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 September 30, 2009

[   ] 

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 24,792,887 as of November 18, 2009.

1

**TABLE OF CONTENTS**

PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements

              Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2009 and

    December 31, 2008

3

              Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine 

  Months Ended September 30, 2009 and 2008 and for the Cumulative Period from 

  February 24, 2004 (Date of Emergence from Bankruptcy) through September 30, 2009

4

             

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

                Months Ended September 30, 2009 and 2008 and for the Cumulative Period from 

                February 24, 2004 (Date of Emergence from Bankruptcy) through September 30, 2009

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

16

Item 4T. Controls and Procedures  

16

PART II: OTHER INFORMATION

Item 1A.  Risk Factors

17

Item 6.  Exhibits

 19

Signatures

19

**PART I - FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

The financial information set forth below with respect to our condensed consolidated financial position as of September 30, 2009, and December 31, 2008, the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2009 and 2008, and condensed consolidated statements of cash flows for the nine month periods ended September 30, 2009 and 2008 is unaudited. This financial information, 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 and nine month periods ended September 30, 2009 and 2008, respectively, are not necessarily indicative of results to be expected for any subsequent period.

2

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

**(A Development Stage Company)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 

 

**September 30,**

 

**December 31,**

 

 

** 2009**

** **

** 2008**

**ASSETS**

 

 

 

 

**Current Assets**

 

 

 

 

Cash and cash equivalents

$

  49,520 

$

    178,158 

Accounts receivable

 

6,506 

 

32,551 

Inventory

 

8,622 

 

10,016 

Deposits and prepaid expenses

 

20,730 

 

30,717 

**Total Current Assets**

 

85,378 

 

251,442 

**Long-Term Deposits**

 

6,500 

 

6,500 

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

 

471,861

 

560,161

     of $120,830 and $29,984

 

 

 

 

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

 

 

 

 

amortization of $126,993 and $31,748

 

833,991 

 

929,237 

**Goodwill**

 

5,356,414 

 

5,356,414 

**Total Assets**

$

  6,754,144 

 $

7,103,754 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

 

**Current Liabilities**

 

 

 

 

Accounts payable

$

52,351 

$

34,072 

Accrued liabilities

 

344,830 

 

159,196 

Convertible notes payable, net of discount of $6,061 and $0

 

16,139 

 

- 

Short-term convertible notes payable to related party, 

 

 

 

 

     net of discounts of $21,627 and $50,000

 

391,386 

 

250,000 

**Total Current Liabilities**

 

804,706 

 

443,268 

 

 

 

 

 

Long-term convertible notes payable to related party, 

 

 

 

 

     net of discounts of $25,812 and $0

 

361,374 

 

- 

**Total Liabilities**

 

1,166,080 

 

443,268 

 

 

 

 

 

**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;

 

 

 

 

24,792,887 shares issued and outstanding each period

 

24,792 

 

24,792 

Additional paid-in capital

 

17,960,849 

 

17,851,493 

Warrants and options outstanding

 

2,129,768 

 

2,037,214 

Deficit accumulated during the development stage

 

(14,527,345)

 

(13,253,013)

**Total Stockholders' Equity**

 

5,588,064 

 

6,660,486 

**Total Liabilities and Stockholders' Equity**

$

6,754,144 

 $

7,103,754 

 

 

 

 

 

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**

 

 

 

 

 

 

 

 

 

 

**from**

 

 

 

 

 

 

 

 

 

 

**Bankruptcy)**

 

 

**For the Three Months**

 

**For the Nine Months**

 

**Through**

 

 

**Ended September 30,**

 

**Ended September 30,**

 

**September 30,**

 

 

**2009**

 

**2008**

 

**2009**

 

**2008**

 

**2009**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Design, Contract and Testing Revenue**

$

20,004 

 $

102,657 

 $

52,211 

$

112,750 

 $

719,373 

 

 

 

 

 

 

 

 

 

 

 

**Operating Costs and Expenses**

 

 

 

 

 

 

 

 

 

 

Amortization of patents and proprietary technology

 

31,749 

 

35,091 

 

95,246 

 

105,274 

 

802,870 

Cost of revenue

 

1,365 

 

7,316 

 

10,612 

 

10,415 

 

137,489 

Administrative and marketing expense

 

231,327 

 

255,466 

 

732,732 

 

923,794 

 

9,940,948 

 Research and development expense

 

99,273 

 

100,952 

 

342,146 

 

355,911 

 

2,298,188 

Impairment of long-term assets

 

- 

 

246,764 

 

- 

 

246,764 

 

546,562 

 

 

 

 

 

 

 

 

 

 

 

**Total Operating Costs and Expenses**

 

363,714 

 

645,589 

 

1,180,736 

 

1,642,158 

 

13,726,057 

 

 

 

 

 

 

 

 

 

 

 

**Other Income and Expenses**

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(44,015)

 

(107)

 

(146,111)

 

(107)

 

(1,735,451)

Interest income

 

32 

 

1,227 

 

304 

 

9,187 

 

131,704 

Sublease rent income

 

- 

 

- 

 

- 

 

- 

 

11,340 

Other income 

 

- 

 

- 

 

- 

 

- 

 

478 

Gain on forgiveness of debt

 

- 

 

- 

 

- 

 

- 

 

71,268 

 

 

 

 

 

 

 

 

 

 

 

**Net Other Income Expense)**

 

(43,983)

 

1,120 

 

(145,807)

 

9,080 

 

(1,520,661)

 

 

 

 

 

 

 

 

 

 

 

**Net Loss**

$

(387,693)

 $

(541,812)

 $

(1,274,332)

 $

(1,520,328)

  

(14,527,345)

 

 

 

 

 

 

 

 

 

 

 

**Basic and Diluted Loss**

 

 

 

 

 

 

 

 

 

 

**    Per Common Share**

$

(0.02)

 $

(0.02)

 $

(0.05)

 $

(0.06)

 

 

 

 

 

 

 

 

 

 

 

 

 

**Basic and Diluted Weighted-**

 

 

 

 

 

 

 

 

 

 

**    Average Common Shares Outstanding**

 

24,792,887 

 

24,792,887 

 

24,792,887 

 

24,792,887 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 from**

 

 

 

 

 

 

 

 

 

 

**Bankruptcy)**

 

 

 

 

 

 

**For the Nine Months**

 

**through**

 

 

 

 

 

 

**Ended September 30,**

 

**September 30,**

 

 

 

 

 

 

**2009**

 

**2008**

 

**2009**

**Cash Flows from Operating Activities:**

 

 

 

 

 

 

Net loss

 

 

 

$

(1,274,332)

$

(1,520,328)

$

(14,527,345)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

Depreciation

 

 

 

90,845 

 

107,840 

 

764,159 

 

Amortization of patents and proprietary technology

95,246 

 

105,274 

 

802,870 

 

Impairment of long-lived assets

 

 

- 

 

246,764 

 

546,562 

 

Issuance of common stock and warrants for services

- 

 

- 

 

2,695,053 

 

Expenses paid by increase in convertible note payable

- 

 

- 

 

60,000 

 

Amortization of discount on note payable

 

- 

 

- 

 

1,556,666 

 

Stock-based compensation expense for employees

92,554 

 

202,596 

 

1,736,220 

 

Non-cash interest expense on convertible notes payable

105,856 

 

- 

 

115,856 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

 

26,045 

 

(16,397)

 

(6,506)

 

Inventory

 

 

 

 

1,394 

 

- 

 

(8,622)

 

Deposits and prepaid expenses

 

 

9,987 

 

(9,412)

 

(27,230)

 

Accounts payable

 

 

 

40,480 

 

(5,894)

 

(133,555)

 

Accrued liabilities

 

 

 

185,634 

 

55,886 

 

342,338 

 

Deferred revenue

 

 

 

- 

 

(19,300)

 

(343,750)

**Net Cash Used in Operating Activities**

** **

(626,292)

 

(852,971)

 

(6,427,284)

**Cash Flows from Investing Activities:**

 

 

 

 

 

 

 

Payments for the purchase of equipment

 

(2,546)

 

- 

 

(200,120)

Payments for patents

 

 

 

- 

 

(2,238)

 

(45,868)

Payment for acquisition of equipment and proprietary

 

 

 

 

 

 

technology from Flexpoint Holdings, LLC

 

- 

 

- 

 

(265,000)

**Net Cash Used in Investing Activities**

 

 

(2,546)

 

(2,238)

 

(510,988)

**Cash Flows from Financing Activities:**

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

- 

 

- 

 

5,617,207 

Principal payments on notes payable - related parties

- 

 

- 

 

(460,300)

Proceeds from notes payable - related parties

 

- 

 

- 

 

445,300 

Proceeds from borrowings under convertible note payable

500,200 

 

- 

 

1,383,534 

**Net Cash Provided by Financing Activities**

 

500,200 

 

- 

 

6,985,741 

**Net Change in Cash and Cash Equivalents**

 

(128,638)

 

(855,209)

 

47,468 

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

178,158 

 

1,058,135 

 

2,051 

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

$

49,520 

$

202,926 

$

49,520 

 

 

 

 

 

 

 

 

 

 

 

**Supplemental Cash Flow Information:**

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

$

- 

$

107 

$

16,995 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Accounts payable converted to note payable

$

22,200 

$

- 

$

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, 2008, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2009. 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, 2009.

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 planned production and revenue generation have not commenced.  Development stage activities primarily include acquiring equipment and technology, organizing activities, obtaining financing and seeking manufacturing contracts. During the third quarter 2008, the Company entered into new manufacturing agreements which are described in Note 3.  Even though the Company is making strides forward with its business plan, it is likely that significant progress may not occur within the next eight to twelve months. Accordingly, the Company may not realize significant revenues or become profitable within the next twelve months, and will require additional financing to fund its current 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.

***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 are reasonably assured, therefore the Company has not created an allowance for doubtful accounts. Contracts associated with design and development engineering require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered deferred income until the entire project is completed and accepted by the customer, at which time the entire contract price is billed to the customer and the deposit applied. 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. 

***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.

6

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

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

***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.  The Company’s analysis did not indicate any impairment of assets as of September 30, 2009.

***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.

***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 of common shares outstanding during the period. At September 30, 2009, there were outstanding options to purchase 1,737,000 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.

***Subsequent events*** – Subsequent events have been evaluated through November 18, 2009 the date the financial statements were issued, and there have been no material changes to the Company's financial condition since September 30, 2009.   

OnOctober 29, 2009 the Company secured $50,000 in additional operating capital through the issuance of notes with identical conversion features, terms and conditions as those secured during the nine months ended September 30, 2009.

**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 utilized the Black-Scholes option-pricing model for calculating the fair value of stock based compensation for financial reporting purposes.  This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.  Projected data related to the expected volatility 

7

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

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

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.

On April 22, 2009 the Company granted options to employees to purchase an aggregate of 350,000 shares of common stock at an exercise price of $0.33 per share.  The options vest in two equal installments on December 31, 2009 and December 31, 2010 and expire on August 25, 2015, which is 10 years from date of Board approval of the Plan.  The Company used the following assumptions in estimating the fair value of the options granted on April 22, 2009; market value at time of issuance - $0.24; expected holding period – 5 years; risk-free interest rate – 4.93%; dividend yield – 0%; and expected volatility – 200%.  Using these assumptions, the options granted have a weighted-average fair value of $0.23 per share.

During the nine month periods ended September 30, 2009 and 2008, the Company recognized $92,554 and $202,596 of stock-based compensation expense, respectively. There were 1,737,000 employee stock options outstanding at September 30, 2009.  A summary of all employee options outstanding and exercisable under the plan as of September 30, 2009, and changes during the nine 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 

 

1,432,000 

$

1.61 

 

6.65 

$

- 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

350,000 

 

0.33 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

- 

 

- 

 

**- **

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

45,000 

 

0.72 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at the end of Period

 

1,737,000 

$

1.38 

 

4.74 

$

- 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at the end of Period

 

1,257,000 

$

1.72 

 

5.75 

$

- 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2009, there was approximately $65,950 of unrecognized compensation cost related to employee stock options that will be recognized over a weighted average period of approximately 1.14 years. 

**NOTE 3 – RELATED PARTY MANUFACTURING CONTRACT**

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 

8

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

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

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. The Licensee has assigned a design and development team of engineers that are working closely with the Company’s engineering staff and are jointly developing a marketing strategy with specific price points and milestones for production.  The Company expects to be in full production of the bed by the end of year 2011 to early 2012. 

**NOTE 4 – CONVERTIBLE NOTES PAYABLE**

During the nine months ended September 30, 2009 the Company secured $500,200 of short and long-term financing from related parties, which represents notes with maturity dates ranging from December 31, 2009 to March 31, 2011. Also a $22,200 note due on March 31, 2010, was issued to finance insurance. The proceeds were used for operations and to finance our annual directors and officers insurance. All of the notes have an annual interest rate of 10% and are secured by the Company’s business equipment. $235,214 of the notes also have a conversion feature for restricted common shares at $.25 per share and $287,186 of the total notes have a conversion feature for restricted common share at $.15 per share. Due to the difference of the market price of the common stock associated with the conversion features of the notes and the conversion price, the convertible notes resulted in a beneficial conversion feature of $109,356, which was recognized as a debt discount and an increase to additional paid-in capital. The calculation for the “intrinsic value” of the beneficial conversion feature was the difference between the conversion price of the common stock and the market value on the date the notes were executed multiplied by the number of shares into which the notes may be converted. The debt discount will be amortized from the date the notes were executed through the maturity date of the notes.  

In addition, the Company was able to extend the maturity of $300,000 of the existing notes payable, $200,000 until May 31, 2010 and $100,000 until March 31, 2011 which originally matured on May 31, 2009.

**NOTE 5 – 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 $7,950, including common area maintenance through December 31, 2010. This amount increases to $8,450 during the final year of the lease ending December 31, 2011.  The total future minimum payments under this lease as of September 30, 2009 are as follows:

Year End December 31

 

 

 

 

 

 

 

 

2009

 

$        23,850 

 

2010

 

$        95,400 

 

2011

 

$      101,400 

 

Total minimum lease payments

$      220,650 

9

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

**(A Development Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**NOTE 6 - LITIGATION**

OnMay 1, 2009, the Company negotiated a settlement agreement on the legal action and patent encroachment that was filed against Michael W. Wallace, d/b/a Pure Imagination, in January 2006. The complaint alleged that Mr. Wallace filed for patent rights and protection using certain software in combination with our Bend Sensor® technology related to the SEAT MATTM for which Mr. Wallace assisted the Company in developing and was paid by the Company for his services. In his patent filing Mr. Wallace failed to list the Company, its employees and previous employees as co-inventors on the patent he obtained and for his pending application for a patent.  The Company sought a copy of the source code and ownership of the patent and/or correction of the patent and patent application to add the appropriate co-inventors. Under the terms of the settlement there is an option to purchase the rights to the patent for $120,000, but the Company is under no obligation to exercise the option. On May 15, 2009 the Company received approval of the settlement by the court and the legal action was dismissed.

10

 *In this quarterly report references to 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 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 engaged principally in acquiring equipment and technology, obtaining financing and seeking manufacturing contracts.  Our planned operations have not commenced to a commercial level and include designing, engineering and manufacturing and selling sensor technology and products featuring our Bend Sensor® technology and equipment. 

We emerged from Chapter 11 bankruptcy on February 24, 2004 and since that time we have leased a manufacturing facility, purchased necessary equipment to establish a production line, negotiated contracts, manufactured and enhanced Bend Sensor technology devices and conducted testing on those devices.  Our goal is to qualify our production line and facility as an ISO/TS 16949 production line and facility at a time that production contracts will require it.  This qualification will increase the marketability of our products to automotive parts suppliers.

On September 1, 2009 the Company submitted to the National Aeronautics and Space Administration (NASA) a proposal for a SBIR grant. The grant request was part of NASA's National Aviation Safety Program that is interested in products that will assist in the on-board diagnosis, prognosis, prediction and mitigation of potential system failures and faults. The grant application included the declaration that "the Bend Sensor® could be placed in areas previously impractical or not economically feasible for the placing of sensors. The Bend Sensor's unique design and durability would allow it to be laminated into assemblies such as wings, critical areas in fuselages, and rotors. The Bend Sensor's predictability would provide critical performance data that will be available to the operators and maintenance personnel. Real time monitoring of rotorcraft power trains along with automated techniques to obtain and process diagnostic information assists detection of onset of failure, isolating damage, and assessing damage severity. By integrating the Bend Sensor® with rotorcraft, it could be used to predict the health and usage of rotorcraft dynamic mechanical systems in the engine and drive system, as well as automatic rotor imbalance detection and rotor smoothing.” 

If approved, the grant could provide the Company with up to $850,000 in funds, while proving the viability and commercialization of an aeronautics application for the Bend Sensor® without any dilution to the Company's current shareholders.

The Company has negotiated the following contracts, which management believes may produce revenues within the next twelve to eighteen months:

In September 2007 the Company entered into an agreement with Intertek Industrial Corp. on 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.  Revenue from the development fees and the initial 

11

purchase order were approximately $30,000 in 2008. During the first quarter of 2009 Intertek issued a second purchase order for over $10,000, and has initiated discussions with other seat manufactures for additional applications of their technology. The Company believes that through its relationship with Intertek it will further validate its technology in the automotive and safety industries. Through this validation the Company anticipates additional projects with Intertek using the Bend Sensors®. 

In March 2008 the Company entered into a basic agreement with Auto Electronic Corporation (“AEC”) to mutually develop, manufacture, market, and sell automotive products utilizing Bend Sensor® technology. Since March 2008 we have completed advanced testing on four various designs of a Seat-Belt-Reminder (SBR) with AEC and signed a joint development agreement with them prior to December 31, 2008. AEC’s has completed their final tests and design specifications for the SBR and is currently marketing the integrated system to its Tier 1 suppliers. We anticipate that the SBR will be one of many automobile applications that AEC will integrate using the Bend Sensor® technology. AEC, a South Korean auto parts supplier, has a strong relationship with Hyundai-Kia Motors, as well as other Tier 1 automotive suppliers and manufacturers.  AEC intends to promote new and innovative applications to automotive manufacturers and parts suppliers including Hyundai-Kia, the sixth largest auto manufacturer in the world.  In addition, under the agreement AEC and Flexpoint will cooperatively work toward development of other applications utilizing the Bend Sensor® technology for which the company sees a market. Management believes that the automotive sector offers the greatest potential for acquiring large, long-term contracts, but because of the length of time required to successfully market and develop products for automotive use, the realization of income takes longer in this sector, with substantial income coming as much as three to five years after agreements have been successfully negotiated.

On September 11, 2008 the Company entered into a Joint Manufacturing Agreement with R&D Products, LLC, a Midvale, Utah company and R&D’s Licensee of its patented medical bed technology.  The Licensee is one of the world’s leading medical mattress providers. The Company agreed to sell Bend Sensors® to be used in the manufacture and development of R&D’s mattress and related medical products on a commercial scale. The mattress and related products will be distributed, sold and marketed through the Licensee’s current world-wide distribution channels. It is anticipated that sensors sold for the mattress and related products will begin to generate revenue by the fourth quarter 2009 and have the potential for significant revenues over the 10 year manufacturing agreement.  

The down turn of the global economy and the current uncertainties in the health care industry has resulted in a slower roll out of this product by the Licensee, which has required the Company to revise its earlier production ramp up estimates and lowered the projected revenues for 2009. The Licensee continues to work with the Company on improvements to the mattress as they develop a long-term marketing strategy for its estimated roll out and production ramp up during 2010.   

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 are making positive strides forward with our business plan, it is likely that significant progress may not occur for the next eight to twelve months.  Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable during 2009. 

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 world wide slowing of the global economy. While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged. Worldwide automakers are seeing double digit declines in profits. This trend is expected to continue through 2009 and not only affect the automobile manufacturer but also the Tier 1 and after market suppliers. 

Because the Company has concentrated most of its marketing efforts on the automotive industry and with the downturn in this industry and the economy as a whole we might experience further delays in securing 

additional long-term production contracts. However, the economic down turn might also be to our advantage. Our Bend Sensor® is lighter in weight, has fewer moving parts than conventional sensing devises, is more versatile and due to its unique design is more cost effective. Product and design changes in the automotive industry are slow, 

12

averaging two to three years before actually being incorporated into a commercially viable automotive platform. Because we are not currently under production in an auto application, 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 will be looking to develop 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. 

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 to twelve months.  For the past twelve months we have relied on proceeds from private placements and loans from related parties. We completed a private placement in June and September of 2007 to satisfy most of our cash requirements through December 31, 2008.  In these private placements we issued an aggregate of 1,500,000 shares of common stock at a price of $1.00 per share.  We realized net proceeds of $1,500,000 from the private placements that we have used to fund continuing operations and business development.  In November 2008 we secured $300,000 of short-term financing from related parties. The notes were due and payable on May 31, 2009. In June 2009 we extended these notes for an additional year. We also secured an additional $500,200 in short and long-term financing from related parties during the nine months ended September 30, 2009 and an additional $50,000 on October 29, 2009 through the issuance of notes.  The notes have an annual interest rate of 10%.  They also have a conversion option for restricted common shares at $.15 to $.25 per share.  The same related parties have agreed to fund our continued operations under similar terms as needed. To date we have used the funds generated from these private placements and notes to fund continuing operations and business development.  

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 private placement, notes and our engineering and design fees will not fund our operations. We are currently in negotiations with existing shareholders for additional convertible debt financing that will provide sufficient funds for the next eight to twelve months. We believe that this additional financing will provide the needed capital to extend operations to the development of production with R&D Products, LLC and their Licensee on the medical mattress project. At that time the Licensee will be providing some needed cash flow through the development stage of the agreement.  If necessary we may rely on additional debt financing, loans from related parties and private placements of common stock for additional funding.  However, we may not be able to obtain financing, or that sources of financing, if any, will continue to be available, and if available, that they will be on terms favorable 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 September 30, 2009 consist of our operating lease and total liabilities of $1,166,080 which includes $752,760 short and long-term notes payable to related parties, net of $53,500 discount. Under the new terms of our operating lease the average monthly payments are $7,950, including common area maintenance through December 31, 2010. This amount increases to $8,450 during the final year of the lease ending December 31, 2011.  The total future minimum payments under this lease as of September 30, 2009 are $220,650.

Our total current liabilities include accounts payable of $52,351 related to normal operating expenses, including health insurance, utilities, production supplies, travel expense, and expenses for professional fees. 

Accrued liabilities at September 30, 2009, were $344,830 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued interest expense on notes and accrued paid time off.  

13

In January 2006 we initiated a legal action for patent encroachment and we anticipated that this legal action would result in legal costs of approximately $100,000; however, the cost of this action was higher than anticipated. Based upon the cost to-date and the open-ended nature of the legal and court cost of the litigation 

management felt it was in the best interest of the Company to settle the above referenced litigation. On May 1, 2009 we negotiated a settlement agreement on the legal action and patent encroachment. The Company received approval of the settlement by the court and the legal action was dismissed on May 15, 2009

OFF-BALANCE SHEET ARRANGEMENTS 

None.

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. 

We annually test long-lived assets 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 long-lived asset impairment test conducted at December 31, 2007 and 2008 identified a loss of $299,798 and $246,764 respectively, and these additional expenses were recognized accordingly. The analysis compared 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.  The result of the valuation analysis showed an impairment of long-lived assets, as their carrying values exceeded the present value of the discounted projected revenues.  Under similar analysis no impairment charge was taken during the nine months ended September 30, 2009.  Impairment tests will be conducted on a regular 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 nine month periods ended September 30, 2009 and 2008 we recognized $92,554 and $202,596, respectively, of stock-based compensation expense for our stock options and there was approximately $65,930 of unrecognized compensation cost related to employee stock options that will be recognized over approximately 1.14 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 and nine month periods ended September 30, 2009 and 2008, 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, 2008 and 2007 respectively.   

14

 

 

 

 

Three month period ended

 

Nine month period ended

 

 

 

 

Sept. 30, 2009

 

Sept. 30, 2008

 

Sept. 30, 2009

 

Sept. 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Design, contract and testing revenue

$

20,004 

$

102,657 

$

52,211 

$

112,750 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

363,714 

 

645,589 

 

1,180,736 

 

1,642,158 

 

 

 

 

 

 

 

 

 

 

 

Net other income (expense)

 

(43,983)

 

1,120 

 

(145,807)

 

9,080 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 $

(387,693)

$

(541,812)

$

(1,274,332)

$

(1,520,328)

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

$

(0.02)

$

(0.02)

$

(0.05)

$

(0.06)

 

 

 

 

 

 

 

 

 

 

 

Revenue for the 2009 interim periods was from design, contract and limited production.  Revenue for the 2008 interim periods was primarily from design and development engineering, prototype products and testing services. 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 $363,714 and $1,180,736 total operating costs and expenses for the three and nine months ending September 30, 2009, $99,273 and $342,146 were for direct research and development cost, respectively.  Of the $645,589 and $1,642,158 total operating cost and expense for the three and nine months ending September 30, 2008, $100,952 and $355,911 were for direct research and development cost, respectively.

The decrease in revenue for the three and nine month periods ended September 30, 2009 compared to the three and nine month periods ended September 30, 2008 resulted from the recognition of deferred revenue in the third quarter of 2008 that was not available during the same period 2009. Excluding the 2008 deferred revenues, annual revenues in 2009 increased by approximately $10,000.  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.

Total operating expenses decreased by $281,875 and $461,422 for the three and nine months ended September 30, 2009 when compared to the same periods in 2008. Most of the decrease is due to lower stock based compensation expense to employees, and the cost cutting initiatives that were implemented during the first quarter of 2009.  The decreases were more than offset by the accrual of interest expense and amortization of discounts on the related party convertible notes. 

Due to minimal revenues and overall operating costs and expenses, we recorded a net loss and loss per share for both the 2009 and 2008 periods.  Management expects losses to continue in the short term. 

The chart below presents a summary of our consolidated balance sheets at September 30, 2009 and December 31, 2008. 

15

SUMMARY OF BALANCE SHEET INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,520 

$

178,158 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

 

85,378 

 

251,442 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

6,754,144 

 

7,103,754 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

1,166,080 

 

443,268 

 

 

 

 

 

 

 

 

 

 

Deficit accumulated during the development stage

(14,527,345)

 

(13,253,013)

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

$

5,588,064 

$

6,660,486 

 

Cash and cash equivalents decreased by $129,638 at September 30, 2009 compared to December 31, 2008 because we had minimal revenue during the nine month period to provide cash.  The entire decrease in cash resulted from funds used for operating activities.  Until our revenue increases, our cash will continue to decrease.  

Our non-current assets decreased at September 30, 2009 due to the depreciation and amortization of long-lived assets. These assets include property and equipment valued at $471,861, net of depreciation; patents and proprietary technology of $833,991, net of amortization; goodwill of $5,356,414 and long-term deposits of $6,500 associated with the facility operating lease.    

Total liabilities increased by $722,812 at September 30, 2009, which was the result of increases in accrued liabilities and a net increase in short and long-term convertible notes payable of $518,899.

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.

**ITEM 4T.  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.  Based upon this evaluation, our Chief Executive Officer and Chief Financial  Officer concluded that 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 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.  

16

**(b)**

**Management’s Report on 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 September 30, 2009 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 2009 nine month period we had negative cash flows from operating activities of $626,292.  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 during 2011.  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  2010.  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 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.

17

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 will 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. 

Failure to achive and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley

Act could lead to loss of investor confidence in our reported financial information.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  Our independent registered accounting firm must attest to the effectiveness of our internal control over financial reporting for the fiscal year ended December 31, 2010.  We cannot assure you as to our independent auditors’ conclusions at December 31, 2010 with respect to the effectiveness of our internal control over financial reporting.  There is a risk that our independent auditors will not be able to conclude at that time that our internal controls over financial reporting are effective as required by Section 404 of the Act.  

18

**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)

**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: November 18, 2009

*/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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