FLEXPOINT SENSOR SYSTEMS INC - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

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

For the transition period ___to___

Commission file number: No. 0-24368

FLEXPOINT SENSOR SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Securities registered under Section 12(b) of the Act:  None

Securities registered under Section 12(g) of the Act:  Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [   ]   No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes [   ]   No [X]

Indicate by check mark whether the registrant (1) 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  [X]   No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

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.:

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 aggregate market value of 26,851,860 shares of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold ($0.30), as of the last business day of the registrant’s most recently completed second fiscal quarter was $8,055,558

The number of shares outstanding of the registrant’s common stock as of March 30, 2012, was 36,277,615.

Documents incorporated by reference:  None

TABLE OF CONTENTS

PART I

Item 1.  Business

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Item 1A.  Risk Factors

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Item 2.  Properties

11

Item 3.  Legal Proceedings

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Item 4.  Mine Safety Disclosure

11

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters

and Issuer Purchases of Equity Securities

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Item 6.  Selected Financial Data

12

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 8.  Financial Statements and Supplementary Data

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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Item 9A.  Controls and Procedures

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Item 9B.  Other Information

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

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Item 11.  Executive Compensation

36

Item 12.  Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

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Item 13.  Certain Relationships and Related Transactions, and Director Independence

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Item 14.  Principal Accounting Fees and Services

40

PART IV

Item 15.  Exhibits, Financial Statement Schedules

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Signatures

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In this annual report references to “Company”, “Flexpoint”, “Flexpoint Sensor,” “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.

PART I

ITEM 1.  BUSINESS

HISTORICAL DEVELOPMENT

Flexpoint Sensor Systems, Inc. was incorporated in the state of Delaware in June 1992 as Nanotech Corporation.  In April 1998, Nanotech acquired Sensitron, Inc., a Utah corporation (“Sensitron”), as a wholly-owned subsidiary through a reverse triangular merger.  Nanotech also acquired Sensitron’s wholly-owned subsidiary, Flexpoint, Inc. As part of this acquisition, Nanotech changed the company name to Micropoint, Inc.  In July 1999 Micropoint changed its name to Flexpoint Sensor Systems, Inc.

Flexpoint was forced to seek bankruptcy protection on July 3, 2001, and filed a voluntary petition for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code. On February 24, 2004, the bankruptcy court confirmed Flexpoint's Plan of Reorganization.  As a result of the reorganization, we are now a development stage company with a date of emergence from bankruptcy of February 24, 2004.  We used fresh-start reporting and all assets of Flexpoint Sensor Systems, Inc. were restated to reflect their reorganization value, which approximated the fair value at the date of reorganization.

BUSINESS OVERVIEW

Flexpoint Sensor Systems, Inc. (“Flexpoint”, or “Company”), is a development stage company and is principally engaged in designing, engineering and manufacturing bend sensor technology and products using its patented Bend Sensor^® technology, (a flexible potentiometer technology). Since emerging from bankruptcy we have been negotiating and signing contracts, manufacturing and developing devices and related products and making further improvements to our technologies and processes. We own nine patents, including patents on specific devices that use the Bend Sensor^® and have filed for additional patents and are continuing to develop and enhance our intellectual properties that will result in additional patents being filed. The Company currently manufactures, and has jointly developed, six products that are being sold and supplied to current customers. Over the past twelve months we have expanded our customer base and the Company is currently marketing to a number of users and continues to further its marketing effort for the products that the Company is manufacturing.  Over the next 12 to 18 months the Company anticipates manufacturing sensors and electronics on a larger scale for many of their existing customers and a variety of new customers including Tier 1 suppliers in the automotive industry.

In addition to the sale of its products and engineering and design services the Company also may consider generating revenues through licensing its unique technology for field of use or territory. The Company will negotiate so that each license agreement will contain a provision for either first right of refusal to manufacture, or a royalty provisions on a specific product or application. During the last year we have continued to concentrate our marketing efforts on smaller, quick to market production orders and engineering services that have generated limited, but immediate, revenues which assisted in improving the Company's cash flow and name recognition. The Company has also continued marketing efforts in the automotive industry, through the agreement with Mr. Suhkamder Bedi. Due to their size and regulations this industry requires a significantly longer time to develop and acquire approvals for new technologies but because of the high volumes associated with the automotive  industry this industry will potentially generate long term revenue streams for the Company.  

During 2008 and 2009 the Company jointly developed and produced 20 prototype medical beds that through the use of the Bend Sensor^® Technology would assist in the management of bed sores. The electronics of the bed are able to determine, based on the Bend Sensor^® Technology input, the position of the person on the bed and how they are moved. The bed has the ability to roll a patient left or right to relieve pressure areas as well as facilitate dressing changes. In September 2008 a leader in

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the development of innovative pressure ulcer management technology entered in to a manufacturing agreement with the Company wherein the Company would manufacture the sensors used in the medical bed application. The bed was originally scheduled to launch in mid to late 2009, however due to internal issues within the medical bed distributer, including an acquisitions in August 2010, the launch date of this particular product has been further delayed. Due to the continued delays the Company is seeking to be released from the existing manufacturing and licensing agreement and to begin marketing the bed technology to other interested parties.

The Company continues to work with various Tier 1 (major) automotive suppliers on a variety of products that are in various stages of development and implementation. Both the medical and automotive industries have undergone significant changes due to the economic and political uncertainties over the past two years. These uncertainties have created delays in the implementation of the Company's automotive and medical devices and therefore, the Company has focused the majority of its limited resources and marketing activities on sensors and products that in the aggregate will generate a smaller dollar volume than those anticipated from their medical or automotive devices, but have been quicker to market and have generate limited additional immediate cash flow and name and product recognition that we believe will provide long term benefits once the economy changes.

PRINCIPAL PRODUCTS

Bend Sensor^® Technology

The Company owns the patent rights to our Bend Sensor^® technology through Sensitron, a wholly-owned subsidiary of the Company. The Bend Sensor^® is a flexible potentiometer bend sensor product consisting of a coated substrate, such as plastic, that changes electrical conductivity as it is bent in a consistent manner.  Electronic systems can connect to this sensor and measure in detail the amount of bending or movement that occurs in a predictable manner.  Certain applications of the Bend Sensor^® potentiometer have been patented (See “Patents and Intellectual Property,” below).

A typical potentiometer functions through the means of metal contacts swiping or rubbing across a resistive element. Our Bend Sensor^® potentiometer is a single layer with no mechanical assembly that makes it more reliable and significantly smaller, lighter in weight and usually less expensive than mechanical potentiometers.  Management believes many sensor applications can be improved using our technology and the use of our technology will result in new products and new sensor applications.

We have developed the following applications and devices using the Bend Sensor^® technology and are currently marketing these items:

            Automotive Products

For the past several years we have been in negotiations with several Tier 1 suppliers and OEMs and have proved the benefit and capabilities of the Bend Sensor^® Technology in the automotive industry for the following products:

Comfort Seats

The Company has developed an advanced comfort seat for automobiles utilizing their patented Bend Sensor^® technology and is currently working with Tier 1 suppliers on development of the seat and various seat related controls. Through a joint development arrangement with a Tier1supplier Flexpoint developed and delivered prototypes of the seat. The supplier anticipates marketing the product as an added feature to its luxury car manufacturers.

With the success and acceptance of the comfort seat the Company has received additional inquiries regarding the feasibility of and implementation of the technology for commercial vehicles and buses.

Horn Switch

A major automobile manufacture has partnered with a Tier 1 supplier and is in the final stages of evaluating our patented horn switch to replace their existing technology. The advantages of the Bend Sensor^® switch are that it is a "drop in" item that can immediately go into existing vehicle platforms. Because the Bend Sensor^® switch and the associated electronics have very few moving parts, our switch will help eliminate the squeaks and rattles and other noise associated with the existing technology in use. Additionally because the Bend Sensor^® has few moving parts it can withstand a higher number of actuations without replacement.

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The Company anticipates that once the manufacturer implements the initial horn switch and the first units are integrated into existing production the project will be expanded to incorporate additional switches on the horn pad and additional vehicle platforms. The automobile manufacturer is also evaluating   the use of the Bend Sensor^® as a switch to open rear doors of SUV's and as a seat belt reminder (SBR).    

Steering Wheel

A provider of luxury automotive accessories has contacted the Company to provide engineering and design for an alertness detection system that would be incorporated into their steering wheel assembly. With the Bend Sensor’s^® programmable ability each driver would set his or her settings and should they begin to get drowsy the sensor would detect the lack of pressure and alert the driver to get off the road.  A similar concept using our Bend Sensor technology has been discussed with a manufacturer of commercial vehicles and buses.

Seat Belt Reminder

While working with various Tier 1 automotive suppliers we have developed and tested a Seat Belt Reminder (SBR) sensor that alerts the occupant of an automobile to fasten his/her seatbelt.  We are currently working with multiple manufacturers to potentially replace existing devices in the marketplace with a system superior in performance and at a lower price point.

Using the same concept, this same product is currently being considered as a safety device, similar to the emergency vehicle application discussed below, but for school buses. A bus driver could know and be alerted should any of the passengers be in an un safe position prior to entering traffic. There have been some legislative debates about whether a bus, especially a school bus, should provide seatbelts for all of the passengers. Coupled with Intertek's Protek Passenger Awareness System, our SBR could be easily implemented to fulfill such legislation.   

Pedestrian Impact Detection Sensor

 In 2003, the European Parliament and the Council of the European Union published a directive on pedestrian protection to reduce the number of pedestrian deaths and injuries. Over the past several years our Pedestrian Impact Detection (PID) has demonstrated its ability to distinguish within milliseconds between a human leg and an inanimate object.  Four separate and independent automotive suppliers and OEMs tested the Bend Sensor^® device for use in pedestrian impact detection device. The tests proved that the Bend Sensor^® device was able to detect impact with a human leg and in the event of an accident and trigger the desired safety response. The system was also tested by MGA Research and this research confirmed results of our internal testing. The system is placed in the vehicle's front bumper to detect crash impact. Within milliseconds of contact, the system can differentiate between a human leg and an inanimate object and trigger a safety response in accordance with the manufacturer’s specifications.

Since 2003 other automobile manufacturers and Tier 1 suppliers have express interest in the PID and we have provided various sensors to these interested parties for testing.

We have also developed a crash sensor, which is a series of sensors mounted in strategic places on the side and door panels of an automobile to detect an impact, as well as the speed, direction and force of the impact.  This allows an onboard computer to deploy side air bags where needed.

Theater Seats

Using the same concept as our automotive seat belt reminder (SBR), this device monitors cinema theater’s paying customers and identifies available seats. We have supplied a theater management firm with several prototype sensors which have undergone extensive testing for this application. Many theaters are now offering specialized motion seats that move or vibrate depending on what is happening on the screen, similar to the motion machines at amusement or theme parks. These seats are available on a limited basis and the theater can charge a premium price while providing the “ultimate theater experience”. We have also had inquires about using our sensor for a similar product for home theater seats.  There are over 37,000 movie theater screens in the U.S. and several times that throughout the world. It is estimated that theater seats are replaced/refurbished about every seven years. Our system can be easily implemented into new theater construction and also retrofitted into existing movie theater complexes.  

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Emergency Vehicles

Intertek Industrial Corp., located in Jacksonville, Florida is a leading supplier of quality seatbelt systems and safety devices to the emergency vehicle market. Their Protek Passenger Awareness System uses our Bend Sensor^® technology to enhance the safety of passengers and personnel in emergency vehicles. The system is installed in the seats of the rear compartments of the emergency vehicle and provides the driver with constant feedback as to the “seated and secured” status of passengers and personnel in the rear of the vehicle. The system is currently installed in about 30 ambulances and is being tested for use in other types of emergency vehicles.   Intertek continues to issue additional purchase orders for their existing and new customers.

Flow Control Applications

Our flexible sensor has proven to be an extremely robust and durable flow control switch. The Bend Sensor^® product allows for the measurement of liquid and air flow, and has been tested to over 35 million cycles without failure. The Company is currently working with a global leader in cleaning, sanitizing and food safety products who have been testing the Bend Sensor^® as a measuring and dispensing device for their harsh chemical compounds of products.  When the Bend Sensor^® device is placed in a flow stream, it can measure if flow is occurring, or it can measure the amount of flow that is occurring. The fact that our design incorporates a single layer flexible device allows for it to operate in many harsh environments. While other technologies are affected by dirt, dust, and liquids, the Bend Sensor^® product is able to operate under these conditions.  An international supplier of integrated tinting solutions is interested in a similar dispensing system for its paint manufactures, retail chains and plastic producers. We continue to receive inquires from a variety of industries for flow applications.

Medical Bed

Through a joint development agreement with R&D Products the Company developed and produced 20 prototype medical beds that assist in the management of bed sores. Using the Bend Sensor^® technology and accompanying electronics the bed is able to determine the position of the person in the bed and how they are moved. The bed has the ability to roll a patient left or right to relieve pressure areas as well as facilitate dressing changes. Needed adjustments can be made through relieving pressure areas to meet the required standards of care and patient comfort. The medical application for the bed was originally scheduled to launch in mid to late 2009, however due to management changes, and an acquisition the project has been delayed.  The Company is currently attempting to terminate our manufacturing agreement signed in 2008 with the medical bed supplier so that we can once again market the product in the medical industry.

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

Other Medical

In November 2009 the Bend Sensor^® technology was featured in a study by the University of Rome Tor Vergeta, using an interactive glove, and was recommended as a possible tool to assist doctors in neuroscience studies to determine a patient's level of monitor skill or post -surgical evaluation and therapy or for assisting the disabled. (See http://www.hiteg.uniroma2.it/). Due to the ability of the sensor to measure range of motion the study also recommends using the Bend Sensor^® technology as a tool to design ergonomic devices. The University has continued its research and has identified additional medical applications of our sensors.

Other Applications

Management believes the potential market for our technology includes using the technology to replace or upgrade existing devices used in industrial control systems, medical equipment and instrumentation, computer peripherals, automotive transmission equipment, commercial vending equipment and other devices.  We have developed, or are developing:

·

a vibration sensor;

·

 a rupture disc/bursting disc utilizing the Bend Sensor^® as the detection/alarm element of a rupture disc device;

·

an infant bed cover using our patented sensors that will be used to monitor infants in the prevention of sudden infant death syndrome (SIDS);

·

Toys and video gaming devices; and

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·

Sports applications:  

The Company has developed several sports related products featuring the Company's patented Bend Sensor^® technology. The products are currently being demonstrated to major equipment manufacturers and distributors and the Company anticipates they could be easily brought to market through sports related OEM's.  

The products currently include the use of sensor technology for bowling and golf shoes. The products will be used to help measure and improve an individual's performance. Among other things the shoes will measure distribution of weight and weight transfer during the monitored event and present a recorded image of the individual's performance for evaluation.

We intend to further identify applications of our technology in numerous fields and industries.  A core marketing strategy is to seek applications of our technology for products used by customers that emphasize functionality, reliability, quality, and user convenience.

BUSINESS STRATEGY

Due to the many potential applications of our technology and our limited resources management made the decision to focus our marketing  efforts  on a few products that can be brought to market quickly and will provide the Company maximum exposure for the technology and generate additional orders for products from a growing customer base. This has required us to coordinate our product design, manufacturing, distribution and service strategies in a long-term business model, while still generating short term revenues. Another marketing strategy this year was to develop a standard line of sensor products with corresponding hardware, electronics and software to facilitate ease of implementation of our technology into a customer's existing system. Through our joint venture with Card Access we have developed an enclosed standard pressure sensor for an easy-to-use occupancy sensor used in home automation, commercial automation and hospitality automation markets. The “Smart Pressure Sensor” measures the change in distributed pressure when a chair, a bed, or a sofa is occupied. Our standard product line is expected to be sold directly to the customer and through manufacturer's representatives and distributors. We have also expanded our product offering to include substantially complete value-added assemblies, which includes the electronics and software. We continue to consider licensing or partnership arrangements. We anticipate selling primarily to original equipment manufacturers or Tier 1 suppliers for worldwide distribution.  For the international customers, we plan to contract, sell and distribute our products through various manufacturer representatives and distributors.

Since our intended customers are typically technology companies, the design phase of the sales cycle is extremely important and considerably longer than other industries. The original equipment manufacturers typically approach us with a conceptual product and request that we assist in the initial engineering, design and production of a working prototype for which we generate limited revenues. The prototype is then tested in the environment in which the ultimate product will be placed.  During this process, the customer is in constant contact with our application and electrical engineers. Customers also meet with internal sales and support individuals to discuss marketing and distribution channels and strategies for the end consumer products.

We also have added value by expanding our sensor product lines to include circuit boards, enclosures, etc. and have moved toward a fully integrated product while validating and showing the versatility of our Bend Sensor^® technology. We currently have several such fully developed products that will directly compete with existing products in the automotive industry. And have used like designs to develop similar products in other industries, thus maximizing our initial engineering and design work. We believe our products provide greater reliability, more functionality and can be implemented at a lower overall cost to the customer. These fully integrated products will create a much larger value added profit margin for the Company. However, there is no assurance that such profit margins will be achieved or that these products will be produced in volumes sufficient to produce significant revenue in the near future.

MARKETING AND SALES

During 2011 we extended our agreement with Mr. Sukhminder "Bobby" Bedi to assist in the development of products for the automotive industry, including fully integrated products. Over the past year and half through his contacts Mr. Bedi has provided the Company with expanded exposure in the automotive industry that created new opportunities for our existing automotive line of products. Most of our marketing efforts are to offer our automotive products primarily to original equipment manufacturers (“OEM’s”), either directly or through Tier 1 suppliers. Other products are being marketed directly to manufacturers or distributors. Our primary marketing objectives are to continue to generate demand for our products, enhance name and product recognition and support OEM’s and manufactures. As we gain success in branding our name and products we believe the successful use of our products by OEM’s and Tier 1 suppliers will generate additional demand for higher

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quantity orders of our existing product lines. We also anticipate that the success of our existing products will allow us to successfully introduce new products and applications to the market.

Through Mr. Bedi's efforts we continue to expand our relationship with several Tier 1 suppliers and automotive manufacturers and are having some success in introducing additional product offerings within this industry. We believe the OEM's and Tier 1 suppliers will be an important part of our overall future sales strategy. We also have a relationship and history with a significant manufacturer of medical bed mattresses. Due to limited resources our sales strategy depends on a few OEM’s and manufacturers and if we lose their business it will have a significant adverse effect on our results of operations until alternative distribution channels can be established.  We may consider contractual commitments to OEM’s and Tier 1 suppliers in exchange for fees and/or royalties.  In addition, because we sell on a limited basis directly to end users, we are dependent, in part, on the OEM’s for information about retail product sales and demand for sensor technology.  Accordingly, any rapid cessation of purchases or a switch to other companies' products by end users may not be immediately evident to us, and could result in increased product returns.

We have expanded our   website at www.flexpoint.com and also intend to market our products through the use of other social media, and by developing a field sales force including direct marketing employees in strategic areas and manufacturer’s representatives nationwide to generate OEM and Tier 1 supplier customers.  As our market grows we anticipate expanding our distribution network throughout the world.  There can be no assurance that we will be successful in developing such a sales force or in expanding our distribution network.

License and supply arrangements, such as those discussed above, create certain risks for us, including:

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Reliance for sales of products on other parties and, therefore, reliance on the other parties' marketing ability, marketing plans and credit-worthiness;

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If our products are marketed under other parties' labels, goodwill associated with use of the products may inure to the benefit of the other parties rather than Flexpoint Sensor Systems and its subsidiaries;

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We may have only limited protection from changes in manufacturing costs and raw materials costs; and

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If we are reliant on other parties for all or substantially all of our sales, we may be limited in our ability to negotiate with such other parties upon any renewals of their agreements.

MANUFACTURING AND DISTRIBUTION

Automobile manufacturers, Tier 1suppliers and many international companies require all manufactured parts be manufactured in ISO/TS-16949 certified facilities.IS0/TS-16949 is a Quality Management System that contains the particular requirements for the application of ISO 9001:2000 for automotive production and relevant service part organization.  TS-16949 is based on ISO requirements 9001:2000, but it contains additional requirements that are particular to the automotive industry.  These additions are considered automotive “interpretations” by the ISO community of accreditation bodies and registrars. TS-16949 is a common supplier quality standard for Chrysler LLC Corporation, Ford Motor Company and General Motors Corporation. TS-16949 applies to suppliers of production materials, production and service parts, heat treating, painting and plating and other finishing services. It does not, therefore, apply to all suppliers of the major automotive companies.

Our ability to secure the TS-16949 certification is necessary to assure potential customers that we have the ability and resources to meet the quantities demanded in a purchase agreement and that we are able to uphold the quality standards required for consideration as an automotive supplier. We have started the process of qualifying our own manufacturing facility for TS-16949, but we do not have a production agreement in hand and we do not want to inure the additional cost of a manufacturing facility audit at this time. Therefore, based upon our current relationship with Tier 1 Suppliers and automobile manufacturers, to meet the requirement we have identified and entered into a Cooperative Agreement with The Bergquist Company, a Minnesota corporation that is a qualified automotive manufacturer. The agreement provides that the companies will cooperate with one another to produce Bend Sensor^® technology products for the automotive industry. This cooperative agreement provides us with the means to deliver a finished product to market. We have also identified several other third party manufacturers who have the required certifications and who have expressed interest in entering into similar agreements should we be unable to certify our existing facility in time to meet the requirements of our future automotive manufacturing agreements. Such third party

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manufacturing agreements are intended to be short term solutions to meet immediate manufacturing requirements. When we are providing automotive parts on a consistent basis and are required to have the TS-16949 certification we will commit the time and resources necessary to qualify our facility

SOURCE OF RAW MATERIALS

The Bend Sensor^® product consists of a coated substrate, such as plastic, that changes in electrical conductivity as it is bent. Electronic systems connect to the sensor and measure with fine detail the amount of bending or movement that occurs. The single layer design of the Bend Sensor^® eliminates many of the problems associated with conventional sensors such as dust, dirt, liquids, heat or pressure. Depending on the application an over-laminates or over-molding may also be applied to the sensors for added environmental protection. Due to its unique construction and the ability to use multiple types of substrates all raw materials needed to produce the Bend Sensor^® are readily available and therefore, the Company is not reliant on a single supplier.

STATUS OF PUBLICALLY ANNOUNCED NEW PRODUCTS AND SERVICES

During the past year we have continued to mature from a research and development only company into a manufacturing and production company and continue to expand our product line. From 2007 and through 2011 we improved and enhanced the design of products for several Tier 1 automotive and other customers, built various prototypes for testing and advance our overall relationship and exposure within the automotive industry. We have completed advanced testing on various additional products that we developed or enhanced during the year and have signed various agreements to provide the products and devices using the Bend Sensor^® technology to various industries. We advanced our fully integrated safety system that provides added safety to emergency vehicle personnel that has won awards for two years at the EMS show and continues to gain acceptance in the industry as evidenced by the additional orders received during the past two years. We are expanding the opportunities for our sensors to be used in a variety of industries including, additional medical devices, a universal sensor that can be used as a seat detection system than can be used for many applications including theater seats, buses and cabs.  During the year we developed and tested customized products for the US Military. This product has wide application and appears to be something that can be utilized by all branches of the military. We believe this product will help open the door for additional acceptance and development of additional military products in the future.  In 2009, the University of Rome used our sensors to develop an interactive glove to assist them in their neuroscience studies and understanding. They concluded that such a device using the Bend Sensor^® Technology could be used to determine a patient’s level of motor skills, for rehabilitation, post-surgical evaluation or for assisting the disabled. The University’s conclusion was that data glove, and similar devices would have multiple applications in many fields including medical, work, sports and entertainment the full article published in the Journal of Neuroscience Methods “Improving Performance of Data Glove on Bend Sensors," by Giovanni Saggio Ph.D. Over the past year the University has purchased additional sensors to further their studies beyond just the interactive glove.

During the year we signed an agreement with HTK Engineering to produce sensors for an advanced safety device for large trucks. The initial application will be for refuse collection vehicles (garbage trucks), but the system is applicable to all large trucks. The HTK Engineering Anti-Rollaway Braking System is now available and can be installed in a matter of a few hours on existing trucks. HTK is now marketing this product to OEM manufactures and owners of garbage truck currently in use. We anticipate ramping up for this product during the first half of 2012.   

Due to the Bend Sensor’s single layer construction, overall durability, and its chemical resistant properties, over the year we have worked with several companies that have tested our sensor as a flow and dispensing device, Through our relationship with Sensor Products, during the past year we completed the testing of our jointly developed home monitoring device that is currently being used on a limited basis to monitor the presence of individuals in certain locations of a home. With the aging population and increased life expectancy, many older individuals wish to continue living in their own homes and we believe that this product could be implemented at a relatively low cost that will make it attractive for multiple locations and uses. This system would allow aging individuals to continue to live independently while still providing security and peace of mind to their children and caregivers.  

We continue to develop new products that we may sell or license in a variety of industries including industrial control companies. We are continuing to work to further develop our medical bed and are looking forward to expanding this concept into the commercial market. Throughout the year we continued to market and expand our network of Tier 1 automotive customers and product offerings. After the economic down turn in the global economy and the political uncertainty in the U.S. medical market we continue to focus on smaller contracts with smaller production orders that can generate immediate reoccurring income for the Company. This new focus has assisted in developing additional fully integrated products using our Bend Sensor^® Technology, and has shown the diversity and adaptability of the technology to unrelated industries.   

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COMPETITION

The sensor business is highly competitive and competition is expected to continue to increase.  We will compete directly with firms that have longer operating histories, more experience, substantially greater financial resources, greater size, more substantial research and development and marketing organizations, established distribution channels and are better situated in the market.  So far we do not have an established long term customer base that orders products on a constant basis and we will encounter a high degree of competition in developing a larger customer base.

To management's knowledge, technology similar to our technology is currently in production by other competitors. Management believes that our products will be sufficiently distinguishable from the existing products so that it will not compete directly with existing sensor products.  Certain force transducer sensors and fiber optic sensors are comparable to our Bend Sensor^® technology; however, management believes that the force transducer sensor is not as reliable as our Bend Sensor^® technology and that the fiber optic sensors are not as cost effective as our Bend Sensor^® technology.  As this new area grows, additional manufacturers may attempt to introduce similar products and competition could intensify.

In the medical electronics field, our competitors are the numerous potentiometer manufacturers.  In the auto seat field our competitors are the numerous capacitive, piezo, infrared, fsr and ultrasonic sensor manufacturers.  Such competitors may use their economic strength and relationships to influence the market to continue to buy their existing products.  One or more of these competitors could use their resources to improve their current products or develop new products that may compete more effectively with our products.  New competitors may emerge and may develop products and capabilities which compete directly with our products.  No assurance can be given that we will be successful in competing in this industry.

We intend to compete by offering products that have enhanced value, added features, ease of use, functionality, compatibility, reliability, comparable price, quality and support.  Management also believes our intellectual property provides an advantage over our competitors.  Although management believes that our products will be well received in the various sensor  markets because of innovative features, performance characteristics and cost-effective pricing, there can be no assurance that comparable or superior products incorporating more advanced technology or other features or having better price or performance characteristics will not be introduced by competitors with greater resources than ours.

PATENTS AND INTELLECTUAL PROPERTY

We regard certain of our designs as proprietary and attempt to protect them with patents and by restricting disclosure of the designs as trade secrets.  We have nine issued patents for our Bend Sensor^® technology and have filed additional patent applications, and are in the process of preparing additional patents for new types of sensors using our technology. Due to the joint development of the medical bed product we believe we also have claims and protection under the patents filed for this specific application.  Sensitron owns eight United States patents and one foreign patent related to the Bend Sensor^® technology.  Patents do expire and it will be necessary for us to file patents in the United States and in various foreign countries for each application we develop so that it is protected from competition.  The earliest patent will expire in December 2013; however, we have improved these technologies and expect to file new patents based on the enhancements and specific applications or products.  We must file patents on any technology for which we develop enhancements which contain material improvements to the original technology.  We are aware of three potentially conflicting patents which we believe will not affect our current or planned use of our technology.

There can be no assurance that the protection provided by patents and patent applications, if issued, will be broad enough to prevent competitors from introducing similar products or that such patents, if challenged, will be upheld by the courts of any jurisdiction.  Patent infringement litigation, either to enforce our patents or defend us from infringement suits, are expensive and could divert resources from other planned uses.   

Patent applications filed in foreign countries and patents in those countries are subject to laws and procedures that differ from those in the United States.  Patent protection in foreign countries may be different from patent protection under United States laws and may not be as favorable to us.  We also attempt to protect our proprietary 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 proprietary technology.

Management believes that because of the rapid pace of technological change in our markets, legal protection of our proprietary information is less significant to our competitive position than factors such as continuing product innovation in response to evolving industry standards, technical and cost-effective manufacturing expertise, effective product marketing strategies and

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customer service.  Without legal protection; however, it may be possible for third parties to commercially exploit the proprietary aspects of our products.

MAJOR CUSTOMERS

Currently the Company has a limited customer base and historically revenues have not been sufficient to support our current operations the Company does not have one customer that represents 10% or more of our total revenue and we do not have any backlog of production of our Bend Sensor^® products. Because our technology uses raw materials that are readily available throughout the world we have never had an environmental complaint or issue.

RESEARCH AND DEVELOPMENT

Although we hold the patent to the basic Bend Sensor^® technology, as well as other applications, there will be other competitors working to develop competing technologies.  To stay on the forefront of the technology, and to serve the needs of the customer, we will need to aggressively pursue improvements to existing systems and develop new systems as well.  For the year ended December 31, 2011 we spent $266,996 in research and development, primarily enhancing specific applications for the automotive, medical and industrial industries with our Bend Sensor^® technology, and testing Bend Sensor^® applications for and in new products.  Compared to $328,359 spent on research and development for the year ended December 31, 2010 related to development engineering for new product development resulting in potential of new patents and testing of products for marketable applications.

Also, we believe that our coatings for the Bend Sensor^® product are difficult to duplicate. We must develop new coatings to fit emerging customer needs and to stay ahead of the competition.  There can be no assurance that we will be successful in developing new coatings.  While we expect that future research and development efforts, if any, will lead to the filing of additional patent applications, there can be no assurance that any additional patent filings will be forthcoming.

EMPLOYEES

As of the date of this filing we have 4 full time employees and employ 2 sub-contractors.  Our employees are not presently covered by any collective bargaining agreement.  We have not experienced any work stoppages and believe that our relations with our employees are good.

ITEM 1A. RISK FACTORS

Factors Affecting Future Performance

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

We are currently unable to fund our day-to-day operations from revenues and the lack of revenues has impeded our continued growth and has caused delays in our business development.  We have generated operating capital from our private placements completed in March 2005 and June and September 2007 that have helped fund our operations for the past six years.  For the 2011 twelve month period we had negative cash flows from operating activities of $598,733 and as of the date of this filing we cannot guarantee that total revenues in 2012 will be sufficient to support our manufacturing operations, pay off existing debt and fund all of our research and development. In addition, with the economic uncertainties we have had to further expand our business activities to include additional  markets; therefore, we anticipate needing to raise an additional $1 million in funding. We may be required to rely on further debt financing, further loans from related parties, and private placements of our common stock for our additional cash needs. 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 experience to successfully manage anticipated growth.

 Since emerging from bankruptcy we restructured our management team and brought in an experienced group of executive level management personnel to direct the growth of our business operations.  However, 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:

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•

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 may need to complete a second production line and have it installed and approved during the last quarter of 2012.  The second manufacturing line is expected as a result of anticipated increased manufacturing demand and improved manufacturing efficiencies.  We have completed installation of our first production line and anticipate qualifying our manufacturing facility for ISO/TS-16949 certification as the Company successfully obtains larger manufacturing contracts during 2012 through 2013.  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 existing or future 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 our patents or defend ourselves from infringement suits, will be expensive and could divert our limited 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 from competitors.

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

Customers request that we create prototypes and perform pre-production engineering, 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 engineering, research and development.  However, we are currently unaware of any insurmountable problems with ongoing engineering, research and development that may prevent further development of an application and products.

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.  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

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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 may limit the market potential for our products.

In the automotive parts industry, there has been 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.   

These industry trends may limit the market for our products in these industries.

ITEM 2.   PROPERTIES

We currently occupy approximately 11,639 square feet of office and manufacturing space from F.G.B.P., L.L.C.   The original lease term was for five years, commencing on October 1, 2004 and terminating on September 30, 2009.  In April 2009, the Company amended the operating lease agreement for its manufacturing facility in Draper, Utah. Under the terms of the amended operating lease the average monthly payments are $7,950, including common area maintenance through December 31, 2010. This amount increased to $8,450 during the final year of the lease ending December 31, 2011.  At this time we continue to occupy the manufacturing facility while management works out details of an additional extension to the original lease. An agreement in principal has been reached which would include a reduction of the average monthly payment to $7,950 through the end of 2013 and then increase by $500 per month in each of the following two years, but this amendment to the agreement has not yet been executed. This facility has executive offices and space for research and development and manufacturing. The building is located in a business park in Draper, Utah consisting primarily of high tech manufacturing firms and it is located adjacent to Utah’s main interstate highway.  

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable to our operations.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is listed on the Financial Industry Regulatory Authority (“FINRA”) OTC Bulletin Board under the symbol “FLXT.”  The following table lists the range for the high and low bid prices of our common stock for each quarter for the years ended December 31, 2011 and 2010, respectively, as reported by the OTC Bulletin Board.  Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-downs or commissions, and may not necessarily represent actual transactions.

Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and Exchange Act, commonly referred to as the “penny stock” rule. The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.  Broker-dealers who sell penny stocks to persons other than established customers and accredited investors must make a special suitability determination for the purchase of the security.  Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse, and certain institutional investors.  The rules require the broker-dealer to receive the purchaser’s written consent to the transaction prior to the purchase and require the broker-dealer to deliver a risk disclosure document relating to the penny stock prior to the first transaction.  A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security.  Finally, monthly statements must be sent to customers disclosing recent price information for the penny stocks.

HOLDERS

As of March 30, 2012, we had 467 stockholders of record of our common stock, which does not include “street accounts” of securities brokers.

DIVIDENDS

We have not paid cash or stock dividends and have no present plan to pay any dividends.  We intend to retain any earnings to finance the operation and expansion of our business and the payment of any cash dividends on our common stock is unlikely.  However, our board of directors may revisit this matter from time to time and may determine our earnings, financial condition, capital requirements and other factors allow the payment of dividends.

RECENT SALES OF UNREGISTERED SECURITIES

On January 31, 2011 in lieu of paying cash for sales and marketing services to an outside consultant the Company issued 90,250 restricted shares to Mr. Sukhminder "Bobby" Bedi and canceled the Company's debt of $30,000. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

On February 8, 2011 in lieu of paying cash for investor relations services the Company issued 200,000 restricted shares of stock, to related parties for payment of investor relations services during the first quarter 2011 and canceled $90,000 of the Company's debt. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

On July 6, 2011 in lieu of paying cash for sales and marketing services to an outside consultant the Company issued 72,900 restricted shares to Mr. Sukhminder "Bobby" Bedi and canceled the Company's debt of $30,000. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

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On December 22, 2011 our board of directors authorized the grant of options to purchase 300,000 shares at $0.15 to Clark M. Mower, our President. These options to purchase shares were granted in consideration for Mr. Mower accepting a voluntary salary reduction over the first six months of 2012 and vested on December 31, 2011. The options were granted under the 2005 Stock Incentive Plan.  (See Items 11 and 12, below).  We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

On December 31, 2011 in lieu of paying cash for sales and marketing services to an outside consultant the Company issued 68,600 restricted shares to Mr. Sukhminder "Bobby" Bedi and canceled the Company's debt of $15,000. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

On February 2, 2012 in lieu of paying cash for sales and marketing services to an outside consultant the Company issued 91,100 restricted shares to Mr. Sukhminder "Bobby" Bedi and canceled the Company's debt of $15,000. We relied on an exemption from the registration requirements provided by Section 4(2) of the Securities Act.

ISSUER PURCHASE OF SECURITIES

None.

ITEM 6.  SELECTED FINANCIAL DATA

Not applicable to smaller reporting companies.

ITEM 7.  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 improving its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term sustainable manufacturing contracts.  Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing and 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 improved our patented Bend Sensor^® technology devices, developed additional applications for the technology and conducted testing on those devices and applications.  When volumes dictate our goal will be to qualify our production line and facility as an ISO/TS 16949 production line and facility as it is required for manufacturing automotive and related parts. This qualification will increase the marketability of our products to automotive Tier 1 and parts suppliers; however, once we have a manufacturing agreement in hand we will incur cost related to the audit of our manufacturing facility and ISO/TS 16949 certification.

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 still need to raise additional operating capital. Over the last year we have made significant progress within the automotive industry and based upon that progress we believe that over the next twelve to eighteen months we will have signed various long-term contracts that should produce sufficient volumes to provide ongoing revenues streams to support operations. In anticipation of manufacturing products for the automotive industry we will begin the process to have our manufacturing facility certified as a TS 16949 manufacturer. However, we cannot guarantee that we will be successful in negotiating such contracts or that once signed they will produce sufficient enough revenues with high enough margin during 2012 to become fully cash flow positive.

The past year's 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 in new technology and development. While all sectors of the economy are experiencing difficult times, many including the automotive

15

industry have seen some turn around in overall sales. Worldwide automakers are now 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. 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

Currently our revenue is primarily from design contract, testing and limited production services for prototypes and samples, and is not to a level to support our operations.  However we believe based upon current orders and projected orders over the next twelve months that we could be producing sensors under long-term contracts that will help support our existing operations. However management recognizes that until 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 operations and projected growth.

Since emerging from bankruptcy and for the past twelve months we have relied on the proceeds of convertible loans from existing shareholder and private placements. In November 2008 we secured $300,000 of short-term financing from related parties. The notes were originally due on May 31, 2009 with an annual interest rate of 10% and secured by the Company's business assets, they also carried a conversion option for restricted common shares at $.25 per share.  In May 2009 these notes were extended to May 31, 2010. During 2009 and through 2010 the same related parties have provided additional funding of $1,696,399 including accrued interest, under similar terms (see Item 13 below). In 2010 the Company also issued 7,590,663 in restricted common shares of stock to retire the $1,696,399 of outstanding convertible notes and associated accrued interest incurred over the past two years to fund operations.

During 2010 the Company issued 1,557,500 in restricted common shares of stock in lieu of cash and cancelled $347,732 in Company debt. The shares were issued to satisfy the Company's obligations for investor relations, legal fees, sales and marketing expense, and insurance expense associated with directors and officers insurance as well as its annual causality and liability insurance policies. The Company also issued 7,590,663 in restricted common shares of stock to retired the $1,696,399 of outstanding convertible notes and associated accrued interest incurred over the past two years used to fund operations.

In December 2010 two employees exercised options, under the 2005 Employee Stock Option Plan, and the Company issued 25,714 restricted common shares of stock, for which the Company received $4,950.

In November 2010 we entered into an agreement with Maestro Investment LLC for a $500,000 line of credit secured by 1,666,667 of our restricted stock. The line of credit has a 12% interest rate and is due and payable no later than December 31, 2012. Maestro has the option to convert any outstanding amounts for the stock issued as collateral. During 2011 the Company used the line of credit to fund our operations.  Due to the decline in the trading value of our stock, we agreed to and issued an additional 833,333 in stock as additional collateral for the line of credit that is also held in escrow.

Management believes that our current cash burn rate is approximately $50,000 per month and that the remaining proceeds from the convertible notes to existing shareholders, accounts receivable and the Maestro line of credit has funded our operations for the past year. 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 as we ramp up manufacturing for the second half of 2012. 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 current purchase orders and anticipated purchase orders over the next twelve months our projected revenues by the second half of 2012 should be sufficient to cover our projected operations based on our current burn rate. However, we cannot assure you that we will be able to obtain short-term 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. Nor is there any guarantee that the projected volume of purchase orders will materialize within the time frame we have projected or will meet the volumes that we anticipate.

We also expect that in the short term we may have to continue to issue common stock to pay for services and agreements rather than use our limited cash resources.  Any issuance of common stock will likely be pursuant to exemptions provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our shareholders may experience dilution in the value per share of their common stock.  

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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. 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 royalties related to these agreements.  However, we have formalized only a few agreements during the past year 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 can be successfully brought to market.

COMMITMENTS AND CONTINGENCIES

Our principal commitments at December 31, 2011 consist of our monthly lease and total current liabilities of $1,088,334, which includes $550,000 in convertible notes from existing shareholders and the Maestro Line of Credit. Our long term  lease of our manufacturing facility expired as of December 31, 2011 and we are currently paying $7,950 on a month-to- month basis. Management is currently in discussions with the landlord to extend the lease of the existing facility over a three to five year period.

Our total current liabilities include accounts payable of $261,478 related to normal operating expenses, including health insurance, utilities, production supplies, legal expenses and travel expense.  Accrued liabilities at December 31, 2011, were $276,287 and were related to payroll tax liabilities, tax expenses, investor relations consulting, and accrued Paid Time Off, a combination vacation-sick leave policy.

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 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 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. Under similar analysis no impairment charge was taken during the twelve months ended December 31, 2011 and 2010 respectively. 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.

We account for stock options under Statement of Financial Accounting Standards, Accounting Standards Codification Topic 718, Stock Compensation (formerly FASB Statement No. 123(R)), the pronouncement requires 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 years ended December 31, 2011 and 2010 we recognized $43,408 and $65,308, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options that will be recognized based upon the current grants issued.

RESULTS OF OPERATIONS

The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and its subsidiaries, Sensitron, and Flexpoint International, LLC and should be read in conjunction with our audited financial statements for the years ended December 31, 2011 and 2010.  These financial statements are included in this report at Part II, Item 8, below.

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Our revenue for the 2011 and 2010 years was primarily from design and development engineering, prototype products and sample products. Revenue from research and development engineering and prototype product 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. Management anticipates that revenue will increase as we continue to provide engineering services and our customers continue to order more frequently and in larger quantities.

Total operating costs and expenses increased in 2011 when compared to 2010 by $262,859. The increase is partially due to the recognition of the impairment of goodwill of $250,750, during 2011. Administrative and marketing expenses increased slightly to $1,017,156 for 2011 compared to $939,009 in 2010 the increase is primarily due to legal fees associated with our defense of our rights to the patents associated with the litigation with R&D Company. The cost of revenue and amortization of patents and proprietary technology expense remained relatively the same.

In 2010 total net other expense was $540,725 and includes total interest expense of $516,539 of which $256,222 was non-cash interest expense associated with the amortization of the beneficial conversion feature on the convertible notes to existing shareholders, accrued interest expense for the year of $104,087 on the outstanding notes payable and due to the extinguishment of all convertible notes during 2010. Additional interest expense of $156, 230 was recognized for unamortized discount on the convertible notes. During 2011 the Company had no non-cash interest expense or amortization of discounts on convertible notes.

As we continued to mature as a manufacturing company our engineering design and production revenues increased as a percent of our total revenue during 2011.  As we expand and sell our existing suite of products and as we grow the relationship with our existing and growing customer base we expect this trend to continue in the future. We are not able to guarantee that our operating losses will be reduced in the short term.

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

Cash and cash equivalents increased slightly in 2011 compared to 2010.  The increase is the result of additional funding from convertible notes to fund operations.  Until our revenue increases, our cash and assets will decrease as we fund our operations. As we expand our customer base and product offerings we will need to raise additional operating capital during the first two quarters 2012. It is expected that this will be accomplished by issuing stock, securing additional loans from related parties and existing shareholders, or through the licensing of our technology. We anticipate needing to raise an approximate $1 million in funding to support our existing operations and our anticipated growth during the last half of 2012.

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Our non-current assets decreased at December 31, 2011 compared to 2010 due to the depreciation and amortization associated with our long-lived assets.  These assets include, after adjustments, property and equipment valued at $211,890, patents and proprietary technology of $584,747, goodwill of $5,105,664, and deposits of $16,500 for the leased facility.  

Accrued liabilities increased at December 31, 2011 by $220,444 when compared to December 31, 2010. The increase is primarily due to the issuance of restricted stock to pay for services related to legal, insurance and investor relations expenses in 2010 that was not done in 2011. Total liabilities increased by $881,367 at December 31, 2011, as a result of increase in accrued liabilities and the $550,000 in convertible notes to Maestro and existing shareholders. In 2010 we issued restricted stock to retire all convertible notes payable and most of the services performed during the year, therefore as of December 31, 2010 our total liabilities were significantly less.   

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

(A Development Stage Company)

INDEX TO FINANCIAL STATEMENTS

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SADLER, GIBB & ASSOCIATES, LLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

Flexpoint Sensor Systems, Inc.

We have audited the accompanying consolidated balance sheets of Flexpoint Sensor Systems, Inc. and subsidiaries (a development stage company) (the Company) as of December 31, 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  The consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries as of December 31, 2010 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2010 were audited by other auditors whose report dated April 15, 2011, expressed an unqualified opinion on those statements. Our opinion, in so far as it relates to the period from February 24, 2004 through December 31, 2010, is based solely on the report of the other auditors. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial stat0ements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Flexpoint Sensor Systems, Inc. and subsidiaries as of December 31, 2011 and the results of their operations and cash flows for the year then ended and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2011 in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in the development stage, has not earned significant revenue, has suffered net losses and has had negative cash flows from operating activities during the year ended December 31, 2011 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2011. These matters raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1. 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.

/s/ Sadler, Gibb & Associates, LLC

Sadler, Gibb & Associates, LLC

Salt Lake City, UT

March 30, 2012

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Mantyla, McReynolds Letterhead

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

Flexpoint Sensor Systems, Inc.

We have audited the accompanying consolidated balance sheet of Flexpoint Sensor Systems, Inc. and subsidiaries (a development stage company) (the Company) as of December 31, 2010 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Flexpoint Sensor Systems, Inc., for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2009, were audited by other auditors whose report dated April 6, 2010, expressed an unqualified opinion on those statements.  Our opinion, in so far as it relates to the period from February 24, 2004 through December 31, 2009, is based solely on the report of other auditors.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flexpoint Sensor Systems, Inc. and subsidiaries as of December 31, 2010 and the results of their operations and their cash flows for the year then ended, and for the period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2010 in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in the development stage, has not earned any appreciable revenue, has suffered net losses and has had negative cash flows from operating activities during the year ended December 31, 2010 and for the cumulative period from February 24, 2004 (date of emergence from bankruptcy) through December 31, 2010. These matters raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1. 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.

/s/ Mantyla McReynolds

MANTYLA MCREYNOLDS LLC

Salt Lake City, Utah

April 15, 2011