before year end and continuing into 2018.no longer safe.

The Company began selling and distributing sensors through two resellers in 2016.  Flexpoint has since greatly increased its relationships with resellers and is currently workingcollaborating with seven resellers across diverse industries. Somethree 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.

On October 18, 2018, the Company announced it had signed a five-year manufacturing and supply agreement with Counted LLC. Counted LLC conceived of these companies include Amazon, NoDNA, RobotShop, Karlsson Robotics, SPIa medication delivery monitoring system and Infusion Systems.  We are receiving recurring sales from these resellersdispensing monitoring system. Flexpoint designed and produced the monitoring system with most experiencing a growing numberFlexpoint features, Flexpoint technology and Flexpoint designed electronics to track and report the dispensing of sensors ordered eachmedications in real time. We anticipateThe 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. Currently Counted has announced that sensor volume sold in 2017 through these channels should approach 25,000.

The biggest revenue contributors duringthey do not have sufficient funding to continue with the 2017 nine month period were for glove based productsproject and the toy relationship.  Flexpoint, year-to-date, has delivered on approximately 200,000 sensors for its partnership withcompany is pursuing other avenues to provide the toy manufacturer.  The Company expects annualized volumes for 2017funding or transfer the technology to be approximately a half a million sensors. Sensor volume from glove based applications is expected to exceed 175,000 in 2017.  another entity.

In October the Company made announcements relating to two of its partners.  The first announced the receipt of additional production orders from global market virtual reality leader Manus VR, which brought 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 additional orders from other customers for this sensor as it becomes more recognizable in the market. Currently our customers for this type of sensor include companies in the following industries: automobiles, trucking, emergency vehicles, public transportation, military and other governmental entities. As anticipated, the Company is beginning to see the potential for more significant volumes and revenues from the sale of this sensing devise over the next year and beyond.

Finalizing additional long-term, 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 short term,recent Pandemic and we are unable to determine what the long-term effect 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 ensure that our customers continue to receive quality, personalized service.

The Pandemic negatively impacted our revenue during the first six months of 2021. 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 2020, 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 $728,513 as of June 30, 2021. 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 month and expectations are that it will continue at this rate for the foreseeable future. If the Pandemic ends and business returns to pre-Pandemic levels, with proceeds from 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 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.  

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, 20172021 consisted of our operating lease of $9,600$14,635 per month, and total liabilities of $2,870,563,$3,275,684, which includes $1,467,488$728,513 of convertible notes payable, net of debt discounts.payable. Accrued liabilities at SeptemberJune 30, 2017,2021, were $1,008,986$2,021,979 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, 2017In August 2020 the Company received $50,000 from John Kelley, a short-termlarge shareholder, to meet operating expenses. Mr. Kelly indicated that he would want the $50,000 loan repaid when the Company was in a position to do so. Mr. Kelly subsequently provided an additional $5,000, for a total loan of $55,000. This loan has not formally been documented by a note at the amounttime of this filing, and there is no term or interest on the note. During the six-month period ended June 30, 2021, $20,000 from an officer of the Company.  The Company intendsloan was repaid to repay the loan when funds are available.  No terms have been established for this loan at the dateMr. Kelly, leaving a remaining balance of this filing.$35,000.

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 customer2021, two customers represented 18%65% of sales and represents 16%one customer represented 83% of accounts receivable at September 30, 2017.receivable. The Company has a strong ongoing relationship with