FLEXPOINT SENSOR SYSTEMS INC - Quarter Report: 2015 September (Form 10-Q)

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

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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. and its subsidiaries (the “Company”). These financial statements are condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. Therefore, these statements should be read in conjunction with the most recent annual consolidated financial statements of Flexpoint Sensor Systems, Inc. and subsidiaries for the year ended December 31, 2014 included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2015. 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, 2015.

Nature of Operations – The Company is located near Salt Lake City, in Draper, Utah and is a company engaged principally in designing, engineering, and manufacturing sensor technology products and equipment using Bend Sensors^® flexible potentiometer technology. The Company suffered losses of $1,660,777 and $728,915 and used cash in operating activities of $405,413 and $360,225 during the nine months ended September 30, 2015 and 2014, respectively. Through September 30, 2015, the Company had an accumulated deficit of $23,048,374. These matters raise doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Cash and Cash Equivalents – Cash and cash equivalents are considered to be cash and highly liquid securities with original maturities of three months or less. The cash and equivalents of $46,124 at September 30, 2015 and $18,307 at December 31, 2014 represent cash on deposit in various bank accounts with a financial institution.   

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

Accounts Receivable – Trade accounts receivable are recorded at the time product is shipped or services are provided, including any shipping and handling fees, and are shown net of the allowance for bad debts. Due to the limited amount of transactions, collectability of the trade receivables is reasonably assured; however, the Company has created an allowance for doubtful accounts to provide for any bad debts experienced.

Most contracts associated with design and development engineering require a deposit of up to 50% of the quoted price of the initial phase of such contracts prior to the commencement of work. As the Company completes each phase or milestone of such a contract additional funding is normally required from the customer. These deposits are considered deferred income until each phase or milestone is completed and accepted by the customer, at which time the agreed upon price for that particular phase of the contract is billed to the customer and the deposit applied. As the Company’s revenues and customer base increase, our allowance policy will be reviewed to insure it adequately provides for uncollectible accounts.

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

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

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Valuation of Long-lived Assets – The carrying values of the Company’s long-lived assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that they may not be recoverable. When projections indicate that the carrying value of the long-lived asset is not recoverable, the carrying value is reduced by the estimated excess of the carrying value over the projected discounted cash flows. The Company’s analysis did not indicate any impairment of assets as of September 30, 2015.

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 rights to several patents and proprietary technology.  Patents and technology are amortized from the date the Company acquires or is awarded the patent or technology rights, over their estimated useful lives, which range from 5 to 15 years.  An impairment charge is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible assets as determined by projected discounted net future cash flows. The Company’s analysis did not indicate any impairment of intangible assets as of September 30, 2015.

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

Goodwill – Goodwill represents the excess of the Company’s reorganization value over the fair value of net assets of the Company upon emergence from bankruptcy. Goodwill is not amortized, but is tested for impairment annually, or

when a triggering event occurs. As described in ASC 360, the Company has adopted the two step goodwill impairment analysis that includes quantitative factors to determine whether it is more likely than not that the fair

value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. A fair-value-based test is applied at the overall Company level. The test

compares the estimated fair value of the Company at the date of the analysis to the carrying value of its net assets. The analysis also requires various judgments and estimates, including general and macroeconomic conditions, industry and the Company’s targeted market conditions, as well as relevant entity-specific events; such as a change in the market for the Company’s products and services. After considering the qualitative factors that would indicate a need for interim impairment of goodwill and applying the two-step process described in ASC 360, management has determined that the value of Company’s assets is not more likely than not less than the carrying value of the Company including goodwill, and that no impairment charge needs be recognized during the reporting periods.

Revenue Recognition – Revenue is recognized when persuasive evidence of an arrangement exists, services have been provided or goods delivered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Revenue from the sale of products is recorded at the time of shipment to the customers.  Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the

customer.  Revenue from contracts to license technology to others is deferred until all conditions under the contracts are met and then recognized as licensing royalty revenue over the remaining term of the contracts.

Stock-Based Compensation – Under ASC Topic 718, Stock Compensation, the Company is required to recognize the cost of employee services received in exchange for stock options and awards of equity instruments based on the grant-date fair value of such options and awards, over the period they vest.  Prior to 2006, no compensation was recorded in earnings for the Company’s stock-based options granted under the 2005 Stock Incentive Plan (the “Plan”).  Under ASC 718, all share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in operations over the requisite service period.  On January 1, 2006, the

Company adopted the provisions of ASC 718, for its share-based compensations plans and began recognizing the unvested portion of employee compensation from stock options and awards equal to the unamortized grant-date fair value over the remaining vesting period.  Furthermore, compensation costs will also be recognized for any awards issued, modified, repurchased, or canceled after January 1, 2006.

Basic and Diluted Earnings (loss) Per Share – Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net earnings (loss) by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. At September 30, 2015, there were $1,264,998 of

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

convertible notes, principal and interest. These convertible notes amounted to 25,294,830 common share equivalents that were not included in the computation of diluted earnings (loss) because the effect would be anti-dilutive.  Other convertible notes and options- related exercise prices were less than the average market price of the common stock.

Concentrations and Credit Risk - The Company has a major customer who represents a significant portion of revenue, accounts receivable and notes receivable.  During the nine months ended September 30, 2015, the customer represented 61% of sales and represents 85% of accounts receivable and 100% of notes receivable at September 30, 2015. The Company has a strong relationship with this customer and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.  The Company has the option, under one of the notes receivable, to convert the principal and interest into equity of the customer.

NOTE 2 – STOCK OPTION PLANS

On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Employee Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and continued in effect for ten years.  This plan was approved by the stockholders of the Company on November 22, 2005. Under the Plan, the exercise price for all options issued was to be not 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 could have been awarded under the Plan was 2,500,000 shares.  The Plan was set to expire on August 24, 2015, but authorized the issuance of options for shares of stock that extend beyond the termination of the Plan.  On August 24, 2015 all options issued under the Plan were either surrendered or expired on August 25, 2015 as provided in the Plan.

On August 24, 2015, prior to the expiration of the Plan, the Board of Directors approved the issuance of options for the purchase of 2,185,000 shares of the Company’s common stock to current employees and directors under the Plan. Said options were granted to offset surrendered options to existing employees issued prior to the date of the resolution and to provide compensation for existing employees and new employees.  The options are subject to the terms and conditions of the Plan and were effective as of the grant date.  Any options issued that were not replacements for the surrendered options are scheduled to vest in equal installments on the last calendar day of 2015, 2016 and 2017, respectively.  In keeping with the provisions of the Plan, the Stock price for any options issued as replacements for options surrendered by existing employees and directors, and any additional shares of stock issued to existing employees, directors of new employees, was set at not 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 Company continues to utilize the Black-Scholes option-pricing model for calculating the fair value as defined by ASC Topic 718, which is an acceptable valuation approach under ASC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock. Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Company’s common stock has limited trading history. The Company uses the simplified method to calculate the expected term. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Company’s employee stock options.

During the nine month period ended September 30, 2015 the Company recognized $214,997 of stock-based compensation expense, compared to $0 during the same period in 2014. Inputs used in the Black-Scholes calculation, which valued the options at $294,756 were:  Volatility – 424%; estimated life – 10 years; risk free interest rate – 1.60%; forfeiture – 0%; vesting – ranging from immediate to December 31, 2017; and option prices of $0.14 to $0.25 per share.  The 2,024,000 employee stock options outstanding at the beginning of this reporting period had all expired at August 25, 2015, with 2,185,000 new options being issued. A summary of all employee options activity under the Plan as of September 30, 2015 and changes during the nine months then ended is set forth below:

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of September 30, 2015, there was $79,759 of unrecognized compensation cost related to employee stock options that will be recognized.   An additional $21,753 will be expensed during the fourth quarter of 2015 and $29,003 will be charged in both 2016 and 2017.

NOTE 3 – COMMON STOCK

On January 12, 2015, the Board of Directors approved the conversion of $165,000 in convertible notes held by Capital Communications LLC, plus $34,605 in interest accrued and unpaid, to 2,800,000 shares of restricted common stock at an average conversion price of $0.07 per share, resulting in a gain on conversion of $11,847.

On January 20, 2015, the Board of Directors approved the conversion of $135,000 in convertible notes held by Empire Fund Managers, plus $26,129 in interest accrued and unpaid, to 2,650,000 shares of restricted common stock at an average conversion price of $0.06 per share, resulting in a gain on conversion of $43,815.

NOTE 4 – RELATED PARTY TRANSACTIONS

The Company has a related party payable to its President, CEO and Director for reimbursement of travel and other related expenses incurred on behalf of the Company. The amount due to the President as of September 30, 2015 and December 31, 2014 is $1,742 and $712, respectively.

The Company has a related party convertible promissory note entered into in 2011 with a member of its board for $40,000.  The note bears interest at 10%, with a default rate of 15%, has a maturity date of July 31, 2015, and is convertible at $0.20 per share.  The principal and interest outstanding at September 30, 2015, is $40,000 and $16,789 respectively ($40,000 and $14,100 at December 31, 2014).

In July 2015 the Company entered into a stock subscription agreement with an employee as part of an employment agreement.  The employee issued the Company a note with a fair market value of $9,499 and a maturity date of January 15, 2016.   The note is secured by 86,350 shares of the Company’s restricted common stock valued at $0.11 per share for a subscription payable of $3,958.   As of September 30, 2015, the Company had recorded $3,958 in subscription payable.

NOTE 5 – NOTES RECEIVABLE

On April 1, 2015, the Company paid $51,157 for the assumption and assignment of a convertible promissory note receivable issued by Bend Tech, LLC (“Bend Tech” one of the Company’s customers – see also Note 1, Concentrations and Credit Risk) and held by a third-party Bend Tech investor (“the Investor”).  The note bears interest at the rate of 10% per annum and had a maturity date of April 1, 2015.  The agreement allows the holder, at its option, to convert the note to a 5% ownership of Bend Tech.  The Company elected to take assignment of those

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

conversion rights, reaching an agreement with the Investor to pay the principle and interest to the Investor at the due date.  Bend Tech is expected to become a more significant customer of the Company as it begins its product

introductions, and the Company elected to pay off the note and put itself in position to either receive the payment plus interest of   convert the note into ownership of Bend Tech rather than have an outside investor make such conversion.  As of the date of this report, the note is in default and the Company has not exercised its conversion option.

NOTE 6 – NOTES PAYABLE

Convertible Notes Payable – Third Parties

Prior to 2014, the Company had obtained financing by issuing multiple convertible notes payable to third parties. These notes have an annual interest rate of 10%, increasing to 15% in case of default, and are secured by the Company’s business assets, with a conversion feature for restricted common shares ranging from $.07 to $.05 per share. These notes had a balance of $525,000 (with a discount of $4,653) at December 31, 2013.

During 2014, the Company secured additional financing to cover its ongoing operations in the amount of $480,000 by issuing various convertible notes to one of the third parties who had provided financing prior to 2014, Capital Communications, LLC. The notes matured in 2014, bore an annual interest rate of 10%, with a 15% default rate, and were secured by the Company’s business assets, with a conversion feature for restricted common shares ranging from $.08 to $.02 per share. These notes had a balance of $1,005,000 (“the 2014 Capital Communication Notes”), beneficial conversion discounts of $210,000 (against which $75,050 in amortization expense was recorded - leaving a discount balance of $139,603), and had accrued interest balances totaling $123,273 at December 31, 2014.

During 2015, the Company secured additional financing from Capital Communications to cover its ongoing operations in the amount of $300,000 with the same terms as the 2014 Capital Communication Notes, bringing the total balance to $1,125,000 (“the $1,125,000 Notes”), with related beneficial conversion discounts of $120,000.

Conversion of convertible Notes Payable – Third Parties during 2015

On January 12, 2015, of the balance of the $1,125,000 Notes, Company converted $165,000 of these convertible notes plus $34,605 in accrued and unpaid interest, to 2,800,000 shares of restricted common stock at an average conversion price of $0.07 per share, resulting in a gain on conversion of $11,847.

On January 20, 2015, of the balance of the $1,125,000 Notes the Company converted $135,000 of these convertible notes plus $26,129 in accrued and unpaid interest, to 2,650,000 shares of restricted common stock at an average conversion price of $0.06 per share, resulting in a gain on conversion of $43,815.

On March 13, 2015, the Board of Directors approved the consolidation of $225,000 in principal and $40,714 in accrued interest of the balance of the $1,125,000 Notes, to a new note dated March 13, 2015 for $257,103.  In addition, the Board approved the consolidation of $600,000 in principal and $45,452 in accrued interest of the $1,125,000 Notes, to a new note dated March 31, 2015 for $631,945.  Both notes (“the Consolidated Capital Communication Notes”) bear interest at the rate of ten percent 10%, with 15% default rates, and have maturity dates on March 31, 2016.  Under Accounting Standards Codification (“ASC”) 470 the conversion of the notes and the extension of the term are accounted for as an extinguishment of debt and requires a valuation be performed on the new notes issued.  That calculation resulted in a loss on extinguishment of debt of $168,286. The Consolidated Capital Communication Notes are convertible at $.05 per common share, resulting in a beneficial conversion discount of $889,048, to be amortized over the term of the notes.

Convertible Notes Payable – Third Parties (post March consolidation)

On June 18, 2015, the Board of Directors approved an Amendment to the Consolidated Capital Communication Notes to finance an additional $200,000, all other terms on the Promissory Note remaining unchanged.

Pursuant to the Amendment, during April through September 2015, the Company has raised an additional $440,000 in operating capital bearing an annual interest rate of 10%, with a default rate of 15%. Consistent with the Consolidated Capital Communication Notes, these amounts are secured by the Company’s business equipment and have a conversion feature for restricted common shares at $.05 per share with a maturity date of March 31, 2016.  

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Given the aforementioned, Convertible Notes Payable principal of $1,209,048, discount of $655,555 ($622,692 in amortization expense during the nine month period), and accrued interest of $55,950 (interest expense of $77,605) has been recorded by the Company as of September 30, 2015.

Notes Payable – Third Parties

On April 1, 2015, the Company entered into a non-convertible note payable with Capital Communications, LLC for $51,000. This note bears an annual interest rate of 10% and a default rate of 15% annually and is secured by the $51,157 note receivable held by the Company (see Note 5).

NOTE 7 - LITIGATION

R&D Products, LLC - On June 23, 2010, the Company, along with David B. Beck, the Company's Director of Engineering, filed a complaint against R&D Products, LLC, Persimmon Investments, Inc. and Jules A. deGreef, the managing member of R&D Products, LLC. The complaint alleged 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 believed 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 claimed that such intellectual properties, patents, etc. filed by deGreef, Persimmon and R&D belong to Flexpoint and therefore is sought financial damages and ownership of all intellectual rights, patents and inventions created by Mr. Beck for deGreef, Persimmon and R&D Products.

On April 9, 2013, the parties of the above referenced litigation reached a favorable universal settlement agreement that reinforces the Company's rights to the intellectual properties and their related products, including the medical bed. In order to secure the Company had exclusive rights to all patents and intellectual properties associated with this litigation, the Company advanced to Mr. deGreef $25,000 to bring current all of the filing and maintenance fees for the patents detailed in the law suit. The advance is secured by a promissory note with an annual interest rate of 10% to be paid no later than April 8, 2015.  As of the date of this report the agreement is in default.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

On the same date as part of the settlement agreement (see Note 7- Litigation), the Company entered into an exclusive licensing agreement that granted the Company the sole and exclusive rights to all products, devices, and commercial applications of any type or nature that relate to or are derived from the patents and application for patents controlled by Mr. deGreef and his companies. As additional compensation for the settlement the Company also received a note in the amount of $360,000 from the deGreef companies to be paid with accrued interest no later than April 8, 2018 through future royalties generated from the exclusive rights to technology specifically identified in the settlement and licensing agreements. The note has an annual interest rate of 5% and is secured by the intellectual properties of Mr. deGreef and his companies, including patents issued and those currently under application and any and all devices derived from such.

At the time of this filing, the Company does not have orders for products or devices, contracts for, or contracts that are currently being negotiated, or any type of existing or negotiated royalty agreement that uses the patents or technology identified in the settlement and licensing agreement. Because the source of repayment of the $360,000 note receivable is from future royalty income from the sales of product, devices or uses of the technology,  as stipulated in Accounting Standards Codification ("ASC") 450 the Company is not permitted at this time to recognize a contingent asset.  At such time as royalty income can be reasonably estimated and is "virtually certain", the Company will recognize the note receivable.   

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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS - UPDATE

In September 2015, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2015-16, Business Combinations (Topic 805). The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Additionally, this ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this ASU eliminates the requirement to retrospectively account for those adjustments. This ASU is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures.

In August 2015, the Financial Accounting Standards Board issued ASU 2015-14, Revenue from Contracts with Customer (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09, Revenue from Contracts with Customer (Topic 606) for all entities by one year. As a result, all entities will be required to apply the provisions of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the adoption date and impact the guidance in this ASU will have, if any, on our consolidated results of operations, cash flows, or financial position.

In June 2015, the Financial Accounting Standards Board issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this ASU represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. This ASU is effective for fiscal years and interim periods beginning on or after December 15, 2015, with early adoption permitted. The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures.

In August 2014, the Financial Accounting Standards Board issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). This ASU will require an entity's management, for each annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The definition of substantial doubt within this ASU incorporates a likelihood threshold of "probable" similar to the use of that term under current guidance for Topic 450, Contingencies. Certain disclosures will be required if conditions give rise to substantial doubt. This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, with early adoption permitted. The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures.

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 10 - SUBSEQUENT EVENTS

On October 30, 2015 the Company issued a convertible promissory note for $150,000 to a third party, the proceeds of which will be used to fund operating expenses. The note has an annual interest rate of 10% and is secured by the Company’s equipment. The note has a conversion feature for restricted common shares at $.05 per share and a maturity date of January 15, 2016.  To date, $50,000 had been drawn against the note.

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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 an innovative technology firm specializing in developing products that feature the Company’s patented Bend Sensor^® and related technology.  The Bend Sensor^® is a groundbreaking sensing solution that is revolutionizing applications in the automobile, safety, medical and industrial industries.  The Bend Sensor’s single-layer, thin film construction cuts costs and mechanical bulk while introducing a range of functions and stylistic design possibilities that have never before been available in sensing technology.  We currently own six patents and through our research and development, efforts are in the process of filing for more that include fully integrated products being sold and supplied to our limited customer base. We have also jointly developing additional commercially viable products, including a universal sensor that will be used in the automotive, medical and industrial industries.

Our plan for the balance of 2015 is to concentrate our marketing efforts and limited financial resources on current projects that we believe can be brought to market in the shortest period of time. In July 2015 we announced the hiring of a Vice President of Sales and Marketing with the intent of accelerating the introduction of our products into multiple markets.  We anticipate having additional products featuring our patented Bend Sensor^® technology on the market over the next 6 to 9 months including products in the medical, sport shoe, residential home care and industrial control industries.

We continue to develop new types of products for our Bend Sensor^® technologies and continue to receive small repeat production orders from existing customers. We have made improvements on our initial prototype for a Home Monitoring Presence Detection System using our Bend Sensor^® technologies and have received development and design orders from various industries.  We have continued to work with market makers and Tier I automotive suppliers in the U.S and Europe on numerous other applications for our sensors and devises.   Based upon our discussions within the automotive industry in the U.S. and Europe our unique sensor systems meet the requirements for manufacturers to have lighter weight, more fuel efficient cars.  Our Bend Sensor^® is lighter in weight, has fewer moving parts than conventional sensing devices, is more versatile and, due to its unique design is more cost effective. Product and design changes in the automotive industry are slow, averaging two to three years before actually being incorporated into a commercially viable automotive platform. Because of our recent work with several Tier 1 suppliers, we have shown the Bend Sensor^® to be viable as the next generation of sensing devises to the industry. Due to the advanced technology of the Bend Sensor^® and its versatility of applications, we anticipate being a part of the changes taking place in the automotive, energy and technological industries.

In September and October we made announcements on a number of developments utilizing the Bend Sensor technology in wearable gloves for various applications.  The products are for several different uses across multiple industries.  Orders have been received for a variety of applications including industrial use, virtual gaming, medical rehabilitation and music.  The company has added German based Workaround UG and South Korean-based Neofect to its expanding roster of “wearables” customers.  

The Company recently received purchase orders from Virtual Motion Labs and others for glove applications.  The sensors are used in a variety of applications, including virtual reality, motion capture, animation applications,  

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robotics, and physical therapy and rehabilitation.  It is anticipated that larger orders for these applications will be received in the coming months.

With the increased interest in numerous applications for the Bend Sensor technology we announced in September the availability of their new USB Bend Sensor Kit.  This kit will enable engineers and product developers to start integrating the Bend Sensor into their products within minutes.  The kit includes a circuit board that interfaces the Bend Sensor directly to a laptop or desktop PC through a USB port.  

In October 2015 we announced that a major pre-production milestone with a multi-national toy manufacturing company had successfully been passed.  In connection with this company we are now engaged with a multi-national supply chain solutions company that offers design, manufacturing, distribution and aftermarket services to original equipment manufacturers.  It is, globally, the second largest electronics manufacturing services and original design manufacturing company.  We have recently received orders and delivered product to both companies.  Larger purchase orders will be received over the next months, beginning a multi-year production collaboration in early 2016.

In 2014 we announced that we had completed the electronics and software that will be used in a running shoe and other sports related products. It also is a critical piece of the golf training aid that Bend Tech LLC will market. Beyond its sport and recreational value, golf is a major industry that generates jobs, commerce, economic development and tax revenues for communities throughout the country

As part of the golf training project the Company entered into a development agreement with Bend Tech, LLC to manufacture working prototypes of a golf shoe and golf shaft that will utilize a series of Bend Sensors® in a high tech training aid for golf. Flexpoint was paid upon completion of various milestones during the development process.  The agreement provided an added source of income for the Company during the 2014 year. In July 2014, the Company and Bend Tech announced that all work under the development agreement has been successfully completed and that they were working on finalizing a manufacturing agreement.

In January 2015, at the CES show in Las Vegas, Nevada, Veristride received an award for a shoe utilizing our sensors. The use of sensors in wearable shoes and devices is a significant market.  In March 2015, we announced the finalization of a manufacturing and distribution agreement with Bend Tech LLC for the company’s smart shoe insole system.  We will produce and distribute sensors to Bend Tech which will be used to create the Mettis Trainer.

In August 2015 we announced that Bend Tech LLC would begin taking orders for its smart shoe insert through the Mettis Trainer website.  Orders placed are expected to arrive beginning in the fourth quarter of 2015.   

We successfully completed PhaseTwo of the disposable directional colonoscope for Haemoband Surgical, Ltd, a Northern Ireland based company that specializes in unique medical devices last year. We subsequently made a partial delivery of the products required by Phase Three and completed the delivery of all products for Phase Three by the end of the 2014 fourth quarter.  Under the terms of the agreement, we received a milestone payment upon completion of delivery for Phase Three. We are now proceeding through Phase Four and Phase Five, the final phases that will bring the project to completion and commercialization.  With the successful completion of Phase Three management believes the Company moves closer to an agreement for a long-term contract with Haemoband. The estimated volumes quoted for this device are between 500,000 to 1 million sensors annually. The application will use a sensor that is an adaptation of a sensor that we already have commercially available; therefore, the cost associated with the development of this medical application has been marginal. It is estimated that the annual demand for colonoscopy procedures ranges from 2.21 to 7.96 million in the United States and as the overall population continues to age more procedures will be required. One of the difficulties with the procedure is providing an inexpensive means of locating the exact position of the colonoscopes. With the use of our sensor array and monitoring equipment, the initial testing has shown that with the Bend Sensor^® technology it is possible to locate the positioning of the colonoscopes. It is anticipated that completion and commercialization of this product will open up significant other markets for additional products that uses similar equipment for other unrelated products in the medical industry.

The Company continues working with HTK Engineering, LLC and Vista Brake who are currently marketing their safety mechanisms specifically designed for garbage trucks and other large commercial and emergency vehicles. Most commercial vehicles have an "air braking system" which can lose pressure and disengage the brakes while the vehicle is still running. Our Bend Sensor^® technology is the key component of the HTK and Vista's systems, which provide a backup braking system preventing the vehicle from inadvertently rolling into people, buildings or other

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vehicles. Part of the marketing effort has been to involve insurance companies who have paid claims related to the initial brake failure. Because our jointly designed systems are easily installed and adaptable to most vehicles, insurance companies have indicated they would provide a reduction in premiums should their customers install one of these systems. There are over 179,000 garbage and recycling trucks in use in the United States and HTK is also pursuing opportunities for the system throughout Europe and Asia.

We continue to receive development orders from Intertek Industrial Corp. for their ProTek System. The ProTek System is an automotive seat-monitoring device integrated into emergency response vehicles.  This monitoring device places the Company’s Bend Sensors^® in each rear passenger seat with a monitor viewable to the vehicle’s driver.  The foolproof system informs the driver if the emergency medical technicians are seated and properly secured prior to departure and while the vehicle is in motion. The system is installed in the seats of the rear compartments of the emergency vehicle and provides the driver with constant feedback as to the “seated and secured” status of passengers and personnel in the rear of the vehicle. The system is currently installed in ambulances and is being tested for use in other types of emergency vehicles. Through its relationship with Intertek, the Company has further validated its technology in the automotive and safety industries and is currently working with other companies on similar systems for buses, cabs and heavy equipment operators to ensure the safety of the their passengers and drivers. A national surge in ambulance accidents has called for increased safety standards for emergency vehicles. Due to the rise in injuries and fatalities that result from these accidents, the National Fire Protection Association (NFPA) has taken on the task of rewriting the ambulance standard.  The proposed legislation will require a safety system similar to Intertek's ProTek System, which will give Intertek a significant competitive advantage being first to market with an already proven system that will meet the legislative requirements.

Using our Bend Sensor^® technology the Company has developed a patented medical bed and with the settlement with R&D Products and Mr. deGreef we are now able to openly market this unique bed. Because of the Bend Sensor’s^® predictability the accompanying electronics of the bed are 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 that can cause bed sores or other life threatening complications for patients that are bed ridden as well as facilitate dressing changes.  Needed adjustments can be programmed into the bed to relieve pressure areas to meet the required standards for patient care and comfort. We anticipate that progress on this application will follow completion of the running shoe application.  Our Bend Sensor^® technology has many other medical applications that the Company is pursuing.

The Company anticipates marketing a similar bed as part of 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 commercial mattress company has a specialty bed they promote. The Company has had some discussions with mattress companies who have expressed interest in the concept. Mr. deGreef has been intimately involved with the medical mattress and other products that have been placed on hold during the lawsuit, and has successfully marketed these products in prior years. Mr. deGreef is currently in discussions with additional interested clients.   

Our patented technology continues to gain recognition in various markets and industries as evidenced by the recent receipt of an initial production order from CPS Color Equipment S.p.A Italy and orders from a Fortune 100 automotive maker for our horn system.  Although, so far the volumes for our applications and devises have been relatively small we continue to receive follow up orders for the universal sensor that we jointly developed last year. We expect to receive additional orders from other customers for this sensor as it becomes more recognizable in the market. Currently our customers for this type of sensor include companies in the following industries: automobiles, trucking, emergency vehicles, public transportation, military and other governmental entities. As anticipated, the Company is beginning to see the potential for more significant volumes and revenues from the sale of this sensing devise over the next year and beyond.

Over the past year we have been enhancing our relationships with various automotive Tier 1 suppliers as they have continued testing and proving our patented horn and seat switch reliability.  In 2013, we announced that our steering wheel horn pad received implementation ready status for a U.S. Fortune 100 automaker that has also identified up to four vehicle platforms being considered for the Company’s longer lasting and more cost effective horn switch.  The horn system has successfully completed in-vehicle testing which requires that the system be installed in a vehicle and driven for 150,000 miles without failure.  The horn passed the extensive testing process without failure.

Finalizing additional long-term revenue generating production contracts with other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to, and are dependent upon, our ability to attract

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significant long-term production contracts.  In the short term, we must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor^® and Bend Sensor^® related technologies and products to the market.  Management believes that even though we have made positive strides forward with our business plan, it is likely that significant progress may not occur for the next three to six months, primarily due to the time it takes for negotiating such contracts.  Accordingly, we cannot guarantee that we will realize significant revenues or that we will become profitable over the next six to nine months.

Management believes with the signing of the development agreement with Bend Tech and receiving the exclusive rights to a group of products that have proven in the past to generate revenue streams, and the recent orders received for its automotive and industrial control devises, the Company is on the threshold of growing its customer base that should help in producing long-term production contracts that will be sustainable in the near future.

LIQUIDITY AND CAPITAL RESOURCES

Our revenue is primarily from design, contract, testing and limited production services and is not to a level to support our operations.  Management anticipates that we may not realize significant revenue within the next three to nine months.

Management believes that our current cash burn rate is approximately $60,000 per month and the proceeds from the convertible notes and our engineering and design fees will not totally fund our anticipated growth in operations. We will therefore need to raise additional financing. We believe that this additional financing will provide the needed capital to extend operations to the development and production of our growing product offerings and growing manufacturing opportunities. However, we may not be able to obtain financing, or the sources of financing, if any, may not continue to be available, and if available, they may be on terms unfavorable to us.

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

FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES

Our principal commitments at September 30, 2015 consisted of our operating lease of $8,950 per month, and total liabilities of $1,503,901, which includes $553,493 of convertible notes payable, net of discounts of $655,555.  Accrued liabilities at September 30, 2015, were $694,306 and were related to payroll, payroll tax liabilities, accrued professional expenses, accrued insurance expense, accrued interest expense on notes and accrued paid time off.  

During the nine month period ended September 30, 2015, the Company converted $300,000 in convertible notes and accrued and unpaid interest of $60,734 through the issuance of 5,450,000 shares of restricted common stock.  In March 2015, the Company consolidated $825,000 in convertible notes, along with $64,048 of accrued and unpaid interest into two notes.  One note is $257,103, convertible into restricted common stock at $0.06 per share;  the other note amount is $631,945, convertible into restricted common stock at $0.07 per share.  Both notes bear an interest rate of 10% and have maturity dates on March 31, 2016.

During the nine months ending September 30, 2015, the Company has raised an additional $491,000 in operating capital through the issuance of short-term notes to Capital Communications LLC.  The notes have an annual interest rate of 10% and a default rate of 15% annually. One note, in the amount of $51,000, bears interest at the rate of ten percent (10%) per annum and is secured by the promissory note purchased by the Company on April 1, 2015. The remaining notes, which total $440,000, are secured by the Company’s business equipment and have a conversion feature for restricted common shares at $.05 per share with a maturity date of March 31, 2016.

In July 2015 the Company entered into a stock subscription agreement with an employee as part of an employment agreement.  The employee issued the Company a note with a fair market value of $9,499 and a maturity date of January 15, 2016.   The note is secured by 86,350 shares of the Company’s restricted common stock valued at $0.11 per share for a subscription payable of $3,958.   As of September 30, 2015, the Company had recorded $3,958 for the subscription payable.

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On October 30, 2015 the Company drew an additional $50,000 against a $150,000 convertible promissory note issued to Capital Communications LLC. The note has an annual interest rate of 10% and is secured by the Company’s equipment. The note has a conversion feature for restricted common shares at $.05 per share and a maturity date of January 31, 2016.

The Company has a major customer who represents a significant portion of revenue, accounts receivable and notes receivable.  During the nine months ended September 30, 2015, the customer represented 61% of sales, represents 85% of accounts receivable and 10% of notes receivable at September 30, 2015.  The Company has a strong relationship with this customer and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies.  The Company has the option, under one of the notes receivable, to convert the principal and interest into equity of the customer.

OFF-BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING ESTIMATES

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

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 nets assets. The test requires various judgments and estimates. During 2014 and for the nine months ending September 30, 2015, 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, the Company considered factors such as the global market volatility, variables in the economy, and the overall uncertainty in the markets which 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. Based upon our analysis for the impairment test for the nine months ended September 30, 2015 compared the carrying value of the Company's net assets to the estimated fair value of the overall Company, and the present values of projected net cash flows of the Company over the next three years, no impairment was recognized during the nine months ended September 30, 2015.

We test long-lived assets for impairment quarterly or when a triggering event occurs. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The amount of impairment is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other factors. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. If the carrying values of the long lives assets exceed the present value of the discounted projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly. Under similar analysis no impairment charge was taken during the nine month period ended September 30, 2015. Impairment tests will be conducted on a quarterly basis and, should they indicate a carrying value in excess of fair value, additional charges may be required.

Financial accounting standards require that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest. The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model. Option pricing models require the input of highly sensitive assumptions, including expected stock volatility. Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. For the nine month periods ended September 30, 2015 and 2014 we recognized $214,997 and $0.00, respectively, of stock-based compensation expense

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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 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 and nine months ended September 30, 2015 and 2014, 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, 2014 and 2013.

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2015:

For the three months ending September 30, 2015 revenue was $35,812, an $88,652 decrease when compared to the same period in 2014. The majority of the revenue for this period came from billable engineering services. 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.  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 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. 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 received revenue from design contract, development engineering, limited production and repeat orders from our existing customers. Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer. Revenue from contracts to license technology to others is deferred until all conditions under the contract are met and then the sale is recognized as licensing royalty revenue over the remaining term of the contract. Revenue from the sale of a product is recorded at the time of shipment to the customer.  

Of the $419,577 and $273,555 total operating costs and expense for the three months ending September 30, 2015 and 2014, respectively, $72,432 and $78,056 were for direct research and development cost, respectively. For the three months ended September 30, 2015, total operating expenses increased by $146,022 when compared to the same period in 2014, due primarily to anon-cash  stock-based compensation charge of $214,997 related to the issuance of stock options.  Our fixed assets reached full depreciation in 2014 so there is no depreciation charge in 2015.

Other expense for the three month period ended September 30, 2015 was $352,481, a $269,138 increase compared to the same period in 2014.  The increase is attributable to the beneficial conversion charges on the convertible notes.    

A net loss of $736,246 was realized for the three months ended September 30, 2015, the loss being increased by the stock-based compensation and note discount charges earlier described.  A net loss of $232,434 was realized for the three month period ended September 30, 2014.

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NINE MONTH PERIOD ENDED SEPTEMBER 30, 2015:

For the nine months ending September 30, 2015 revenue was $116,280, a $104,837 decrease when compared to the same period in 2014. The majority of the revenue for this period came from billable engineering services. 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 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. 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 received revenue from design contract, development engineering, limited production and repeat orders from our existing customers. Revenue from research and development engineering contracts is recognized as the services are provided and accepted by the customer. Revenue from contracts to license technology to others is deferred until all conditions under the 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.  

Total operating costs and expense for the nine months ending September 30, 2015 and 2014 were $920,135 and $818,100, respectively.  Of the total expenses $205,074 and $216,746 were for direct research and development cost, respectively. For the nine months ended September 30, 2015, total operating expenses increased by $102,035 when compared to the same period in 2014 due to the $214,997 non-cash stock compensation charge resulting from the issuance of stock options.  

Other expense for the nine month period ended September 30, 2015 was $856,922, a $724,990 increase compared to the $131,932 expensed in 2014.  The increase is attributable to the beneficial conversion charges on the convertible notes.

A net loss of $1,660,777 was realized for the nine months ended September 30, 2015, the loss being increased by the note discount charge earlier described.  A net loss of $728,915 was realized for the nine month period ended September 30, 2014.

The chart below represents a summary of our condensed consolidated balance sheets at September 30, 2015 and December 31, 2014.

Cash and cash equivalents increased by $27,817 at September 30, 2015 compared to December 31, 2014. The increase in cash is due to the timing of payment of expenses, collection of accounts receivable and proceeds from borrowings. Our non-current assets decreased at September 30, 2015 due to the depreciation and amortization of long-lived assets.

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Total liabilities decreased by $159,913 at September 30, 2015; the decrease was primarily due to the conversion of convertible notes payable and accrued interest into shares of restricted common stock.

INFLATION

We do not expect the impact of inflation on our operations to be significant for the next twelve months.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer evaluated whether information required to be disclosed is recorded, processed, summarized and reported within the specified periods, and is accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective for the nine-month period ending September 30, 2015

(b)

Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management reviewed our internal controls over financial reporting, and there have been no changes in our internal controls over financial reporting for the nine month period ended September 30, 2015 that have materially affected, or are likely to affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1A.  RISK FACTORS

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

We are unable to fund our day-to-day operations from revenues and the lack of revenues for continued growth may cause us to delay our business development.  For the nine months ending September 30, 2015, we had negative cash flows from operating activities of $405,413. We will require additional financing to fund our short-term cash needs and we may be required to rely on debt financing, loans from related parties, and private placements of our common stock for that additional funding. Such funding sources may not be available or the terms of such funding sources may not be acceptable to the company. If the Company is unable to find such funding it could have a material adverse effect on our ability to continue as a going concern.

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

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

·

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

·

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

·

attract and retain additional qualified technical and marketing personnel.

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

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

We have completed installation of our first manufacturing line; however, our agreement with the Walker Group will allow us to delay installation and approval of a second production line. The second manufacturing line will be needed as a result of anticipated increased manufacturing demand and improved manufacturing efficiencies. We anticipate qualifying our manufacturing facility for ISO/TS-16949 certification as the Company successfully obtains additional manufacturing contracts during the coming year. However, we cannot assure you that we will satisfy ISO/TS-16949 qualification or that the production lines will produce product in the volumes required or that the production lines will satisfy the requirements of our automotive customers.

Our success is dependent on our intellectual property rights which are difficult to protect.

Our future success depends on our ability to protect our intellectual property. We use a combination of patents and other intellectual property arrangements to protect our intellectual property. There can be no assurance that the protection provided by our patents will be broad enough to prevent competitors from introducing similar products or that our patents, if challenged, will be upheld by courts of any jurisdiction. Patent infringement litigation, either to enforce patents or defend ourselves from infringement suits, will be expensive and could divert our resources from other planned uses. Patent applications filed in foreign countries and patents in these countries are subject to laws and procedures that differ from those in the U.S. and may not be as favorable to us. We also attempt to protect our confidential information through the use of confidentiality agreements and by limiting access to our facilities. There can be no assurance that our program of patents, confidentiality agreements and restricted access to our facilities will be sufficient to protect our confidential information and intellectual properties from our competitors.

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

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

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currently unaware of any insurmountable problems with ongoing research and development that may prevent further development of an application.

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

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

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

In the automotive parts industry, there is a trend of consolidation through business combinations and acquisitions of complementary technologies among worldwide suppliers as these suppliers seek to build stronger customer relationships with automobile manufacturers. Automobile manufacturers look to Tier 1 suppliers (major suppliers) to provide fully engineered systems and pre-assembled combinations of components rather than individual components. This trend of consolidation of suppliers may result in fewer Tier 1 suppliers and thus limit the marketing opportunities for our Bend Sensor^® technology

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 12, 2015, the Board of Directors approved the conversion of $165,000 in convertible notes held by Capital Communications LLC, plus $34,605 in interest accrued and unpaid, to 2,800,000 shares of restricted common stock at an average conversion price of $0.07 per share.  We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.

On January 20, 2015, the Board of Directors approved the conversion of $135,000 in convertible notes held by Empire Fund Managers, plus $26,129 in interest accrued and unpaid, to 2,650,000 shares of restricted common stock at an average conversion price of $0.06 per share. We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.

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, 1,540,000 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, 1,100,000 have an option price of $0.15 per share, 825,000 have an option price of $0.20 per share, and 260,000 have an option price of $0.25 per share.  Options issued as replacement shall have immediate vesting.  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.  We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.

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ITEM 6. EXHIBITS

Part I Exhibits