UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

**FORM 10-Q**

[X] 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended March 31, 2011

[   ] 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number: No. 0-24368

**FLEXPOINT SENSOR SYSTEMS, INC.**

(Exact name of registrant as specified in its charter)
|  

 

Delaware

87-0620425

 (State of incorporation)

(I.R.S.  Employer Identification No.)

     

106 West Business Park Drive, Draper, Utah  84020

(Address of principal executive offices)

801-568-5111

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [  ]   No [  ]

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

Large accelerated filer  [   ]  

Accelerated filer                   [   ]

Non-accelerated filer    [   ]

Smaller reporting company  [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.

Yes [   ]     No [X]

The number of shares outstanding of the registrant’s common stock was 36,045,014 as of May 6, 2011.

1

**TABLE OF CONTENTS**

PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements

              Condensed Consolidated Balance Sheets (Unaudited) at March 31, 2011 and

    December 31, 2010

3

              Condensed Consolidated Statements of Operations (Unaudited) for the Three   

  Months Ended March 31, 2011 and 2010 and for the Cumulative Period from 

  February 24, 2004 (Date of Emergence from Bankruptcy) through March 31, 2011

4

             

              Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three 

                Months Ended March 31, 2011 and 2010 and for the Cumulative Period from 

                February 24, 2004 (Date of Emergence from Bankruptcy) through March 31, 2011

5

              Notes to Condensed Consolidated Financial Statements (Unaudited)

6

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

11

Item 3. Quantitative and Qualitative Disclosures about Market Risk

15

Item 4. Controls and Procedures  

15

PART II: OTHER INFORMATION

Item 1A.  Risk Factors

16

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

17

Item 6.  Exhibits

 18

Signatures

18

**PART I - FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

The financial information set forth below with respect to our condensed consolidated financial position as of March 31, 2011, the condensed consolidated statements of operations for the three month periods ended March 31, 2011 and 2010, and condensed consolidated statements of cash flows for the three month periods ended March 31, 2011 and 2010 is unaudited. The information presented below for the condensed consolidated financial position as of December 31, 2010 was audited and reported as part of our annual filing of our 10-K, filed with Securities and Exchange Commission on April 15, 2011. The cumulative financial information from February 24, 2004 (the date of emergence from bankruptcy) through March 31, 2011, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data.  The results of operations for the three month periods ended March 31, 2011 and 2010, respectively, are not necessarily indicative of results to be expected for any subsequent periods.

2

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

**March 31,**

 

**December 31,**

 

**2011**

 

**2010**

 

**(Unaudited)**

 

**(Audited)**

**ASSETS**

 

 

 

Current Assets

 

 

 

Cash and cash equivalents

 $         25,909 

 

 $           6,027 

Accounts receivable

            18,025 

 

            36,600 

Inventory

              8,098 

 

              9,440 

Deposits and prepaid expenses

            11,889 

 

            11,889 

**Total Current Assets**

            63,921 

 

            63,956 

**Long-Term Deposits**

            16,500 

 

            10,500 

**Property and Equipment,** net of accumulated depreciation

 

 

 

of $295,634 and $265,720

          290,760 

 

          320,673 

**Patents and Proprietary Technology**, net of accumulated

 

 

 

amortization of $296,079 and $268,612

          664,905 

 

          692,373 

**Goodwill**

        5,356,414 

 

        5,356,414 

**Total Assets**

 $     6,392,500 

 

 $     6,443,916 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

Current Liabilities

 

 

 

Accounts payable

 $       137,347 

 

 $       123,865 

Accounts payable - related party

              6,838 

 

            19,000 

Accrued liabilities

77,072 

 

            56,411 

Deferred Revenue

7,120 

 

              7,120 

**Total Current Liabilities**

          228,377 

 

          206,396 

 

 

 

 

Long-term convertible notes payable 

          150,000 

 

                  -   

**Total Liabilities**

          378,377 

 

          206,396 

 

 

 

 

**Stockholders' Equity**

 

 

 

Preferred stock – $0.001 par value; 1,000,000 shares authorized;

 

 

 

no shares issued or outstanding

                  -   

 

                  -   

Common stock – $0.001 par value; 100,000,000 shares authorized;

 

 

36,045,014 shares and 35,754,764 issued and outstanding 

            36,045 

 

            35,754 

Additional paid-in capital

      23,156,704 

 

      23,032,628 

Stock subscription receivable

          (50,000)

 

          (50,000)

Deficit accumulated during the development stage

  (17,128,626)

 

  (16,780,863)

**Total Stockholders' Equity**

        6,014,123 

 

        6,237,520 

**Total Liabilities and Stockholders' Equity**

 $     6,392,500 

 

 $     6,443,916 

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

3

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the Cumulative**

 

 

 

 

 

 

**Period from**

 

 

 

 

 

 

**February 24, 2004**

 

 

 

 

 

 

**(Date of**

 

 

 

 

 

 

**Emergence**

 

 

**For the Three Months**

 

**from Bankruptcy)**

 

 

**Ended March  31,**

 

**through**

 

 

**2011**

 

**2010**

 

**March 31, 2011**

 

 

 

 

 

 

 

**Design, Contract and Testing Revenue**

** **

 $          12,125 

 

 $          28,137 

 

 $                837,861 

 

 

 

 

 

 

 

**Operating Costs and Expenses**

 

 

 

 

 

 

Amortization of patents and proprietary technology

 

             27,468 

 

             31,748 

 

                   971,955 

Cost of revenue

 

               2,681 

 

               1,557 

 

                   156,676 

Administrative and marketing expense

 

           281,605 

 

           205,877 

 

              11,399,315 

Research and development expense

 

             45,441 

 

             75,702 

 

                2,776,136 

Impairment of long-term assets

 

                     -   

 

                     -   

 

                   546,562 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Total Operating Costs and Expenses**

 

           357,195 

 

           314,884 

 

              15,850,644 

 

 

 

 

 

 

 

**Other Income and Expenses**

 

 

 

 

 

 

Interest expense

 

             (2,693)

 

           (89,303)

 

              (2,298,668)

Interest income

 

                     -   

 

                    14 

 

                   131,790 

Sublease rent income

 

                     -   

 

                     -   

 

                     11,340 

Other income 

 

                     -   

 

                     -   

 

                              3 

Gain (loss) on sale of equipment

 

                     -   

 

                     -   

 

                        (810)

Gain (loss) on stock debt exchange

 

                     -   

 

                     -   

 

                     40,502 

 

 

 

 

 

 

 

**Net Other Income (Expense)**

 

             (2,693)

 

           (89,289)

 

              (2,115,843)

 

 

 

 

 

 

 

**Net Loss**

 

 $      (347,763)

 

 $      (376,036)

 

 $         (17,128,626)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Basic and Diluted Loss Per Common Share**

 

 $            (0.01)

 

 $            (0.01)

 

 

 

 

 

 

 

 

 

**Basic and Diluted Weighted-Average**

 

 

 

 

 

 

**    Common Shares Outstanding**

 

      35,930,486 

 

      26,583,998 

 

 

 

 

 

 

 

 

 

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

4

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

 

 

**For the Cumulative**

 

 

 

 

 

 

 

 

 

 

**Period from**

 

 

 

 

 

 

 

 

 

 

**February 24, 2004**

 

 

 

 

 

 

 

 

 

 

**(Date of Emergence**

 

 

 

 

 

 

**For the Three Months**

 

**from Bankruptcy)**

 

 

 

 

 

 

**Ended March 31,**

 

**through**

 

 

 

 

 

 

**2011**

 

**2010**

 

**March 31, 2011**

**Cash Flows from Operating Activities:**

 

 

 

 

 

 

Net loss

 

 

 

 

 $        (347,763)

 

 $        (376,036)

 

 $           (17,128,626)

Adjustments to reconcile net loss to net cash used in

 

 

 

 

 

 

   operating activities:

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

               29,915 

 

               30,282 

 

               942,825 

 

Amortization of patents and proprietary technology

               27,468 

 

               31,748 

 

               971,955 

 

Impairment of long-lived assets

 

 

                       -   

 

                       -   

 

               546,562 

 

Issuance of common stock and warrants for services

             90,000 

 

                 6,050 

 

            3,467,784 

 

Expenses paid by increase in convertible note payable

                       -   

 

                       -   

 

                 82,200 

 

Amortization of discount on note payable

 

                       -   

 

               64,414 

 

            2,230,654 

 

Stock-based compensation expense for employees

                 4,366 

 

               11,172 

 

            1,835,807 

 

Loss on asset disposal

 

 

 

                       -   

 

                       -   

 

                   2,437 

 

Loss on extinguishment of debt

 

 

                       -   

 

                       -   

 

                 22,966 

 

Loss on conversion of notes payable to common stock

                       -   

 

                       -   

 

                   7,800 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

 

               18,575 

 

             (13,723)

 

                (18,025)

 

Inventory

 

 

 

 

                 1,342 

 

                  (453)

 

                  (8,098)

 

Deposits and prepaid expenses

 

 

               (6,000)

 

                      (7)

 

                (28,389)

 

Accounts payable

 

 

 

               13,481 

 

                 5,484 

 

                (70,758)

 

Accounts payable - related parties

 

 

             (12,162)

 

                       -   

 

                   6,838 

 

Accrued liabilities

 

 

 

               50,661 

 

               95,802 

 

                 104,580 

 

Deferred revenue

 

 

 

                       -   

 

                       -   

 

              (336,630)

**Net Cash Used in Operating Activities**

** **

           (130,118)

 

           (145,267)

 

           (7,368,119)

**Cash Flows from Investing Activities:**

 

 

 

 

 

 

 

Payments for the purchase of equipment

 

                       -   

 

                       -   

 

              (200,119)

Payments for patents

 

 

 

                       -   

 

                       -   

 

                (45,868)

Payment for acquisition of equipment and proprietary

 

 

 

 

 

 

technology from Flexpoint Holdings, LLC

 

                       -   

 

                       -   

 

              (265,000)

**Net Cash Used in Investing Activities**

 

 

                       -   

 

                       -   

 

              (510,987)

**Cash Flows from Financing Activities:**

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

                       -   

 

                       -   

 

            5,622,157 

Principal payments on notes payable - related parties

                       -   

 

                       -   

 

              (510,300)

Proceeds from notes payable - related parties

 

                       -   

 

                       -   

 

               445,300 

Proceeds from borrowings under convertible note payable

             150,000 

 

             150,000 

 

            2,345,807 

**Net Cash Provided by Financing Activities**

 

             150,000 

 

             150,000 

 

            7,902,964 

**Net Change in Cash and Cash Equivalents**

 

               19,882 

 

                 4,733 

 

                 23,858 

**Cash and Cash Equivalents at Beginning of Period**

                 6,027 

 

               12,680 

 

                   2,051 

**Cash and Cash Equivalents at End of Period**

 

 $             25,909 

 

 $              17,413 

 

 $                   25,909 

 

 

 

 

 

 

 

 

 

 

 

**Supplemental Cash Flow Information:**

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

 

 $                    -    

 

 $                    -   

 

 $                   16,955 
Cash paid for income taxes                       -
                        -
                                -
**Supplemental Disclosure on Non-cash Investing and**

 

 

 

 

 

**Financing Activities**

 

 

 

 

 

 

 

 

      Stock issued for debt

 

 

 

30,000

 

-    

 

30,000

 

Outstanding notes payable converted to stock

 

                       -   

 

                       -   

 

            3,218,599 

 

Expiration of warrants outstanding

 

 

                         -    

 

                         -   

 

            2,361,785 

 

Subscription receivable

 

 

 

 

 

 

                 50,000 

 

Recognition of discounts on convertible notes payable

                         -   

 

             145,000 

 

            2,069,003 

 

Extinguishment of unamortized discount on modified 

 

 

 

 

 

 

     convertible notes payable

 

 

                         -   

 

                         -   

 

                (17,477)

 

Accounts payable converted to notes payable

 

                         -   

 

                         -   

 

                 22,200 

 

 

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

5

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 1*–*SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Condensed Interim Financial Statements –***The accompanying unaudited condensed consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. and its subsidiaries (the “Company”).  These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries for the year ended December 31, 2010, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2011. 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, 2011.

***Nature of Operations –***The Company is located near Salt Lake City, in Draper, Utah and is a development stage company engaged principally in designing, engineering, and manufacturing sensor technology and equipment using Bend Sensors® flexible potentiometer technology. The Company is in the development stage as significant production and revenue generation have not yet commenced on a sustainable basis.  Development stage activities primarily include acquiring equipment and technology, organizing activities, obtaining financing and seeking long-term manufacturing contracts. Even though the Company has made significant strides forward with its business plan, it is likely that additional progress may not occur within the next eight months due primarily to the time necessary to negotiate long-term manufacturing and production agreements. Accordingly, the Company is not anticipating significant revenues until the fourth quarter 2011, and will require additional financing to fund its short-term cash needs. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The Company may be required to rely on debt financing, loans from related parties, and private placements of common stock for additional funding.  These sources of financing may only be available on terms not acceptable to the Company.

***Cash and Cash Equivalents –***Cash and cash equivalents are considered to be cash and  highly liquid securities with original maturities of three months or less. The cash and equivalents of $25,909 at March 31, 2011 and $6,027 at December 31, 2010 represent cash on deposit in various bank accounts with two separate financial institutions.   

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

***Accounts Receivable –***Trade accounts receivable are recorded at the time product is shipped or services are provided including any shipping and handling fees. Due to the limited amount of transactions, collectability of the trade receivables is reasonably assured, therefore the Company has not created an allowance for doubtful accounts. Contracts associated with design and development engineering require a deposit of up to 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. As the Company’s revenues and customer base increase, an allowance policy will be established. 

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

6

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

***Property and Equipment**–*** Property and equipment are stated at cost.  Additions and major improvements are capitalized while maintenance and repairs are charged to operations.  Upon trade-in, sale, or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized.

***Valuation of Long-lived Assets –***The carrying values of the Company’s long-lived assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that they may not be recoverable. When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying value is reduced by the estimated excess of the carrying value over the projected discounted cash flows.  The Company’s analysis did not indicate any impairment of assets as of March 31, 2011.

***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. The Company’s analysis did not indicate any impairment of intangible assets as of March 31, 2011. 

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

***Goodwill***– Goodwill represents the excess of the Company’s reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually or when a triggering event occurs 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 net assets. This test requires various judgments and estimates. The fair value of the Company is determined using the market value of the Company’s common stock. 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 –***Revenue is recognized when persuasive evidence of an arrangement exists, services have been provided or goods delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenue from the sale of products is recorded at the time of shipment to the customers.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contracts are met and then recognized as licensing royalty revenue over the remaining term of the contracts.

***Stock-Based Compensation*** – The Company recognizes expense for employee compensation from stock options and awards equal to the grant-date fair value over the vesting period.

***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, 2011, there were outstanding options to purchase 1,724,000 shares of common stock.  These options were not included in the computation of diluted loss per share as their effect would have been anti-dilutive, thereby decreasing loss per common share.

7

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 2 *–*STOCK OPTION PLANS**

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

The Company continues to utilize the Black-Scholes option-pricing model for calculating the fair value as defined by ASC Topic 718, which is an acceptable valuation approach under ASC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock. Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Company’s common stock has limited trading history.  Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Company’s employee stock options.

During the three month periods ended March 31, 2011 and 2010, the Company recognized $4,366 and $11,172 of stock-based compensation expense, respectively. There were 1,724,000 employee stock options outstanding at March 31, 2011.  A summary of all employee options outstanding and exercisable under the plan as of 

March 31, 2011, and changes during the three months then ended is set forth below:

**Options**

**Shares**

**Weighted**

** Average**

** Exercise Price**

**Weighted**

**Average**

**Remaining**

**    Contractual **

** Life (Years)**

**Aggregate**

** Intrinsic**

**Value**

 

 

 

 

 

Outstanding at the beginning of period 

1,799,000 

$

1.27

4.68

$

-

 

 

 

 

 

Granted

- 

-

-

-

 

 

 

 

 

Expired

- 

-

-

-

 

 

 

 

 

Forfeited

(75,000)

1.26

-

-

 

 

 

 

 

Outstanding at the end of Period

1,724,000 

$

1.27

4.43

9,200

 

 

 

 

 

Exercisable at the end of Period

1,569,000 

$

1.36

4.43

-

As of March 31, 2011, there was approximately $10,662 of unrecognized compensation cost related to employee stock options that will be recognized over a weighted average period of approximately 0.67 years.

**NOTE 3 – ISSUANCE OF STOCK**

On January 31, 2011 the Company issued 90,250 restricted shares at $.33 per share, in lieu of cash, to a consultant for marketing consulting services in cancelation of $30,000 of the Company's debt.  

On February 8, 2011, the Company issued 200,000 restricted shares at $.45 per share, in lieu of cash, for payment for investor relations services valued at $90,000. 

8

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 4 – RELATED PARTY TRANSACTIONS**

In September 2005 the Company entered into a manufacturing agreement with R&D Products, LLC, a Utah limited liability company, doing business in Midvale, Utah.  For the purpose of this contract, management considers R&D Products to be a related party because a controlling member of R&D Products, LLC is also a non-controlling shareholder of Flexpoint Sensor Systems, Inc.  R&D Products has developed a mattress with multiple air chambers that uses the Company’s Bend Sensors® and the Company has entered into an agreement to manufacture the Bend Sensors® for R&D’s specific mattress use.  The initial order is for 30,000 Bend Sensors® to be used to begin manufacture of 1,000 mattresses.  During 2007 and 2008 R&D Products deposited with Flexpoint the sum of $100,000 to begin work on the initial production order of 20 commercial beds.  Additional revenue from this contract is dependent upon R&D Products selling either their bed technology directly or licensing their technology to a third party. 

On September 11, 2008 R&D Products, LLC entered into a long-term Licensing Agreement for their bed technology with a major medical solutions provider (Licensee). The Agreement provides the Licensee the exclusive world–wide rights to R&D’s patented medical bed technology. On that same day the Company, R&D Products and the Licensee entered into a long-term joint manufacturing agreement for R&D’s medical bed technology and related products. The manufacturing agreement allows for the Company to manufacture sensors for the bed technology and related medical products through 2018 with an option to renew each year thereafter. Production schedules with specific quantities and deadlines are still being outlined. (see Note 7. "Litigation"). At this time management is unsure the effect their litigation with R&D will have on this agreement with R&D or its Licensee.  

The Company has a related party payable to its President, CEO and Director for reimbursement of travel and other related expenses incurred on behalf of the Company. The amount due to the President as of March 31, 2011 and December 31, 2010 is $4, 838 and $12,000, respectively.

The Company has a related party payable to its Chief Financial officer for services provided to the Company. The amount due to the Chief Financial officer as of March 31, 2011 and December 31, 2010 is $2,000 and $7,000, respectively. 

**NOTE 5 – NOTES PAYABLE**

On November 2, 2010 the Company secured a $500,000 line of credit from Maestro Investments. LLC. Under the terms and conditions of the line of credit the Company can draw against the line as needed to fund operations. The line has a fixed interest rate of 12% per annum and the principle amount of all draws and outstanding interest is due and payable on or before December 31, 2012.  The line of credit is secured by the Company's assets including, but not limited to, business furniture, fixtures and equipment. During the three months ending the Company drew down $150,000 of the line of credit to fund its operations.

**NOTE 6 – OPERATING LEASES**

In April 2009, the Company amended the operating lease agreement for its manufacturing facility in Draper, Utah. Under the new terms of the operating lease the average monthly payments are $8,450, including common area maintenance through December 2011. Management has discussed further extension of the lease under similar terms and should have the specific terms finalized before the current lease expires. The total future minimum payments under this lease as of March 31, 2011 are as follows:

**Year Ended December 31**

 

2011

 $     76,050 

 

 

 

 

 

 

 

 

 

                                Total

 

 $     76,050 

9

**FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 7 - LITIGATION**

On June 23, 2010, the Company, along with David B. Beck, the Company's Director of Engineering, filed a complaint against R&D Products, LLC, Persimmon Investments, Inc. and Jules A. deGreef, the managing member of R&D Products, LLC. The complaint alleges that all of the intellectual properties owned by R&D Products and Mr. deGreef, specifically patented applications using Bend Sensor® technology that were filed jointly by Mr. Beck and Mr. deGreef, and later assigned solely to Mr. deGreef and R&D Products, are the property of the Company. The assignment by Mr. Beck of his rights in the patents and intellectual properties were improperly given and are the property of the Company. The Company believes that since Mr. Beck was an employee of the Company during the time that he became the primary creative force and inventor of the Bend Sensor® applications for R&D Products and Mr. deGreef, and the inventions and applications were created using Flexpoint resources, the Company is claiming that such intellectual properties, patents, etc. filed by deGreef, Persimmon and R&D belong to Flexpoint and therefore is seeking financial damages and ownership of all intellectual rights, patents and inventions created by Mr. Beck for deGreef, Persimmon and R&D Products.

 

**NOTE 8 - LINE OF CREDIT**

On November 2, 2010 the Company secured a $500,000 line of credit from Maestro Investment LLC. Under the terms and conditions of the line of credit the Company can draw against the line as needed to fund operations. The line has a fixed interest rate of 12% per annum and the principle amount of all draws and outstanding interest is due and payable on or before December 31, 2012. During the three months ending March 31, 2011 the Company drew down $150,000 of the line of credit to fund operations.

**NOTE 9 - COMMITMENT**

On January 1, 2011 the Company extended its marketing agreement with Mr. Suhkamder Bedi through June 30, 2011. Under the agreement Mr. Bedi is to be paid $5,000 per month for his services, of which Mr. Bedi has agreed to accept shares of the Company's restricted common stock in lieu of cash payable quarterly. The number of shares issued will be based upon the average monthly market price of the common stock. 

**NOTE 10 - SUBSEQUENT EVENTS**

Subsequent to the date of the financial statements presented the Company received $50,000 for the subscription receivable.

10

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

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

EXECUTIVE OVERVIEW

Flexpoint Sensor Systems, Inc. is a development stage company principally engaged in designing, engineering and manufacturing bend sensor technology and devises using its patented Bend Sensor® technology, (a flexible potentiometer technology). For the past three years we have been making improvements to our technology and proving the versatility and durability of the Bend Sensor® by manufacturing Bend Sensor® devices and related products and introducing these to a variety of industries.  We own nine patents and have filed for additional patents and are in the process of filing for more. The Company is currently manufacturing several products that are being sold and supplied to its current customers. We are also working with several customers on the jointly developing additional commercially viable product in the automotive, medical and industrial industries. We are working towards the expansion of our customer base as our patented technology continues to gain recognition in the market. Over the next six to nine months we will concentrate most of our marketing efforts and limited financial resources on projects that we believe can be brought to market in the shortest period of time. We anticipate having as many as 5 to 10 different products featuring our patented Bend Sensor® technology on the market over the next 8 to 12 months including products in the automotive industry.

During 2010 our management announced a modification of our business model to more aggressively focus on smaller contracts and production orders that produce immediate income for the Company, which has generated more recognition of the technology and interest in the Bend Sensor's® depth and breadth of capabilities   We are currently working with and will continue to focus on larger contracts in the medical bed and automotive industry, but will also seek smaller contracts that can generate immediate cash flow.  As a result management expects a continued increase in our customer base which will increase interest in our Bend Sensor® technologies and devices which we can leverage into future growth.

During 2010 and during the past three months we have entered into several new agreements to develop new types of products for our Bend Sensor® technologies.  We have further developed the “poppet valve” for an airline craft hydraulic system, along with airline seat impact detection sensors.   We have made improvements on our initial prototype for a Home Monitoring Presence Detection System using our Bend Sensor® technologies and also an infant bed covering to monitor infants in the prevention of sudden death syndrome.  In addition, we continue working with automotive Tier one suppliers of our horn switch, comfort seat application, steering wheel alertness detection and seat belt reminder switch. The U.S. auto manufacturers are currently seeking out new technology that will help make their cars lighter and more fuel efficient. We believe that the Bend Sensor®   will meet or exceed their expectations for a low cost, durable light weight alternative.

The Company continues to manufacture products for Intertek Industrial Corp. Their ProTeck System is an automotive seat monitoring device application for emergency response vehicles.  This monitoring device places the Company’s Bend Sensors® in each rear passenger seat with a monitor viewable to the vehicle’s driver.  The foolproof system informs the driver if the emergency medical technicians are seated and properly secured prior to departure and while the vehicle is in motion. The system is installed in the seats of the rear compartments of the emergency vehicle and provides the driver with constant feedback as to the “seated and secured” status of passengers and personnel in the rear of the vehicle. The system is currently installed in about 20 ambulances and is being tested for use in other types of emergency vehicles.  The Company believes that through its relationship with Intertek it will further validate its technology in the automotive and safety industries. We have received inquires for similar systems for buses and cabs to ensure the safety of the their drivers 

11

Through its Joint Development and Manufacturing Agreement with R&D Product the Company has developed a patented medical bed technology. Using the Bend Sensor® technology and accompanying electronics the bed is able to determine the position of the person in the bed and how they are moved. The bed has the ability to roll a patient left or right to relieve pressure areas as well as facilitate dressing changes. Needed adjustments can be made through relieving pressure areas to meet the required standards of care and patient comfort. The medical application for the bed was originally scheduled to launch in mid to late 2009, however due to management changes, and an acquisition the project has been delayed. In addition, in June 2010 the Company initiated a legal action against R&D Products, LLC and our management is unsure of the effect that this action may have on our relationship with R&D Products and its Licensee (See note 7 of the financial statements).

The bed technology has a commercial application that will be marketed as an in-home specialty mattress. The specialty (non-innerspring) segment of the bedding market has been growing rapidly over the past six to seven years. With the increasing demand of specialty mattresses almost every mattress company has a specialty bed they promote. The Company has had some discussions with mattress companies who have expressed interest in the concept.

  

The down turn of the global economy and the current uncertainties in the health care industry resulted in a slower roll out of this product by the Licensee, which required the Company to revise its earlier production ramp up estimates and lowered the projected revenues for 2010. The Company continues to work on improvements to the mattress as they develop a long-term marketing strategy for its estimated roll out and production ramp up during 2011 and into 2012. 

Finalizing additional long-term revenue generating production contracts with other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts.  We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor® and Bend Sensor® related technologies and products to the market.  Management believes that even though we have made positive strides forward with our business plan, it is likely that significant progress may not occur for the next eight 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 during 2011. 

The widespread credit crisis has reduced consumer purchasing power and resulted in an overall down turn in consumer confidence. These factors have contributed to lower consumer spending and investments by companies and have resulted in a worldwide slowing of the global economy. While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged. During 2008 and 2009 some worldwide automakers saw double digit declines in profits, and others were required to seek protection through bankruptcy. However in 2010 and during the first quarter of 2011 the U.S. auto manufacturers have seen an increase in demand for more fuel efficient, smaller cars. 

In management's opinion the desire of U.S. manufacturers to have lighter weight more fuel efficient cars will be to our advantage. Our Bend Sensor® is lighter in weight, has fewer moving parts than conventional sensing devices, is more versatile and due to its unique design is more cost effective. Product and design changes in the automotive industry are slow, averaging two to three years before actually being incorporated into a commercially viable automotive platform. Because we are currently working with several Tier 1 suppliers, we believe we are poised to provide the next generation of sensing devises to the industry. With the likelihood of higher fuel and manufacturing costs, the auto industry are in the process of developing more fuel-efficient and alternative-fuel type (“green”) vehicles that will need to be lighter in weight, less complicated in design, and more cost effective to run and build. Due to the advanced technology of the Bend Sensor® and its versatility of applications we believe we can be a part of the changes needed in the automotive, energy and technological industries. 

In 2010 we entered into a Technology Development Agreement with Design HMi, LLC, which has extensive experience, contact and knowledge involving product design and development in the automotive industry. We believe this agreement will enhance our marketing efforts in the industry and focus our design efforts on current automotive needs.    

12

LIQUIDITY AND CAPITAL RESOURCES

Our revenue is primarily from design, contract, testing and limited production services and is not to a level to

support our operations.  Management anticipates that we may not realize significant revenue within the next eight months.  From 2008 through 2010 we have relied on proceeds from various convertible loans from existing shareholders to fund our operations. In November 2010 we issued 7,590,663 in restricted common shares of stock and retired $1,696,399 of outstanding convertible notes and corresponding accrued interest.

On November 2, 2010 the Company secured a $500,000 line of credit from Maestro Investments. LLC. Under the terms and conditions of the line of credit the Company can draw against the line as needed to fund operations. The line has a fixed interest rate of 12% per annum and the principle amount of all draws and outstanding interest is due and payable on or before December 31, 2012.  During the three months ending the Company drew down $150,000 of the line of credit to fund its operations.

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

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

FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES

Our principal commitments at March 31, 2011 consist of our operating lease and total liabilities of $378,377 which includes $150,000 of long-term notes payable related to our existing line of credit. Under the terms of our operating lease the average monthly payments are $8,450, including common area maintenance through December 31, 2011. The total future minimum payments under this lease as of March 31, 2011 are $76,050.

During the first three months of 2011 we drew $150,000 from our $500,000 existing line of credit.  The line of credit has an annual interest rate of 12% and is due and payable, including any outstanding interest, on or before December 31, 2012. The line of credit is collateralized by the Company's business furniture, fixtures and equipment.

Our total current liabilities include accounts payable of $137,347 related to normal operating expenses, including health insurance, utilities, production supplies, travel expense, and expenses for professional fees. 

Accrued liabilities at March 31, 2011, were $77,072 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.  

OFF-BALANCE SHEET ARRANGEMENTS 

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

CRITICAL ACCOUNTING ESTIMATES

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

13

We test long-lived assets quarterly for impairment or when a triggering event occurs.  Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets.  The amount of impairment is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other factors. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. If the carrying values of the long lives assets exceed the present value of the discounted projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly.  Under similar analysis no impairment charge was taken during the three month period ended March 31, 2011.  Impairment tests will be conducted on a quarterly basis and, should they indicate a carrying value in excess of fair value, additional charges may be required.

Financial accounting standards require that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest.  The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model.  Option pricing models require the input of highly sensitive assumptions, including expected stock volatility.  Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.  For the three month periods ended March 31, 2011 and 2010 we recognized $4,366 and $11,172, respectively, of stock-based compensation expense for our stock options and there was approximately $10,662 of unrecognized compensation cost related to employee stock options that will be recognized over approximately 0.67 years.

RESULTS OF OPERATIONS

The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and its subsidiaries and should be read in conjunction with our unaudited financial statements for the three months ended March 31, 2011 and 2010, 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, 2010 and 2009.   

 

Three month period ended

 

March 31, 2011

 

March 31, 2010

Design, contract and testing revenue

$                  12,125

 

$                  28,137

Total operating costs and expenses

357,195

 

314,884

Net other income (expense)

(2,693)

 

(89,289)

Net loss

(347,763)

 

(376,036)

Basic and diluted loss per common share

$                   (0.01)

 

$                   (0.01)

 

 

 

 

For the three months ending March 31, 2011 revenue decreased by $16,012 compared to the same period in 2010. Part of the decrease in revenue is due to the Company concentrating its marketing strategy and resources on a limited number of customers. Management believes this approach will have the highest potential to bring commercially viable products to market by the end of 2011 or early 2012, and provide sustainable cash flow to fund the Company's operations. Currently, overall revenues are not sufficient to sustain our operations and management does not anticipate that revenues will significantly increase until we are in a full production phase of a long-term licensing or manufacturing contract.

Revenue for the 2011 and 2010 interim periods was from design, contract and limited production. Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer. Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is recognized as licensing royalty revenue over the remaining term of the contract. Revenue from the sale of a product is recorded at the time of shipment to the customer.  

Of the $357,195 total operating costs and expenses for the three months ending March 31, 2011,  $45,441 was for direct research and development cost.  Of the $314,884 total operating cost and expense for the three months ending March 31, 2010,  $75,702 was for direct research and development cost.

14

Total operating expenses increased by $42,311 for the three months ended March 31, 2011, when compared to the same period in 2010. Part of the increase was due to the increase in consulting fees associated with our agreement with Mr. Suhkmander Bedi and an increase of investor relations fees for the three month period.  The operating expense increase was more than offset by the decrease in interest expense and amortization of discounts on the related party convertible notes outstanding during the same period 2010. 

Due to minimal revenues and overall operating costs and expenses, we recorded a net loss and loss per share for both the 2011 and 2010 periods.  Management expects losses to continue in the short term. 

The chart below presents a summary of our condensed consolidated balance sheets at March 31, 2011 and December 31, 2010

 

March 31, 2011

 

December 31, 2010

Cash and cash equivalents

$                 25,909

 

$                         6,027

Total current assets

63,921

 

63,956

Total assets

6,392,500

 

6,443,916

Total liabilities

378,377

 

206,396

Deficit accumulated during the development stage

(17,128,626)

 

(16,780,863)

Total stockholders’ equity

$           6,014,123

 

$                 6,237,520

Cash and cash equivalents increased $19,882 at March 31, 2011 compared to December 31, 2010.  The increase in cash resulted from collection efforts of accounts receivable during the first quarter 2011.  Our non-current assets decreased at March 31, 2011 due to the depreciation and amortization of long-lived assets. These assets include property and equipment valued at $290,760, net of depreciation; patents and proprietary technology of $664,905, net of amortization; goodwill of $5,356,414 and long-term deposits of $16,500 associated with the facility operating lease and pending patents.   

Current liabilities increased by $21,981 at March 31, 2011, and the increase was the result of increases in accrued liabilities for investor relations and attorneys' fees. Total liabilities increased by $171,981 during the three months ended March 31, 2011 due to the $150,000 draws against our line of credit to fund operations.

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, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Our Chief Executive Officer and Chief Financial Officer evaluate whether information required to be disclosed is recorded, processed, summarized and reported within the specified periods, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and 

15

Chief Financial Officer have concluded that our disclosure controls and procedures are effective to a reasonable assurance level of achieving such objectives.  However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  

**(b)**

**Changes in Internal Control over Financial Reporting**

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management reviewed our internal controls over financial reporting, and there have been no changes in our internal controls over financial reporting for the quarter ended March 31, 2011 that have materially affected, or are likely to affect, our internal controls over financial reporting.

**PART II - OTHER INFORMATION**

**ITEM 1A.  RISK FACTORS**

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

We are unable to fund our day-to-day operations from revenues and the lack of revenues for continued growth may cause us to delay our business development.  For the quarter ended March 31, 2011 we had negative cash flows from operating activities of $130,118.  We will require additional financing to fund our long-term cash needs and we may be required to rely on debt financing, loans from related parties, and private placements of our common stock for that additional funding. Such funding sources may not be available or the terms of such funding sources may not be acceptable to the company. If the Company is unable to find such funding it could have a material adverse effect on our ability to continue as a going concern.

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

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

·

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

·

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

·

attract and retain additional qualified technical and marketing personnel. 

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

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

Based on projected business development, we will need to complete a second production line and have it installed and approved by the end 2012.  The second manufacturing line is expected as a result of anticipated increased manufacturing demand and improved manufacturing efficiencies.  We have completed installation of our first production line and anticipate qualifying our manufacturing facility for ISO/TS-16949 certification as the Company successfully obtains additional manufacturing contracts during 2011 and into 2012.  However, we cannot assure you that we will satisfy ISO/TS-16949 qualification or that the production lines will produce product in the volumes required or that the production lines will satisfy the requirements of our automotive customers. 

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 

16

other planned uses.  Patent applications filed in foreign countries and patents in these countries are subject to laws and procedures that differ from those in the U.S. and may not be as favorable to us.  We also attempt to protect our confidential information through the use of confidentiality agreements and by limiting access to our facilities. There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our confidential information and intellectual properties from our competitors.

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

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

Economic uncertainties will delay or eliminate new technological investments. 

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

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

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

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

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

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS**

On January 31, 2011 the Company issued 90,250 restricted shares at $.33 per share, in lieu of cash, to Suhkmander Beddi for marketing and consulting services in cancellation of $30,000 of the Company's debt.  We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

17

On February 8, 2011, the Company issued 200,000 restricted shares at $.45 per share, in lieu of cash, for payment to the Chesapeake Group for investor relations services valued at $90,000. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

**ITEM 6. EXHIBITS**

**Part I Exhibits**

No.   

Description.

31.1

Certification of Clark M. Mower pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

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

32

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**Part II Exhibits**

No.   

Description.

3.1

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

3.2

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

10.1

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

10.2

Addendum to Lease Agreement between Flexpoint Sensor and F.G.B.P., L.L.C., dated April 1, 2009 (incorporated by reference to exhibit 10.2 of Form 10-Q filed May 14, 2009)

10.3

Promissory Note and Loan Agreement between Flexpoint Sensor and Maestro Investments, LLC, dated November 2, 2010.

**SIGNATURES**

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

**FLEXPOINT SENSOR SYSTEMS, INC**. 

Date: May 13, 2011

*/s/ Clark M. Mower*

Clark M. Mower

President, Chief Executive Officer and Director

Date: November 8, 2006

*/s/ Thomas N. Strong*

Thomas N. Strong

Controller, Chief Financial Officer 

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