FLEXPOINT SENSOR SYSTEMS INC - Quarter Report: 2018 September (Form 10-Q)

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Convertible Note Payable Related Party

At December 31, 2017 there were notes outstanding with two directors of the Company with balances of $87,257 and $27,256, respectively.  The notes bear an 8% annual rate of interest with a 12% default rate. These notes were due as follows:  $10,000 was due November 30, 2016, $10,000 was due December 31, 2016, $30,000 was due December 31, 2017, and $64,513 is due December 31, 2018.  These notes are convertible into shares of common stock at the rate of $0.07 per share.

On August 28, 2018, the Company entered into two convertible notes with directors of the Company for $60,000 and $5,000.  These notes are due December 31, 2019  and are convertible into shares of common stock at the rate of $0.06 per share.

During the year ended 2017 and the period ended June 30, 2018, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares necessary to settle all convertible instruments, in accordance with ASC 815-40-25, the Company determined that the conversion features related to these notes are derivative instruments since we do not have control to increase the number of authorized shares to settle all convertible instruments.  The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

The Company recognizes a debt discount for the initial value of the derivative liability.  The resultant debt discount is amortized over the term of the note.  At September 30, 2018 there was $17,497 in unamortized debt discounts related to the above notes which will be expensed over future periods.

NOTE 4 – STOCK OPTION PLANS

On August 25, 2005, the Board of Directors of the Company approved and adopted the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its adoption by the Board and will continue in effect for ten years, unless terminated.  This plan was approved by the stockholders of the Company at their annual meeting of shareholders on November 22, 2005. Under the Plan, the exercise price for all options issued will not be less than the average quoted losing market price of the Company’s trading common stock for the thirty day period immediately preceding the grant date plus a premium of ten percent.  The maximum aggregate number of shares that may be awarded under the lan is 2,500,000 shares.  The Company continues to utilize the Black-Scholes option-pricing model for calculating the fair value of the options granted as defined by ASC Topic 718, which is an acceptable valuation approach under SC 718. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock.

On August 24, 2015, the Board of Directors approved the issuance of options to purchase 2,185,000 shares of the Company’s common stock.  Of the total issued, 1,960,000 options were issued to replace options held by directors and employees which were to expire and 225,000 options were issued to new employees.  Of the options issued, 640,000 have an option price of $0.14 per share, 500,000 have an option price of $0.15 per share, 995,000 have an option price of $0.20 per share, and 50,000 have an option price of $0.25 per share.  Options issued as replacement shall have immediate vesting terms. Options which are not replacements shall vest over a two year four month period in equal installments on the last day of 2015, 2016 and 2017, respectively.  We relied on an exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.

Projected data related to the expected volatility and expected life of stock options is based upon historical and other information, and notably, the Company's common stock has limited trading history. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of the Company's employee stock options.  Between August 25, 2005 and December 31, 2015, the Company granted options to employees to purchase an aggregate 3,096,000 shares of common stock at exercise prices ranging from $0.14 to $2.07 per share.  The options vest over three years and expire 10 years from the date of grant.  The Company used the following assumptions in estimating the fair value of the options granted:

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Market value at the time of issuance – Range of $0.14 to 2.07

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Expected term – Range of 3.7 years to 10.0 years

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Risk-free interest rate – Range of 1.60% to 4.93%

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·

Dividend yield – 0%

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Expected volatility – 200% to 424%

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Weighted-average fair value - $0.16 to $2.07

All of the options were fully vested at December 31, 2017. As a result there was no stock-based compensation expenses recorded for the three and nine months ended September 30, 2018.  The Company recognized $0 and $9,890 in stock-based compensation expense for the three and nine months period ended September 30, 2017. There were 2,185,000 and 2,185,000 employee stock options outstanding at September 30, 2018 and December 31, 2017, respectively.  

A summary of all employee options outstanding and exercisable under the plan as of September 30, 2018, and changes during the nine months then ended is set forth below:

NOTE 5 – CAPITAL STOCK

Preferred Stock – There are 1,000,000 shares of preferred stock with a par value of $0.001 per share authorized.  At September 30, 2018 and December 31, 2017, there were no shares of preferred stock issued or outstanding.

Common Stock – There are 100,000,000 shares of common stock with a par value of $0.001 per share authorized.  No shares of stock were issued during the nine months ended September 30, 2018.  

NOTE 6 – COMMITMENTS AND CONTINGENCIES

The Company currently occupies approximately 11,639 square feet of office and manufacturing space from American Covers, Inc., dba Handstands. In 2014 the Company extended the operating lease agreement for its manufacturing facility in Draper, Utah. Under the terms of a three year lease extension effective January 1, 2015, the monthly rent remained at $8,950 per month for 2015, increased to $9,300 per month for 2016 and to $9,600 per month for 2017. The lease further provides that on the expiration of the lease on December 31, 2017, the lease becomes a month-to-month lease at a rate of the current monthly lease rate ($9,600), plus an increase of 10%, (now $10,560), with a 10% increase on the anniversary date of each succeeding year. The building is located in a business park in Draper, Utah which consists primarily of high tech manufacturing firms and it is located adjacent to Utah’s main interstate highway.

NOTE 7 – RELATED PARTY TRANSACTIONS

At December 31, 2017, the Company had $20,000 due to its Chief Executive Officer for funds loaned to the Company to pay off various operating expenses of the business.  The amount owed at December 31, 2017, was converted to notes payable, bearing interest at the rate of 8% per annum with a due date of December 31, 2019.

At December 31, 2017, the Company had outstanding notes payable to an officer in the amount of $87,257 and an outstanding note payable to a director in the amount of $27,256. On August 28, 2018, additional notes payable in the amounts of $60,000 and $5,000, respectively, were issued to directors of the Company.  See note 3.

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NOTE 8 – SUBSEQUENT EVENTS

On October 2, 2018 the Company drew an additional $25,000 against the $150,000 line of credit dated June 15, 2018 provided by a third party.

On October 18, 2018, the Company announced it had signed a five year manufacturing and supply agreement with a medical device company for a medicine dispensing product.  It is anticipated that full production under this agreement will commence during the first quarter of 2019.

In accordance with ASC 855-10 management reviewed all material events through the date of this report.  There are no material subsequent events to report other than those disclosed above.

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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. (“Flexpoint”, or “Company”), is principally engaged in designing, engineering and manufacturing bend sensor technology and products using its patented Bend Sensor^® technology, a flexible potentiometer technology.  We continue to make further improvements to our technologies, manufacturing and developing fully integrated devices and related products that we have been marketing and selling to a variety of companies in diverse industries. We are negotiating and signing agreements, purchase orders and contracts that have provided some revenues and have proven that our sensors are more durable, adaptable and cost effective than any other product currently on the market.  

The Company owns five patents, including patents on specific devices that use the Bend Sensor^® and we have exclusive rights through licensing agreements to other patents and devices.  We 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, twenty-five products that are being sold and supplied to current customers and we continue to receive orders for custom prototype sensors as well as our standard sensors.  We are continuing to develop and enhance our intellectual properties that will result in additional patents being filed.

During 2018 we have focused our marketing efforts on a number of larger domestic and international companies that have applications which have the potential to greatly increase the volume of sensors we are currently manufacturing. As of the date of this report, the Company had at least sixteen global commercial partners covering a variety of different products.  In coordination with its partners, the Company introduced at least eight new products.  Management believes this growth in sales channels will allow the Company to grow at an increasingly accelerated rate over the next several quarters.  

On October 18, 2018, the Company announced it had signed a five year manufacturing and supply agreement with Counted LLC.  Counted LLC conceived of a medication delivery monitoring system and dispensing monitoring system. Flexpoint designed and produced the monitoring system with Flexpoint features, Flexpoint technology and Flexpoint designed electronics to track and report the dispensing of medications in real time.  This information has the potential to be transmitted to physicians, pharmacists and governmental agencies.  Prototypes have been built and successfully tested and it is expected that additional production and testing will continue throughout the remainder of the year with production increasing in 2019.     

The Company has completed delivery of two different products to Haemoband, Ltd. and continues to work with them toward the completion of their testing program for product launch.

The Company continues to develop relationships in a number of application fields.  We have a working relationship for the production of sensors for glove based IR/VR applications with Manus VR and others. Flexpoint has also established relationships with several medical IoT vendors.  These include companies like Neofect, Gloreha and YouReHab; all with a focus on medical rehabilitation with a different approach.  Products from these companies

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range from gloves to prosthetics to virtual reality, all with the intention of improving medical health or medical rehab.  

In addition to the sale of our products and engineering and design services, we also may consider generating revenues through licensing our unique technology for field of use or territory. We will attempt to negotiate each license agreement to contain a provision for either first right of refusal to manufacture, or royalty provisions for specific products or applications. We have continued to concentrate our marketing efforts on sensors and electronics which we consider to be quick-to-market production orders, and on engineering services that have generated limited, but immediate, revenues that have provided cash flow and name recognition. We have also continued our marketing efforts in the automotive industry. Due to the size and the numerous regulations inherent in the automotive industry, it requires a significantly longer time to develop and acquire approvals for new technologies.  However, as there are high volumes associated within the automotive industry, we anticipate that this industry will potentially generate significant long-term revenue streams.  

We continue to work with Tier 1 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 over the past several years. This changing environment has created delays in the implementation of the automotive and medical devices and therefore, over the past several years, we have focused our limited resources and marketing efforts on sensors and products that, in the aggregate, will generate a smaller dollar volume than those anticipated from our medical or automotive devices, but have a quicker pathway to market and have generated needed limited, but immediate, cash flow while providing additional name and product recognition that we believe will provide long term benefits. Based upon the current interest in our sensors from both the automotive and medical industries, we anticipate that over the next twelve months, we will begin producing larger repeatable volumes of sensors and devices in these focus industries.

LIQUIDITY AND CAPITAL RESOURCES

Currently our revenue is primarily from design contract, testing and limited production services for products, 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 and potential future growth. Management recognizes such contracts usually go through a long negotiation process and there can be no guarantee that we will be successful in our negotiations or that such contracts will be sufficient to support our current operations in the near future.

For the past twelve months we have relied on the proceeds of convertible loans from existing shareholders and private placements of our common stock.  During 2017 and the first nine months of 2018, the Company secured financing to fund its operations by issuing additional convertible notes to Capital Communications LLC, a third party, and our officers, the balances of which were $1,243,514 as of September 30, 2018. The notes have an annual interest rate of 8% to 10% and default rates of 12% to 15%, have various maturity dates, and are secured by the Company’s business assets.  On October 2, 2018, the Company drew an additional $25,000 against the $150,000 Capital Communications LLC line of credit.

Management believes that our current cash burn rate is approximately $75,000 per month and that proceeds from additional convertible notes and estimated revenues for engineering design and prototype products will be sufficient to fund the next twelve months of operations.  Our auditors have expressed doubt about our ability to continue as a going concern and that we may not realize significant revenue or become profitable within the next twelve months. We will require additional financing to fund our short-term cash needs. We will have to rely on additional debt financing, loans from existing shareholders and private placements of common stock for additional funding. Based upon our current purchase orders and anticipated purchase orders over the next twelve months our projected revenues by the end of 2018 are anticipated to cover our projected operating expenses, 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 such financing, if any, will continue to be available, and if available, that they will be on terms favorable to us. Nor is there any guarantee that the projected volume of purchase orders will meet the volumes that we anticipate.

We also expect that in the short term we may have to continue to issue convertible notes, convertible into our common stock, to pay for services and agreements rather than use our limited cash resources; however, the common stock the Company is currently obligated to issue under current convertible notes will exceed the total number of shares authorized under our Articles of Incorporation.  Any additional 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

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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.  

As we enter into new agreements, we must ensure that those agreements provide adequate funding for any pre-production research and development and manufacturing costs. If we are successful in establishing agreements with adequate initial funding, management believes that our operations for the long term will be funded by revenues, licensing fees and/or royalties related to these agreements. However, we have formalized only a few agreements during the past four years and there can be no assurance that the agreements will generate sufficient revenues or be profitable in the future or that a desired technological application will be successful enough to produce the volumes and profits necessary to fund our operations.  

FINANCIAL OBLIGATIONS AND CONTINGENT LIABILITIES

Our principal commitments at September 30, 2018 consisted of our operating lease of $10,560 per month, and total liabilities of $2,787,122 which includes $1,198,742 of convertible notes payable, net of discounts of $35,772. Accrued liabilities at September 30, 2018, were $1,079,200 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 months ending September 30, 2018, the Company has raised an additional $220,000 in operating capital through the issuance of convertible notes.  The notes have annual interest rates of 8% to 10% and default rates of 12% to 15% annually. The notes are secured by the Company’s business equipment and have conversion features for restricted common shares at $0.06 to $0.07 per share.

During the year ended 2017 and the period ended September 30, 2018, the Company issued convertible promissory notes which are convertible into common stock. Due to the Company’s lack of authorized shares necessary to settle all convertible instruments, we determined that the conversion features related to these notes are derivative instruments since we do not have control to increase the number of authorized shares to settle all convertible instruments.  At September 30, 2018, the Company determined a fair value of $131,190 for the derivative instruments. The Company recorded a gain from change in fair value of derivatives of $291,446 for the nine month period ended September 30, 2018.

The Company has a few major customers who represent a significant portion of revenue and accounts receivable.  During the nine months ended September 30, 2018, two customers represented 41% of sales and represented 13% of accounts receivable at September 30, 2018.  The Company has a strong ongoing relationship with this customer with scheduled delivery extending through the year and does not believe this concentration poses a significant risk, as their products are based entirely on the Company’s technologies

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 2017 and for the nine months ending September 30, 2018, the Company recorded no impairment charge to reduce the carrying value of the goodwill to its estimated fair value. As part of the

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impairment testing performed at December 31, 2017, 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.

We test long-lived assets for impairment annually or when a triggering event occurs. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The amount of impairment is measured using a discounted-cash-flows model considering future revenues, operating costs and risk-adjusted discount rate and other factors. The analysis compares the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. If the carrying values of the long-lived assets exceed the present value of the discounted projected revenues an impairment expense would be recognized in the period and the carrying value of the assets would be adjusted accordingly. Impairment tests are conducted on an annual basis and, should they indicate a carrying value in excess of fair value, a charge may be required.

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, 2018 and 2017 we recognized $0 and $9,890, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options at the current time.

RESULTS OF OPERATIONS

The 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, 2018 and 2017, 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, 2017 and 2016.

THREE MONTH PERIOD ENDED SEPTEMBER 30, 2018:

For the three months ending September 30, 2018 revenue was $72,208, an increase of $32,186 when compared to the same period in 2017. The majority of the revenue for this period came from development engineering, production, prototype and pre-production products. 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.

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We recognized revenue from repeat orders from our existing customers, design contracts, and development engineering.  Revenue is recognized using the ASC 606 five step detailed in Note 1 to the financial statements. Revenue from the sale of a product is recorded at the time of shipment to the customer.  Revenue from 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.

Of the $205,046 and $258,401 total operating costs and expense for the three months ending September 30, 2018 and 2017, respectively, $73,873 and $79,975 were for direct research and development cost, respectively. For the three months ended September 30, 2018, total operating expenses decreased by $53,355 when compared to the same period in 2017, due primarily to reduced amortization charges and professional fees.  

Other income (expense) for the three month period ended September 30, 2018 was $10,235, a $20,414 increase compared to the same period in 2017.  The increase is attributable to a gain on the change in fair value of derivative liabilities of $88,606 for the three months ended September 30, 2018, compared to $63,006 recognized for the three month period ended September 30, 2017.

A net loss of $122,603 was realized for the three months ended September 30, 2018.  A net loss of $227,958 was realized for the three month period ended September 30, 2017.

NINE MONTH PERIOD ENDED SEPTEMBER 30, 2018:

For the nine months ending September 30, 2018 revenue was $202,630, a decrease of $53,693 when compared to the same period in 2017. The majority of the revenue for this period came from development engineering, production, prototype and pre-production products. 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 repeat orders from our existing customers for production, design contracts, and development engineering.  Revenue is recognized using the ASC 606 five step detailed in Note 1 to the financial statements.  Revenue from the sale of a product is recorded at the time of shipment to the customer.  Revenue from 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.

Of the $642,678 and $842,935 total operating costs and expense for the nine months ending September 30, 2018 and 2017, respectively, $237,678 and $244,484 were for direct research and development cost, respectively. For the nine months ended September 30, 2018, total operating expenses decreased by $200,257 when compared to the same period in 2017, due primarily to reduced amortization charges, a reduction in salaries and related taxes and benefits, and reduced consulting fees.

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Other income for the nine month period ended September 30, 2018 was $55,590, compared to other expense of $126,317 for the same period in 2017.  The major contributor to this change was the recognition of a $291,446 gain on derivative in 2018 compared to a gain on derivative of $112,185 recognized in 2017.  

A net loss of $384,458 was realized for the nine months ended September 30, 2018.  A net loss of $712,929 was realized for the nine month period ended September 30, 2017.

The chart below represents a summary of our condensed consolidated balance sheets at September 30, 2018 and December 31, 2017.

Cash and cash equivalents decreased by $9,770 at September 30, 2018 compared to December 31, 2017. The decrease 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, 2018 due to the amortization of long-lived assets.

Total liabilities increased by $328,524 at September 30, 2018.  The increase was due primarily to increases in convertible notes payable, accrued interest related to those notes, and other accounts payable and accrued liabilities offset in part by a decrease in the derivative liability.

INFLATION

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES

(a)

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report we carried out an evaluation of the effectiveness of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer, who also serves as our Principal Financial Officer.  Our controls and procedures are designed to allow information required to be disclosed in our reports to be recorded, processed, summarized and reported within the specified periods, and accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  Based upon the evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were not effective at that reasonable assurance level as of the end of the period September 30, 2018.  

The material weaknesses relate to the limited number of persons responsible for the recording and reporting of financial information, the lack of separation of financial reporting duties, and the limited size of our management team in general. We are in the process of evaluating methods of improving our internal control over financial reporting, including the possible addition of financial reporting staff and the increased separation of financial reporting responsibility, and intend to implement such steps as are necessary and possible to correct these material weaknesses.

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(b)

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the first nine months of 2018 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A.  RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.

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

The Company has not issued any securities since the year ended December 31, 2017.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

Flexpoint Sensor Systems, Inc. intends to conduct an annual shareholders’ meeting on Friday, December 28, 2018. The rules of the SEC provide that shareholder proposals may be considered for inclusion in the proxy materials for such an annual meeting under certain circumstances.  Our bylaws provide that any qualified shareholder proposals for an annual meeting must be made in writing and delivered to us or mailed and received at our principal executive offices not less than 50 days and not more than 80 days prior to that meeting.  However, if we provide you with less than 60 days’ notice (or public disclosure) of the meeting, shareholder proposals will be deemed timely if they are received not more than the 10^th day following the date the notice was mailed or the public disclosure was made. Accordingly, shareholders’ proposals for the December 28, 2018 meeting must be received no later than the10^th day following the date of the filing of this Form 10-Q (public disclosure), which is November 24, 2018.

Any such proposals need to be accompanied by specific information regarding:

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a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting;

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the name and address of the shareholder proposing the business;

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the class and number of shares owned by the shareholder; and

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any material interest the shareholder has is such business.

Under Rule 14a-8 promulgated under the Exchange Act, in order to be eligible to submit a proposal, you must be a shareholder of record and have continuously held at least $2,000 in market value, or 1%, of the Company’s

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securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the proposal. You must continue to hold those securities through the date of the meeting.

Based upon these factors, shareholders’ proposals for the December 28, 2018 meeting must be received no later than the10^th day following the date this Form 10-Q is filed, which is November 24, 2018.

Shareholder Relations

Flexpoint Sensor Systems, Inc.

106 West Business Park Drive

Draper, Utah  84020

ITEM 6. EXHIBITS

Part I Exhibits

Part II Exhibits

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