U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 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 98-0226032
(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 August 1, 2005 there were 59,279,241 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 June 30, 2005 (unaudited) 1
and December 31, 2004.
Condensed Consolidated Statements of Operations for three months and
six-months ended June 30, 2005 and 2004 (unaudited) 2
Condensed Consolidated Statement of Changes in Stockholders'
Deficiency for the six-months ended June 30, 2005 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the six-months
ended June 30, 2005 and 2004 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-10
Item 2. Management's Discussion and Analysis or Plan of Operations 16-19
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 20
Item 2. Changes In Securities and Small Business Issuer Purchases of
Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission Of Maters To a vote Of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2005 (Unaudited)
and December 31, 2004
ASSETS
June 30, 2005 December 31,
CURRENT ASSETS (Unaudited) 2004
------------ ------------
Cash $ 5,118 $ 17,115
Accounts receivable 116,326 100,530
Inventory 254,693 220,445
Prepaids and other current assets -- 24,552
------------ ------------
Total current assets 376,137 362,642
Property and equipment, net 268,885 320,717
Other assets 54,112 54,112
------------ ------------
Total assets $ 699,134 $ 737,471
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 994,191 $ 720,817
Notes payable 391,423 263,923
Notes payable, related parties 343,879 718,133
Current portion of capital lease obligations 7,819 7,819
Current portion of deferred rent concession 4,754 5,258
------------ ------------
Total current liabilities 1,742,066 1,715,950
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 30,414 34,199
Deferred rent concession, net of current portion 8,017 10,513
------------ ------------
38,431 44,712
------------ ------------
Commitments and contingencies -- --
STOCKHOLDERS' DEFICIENCY
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 2,100,000
Additional paid-in capital 6,674,202 4,867,790
Deferred compensation (63,516) (186,400)
Accumulated deficit (8,629,840) (7,808,558)
------------ ------------
Total stockholders' deficiency (1,081,363) (1,023,191)
------------ ------------
Total liabilities and stockholders' deficiency $ 699,134 $ 737,471
============ ============
See accompanying notes to condensed consolidated financial statements.
1
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2005 and 2004 (Unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales, net $ 303,256 $ 196,197 $ 508,271 $ 303,476
Cost of goods sold 226,570 104,976 373,844 205,533
------------ ------------ ------------ ------------
Gross profit 76,686 91,221 134,427 97,943
------------ ------------ ------------ ------------
Operating expenses 433,693 232,117 764,249 411,567
Amortization of discount on notes payable 36,339 157,834 191,460 218,446
------------ ------------ ------------ ------------
Total operating expenses 470,032 389,951 955,709 630,013
------------ ------------ ------------ ------------
Net loss $ (393,346) $ (298,730) $ (821,282) $ (532,070)
============ ============ ============ ============
Loss per common share, basic and diluted
$ (.01) $ (.01) $ (.01) $ (.04)
============ ============ ============ ============
Weighted average shares outstanding, basic and
diluted 59,279,241 25,262,603 59,279,241 11,855,830
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For the six-months ended June 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 3,976,868 $ 3,977 7,700,000 $ 2,100,000 $4,867,790 (186,400) $(7,808,558) $(1,023,191)
Forfeit of stock
options -- -- -- -- (99,000) 99,000 -- --
Compensatory stock
issued 7,500,000 7,500 (7,500,000) (1,800,000) 1,792,500 -- -- --
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 -- -- -- -- -- 23,884 -- 23,884
Net loss -- -- -- -- -- -- (821,282) (821,282)
----------- -------- ----------- ----------- ---------- ----------- ----------- -----------
Balance June 30, 2005 59,279,241 $ 59,279 $15,404,871 $ 878,512 $6,674,202 $ (63,516) $(8,629,840) $(1,081,363)
=========== ======== =========== =========== ========== =========== =========== ===========
3
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For six months ended June 30, 2005 and 2004 (Unaudited)
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (821,282) $ (532,070)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 51,832 57,363
Amortization of discount on notes payable 191,460 218,446
Amortization of deferred compensation 23,884 24,750
Net loss from assets held for disposal -- 29,216
Changes in operating assets and liabilities:
Accounts receivable (15,796) (50,366)
Inventory (34,249) (12,914)
Prepaids and other current assets 24,552 (41,559)
Deferred rent (3,000)
Accounts payable and accrued expenses 324,387 80,050
------------ ------------
Net Cash Used In Operating Activities (258,212) (227,084)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment -- (4,562)
------------ ------------
Cash flows from financing activities:
Advance from shareholder and others -- 13,000
Proceeds from notes payable 250,000 250,000
Principal payments on capital leases (3,785) (1,979)
------------ ------------
Net Cash Provided By Financing Activities 246,215 261,021
------------ ------------
Net (decrease) increase in cash and cash equivalents (11,997) 29,375
Cash and cash equivalents, beginning of period 17,115 10,712
------------ ------------
Cash and cash equivalents, end of period $ 5,118 $ 40,087
============ ============
Supplemental disclosure of cash flow information Cash paid for:
Interest $ 9,914 $ 6,110
============ ============
Taxes $ 800 $ 800
============ ============
Non-cash investing and financing activities:
Forfeiture of stock options $ 99,000 $ --
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 26,968
Discount related to warrants and convertible notes 160,714 225,997
Acquisition of equipment through capital lease obligations -- 47,365
See accompanying notes to condensed consolidated financial statements.
4
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 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
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 $821,282 and a negative cash flow from
operations of $258,212 for six months ended June 30, 2005, and had a
working capital deficiency of $1,365,929 and a stockholders' deficiency of
$1,081,363 at June 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
June 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 has a substantial working capital deficit. The Company's
ability to implement its strategic plan related to acquisitions and
production of new products as well as to continue operations will require
additional capital. Therefore, the Company is actively seeking additional
funds in the form of debt or equity or combination thereof. 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 six months ended June 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.
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
5
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
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 six months ended June 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:
Six months ended June 30:
2005 2004
------------ ------------
Net loss $ (821,282) $ (532,070)
Add: Stock-based expense included in net loss 23,884 24,750
Deduct: Fair value based stock-based expense (25,960) (26,900)
------------ ------------
Pro forma net loss $ (823,358) $ (534,220)
============ ============
Basic and diluted earnings per share:
As reported $ (.01) $ (0.04)
Pro forma under SFAS No. 123 $ (.01) $ (0.04)
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. Diluted
earnings per common share are based on shares outstanding (computed as
under basic EPS) and potentially dilutive common shares. As of June 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.
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.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method. Accordingly,
6
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
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 include 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.
NOTE 2 INVENTORY
Inventory consists of the following at:
June 30,
2005 December 31,
(unaudited) 2004
----------- ------------
Raw material $ 146,280 $ 149,840
Work in process -- 1,749
Finished Goods 108,413 68,856
---------- ----------
$ 254,693 $ 220,445
========== ==========
NOTE 3 NOTES PAYABLE
Notes payable consist of the following at:
June 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 $ 92,984 $ 92,984
Note payable, unsecured, interest payable monthly at prime + 3% per annum
(prime rate at June 30, 2005 was 6.00%), 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
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
7
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
June 30,
2005 December 31,
(unaudited) 2004
------------ ------------
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 (121,561) (49,061)
------------ ------------
$ 391,423 $ 263,923
============ ============
NOTE 4 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following at:
June 30,
2005 December 31,
(unaudited) 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. 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 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 $ 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, 2004. On September 16, 2004, a new
note 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
8
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
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
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 was 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 to shareholder, 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 were
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
9
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
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 were 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 (26,786) (130,032)
------------ ------------
$ 343,879 $ 718,133
============ ============
NOTE 5 STOCKHOLDERS' EQUITY
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 Advanced Custom Sensors, Inc. (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 47,802,373 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.
See Note 4 for issuance of stock and warrants to settle related party debt.
10
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
11
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.
PLAN OF OPERATION
We plan to grow our business in four areas.
o 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.
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 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.
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
Three months Ended June 30, 2005 and 2004
Revenues
We generated revenues of $303,256 for the three months ended June
30, 2005, which was $107,059 or a 55% increase from $196,197 for the three
months ended June 30, 2004. The increase is the result of the continuing
sales effort, the addition of new sales representatives and the
introduction of new products.
Gross Profit
Gross profit for the three months ended June 30, 2005, was $76,686
or 25.4% of revenues, compared to $91,221 or 46.5% for the three months
ended June 30, 2004. The $14,535 decrease in gross profit was mainly due
to late posting of inventory for new products in June 30, 2005.
Total Operating expenses
Operating expense
Operating expense increased to $433,693 for the three months ended
June 30, 2005 compared to $232,117 for the three months ended June 30,
2004. The expense increased $201,576, 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
Amortization of discount on notes payable decreases to $36,339 for
the three months ended June 30, 2005 compared to $157,834 for the three
months ended June 30, 2004. The expense decreased $121,495, or 77%,
primarily due to the settlement of two notes payable, Sino-American, Inc
and Pei Jen Hsu.
Net Loss
Net loss from operations increased to ($393,346) for the three
months ended June 30, 2005 compared to ($298,730) for the three months
ended June 30, 2004. The $94,616 increase in net loss was primarily due
to the increase in investment in R&D and production capacity, and the
additional cost for being a public company.
Six months Ended June 30, 2005 and 2004
Revenues
We generated revenues of $508,271 for the six months ended June 30,
2005, which was $204,795 or a 67% increase from $303,476 for the six
months ended June 30, 2004. The increase was the result of the continuing
sales effort, the addition of new sales representatives and the
introduction of new products.
Gross Profit .
Gross Profit for the six months ended June 30, 2005, was $134,427 or
26% of revenues, compared to $97,943 or 32% for the six months ended June
30, 2004. The $36,484 increase in gross profit was generated by the
increase in revenues.
Total Operating expenses
Operating expense
Operating expense increased to $764,249 for the six months ended
June 30, 2005 compared to $411,567 for the six months ended June 30, 2004.
The expense increased $352,682, primarily as a result of an increase in
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interest expense and additional investment in R&D personnel and
development, and professional fees for a public company.
Amortization of discount on notes payable
Amortization of discount on notes payable decreased to $191,460 for
the six months ended June 30, 2005 compared to $218,446 for the six months
ended June 30, 2004. The expense decreased $26,986, or 12%, primarily due
to the settlement of two notes payable, Sino-American, Inc and Pei Jen
Hsu.
Net Loss
Net loss increased to ($821,282) for the six months ended June 30,
2005 compared to ($532,070) for the six months ended June 30, 2004. The
$289,212 increase in net loss was primarily due to the $191,460 of notes
payable- debt discount costs along with the increase in investment in R&D
and production capacity, and the additional cost for being a public
company.
FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES
Going Concern
The Company incurred a net loss of $821,282 and a negative cash flow from
operations of $258,212 for six months ended June 30, 2005, and had a
working capital deficiency of $1,365,929 and a stockholders' deficiency of
$1,081,363 at June 30, 2005. These matters raise substantial doubt about
the Company's ability to continue as a going concern.
We have relied primarily on cash flow from operations, bank loans, and
advances and investments for our capital requirements since inception.
Current cash on hand will allow the Company to continue its operations for
one month.
At June 30, 2005, cash was $5,118 as compared to $17,115 at December 31,
2004. The decrease is due to the increase in operating expense. The
Company has a substantial working capital deficit. The Company's
ability to implement its strategic plan related to acquisitions and
production of new products as well as to continue operations will require
additional capital. Therefore, the Company is actively seeking additonal
funds in the form of debt or equity or combination thereof. However, no
assurance can be given that such funds will be available or the term
thereof. 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.
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:
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Six months ended June 30, Amount
--------------------------------------------------------------------------------- ---------------------
2005 $6,366
2006 12,732
2007 12,732
2008 12,732
2009 3,543
---------------------
48,105
Amount representing interest (11,133)
---------------------
Present value of minimum lease payments 36,972
Less: Current portion (7,819)
---------------------
$ 29,153
=====================
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, which 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 June 30, 2005 are as follows:
Six months ended June 30,
2005 $ 50,239
2006 106,382
2007 64,064
--------------
$ 220,685
==============
The total lease commitment as of June 30, 2005 for which the Company could
be contingently liable in the event of default of TransOptix is
approximately $579,725. Rent expense for the six months ended June 30,
2005 and 2004 was $59,766 and $58,579 respectively.
Inflation and Changing Prices
We doe 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
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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.
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
15
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. 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:
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
16
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.
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 June 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.
17
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 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.
(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.
19
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
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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: August 18, 2005 /s/ Michael Young
----------------------------------
Name: Michael Young
Title: Chief Executive Officer and
Principal
Accounting Officer
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