================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-KSB/A No. 2
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended - December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
Commission file number 0-024828
SENSOR SYSTEM SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 98-0204898
(State or Other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
45 Parker Avenue, Suite A
Irvine, California 92618
(Address of Principal Executive Offices, including zip code.)
(949) 855-6688
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by referenced in Part III of this Form
10-KSB or any amendment to this Form 10-KSB |_|
================================================================================
State issuer's revenues for its most fiscal year December 31, 2004: $661,340.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity. As of May 5,
2005, the value was $39.3 million.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 18, 2005: 59,279,241
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
ITEM 2. DESCRIPTION OF PROPERTY.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR FINANCIAL PLAN OF
OPERATION.
ITEM 7. FINANCIAL STATEMENTS.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
ITEM 8A. CONTROLS AND PROCEDURES.
ITEM 8B. OTHER INFORMATION.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
SIGNATURES
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Sensor System Solutions, Inc. (the "Company", "3S" or the "Company") was
incorporated in Nevada in April 1982 under the name The Enchanted Village, Inc.
As the result of the March 13, 2004 acquisition of Advanced Custom Sensors,
Inc., a California corporation ("ACSI"), the Company is now in the business of
design and manufacturing sensors and signal conditioning modules.
Acquisition of Advanced Custom Sensors
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated
as of March 13, 2004, by and among the Company, Spectre Merger Sub, Inc., a
California corporation and wholly owned subsidiary of the Company ("Merger
Sub"), Ian S. Grant ("Shareholder") and ACSI, on May 24, 2004 (the "Closing
Date"), Merger Sub merged with and into Advanced Custom Sensors, Inc. ("ACSI")
(the "Merger"). As a result of the Merger, ACSI became a subsidiary of the
Company. As consideration for the Merger, the Company issued 2,584,906 shares of
common stock and warrants to purchase up to 47,802,373 shares of common stock to
the shareholders of ACSI. The terms of the Merger were determined through
arms-length negotiations between the management of the Company and management of
ACSI. We changed our company name to Sensor System Solutions, Inc. (3S) in
December 2004 to better represent our new focus. As such, the following results
of operations are those of ACSI.
Until we acquired ACSI, we had only nominal assets and liabilities and
limited business operations. Although ACSI became our wholly-owned subsidiary
following the acquisition, because the acquisition resulted in a change of
control, the acquisition was recorded as a "reverse merger" whereby ACSI is
considered to be the accounting acquirer. Also, as a result of the acquisition,
we have had a change of our financial position and our business. 3S is now a
holding company and after the Spin-Off, defined below, will have no significant
operations or assets other than its interest in Advanced Custom Sensors, Inc.
("ACSI"). Since the acquisition of ACSI, the company has been engaged in the
development, manufacturing, marketing and distribution of high quality sensors
and transducers at an economical price by employing innovative designs and
creative manufacturing methods.
Spin-Off of Spectre Holdings
On December 15, 2004, in consideration for making and guaranteeing certain
representations, warranties and obligation in connection with the Agreement and
Plan of Merger dated March 13, 2004 by and between the Company and ACSI, the
Company transferred 20,878,081 shares of common stock (the "Shares"), which are
all of the issued and outstanding shares of Spectre Holdings, Inc., our
wholly-owned subsidiary to Ian Grant. After the distribution of the Shares, the
Company no longer owns any stock of Spectre Holdings, Inc. In addition, we will
not have any common board members after the distribution.
Advanced Custom Sensors
ACSI was founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. Through ACSI,
3S offers a variety of Digital Pressure Gauges, Pressure Transducers, Pressure
Sensors, Force Beams, Load Cells, Strain Gauges and Sensor Kits.
4
3S produces or supplies a family of nearly thirty (30) distinctive
products. 3S has a volume production line with an ISO 9000 certified partner in
Taiwan in 2002. This allows 3S to penetrate high-volume consumer markets that
are very price sensitive. 3S also signed a letter of intent with China
Automotive Systems, Inc. (CAAS) in 2004 to establish a joint venture in China
targeting its automotive sensor market.
3S is a supplier of thin-film and micro-machined force and pressure
sensors to the medical, chemical, oil, and gas industries. 3S believes that its
technology will enable it to become a global supplier of advanced
MEMS/Microelectronic products in myriad developing markets. 3S's strategic plan
is to focus on developing custom MEMS pressure sensor devices and forming
strategic partnerships where its strategic partners dominate the sales channels
in industries accepting MEMS sensor applications.
In addition to its core operational assets dedicated to the MEMS sensor
markets, 3S owns approximately 7.5% of TransOptiX, Inc., ("TransOptiX"), a
business dedicated to the development and production of high performance optical
switches. TransOptiX intends to make significant progress in 2005 and 2006 in
the optical switch segment by offering its switches at prices up to 40% below
its competition and with better performance.
We plan to grow our business in four areas.
o Increase the revenue of our existing sensor component business. Once
finalized, the majority of our sensor component manufacturing will
be moved to our joint venture in China to help reduce the cost of
our products. We will invest to increase our production capacity and
will qualify offshore suppliers to meet the increasing demands.
Substantial efforts will be invested in sales and marketing in order
to expand our customer base and to secure additional OEM projects.
o Develop sensor solution business. By leveraging the advances in
technology and the large industry-wide investments in wireless and
telecommunication in the last decade, we can now offer total sensor
solutions at a very affordable price. These sensor solutions are
modules containing sensing elements, signal conditioning circuitry,
software for calibration and interface, and capability of wireless
communication and/or networking. These sensor solutions will provide
information continuously to decision makers in all phases of
business operation.
o Penetrate the automotive sensor market in China. By leveraging the
marketing channel of our joint venture partner, we will have access
to the automotive market in China immediately. We plan to use the
next three years to build up our production capacity, product
offerings, and technical team there. We will import automotive
sensors produced by our joint venture to North America and Europe
around 2008.
o Strategic acquisition: Being a public company gives us an additional
tool to grow our business through acquisition besides internal
growth. We will actively seek equity or debt funding to bring in the
necessary resources to execute this plan.
Industry Overview
Micro-Electro-Mechanical Systems, or MEMS, is the integration of
mechanical elements, sensors, actuators, and electronics on a common silicon
substrate through the utilization of microfabrication technology. MEMS is an
enabling technology, allowing the development of smart products by augmenting
the computational ability of microelectronics with the perception and control
capabilities of microsensors and microactuators. MEMS is also an extremely
diverse and fertile technology, both with regard to applications, and the
methodology of how electronic devices are designed and manufactured.
5
Microelectronic integrated circuits ("IC's") can be thought of as the
"brains" of systems and MEMS augments this decision-making capability with
"eyes" and "arms", to allow microsystems to sense and control the environment.
In its most basic form, the sensors gather information from the environment
through measuring mechanical, thermal, biological, chemical, optical, and
magnetic phenomena; the electronics process the information derived from the
sensors and through some decision making capability direct the actuators to
respond by moving, positioning, regulating, pumping, and filtering, thereby,
controlling the environment for some desired outcome or purpose. Since MEMS
devices are manufactured using batch fabrication techniques, similar to ICs,
unprecedented levels of functionality, reliability, and sophistication can be
placed on a small silicon chip at a relatively low cost.
Market Size and Viability
The total MEMS market size is about $2.7 billion USD with following
distribution in 1991, according to an MIRC market study report. MEMS pressure
sensor, currently the focus of 3S's operations, owns the largest market share of
$6 billion USD in 2000. According to MIRC, MEMS Silicon Pressure Sensors will
grow to about 80% of the total market and become the main stream of this
industry. The applications of MEMS Pressure Sensors can be separated into five
categories: Automotive, Process Control, Medical, Consumer /Appliances and
Aerospace. Currently, the market in Consumer Electronics is enjoying the fast
growth. Due to its versatility, MEMS is taking the lead in the various
fast-growing electronic applications in addition to its excellent performance
and price ratio. The total MEMS sensor market was $800 millions USD in 1990 with
an annual growth rate of 20%. It is expected to grow to $1 billion USD by 2005.
Products
The Company's future technology strategy is to develop and/or acquire core
intellectual property that will place it in a leadership position to manufacture
and market MEMS sensors. 3S has filed two (2) provisional patents with the
United States Patent and Trademark Office ("USPTO") and TransOptiX has made nine
(9) provisional patent filings with the USPTO to date. In addition, each company
has developed many proprietary techniques/processes. These serve as the
foundation to further develop our MEMS business.
3S produces or supplies a family of nearly thirty (30) distinctive
products. These products employ or utilize the latest state-of-the-art
technologies. The products are primarily electro-mechanical sensing devices and
are identified under the following categories: Pressure Transducers, Pressure
Transmitters, Pressure Switches, Force Sensors, Load Cells, Strain Gages, and
MEMS Sensors. It is expanding its product offering to include intelligent
embedded systems that combine the attributes of both intelligent sensor and host
systems
3S uses sputtered thin film, bonded foil, semi-conductor gages and
piezoresistive strain gage technologies primarily in the design, development and
manufacture of its general sensor products, although other technology options
are also available. All of 3S's products employ proven technologies with little,
or no risk involved with their manufacture. What sets 3S's products apart from
their competitors is their ability to optimize the performance of their products
by efficient application of their diverse technologies into unique design
concepts and utilizing sophisticated materials in construction and packaging
techniques.
6
Customers
We supply our sensors mainly to the medical and automation industries. In
general customers are divided into three groups: original equipment
manufacturers ("OEM's"), end users and catalogs. Each one accounted for about
one third of our revenue in 2004.
Our revenue mainly was from end users before the hiring of our sales
manager in March 2004. We moved our focus to OEM account since then. The success
is obvious since we started 2005 with an OEM backlog of around $600K.
We have established a wide presence in the catalog houses through our
Model 1200 in 2004. This penetration will allow us to increase our revenue by
moving other products through the same channel.
Sales and Marketing
We use sales representatives to promote our product since sensors are
quite complicated devices. We have a network of 9 sales representatives to cover
North America and 6 international representatives. In addition to our sales reps
network, we also have a network of distributors to handle products that do not
require much technical support. Both networks are managed by our Sales Manager.
We are seeking new distribution channels for our Sensor Modules and we are
working to leverage existing market intelligence. We will hire a Marketing
Manager in 2005 to assist us in capturing the market opportunity in our Sensor
Modules.
Research and Development
We hired two key engineers in October of 2004. Together, they have sixty
years of combined experience in designing creative sensor modules. To date, two
series of sensor modules have been designed, models have been constructed and
beta-site tested. We project that the unit price of these modules will be at
least ten times higher than our current sensor component's sale price. We expect
an increase in our sales from these two product lines.
Our Goals
Our goal is to become the market leader in innovative sensor system solutions,
and a dominant sensor supplier with a competitive pricing and performance mix.
To accomplish this objective, the Company plans to integrate proprietary
techniques and processes developed by 3S that serve as the foundation to develop
the Company's MEMS business. These MEMS core competences include MEMS front-end
wafer design and processing, volume assembly and testing, application-specific
environmental protection, and cost modeling. Combined with 3S's expansion plans
to increase marketing and sales efforts, these technologies present the Company
with opportunities to further grow the business in international markets such as
China. The Company has also partnered on or about November 2001 with an
established production partner, Powertip Technology Corporate, in Taiwan to
address production requirements. 3S also has MEMS wafer fabrication partners in
China and Taiwan, allowing the Company to maintain sensor wafer supplies as well
as to continue MEMS device research.
7
3S intends to upgrade from sensor component business to system solution
business. It will be focused on providing complete data management solutions
that can accommodate the needs of a wide range of industries and businesses.
These solutions include a comprehensive set of products and services that
establish the infrastructure necessary for manufacturing process partners to
proactively participate in sustaining and optimizing the operation.
The Company is striving to be the dominant provider of sensor solutions
with built-in network connectivity to supply critical data continuously for
enterprises to monitor and control:
o Machine conditions
o Manufacturing processes
o Business Transactions
The Company plans to develop and integrate various core intellectual
properties in the areas of MEMS sensors, intelligent sensor interface
electronics, intelligent embedded control systems and meters, wireless
communication network interfaces, data appliances and mobile devices that
facilitate machine-to-business data sharing, software & hardware to support
web-based device diagnostics and data collection/data distribution, and
web-based data management.
The Company is actively seeking funding to expand its design, development
and marketing of MEMS based thin-film and micro-machined force and pressure
sensors to the medical, chemical, oil, and gas industries. The Company believes
that MEMS is an enabling technology allowing the development of smart products
by augmenting the computational ability of microelectronics with the sensing and
control capabilities of microsensors and microactuators.
The Company's strategy includes the hiring of world-class engineering and
sales and marketing team coupled with robust off-shore joint ventures such as
the one they recently signed with CAAS. Management expects that the Company's
joint venture with CAAS will enable the transformation of 3S into a global
supplier of advanced MEMS/Microelectronic products in the automotive market.
Strategy
The keys to success for 3S are as follows:
o Penetrate automotive and appliance markets thru the Joint Venture
with CAAS in China;
o Leverage the cost performance of above alliance to penetrate
industrial and medical markets in N. America and Europe;
o Complete development of sensor-based systems to increase revenues;
o Merger and acquisition;
8
Competition
Our products and services are affected by varying degrees of competition.
We compete with other companies in most markets we serve, many of which have far
greater sales volumes and financial resources. The principal competitive factors
in the commercial markets in which we participate are product performance,
service and price. Part of product performance requires expenditures in research
and development that lead to product improvement. The market for many of our
products may be affected by rapid and significant technological changes and new
product introduction. Our principal competitors include Honeywell, GE and MSI in
our sensor component segment, and Delphi, Bosch, and Denso in automotive sensor
segment. There is no major competitor in Sensor System Solutions Market at
current time.
Employees and employment agreements
The Company currently employs 15 persons: There are no employment agreements
with any of the employees.
ITEM 2. DESCRIPTION OF PROPERTY.
Our headquarters are located 45 Parker Avenue, Suite A, Irvine, California
92618. The facilities include 25,000 square feet of office, production and
warehouse, which we lease from Irvine Company under a five year lease. Annual
rental payments for this lease are listed in the MD&A Section. The office and
warehouse facility is shared with TransOptix, a related party, who signed the
lease as co-tenant with the Company. The Company and TransOptix have entered
into an agreement stipulating each entities share of the rent, however, in event
of default by TransOptix, the Company could contingently be liable for the full
amount of the rent.
We believe that these facilities have the capacity to meet its
manufacturing and assembly needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending litigation and none is contemplated or
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the stockholders in the fourth quarter of
2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND SMALL
BUSINESS ISSUERS PURCHASES OF EQUITY SECURITIES.
Our shares are quoted on the Over-The-Counter Bulletin Board. Our symbol is
"SSYO." The table shows the high and low bid price of our stock for 2003 and
2004. These prices represent prices between dealers; they do not include retail
markup, markdown or commission. These are bid prices only and do not represent
actual transactions and are adjusted for dividends and splits.
Quarter ended High Low
2003
March 31 $ 2.25 $ 1.35
June 30 $ 1.50 $ 1.05
September 30 $ 1.05 $ 0.30
December 31 $ 0.90 $ 0.60
2004
March 31 $ 3.15 $ 0.45
June 30 $ 2.40 $ 1.20
September 30 $ 2.40 $ 1.20
December 31 $ 2.75 $ 0.51
9
Stockholders
At May 5, 2005, we had approximately 150 registered stockholders of record of
our common stock. This number does not include shares held by brokerage clearing
houses, depositories or otherwise in unregistered form.
Dividends
We have not declared any cash dividends, nor do we intend to do so. We are not
subject to any legal restrictions respecting the payment of dividends, except
that they may not be paid to render us insolvent.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as
of December 31, 2004 under our 2004 Stock Compensation Plan, the number of
shares of our common stock issuable upon the exercise of outstanding options,
the weighted average exercise price of such options and the number of additional
shares of our common stock still authorized for issuance under such plan. The
2004 Stock Compensation Plan has not been approved by our security holders, a
description of which is set forth in Note 10 of the Notes to Consolidated
Financial Statements.
Number of
Weighted- securities
Number of average remaining
securities exercise available or
to be issued price of future
upon exercise outstanding issuance
of outstanding options, under equity
options, warrants warrants compensation
Plan category and rights and rights plans
----------------- ------------- -------------
Equity compensation plans
approved by security holders -- $ -- --
Equity compensation plans not
approved by security holders 96,500 .50 103,500
----------------- --------------
Total 96,500 103,500
================= =============
10
Recent Sales of Unregistered Securities
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following is management's discussion and analysis of certain significant
factors that have affected our financial position and operating results during
the periods included in the accompanying consolidated financial statements, as
well as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
place on these forward-looking statements that speak only as of the date hereof.
We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with
and our consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-KSB.
OVERVIEW
On May 24, 2004, we acquired all of the issued and outstanding equity interests
of Advanced Custom Sensors, Inc ("ACSI"). Until we acquired ACSI, we had only
nominal assets and liabilities and limited business operations. Although ACSI
became our wholly-owned subsidiary following the acquisition, because the
acquisition resulted in a change of control, the acquisition was recorded as a
"reverse merger" whereby ACSI is considered to be the accounting acquirer. We
changed our company name to Sensor System Solutions, Inc. (3S) in December 2004
to better represent our new focus. As such, the following results of operations
are those of ACSI.
3S was founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. 3S offers a
variety of Digital Pressure Gauges, Pressure Transducers, Pressure Sensors,
Force Beams, Load Cells, Strain Gauges and Sensor Kits.
3S commenced operations as a private company in September of 1996. 3S is
headquartered in Irvine, California where 3S occupies a 25,000 square foot
facility fully equipped with fabrication capability.
3S has fifteen (15) employees in the United States, and utilizes a network
of independent contractors and consultants throughout the United States and
Asia. 3S produces or supplies a family of nearly thirty (30) distinctive
products. 3S set up a volume production line with an ISO 9000 partner in Taiwan
in 2002. This allows 3S to penetrate high-volume consumer markets that are very
price sensitive. 3S also signed a letter of intent with China Automotive
Systems, Inc. (NASDAQ: CAAS) in 2004 to establish a joint venture in China
targeting its automotive sensor market.
3S is a supplier of thin-film and micro-machined force and pressure
sensors to the medical, chemical, oil, and gas industries. 3S believes that its
technology will enable it to become a global supplier of advanced
MEMS/Microelectronic products in myriad developing markets. 3S's strategic plan
is to focus on developing custom MEMS pressure sensor devices and forming
strategic partnerships where its strategic partners dominate the sales channels
in industries accepting MEMS sensor applications.
11
In addition to its core operational assets dedicated to the MEMS sensor markets,
3S owns approximately 7.5% of TransOptiX, Inc., ("TransOptiX"), a business
dedicated to the development and production of high performance optical
switches. TransOptiX intends to make significant progress in 2005 and 2006 in
the optical switch segment by offering its switches at prices up to 40% below
its competition and with better performance.
PLAN OF OPERATION
We plan to grow our business in four areas.
o Increase the revenue of existing sensor component business. Majority
of our sensor component manufacturing will be moved to our joint
venture in China to help reduce the cost of our products. We will
invest to increase our production capacity and will qualify offshore
suppliers to meet the increasing demands. Substantial efforts will
be invested in sales and marketing in order to expand our customer
base and to secure more OEM projects.
o Develop sensor solution business. With the rapid advance in
technology and huge investment in wireless and telecommunication in
the last decades, we can now offer total sensor solutions at a very
affordable price. These sensor solutions are modules containing
sensing elements, signal conditioning circuitry, software for
calibration and interface, and capability of wireless and/or
networking. These sensor solutions will provide information
continuously to decision makers in all phases of business operation.
o Penetrate automotive sensor market through China. By leverage the
marketing channel of our joint venture partner, we will have access
to the automotive market in China immediately. We plan use the next
three years to build up our production capacity, product offerings,
and technical team there. We will import automotive sensors produced
by our joint venture to North America and Europe around 2008.
o Strategic acquisition: Being a public company gives us an additional
tool to grow our business through acquisition besides internal
growth. We will actively seek equity or debt funding to bring in the
necessary resources to execute this plan.
RESULTS OF OPERATIONS
Years ended December 31, 2004 and 2003
Revenues
We generated revenues of $661,340 for the year ended December 31, 2004.
which was a $225,269 or a 51.7% increase from $436,071 for the year ended
December 31, 2003. The increase is the result of the hiring of a full-time
sales manager, the addition of new sales representatives and the
introduction of new products.
12
Gross Profit
Gross profit for the twelve months ended December 31, 2004, was $81,550 or
12.3% of revenues, compared to $34,374 or 7.9% for the year ended December
31, 2003. The $47,176 increase in gross profit was generated by a decrease
in cost of sales percentage, which was the result of increased
productivity and management's efforts to reduce operating expense, and
production tooling improvement.
Total Operating expenses
Operating expense
Operating expense increased to $1,292,072 for the year ended
December 31, 2004 compared to $874,506 for the year ended December
31, 2003. The expense increased $417,566, or 47.7%, from 2003,
primarily as a result of an increase in interest expense and
additional investment in R&D personnel and development.
Amortization of discount on notes payable
Amortization of discount on notes payable increased to $651,868 for
the year ended December 31, 2004 compared to $121,223 for the year
ended December 31, 2003. The expense increased $530,645, or 437.7%,
primarily due to the convertible loans from Sino-America and Tina
Young.
Non-cash compensation costs
On May 24, 2004, the Company issued 2,584,905 shares of its common
stock and warrants (the Merger Warrants) to purchase up to
47,802,373 shares of its common stock, to the shareholders of ACSI
in exchange for all the issued and outstanding shares of ACSI. On
May 24, 2004, the OTCBB closing price for the Company's common stock
was $3.15 per share, resulting in a valuation of $12,527,134 (the
Merger Valuation) for the 3,976,868 shares of common stock
outstanding immediately following the Merger. On December 4, 2004,
the Company granted 7,500,000 shares of its common stock to five
shareholders in Spectre, including two individuals who are also
Directors of the Company, for providing services to the Company.
1,500,000 shares were treated as compensatory stock with a fair
value $1.20 per share, representing the most recent OTCBB closing
price prior to that date, for a total of $1,800,000 and was
recognized as stock-based compensation expense in the accompanying
financial statements. The remaining 6,000,000 shares were treated as
a stock dividend. All share and per share amounts included herein
have been restated to reflect the effects of the grant as if it had
occurred at the date of the Merger.
Net Loss
Net loss increased to ($3,662,390) for the year ended December 31, 2004
compared to ($961,355) for the year ended December 31, 2003. The loss
increased $2,701,035, or 281%, from 2003, primarily as a result of
$1,800,000 of stock compensation expense and $651,868 of notes payable -
debt discount costs along with increase in investment in R&D and
production capacity, and additional cost for being a public company.
13
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
Going Concern
In their report in connection with our 2004 financial statements, our
auditors included an explanatory paragraph stating that, because we have
incurred a net loss of $3,662,390 and a negative cash flow from operations of
$594,293 for the year ended December 31, 2004, and had a working capital
deficiency of $1,353,308 and a stockholders' deficiency of $1,023,191 at
December 31, 2004 there is substantial doubt about our ability to continue as a
going concern.
We have relied primarily on cash flow from operations, bank loans, and
advances and investments from our shareholders for our capital requirements
since inception. The company received a $200K convertible loan from one of its
existing shareholders on February 23, 2005. This allowed the company to pay off
some of the debt and continue its operation. Current cash on hand will allow the
company to continue its operation for one month.
At December 31, 2004, cash was $17,115 as compared to $10,712 at December
31, 2003. The increase is due to the net cash from promissory notes. We have a
substantial working capital deficit. We require $3M to continue operations for
the next three years. We are in the process of raising capital in the form of
equity and/or debt. However, there is no guarantee that we will raise sufficient
funds to execute our business plan. To the extent we are unable to raise
sufficient funds, our business plan will be required to be substantially
modified, its operations curtailed or protection under bankruptcy/reorganization
laws sought.
We are addressing our liquidity requirements by the following actions:
Continue our programs for selling products; continue to seek investment capital
through the public markets. However, there is no guarantee that these strategies
will enable us to meet our obligations for the foreseeable future.
Commitments and Contingencies
We have the following material contractual obligations and capital
expenditure commitments:
On February 11, 2004, ACSI signed a promissory note payable with
Sino-America. The promissory note is for $500,000 and due February 11,
2005. After maturity, the lender agreed to convert the loan into shares of
the Company's stock. On March 15, 2005, an agreement was made to convert
the note payable and warrant into 500,000 shares of common stock.
The Company leases certain equipment under two capital leases with monthly
payments of $360 and $701, respectively, including interest at 12.75% per
annum.
Future minimum annual rental payments for capitalized leases are as
follows:
Years ending December 31, Amount
----------------------------------------------------- ----------
2005 $ 12,732
2006 12,732
2007 12,732
2008 12,732
2009 3,543
----------
54,471
Amount representing interest (12,453)
----------
Present value of minimum lease payments 42,018
Less: Current portion (7,819)
----------
$ 34,199
==========
14
The Company leases its office and facility through 2007 under a long term
operating lease agreement. Under terms of the lease, the Company pays the
cost of repairs and maintenance. The office and warehouse facility is
shared with TransOptix, who signed the lease as co tenant with the
Company. The Company and TransOptix have entered into an agreement
stipulating each entities share of the rent, however, in event of default
by TransOptix, the Company could contingently be liable for the full
amount of the rent.
Future minimum lease commitments for the Company's share under this lease
at December 31, 2004 are as follows:
Years ending December 31, Amount
2005 $ 104,131
2006 104,906
2007 91,520
----------------------------------------------------- ----------
$ 300,557
==========
The total lease commitment as of December 31, 2004 for which the Company
could be contingently liable in the event of default of TransOptix is
approximately $650,000. Rent expense for the years ended December 31, 2004
and 2003 was $122,905 and $116,588 respectively.
Inflation and Changing Prices
We do not foresee any adverse effects on our earnings as a result of
inflation or changing prices. CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue when risk of loss and title to the product
is transferred to the customer, which occurs at shipment
Stock-based compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock Based
Compensation Transition and Disclosures" as well as those outlined in SFAS
No. 123, "Accounting for Stock Based Compensation". As permitted by SFAS
148 and SFAS 123, the Company continues to apply the provisions of
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
issued to Employees" and related interpretations in accounting for the
Company's stock option plan. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the estimated fair value of
the Company's stock at the date of the grant, over the amount an employee
must pay to acquire the stock. Stock based awards for non employees are
accounted for at fair value equal to the excess of the estimated fair
value of the Company's stock over the option price using an estimated
interest rate to calculate the fair value of the option. There were no
stock based awards to non employees in 2004 or 2003.
15
Inventories
Inventories are stated at the lower of cost (first in, first out method)
or market.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs". This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility
costs, excessive spoilage, double freight and rehandling costs to be expensed in
the current period, regardless if they are abnormal amounts or not. This
Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on our
financial condition, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" (SFAS 123R), which revises SFAS No. 123. SFAS 123R also
supersedes APB No. 25 and amends SFAS No. 95, "Statement of Cash Flows". In
general, the accounting required by SFAS 123R is similar to that of SFAS No.
123. However, SFAS No. 123 gave companies a choice to either recognize the fair
value of stock options in their income statements or disclose the pro forma
income statement effect of the fair value of stock options in the notes to the
financial statements. SFAS 123R eliminates that choice and requires the fair
value of all share based payments to employees, including the fair value of
grants of employee stock options, be recognized in the income statement,
generally over the option vesting period. SFAS 123R must be adopted no later
than July 1, 2005. Early adoption is permitted.
The Company is currently evaluating the timing and manner in which it will
adopt SFAS 123R. As permitted by SFAS 123, the Company currently accounts for
share based payments to employees using APB 25's intrinsic value method.
Accordingly, adoption of SFAS 123R's fair value method will have an effect on
results of operations, although it will have no impact on overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share based payments granted in the future.
However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as
shown above. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as currently required, thereby reducing net
operating cash flows and increasing net financing cash flows in periods after
adoption
RISKS RELATED TO OUR BUSINESS
We have had negative cash flows from operations. Our business operations
may fail if our actual cash requirements exceed our estimates, and we are not
able to obtain further financing.
Our company has had negative cash flows from operations. To date, we have
incurred significant expenses in product development and administration in order
to ready our products for market. Our business plan calls for additional
significant expenses necessary to bring our products to market. We believe we do
not have sufficient funds to satisfy our short term cash requirements. There is
no assurance that actual cash requirements will not exceed our estimates, in
which case we will require additional financing to bring our products into
commercial operation, finance working capital and pay for operating expenses and
capital requirements until we achieve a positive cash flow. In particular,
additional capital may be required in the event that:
16
o we incur unexpected costs in completing the development of our
technology or encounter any unexpected technical or other
difficulties;
o we incur delays and additional expenses as a result of technology
failure;
o we are unable to create a substantial market for our product and
services; or
o we incur any significant unanticipated expenses.
We may not be able to obtain additional equity or debt financing on
acceptable terms if and when we need it. Even if financing is available it may
not be available on terms that are favorable to us or in sufficient amounts to
satisfy our requirements. If we require, but are unable to obtain, additional
financing in the future, we may be unable to implement our business plan and our
growth strategies, respond to changing business or economic conditions,
withstand adverse operating results, and compete effectively. More importantly,
if we are unable to raise further financing when required, our continued
operations may have to be scaled down or even ceased and our ability to generate
revenues would be negatively affected.
A decline in the price of our common stock could affect our ability to raise
further working capital and adversely impact our operations.
A prolonged decline in the price of our common stock could result in a
reduction in the liquidity of our common stock and a reduction in our ability to
raise capital. Because our operations have been primarily financed through the
sale of equity securities, a decline in the price of our common stock could be
especially detrimental to our liquidity and our continued operations. Any
reduction in our ability to raise equity capital in the future would force us to
reallocate funds from other planned uses and would have a significant negative
effect on our business plans and operations, including our ability to develop
new products and continue our current operations. If the stock price declines,
there can be no assurance that we can raise additional capital or generate funds
from operations sufficient to meet our obligations.
If we issue additional shares in the future this may result in dilution to our
existing stockholders.
Our Amended Certificate of Incorporation authorizes the issuance of
200,000,000 shares of common stock. Our board of directors has the authority to
issue additional shares up to the authorized capital stated in the certificate
of incorporation. Our board of directors may choose to issue some or all of such
shares to acquire one or more businesses or to provide additional financing in
the future. The issuance of any such shares may result in a reduction of the
book value or market price of the outstanding shares of our common stock. It
will also cause a reduction in the proportionate ownership and voting power of
all other stockholders. Further, any such issuance may result in a change of
control of our corporation.
17
We have a history of losses and negative cash flows, which is likely to continue
unless our products gain sufficient market acceptance to generate a commercially
viable level of sales.
From inception through December 31, 2004, we have incurred aggregate net
losses. There is no assurance that we will operate profitably or will generate
positive cash flow in the future. In addition, our operating results in the
future may be subject to significant fluctuations due to many factors not within
our control, such as market acceptance of our products, the unpredictability of
when customers will order products, the size of customers' orders, the demand
for our products, and the level of competition and general economic conditions.
Although we anticipate that we will be able to increase revenues during
the next 12 months, we also expect an increase in development and operating
costs. Consequently, we expect to incur operating losses and net cash outflow
unless and until our existing products, and/or any new products that we may
develop, gain market acceptance sufficient to generate a commercially viable and
sustainable level of sales.
Unless we can establish significant sales of our current products, our potential
revenues may be significantly reduced.
We expect that a substantial portion, if not all, of our future revenue
will be derived from the sale of our sensor products. We expect that these
product offerings and their extensions and derivatives will account for a
majority, if not all, of our revenue for the foreseeable future. The successful
introduction and broad market acceptance of our sensor products as well as the
development, introduction and market acceptance of any future enhancements are,
therefore, critical to our future success and our ability to generate revenues.
Unfortunately, there can be no assurance that we will be successful in marketing
our current product offerings, or any new product offerings, applications or
enhancements. Failure to achieve broad market acceptance of our sensor products,
as a result of competition, technological change, or otherwise, would
significantly harm our business.
We could lose our competitive advantages if we are not able to protect any
proprietary technology and intellectual property rights against infringement,
and any related litigation could be time consuming and costly.
Our success and ability to compete depends to a significant degree on our
proprietary technology incorporated in our products. We have taken limited
action to protect our proprietary technology and proprietary computer software.
If any of our competitors copies or otherwise gains access to our proprietary
technology or software or develops similar technologies independently, we would
not be able to compete as effectively.
Further, the laws of foreign countries may provide inadequate protection
of such intellectual property rights. We may need to bring legal claims to
enforce or protect such intellectual property rights. Any litigation, whether
successful or unsuccessful, could result in substantial costs and diversions of
resources. In addition, notwithstanding any rights we have secured in our
intellectual property, other persons may bring claims against us that we have
infringed on their intellectual property rights, including claims based upon the
content we license from third parties or claims that our intellectual property
right interests are not valid. Any claims against us, with or without merit,
could be time consuming and costly to defend or litigate, divert our attention
and resources, result in the loss of goodwill associated with our service marks
or require us to make changes to our website or other of our technologies.
Our products may become obsolete and unmarketable if we are unable to respond
adequately to rapidly changing technology and customer demands.
Our industry is characterized by rapid changes in technology and customer
demands. As a result, our products may quickly become obsolete and unmarketable.
Our future success will depend on our ability to adapt to technological
advances, anticipate customer demands, develop new products and enhance our
current products on a timely and cost effective basis. Further, our products
must remain competitive with those of other companies with substantially greater
resources. We may experience technical or other difficulties that could delay or
prevent the development, introduction or marketing of new products or enhanced
versions of existing products. Also, we may not be able to adapt new or enhanced
products to emerging industry standards, and our new products may not be
favorably received.
18
If we fail to effectively manage our growth our future business results could be
harmed and our managerial and operational resources may be strained.
As we proceed with the commercialization of our products, we expect to
experience significant and rapid growth in the scope and complexity of our
business. We will need to add staff to market our products, manage operations,
handle sales and marketing efforts and perform finance and accounting functions.
We will be required to hire a broad range of additional personnel in order to
successfully advance our operations. This growth is likely to place a strain on
our management and operational resources. The failure to develop and implement
effective systems, or to hire and retain sufficient personnel for the
performance of all of the functions necessary to effectively service and manage
our potential business, or the failure to manage growth effectively, could have
a materially adverse effect on our business and financial condition.
OFF BALACE SHEET ARRANGEMENTS
There are no Off-Balance Sheet Arrangements to report.
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS
Balance Sheet F-2
Statements of Operations F-3
Statement of Changes in Stockholders' Deficiency F-4
Statements of Cash Flows F-5
NOTES TO THE FINANCIAL STATEMENTS F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive
and Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form 10
KSB. Based on this evaluation, our Chief Executive and Financial Officer has
concluded that our disclosure controls and procedures (as defined in Rules 13a
15(e) and 15d 15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) are inadequate to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. We are developing a plan to ensure that all information will be recorded,
processed, summarized and reported on a timely basis. This plan is dependent, in
part, upon reallocation of responsibilities among various personnel, possibly
hiring additional personnel and additional funding. It should also be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
19
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that
occurred during the fourth fiscal quarter of the fiscal year covered by this
Annual Report on Form 10 KSB that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and position held by each of the directors and officers of
our company are as follows:
Name Position
Michael Young Chief Executive Officer and Chairman
Hanlin Chen Director
All directors have a term of office expiring at the next annual general meeting,
unless re elected or earlier vacated in accordance with the Bylaws. All officers
have a term of office lasting until their removal or replacement by the Board of
Directors.
Background of Officers and Directors
MICHAEL YOUNG founded and has served for seven years as CEO of 3S.
Previously, his 20 year career includes MEMS design, fabrication, packaging and
applications development at Rosemount, Endevco, Hughes Aircraft and other firms.
He is responsible for leading 3S given his technical expertise and a broad range
of business experiences with 3S. He holds a Master of Science degree in
Mechanical Engineering from Stanford University.
HANLIN CHEN began serving as the Chairman and CEO of China Automotive
Systems, Inc. in 2003. Prior to this appointment, Mr. Chen was the general
manager of Jiulong Power Steering Company Limited from 1992 to 1997. Mr. Chen
holds a MBA from Barrington University and serves as a board member of Political
Consulting Committee of Jingzhou city and vice president of Foreign Investors
Association.
20
Family Relationships
There are no family relationships on the Board of Directors.
Involvement in Certain Legal Proceedings
To our knowledge, during the past five years, our officers and directors: have
not filed a petition under the federal bankruptcy laws or any state insolvency
law, nor had a receiver, fiscal agent or similar officer appointed by a court
for the business or present of such a person, or any partnership in which he was
a general partner at or within two years before the time of such filing, or any
corporation or business association of which he was an executive officer within
two years before the time of such filing; were not convicted in a criminal
proceeding or named subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses); were not the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting their respective activities.
Compliance with Section 16 (a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
us pursuant to Rule 16a 3(e) under the Securities Exchange Act of 1934 during
our most recent fiscal year and Forms 5 and amendments thereto furnished to us
with respect to our most recent fiscal year, all officers, directors and owners
of 10% or more of our outstanding shares have filed all Forms 3, 4 and 5
required by Section 16(a) of the Securities Exchange Act of 1934.
Audit Committee and Charter
Due to the size of our Board of Directors we do not have an audit committee at
this time.
Audit Committee Financial Expert
We have no financial expert.
Code of Ethics
We have adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to compensation paid by
us to the chief executive officer since the Exchange. No other executive officer
received compensation in excess of $100,000 for the fiscal year ended December
31, 2004.
21
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Year Salary Bonus sation Award(s) Options / Payouts Compen-
Position ($) ($) ($) ($) SARs (#) ($) sation ($)
-------------------------------------------------------------------------------------------------------------------------
Michael Young, CEO 2004 75,000 N/A - - - - -
N/A 2003 N/A N/A - - - - -
N/A 2002 N/A N/A - - - - -
There are no stock option, retirement, pension, or profit sharing plans for the
benefit of our officers and directors.
Option/SAR Grants
No individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director since our inception, accordingly, no stock
options have been exercised by any of the officers or directors in fiscal 2004.
Long Term Incentive Plan Awards
We do not have any long term incentive plans that provide compensation intended
to serve as incentive for performance to occur over a period longer than one
fiscal year, whether such performance is measured by reference to our financial
performance, our stock price, or any other measure.
Compensation of Directors
The directors did not receive any other compensation for serving as members of
the board of directors. The Board has not implemented a plan to award options.
There are no contractual arrangements with any member of the board of directors.
We do not intend to pay any additional compensation to our directors. As of the
date hereof, we have not entered into employment contracts with any of our
officers and we do not intend to enter into any employment contracts until such
time as it profitable to do so.
Indemnification
Nevada corporation law provides that:
o A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
22
o A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests
of the corporation. Indemnification may not be made for any claim, issue
or matter as to which such a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the
action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper; and
22
o To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action,
suit or proceeding, or in defense of any claim, issue or matter therein,
the corporation shall indemnify him against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the
defense.
o Our bylaws provide that we will advance all expenses incurred to any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suite or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact
that he is or was our director or officer, or is or was serving at our
request as a director or executive officer of another company,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request. This advanced
of expenses is to be made upon receipt of an undertaking by or on behalf
of such person to repay said amounts should it be ultimately determined
that the person was not entitled to be indemnified under our bylaws or
otherwise.
o Our bylaws also provide that no advance shall be made by us to any officer
in any action, suit or proceeding, whether civil, criminal, administrative
or investigative, if a determination is reasonably and promptly made: (a)
by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding; or (b) if such quorum is
not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion,
that the facts known to the decision making party at the time such
determination is made demonstrate clearly and convincingly that such
person acted in bad faith or in a manner that such person did not believe
to be in or not opposed to our best interests.
o Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of our
company under Nevada law or otherwise, we have been advised the opinion of
the Securities and Exchange Commission is that such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event a claim for indemnification against
such liabilities (other than payment by us for expenses incurred or paid
by a director, officer or controlling person of our company in successful
defense of any action, suit, or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question of whether such indemnification by it is
against public policy in said Act and will be governed by the final
adjudication of such issue.
23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS.
The following table sets forth, as of May 5, 2005, the beneficial shareholdings
of persons or entities holding five percent or more of our common stock, each
director individually, each named executive officer and all of our directors and
officers as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown, and all ownership is of record and
beneficial. Unless otherwise disclosed, the address of each person set forth
below is that of the Company.
Amount and
Name of Beneficial Nature Percent
Owner Beneficial Owner Position of Class (1)
Chief Executive
Michael Young 10,620,186 Officer and Chairman 18%
Hanlin Chen Director *
Officers and Directors
as a Group (2 persons) 10,620,186 18%
Principal Shareholders
Andy Ju (2) 3,374,729 5.8%
Jeffrey Ju (3) 3,374,729 5.8%
----------
*Less than 1%
(1) Based on 59,279,241 shares outstanding at May 5, 2005
(2) Andy Ju's address is No 54, Jiango Rd., Jhongli City, Taiwan.
(3) Jeffrey Ju's address is No 54, Jiango Rd., Jhongli City, Taiwan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Hanlin Chen, a Director of the Company is the Chief Executive Officer of
China Automotive Systems, Inc. The Company has signed a letter of intent to form
a Joint Venture with China Automotive Systems, Inc
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K
There were no Reports filed on Form 8-K during the fourth quarter of 2004.
24
(b) Exhibits
Exhibit No. Document Description
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Share Exchange Agreement and Plan of Reorganization (2)
10.2 License Agreement
23.1 Consent of Weinberg & Company, P.A.
31.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 13a 14 and Rule 15d 14(a), promulgated
under the Securities and Exchange Act of 1934, as amended. (3)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (Chief
Executive Officer). (3)
----------
(1) Incorporated herein by reference from the Company's Form 10 QSB filed
with the Securities and Exchange Commission, File No. 000 11991 on May 28, 2003.
(2) Incorporated herein by reference from the Company's Form 8 K Current
Report and amendment thereto as filed with the Securities and Exchange
Commission, on May 24, 2004.
(3) Filed herewith.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Weinberg & Company, P.A., was the Company's independent registered public
accounting firm engaged to examine the financial statements of the Company for
the fiscal years ended December 31, 2003 and 2004. Weinberg & Company, P.A.
performed the following services and has been paid the following fees.
Fiscal Years Ended December 31, 2004 and 2003
Audit Fees
Weinberg & Company, P.A. was paid aggregate fees of approximately $54,500 for
the fiscal year ended December 31, 2004 and 2003 for professional services
rendered for the audit of the Company's annual financial statements and for the
reviews of the financial statements included in the Company's interim quarterly
reports.
Audit Related Fees
Weinberg & Company, P.A. was not paid additional fees for the fiscal year
December 31, 2004 for assurance and related services reasonably related to the
performance of the audit or review of the Company's financial statements.
Tax Fees
Weinberg & Company, P.A. was not paid any fees for the fiscal year ended
December 31, 2004 for professional services rendered for tax compliance, tax
advice and tax planning. This service was not provided.
25
All Other Fees
Weinberg & Company, P.A. was paid no other fees for professional services during
the fiscal year ended December 31, 2004.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 21st day of
March, 2006.
SENSOR SYSTEM SOLUTIONS, INC.
By: /s/ Michael Young
------------------------
Michael Young
Chief Executive Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the Company and in
the capacities.
Signatures Title Date
/s/ Michael Young Chief Executive Officer and March 21, 2006
------------------------- Principal Accounting Officer
Michael Young
/s/ Hanlin Chen Director March 21, 2006
-------------------------
Hanlin Chen
27
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONTENTS
--------
PAGE 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PAGE 2 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004
PAGE 3 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2004 (CONSOLIDATED) AND 2003
PAGE 4 STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY FOR THE
YEAR ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
PAGE 5 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2004 (CONSOLIDATED) AND 2003
PAGES 6 -16 NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004
(CONSOLIDATED) AND 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Sensor System Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Sensor System
Solutions, Inc. and subsidiary as of December 31, 2004, and the related
statements of operations, changes in stockholders' deficiency, and cash flows
for the years ended December 31, 2004 (consolidated) and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sensor System
Solutions, Inc. and subsidiary as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004
(consolidated) and 2003, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated 2004 financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company incurred a net loss of
$3,662,390 and a negative cash flow from operations of $594,293 for the year
ended December 31, 2004, and had a working capital deficiency of $1,353,308 and
a stockholders' deficiency of $1,023,191 at December 31, 2004. These matters
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 4, 2005, except for Notes 9 and 13, as to which the date is February 8,
2006
1
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of December 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 17,115
Accounts receivable 100,530
Inventory 220,445
Prepaids and other current assets 24,552
------------
Total current assets 362,642
Property and equipment, net 320,717
Other assets 54,112
------------
Total assets $ 737,471
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 720,817
Notes payable 263,923
Notes payable, related parties 718,133
Current portion of capital lease obligations 7,819
Current portion of deferred rent concession 5,258
------------
Total current liabilities 1,715,950
------------
LONG TERM LIABILITIES
Capital lease obligations, net of current portion 34,199
Deferred rent concession, net of current portion 10,513
------------
44,712
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY (See Note 13)
Preferred stock, $.001 par value, 20,000,000
shares authorized, none outstanding -
Common stock, $.001 par value, 180,000,000 shares
authorized, 3,976,868 issued and outstanding 3,977
Common stock to be issued (7,700,000 shares) 9,300,000
Additional paid in capital 4,867,790
Deferred compensation (186,400)
Accumulated deficit (15,008,558)
------------
Total stockholders' deficiency (1,023,191)
------------
Total liabilities and stockholders' deficiency $ 737,471
============
See accompanying notes to financial statements.
2
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the years ended December 31, 2004 (Consolidated) and 2003
2004 2003
--------------- -----------
(Consolidated)
Sale, net $ 661,340 $ 436,071
Cost of goods sold 579,790 401,697
--------------- -----------
Gross profit 81,550 34,374
--------------- -----------
Operating expenses 1,292,072 874,506
Amortization of discount on notes payable 651,868 121,223
Stock-based compensation costs 1,800,000 --
--------------- -----------
Total operating expenses 3,743,940 995,729
--------------- -----------
Net loss $ (3,662,390) $ (961,355)
=============== ===========
Loss per common share, basic and diluted $ (0.46) $ (0.39)
=============== ===========
Weighted average shares outstanding, basic and diluted 7,920,079 2,486,539
(See Note 13) =============== ===========
See accompanying notes to financial statements.
3
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For the years ended December 31, 2004 (Consolidated) and 2003
Sensor Sensor ACSI ACSI
common comon common common Common Additional
stock stock stock stock stock to be Treasury paid-in Deferred
shares amount shares amount issued stock capital compensation
------------ ------ ------------ ------------ ------------ ------------ ------------ ------------
Ba lance
January 1, 2003 -- $ -- 2,466,868 $ 3,433,679 $ -- $ (10,000) $ 198,000 $ (198,000)
Issuance of
stock for
settlement
of amount due
to vendor -- -- 82,969 160,000 -- -- -- --
Issuance of
stock
for settlement
of accounts
payable -- -- 35,058 45,834 -- -- -- --
Intrinsic value
of
common stock
issued with
notes payable -- -- -- -- -- -- 315,666 --
Issuance of
stock options -- -- -- -- -- -- 72,270 (72,270)
Amortization
of deferred
compensation -- -- -- -- -- -- -- 49,500
Net loss -- -- -- -- -- -- -- --
------------ ------ ------------ ------------ ------------ ------------ ------------ ------------
Balance December
31, 2003 -- -- 2,584,895 3,639,513 -- (10,000) 585,936 (220,770)
Common stock of
Sensor
outstanding when
Advanced Custom
Sensors,
Inc was merged into
Sensor, Inc. 1,391,962 1,392 -- -- -- -- (1,392) --
Exchange of
Advanced
Custom Sensors,
Inc.
common stock for
Sensor, Inc.
common stock 2,584,906 2,585 (2,584,895) (3,639,513) -- 10,000 3,626,928 --
Stock options
issued
to employees -- -- -- -- -- -- 19,800 (19,800)
Common stock
warrants
issued with notes
payable -- -- -- -- -- 636,518 --
Amortization of
deferred
compensation -- -- -- -- -- -- -- 54,170
Stock to be issued
(200,000 shares) for
settlement of note
payable -- -- -- -- 300,000 -- -- --
Compensatory stock
to be
issued (1,500,000
shares) 1,800,000 -- -- --
Stock dividend to
be issued
(6,000,000 shares) 7,200,000 -- -- --
Net loss -- -- -- -- -- -- --
------------ ------ ------------ ------------ ------------ ------------ ------------ ------------
Balance December
31, 2004 3,976,868 $3,977 $ -- $ -- $ 9,300,000 $ -- $ 4,867,790 $ (186,400)
(See Note 13) ============ ====== ============ ============ ============ ============ ============ ============
Accumulated
deficit Total
------------ ------------
Ba lance
January 1, 2003 $ (3,184,813) $ 238,866
Issuance of
stock for
settlement
of amount due
to vendor -- 160,000
Issuance of
stock
for settlement
of accounts
payable -- 45,834
Intrinsic value
of
common stock
issued with
notes payable -- 315,666
Issuance of
stock options -- --
Amortization
of deferred
compensation -- 49,500
Net loss (961,355) (961,355)
------------ ------------
Balance December
31, 2003 (4,146,168) (151,489)
Common stock of
Sensor
outstanding when
Advanced Custom
Sensors,
Inc was merged into
Sensor, Inc. -- --
Exchange of
Advanced
Custom Sensors,
Inc.
common stock for
Sensor, Inc.
common stock -- --
Stock options
issued
to employees -- --
Common stock
warrants
issued with notes
payable -- 636,518
Amortization of
deferred
compensation -- 54,170
Stock to be issued
(200,000 shares) for
settlement of note
payable -- 300,000
Compensatory stock
to be
issued (1,500,000
shares) -- 1,800,000
Stock dividend to
be issued
(6,000,000 shares) (7,200,000) --
Net loss (3,662,390) (3,662,390)
------------ ------------
Balance December
31, 2004 $(15,008,558) $ (1,023,191)
(See Note 13) ============ ============
See accompanying notes to financial statements.
4
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 (Consolidated) and 2003
2004 2003
-------------- -----------
(Consolidated)
Cash flows from operating activities:
Net loss $ (3,662,390) $ (961,355)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation costs 1,800,000 --
Costs related to settlement of note payable 140,000 --
Depreciation and amortization 109,954 113,927
Amortization of discount cost on notes payable 651,868 121,223
Amortization of deferred compensation 54,170 49,500
Changes in operating assets and liabilities:
Accounts receivable (32,992) (24,059)
Inventories (20,913) (31,333)
Prepaids and other current assets (20,445) (4,001)
Accounts payable and accrued expenses 370,685 234,399
Deferred rent concession 15,770 --
-------------- -----------
Net Cash Used In Operating Activities (594,293) (501,699)
-------------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,957) (1,289)
-------------- -----------
Cash flows from financing activities:
Proceeds from notes payable 590,000 407,984
Proceeds from notes payable, related parties 20,000 100,000
Principal payments on capital leases (5,347) --
-------------- -----------
Net Cash Provided By Financing Activities 604,653 507,984
-------------- -----------
Net increase in cash and cash equivalents 6,403 4,996
Cash and cash equivalents, beginning of the year 10,712 5,716
-------------- -----------
Cash and cash equivalents, end of the year $ 17,115 $ 10,712
============== ===========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 14,458 $ 7,715
============== ===========
Taxes $ 800 $ 800
============== ===========
Non-cash investing and financing activities:
Acquisition of equipment through capital lease obligations $ 47,365 $ --
Issuance of stock options 19,800 72,270
Interest payable added to principal amount of notes payable 12,500 --
Discount related to warrants and convertible notes 636,518 316,666
Issuance of stock for settlement of due to vendor -- (160,000)
Issuance of stock for settlement of accounts payable -- (45,834)
Common stock to be issued in settlement of note payable 160,000 --
Stock dividend 7,200,000 --
See accompanying notes to financial statements.
5
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
The Company is a manufacturer and assembler of sensors and micro systems, and
its products include thin film sensors, thin film pressure sensors and micro
machined pressure sensors, and micro systems that may include sensors, signal
conditioning circuits, LCD display, computer interface and molded housing
specifically designed to the customers needs.
Merger
On May 24, 2004, Sensor System Solutions (formerly known as Spectre Industries,
Inc.,) a Nevada corporation, entered into an agreement and plan of merger (the
Merger) with Advanced Custom Sensors, Inc. (ACSI). Sensor issued 2,584,906
shares of its common stock and warrants (the Merger Warrants) to purchase up to
47,802,373 shares of its common stock to the shareholders of ACSI in exchange
for all the issued and outstanding shares of ACSI. The transaction was accounted
for as a recapitalization with ACSI deemed to be the accounting acquirer and
Spectre the legal acquirer. All financial information included in these
financial statements prior to the Merger is that of ACSI, as if ACSI had been
the registrant. The financial information since the Merger is that of ACSI and
Sensor consolidated.
All references to "Sensor", "Spectre" and "ACSI", mean Spectre or ACSI
separately prior to the Merger and Sensor (the Company) after the Merger.
The Company agreed that it would "spin-off" certain assets and liabilities
included in Spectre in connection with the Merger on May 24, 2004. These assets
and liabilities were transferred to Spectre Holdings, Inc. (Spectre Holdings), a
wholly-owned subsidiary of the Company. On December 15, 2004, in consideration
for making and guaranteeing certain representations, warranties and obligation
in connection with the Agreement and Plan of Merger dated March 13, 2004 by and
between the Company and ACSI, the Company transferred 20,878,081 shares of
common stock, which are all of the issued and outstanding shares of Spectre
Holdings to Ian Grant, a Director of the Company and shareholder in Spectre. As
the Company never had direct or indirect control of those assets and
liabilities, Spectre Holdings was not considered owned at the date of the
Merger.
Going concern
The Company incurred a net loss of $3,662,390 and a negative cash flow from
operations of $594,293 for the year ended December 31, 2004, and had a working
capital deficiency of $1,353,308 and a stockholders' deficiency of $1,023,191 at
December 31, 2004. These matters raise substantial doubt about its ability to
continue as a going concern. Without realization of additional capital, it would
be unlikely for the Company to continue as a going concern. Management believes
that actions are presently being taken to revise the Company's operating and
financial requirements in order to improve the Company's financial position and
operating results. However, given the levels of its cash resources and working
capital deficiency at December 31, 2004, management believes cash to be
generated by operations will not be sufficient to meet anticipated cash
requirements for operations, working capital, and capital expenditures during
2005. The Company completed a merger and recapitalization on May 20, 2004, with
Spectre Industries, Inc., a public company, to gain access to the United States
and European capital markets, but there can be no assurances that the Company
will ultimately be successful in this regard. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
6
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
Principles of consolidation
The 2004 consolidated financial statements include the accounts and operations
of Sensor System Solutions Inc. and its wholly owned subsidiary. Intercompany
accounts and transactions have been eliminated in consolidation.
Use of 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 reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounts receivable
The company performs ongoing credit evaluations of its customers and generally
does not require collateral. An appropriate allowance for doubtful accounts is
included in accounts receivable.
Inventory
Inventory is stated at the lower of cost (first in, first out method) or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for additions, renewals, and improvements are
capitalized. Costs of repairs and maintenance are expensed when incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Leasehold
improvements are amortized over the shorter of the lease term or the asset's
useful life.
Impairment of long lived assets
Property and equipment and other long-lived assets are evaluated for impairment
whenever events or conditions indicate that the carrying value of an asset may
not be recoverable. If the sum of the expected undiscounted cash flows is less
than the carrying value of the related asset or group of assets, a loss is
recognized for the difference between the fair value and carrying value of the
asset or group of assets. Such analyses necessarily involve significant
judgment. There were no impairment losses recorded in 2004 or 2003.
Note payable debt discount cost
The Company has issued warrants to investors and related parties in conjunction
with notes payable. The discounts allocated to the warrants are being treated as
additional consideration for notes payable and are being amortized over the life
of the note as additional interest cost.
Revenue Recognition
The Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment
Income taxes
7
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized and
measured using enacted tax rates at the balance sheet date. Deferred tax expense
or benefit is the result of changes in deferred tax assets and liabilities.
Valuation allowances are established when necessary to reduce net deferred taxes
to amounts that are more likely than not to be realized.
Stock-based compensation
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 148, "Accounting for Stock Based Compensation-
Transition and Disclosures" as well as those outlined in SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS 148 and SFAS
123, the Company continues to apply the provisions of Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock issued to Employees" and
related interpretations in accounting for the Company's stock option plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the
grant, over the amount an employee must pay to acquire the stock. Stock based
awards for non employees are accounted for at fair value equal to the excess of
the estimated fair value of the Company's stock over the option price using an
estimated interest rate to calculate the fair value of the option. There were no
stock based awards to non employees in 2004 or 2003.
Had compensation cost for all stock option grants been determined based on their
fair value at the grant dates, consistent with the method prescribed by SFAS 148
and SFAS 123, our net loss and loss per share would have been adjusted to the
pro forma amounts indicated below:
Year ended December 31:
2004 2003
----------- -----------
Net loss $(3,662,390) $ (961,355)
Add: Stock-based expense included in net loss 54,170 49,500
Deduct: Fair value based stock based expense (58,880) (51,750)
----------- -----------
Pro forma net loss $(3,667,100) $ (963,605)
=========== ===========
Basic and diluted earnings per share:
As reported $ (0.46) $ (0.39)
Pro forma under SFAS No. 123 $ (0.46) $ (0.39)
Earnings (loss) per share
Basic earnings (loss) per common share (EPS) are based on the weighted average
number of common shares outstanding during each period (see Notes 9 and 13).
Diluted earnings per common share are based on shares outstanding (computed as
under basic EPS) and potentially dilutive common shares. As of December 31, 2004
and 2003, the Company had granted stock options for 96,500 and 136,500 shares of
common stock, respectively, that are potentially dilutive common shares but are
not included in the computation of loss per share because their effect would be
anti dilutive.
Comprehensive income (loss)
The Company has no items of other comprehensive income (loss) for the years
ended December 31, 2004 and 2003.
8
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
Fair value of financial instruments
The Company believes that the carrying value of its cash, accounts receivable,
accounts payable, accrued liabilities, notes payable, and notes payable to
related parties as of December 31, 2004 approximates their respective fair
values due to the demand or short-term nature of those instruments. The carrying
value of long term obligations approximates the fair value based on the
effective interest rates compared to current market rates.
Concentration of Credit Risk
Financial instruments that are exposed to concentrations of credit risk consist
principally of cash and accounts receivable. The Company places its cash in what
it believes to be credit-worthy financial institutions. However, cash balances
may have exceeded federally insured levels at various times during the year. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risk in cash.
The Company had four customers that accounted for 29% and 42% of sales in the
years ended December 31, 2004 and 2003, respectively. Approximately 90% and 10%
of the Company's sales in the years ended December 31, 2004 and 2003 were to
customers in North America and Asia respectively.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs". This Statement amends the guidance in ARB No. 43
Chapter 4 Inventory Pricing, to require items such as idle facility costs,
excessive spoilage, double freight and rehandling costs to be expensed in the
current period, regardless if they are abnormal amounts or not. This Statement
will become effective for us in the first quarter of 2006. The adoption of SFAS
No. 151 is not expected to have a material impact on our financial condition,
results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R), which revises SFAS No. 123. SFAS 123R also supersedes APB
No. 25 and amends SFAS No. 95, "Statement of Cash Flows". In general, the
accounting required by SFAS 123R is similar to that of SFAS No. 123. However,
SFAS No. 123 gave companies a choice to either recognize the fair value of stock
options in their income statements or disclose the pro forma income statement
effect of the fair value of stock options in the notes to the financial
statements. SFAS 123R eliminates that choice and requires the fair value of all
share based payments to employees, including the fair value of grants of
employee stock options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than July 1, 2005.
Early adoption is permitted.
The Company is currently evaluating the timing and manner in which it will adopt
SFAS 123R. As permitted by SFAS 123, the Company currently accounts for share-
based payments to employees using APB 25's intrinsic value method. Accordingly,
adoption of SFAS 123R's fair value method will have an effect on results of
operations, although it will have no impact on overall financial position. The
impact of adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had
SFAS 123R been adopted in prior periods, the effect would have approximated the
SFAS 123 pro forma net loss and loss per share disclosures as shown above. SFAS
123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as currently required, thereby reducing net operating cash
flows and increasing net financing cash flows in periods after adoption.
9
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
NOTE 2 INVENTORY
Inventory consists of the following as of December 31, 2004:
Raw materials $ 149,840
Work in process 1,749
Finished goods 68,856
----------
$ 220,445
==========
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2004:
Machinery and equipment $ 586,812
Office equipment 2,636
Furniture and fixtures 17,398
Equipment under capital leases 47,365
Leasehold improvements 143,637
----------
797,848
Less accumulated depreciation and amortization (477,131)
----------
$ 320,717
==========
Depreciation and amortization expense of $109,954 and $113,927 is reflected in
the accompanying Statement of Operations for the years ended December 31, 2004
and 2003, respectively.
As of December 31, 2004 the Company maintained tooling assets with a net book
value of approximately $112,000 at their main supplier located in Taiwan.
Although this country is considered politically and economically stable, it is
possible that unanticipated events in this foreign country could disrupt the
operations of the Company because their main supplier is located there, has
possession of the tooling assets, and manufactures certain products.
NOTE 4 INVESTMENT IN AFFILIATED ENTITY
The Company owns 7.5% of TransOptix, Inc. (TransOptix), a company involved in
the design and manufacturing of optical switches for telecommunication. The
Company's Chief Executive Officer is also the Chief Executive Officer of
TransOptix and owns 12% of TransOptix. At December 31, 2003, the Company and the
Company's Chief Executive Officer owned 14.3% and 15%, respectively, in
TransOptix. These percentages were reduced in 2004 when additional investments
were made from its board members. As a result of the combined equity holdings of
TransOptix by the Company and its Chief Executive Officer, the Company accounts
for this investment under the equity method of accounting. The Company
discontinued applying the equity method in 2002 when Company's share of losses
of TransOptix exceeded its investment in TransOptix. The Company did not record
any income or loss from TransOptix in 2004 or 2003. The Company and TransOptix
share the same office and facility. There were no transactions between the
Company and TransOptix in 2004 or 2003.
10
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
Summarized unaudited financial information for TransOptix, Inc. is as follows:
December 31,
2004
------------
Current assets $ 363,082
Fixed assets, net 359,011
Other Assets 23,079
-------------
$ 745,172
============
Current liabilities $ 37,905
Note payable-stockholder 12,488
Note payable 2,249,920
Stockholders' deficiency (1,555,141)
-------------
$ 745,172
============
Year ended Year ended
December 31, December 31,
2004 2003
------------ ------------
Revenues $ 674,702 $ 94,099
Cost of revenues 441,861 26,893
------------ -------------
Gross profit 232,841 67,206
Operating expenses 1,399,446 1,002,491
------------ -------------
Net loss $ (1,166,605) $ (935,285)
============ ============
NOTE 5 NOTES PAYABLE
Notes payable consist of the following at December 31, 2004:
Two lines of credit, unsecured, interest payable monthly at 8.5% and 9.5% per
annum, due on demand. $ 92,983
Note payable, unsecured, interest payable monthly at Prime + 3% per annum (prime
rate at December 31, 2004 was 5.25%), due on demand. 40,000
Note payable, unsecured, interest payable monthly at 10% per annum, payable as a
percentage of any future private or public stock offerings (see Note 9 with regard
to the September 3, 2004 settlement agreement). 90,000
Two notes payable, secured by all assets of the Company, interest at 8% per annum,
payable at various maturities through October 18, 2005. At maturity, the notes are
convertible at the holder's option at a conversion price equal to 70% of the weighted
average price of the common stock for the 30 trading days immediately preceding the
conversion date. In addition, each note has warrants attached that, once the note is
converted into stock, allow the holder to purchase stock at 85% of the weighted average
price of the common stock for the 30 trading days immediately preceding the conversion
date. The intrinsic value of the beneficial conversion feature of the notes and
warrants, valued at $57,857, have been recorded as loan discount costs and are being
amortized over the life of the respective note as additional interest cost. 90,000
Less remaining debt discount (49,060)
-------------
$ 263,923
=============
11
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
NOTE 6 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following at December 31, 2004:
Note payable to the sister of the Company's Chief Executive Officer, secured by all
assets of the Company, interest at 14.25% per annum, due December 31, 2004. In
connection with the note payable, the Company issued warrants to purchase 190,665
shares of ACSI's common stock at $.50 per share and 110,000 shares of Spectre's
common stock at a price equal to 85% of the average trading price of
the Company common stock at March 16, 2005. The intrinsic value of the warrants,
valued at $190,665, has been recorded as loan discount costs and are being
amortized over the life of the note as additional interest cost. The Company is
currently negotiating an extension of this note. $ 190,665
Note payable to the sister of the Company's Chief Executive Officer, secured by all
assets of the Company, interest at 10.0% per annum, due March 15, 2005. At maturity, the
note is convertible at the holder's option at a conversion price equal to 80% of the
weighted average price of the common stock for the 30 trading days immediately preceding
the conversion date. In addition, the note has warrants attached that, once the note is
converted into stock, allow the holder to purchase stock at 85% of the weighted average
price of the common stock for the 30 trading days immediately preceding the conversion
date. The intrinsic value of the beneficial conversion feature of the note and warrants,
valued at $48,125, has been recorded as loan discount costs and is being amortized over
the life of the note as additional interest cost. The Company is currently negotiating an
extension of this note. 110,000
Note payable to an employee of the Company, secured by all assets of the Company,
interest at 10.0% per annum, due March 15, 2005. At maturity, the note is convertible at
the holder's option at a conversion price equal to 80% of the weighted average price of
the common stock for the 30 trading days immediately preceding the conversion date. In
addition, the note has warrants attached that, once the note is converted into stock,
allow the holder to purchase stock at 85% of the weighted average price of the common
stock for the 30 trading days immediately preceding the conversion date. The intrinsic
value of the beneficial conversion feature of the note and warrants, valued at $12,857,
has been recorded as loan discount costs and is being amortized over the life of the note
as additional interest cost. 20,000
Note payable, secured by accounts receivable of the Company, interest at 10%,
due February 11, 2005. The note payable was originally issued by ACSI. In
connection with the note payable, ACSI issued warrants to purchase 500,000
shares of stock at $.50 per share (the ACSI shares are convertible into
14,088,865 shares of the Company's common stock). The note was payable to Sino-
American, Inc., a company controlled by Mr. Hanlin Chen, a director of the
Company. The intrinsic value of the warrants was valued at $500,000 was recorded
as loan discount costs and is being amortized over the life of the note as
additional interest cost. On March 15, 2005, the warrants were exercised for
$250,000 of the debt outstanding. The balance of the note payable and accrued
interest ($300,000) was exchanged for 390,228 shares of the Company's common
stock at approximately $0.77 per share, which approximated the market value of
the stock on March 15, 2005. 500,000
Note payable, secured by all assets of the Company, interest at 8% per annum, due October
1, 2005. The note payable was originally issued by ACSI in 2003, at which time ACSI
issued a warrant to purchase 25,000 shares of stock at $.50 per share (the ACSI shares
are convertible into 704,425 shares of the Company's common stock). The intrinsic value
of the original warrant was valued at $25,000, recorded as loan discount cost, and was
amortized over the life of the original note as additional interest cost. The original
note was due September 16, 2004. On October 2, 2004, a new note was issued to replace
the original note. At maturity, the new note is convertible at the holder's option at a
conversion price equal to 70% of the weighted average price of the common stock for the
30 trading days immediately preceding the conversion date. In addition, the new note has
a warrant attached that, once the new note is converted into stock, allows the holder to
purchase stock at 85% of the weighted average price of the common stock for the 30
trading days immediately preceding the conversion date. The intrinsic value of the
beneficial conversion feature of the new note and new warrant, valued at $17,679 has been
recorded as loan discount cost and is being amortized over the life of the new note as
additional interest cost. On March 15, 2005, the ACSI warrant was exercised for $12,500
of the debt outstanding. The balance of the note payable and accrued interest ($16,012)
was exchanged for 21,353 shares of the Company's common stock at approximately $0.77 per
share, which approximated the market value of the stock on March 15, 2005. 27,500
Less remaining debt discount (130,032)
-------------
$ 718,133
=============
12
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
NOTE 7 CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under two capital leases with monthly
payments of $360 and $701, respectively, including interest at 12.75% per annum.
Future minimum annual rental payments for capitalized leases are as follows:
Years ending December 31, Amount
----------------------------------------------------------- ----------
2005 $ 12,732
2006 12,732
2007 12,732
2008 12,732
2009 3,543
----------
54,471
Amount representing interest (12,453)
----------
Present value of minimum lease payments 42,018
Less: Current portion (7,819)
----------
$ 34,199
==========
NOTE 8 INCOME TAXES
There is no income tax provision due to continuing tax losses.
Significant components of the Company's deferred income tax assets at December
31, 2004 and 2003 are as follows:
2004 2003
----------- -----------
Deferred income tax asset:
Net operating loss carry forward $ 1,716,000 $ 850,000
Valuation allowance (1,716,000) (850,000)
----------- -----------
Net deferred income tax asset $ - $ -
=========== ===========
Reconciliation of the effective income tax rate to the U. S. statutory rate is
as follows:
2004 2003
----------- -----------
Tax expense at the U.S. statutory
Income tax rate (34.0)% (34.0)%
Increase in the valuation allowance 34.0 34.0
----------- -----------
Effective income tax rate --% --%
=========== ===========
Deferred taxes are recorded to give recognition to temporary differences between
the tax bases of assets or liabilities and their reported amounts in the
financial statements. Deferred tax assets generally represent items that can be
used as a tax deduction or credit in future years. Deferred tax liabilities
generally represent items that we have taken a tax deduction for, but have not
yet recorded in the Consolidated Statement of Operations.
13
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
Net operating loss carryforwards totaling approximately $3.5 million federal and
$1 million state amounts at December 31, 2004 are being carried forward. The net
operating loss carryforwards expire at various dates through 2024 for federal
purposes and 2015 for state purposes.
A full valuation allowance has been established due to the lack of earnings to
support recognition of the deferred tax assets recorded.
NOTE 9 STOCKHOLDERS' EQUITY
On May 24, 2004 (the date of the Merger, see Note 1), the Company issued
2,584,905 shares of its common stock and warrants to purchase up to 47,802,373
shares of its common stock (see Note 12), to the shareholders of ACSI in
exchange for all the issued and outstanding shares of ACSI. . On December 4,
2004, the Company granted 7,500,000 shares of its common stock (which are
included in the weighted average shares computation from May 24, 2004) to five
current shareholders who were shareholders in Spectre, including two individuals
who are also Directors of the Company, for providing services to the Company. Of
the shares granted on December 4,2004, 1,500,000 shares represented stock-based
compensation in the amount of $1,800,000 and 6,000,000 shares were deemed to be
a stock dividend (see Note 13). The fair value of the shares granted was
determined to be $1.20 per share based on the OTC Bulletin Board (OTCBB) closing
price for the Company's stock on December 3, 2004, the most recent closing price
prior to the grant for the Company's stock.
Effective June 8, 2004 the Board of Directors initiated a fifteen for one
reverse split of the common stock. It also increased the authorized number of
common stock shares from 100,000,000 to 180,000,000. All share and per share
amounts included herein have been restated to reflect the effects of the split
as if had occurred at the beginning of the period.
On September 3, 2004, the Company negotiated a settlement of an unsecured note
payable for $250,000 that was due March 9, 2004. Terms of the settlement require
the Company to pay $90,000 plus interest at 10% per annum, payable from future
stock offerings. In addition, the Company is to issue 200,000 shares of common
stock to the lender. The fair value of the shares to be issued was determined to
be $1.50 per share based on the OTCBB closing price for the Company's stock on
September 3, 2004, for a total fair value of $300,000. The Company recorded the
difference between the net carrying amount of the extinguished note ($250,000)
and the settlement price ($390,000) as settlement costs on note payable of
$140,000 in the accompanying financial statements.
NOTE 10 STOCK OPTIONS AND WARRANTS
Stock Option Plan
The Company has a stock option plan, which provides for the granting of options
to employees, independent representatives and directors of the Company. The
Company is authorized to issue 200,000 shares of common stock. The exercise
price is fixed by the plan administrator. The shares vest over 4 years upon the
optionee's completion of service. The options expire ten years from the date of
grant.
For the year ended December 31, 2004, in accordance with APB No. 25, the
intrinsic value of the 10,000 stock options granted under this plan was $19,800
and was recorded as deferred compensation and additional paid-in capital in the
accompanying financial statements (and is being amortized over the vesting
periods of the options.) Amortization of the deferred compensation related to
these stock options totaled $4,125.
14
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
At December 31, 2004, options outstanding are as follows:
Average
Exercise
Shares Price
----------- -----------
Balance at January 1, 2004 136,500 $ .50
Granted 10,000 $ .50
Exercised --
Cancelled (50,000) $ .50
----------- -----------
Balance at December 31, 2004 96,500 $ .50
=========== ===========
Additional information regarding options outstanding as of December 31,
2004 is as follows:
Options outstanding Options exercisable
--------------------------- ---------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Exercise price outstanding life (years) price exercisable price
-------------- ----------- ------------ --------- ----------- --------
$0.50 96,500 1.5 $ 0.50 -- --
Warrants
During 2003, in conjunction with the issuance of certain notes payable, the
board of directors approved the issuance of warrants to purchase a total of
315,666 shares of the Company's common stock. The warrants are exercisable at
$.50 per share, are exercisable upon issuance, and expire in five years from
issuance. The warrants had a total fair value of $315,666, which has been
accounted for as notes payable - debt discount cost and is being amortized over
the life of the related debt.
During 2004, in conjunction with the issuance of a note payable, the board of
directors approved the issuance of warrants to purchase a total of 500,000
shares of the Company's common stock. The warrants are exercisable at $.50 per
share, are exercisable upon issuance, and expire in five years from issuance.
The warrants had a total fair value of $500,000, which has been accounted for as
note payable-debt discount cost and is being amortized over the life of the
related debt.
On May 24, 2004, as part of the merger between the Company and ACSI, the Company
issued warrants to purchase up to 47,802,464 shares of its common stock. The
warrants are exercisable at $.0001 per share, are exercisable six months after
the merger closing date, and expire three years from issuance.
At December 31, 2004, stock warrants outstanding were as follows:
Average
Exercise
Shares Price
---------- ----------
Balance at January 1, 2004 315,666 $ .50
Granted 48,302,373 $ .005
Exercised --
Cancelled --
---------- ----------
Balance at December 31, 2004 48,618,039 $ .008
========== ==========
15
SENSOR SYSTEM SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
Additional information regarding stock purchase warrants outstanding as of
December 31, 2004 is as follows:
Warrants outstanding Warrants exercisable
--------------------------- ---------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Exercise price outstanding life (years) price exercisable price
-------------- ----------- ------------ --------- ----------- --------
$0.50 815,666 4.5 $ 0.50 816,666 $ 0.50
47,802,373
$.0001 (A) 3.0 $ .0001 47,802,373 $ .0001
(A) See Note 12 for subsequent exercise of warrants
NOTE 11 COMMITMENT AND CONTINGENCIES
Operating Leases
The Company leases its office and facility through 2007 under a long term
operating lease agreement. Under terms of the lease, the Company pays the cost
of repairs and maintenance. The office and warehouse facility is shared with
TransOptix, who signed the lease as co-tenant with the Company. The Company and
TransOptix have entered into an agreement stipulating each entities share of the
rent, however, in event of default by TransOptix, the Company could contingently
be liable for the full amount of the rent.
Future minimum lease commitments for the Company's share under this lease at
December 31, 2004 are as follows:
Year Ended December 31, Amount
----------------------------------------------------------- ----------
2005 $ 104,131
2006 104,906
2007 91,520
----------
$ 300,557
==========
The total lease commitment as of December 31, 2004 for which the Company could
be contingently liable in the event of default of TransOptix is approximately
$650,000. Rent expense for the years ended December 31, 2004 and 2003 was
$122,905 and $116,588 respectively.
NOTE 12 SUBSEQUENT EVENTS
On January 26, 2005, in relation to the Merger, warrants for 47,802,373 shares
of common stock were exercised for $ 0.001 per share.
On February 3, 2005 and February 22, 2005, two notes payable for $50,000 and
$200,000, respectively, were issued. The notes are secured by all assets of the
Company, interest is payable at 8% per annum, and the notes mature February 3,
2006 and February 22, 2006, respectively. At maturity, the notes are convertible
at the holder's option at a conversion price equal to 70% of the weighted
average price of the common stock for the 30 trading days immediately preceding
the conversion date. In addition, each note has warrants attached that, once the
note is converted into stock, allow the holder to purchase stock at 85% of the
weighted average price of the common stock for the 30 trading days immediately
preceding the conversion date.
NOTE 13 REVISION TO PREVIOUSLY FILED FINANCIAL STATEMENTS
This revision to the Company's financial statement that are included in its Form
10-KSB for the year ended December 31, 2004 revises the per share value of
compensatory stock granted on December 4, 2004 to five individuals, including
two directors of the Company. The 7,500,000 shares had originally been valued at
$0.24 each or $1,800,000 in total. This was revised to reflect that 1,500,000
shares were treated as compensatory stock with a fair market value of $1.20 per
share for a total of $1,800,000 and the remaining 6,000,000 shares were treated
as a stock dividend in the amount of $7,200,000. All share and per share amounts
were also revised to reflect the effects of the grant as if it had occurred at
the date of the merger with ACSI. There was no change to total assets as of
December 31, 2004 or net loss for the year then ended.
Stockholders' deficiency was revised as follows:
December 31, 2004
--------------------------------------------------
As previously reported As currently reported
----------------------- -----------------------
Common stock $ 3,977 $ 3,977
Common stock to be issued 2,100,000 9,300,000
Additional paid in capital 4,867,790 4,867,790
Deferred compensation (186,400) (186,400)
Accumulated deficit (7,808,558) (15,008,558)
----------------- -------------------
Total stockholders' deficiency $ (1,023,191) $ (1,023,191)
================= ===================
Loss per common share and weighted average shares outstanding were revised as
follows:
For the year ended December 31, 2004
--------------------------------------------------
As previously reported As currently reported
----------------------- -----------------------
Loss per common share $ (1.12) $ (0.46)
=========== ============
Weighted average shares outstanding 3,280,831 7,920,079
=========== ============
16