U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2005
or
|_| Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From ___________ to ___________
Commission File number 0-024828
SENSOR SYSTEM SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 98-0204898
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45 Parker Avenue, Suite A
Irvine, California 92618
(Address of principal executive offices)
(949) 855-6688
(Issuer's telephone number)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes |_| No |X|
As of November 15, 2005 there were 61,705,019 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements: (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2005
(unaudited) and December 31, 2004 1
Condensed Consolidated Statements of Operations for three months and
nine months ended September 30, 2005 and 2004 (unaudited) 2
Condensed Consolidated Statement of Changes in Stockholders'
Deficiency for the nine months ended September 30, 2005 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-12
Item 2. Management's Discussion and Analysis or Plan of Operations 13-18
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 19
Item 2. Changes In Securities and Small Business Issuer Purchases of
Equity Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission Of Maters To a vote Of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 (Unaudited)
and December 31, 2004
ASSETS
September 30,
2005 December 31,
CURRENT ASSETS (Unaudited) 2004
----------- -----------
Cash $ 11,981 $ 17,115
Accounts receivable, net 139,230 100,530
Inventory 278,788 220,445
Prepaids and other current assets 14,148 24,552
----------- -----------
Total current assets 444,147 362,642
Property and equipment, net 255,753 320,717
Other assets 54,112 54,112
----------- -----------
Total assets $ 754,012 $ 737,471
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,250,822 $ 720,817
Notes payable 505,347 263,923
Notes payable, related parties 358,076 718,133
Current portion of capital lease obligations 7,819 7,819
Current portion of deferred rent concession 4,757 5,258
----------- -----------
Total current liabilities 2,126,821 1,715,950
----------- -----------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 28,429 34,199
Deferred rent concession, net of current portion 6,514 10,513
----------- -----------
34,943 44,712
----------- -----------
Commitments and contingencies -- --
STOCKHOLDERS' DEFICIENCY (see Note 8)
Preferred stock, $.001 par value, 20,000,000
shares authorized, none outstanding -- --
Common stock, $.001 par value, 180,000,000
shares authorized, 59,279,241 and 3,976,868 shares issued and outstanding 59,279 3,977
Common stock to be issued (15,404,871 and 7,700,000 shares) 878,512 9,300,000
Additional paid-in capital 13,861,002 4,867,790
Deferred compensation (39,612) (186,400)
Accumulated deficit (16,166,933) (15,008,558)
----------- -----------
Total stockholders' deficiency (1,407,752) (1,023,191)
----------- -----------
Total liabilities and stockholders' deficiency $ 754,012 $ 737,471
=========== ===========
See accompanying notes to condensed financial statements.
1
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For three and nine months ended September 30, 2005 and 2004 (Unaudited)
For three months ended For nine months ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales, net $ 347,061 $ 161,726 $ 855,332 $ 465,202
Cost of goods sold 191,545 211,701 565,389 423,484
------------ ------------ ------------ ------------
Gross profit (loss) 155,516 (49,975) 289,943 41,718
------------ ------------ ------------ ------------
Operating expenses 405,733 355,494 1,169,982 760,810
Amortization of discount on notes payable
and finance costs 86,876 197,267 278,336 415,713
------------ ------------ ------------ ------------
Total operating expenses 492,609 552,761 1,448,318 1,176,523
------------ ------------ ------------ ------------
Net loss $ (337,093) $ (602,736) $ (1,158,375) $ (1,134,805)
============ ============ ============ ============
Loss per common share, basic and diluted $ (.01) $ (.05) $ (.02) $ (.17)
============ ============ ============ ============
Weighted average shares outstanding, basic and
diluted, including effects of in-kind stock
splits. (See Note 8) 59,279,241 11,476,868 59,279,241 6,734,483
============ ============ ============ ============
See accompanying notes to condensed financial statements.
2
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For nine months ended September 30, 2005 (Unaudited)
Common Stock Common Stock to be issued
Additional
paid-in Deferred Accumulated
Shares Amount Shares Amount capital compensation deficit Total
----------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
Balance January 1,
2005 (See Note 8) 3,976,868 $ 3,977 7,700,000 $ 9,300,000 $ 4,867,790 $ (186,400) $(15,008,558) $(1,023,191)
Forfeiture of
stock options -- -- -- -- (112,200) 112,200 -- --
Compensatory stock
issued 1,500,000 1,500 (1,500,000) (1,800,000) 1,798,500 -- -- --
Stock dividend issued 6,000,000 6,000 (6,000,000) (7,200,000) 7,194,000 -- -- --
Warrants exercised by
shareholders from
merger 47,802,373 47,802 -- -- (47,802) -- -- --
Common stock to be
issued
for settlement of
debt -- -- 14,793,290 262,500 -- -- -- 262,500
Common stock to be
issued
for settlement of
debt -- -- 411,581 316,012 -- -- -- 316,012
Intrinsic value of
common stock warrants
issued with
note payable -- -- -- 160,714 -- -- 160,714
Amortization of
deferred
Compensation -- -- -- -- 34,588 -- 34,588
Net loss -- -- -- -- -- (1,158,375) (1,158,375)
----------- ----------- ----------- ----------- ----------- ----------- ------------ -----------
Balance September
30, 2005 59,279,241 $ 59,279 15,404,871 $ 878,512 $13,861,002 $ (39,612) $(16,166,933) $(1,407,752)
=========== =========== =========== =========== =========== =========== ============ ===========
See accompanying notes to condensed financial statements.
3
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net loss $(1,158,375) $(1,134,805)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 71,464 83,807
Amortization of discount on notes payable 270,837 400,646
Amortization of deferred compensation 34,588 58,204
Net loss from assets held for disposal -- 29,216
Changes in operating assets and liabilities:
Accounts receivable (38,700) (59,448)
Inventory (58,343) (6,340)
Prepaids and other current assets 10,404 (29,864)
Deferred rent (4,500) --
Accounts payable and accrued expenses 581,017 222,562
----------- -----------
Net Cash Used In Operating Activities (291,608) (436,022)
----------- -----------
Cash flows from investing activities:
Deposit -- (29,377)
Purchase of property and equipment (6,500) (51,927)
----------- -----------
Net Cash Used In Investing Activities (6,500) (81,304)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 298,744 500,00
Principal payments on capital leases (5,770) 43,823
----------- -----------
Net Cash Provided By Financing Activities 292,974 543,823
----------- -----------
Net (decrease) increase in cash and cash equivalents (5,134) 26,497
Cash and cash equivalents, beginning of period 17,115 10,712
----------- -----------
Cash and cash equivalents, end of period $ 11,981 $ 37,209
=========== ===========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 9,914 $ 10,131
=========== ===========
Taxes $ 800 $ 800
=========== ===========
Non-cash investing and financing activities:
Forfeiture of stock options $ 112,200 $ --
Compensatory stock issued 1,800,000 --
Warrants exercised by shareholders from merger 47,802 --
Conversion of notes payable to common stock to be issued 578,512 --
Accrued interest added to notes payable principal 51,012 60,663
Discount related to warrants and convertible notes 160,714 278,730
Acquisition of equipment through capital lease obligations -- 47,365
4
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information included herein is unaudited. The interim consolidated
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, considered necessary for a fair
presentation of the Company's consolidated financial position and results of
operations for the periods presented. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes presented in the Company's Form 10-KSB for the year ended December 31,
2004. Interim operating results are not necessarily indicative of operating
results expected for the entire year.
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.
Going concern
The Company incurred a net loss of $1,158,375 and a negative cash flow from
operations of $291,608 for nine months ended September 30, 2005, and had a
working capital deficiency of $1,682,674 and a stockholders' deficiency of
$1,407,752 at September 30, 2005. 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 September 30, 2005, 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 had a substantial working capital deficit. On October 6, 2005, the
Company has secured a total of $15,600,000 in financing with Cornell Capital
Partners, LP (Cornell) to support the continued development and growth of the
Company.
Under the agreement, Cornell has committed to provide up to $15 million of
funding in the form of a Standby Equity Distribution Agreement (SEDA) to be
drawn down over a 24-month period at the Company's discretion. In addition, the
Company sold an aggregate of $600,000 of fixed price Secured Convertible
Debentures to Cornell.
The Company is seeking additional $1,000,000 bridge financing to further develop
into a fully-equipped public company in order to take advantage of the SEDA
funding for its long-term plan. However, no assurance can be given that such
funds will be available or the term thereof. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Principles of consolidation
The consolidated financial statements for the nine months ended September 30,
2005 and 2004 include the accounts and operations of Sensor Systems Solutions
Inc. and its wholly owned subsidiary. Intercompany accounts and transactions
have been eliminated in consolidation.
5
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
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.
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 for the nine months ended September 30,
2005.
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:
Nine months ended
September 30:
2005 2004
----------- -----------
Net loss $(1,158,375) $(1,134,805)
Add: Stock-based expense included in net loss 34,588 58,204
Deduct: Fair value based stock-based expense (39,160) (26,900)
----------- -----------
Pro forma net loss $(1,162,947) $(1,103,501)
=========== ===========
Basic and diluted earnings per share:
As reported $ (.02) $ (.17)
Pro forma under SFAS No. 123 $ (.02) $ (.16)
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 Note 8). Diluted
earnings per common share are based on shares outstanding (computed as under
basic EPS) and potentially dilutive common shares. As of September 30, 2005 and
2004, 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. The exercise of the shareholder warrants was accounted for in
earnings per share as a stock split retroactive to the May 24, 2004 merger as
discussed in Note 5.
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 the Company's consolidated
financial statement.
6
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (R), "Share-Based
Payment" ("SFAS 123(R)"). SFAS No. 123 (R) revises SFAS 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123 (R) requires companies to
recognize in the statement of operations the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions).SFAS 123 (R) is effective as of the
first interim or annual reporting period of the first fiscal year that begins
after June 15, 2005 for small business issuers. Accordingly, the Company will
adopt SFAS 123 (R) in its quarter ending March 31, 2006.
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.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This Statement replaces APB No. 20, "Accounting Changes" and FASB
No. 3, "Reporting Accounting Changes in Interim Financial Statements", and
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement includes specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. This Statement requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The adoption of
SFAS No. 154 did not have an impact on the Company's consolidated financial
statements.
NOTE 2 INVENTORY
Inventory consists of the following:
September 30,
2005 December 31,
(unaudited) 2004
---------- ----------
Raw materials $ 154,390 $ 149,840
Work in process -- 1,749
Finished goods 124,398 68,856
---------- ----------
$ 278,788 $ 220,445
========== ==========
7
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 3 NOTES PAYABLE
Notes payable consist of the following :
September 30,
2005 December 31,
(unaudited) 2004
--------- ---------
Two lines of credit, unsecured, interest payable monthly at 9.25%
and 10.0% per annum, due on demand $ 92,983 $ 92,983
Note payable, unsecured, interest payable monthly at prime + 3% per annum (prime
rate at September 30, 2005 was 6.75%), due on demand 40,000 40,000
Note payable, unsecured, interest payable monthly at 10% per annum, payable as a
percentage of any future private or public stock offerings 90,000 90,000
Note payable, unsecured, interest payable at 8% per annum, due on
maturity date 48,745 --
Three notes payable, secured by all assets of the Company, interest at 8% per
annum, payable at various maturities through February 21, 2006. At December 31,
2004, there were two notes payable totaling $ 90,000. On February 22, 2005, a
note payable for $200,000 was issued. 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 aggregate intrinsic value of the beneficial
conversion feature of the notes and warrants, valued at $186,571 (of which
$128,571 is related to the note issued in 2005), has been recorded as loan
discount costs and are being amortized over the life of the respective note as
additional interest cost 290,000 90,000
Less remaining debt discount (56,381) (49,060)
--------- ---------
$ 505,347 263,923
========= =========
8
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 4 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following:
September 30,
2005 December 31,
(unaudited) 2005
--------- ---------
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.
The note payable was originally issued by Advanced Custom Sensors, Inc. (ACSI),
which merged with the company in 2004. In connection with the note payable, the
ACSI issued warrants expiring September 17, 2008, to purchase 190,665 shares of
ACSI's common stock at $.50 per share (The ACSI warrant is convertible into
5,372,940 shares of the Company's stock). The intrinsic value of the warrants
($190,665) 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. $ 190,665 $ 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. The
note payable was originally issued by ACSI in 2003, at which time ACSI issued a
warrant expiring September 17, 2008, to purchase 100,000 shares of stock at $.50
per share (the ACSI warrant is convertible into 2,817,215 shares of the
Company's common stock. The intrinsic value of the original warrant ($100,000)
recorded as a loan discount cost, and was amortized over the life of the
original note as additional interest cost The original note was due September
16, 2204. On September 16, 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 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. 110,000 110,000
Note payable to an employee of the Company, secured by all assets of the
Company, interest at 8.0% per annum, due November 11, 2005. At maturity, the
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 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 20,000
9
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
Note payable to shareholder, secured by all assets of the Company, interest at
8.0% per annum, due February 3, 2006. At maturity the 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 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 $32,143, has been recorded as loan discount
costs and is being amortized over the life of the note as additional interest
cost. 50,000 --
Note payable, secured by accounts receivable of the Company, interest at 10%,
due February 11, 2005. The note payable was originally issued by ACSI In
connection with the note payable, ACSI issued a warrant to purchase 500,000
shares of stock at$.50 per share (the ACSI warrant is 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. On March 15, 2005, the warrant was 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
Notes 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. 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 costs and
is amortized over the life of the new note. On March 18, 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 (12,589) (130,032)
--------- ---------
$ 358,076 $ 718,133
========= =========
10
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 5 STOCKHOLDERS' EQUITY
On May 29, 2003, Advanced Custom Sensors, Inc. (ACSI) signed an agreement with
Duke Capital to retain its consulting service for merger transaction with
Spectre Industries and to obtain a $250,000 unsecured bridge financing in order
to finance all the expense in merger. However, Duke failed to perform to ACSI's
expectation; ACSI decided to cancel its agreement with Duke before the merger
was completed. On September 3, 2004, the Company agreed to issue 200,000 shares
of common stock for the settlement this agreement. As an agreement was
consummated and an exchange of debt had taken place, the Company recorded the
stock to be issued as an equity transaction. This is a fixed number and will not
change with market value.
On May 24, 2004, Sensor System Solutions (formerly known as Spectre Industries,
Inc.,) a Nevada corporation, entered into an agreement and plan of merger with
ACSI. Sensor issued 2,584,906 shares of its common stock and 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 January 29,
2005, warrants for the 47,802,464 shares of common stock were exercised. The
Company recorded the par value of the stock issued ($47,802) as an increase in
common stock and a reduction to additional paid in capital in the accompanying
financial statements.
NOTE 6 COMMITMENTS AND CONTINGENCIES
The Company leases its office and facility through 2007 under a long term
operating lease agreement. The office and warehouse facility is shared with
TransOptix Inc. (TransOptix), who signed the lease as co-tenant with the
Company. The Company and TransOptix had entered into an agreement stipulating
each entity's share of the rent. The Company owns 7.5% of TransOptix. The
Company's Chief Executive Officer is also the Chief Executive Officer of
TransOptix and owns 12% of TransOptix. On August 26, 2005, TansOptix filed for
Chapter 7 bankruptcy and the Company has taken over the whole facility and is
liable for the full amount of the lease. The total lease commitment as of
September 30, 2005 for which the Company was liable with the default of
TransOptix increased from approximately $196,000 to approximately $463,000.
NOTE 7 SUBSEQUENT EVENT
On October 6, 2005, the Company secured a total of $15,600,000 in financing with
Cornell Capital Partners, LP ("Cornell") to support the continued development
and growth of the Company. Under the agreement, Cornell has committed to provide
up to $15 million of funding in the form of a Standby Equity Distribution
Agreement ("SEDA") to be drawn down over a 24-month period at the Company's
discretion. In addition, the company sold an aggregate of $600,000 of fixed
price Secured Convertible Debentures to Cornell. The Company is seeking an
additional $1,000,000 in bridge financing to further develop into a
fully-equipped public company in order to take advantage of the SEDA funding for
its long-term plan. However, no assurance can be given that such funds will be
available or the term thereof.
On October 19, 2005, the Company issued the 200,000 shares of common stock to a
lender as part of the Company's payment agreement with the lender in 2004.
On October 19, 2005, the Company issued 725,778 shares of common stock to a
lender for warrants exercised by the lender in March 2005. The shares are shown
as common stock to be issued at September 30, 2005.
11
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 8 REVISION TO PREVIOUSLY FILED FINANCIAL STATEMENTS
The Company filed an amendment to its Form 10-KSB for the year ended December
31, 2004 to revise 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 or net loss as of December
31, 2004 and for the year then ended.
Stockholders' deficiency was revised as follows:
December 31, 2004 September 30, 2005
----------------------------------------------- -----------------------------------------------
As previously reported As currently reported As previously reported As currently reported
---------------------- --------------------- ---------------------- ---------------------
Common stock $ 3,977 $ 3,977 $ 59,279 $ 59,279
Common stock to be issued 2,100,000 9,300,000 878,512 878,512
Additional paid in capital 4,867,790 4,867,790 6,661,002 13,861,002
Deferred compensation (186,400) (186,400) (39,612) (39,612)
Accumulated deficit (7,808,558) (15,008,558) (8,966,933) (16,166,933)
---------------------- --------------------- ---------------------- ---------------------
Total stockholders' deficiency $ (1,023,191) $ (1,023,191) $ (1,407,752) $ (1,407,752)
====================== ===================== ====================== =====================
Loss per common share and weighted average shares outstanding were revised as
follows:
For three months ended Sept. 30, 2004 For nine months ended Sept. 30, 2004
---------------------------------------------- ----------------------------------------------
As previously reported As currently reported As previously reported As currently reported
---------------------- --------------------- ---------------------- ---------------------
Loss per common share $ (.01) $ (.05) $ (.04) $ (.17)
====================== ===================== ====================== =====================
Weighted average shares
outstanding 59,279,241 11,476,868 27,896,071 6,734,483
====================== ===================== ====================== =====================
12
Item 2. Management's Discussion and Analysis or Plan of Operation.
Cautionary Statement
Statements in this report on Form 10-QSB that are forward-looking are based on
current expectations. Actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties including, but not limited
to, the possibility that the demand for our products may decline as a result of
possible changes in general and industry specific economic conditions, the
effects of competitive pricing and such other risks and uncertainties as are
described in this report on Form 10-QSB and other documents previously filed or
hereafter filed by us from time to time with the Securities and Exchange
Commission. All forward-looking statements speak only as of the date made, and
we undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
Sensor System Solutions, Inc. (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 Joint Venture agreement with China Automotive
Systems, Inc. (NASDAQ: CAAS) in April of 2005 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.
PLAN OF OPERATION
We plan to grow our business in four areas.
|X| Increase the revenue of existing sensor component business. 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 more OEM projects.
|X| 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.
|X| Penetrate automotive sensor market through China. By leveraging 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 plan to import automotive sensors produced by our joint venture to North
America and Europe around 2008.
|X| Strategic acquisitions: Being a public company and having better access to
the capital markets that this affords, provides us with the means to grow our
business through acquisitions as well as through internal growth. We will
actively seek equity or debt funding to bring in the necessary resources to
execute this plan.
13
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 and 2004
Revenues
We generated revenues of $347,061 for the three months ended September 30, 2005,
which was an increase of $185,335 or 115% from the $161,726 for the three months
ended September 30, 2004. The increase is the result of the continuing sales
efforts, the addition of new sales representatives and the introduction of new
products.
Gross Profit
Gross profit for the three months ended September 30, 2005, was $155,516 or
44.8% of revenues, compared to ($49,975) or (30.9%) for the three months ended
September 30, 2004. The $205,491 increase in gross profit was mainly due to the
increase in sales and lower fixed costs included in cost of goods sold for the
current quarter versus the third quarter in the prior year.
Total Operating Expenses
Operating expenses
Operating expenses increased 14% to $405,733 for the three months ended
September 30, 2005 compared to $355,494 for the three months ended September 30,
2004. The expenses increased $50,239, primarily as a result of an increase in
payroll costs.
Amortization of discount on notes payable and finance costs
Amortization of discount on notes payable and finance costs decreased to $86,876
for the three months ended September 30, 2005 compared to $197,267 for the three
months ended September 30, 2004. The expense decreased $110,391, or 56%,
primarily due to the settlement of two notes payable, Sino-American, Inc and Pei
Jen Hsu.
Net Loss
Net loss from operations decreased to ($337,093) for the three months ended
September 30, 2005 compared to ($602,736) for the three months ended September
30, 2004. The $265,643 decrease in net loss was primarily due to the increase in
revenue and resulting improvement in gross profit.
Nine Months Ended September 30, 2005 and 2004
Revenues
We increased revenues 84% to $855,332 for the nine months ended September 30,
2005, which was an increase of $390,130, when compared to revenues of $465,202
for the same period last year. The increase was the result of the continuing
sales efforts, the addition of new sales representatives and the introduction of
new products.
Gross Profit
Gross profit for the nine months ended September 30, 2005 grew to $289,943 or
34% of revenues, compared to $41,718 or 9% for the nine months ended September
30, 2004. The $248,225 increase in gross profit was generated by the increase in
revenues and higher utilization of production capacity.
Total Operating Expenses
Operating expenses
Operating expenses increased to $1,169,982 for the nine months ended September
30, 2005 compared to $760,810 for the nine months ended September 30, 2004. The
expenses increased $409,172, primarily as a result of an increase in interest
expense and additional investment in R&D personnel and development, and
professional fees for a public company.
Amortization of discount on notes payable and finance costs
Amortization of discount on notes payable and finance costs decreased to
$278,336 for the nine months ended September 30, 2005 compared to $415,713 for
the nine months ended September 30, 2004. The expense decreased $137,377, or
33%, primarily due to the settlement of two notes payable, Sino-American, Inc
and Pei Jen Hsu.
14
Net Loss
Net loss increased to ($1,158,375) for the nine months ended September 30, 2005
compared to ($1,134,805) for the nine months ended September 30, 2004. The small
increase of $23,570 in net loss was primarily due to the $224,230 increase in
gross profit, an $137,377 decrease in finance cost expense, and offset by
increases in interest expense, additional investment in R&D, and professional
fees associated with being a public company.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
Going Concern
The Company incurred a net loss of $1,158,375 and a negative cash flow from
operations of $291,608 for the nine months ended September 30, 2005, and had a
working capital deficiency of $1,682,674 and a stockholders' deficiency of
$1,407,752 at September 30, 2005. At September 30, 2005, cash was $11,981 as
compared to $17,115 at December 31, 2004. The decrease is due to the increase in
operating expense.
The Company had a substantial working capital deficit. On October 6, 2005, the
Company secured a total of $15,600,000 in financing with Cornell Capital
Partners, LP ("Cornell") to support the continued development and growth of the
Company.
Under the agreement, Cornell has committed to provide up to $15 million of
funding in the form of a Standby Equity Distribution Agreement ("SEDA") to be
drawn down over a 24-month period at 3S' discretion. In addition, 3S sold an
aggregate of $600,000 of fixed price Secured Convertible Debentures to Cornell.
The Company is seeking an additional $1,000,000 in bridge financing to further
develop into a fully-equipped public company in order to take advantage of the
SEDA funding for its long-term plan. However, no assurance can be given that
such funds will be available or the term thereof.
Commitments and Contingencies
We have the following material contractual obligations and capital expenditure
commitments:
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:
Amount
-------------------------------------------- ---------------------
Three months ended December 31, 2005 $3,183
2006 12,732
2007 12,732
2008 12,732
2009 3,543
---------------------
44,922
Amount representing interest (8,674)
---------------------
Present value of minimum lease payments 36,248
Less: Current portion (7,819)
---------------------
$ 28,429
=====================
15
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 was shared with
TransOptix, which signed the lease as co-tenant with the Company. The Company
and TransOptix had entered into an agreement stipulating each entities share of
the rent. However, TransOptix has filed for Chapter 7 bankruptcy and the Company
has taken over the whole facility and is liable for the full amount of the
lease.
Future minimum lease commitments for this lease at September 30, 2005 are as
follows:
Amount
Three months ended December 31, 2005 $ 61,275
2006 250,900
2007 151,095
---------------------
$463,270
=====================
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
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 the company's consolidated
financial statements.
In December 2004, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment"
("SFAS 123 (R)"). SFAS 123 (R) revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123 (R) focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123 (R) requires companies to recognize
in the statement of operations the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (with limited exceptions). SFAS 123 (R) is effective as of the
first interim or annual reporting period of the first fiscal year that begins
after June 15, 2005 for non-small business issuers, and after the first fiscal
year that begins after December 15, 2005 for small business issuers.
Accordingly, the Company will adopt SFAS 123 (R) in its quarter ending March 31,
2006.
16
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
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. This Statement replaces APB No. 20, Accounting Changes and FASB No.
3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies it all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement includes specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This Statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. The adoption of SFAS No. 154 is not
expected to have an impact on the Company's consolidated financial statements.
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. Even with the
$15,600,000 financing agreement signed with Cornell on October 6, 2005, we
believe that we still 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 bridge financing
to bring our products into commercial operation, finance working capital and pay
for operating expenses and capital requirements until we can take advantage of
the SEDA funding from Cornell. In particular, additional capital may be required
in the event that:
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 September 30, 2005, 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
9 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.
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 ARRANGMENTS
There are no Off-Balance Sheet Arrangements to report.
18
Item 3. Controls And Procedures
(a) 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 Quarterly Report on Form 10-QSB.
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 ineffective 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.
(b) Changes in Internal Controls.
During the period covered by the Quarterly Report on Form 10-QSB, there were no
significant changes in our internal controls over financial reporting or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes In Securities and Small Business Issuer Purchases of Equity
Securities.
None.
Item 3. Defaults Upon Senior Securities.
The $190,665 promissory note due to Tina Young matured on December 31, 2004. The
Company is currently negotiating a settlement.
The $110,000 convertible loan due to Tina Young matured on March 16, 2005. The
Company is currently negotiating a settlement.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENSOR SYSTEM SOLUTIONS, INC.
Dated: March 27, 2006
/s/ Michael Young
--------------------------------------------
Name: Michael Young
Title: Chief Executive Officer and Principal
Accounting Officer
20