The accompanying notes are an integral part of these condensed consolidated financial
statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(UNAUDITED)
NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Interim Financial Statements – The accompanying unaudited condensed consolidated
financial statements include the accounts of Flexpoint Sensor Systems, Inc. (the “Company”). These financial statements are
condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States
of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of
Flexpoint Sensor Systems, Inc. for the year ended December 31, 2021 included in the Company’s Form 10-K filed with the Securities
and Exchange Commission on March 31, 2022. In particular, the Company’s significant accounting principles were presented as Note
1 to the Consolidated Financial Statements in that report. In the opinion of management, all adjustments necessary for a fair presentation
have been included in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments. The
results of operations presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2022.
Nature of Operations – Flexpoint Sensor Systems, Inc. (the Company) is located
in West Jordan, Utah. The Company’s activities to date have included acquiring equipment and enhancing technology, obtaining financing,
limited production and seeking long-term manufacturing contracts. The Company’s operations are in designing, engineering, manufacturing
and selling sensor technology and equipment using flexible potentiometer technology. Through March 31, 2022, the Company continued to
manufacture products and sensors to fill customer orders and provide engineering and design work.
The COVID-19 Pandemic (“the Pandemic”) has had a dramatic effect on our business as
well as the business of our customers. The wide-ranging effects on the world-wide business market has led to a general reluctance
for businesses to move forward with entering into major commitments until their future markets have been clarified. Because of this, we
have experienced a significant slowdown in the size and number of orders received and, while we cannot predict when the influence of the
Pandemic will end, we expect that orders will return to their former levels and increase following a return to normal business operations.
Use of Estimates – The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents are considered to
be cash and highly liquid securities with original maturities of three months or less.
Fair Value Measurements - The fair value of a financial instrument is the amount that could be
received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated
based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.
In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit
risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality
and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest
level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or
8
model-derived valuations in which all significant inputs are observable
or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement
of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market,
the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes
payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
Accounts Receivable – Trade accounts receivable are recorded at the time
product is shipped or services are provided including any shipping and handling fees. Contracts associated with design, development engineering
and manufacturing generally require a deposit of 50% of the quoted price prior to the commencement of work. The deposit is considered
deferred income until the entire project, or the appropriate portion of the contract to meet scheduled deliveries is completed and shipped,
and accepted by the customer, at which time the entire contract price, or the appropriate portion of the contract, is billed to the customer
and the deposit applied. The Company has established an allowance for bad debts based on a historical experience and an analysis of risk
associated with the account balances. The balance in the allowance account was $105,790 and $105,790 as of March 31, 2022
and December 31, 2021, respectively.
Inventories – The Company does not currently have inventory. However,
as production levels increase inventories will be carried on the balance sheet. Inventories will be stated at the lower of cost
or market or net realizable value. Cost is determined by using the first in, first out (FIFO) method.
Property and Equipment – Property and equipment are stated at cost.
Additions and major improvements are capitalized while maintenance and repairs are charged to operations. Upon trade-in, sale
or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss
is recognized. Depreciation is computed using the straight-line method and is recognized over the estimated useful lives of the property
and equipment, which range from three to ten years.
Valuation of Long-lived Assets – The carrying values of the Company’s long-lived assets are
reviewed for impairment annually and whenever events or changes in circumstances indicate that they may not be recoverable. When projections
indicate that the carrying value of the long-lived asset is not recoverable, the carrying value is reduced by the estimated excess of
the carrying value over the projected discounted cash flows. Under similar analysis no impairment charge was taken during the three-month
period ended March 31, 2022 and during the year ended December 31, 2021. Impairment tests will be conducted on an annual basis and,
should they indicate a carrying value in excess of fair value, additional impairment charges may be required.
Intangible Assets – Costs to obtain or develop patents are capitalized and
amortized over the remaining life of the patents, and technology rights are amortized over their estimated useful lives. The Company currently
has the right to several patents and proprietary technology. Patents and technology are amortized from the date the Company acquires
or is awarded the patent or technology right, over their estimated useful lives, which range from 5 to 15 years. An impairment charge
is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined
by projected discounted net future cash flows. Under similar analysis there was no impairment charge taken during the three-month
period ended March 31, 2022 and during the year ended December 31, 2021.
Research and Development – Research and development costs are recognized
as an expense during the period incurred, which is until the conceptual formulation, design, and testing of a process is completed and
the process has been determined to be commercially viable.
Lease Obligations – While the Company has adopted ASC 842 the Company has no leases at the date
of this report that are required to be reported under ASC 842. As the Company enters into such leases it will record obligations
under all leases it has entered into pursuant to the reporting requirements under ASC 842, allocating such obligations between current
and long term.
9
Goodwill – Goodwill represents the excess of the Company’s reorganization value over the fair
value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually, or
at interim periods when a triggering event occurs using a fair value approach. According to Accounting Standards Codification (or “ASC”)
350-20 Intangibles – Goodwill and Other, a fair-value-based test is applied at the overall Company level. The test compares the fair
value of the Company to the carrying value of its net assets. This test requires various judgments and estimates. The fair value of the
Company is allocated to the Company’s assets and liabilities based upon their fair values with the excess fair value allocated to
goodwill. An impairment of goodwill is measured as the excess of the carrying amount of goodwill over the determined fair value.
Revenue Recognition – On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts
with Customers, and all of the related amendments (“new revenue standard”). We have applied the new revenue standard
to all contracts as of the date of the initial adoption. The new revenue standard establishes five steps whereby a transaction is
analyzed to determine if revenue has been earned and can be recognized. The adoption of the new revenue standard did not have any
effect on our financial statements. The vast majority of our sales are made to order, for which orders we require a deposit of 50%
of the value of the order. That amount is put in a customer deposit account until the entire order has been manufactured and shipped
or the appropriate portion of the project is completed to meet scheduled deliveries, invoiced and shipped. At the ship date, the
Company has no further obligations under that portion of the contract and the revenue from the sale is recognized.
A part of our customer base is made up of international customers. The table below allocates revenue between
domestic and international customers. The following table presents Flexpoint Sensor Systems
revenues disaggregated by region and product type:
| Three months ended: |
|
March 31, |
|
|
|
March 31, |
| |
|
|
|
2022 |
|
|
|
|
|
2021 |
|
| |
|
|
|
|
|
|
|
| |
|
|
Consumer |
Long-term |
|
|
|
|
Consumer |
Long-term |
|
| Segments |
|
|
Products |
Contract |
Total |
|
|
|
Products |
Contract |
Total |
| Domestic |
|
$ |
10,441 |
- |
10,441 |
|
|
$ |
8,261 |
- |
8,261 |
| International |
|
|
50,483 |
- |
50,483 |
|
|
|
12,029 |
- |
12,029 |
| |
|
$ |
60,924 |
- |
60,924 |
|
|
$ |
20,290 |
- |
20,290 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Components |
|
|
60,924 |
- |
60,924 |
|
|
|
19,290 |
- |
19,290 |
| Engineering Services |
|
|
- |
- |
- |
|
|
|
1,000 |
- |
1,000 |
| |
|
$ |
60,924 |
- |
60,924 |
|
|
$ |
20,290 |
- |
20,290 |
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, 2022
and 2021 there were outstanding common share equivalents (options and convertible notes payable) which amounted to 10,849,008 and 18,605,548
of common stock, respectively. These common share equivalents were not included in the computation of diluted earnings per share for the
three-month periods ended March 31, 2022 and 2021 as their effect would have been anti-dilutive, thereby decreasing loss per common share.
Concentrations and Credit Risk - The Company has a few major customers who represent a significant portion
of revenue, accounts receivable and notes receivable. During the three-month period ended March 31, 2022, two customers represented
74% of sales and two customers represented 93% of accounts receivable. The Company has a strong ongoing relationship with these
customers with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their
products are based entirely on the Company’s technologies.
Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting
Standards Board Accounting Codification (ASC) 740: Income Taxes. Deferred tax assets and liabilities are
10
measured using enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets will be reflected on the balance sheet when it is determined that it is more likely than not that
the asset will be realized
Recent Accounting Pronouncements – On August 20, 2020 the FASB released ASU 2020-06 “Simplified
Convertible Instrument Framework”. This pronouncement simplifies the convertible debt accounting framework, eliminating,
among other things, the beneficial conversion feature model. The adoption date of this pronouncement is for fiscal years beginning
after December 15, 2023, but allows for earlier adoption for fiscal years beginning after December 31, 2020. The Company has elected
to adopt this accounting treatment effective January 1, 2021. Its adoption will have a beneficial effect on its financial statements
in those instances when the conversion rate set by convertible notes is below the market price on the date the convertible note is issued,
as no beneficial conversion expense will be recorded.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine
their effects, if any, on its consolidated results of operation, financial position and cash flows. Based on that review, the Company
believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.
NOTE 2 – GOING CONCERN
The Company continues to accumulate significant operating losses and has an accumulated deficit of $30,338,151 at
March 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of these uncertainties.
Management is seeking additional funding to provide operating capital for its operations until such time as revenues
are sufficient to sustain our level of operations. However, there is no assurance that additional funding will be available on acceptable
terms, if at all.
NOTE 3 – NOTES PAYABLE
During the three months ended March 31, 2022, the Company received four payments of $25,000
each and one payment of $20,000, for a total of $120,000, from one of the convertible note holders as working capital loans to enable
the Company to meet its obligations for operating expenses. While it is the intent of both parties to enter into a convertible note,
of which these payments will be a part, no terms, either as to conversion rate, interest rate, or maturity date has been agreed upon as
of this date. Until such agreement is reached the balance of $415,000 as of March 31, 2022 is unsecured, non-interest bearing and due
on demand.
In August 2020 the Company received $50,000 from a large
shareholder to meet operating expenses. The shareholder indicated that he would want the $50,000 loan repaid when the Company was
in a position to do so. The shareholder subsequently provided an additional $5,000, for a total loan of $55,000. The balance
is non-interest bearing and due on demand. During the three-month period ended March 31, 2022, no payments were made against the loan,
leaving a remaining balance of $35,000 which is non-interest bearing and due on demand.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable
At March 31, 2022, there are notes outstanding with principal balances which total $180,000. Of
the notes, $140,000 are convertible notes bearing a 10% annual rate of interest (with a 15% default rate). Of these notes, $100,000
is convertible into shares of common stock at the rate of $0.05 per share and $40,000 is convertible at $0.07 per share. The remaining
$40,000 is a convertible note entered into on August 8, 2011 with a former Company Director, at a conversion rate of $0.20 per share.
That note was due on December 31, 2015 and bears a default interest rate of 10%. The notes are in default and interest is accrued
at the default rate.
Convertible Note Payable - Related Party
At March 31, 2022, there are notes outstanding with two directors of the Company with balances of $164,257 and $54,257,
respectively. The notes bear an 8% annual rate of interest with a 12% default rate and are convertible into shares of restricted
common stock. Of the notes, $114,514 is convertible into shares of restricted common stock at
11
$0.07 per share and $104,000 of the notes are convertible at $0.06 per share. All
of these notes have a maturity date of March 31, 2022. Therefore, the default rate of interest was not used in accruing interest
due on these notes.
NOTE 5 – STOCK OPTION PLANS
On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock
Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and continued in effect for ten years, terminating
on August 25, 2015. This plan was approved by the stockholders of the Company at their annual meeting of shareholders on November
22, 2005. Under the Plan, the exercise price for all options issued will not be less than the average quoted closing market price of the
Company’s trading common stock for the thirty-day period immediately preceding the grant date plus a premium of ten percent. The
maximum aggregate number of shares that may be awarded under the plan is 2,500,000 shares. The Company continues to utilize
the Black-Scholes option-pricing model for calculating the fair value of the options granted as defined by ASC Topic 718, which is an
acceptable valuation approach under ASC 718. This model requires the input of subjective assumptions, including the expected price volatility
of the underlying stock.
On August 24, 2015, the Board of Directors approved the issuance of options to purchase 2,185,000
shares of the Company’s common stock. Of the total issued, 1,960,000 options were issued to replace options held by directors
and employees which were to expire and 225,000 options were issued to new employees. Of the options issued, 640,000 have an option
price of $0.14 per share, 500,000 have an option price of $0.15 per share, 995,000 have an option price of $0.20 per share, and 50,000
have an option price of $0.25 per share. Options issued as replacement shall have immediate vesting terms. Options which are not
replacements shall vest over a two-year, four-month period in equal installments on the last day of 2015, 2016 and 2017, respectively.
Projected data related to the expected volatility and expected life of stock options is based
upon historical and other information, and notably, the Company's common stock has limited trading history. Changes in these subjective
assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise
measure of the fair value of the Company's employee stock options.
Between August 25, 2005 and August 25, 2019, the Company granted options to employees to purchase
an aggregate 3,096,000 shares of common stock at exercise prices ranging from $0.15 to $2.07 per share. The options all vested by
December 31, 2017 and expire 10 years from the date of grant.
On December 30, 2020 the Board of Directors approved the revaluation of all outstanding stock
options, reducing the option price to $0.05 per share. The Company recorded a charge of $8,203 as the result of this change.
As of the years ended December 31, 2005 through 2020, the Company recognized a total of $2,451,971
of stock-based compensation expense, which includes charges of $8,203 in 2020, leaving $0 in unrecognized expense as of December 31, 2021.
There were 1,900,000 employee stock options outstanding at March 31, 2022.
A summary of all employee options outstanding and exercisable under the plan as of March 31,
2022 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 |
1,900,000 |
$ 0.05 |
3.65 |
|
|
Granted |
|
|
-- |
|
|
Expired |
|
|
-- |
|
|
Forfeited |
|
|
-- |
|
|
Outstanding at the end of Period |
1,900,000 |
$ 0.05 |
3.41 |
|
|
Exercisable at the end of Period |
1,900,000 |
$ 0.05 |
3.41 |
|
NOTE 6 – CAPITAL STOCK
Preferred Stock – There are 1,000,000 shares of preferred stock with a par value of $0.001
per share authorized. At March 31, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
12
Common Stock – There are 200,000,000 shares of common stock with a par value of $0.001
per share authorized. At March 31, 2022 and December 31, 2021, there were 125,557,174 and 114,396,242 shares of common stock issued
and outstanding, respectively. The Company issued 11,160,932 shares of restricted common stock during the three months ended March
31, 2022 for the retirement of convertible notes and accrued interest.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company currently occupies approximately 8,029 square feet of office and manufacturing space leased
from D&M Management, Inc. The building is located in a commercial business district in West Jordan, Utah which consists primarily
of high-tech manufacturing firms and it is located adjacent to a major intersection, allowing easy access to Utah’s main interstate
highway. The lease is for $6,787 per month and is for a period of twelve months, with a termination date of August 31, 2022, and
contains a 90-day notice clause if our intent is to either terminate the lease or renew the lease for additional periods.
The Company evaluated the lease under the new lease accounting standard and determined that it was a short-term lease
due to the twelve month term and the 90-day notice of termination clause.
NOTE 8 – RELATED PARTY TRANSACTIONS
At March 31, 2021, there was $32,543 payable to the Chief Executive Officer. At December
31, 2021, the Company had amounts of $20,481 payable to its Chief Executive Officer for funds provided to meet the operating expense obligations
of the Company.
NOTE 9 – SUBSEQUENT EVENTS
In April 2022, the Company received $25,000 in additional funding from a holder of convertible notes.
There has not been a note written on these funds, and no terms have been agreed to. The Company is recording the receipt of
the funding as an on demand note until such time as terms are agreed upon by the parties.
13
In this quarterly report references to “Flexpoint", "the Company," “we,”
“us,” and “our” refer to Flexpoint Sensor Systems, Inc. and its subsidiaries.
FORWARD LOOKING STATEMENTS
The U.S. Securities and Exchange Commission (“SEC”) encourages reporting companies to
disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.
This report contains these types of statements. Words such as “may,” “expect,” “believe,” “anticipate,”
“estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of
future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance
on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present
expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Flexpoint Sensor Systems, Inc. is a company engaged principally in improving
its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term
sustainable manufacturing contracts, licensing agreements and royalty agreements. Our operations have not yet commenced to a commercially
sustainable level and include designing, engineering, manufacturing, licensing and selling sensor technology and products featuring our
Bend Sensor® technology and
equipment.
Finalizing long-term, constant revenue generating production contracts with our
existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash
flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract
significant long-term production contracts. We must continue to obtain funding to operate and expand our operations so that we can deliver
our unique Bend Sensor® and
Bend Sensor® related technologies
and products to the market. Management believes that even though we are making positive strides forward with our business plan we
will need to raise additional operating capital.
Worldwide automakers are faced with the challenge of providing a safer, more
energy efficient, longer lasting product that consumers can afford. This has required automakers to search new and innovative ways to
lower the overall weight of the vehicle and to improve its fuel efficiencies, while lowering the cost. We continue to experience an increased
interest regarding automotive and other potential applications for our sensor technology because they meet this criterion. With its versatility,
light weight, single layer construction and the fact that it is currently being used in various safety devices the Bend Sensor® is
positioned well to meet the challenges that the automobile industry is facing.
LIQUIDITY AND CAPITAL RESOURCES
The challenges posed by the Pandemic in the United States and global economies increased significantly as the first
quarter progressed. Since the onset of the Pandemic, our top priority has been the health and safety of our employees. During
this difficult time, we have worked to ensure that our customers continue to receive quality, personalized service.
The Pandemic negatively impacted our revenue during the first three months of 2022. At this time, it is impossible
to accurately predict when this will end. Many of our clients, to protect their employees, have sharply curtailed operations and
have most employees working from home. The long-term impact of the Pandemic is difficult to assess at this point, as it will be
dependent on how rapidly our clients can resume their business operations and place orders with us for the needed sensors incorporated
into their products.
Currently our revenue is primarily from product licensing, development, manufacturing and recurring sales with additional
contributions to income from design contract, testing and limited production services for prototypes and samples, and is currently at
a level to support our operations. Depending upon the world returning to some form of normalcy following the end of the Pandemic,
we believe, based upon current orders and projected orders over the
14
next twelve months, that we could be producing sensors under long-term contracts in the
future that will help support our existing operations and potential future growth. Management recognizes such contracts usually go through
a long negotiation process and there can be no guarantee that we will be successful in our negotiations or that such contracts will be
sufficient to support our current operations in the near future.
In 2022, we relied on the proceeds of convertible loans from existing shareholders, which funds are accounted for
as demand notes. The balances of the non-related party convertible notes have a combined total of $180,000 as of March 31, 2022.
The notes have an annual interest rate of 8% to 10% and default rates of 10% to 15%, have various maturity dates, and are secured by the
Company’s business assets. The on-demand notes have a principal balance of $450,000 at March 31, 2022 and no terms have yet
been established for these funds.
Management believes that our current cash burn rate is approximately $60,000 per month and expectations
are that it will continue at this rate for the foreseeable future. If the Pandemic ends and business returns to pre-Pandemic levels,
with proceeds from additional convertible notes and estimated revenues for manufacturing, production, engineering design and prototype
products should be sufficient to fund the next twelve months of operations. Our auditors have expressed doubt about our ability
to continue as a going concern and that we may not realize significant revenue or become profitable within the next twelve months. We
will require additional financing to fund our short-term cash needs. We will have to rely on additional debt financing, loans from existing
shareholders and private placements of common stock for additional funding. Based upon our anticipated purchase orders over the next twelve
months the revenue generated will not be sufficient to cover our operating expenses, based on our current burn rate. However, we cannot
assure that we will be able to obtain short-term financing, or that sources of such financing, if any, will continue to be available,
and if available, that they will be on terms favorable to us. Nor is there any guarantee that the projected volume of purchase orders
will meet the volumes that we anticipate.
As we enter into new agreements, we must ensure that those agreements provide adequate funding
for any pre-production research and development and manufacturing costs. If we are successful in establishing agreements with adequate
initial funding, management believes that our operations for the long term will be funded by revenues, licensing fees and/or royalties
related to these agreements. However, we have formalized only a few agreements during the past four years and there can be no assurance
that the agreements will generate sufficient revenues or be profitable in the future or that a desired technological application will
be successful enough to produce the volumes and profits necessary to fund our operations.
FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES
Our principal commitments at March 31, 2022 consisted of our operating lease of $6,787 per month, and total liabilities
of $3,333,250, which includes $398,513 of convertible notes payable. Accrued liabilities at March 31, 2022, were $2,181,666 and
were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on
notes and accrued paid time off.
In August 2020 the Company received $50,000 from John
Kelley, a large shareholder, to meet operating expenses. Mr. Kelly indicated that he would want the $50,000 loan repaid when the
Company was in a position to do so. Mr. Kelly subsequently provided an additional $5,000, for a total loan of $55,000. This
loan has not formally been documented by a note at the time of this filing, and there is no term or interest on the note. In 2021
payment of $20,000 was made to reduce the loan balance. During the three-month period ended March 31, 2022, no payments were made
to reduce this loan, leaving a remaining balance of $35,000.
The Company has a few major customers who represent a significant portion of revenue and accounts receivable. During
the three months ended March 31, 2022, two customers represented 74% of sales and two customers represented 93% of accounts receivable.
The Company has a strong ongoing relationship with these customers with scheduled product deliveries extending through the year
and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.
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.
15
CRITICAL ACCOUNTING ESTIMATES
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
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.
ASC 350-20 “Intangibles – Goodwill and Other: The Company follows the guidance provided by
ASC 350-20. The Company's goodwill represents the excess of its reorganization value over the fair value of the net assets upon
emergence from bankruptcy. Goodwill is not amortized; therefore, we test our goodwill for impairment annually or when a triggering event
occur using a fair value approach. A fair value-based test is applied at the overall Company level. The test compares the fair value of
the Company to the carrying value of its net assets. The test requires various judgments and estimates. During 2021 and for the three
months ended March 31, 2022, the Company recorded no impairment charge to reduce the carrying value of the goodwill to its estimated fair
value. As part of the impairment testing performed at December 31, 2021, the Company considered factors such as the global market volatility,
variables in the economy, and the overall uncertainty in the markets that has resulted in a decline in the market price of the Company's
stock price and market capitalization for a sustained period, as indicators for potential goodwill impairment.
ASC 820 Fair Value Measurement: We test long-lived assets for impairment annually or when a triggering
event occurs. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The amount of impairment
is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other
factors. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against
the carrying value of the long-lived assets. If the carrying values of the long-lived assets exceed the present value of the discounted
projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly.
Impairment tests are conducted on an annual basis and, should they indicate a carrying value in excess of fair value, a charge may be
required.
ASC 718 “Compensation – Stock Compensation: 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. In addition, our stock options have characteristics significantly
different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.
For the three-month periods ended March 31, 2022 and 2021, we recognized $0 and $0, respectively, of stock-based compensation expense
for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.
RESULTS OF OPERATIONS
The Company continues to concentrate its marketing resources on a limited number of customers
that have the greatest potential to generate the most short-term revenue while still building relationships with our larger customers.
Management believes this approach has the highest potential to bring long-term commercially viable products to market and will provide
sustainable cash flow to fund the Company's operations in the future. Currently, overall revenues are not sufficient to sustain our operations.
The Pandemic has had a dramatic effect on our business as well as the business of our customers. The wide-ranging effects
on the world-wide business market has led to a general reluctance for businesses to move forward with entering into major commitments
until their future markets have been clarified. Because of this, we have experienced a significant slowdown in the size and number of
orders received and, while we cannot predict when the influence of the Pandemic will end, we expect that orders will return to their former
levels and increase throughout the remainder of 2022 following a return to normal business operations. Following a return to normal
business operations in the world, management anticipates that revenues will increase as we continue to execute our long-term business
plan and cultivate larger customer bases with our existing product offering. However, until the Pandemic ends and a long-term production
contract is in place there is no guarantee that our current customer base will order in sufficient volumes to sustain our operations.
16
Therefore, management continues to work with larger companies and industries
and is hopeful that in the near future we will sign a long-term licensing or manufacturing contract.
We recognized revenue from repeat orders from our existing customers, design contract, and development engineering.
Revenue is recognized using the ASC 606 five step detailed in Note 1 to the financial statements. Revenue from the sale of a product
is recorded at the time of shipment to the customer. Revenue from the license agreements was recognized in the period the agreement
was concluded, as it is a right of use license and the Company has no further obligations to perform under the terms of the agreement.
Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer.
Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is
recognized as licensing royalty revenue over the remaining term of the contract.
The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and should be
read in conjunction with our unaudited financial statements for the three months ended March 31, 2022 and 2021, 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, 2021 and 2020.
THREE MONTH PERIODS ENDED MARCH 31, 2022 AND 2021
|
|
|
| |
|
SUMMARY OF OPERATING RESULTS |
|
|
Three-month period ended |
|
|
March 31, 2022 |
|
March 31, 2021 |
|
Manufacturing, design, licensing and contract revenue |
$ 60,924 |
|
$ 20,290 |
|
Total operating costs and expenses |
250,134 |
|
207,864 |
|
Net other income (expense) |
(66,568) |
|
(23,893) |
|
Net loss |
(255,778) |
|
(211,467) |
|
Basic and diluted loss per common share |
$ (0.00) |
|
$ (0.00) |
For the three months ending March 31, 2022, revenue was $60,924, an increase of $40,634 when compared to the same
period in 2021. The majority of the revenue variance for this period is attributable to orders from customers who are beginning to manufacture
products incorporating our products.
Of the $250,134 and $207,864 total operating costs and expense for the three months ending March 31, 2022 and 2021,
respectively, $60,093 and $75,216 were for direct research and development cost, respectively. For the three months ended March 31, 2022,
total operating expenses increased by $42,270 when compared to the same period in 2021, increases in payroll and professional fees comprising
the largest part of the increased expense level.
Other expense for the three-month period ended March 31, 2022 was $66,568, a $42,675 increase resulting, primarily,
from a $46,194 loss on note conversion.
A net loss of $255,778 was realized for the three months ended March 31, 2022. A net loss of $211,467 was realized
for the three-month period ended March 31, 2021.
The chart below represents a summary of our condensed consolidated balance sheets at March 31, 2022 and December 31,
2021.
