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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31,SEPTEMBER 30, 2022

(UNAUDITED)

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Condensed Consolidated Interim Financial Statements – The accompanying unaudited condensed consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. (the “Company”). These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. for the year ended December 31, 2021 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 31, 2022. In particular, the Company’s significant accounting principles were presented as Note 1 to the Consolidated Financial Statements in that report. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments. The results of operations presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022.

Nature of Operations – Flexpoint Sensor Systems, Inc. (the Company) is located in West Jordan, Utah. The Company’s activities to date have included acquiring equipment and enhancing technology, obtaining financing, limited production and seeking long-term manufacturing contracts. The Company’s operations are in designing, engineering, manufacturing and selling sensor technology and equipment using flexible potentiometer technology. Through March 31,September 30, 2022, the Company continued to manufacture products and sensors to fill customer orders and provide engineering and design work.

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

Principles of Consolidation – The accompanying financial statements include the accounts of Flexpoint Sensor Systems, Inc. and its wholly-owned subsidiary, Flexpoint International, LLC. Intercompany transaction and accounts have been eliminated in consolidation.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could differ from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents are considered to be cash and highly liquid securities with original maturities of three months or less.

Fair Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

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

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

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or

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model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

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

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

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

Accounts Receivable – Trade accounts receivable are recorded at the time product is shipped or services are provided including any shipping and handling fees. Contracts associated with design, development engineering and manufacturing generally require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project, or the appropriate portion of the contract to meet scheduled deliveries is completed and shipped, and accepted by the customer, at which time the entire contract price, or the appropriate portion of the contract, is billed to the customer and the deposit applied. The Company has established an allowance for bad debts based on a historical experience and an analysis of risk associated with the account balances. The balance in the allowance account was $105,790 and $105,790 as of March 31,September 30, 2022 and December 31, 2021, respectively.

Inventories – The Company does not currently have inventory. However, as production levels increase inventories will be carried on the balance sheet. Inventories will be stated at the lower of cost or market or net realizable value. Cost is determined by using the first in, first out (FIFO) method.

Property and Equipment –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 three-monthnine-month period ended March 31,September 30, 2022 and during the year ended December 31, 2021. Impairment tests will be conducted on an annual basis and, should they indicate a carrying value in excess of fair value, additional impairment charges may be required.

Intangible Assets – Costs to obtain or develop patents are capitalized and amortized over the remaining life of the patents, and technology rights are amortized over their estimated useful lives. The Company currently has the right to several patents and proprietary technology.  Patents and technology are amortized from the date the Company acquires or is awarded the patent or technology right, over their estimated useful lives, which range from 5 to 15 years.  An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined by projected discounted net future cash flows. Under similar analysis there was no impairment charge taken during the three-monthnine-month period ended March 31,September 30, 2022 and during the year ended December 31, 2021.

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

Lease Obligations – While the Company has adopted ASC 842 the Company has no leases at the date of this report that are required to be reported under ASC 842. As the Company enters into such leases it will record obligations under all leases it has entered into pursuant to the reporting requirements under ASC 842, allocating such obligations between current and long term.

Goodwill– Goodwill represents the excess of the Company’s reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually, or at interim periods when a triggering event occurs using a fair value approach. According to Accounting Standards Codification (or “ASC”) 350-20 Intangibles – Goodwill and Other, a fair-value-based test is applied at the overall Company level. The test compares the fair value of the Company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value of the Company is allocated to the Company’s assets and liabilities based upon their fair values with the excess fair value allocated to goodwill. An impairment of goodwill is measured as the excess of the carrying amount of goodwill over the determined fair value.

Revenue Recognition – On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”). We have applied the new revenue standard to all contracts as of the date of the initial adoption. The new revenue standard establishes five steps whereby a transaction is analyzed to determine if revenue has been earned and can be recognized. The adoption of the new revenue standard did not have any effect on our financial statements. The vast majority of our sales are made to order, for which orders we require a deposit of 50% of the value of the order. That amount is put in a customer deposit account until the entire order has been manufactured and shipped or the appropriate portion of the project is completed to meet scheduled deliveries, invoiced and shipped. At the ship date, the Company has no further obligations under that portion of the contract and the revenue from the sale is recognized.

A part of our customer base is made up of international customers. The table below allocates revenue between domestic and international customers. The following table presents Flexpoint Sensor Systems revenues disaggregated by region and product type:

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 March 31,September 30, 2022 and 2021 there were outstanding common share equivalents (options and convertible notes payable) which amounted to 10,849,00811,043,870 and 18,605,54817,497,193 of common stock, respectively. These common share equivalents were not included in the computation of diluted earnings per share for the three-monththree and nine-month periods ended March 31,September 30, 2022 and 2021 as their effect would have been anti-dilutive, thereby decreasing loss per common share.

Concentrations and Credit Risk - The Company has a few major customers who represent a significant portion of revenue, accounts receivable and notes receivable. During the three-monthnine-month period ended March 31,September 30, 2022, twofour customers represented 74%81% of sales and two customers represented 93%97% of accounts receivable. The Company has a strong ongoing relationship with these customers with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.

Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards Board Accounting Codification (ASC) 740: Income Taxes. Deferred tax assets and liabilities are

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measured using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets will be reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized

Recent Accounting Pronouncements–On August 20, 2020 the FASB released ASU 2020-06 “Simplified Convertible Instrument Framework”. This pronouncement simplifies the convertible debt accounting framework, eliminating, among other things, the beneficial conversion feature model. The adoption date of this pronouncement is for fiscal years beginning after December 15, 2023, but allows for earlier adoption for fiscal years beginning after December 31, 2020. The Company has elected to adopt this accounting treatment effective January 1, 2021. Its adoption will have a beneficial effect on its financial statements in those instances when the conversion rate set by convertible notes is below the market price on the date the convertible note is issued, as no beneficial conversion expense will be recorded.

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

NOTE 2 –2– GOING CONCERN

The Company continues to accumulate significant operating losses and has an accumulated deficit of $30,338,151$30,736,491 at March 31,September 30, 2022.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

concern for a period of one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

NOTE 3 – NOTES PAYABLE

During the threenine months ended March 31,September 30, 2022, the Company received fourten payments of $25,000 each, two payments of $20,000 and one payment of $20,000,$27,776, for a total of $120,000,$317,776, from onetwo of the convertible note holders as working capital loans to enable the Company to meet its obligations for operating expenses. In March 2022 the holders of $125,000 on notes payable elected to convert the principal and $12,068 of accrued interest into 2,741,385 shares of common stock, resulting in a loss of $13,060 on conversion. While it is the intent of both parties to enter into a convertible note on the remaining advances, of which these payments will be a part, no terms, either as to conversion rate, interest rate, or maturity date has been agreed upon as of this date. Until such agreement is reached, the balance of $415,000$612,776 as of March 31,September 30, 2022 is unsecured, non-interest bearing and due on demand. At September 30, 2022 there is $48,265 in accrued unpaid interest relating to these notes.

In August 2020 the Company received $50,000 from a large shareholder to meet operating expenses. The shareholder indicated that he would want the $50,000 loan repaid when the Company was in a position to do so. The shareholder subsequently provided an additional $5,000, for a total loan of $55,000. The balance is non-interest bearing and due on demand. During the three-monthyear ended December 31, 2021, payments totaling $20,000 were made, and during the nine-month period ended March 31,September 30, 2022, no payments werea $5,000 payment was made against the loan, leaving a remaining balance of $35,000$30,000 which is non-interest bearing and due on demand.

NOTE 4 – CONVERTIBLE NOTES PAYABLE

Convertible Notes Payable

At March 31,September 30, 2022, there are notes outstanding with principal balances which total $180,000. Of the notes, $140,000 are convertible notes bearing a 10% annual rate of interest (with a 15% default rate). Of these notes, $100,000 is convertible into shares of common stock at the rate of $0.05 per share and $40,000 is convertible at $0.07 per share. The remaining $40,000 is a convertible note entered into on August 8, 2011 with a former Company Director, at a conversion rate of $0.20 per share. That note was due on December 31, 2015 and bears a default interest rate of 10%. The notes are in default and interest is accrued at the default rate. At September 30, 2022 there is $120,088 in accrued unpaid interest relating to these convertible notes.

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

Convertible Note Payable - Related Party

At March 31,September 30, 2022, there are notes outstanding with two directors of the Company with balances of $164,257 and $54,257, respectively. The notes bear an 8% annual rate of interest with a 12% default rate and are convertible into shares of restricted common stock. Of the notes, $114,514 is convertible into shares of restricted common stock at

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$0.07 $0.07 per share and $104,000 of the notes are convertible at $0.06 per share. All of these notes have a maturity date of March 31, 2022.2023. Therefore, the default rate of interest was not used in accruing interest due on these notes. At September 30, 2022 there is $81,238 in accrued unpaid interest relating to these related party convertible notes.

NOTE 5– STOCK OPTION PLANS

On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and continued in effect for ten years, terminating on August 25, 2015.  This plan was approved by the stockholders of the Company at their annual meeting of shareholders on November 22, 2005. Under the Plan, the exercise price for all options issued will not be less than the average quoted closing market price of the Company’s trading common stock for the thirty-day period immediately preceding the grant date plus a premium of ten percent.  The maximum aggregate number of shares that may be awarded under the plan is 2,500,000 shares. The Company continues to utilize the Black-Scholes option-pricingoption-

pricing model for calculating the fair value of the options granted as defined by ASC Topic 718, which is an acceptable valuation approach under ASC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.

On August 24, 2015, the Board of Directors approved the issuance of options to purchase 2,185,000 shares of the Company’s common stock. Of the total issued, 1,960,000 options were issued to replace options held by directors and employees which were to expire and 225,000 options were issued to new employees. Of the options issued, 640,000 have an option price of $0.14 per share, 500,000 have an option price of $0.15 per share, 995,000 have an option price of $0.20 per share, and 50,000 have an option price of $0.25 per share. Options issued as replacement shall have immediate vesting terms. Options which are not replacements shall vest over a two-year, four-month period in equal installments on the last day of 2015, 2016 and 2017, respectively.

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

Between August 25, 2005 and August 25, 2019, the Company granted options to employees to purchase an aggregate 3,096,000 shares of common stock at exercise prices ranging from $0.15 to $2.07 per share. The options all vested by December 31, 2017 and expire 10 years from the date of grant.

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

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

A summary of all employee options outstanding and exercisable under the plan as of March 31,September 30, 2022 is set forth below:

NOTE 6 – CAPITAL STOCK

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

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

NOTE 7 –7– COMMITMENTS AND CONTINGENCIES

The Company currently occupies approximately 8,029 square feet of office and manufacturing space leased from D&M Management, Inc. The building is located in a commercial business district in West Jordan, Utah which consists primarily of high-tech manufacturing firms and it is located adjacent to a major intersection, allowing easy access to Utah’s main interstate highway. The original lease iswas for $6,787 per month and iswas for a period of

twelve months, with a termination date of August 31, 2022. A new lease for a period of twelve months to commence September 1, 2022 at a monthly rate of $6,657 was entered into on June 20, 2022. The lease has an expiration date of August 31, 2023 and contains a 90-day notice clause if our intent is to either terminate the lease or renew the lease for one additional periods.three-year term.

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

NOTE 8 – RELATED PARTY TRANSACTIONS

At March 31, 2021,September 30, 2022, there was $32,543$40,261 payable to the Chief Executive Officer. During the nine-months ended September 30, 2022 the Chief Executive Officer provided $11,800 to be used for operating expenses, and also submitted expense reports for company obligations which he paid with his personal credit card. At December 31, 2021, the Company had amounts of $20,481$40,261 payable to its Chief Executive Officer for funds provided to meet the operating expense obligations of the Company.

At September 30, 2022, there was $1,000 payable to the Chairman of the Board. During the nine-months ended September 30, 2022 the Chairman of the Board provided $1,000 to be used for operating expenses.

NOTE 9 – SUBSEQUENT EVENTS

In AprilOctober and November, 2022, the Company received $25,000$75,000 in additional funding from a holderholders of convertible notes. There has not been a note written on these funds, and no terms have been agreed to. The funding is to bear interest at the rate of 10% per annum. The Company is recording the receipt of the funding as an on demand notenotes until such time as terms are agreed upon by the parties.

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

FORWARD LOOKING STATEMENTS

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

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

EXECUTIVE OVERVIEW

Flexpoint Sensor Systems, Inc. is a company engaged principally in improving its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term sustainable manufacturing contracts, licensing agreements and royalty agreements.  Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing, licensing and selling sensor technology and products featuring our Bend Sensor^® technology and equipment.

Finalizing long-term, constant revenue generating production contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts. We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor^® and Bend Sensor^® related technologies and products to the market.  Management believes that even though we are making positive strides forward with our business plan we will need to raise additional operating capital.

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

Currently our revenue is primarily from product licensing, development, manufacturing and recurring sales with additional contributions to income from design contract, testing and limited production services for prototypes and samples, and is currently at a level to support our operations.  Depending upon the world returning to some form of normalcy following the end of the Pandemic, we believe, based upon current orders and projected orders over the

Part II Exhibits