AND RESULTS OF OPERATIONS



EXECUTIVE OVERVIEW

Flexpoint Sensor Systems, Inc. is a company engaged principally in improving its unique sensor technology, expanding its suite of products, developing new sensor applications, obtaining financing and seeking long-term sustainable manufacturing contracts, licensing agreements and royalty agreements. Our operations have not yet commenced to a commercially sustainable level and include designing, engineering, manufacturing, licensing and selling sensor technology and products featuring our Bend Sensor® technology and equipment.

Finalizing long-term, constant revenue generating production contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts. We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor® and Bend Sensor® related technologies and products to the market. Management believes that even though we are making positive strides forward with our business plan we will need to raise additional operating capital.





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Worldwide automakers are faced with the challenge of providing a safer, more energy efficient, longer lasting product that consumers can afford. This has required automakers to search new and innovative ways to lower the overall weight of the vehicle and to improve its fuel efficiencies, while lowering the cost. We continue to experience an increased interest regarding automotive and other potential applications for our sensor technology because they meet this criterion. With its versatility, light weight, single layer construction and the fact that it is currently being used in various safety devices the Bend Sensor® is positioned well to meet the challenges that the automobile industry is facing.

LIQUIDITY AND CAPITAL RESOURCES

Currently our revenue is primarily from design contract, testing and production services for prototypes and samples and recurring business, 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 proceeds from sales. During 2022 and 2021, the Company secured financing to fund its operations by issuing additional convertible notes to Capital Communications LLC, First Equity Holdings and officers, the balances of which were $180,000 and $510,000 as of December 31, 2022 and 2021, respectively, net of $455,000 and $0 in notes converted to shares of restricted common stock in 2022 and 2021, respectively. The notes have an annual interest rate of 10% and default rate of 15%, have various maturity dates, and are secured by the Company's business assets. The Company also received funds under the Paycheck Protection Program.

Management believes that our current cash burn rate is approximately $60,000 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 2022 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.

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

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.

Finalizing long-term, constant revenue generating production contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term production contracts. This process has been impacted by the recent Pandemic and we are unable to determine what the long-term effect of these impacts will be at this time. We must continue to obtain funding to operate and expand our operations so that we can deliver our unique Bend Sensor® and Bend Sensor® related technologies and products to the market. Management believes that even though we are making positive strides forward with our business plan we will need to raise additional operating capital





COMMITMENTS AND CONTINGENCIES

Our principal commitments at December 31, 2022 consist of total current liabilities of $3,956,658, which includes $398,513 in convertible notes.





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We currently occupy approximately 8,029 square feet of office and manufacturing space leased from D&M Management, Inc. The building is located in a commercial business district in West Jordan, Utah which consists primarily of high-tech manufacturing firms and it is located adjacent to a major intersection, allowing easy access to Utah's main interstate highway. The lease is for a period of twelve months with a 90-day notice clause if our intent is to renew the lease for additional periods. We pay $6,787 per month for this lease.

Our total current liabilities include accounts payable of $265,271 related to normal operating expenses, including health insurance, utilities, production supplies, legal expenses and travel expense. Accrued liabilities at December 31, 2022, were $2,416,589 and were related to payroll tax liabilities, tax expenses, accrued interest, investor relations consulting, and accrued Paid Time Off, a combination vacation-sick leave policy, and amounts due to related parties.

OFF-BALANCE SHEET ARRANGEMENTS

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





RESULTS OF OPERATIONS

The following discussions are based on the consolidated operations of Flexpoint Sensor Systems, Inc. and its subsidiaries, Sensitron, Inc. and Flexpoint International, LLC, and should be read in conjunction with our audited financial statements for the years ended December 31, 2022 and 2021. These financial statements are included in this report at Part II, Item 8, below.





                            SUMMARY OF OPERATING RESULTS

                                             For the year ended      For the year
                                                                         ended
                                             December 31, 2022     December 31, 2021

Engineering, contract, licensing and testing $ 151,156 $ 0,249 revenue Total operating costs and expenses

                    (880,406)            (923,523)
Net other income (expense)                             (75,582)               25,572
Net loss                                              (804,832)            (687,702)

Basic and diluted loss per common share $ (0.01) $ (0.01)

Our revenue for 2022 decreased $59,093 as compared to 2021. The decrease resulted from lower product sales and development fees. The decrease of our revenue was primarily the result of world-wide impacts from the Covid 19 crisis including delays in manufacturing orders for the wearable and toy industries, design and development engineering, prototype products and sales of our fully integrated products. Revenue from research and development engineering and prototype product contracts is generally recognized as the services are provided and accepted by the customer. Revenue from the sale of a product is recorded at the time of shipment to the customer. Management anticipates that revenue will increase as we continue to provide engineering services and our customers continue to order more frequently and in larger quantities.

Total operating costs and expenses were $880,406 in 2022 compared to $923,523 in 2021. Administrative and marketing expenses for 2022 were lower, as $34,669 in moving expenses were included in the 2021 totals. As we are working to commercialize products and establish distribution channels, we are also working to bring greater efficiencies and cost reductions to our operations.

For the year ending December 31, 2022 net other expense was $75,582. This compares to other income of $25,572 in 2021, which was benefited from gain on forgiveness of PPP loans in the amount of $119,000. Other expense in 2022 is comprised primarily of interest expense of $76,782. Other income of $25,572 in 2021 was comprised of $119,000 gain on forgiveness of PPP loans, offset by $96,983 in interest expense in 2021.

As we continued to mature into a manufacturing company our engineering design and production revenues increased. As we expand and sell our existing suite of products, and as we grow the relationship with our customers, we expect this trend to continue in the future. We are not able to guarantee that our operating losses will be reduced in the short term. The chart below presents a summary of our consolidated balance sheets at December 31, 2022 and 2021.



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              SUMMARY OF BALANCE SHEET INFORMATION

                              Year ended          Year ended
                           December 31, 2022   December 31, 2021

Cash and cash equivalents       $          -          $      402
Total current assets                  29,083               9,832
Total assets                       5,194,143           4,920,373
Total liabilities                  4,154,725           3,634,168
Accumulated deficit             (30,887,205)        (30,082,373)
Total stockholder's equity    $    1,039,417         $ 1,286,205

Cash and cash equivalents were $-0- in 2022 compared to cash of $402 in 2021, a decrease of $402. The cash decrease in 2022 is attributable to the difficulty in raising funds to cover operating expenses. Until such time as our revenue increases, cash to fund our operations will be our most critical factor. As we expand our customer base and product offerings, we will need to raise additional operating capital during 2022. It is expected that this will be accomplished by securing additional loans from related parties and existing shareholders, through the private placement of stock, or through the licensing of our technology. We anticipate that we will need to raise approximately $500,000 to $800,000 in funding to support our existing operations and our anticipated growth during 2023.

Our current assets increased to $29,083 during the year ending December 31, 2022 compared to $9,832 during the same period in 2021. This increase is primarily due to increases of $11,217 in accounts receivable and $8,346 in deposits. Our fixed assets and patents and proprietary technology are all fully amortized.

Accrued liabilities increased at December 31, 2022 by $212,862 when compared to December 31, 2021. The increase is primarily due to the accrual of interest expense related to notes payable and accrued consulting fees. Total liabilities increased by $520,557 at December 31, 2022 due to the aforementioned increased in accrued liabilities, notes payable due on demand and lease liabilities relating to the building lease, offset by the convertible notes converted to shares of common stock and by the retirement of the PPP loan through forgiveness of debt.

TRANSACTIONS WITH RELATED PARTIES

At December 31, 2022 and 2021, the Company had accounts payable of $44,713 and $20,481 to its Chief Executive Officer for reimbursement of various operating expenses paid by him and a loan which he made the Company.

During 2019, the Company and the Company's CEO and the Chairman of the Board agreed to convert $17,000 and $22,000, respectively, of accounts payable into convertible debt bearing 8% annual interest (with a 12% default rate) and are convertible into shares of common stock at the rate of $0.06 per share. At December 31, 2021 there are related party convertible notes outstanding with principal balances of $164,257 and $54,257 which are due to the CEO and the Chairman of the Board of the Company, respectively. Of the total balance, $114,514 are convertible notes bearing an 8% annual rate of interest (with a 12% default rate) and are convertible into shares of common stock at the rate of $0.07 per share and $104,000 are convertible notes bearing 8% annual interest (with a 12% default rate) and are convertible into shares of common stock at the rate of $0.06 per share. All the convertible notes payable related parties have a maturity date of March 31, 2023.

The Company filed an amendment to our Articles of Incorporation whereby the shareholders approved an increase in the number of shares of common stock authorized. With the filing of the amendment the Company now has sufficient authorized shares to issue to convert all convertible notes and stock options and therefore no longer needs to treat those financial instruments as derivatives. The notes are secured by the business equipment of the Company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We annually test long-lived assets for impairment or when a triggering event occurs. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The analysis compared the present value of projected net cash flows for the remaining current year and next two years against the carrying value of the long-lived assets. Under similar



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analysis no impairment charge was taken during the twelve months ended December 31, 2022 or the twelve months ended December 31, 2021. Impairment tests will be conducted on a regular basis and, should they indicate a carrying value in excess of fair value, additional charges may be required.

We account for stock options under Statement of Financial Accounting Standards, Accounting Standards Codification Topic 718, Stock Compensation. The pronouncement requires that recognition of the cost of employee services received in exchange for stock options and awards of equity instruments be based on the grant-date fair value of such options and awards and is recognized as an expense in operations over the period they vest. The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model. Option pricing models require the input of highly sensitive assumptions, including expected stock volatility. Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable. For the years ended December 31, 2022 and 2021 we recognized $0 and $0, respectively, of stock-based compensation expense for our stock options and there is no additional unrecognized compensation cost related to employee stock options that will be recognized based upon the current grants issued.





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