UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the fiscal year ended
- December 31, 2005
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For
the transition period from
|
Commission
file number
0-024828
SENSOR
SYSTEM SOLUTIONS, INC.
(Name
of
Small Business Issuer in Its Charter)
NEVADA
|
98-0204898
|
(State
or Other jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
|
45
Parker Avenue, Suite A
Irvine,
California 92618
(Address
of Principal Executive Offices, including zip code.)
(949)
855-6688
(Issuer’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
|
|
|
|
Title
of each class
|
Name
of each exchange on which registered
|
|
None
|
None
|
Securities
registered pursuant to Section 12(g) of the Act:
|
|
|
|
Title
of each class
|
Common
Stock
|
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by referenced in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB x
State
issuer's revenues for its most fiscal year
December 31, 2005:
$1,324,872.
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity.
As
of May 1, 2006, the value was $6.1 million.
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of
May 1, 2006: 76,586,112
|
PART
I
|
|
|
ITEM
1.
|
DESCRIPTION
OF BUSINESS.
|
|
|
ITEM
2.
|
DESCRIPTION
OF PROPERTY.
|
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
|
|
|
PART
II
|
|
|
ITEM
5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
|
|
|
ITEM
6.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR FINANCIAL PLAN OF OPERATION.
|
|
|
ITEM
7.
|
FINANCIAL
STATEMENTS.
|
|
|
ITEM
8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
|
|
ITEM
8A.
|
CONTROLS
AND PROCEDURES.
|
|
|
ITEM
8B.
|
OTHER
INFORMATION.
|
|
|
|
PART
III
|
|
|
ITEM
9.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(a) OF THE EXCHANGE ACT.
|
|
|
ITEM
10.
|
EXECUTIVE
COMPENSATION.
|
|
|
ITEM
11.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
|
|
ITEM
12.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
|
|
|
ITEM
13.
|
EXHIBITS.
|
|
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
|
|
SIGNATURES
|
|
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
Sensor
System Solutions, Inc. (the “Company” or “3S”) was incorporated in Nevada in
April 1982 under the name The Enchanted Village, Inc. As the result of the
March
13, 2004 acquisition of Advanced Custom Sensors, Inc., a California corporation
(“ACSI”), the Company is now in the business of design and manufacturing sensors
and signal conditioning modules.
Acquisition
of Advanced Custom Sensors
Pursuant
to an Agreement and Plan of Merger (the "Merger Agreement") dated as of March
13, 2004, by and among the Company, Spectre Merger Sub, Inc., a California
corporation and wholly owned subsidiary of the Company ("Merger Sub"), Ian
S.
Grant ("Shareholder") and ACSI, on May 24, 2004 (the "Closing Date"), Merger
Sub
merged with and into Advanced Custom Sensors, Inc. (“ACSI”) (the "Merger"). As a
result of the Merger, ACSI became a subsidiary of the Company. As consideration
for the Merger, the Company issued 2,584,906 shares of common stock and warrants
to purchase up to 47,802,373 shares of common stock to the shareholders of
ACSI.
The terms of the Merger were determined through arms-length negotiations between
the management of the Company and management of ACSI. We changed our company
name to Sensor System Solutions, Inc. in December 2004 to better represent
our
new focus. As such, the following results of operations are those of
ACSI.
Until
we
acquired ACSI, we had only nominal assets and liabilities and limited business
operations. Although ACSI became our wholly-owned subsidiary following the
acquisition, because the acquisition resulted in a change of control, the
acquisition was recorded as a "reverse merger" whereby ACSI is considered to
be
the accounting acquirer. Also, as a result of the acquisition, we have had
a
change of our financial position and our business. 3S is now a holding company
and after the Spin-Off, defined below, will have no significant operations
or
assets other than our interest in Advanced Custom Sensors, Inc. Since the
acquisition of ACSI, the Company has been engaged in the development,
manufacturing, marketing and distribution of high quality sensors and
transducers at an economical price by employing innovative designs and creative
manufacturing methods.
Spin-Off
of Spectre Holdings
On
December 15, 2004, in consideration for making and guaranteeing certain
representations, warranties and obligation in connection with the Agreement
and
Plan of Merger dated March 13, 2004 by and between the Company and ACSI, the
Company transferred 20,878,081 shares of common stock (the "Shares"), which
were
all of the issued and outstanding shares of Spectre Holdings, Inc., our then
wholly-owned subsidiary, to Ian Grant. As a result of the distribution of the
Shares, the Company no longer owns any stock of Spectre Holdings, Inc.
Advanced
Custom Sensors
ACSI
was
founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. Through ACSI,
3S offers a variety of digital pressure gauges,
pressure
transducers, pressure sensors, force beams, load cells, intelligent sensor
interface electronics, intelligent embedded control systems, and wireless
communication network interfaces. 3S produces or supplies a family of nearly
30
distinctive products. 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' 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.
Universal
Sensors, Inc.
In
April
2005, 3S, China Automotive Systems, Inc. (CAAS) and Shanghai Hongxi Investment
Inc. (HX) formed Universal Sensors, Inc. (USI), a joint venture in the People’s
Republic of China to develop, produce and market sensor and related electronic
products, targeting the Chinese automotive sensor market. 3S is transitioning
to
move its production line in Taiwan to this joint venture. The ownership
percentages of USI are 30%, 60% and 10% to 3S, CAAS and HX, respectively. CAAS
and HX will contribute cash, land and building by the end of 2006. 3S has
contributed technology. Since there was no cash contributed by 3S and the
technology it contributed was not recorded on its books, no investment in USI
was recorded. USI is in a start-up mode and had not begun operations as of
December 31, 2005. It is currently beginning its sales and marketing operations.
Strategic
Plan
We
plan
to grow our business in four areas.
· Increase
the revenue of our existing sensor component business.
Once
finalized, the majority of our sensor component manufacturing will be moved
to
our joint venture in China to help reduce the cost of our products. We will
invest to increase our production capacity and will qualify offshore suppliers
to meet the increasing demands. Substantial efforts will be invested in sales
and marketing in order to expand our customer base and to secure additional
OEM
projects.
· Develop
sensor solution business.
By
leveraging the advances in technology and the large industry-wide investments
in
wireless and telecommunication in the last decade, we can now offer total sensor
solutions at a very affordable price. These sensor solutions are modules
containing sensing elements, signal conditioning circuitry, software for
calibration and interface, and capability of wireless communication and/or
networking. They will provide information continuously to
decision makers in all phases of business operation.
· Penetrate
the automotive sensor market in China and India.
By
leveraging the marketing channel of USI, our joint venture partner, and X-Lab
Global, a leading technology advisory and strategic consulting firm, we will
have access to the automotive market in China and India immediately. We plan
to
use the next two years to build up our production capacity, product offerings
and technical team there. We expect to import automotive sensors produced by
our
joint venture to North America and Europe around 2008.
· Strategic
acquisition:
Being a
public company gives us a supplemental tool to grow our business through
acquisition in addition to internal growth. We will actively seek equity or
debt
funding to enable us to bring in the necessary resources to execute this
plan.
Industry
Overview
Micro-Electro-Mechanical
Systems, or MEMS, is the integration of mechanical elements, sensors, actuators
and electronics on a common silicon substrate through the utilization of
microfabrication technology. MEMS is an enabling technology, allowing the
development of smart products by augmenting the computational ability of
microelectronics with the perception and control capabilities of microsensors
and microactuators. MEMS is also an extremely diverse and fertile technology,
both with regard to applications and the methodology of how electronic devices
are designed and manufactured.
Microelectronic
integrated circuits (“IC’s”) can be thought of as the "brains" of systems and
MEMS augments this decision-making capability with "eyes" and "arms" to allow
microsystems to sense and control the environment. In its most basic form,
the
sensors gather information from the environment through measuring mechanical,
thermal, biological, chemical, optical and magnetic phenomena; the electronics
process the information derived from the sensors and through some decision
making capability direct the actuators to respond by moving, positioning,
regulating, pumping and filtering, thereby controlling the environment for
some
desired outcome or purpose. Since MEMS devices are manufactured using batch
fabrication techniques, similar to ICs, unprecedented levels of functionality,
reliability and sophistication can be placed on a small silicon chip at a
relatively low cost.
Market
Size and Viability
The
total
MEMS market size was about $5.1 billion worldwide and is expected to grow to
$9.7 billion by 2010, according to a recent market study report. MEMS pressure
sensors has the largest market share of the MEMS market. The applications of
MEMS pressure sensors can be separated into five categories: Automotive, Process
Control, Medical, Consumer Appliances and Aerospace. Currently, the market
in
Consumer Electronics is enjoying the fastest growth. Due to its versatility,
MEMS is taking the lead in the various fast-growing electronic applications
in
addition to its excellent performance and price ratio.
Products
The
Company’s future technology strategy is to develop and/or acquire core
intellectual property that will place it in a leadership position to manufacture
and market MEMS sensors. 3S has been granted three patents by the United States
Patent and Trademark Office, including the most recent in February 2006 for
its
Sensor Signal Conditioner for temperature compensation, linearization and
amplification of a transducer output signal.
3S
has
also filed one provisional patent for a backflow testing device. In addition,
the Company has developed many proprietary techniques/processes. These serve
as
the foundation to further develop our MEMS business.
3S
produces or supplies a family of nearly thirty (30) distinctive products. These
products employ or utilize the latest state-of-the-art technologies. The
products are primarily electro-mechanical sensing devices and are identified
under the following categories: Pressure Transducers, Pressure Transmitters,
Pressure Switches, Force Sensors, Load Cells, Strain Gages and MEMS Sensors.
We
are expanding our product offering to include intelligent embedded systems
that
combine the attributes of both intelligent sensor and host systems
3S
uses
sputtered thin film, bonded foil, semi-conductor gages and piezoresistive strain
gage technologies primarily in the design, development and manufacture of its
general sensor products, although other technology options are also available.
All of 3S’ products employ proven technologies with little or no risk involved
with their manufacture. What sets 3S’ products apart from our competitors is our
ability to optimize the performance of our products by efficient application
of
our diverse technologies into unique design concepts and by utilizing
sophisticated materials in construction and packaging techniques.
Customers
We
supply
our sensors mainly to the medical and automation industries. In general
customers are divided into three groups: original equipment manufacturers
("OEM's"), end users and catalogs. OEM’s accounted for 56% of our revenue in
2005 with end users and catalogs splitting the rest.
We
have
established a wide presence in the catalog business with our 1200 Series of
digital pressure gauges starting in 2004. We are currently signed up with six
catalog houses, including the largest instrumentation catalog house in N.
America in 2005. This additional account will allow us to increase our revenue.
Sales
and Marketing
We
use
independent sales representatives with industry expertise to promote our product
since sensors are quite complicated devices. We have a network of nine sales
representatives to cover North America and two international representatives.
In
addition to our sales rep network, we also have a network of distributors to
handle products that do not require much technical support. Both networks are
managed by our VP of Marketing and Sales.
We
are
seeking new distribution channels for our sensor modules and we are working
to
leverage existing market intelligence. We hired a VP of Marketing and Sales
in
January 2006 to assist us in exploring the market for our sensor
modules.
We
plan
to increase our market presence in China through our joint venture - Universal
Sensors, Inc. (USI). USI has a 7-person sales team to promote not only its
own
automotive sensors but also 3S’ products in China.
Research
and Development
We
hired
two key engineers in October of 2004. Together, they have sixty years of
combined experience in designing creative sensor modules. To date, two series
of
sensor modules have been designed, models have been constructed and beta-site
tested. We began production in the first quarter of 2006. One additional product
that we filed a provisional patent for will be ready for production in the
third
quarter of 2006. The unit price of these modules will be at least ten times
higher than our current sensor component’s sale price. We expect an increase in
our sales from these two product lines.
Our
Goals
Our
goal
is to become the market leader in innovative sensor system solutions, and a
supplier with a competitive pricing and performance mix. To accomplish this
objective, the Company plans to integrate proprietary techniques and processes
developed by 3S that serve as the foundation to develop the Company’s MEMS
business. These MEMS core competences include MEMS front-end wafer design and
processing, volume assembly and testing, application-specific environmental
protection and cost modeling. Combined with 3S’s expansion plans to increase
marketing and sales efforts, these technologies present the Company with
opportunities to further grow the business in international markets such as
China. 3S formed a joint venture in China with China Automotive Systems, Inc.
(CAAS) in April of 2005 to address its production requirements. 3S also has
MEMS
wafer fabrication partners in China and Taiwan, allowing the Company to maintain
sensor wafer supplies as well as to continue MEMS device research.
3S
intends to upgrade from the sensor component business to the system solution
business. We will focus on providing complete data management solutions that
can
accommodate the needs of a wide range of industries and businesses. These
solutions include a comprehensive set of products and services that establish
the infrastructure necessary for manufacturing process partners to proactively
participate in sustaining and optimizing the operation.
The
Company is striving to be an important provider of sensor solutions with
built-in network connectivity to supply critical data continuously for
enterprises to monitor and control:
· |
Manufacturing
processes
|
The
Company plans to develop and integrate various core intellectual properties
in
the areas of MEMS sensors, intelligent sensor interface electronics, intelligent
embedded control systems and meters, wireless communication network interfaces,
data appliances and mobile devices that facilitate machine-to-business data
sharing, software & hardware to support web-based device diagnostics and
data collection/data distribution, and web-based data management.
The
Company believes that MEMS is an enabling technology allowing the development
of
smart products by augmenting the computational ability of microelectronics
with
the sensing and control capabilities of microsensors and microactuators.
The
Company’s strategy includes the hiring of world-class engineering and sales and
marketing teams coupled with robust off-shore joint ventures such as the one
with CAAS. Management expects that the Company’s joint venture with CAAS will
enable the transformation of 3S into a global supplier of advanced
MEMS/Microelectronic products in the automotive market.
Implementation
of our goals depends to a large extent on our ability to raise funds in the
form
of debt or equity or a combination thereof. The Company is actively seeking
funding to expand its design, development and marketing.
Strategy
The
keys
to success for 3S are
as
follows:
· |
Penetrate
automotive and appliance markets thru the Joint Venture with CAAS
in
China;
|
· |
Leverage
the cost performance of above alliance to penetrate industrial and
medical
|
|
markets
in North America and Europe;
|
· |
Complete
development of sensor-based systems to increase
revenues;
|
· |
Merger
and acquisition.
|
Competition
Our
products and services are affected by varying degrees of competition. We compete
with other companies in most markets we serve, many of which have far greater
sales volumes and financial resources. The principal competitive factors in
the
commercial markets in which we participate are product performance, service
and
price. Part of product performance requires expenditures in research and
development that lead to product improvement. The market for many of our
products may be affected by rapid and significant technological changes and
new
product introduction. Our principal competitors include Honeywell, GE and MSI
in
the sensor component segment, and Delphi, Bosch and Denso in the automotive
sensor segment. There is no major competitor in the Sensor System Solutions
Market at the current time.
Employees
and employment agreements
The
Company currently employs 17 persons: There are no employment agreements with
any of the employees.
ITEM
2. DESCRIPTION OF PROPERTY.
Our
headquarters is located at 45 Parker Avenue, Suite A, Irvine, California 92618.
The facilities include 25,000 square feet of office, production and warehouse,
which we lease from the Irvine Company under a five year lease. Annual
rental
payments
for this lease are listed in the MD&A section.
We
believe that these facilities have the capacity to meet our manufacturing and
assembly needs for the foreseeable future, in combination with the production
by
our joint venture, USI.
ITEM
3. LEGAL PROCEEDINGS.
We
are
not a party to any pending litigation and none is contemplated or
threatened.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
were no matters submitted to the stockholders in the fourth quarter of
2005.
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND SMALL BUSINESS
ISSUERS PURCHASES OF EQUITY SECURITIES.
The
Company’s shares are quoted on the Over-The-Counter Bulletin Board. Our symbol
is “SSYO”. The table shows the high and low bid price of our stock for 2004 and
2005. These prices represent prices between dealers; they do not include retail
markup, markdown or commission. These are bid prices only and do not represent
actual transactions and are adjusted for dividends and splits.
Quarter
ended
|
|
High
|
|
Low
|
2004
|
|
|
|
|
March
31
|
|
$3.15
|
|
$0.45
|
June
30
|
|
$2.40
|
|
$1.20
|
September
30
|
|
$2.40
|
|
$1.20
|
December
31
|
|
$2.75
|
|
$0.51
|
|
|
|
|
|
2005
|
|
|
|
|
March
31
|
|
$2.40
|
|
$1.05
|
June
30
|
|
$2.10
|
|
$0.25
|
September
30
|
|
$1.25
|
|
$0.30
|
December
31
|
|
$0.51
|
|
$0.18
|
Stockholders
At
May 1,
2006, we
had
approximately 139 stockholders
of record of our common stock. This number does not include shares held by
brokerage clearing houses, depositories or otherwise in unregistered form.
Dividends
We
have
not declared any cash dividends, nor do we intend to do so. We are not subject
to any legal restrictions respecting the payment of dividends, except that
they
may not be paid to render us insolvent.
Securities
Authorized for Issuance under Equity Compensation
Plans
The
following table summarizes the securities authorized for issuance as of December
31, 2005 under our 2004 Stock Compensation Plan, the number of shares of our
common stock issuable upon the exercise of outstanding options, the weighted
average exercise price of such options and the number of additional shares
of
our common stock still authorized for issuance under such plan. The 2004 Stock
Compensation Plan was replaced in March 2006. The existing options were canceled
and new options on 3S shares were issued on a 10 for1 basis at the closing
market price on March 3, 2006.
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
|
Number
of securities remaining available or future issuance under equity
compensation plans
|
|
Equity
compensation plans approved by security holders
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
Equity
compensation plans not approved by security holders
|
|
|
76,000
|
|
|
.50
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
76,000
|
|
|
|
|
|
124,000
|
|
Recent
Sales of Unregistered Securities
None.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
The
following is management's discussion and analysis of certain significant factors
that have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as
well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not
be
place on these forward-looking statements that speak only as of the date hereof.
We undertake no obligation to update these forward-looking
statements.
The
following discussion and analysis should be read in conjunction with and our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-KSB.
OVERVIEW
On
May
24, 2004, we acquired all of the issued and outstanding equity interests of
Advanced Custom Sensors, Inc ("ACSI"). Until we acquired ACSI, we had only
nominal assets and liabilities and limited business operations. Although ACSI
became our wholly-owned subsidiary following the acquisition, because the
acquisition resulted in a change of control, the acquisition was recorded as
a
"reverse merger" whereby ACSI is considered to be the accounting acquirer.
We
changed our company name to Sensor System Solutions, Inc. in December 2004
to
better represent our new focus. As such, the following results of operations
are
those of ACSI.
3S
was
founded by an engineering management team with over 50 years of
Micro-electro-mechanical-systems or "MEMS" transducer experience. Its objective
is to provide high quality sensors and transducers at an economical price by
employing innovative designs and creative manufacturing methods. 3S offers
a
variety of digital pressure gauges, pressure transducers, pressure sensors,
force beams, load cells, intelligent
sensor interface electronics, intelligent embedded control systems, and wireless
communication network interfaces.
3S
commenced operations as a private company in September 1996. 3S is headquartered
in Irvine, California where 3S occupies a 25,000
square
foot facility fully equipped with fabrication capability.
3S
has 17
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 30 distinctive products. 3S
formed
a joint venture in China with China Automotive Systems, Inc. (NASDAQ: CAAS)
in
April 2005, targeting its automotive sensor market. 3S is transitioning to
move
its production line in Taiwan to this joint venture. 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 a myriad of 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.
·
|
Increase
the revenue of existing sensor component business.
The majority of our sensor component manufacturing is being moved
to our
joint venture in China to help reduce the cost of our products. In
the
meantime, we
will strive 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.
|
·
|
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.
|
·
|
Penetrate
automotive sensor market through China and India.
By
leverage the marketing channel of our joint venture partner and X-Lab
Global, we will have access to the automotive market in China and
India
immediately. We plan use the next two years to build up our production
capacity, product offerings, and technical team there. We will import
automotive sensors produced by our joint venture to North America
and
Europe around 2008.
|
·
|
Strategic
acquisition:
Being a public company gives us a supplemental tool to grow our business
through acquisition in addition to internal growth. We will actively
seek
equity or debt funding to bring in the necessary resources to execute
this
plan.
|
RESULTS
OF OPERATIONS
Years
ended December 31, 2005 and 2004
Revenues
We
generated revenues of $1,324,872 for the year ended December 31, 2005, which
was
a $663,532 or a 100.3% increase from $661,340 for the year ended December 31,
2004. The
increase is the result of the hiring of a full-time sales manager and his
success in securing several OEM accounts.
Gross
Profit
Gross
profit for the twelve months ended December 31, 2005, was $446,656 or 33.7%
of
revenues, compared to $81,550 or 12.3% of revenues for the year ended December
31, 2004. The $365,106 increase in gross profit was
a
result of the decrease in cost of sales percentage, which in turn was the result
of increased productivity and management’s efforts to reduce operating expense,
and production tooling improvement.
Total
Operating expenses
Operating
expense
Operating
expense increased to $1,869,896 for the year ended December 31, 2005 compared
to
$1,292,072 for the year ended December 31, 2004. The expense increased $577,824,
or 44.7%, from 2004, primarily as a result of an
increase in payroll costs, professional fees, rent and interest
expense.
Amortization
of discount on notes payable
Amortization
of discount on notes payable decreased to $531,033 for the year ended December
31, 2005 compared to $651,868 for the year ended December 31, 2004. The expense
decreased $120,835, or 18.5%, primarily due to the large amount of discount
associated with the convertible loans from Sino-America and Tina Young in the
prior year, partially offset by the Cornell Capital Partners, LP expense in
2005.
Non-cash
compensation costs
On
May
24, 2004, the Company issued 2,584,905 shares of its common stock and warrants
(the Merger Warrants) to purchase up to 47,802,373 shares of its common stock,
to the shareholders of ACSI in exchange for all the issued and outstanding
shares of ACSI. On May 24, 2004, the OTCBB closing price for the Company’s
common stock was $3.15 per share, resulting in a valuation of $12,527,134 (the
Merger Valuation) for the 3,976,868 shares of common stock outstanding
immediately following the Merger. On December 4, 2004, the Company granted
7,500,000 shares of its common stock to five shareholders in Spectre, including
two individuals who are also Directors of the Company, for providing services
to
the Company. 1,500,000 shares were treated as compensatory stock with a fair
value $1.20 per share, representing the most recent OTCBB closing price prior
to
that date, for a total of $1,800,000 and was recognized as stock-based
compensation expense in the accompanying financial statements. The remaining
6,000,000 shares were treated as a stock dividend. In 2005, 1,500,000 shares
of
common stock and warrants to purchase 86,866 shares of common stock were issued
as compensation for borrowing arrangements. These had a market value of
$775,000.
Net
Loss
Net
loss
decreased to ($2,729,273) for the year ended December 31, 2005 compared to
($3,662,390) for the year ended December 31, 2004. The loss decreased $933,117,
or 25.5%, from 2004,
as
a
result of an increase of $365,106 in gross profit, a decrease of $1,145,835
in
stock-based compensation expense and amortization of discount on notes payable
offset by the $577,824 in operating expenses.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
Going
Concern
In
their
report in connection with our 2005 financial statements, our auditors included
an explanatory paragraph stating that, because we have incurred a net loss
of
$2,729,273 and a negative cash flow from operations of $928,809 for the year
ended December 31, 2005, and had a working capital deficiency of $2,004,770
and
a stockholders’ deficiency of $1,695,890 at December 31, 2005 there
is
substantial doubt about our ability to continue as a going concern.
We
have
relied primarily on cash flow from operations, bank loans, and advances and
investments from our shareholders for our capital requirements since inception.
The company received $800,000 from the issuance of a convertible debenture
to
Cornell Capital Partners, LP in December 2005 and $200,000 in February 2006.
This allowed the company to pay off some of the debt and continue its
operations. Current cash on hand will allow the company to continue its
operations for a short period of time; a combination of additional equity and
debt offerings will be necessary to continue beyond the short term.
At
December 31, 2005, cash was $172,732 as compared to $17,115 at December 31,
2004. The increase is due to the excess of net cash provided by financing
activities over the net cash used in operations. We have a substantial working
capital deficit. We require $2,000,000 to continue operations for the next
three
years. We are in the process of raising capital in the form of equity and/or
debt. However, there is no guarantee that we will raise sufficient funds to
execute our business plan. To the extent we are unable to raise sufficient
funds, our business plan will be required to be substantially modified, our
operations curtailed or protection under bankruptcy/reorganization laws
sought.
We
are
addressing our liquidity requirements by the following actions: Continue our
programs for selling products and continue to seek investment capital through
the public markets. However, there is no guarantee that these strategies will
enable us to meet our obligations for the foreseeable future.
Commitments
and Contingencies
We
have
the following material contractual obligations and capital expenditure
commitments:
The
Company leases certain equipment under two capital leases with monthly payments
of $360 and $701, respectively, including interest at 12.75% per annum.
Future
minimum annual rental payments for capitalized leases are as
follows:
Years
ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
12,732
|
|
2007
|
|
|
12,732
|
|
2008
|
|
|
12,732
|
|
2009
|
|
|
3,903
|
|
|
|
|
42,099
|
|
Amount
representing interest
|
|
|
(7,900
|
)
|
Present
value of minimum lease payments
|
|
|
34,199
|
|
Less:
current portion
|
|
|
(8,877
|
)
|
Non-current
portion
|
|
$
|
25,322
|
|
The
Company leases its office and facility through July 31, 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 formally
shared with TransOptix, but since the bankruptcy of TransOptix, the Company
is
liable for the entire lease obligation.
Future
minimum lease commitments at December 31, 2005 are as follows:
Years
ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
250,900
|
|
2007
|
|
|
151,095
|
|
|
|
$
|
401,995
|
|
Rent
expense for the years ended December 31, 2005 and 2004 was $185,924 and $122,907
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 the Company’s stock at the date
of the grant, over the amount an employee must pay to acquire the stock. Stock
based awards for non-employees are accounted for at fair value equal to the
excess of the estimated fair value of the Company’s stock over the option price
using an estimated interest rate to calculate the fair value of the option.
There were no stock based awards to non-employees in 2005 or
2004.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or
market.
Recent
Accounting Pronouncements
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, “Inventory Costs”. This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle
facility costs, excessive spoilage, double freight and rehandling costs to
be
expensed in the current period, regardless if they are abnormal amounts or
not.
This Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on our
financial condition, results of operations, or cash flows.
In
December 2004, the 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.
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. Additionally, more capital
may be required in the event that:
· |
we
incur unexpected costs in completing the development of our technology
or
encounter any unexpected technical or other
difficulties;
|
· |
we
incur delays and additional expenses as a result of technology
failure;
|
· |
we
are unable to create a substantial market for our product and services;
or
|
· |
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
issuance of convertible notes, 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.
We
have a history of losses and negative cash flows, which is likely to continue
unless our products gain sufficient market acceptance to generate a commercially
viable level of sales.
From
inception through December 31, 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 12
months, we also expect an increase in development and operating costs.
Consequently, we expect to incur operating losses and net cash outflow unless
and until our existing products, and/or any new products that we may develop,
gain market acceptance sufficient to generate a commercially viable and
sustainable level of sales.
Unless
we can establish significant sales of our current products, our potential
revenues may be significantly reduced.
We
expect
that a substantial portion, if not all, of our future revenue will be derived
from the sale of our sensor products. We expect that these product offerings
and
their extensions and derivatives will account for a majority, if not all, of
our
revenue for the foreseeable future. The successful introduction and broad market
acceptance of our sensor products - as well as the development, introduction
and
market acceptance of any future enhancements - are, therefore, critical to
our
future success and our ability to generate revenues. Unfortunately, there can
be
no assurance that we will be successful in marketing our current product
offerings, or any new product offerings, applications or enhancements. Failure
to achieve broad market acceptance of our sensor products, as a result of
competition, technological change, or otherwise, would significantly harm our
business.
We
could lose our competitive advantages if we are not able to protect any
proprietary technology and intellectual property rights against infringement,
and any related litigation could be time-consuming and
costly.
Our
success and ability to compete depends to a significant degree on our
proprietary technology incorporated in our products. We have taken limited
action to protect our proprietary technology and proprietary computer software.
If any of our competitors copies or otherwise gains access to our proprietary
technology or software or develops similar technologies independently, we would
not be able to compete as effectively.
Further,
the laws of foreign countries may provide inadequate protection of such
intellectual property rights. We may need to bring legal claims to enforce
or
protect such intellectual property rights. Any litigation, whether successful
or
unsuccessful, could result in substantial costs and diversions of resources.
In
addition, notwithstanding any rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed
on
their intellectual property rights, including claims based upon the content
we
license from third parties or claims that our intellectual property right
interests are not valid. Any claims against us, with or without merit, could
be
time consuming and costly to defend or litigate, divert our attention and
resources, result in the loss of goodwill associated with our service marks
or
require us to make changes to our website or other of our
technologies.
Our
products may become obsolete and unmarketable if we are unable to respond
adequately to rapidly changing technology and customer
demands.
Our
industry is characterized by rapid changes in technology and customer demands.
As a result, our products may quickly become obsolete and unmarketable. Our
future success will depend on our ability to adapt to technological advances,
anticipate customer demands, develop new products and enhance our current
products on a timely and cost-effective basis. Further, our products must remain
competitive with those of other companies with substantially greater resources.
We may experience technical or other difficulties that could delay or prevent
the development, introduction or marketing of new products or enhanced versions
of existing products. Also, we may not be able to adapt new or enhanced products
to emerging industry standards, and our new products may not be favorably
received.
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.
Our
plans for expansion and cost reduction are substantially dependent on our joint
venture which involves the risk of doing business in
China.
Our
PRC
joint venture is subject to laws and regulations applicable to foreign
investment in China in general and laws and regulations applicable to
foreign-invested enterprises in particular. China has made significant progress
in the promulgation of laws and regulations dealing with economic matters such
as corporate organization and governance, foreign investment, commerce, taxation
and trade. However, the promulgation of new laws, changes of existing laws and
abrogation of local regulations by national laws may have a negative impact
on
our business and prospects.
The
value
of the Chinese currency, RMB, is subject to changes in PRC government policies
and depends to a large extent on China’s domestic and international economic,
financial and political developments, as well as the currency’s supply and
demand in the local market. For over a decade from 1994, the conversion of
RMB
into foreign currencies, including the U.S. dollar, was based on exchange rates
set and published daily by the People’s Bank of China, the PRC central bank,
based on the previous day’s interbank foreign exchange market rates in China and
exchange rates on the world financial markets. The official exchange rate for
the conversion of RMB into U.S. dollars remained stable until RMB was revalued
in July 2005 and allowed to fluctuate by reference to a basket of foreign
currencies, including the U.S. dollar. Under the new policy, RMB will be
permitted to fluctuate within a band against a basket of foreign currencies.
This change in policy resulted initially in an approximately 2.0% appreciation
in the value of Renminbi against the U.S. dollar. There remains significant
international pressure on the PRC government to adopt a substantially more
liberalized currency policy, which could result in a further and more
significant appreciation in the value of RMB against the U.S. dollar. Further
revaluations of RMB against the U.S. dollar may also occur in the future. A
stronger RMB would increase our purchase price of raw material and
parts.
OFF
BALACE SHEET ARRANGEMENTS
There
are
no Off-Balance Sheet Arrangements to report.
ITEM
7. FINANCIAL STATEMENTS.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
FINANCIAL
STATEMENTS
|
|
|
Consolidated
Balance Sheet
|
F-2
|
|
|
|
Consolidated
Statements of Operations
|
F-3
|
|
|
Consolidated
Statements of Changes in Stockholders' Deficiency
|
F-4
|
|
|
Consolidated
Statements of Cash Flows
|
F-5
|
|
NOTES
TO THE FINANCIAL STATEMENTS
|
F-6
|
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
8A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Annual Report on Form 10-KSB. Based
on this evaluation, our Chief Executive and Financial Officer has concluded
that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) are
inadequate to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. We are
developing a plan to ensure that all information will be recorded, processed,
summarized and reported on a timely basis. This plan is dependent, in part,
upon
reallocation of responsibilities among various personnel, possibly hiring
additional personnel and additional funding. It should also be noted that the
design of any system of controls is based in part upon certain assumptions
about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Changes
in Internal Control over Financial Reporting
There
was
no change in our internal control over financial reporting that occurred during
the fourth fiscal quarter of the fiscal year covered by this Annual Report
on
Form 10-KSB that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
8B. OTHER INFORMATION.
None.
ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The
name,
age and position held by each of the directors and officers of our company
are
as follows:
Name
|
|
Age
|
|
Position
|
Michael
Young
|
|
47
|
|
Chief
Executive Officer and Chairman
|
Hanlin
Chen
|
|
48
|
|
Director
|
All
directors have a term of office expiring at the next annual general meeting,
unless re-elected or earlier vacated in accordance with the Bylaws. All officers
have a term of office lasting until their removal or replacement by the Board
of
Directors.
Background
of Officers and Directors
MICHAEL
YOUNG founded and has served for eight years as CEO of 3S. Previously, his
21-year career includes MEMS design, fabrication, packaging and applications
development at Rosemount, Endevco, Hughes Aircraft and other firms. He is
responsible for leading 3S given his technical expertise and a broad range
of
business experiences with 3S. He holds a Master of Science degree in Mechanical
Engineering from Stanford University.
HANLIN
CHEN began serving as the Chairman and CEO of China Automotive Systems, Inc.
since 2003. Prior to this appointment, Mr. Chen was the general manager of
Jiulong Power Steering Company Limited from 1992 to 1997. Mr. Chen holds a
MBA
from Barrington University and serves as a board member of Political Consulting
Committee of Jingzhou city and vice president of Foreign Investors Association.
Family
Relationships
There
are
no family relationships on the Board of Directors.
Involvement
in Certain Legal Proceedings
To
our
knowledge, during the past five years, our officers and directors: have not
filed a petition under the federal bankruptcy laws or any state insolvency
law,
nor had a receiver, fiscal agent or similar officer appointed by a court for
the
business or present of such a person, or any partnership in which he was a
general partner at or within two years before the time of such filing, or any
corporation or business association of which he was an executive officer within
two years before the time of such filing; were not convicted in a criminal
proceeding or named subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses); were not the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting their respective activities.
Compliance
with Section 16 (a) of the Exchange Act
Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934 during
our
most recent fiscal year and Forms 5 and amendments thereto furnished to us
with
respect to our most recent fiscal year, all officers, directors and owners
of
10% or more of our outstanding shares have filed all Forms 3, 4 and 5 required
by Section 16(a) of the Securities Exchange Act of 1934.
Audit
Committee and Charter
Due
to
the size of our Board of Directors we do not have an audit committee at this
time.
Audit
Committee Financial Expert
We
have
no financial expert.
Code
of Ethics
We
have
adopted a corporate code of ethics. We believe our code of ethics is reasonably
designed to deter wrongdoing and promote honest and ethical conduct; provide
full, fair, accurate, timely and understandable disclosure in public reports;
comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
ITEM
10. EXECUTIVE COMPENSATION.
The
following table sets forth information with respect to compensation paid by
us
to the chief executive officer since the Exchange. No other executive officer
received compensation in excess of $100,000 for the fiscal year ended December
31, 2005.
Summary
Compensation Table
|
|
|
|
|
|
Long
Term Compensation
|
|
|
|
|
Annual
Compensation
|
|
Awards
|
|
Payouts
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
Annual Compen sation ($)
|
|
Restricted
Stock Award(s) ($)
|
|
Securities
Underlying Options /SARs (#)
|
|
LTIP
Payouts ($)
|
|
All
Other Compensation ($)
|
Michael
Young, CEO
|
|
2005
|
|
108,500
|
|
N/A
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Michael
Young, CEO
|
|
2004
|
|
75,000
|
|
N/A
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
N/A
|
|
2003
|
|
N/A
|
|
N/A
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
There
are
no retirement, pension or profit sharing plans for the benefit of our officers
and directors. A stock option plan was approved by the Board of Directors in
March 2006 and options for 250,000 shares were granted to Michael
Young.
Option/SAR
Grants
No
individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs were made to any executive
officer or any director prior to March 2006, accordingly, no stock options
have
been exercised by any of the officers or directors in fiscal 2005.
Long-Term
Incentive Plan Awards
We
do not
have any long-term incentive plans that provide compensation intended to serve
as incentive for performance to occur over a period longer than one fiscal
year,
whether such performance is measured by reference to our financial performance,
our stock price, or any other measure.
Compensation
of Directors
The
directors did not receive any other compensation for serving as members of
the
board of directors. The Board has not implemented a plan to award options.
There
are no contractual arrangements with any member of the board of
directors.
We
do not
intend to pay any additional compensation to our directors. As of the date
hereof, we have not entered into employment contracts with any of our officers
and we do not intend to enter into any employment contracts until such time
as
it profitable to do so.
Indemnification
Nevada
corporation law provides that:
·
|
A
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative
or
investigative, except an action by or in the right of the corporation,
by
reason of the fact that he is or was a director, officer, employee
or
agent of the corporation, or is or was serving at the request of
the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and
amounts
paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he acted in good faith and
in a
manner which he reasonably believed to be in or not opposed to the
best
interests of the corporation, and, with respect to any criminal action
or
proceeding, had no reasonable cause to believe his conduct was
unlawful;
|
·
|
A
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment
in its favor by reason of the fact that he is or was a director,
officer,
employee or agent of the corporation, or is or was serving at the
request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against
expenses, including amounts paid in settlement and attorneys' fees
actually and reasonably incurred by him in connection with the defense
or
settlement of the action or suit if he acted in good faith and in
a manner
which he reasonably believed to be in or not opposed to the best
interests
of the corporation. Indemnification may not be made for any claim,
issue
or matter as to which such a person has been adjudged by a court
of
competent jurisdiction, after exhaustion of all appeals therefrom,
to be
liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which
the
action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances
of the
case, the person is fairly and reasonably entitled to indemnity for
such
expenses as the court deems proper;
and
|
·
|
To
the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any
action,
suit or proceeding, or in defense of any claim, issue or matter therein,
the corporation shall indemnify him against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with
the
defense.
|
·
|
Our
bylaws provide that we will advance all expenses incurred to any
person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suite or proceeding, whether
civil, criminal, administrative or investigative, by reason of the
fact
that he is or was our director or officer, or is or was serving at
our
request as a director or executive officer of another company,
partnership, joint venture, trust or other enterprise, prior to the
final
disposition of the proceeding, promptly following request. This advanced
of expenses is to be made upon receipt of an undertaking by or on
behalf
of such person to repay said amounts should it be ultimately determined
that the person was not entitled to be indemnified under our bylaws
or
otherwise.
|
·
|
Our
bylaws also provide that no advance shall be made by us to any officer
in
any action, suit or proceeding, whether civil, criminal, administrative
or
investigative, if a determination is reasonably and promptly made:
(a) by
the board of directors by a majority vote of a quorum consisting
of
directors who were not parties to the proceeding; or (b) if such
quorum is
not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion,
that the facts known to the decision-making party at the time such
determination is made demonstrate clearly and convincingly that such
person acted in bad faith or in a manner that such person did not
believe
to be in or not opposed to our best
interests.
|
·
|
Insofar
as indemnification for liabilities arising under the Securities Act
may be
permitted to directors, officers and controlling persons of our company
under Nevada law or otherwise, we have been advised the opinion of
the
Securities and Exchange Commission is that such indemnification is
against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event a claim for indemnification against such
liabilities (other than payment by us for expenses incurred or paid
by a
director, officer or controlling person of our company in successful
defense of any action, suit, or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question of whether such indemnification by it
is
against public policy in said Act and will be governed by the final
adjudication of such issue.
|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS.
The
following table sets forth, as of May 1, 2006, the beneficial shareholdings
of
persons or entities holding five percent or more of our common stock, each
director individually, each named executive officer and all of our directors
and
officers as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown, and all ownership is of record
and
beneficial. Unless otherwise disclosed, the address of each person set forth
below is that of the Company.
Name
of Beneficial Owner
|
|
Amount
and Nature Beneficial Owner
|
|
Position
|
|
Percent
of Class (1)
|
Michael
Young
|
|
10,620,186
|
|
Chief
Executive Officer and Chairman
|
|
14%
|
|
|
|
|
|
|
|
Hanlin
Chen
|
|
-
|
|
Director
|
|
*
|
|
|
|
|
|
|
|
Officers
and Directors as a Group
(2
persons)
|
|
10,620,186
|
|
|
|
14%
|
|
|
|
|
|
|
|
Principal
Shareholders
|
|
|
|
Address
|
|
|
|
|
|
|
|
|
|
Future
Front International Co. Ltd.
|
|
14,479,093
|
|
6
G/F, Johnston Road
Wanchai,
Hong Kong
|
|
19%
|
______________________
*Less
than 1%
(1) |
Based
on 76,586,112 shares
outstanding at May 1, 2006.
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr.
Hanlin Chen, a Director of the Company is the Chief Executive Officer of China
Automotive Systems, Inc. The Company has a Joint Venture with China Automotive
Systems, Inc. - see Note 4 of Notes to Consolidated Financial
Statements.
The
Company has outstanding convertible notes payable to related parties, including
$300,665 to the sister of the Chief Executive Officer - see Note 6 of Notes
to
Consolidated Financial Statements.
ITEM
13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a)
Reports on Form 8-K
There
were no Reports filed on Form 8-K during the fourth quarter of
2005.
(b)
Exhibits
Exhibit
No.
|
|
Document
Description
|
|
|
|
3.1
|
|
Articles
of Incorporation (1)
|
|
|
|
3.2
|
|
Bylaws
(1)
|
|
|
|
10.1
|
|
Share
Exchange Agreement and Plan of Reorganization (2)
|
|
|
|
10.2
|
|
Joint
Venture Agreement with Universal Sensors, Inc. (3)
|
|
|
|
23.1
|
|
Consent
of Weinberg & Company, P.A. (3)
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant
to
Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
and
Exchange Act of 1934, as amended. (3)
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
(3)
|
(1) Incorporated
herein by reference from the Company's Form 10-QSB filed with the Securities
and
Exchange Commission, File No. 000-11991 on May 28, 2003.
(2) Incorporated
herein by reference from the Company's Form 8-K Current Report and amendment
thereto as filed with the Securities and Exchange Commission, on May 24, 2004.
(3) Filed
herewith.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Weinberg
& Company, P.A., was the Company's independent registered public accounting
firm engaged to examine the financial statements of the Company for the fiscal
years ended December 31, 2004 and 2005. Weinberg & Company, P.A. performed
the following services and has been paid the following fees.
Fiscal
Years Ended December 31, 2005 and 2004
Audit
Fees
Weinberg
& Company, P.A. was paid aggregate fees of approximately $112,000 and
$54,500 for the fiscal years ended December 31, 2005 and 2004,
respectively, for professional services rendered for the audit of the
Company's annual financial statements and for the reviews of the financial
statements included in the Company's interim quarterly reports.
Audit-Related
Fees
Weinberg
& Company, P.A. was not paid additional fees for the fiscal year December
31, 2005 for assurance and related services reasonably related to the
performance of the audit or review of the Company's financial
statements.
Tax
Fees
Weinberg
& Company, P.A. was not paid any fees for the fiscal year ended December 31,
2005 for professional services rendered for tax compliance, tax advice and
tax
planning. This service was not provided.
All
Other Fees
Weinberg
& Company, P.A. was paid no other fees for professional services during the
fiscal year ended December 31, 2005.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
of
1934, the Company has duly caused this report to be signed on its behalf by
the
undersigned, thereunto duly authorized, on this 15th day of May,
2006.
|
SENSOR
SYSTEM SOLUTIONS, INC.
|
|
|
|
By:
|
/s/
Michael Young
|
|
|
Michael
Young
|
|
|
Chief
Executive Officer and Principal Accounting Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following person on behalf of the Company and in the
capacities.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Michael
Young
|
|
Chief
Executive Officer and Principal Accounting Officer
|
|
May
15, 2006
|
Michael
Young
|
|
|
|
|
|
|
|
|
|
/s/
Hanlin Chen
|
|
Director
|
|
May
15, 2006
|
Hanlin
Chen
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2005 AND 2004
SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONTENTS
PAGE
|
F-1
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
|
PAGE
|
F-2
|
CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2005
|
|
|
|
PAGE
|
F-3
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
2004
|
|
|
|
PAGE
|
F-4
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
|
|
|
|
PAGE
|
F-5
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
2004
|
|
|
|
PAGES
|
F6 -
F17
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND
2004
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of Sensor System Solutions, Inc.:
We
have
audited the accompanying consolidated balance sheet of Sensor System Solutions,
Inc. and subsidiary as of December 31, 2005, and the related consolidated
statements of operations, changes in stockholders' deficiency, and cash flows
for the years ended December 31, 2005 and 2004. These financial statements
are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sensor System Solutions,
Inc. and subsidiary as of December 31, 2005, and the results of their operations
and their cash flows for the years ended December 31, 2005 and 2004, in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying consolidated 2005 financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the
consolidated financial statements, the Company incurred a net loss of $2,729,273
and a negative cash flow from operations of $928,809 for the year ended December
31, 2005, and had a working capital deficiency of $2,004,770 and a stockholders’
deficiency of $1,695,890 at December 31, 2005. These matters raise substantial
doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WEINBERG
& COMPANY, P.A.
Boca
Raton, Florida
May
11,
2006
SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
As
of
December 31, 2005
ASSETS |
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
|
|
$
|
172,732
|
|
Accounts
receivable
|
|
|
230,440
|
|
Inventory
|
|
|
302,171
|
|
Prepaids
and other current assets
|
|
|
46,634
|
|
Total
current assets
|
|
|
751,977
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
233,862
|
|
|
|
|
|
|
Other
assets
|
|
|
104,112
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,089,951
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,313,134
|
|
Notes
payable
|
|
|
1,060,171
|
|
Notes
payable, related parties
|
|
|
368,565
|
|
Current
portion of capital lease obligations
|
|
|
8,877
|
|
Current
portion of deferred rent concession
|
|
|
6,000
|
|
Total
current liabilities
|
|
|
2,756,747
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
25,322
|
|
Deferred
rent concession, net of current portion
|
|
|
3,772
|
|
Total
long-term liabilities
|
|
|
29,094
|
|
|
|
|
|
|
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, 61,705,019
shares
issued and outstanding
|
|
|
61,705
|
|
|
|
|
|
|
Common
stock to be issued (14,479,093 shares)
|
|
|
550,000
|
|
Additional
paid-in capital
|
|
|
15,456,834
|
|
Deferred
compensation
|
|
|
(26,598
|
)
|
Accumulated
deficit
|
|
|
(17,737,831
|
)
|
Total
stockholders' deficiency
|
|
|
(1,695,890
|
)
|
Total
liabilities and stockholders' deficiency
|
|
$
|
1,089,951
|
|
See
accompanying notes to consolidated financial statements.
SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31, 2005 and 2004
|
|
2005
|
|
2004
|
|
Sales,
net
|
|
$
|
1,324,872
|
|
$
|
661,340
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
878,216
|
|
|
579,790
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
446,656
|
|
|
81,550
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
1,869,896
|
|
|
1,292,072
|
|
|
|
|
|
|
|
|
|
Amortization
of discount on notes payable
|
|
|
531,033
|
|
|
651,868
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation costs
|
|
|
775,000
|
|
|
1,800,000
|
|
Total
operating expenses
|
|
|
3,175,929
|
|
|
3,743,940
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,729,273
|
)
|
$
|
(3,662,390
|
)
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
$
|
(.05
|
)
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
59,809,253
|
|
|
7,920,079
|
|
See
accompanying notes to consolidated financial statements.
Sensor
System Solutions, Inc.
Consolidated
Statements of Changes in Stockholders' Deficiency
For
the
years ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
Common
stock to be issued
|
|
|
Treasury |
|
|
Additional
paid-in
|
|
|
Deferred
|
|
|
Accumulated |
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
stock
|
|
|
capital
|
|
|
compensation |
|
|
deficit
|
|
|
Total
|
|
Balance
January 1, 2004
|
|
|
|
|
|
|
|
|
2,584,895
|
|
$
|
3,639,513
|
|
|
|
|
|
|
|
$
|
(10,000
|
)
|
$
|
585,936
|
|
$
|
(220,770
|
)
|
$
|
(4,146,168
|
)
|
$
|
(151,489
|
)
|
Common
stock of Sensor outstanding when Advanced Custom Sensors, Inc was
merged into Sensor, Inc.
|
|
|
1,391,962
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,392
|
)
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
of Advanced Custom Sensors, Inc. common
stock for Sensor, Inc. common stock
|
|
|
2,584,906
|
|
|
2,585
|
|
|
(2,584,895
|
)
|
|
(3,639,513
|
)
|
|
|
|
|
|
|
|
10,000
|
|
|
3,626,928
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options issued to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,800
|
|
|
(19,800
|
)
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of common stock warrants issued with notes
payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636,518
|
|
|
|
|
|
|
|
|
636,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,170
|
|
|
|
|
|
54,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
to be issued for settlement of note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory
stock to be issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
dividend to be issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
7,200,000
|
|
|
|
|
|
|
|
|
|
|
|
(7,200,000
|
)
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,662,390
|
)
|
|
(3,662,390)
|
|
Balance
December 31, 2004
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,100
|
)
|
|
122,100
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory
stock issued
|
|
|
1,500,000
|
|
|
1,500
|
|
|
|
|
|
|
|
|
(1,500,000
|
)
|
|
(1,800,000
|
)
|
|
|
|
|
1,798,500
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
dividend issued
|
|
|
6,000,000
|
|
|
6,000
|
|
|
|
|
|
|
|
|
(6,000,000
|
)
|
|
(7,200,000
|
)
|
|
|
|
|
7,194,000
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised by shareholders from merger
|
|
|
47,802,373
|
|
|
47,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,802
|
)
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,702
|
|
|
|
|
|
37,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
to be issued for settlement of note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,479,093
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for settlement of notes payable and exercise of
warrants
|
|
|
925,778
|
|
|
926
|
|
|
|
|
|
|
|
|
(200,000
|
)
|
|
(300,000
|
)
|
|
|
|
|
327,586
|
|
|
|
|
|
|
|
|
28,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665,360
|
|
|
|
|
|
|
|
|
665,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued as compensation for a Standby Equity Distribution
Agreement
|
|
|
1,500,000
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
763,500
|
|
|
|
|
|
|
|
|
765,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,729,273
|
)
|
|
(2,729,273)
|
|
Balance
December 31, 2005
|
|
|
61,705,019
|
|
$
|
61,705
|
|
|
-
|
|
$
|
-
|
|
|
14,479,093
|
|
$
|
550,000
|
|
$
|
-
|
|
$
|
15,456,834
|
|
$
|
(26,598
|
)
|
$
|
(17,737,831)
|
|
$
|
(1,695,890)
|
|
See
accompanying notes to consolidated financial statements.
SENSOR
SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31, 2005 and 2004
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,729,273
|
)
|
$
|
(3,662,390
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Stock-based
compensation costs
|
|
|
775,000
|
|
|
1,800,000
|
|
Costs
related to settlement of note payable
|
|
|
--
|
|
|
140,000
|
|
Depreciation
and amortization
|
|
|
93,355
|
|
|
109,954
|
|
Amortization
of discount on notes payable
|
|
|
531,033
|
|
|
651,868
|
|
Amortization
of deferred compensation
|
|
|
37,702
|
|
|
54,170
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(129,910
|
)
|
|
(32,992
|
)
|
Inventory
|
|
|
(81,726
|
)
|
|
(20,913
|
)
|
Prepaids
and other current assets
|
|
|
(22,082
|
)
|
|
(20,445
|
)
|
Accounts
payable and accrued expenses
|
|
|
653,091
|
|
|
370,685
|
|
Other
assets
|
|
|
(50,000
|
)
|
|
-
|
|
Deferred
rent (amortization) concession
|
|
|
(5,999
|
)
|
|
15,770
|
|
Net
cash used in operating activities
|
|
|
(928,809
|
)
|
|
(594,293
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(6,500
|
)
|
|
(3,957
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
1,648,745
|
|
|
590,000
|
|
Principal
payments on notes payable
|
|
|
(600,000
|
)
|
|
-
|
|
Proceeds
from notes payable, related parties
|
|
|
50,000
|
|
|
20,000
|
|
Principal
payments on capital leases
|
|
|
(7,819
|
)
|
|
(5,347
|
)
|
Net
cash provided by financing activities
|
|
|
1,090,926
|
|
|
604,653
|
|
Net
increase in cash and cash equivalents
|
|
|
155,617
|
|
|
6,403
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
17,115
|
|
|
10,712
|
|
Cash
and cash equivalents, end of the year
|
|
$
|
172,732
|
|
$
|
17,115
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
50,637
|
|
$
|
14,458
|
|
Taxes
|
|
$
|
800
|
|
$
|
800
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Acquisition
of equipment through capital lease obligations
|
|
$
|
-
|
|
$
|
47,365
|
|
(Cancellation)
issuance of stock options
|
|
|
(122,100
|
)
|
|
19,800
|
|
Accrued
interest added to notes payable principal
|
|
|
60,774
|
|
|
12,500
|
|
Discount
related to warrants and convertible notes
|
|
|
665,360
|
|
|
636,518
|
|
Common
stock issued and to be issued in settlement of note
payable
|
|
|
578,512
|
|
|
160,000
|
|
Stock
dividend
|
|
|
-
|
|
|
7,200,000
|
|
See
accompanying notes to consolidated financial statements.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of business
Sensor
System Solutions, Inc. (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. The Company
was
incorporated in Nevada in April 1982 under the name The Enchanted Village,
Inc.
Merger
On
May
24, 2004, Sensor System Solutions (formerly known as Spectre Industries, Inc.,)
a Nevada corporation, entered into an agreement and plan of merger (the Merger)
with Advanced Custom Sensors, Inc. (ACSI). Sensor issued 2,584,906 shares of
its
common stock and warrants (the Merger Warrants) to purchase up to 47,802,373
shares of its common stock to the shareholders of ACSI in exchange for all
the
issued and outstanding shares of ACSI. The transaction was accounted for as
a
recapitalization with ACSI deemed to be the accounting acquirer and Spectre
the
legal acquirer. All financial information included in these financial
statements prior to the Merger is that of ACSI, as if ACSI had been the
registrant. The financial information since the Merger is that of ACSI and
Sensor consolidated.
All
references to “Sensor”, “Spectre” and “ACSI”, mean Spectre or ACSI separately
prior to the Merger and Sensor (the Company) after the Merger.
The
Company agreed that it would “spin-off” certain assets and liabilities included
in Spectre in connection with the Merger on May 24, 2004. These assets and
liabilities were transferred to Spectre Holdings, Inc. (Spectre Holdings),
a
wholly-owned subsidiary of the Company. On December 15, 2004, in consideration
for making and guaranteeing certain representations, warranties and obligations
in connection with the Agreement and Plan of Merger dated March 13, 2004 by
and
between the Company and ACSI, the Company transferred 20,878,081 shares of
common stock, which are all of the issued and outstanding shares of Spectre
Holdings to Ian Grant, a Director of the Company and shareholder in Spectre.
As
the Company never had direct or indirect control of those assets and
liabilities, Spectre Holdings was not considered owned at the date of the
Merger.
Going
concern
The
Company incurred a net loss of $2,729,273 and a negative cash flow from
operations of $928,809 for the year ended December 31, 2005, and had a working
capital deficiency of $2,004,770 and a stockholders’ deficiency of $1,695,890 at
December 31, 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 December 31, 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
2006. The Company completed a merger and recapitalization on May 20, 2004,
with
Spectre Industries, Inc., a public company, to gain access to the United States
and European capital markets, but there can be no assurances that the Company
will ultimately be successful in this regard. The accompanying consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
Principles
of consolidation
The
2005
and 2004 consolidated financial statements include the accounts and operations
of Sensor System Solutions Inc. and its wholly-owned subsidiary. Intercompany
accounts and transactions have been eliminated in consolidation.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Accounts
receivable
The
Company performs ongoing credit evaluations of its customers and generally
does
not require collateral. An appropriate allowance for doubtful accounts is
included in accounts receivable.
Inventory
Inventory
is stated at the lower of cost (first-in, first-out method) or
market.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Expenditures for additions, renewals and improvements are capitalized. Costs
of
repairs and maintenance are expensed when incurred. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Leasehold improvements are amortized
over
the shorter of the lease term or the asset’s useful life.
Impairment
of long-lived assets
Property
and equipment and other long-lived assets are evaluated for impairment whenever
events or conditions indicate that the carrying value of an asset may not be
recoverable. If the sum of the expected undiscounted cash flows is less than
the
carrying value of the related asset or group of assets, a loss is recognized
for
the difference between the fair value and carrying value of the asset or group
of assets. Such analyses necessarily involve significant judgment. There were
no
impairment losses recorded in 2005 or 2004.
Note
payable debt discount cost
The
Company has issued warrants to investors and related parties in conjunction
with
notes payable. The discounts allocated to the warrants are being treated as
additional consideration for notes payable and are being amortized over the
life
of the note as additional interest cost using the straight-line method.
Revenue
recognition
The
Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment.
Income
taxes
The
Company accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized and measured
using enacted tax rates at the balance sheet date. Deferred tax expense or
benefit is the result of changes in deferred tax assets and liabilities.
Valuation allowances are established when necessary to reduce net deferred
taxes
to amounts that are more likely than not to be realized.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Stock -
based compensation
The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosures” as well as those outlined in SFAS
No. 123, “Accounting for Stock-Based Compensation”. As permitted by SFAS
148 and SFAS 123, the Company continues to apply the provisions of Accounting
Principles Board Opinion (APB) No. 25, “Accounting for Stock issued to
Employees” and related interpretations in accounting for the Company’s stock
option plan. Accordingly, compensation cost for stock options is measured as
the
excess, if any, of the estimated fair value of the Company’s stock at the date
of the grant, over the amount an employee must pay to acquire the stock. Stock
based awards for non-employees are accounted for at fair value equal to the
excess of the estimated fair value of the Company’s stock over the option price
using an estimated interest rate to calculate the fair value of the option.
There were no stock based awards to non-employees in 2005 or 2004.
Had
compensation cost for all stock option grants been determined based on their
fair value at the grant dates, consistent with the method prescribed by SFAS
148
and SFAS 123, our net loss and loss per share would have been adjusted to
the pro forma amounts indicated below:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Net
loss
|
|
$
|
(2,729,273
|
)
|
$
|
(3,662,390
|
)
|
Add:
Stock based compensation costs included in net loss
|
|
|
37,702
|
|
|
54,170
|
|
Stock-based
compensation costs
|
|
|
(52,160
|
)
|
|
(58,880
|
)
|
Pro
forma net loss
|
|
$
|
(2,743,731
|
)
|
$
|
(3,667,100
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.05
|
)
|
$
|
(0.46
|
)
|
Pro
forma under SFAS No. 123
|
|
$
|
(0.05
|
)
|
$
|
(0.46
|
)
|
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 9). Diluted earnings
per common share are based on shares outstanding (computed as under basic EPS)
and potentially dilutive common shares. As of December 31, 2005 and 2004, the
Company had granted stock options for 76,000 and 96,500 shares of common stock,
respectively, that are potentially dilutive common shares but are not included
in the computation of loss per share because their effect would be
anti-dilutive.
Comprehensive
income (loss)
The
Company has no items of other comprehensive income (loss) for the years ended
December 31, 2005 and 2004.
Fair
value of financial instruments
The
Company believes that the carrying value of its cash, accounts receivable,
accounts payable, accrued liabilities, notes payable and notes payable to
related parties as of December 31, 2005 approximates their respective fair
values due to the demand or short-term nature of those instruments. The carrying
value of long-term obligations approximates the fair value based on the
effective interest rates compared to current market rates.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Concentration
of credit risk
Financial
instruments that are exposed to concentrations of credit risk consist
principally of cash and accounts receivable. The Company places its cash in
what
it believes to be credit-worthy financial institutions. However, cash balances
may have exceeded federally insured levels at various times during the year.
The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any significant risk in cash.
The
Company had two customers that accounted for 45% of sales and four customers
that accounted for 29% of sales in the years ended December 31, 2005 and 2004,
respectively. Approximately
90% of the Company’s sales in the years ended December 31, 2005 and
2004 were to customers in North America.
Reclassification
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Recent
accounting pronouncements
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No.
151, "Inventory Costs". This Statement amends the guidance in ARB No. 43 Chapter
4 Inventory Pricing, to require items such as idle facility costs, excessive
spoilage, double freight and rehandling costs to be expensed in the current
period, regardless if they are abnormal amounts or not. This Statement will
become effective for us in the first quarter of 2006. The adoption of SFAS
No.
151 is not expected to have a material impact on the Company's consolidated
financial statement.
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.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
2
INVENTORY
Inventory
consists of the following as of December 31, 2005:
Raw
materials
|
|
$
|
204,748
|
|
Finished
goods
|
|
|
97,423
|
|
|
|
$
|
302,171
|
|
NOTE
3 PROPERTY AND EQUIPMENT
|
|
Property
and equipment consists of the following as of December 31,
2005:
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
593,312
|
|
Office
equipment
|
|
|
2,636
|
|
Furniture
and fixtures
|
|
|
17,398
|
|
Equipment
under capital leases
|
|
|
47,365
|
|
Leasehold
improvements
|
|
|
143,637
|
|
|
|
|
804,348
|
|
Less,
accumulated depreciation and amortization
|
|
|
(570,486
|
)
|
|
|
$
|
233,862
|
|
Depreciation
and amortization expense of $93,355 and $109,954 is reflected in Operating
Costs
in the accompanying Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004, respectively.
As
of
December 31, 2005 the Company maintained tooling assets with a net book value
of
approximately $90,000 at its main supplier located in Taiwan. During the first
quarter of 2006, these tooling assets were sold for approximately $88,000 to
Universal Sensors, Inc., a joint venture in which the Company owns 30% (see
Note
4).
NOTE
4
INVESTMENT IN AFFILIATED ENTITIES
Universal
Sensors, Inc.
In
April
2005, the Company, China Automotive Systems, Inc. (CAAS) and Shanghai Hongxi
Investment Inc. (HX) formed Universal Sensors, Inc. (USI), a joint venture
in
the People’s Republic of China to develop, produce and market sensor and related
electronic products. The ownership percentages of USI are 30%, 60% and 10%
to
the Company, CAAS and HX, respectively. CAAS and HX will contribute cash, land
and building and the Company will contribute technology. As there was no cash
contributed by the Company and the technology it contributed is not recorded
as
an asset on the Company’s books, the Company’s investment in USI is recorded at
zero. USI is in a start-up mode and had not begun operations as of December
31,
2005. USI has incurred cumulative losses at December 31, 2005 of approximately
$232,000. The Company has not recorded any loss from USI since its investment
is
zero. The Company will not record any income in the future until such time
as
USI is cumulatively profitable. During 2005, the Company had sales of
approximately $93,000 to USI.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
TransOptix,
Inc.
The
Company had an investment in TransOptix, Inc. (TransOptix), that, when combined
with the Company’s Chief Executive Officer’s ownership interest in TransOptix,
resulted in the Company accounting for its investment in TransOptix under the
equity method of accounting. The Company discontinued applying the equity method
in 2002 when its share of losses of TransOptix exceeded its investment in
TransOptix. There were no transactions between the Company and TransOptix in
2005 and 2004 and the Company did not record any income or loss from TransOptix
in 2005 or 2004. The Company and TransOptix shared the same office and facility
lease. TransOptix declared bankruptcy in August 2005 and the Company took over
TransOptix’s share of the facility lease (see Note 11).
NOTE
5
NOTES PAYABLE
Notes
payable consist of the following at December 31, 2005:
Two
lines of credit, unsecured, interest payable monthly at 10.25%
and 11.5%
per annum,
|
|
$
|
92,983
|
|
due
on demand.
|
|
|
|
|
|
|
|
|
|
Note
payable, unsecured, interest payable monthly at Prime + 3% per
annum
|
|
|
40,000
|
|
(prime
rate at December 31, 2005 was 7.25%), due on demand.
|
|
|
|
|
|
|
|
|
|
Note
payable, unsecured, interest payable monthly at 10% per annum,
payable as
a
|
|
|
90,000
|
|
percentage
of any future private or public stock offerings.
|
|
|
|
|
|
|
|
|
|
Four
notes payable, secured by all assets of the Company, interest at
8% per
annum,
|
|
|
346,907
|
|
payable
at various maturities through May 30, 2006. One note for $200,000
was
due
|
|
|
|
|
February
21, 2006 and was converted into a note due August 21, 2006. Two
notes
for
|
|
|
|
|
$64,800
and $32,400 were due on April 18, 2006 and April 20, 2006,
respectively.
|
|
|
|
|
The
Company is currently negotiating an extension of these notes. The
fourth
note,
|
|
|
|
|
for
$49,707, is due May 30, 2006. 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. Two
of these
notes were
|
|
|
|
|
originally
scheduled to mature in the fourth quarter of 2005. The notes and
the
accrued
|
|
|
|
|
interest
were rolled over into the new notes. The intrinsic value of the
beneficial
conversion
|
|
|
|
|
feature
of the notes and warrants, valued at $223,012, has been recorded
as loan
discount
|
|
|
|
|
costs
and is being amortized over the life of the respective notes as
additional
interest cost.
|
|
|
|
|
|
|
|
|
|
Note
payable, secured by all assets of the Company, interest at 10%
per annum,
payable on
|
|
|
800,000
|
|
December
23, 2006. The note is convertible, with some limitations, at the
holder’s
option at
|
|
|
|
|
a
conversion price equal to the lesser of $0.35 or 90% of the lowest
volume
weighted average
|
|
|
|
|
price
of the common stock for the 15 trading days immediately preceding
the
conversion date.
|
|
|
|
|
In
addition, the note has detachable warrants that allow the holder
to buy
600,000 shares of
|
|
|
|
|
common
stock at $0.2878 per share and another 600,000 shares at $0.35
per share.
|
|
|
|
|
|
|
|
|
|
Less,
remaining debt discount
|
|
|
(309,719
|
)
|
|
|
$
|
1,060,171
|
|
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
6
NOTES PAYABLE, RELATED PARTIES
Notes
payable to related parties consist of the following at December 31, 2005:
Note
payable to the sister of the Company's Chief Executive Officer,
secured by
all assets
|
|
$
|
190,665
|
|
of
the Company, interest at 14.25% per annum, due December 31, 2004.
The note
payable
|
|
|
|
|
was
originally issued by ACSI, which merged with the company in 2004.
In
connection with
|
|
|
|
|
the
note payable, 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)
|
|
|
|
|
was
recorded as loan discount costs and was amortized over the life
of the
original note as
|
|
|
|
|
additional
interest cost. The Company is currently negotiating an extension
of this
note.
|
|
|
|
|
|
|
|
|
|
Note
payable to the sister of the Company's Chief Executive Officer,
secured by
all assets
|
|
|
110,000
|
|
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) was recorded as loan discount costs
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 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.
|
|
|
|
|
|
|
|
|
|
Note
payable to an employee of the Company, secured by all assets of
the
Company, interest at
|
|
|
21,600
|
|
8.0%
per annum, due May 30, 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 $13,886, has been recorded as loan discount costs and
is being
amortized
|
|
|
|
|
over
the life of the note as additional interest cost. This note was
due
November 12, 2005,
|
|
|
|
|
and
the principal and accrued interest were converted into a new note
due May
30, 2006.
|
|
|
|
|
|
|
|
|
|
Note
payable to shareholder, secured by all assets of the Company, interest
at
8.0% per annum,
|
|
|
50,000
|
|
due
February 3, 2006. The principal and accrued interest ($4,000) were
converted into a new
|
|
|
|
|
note
due April 3, 2006. That note was converted at maturity into 342,000
shares
of the
|
|
|
|
|
Company’s
common stock 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.
|
|
|
|
|
|
|
|
|
|
Less,
remaining debt discount
|
|
|
(3,700
|
)
|
|
|
$
|
368,565
|
|
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
7
CAPITAL LEASE OBLIGATIONS
The
Company leases certain equipment under two capital leases with monthly payments
of $360 and $701, respectively, including interest at 12.75% per annum. Future
minimum annual rental payments for capitalized leases are as
follows:
Years
ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
12,732
|
|
2007
|
|
|
12,732
|
|
2008
|
|
|
12,732
|
|
2009
|
|
|
3,903
|
|
|
|
|
42,099
|
|
Amount
representing interest
|
|
|
(7,900
|
)
|
Present
value of minimum lease payments
|
|
|
34,199
|
|
Less:
current portion
|
|
|
(8,877
|
)
|
Non-current
portion
|
|
$
|
25,322
|
|
NOTE
8
INCOME TAXES
There
is
no income tax provision due to continuing tax losses. Significant components
of
the Company’s deferred income tax assets at December 31, 2005 and 2004 are as
follows:
|
|
2005
|
|
2004
|
|
Deferred
income tax asset:
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,090,000
|
|
$
|
1,716,000
|
|
Valuation
allowance
|
|
|
(2,090,000
|
)
|
|
(1,716,000
|
)
|
Net
deferred income tax asset
|
|
$
|
-
|
|
$
|
-
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
2005
|
|
2004
|
|
Tax
expense at the U.S. statutory income tax rate
|
|
|
(34.0)
|
%
|
|
(34.0)
|
%
|
Increase
in the valuation allowance
|
|
|
34.0
|
|
|
34.0
|
|
Effective
income tax rate
|
|
|
-
|
%
|
|
-
|
%
|
Deferred
taxes are recorded to give recognition to temporary differences between the
tax
bases of assets or liabilities and their reported amounts in the financial
statements. Deferred tax assets generally represent items that can be used
as a
tax deduction or credit in future years. Deferred tax liabilities generally
represent items that we have taken a tax deduction for, but have not yet
recorded in the Consolidated Statements of Operations.
Net
operating loss carryforwards totaling approximately $4.7 million federal and
$1.7 million state amounts at December 31, 2005 are being carried forward.
The
net operating loss carryforwards expire at various dates through 2025 for
federal purposes and 2015 for state purposes. A full valuation allowance has
been established due to the lack of earnings as support for recognition of
the
deferred tax assets recorded.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
9
STOCKHOLDERS’ EQUITY
On
October 6, 2005, the Company secured financing through, among others, a Standby
Equity Distribution Agreement (SEDA) with Cornell Capital Partners, LP (Cornell)
to support the continued development and growth of the Company. In connection
with the SEDA the Company issued 1,471,429 shares of the Company's common stock
to Cornell and 28,571 shares of the Company's common stock to Monitor Capital
for fees. The fair value of the shares issued was determined to be $0.51 per
share based on the OTC Bulletin Board (OTCBB) closing price for the Company’s
stock on October 6, 2005, for a total fair value of $765,000. Also on October
6,
2005, the Company sold an aggregate of $600,000 of convertible debentures to
Cornell and issued a warrant to Cornell to purchase 600,000 shares of the
Company's common stock, at $0.35 per share, expiring October 6, 2009.
On
December 23, 2005, the Company and Cornell terminated the SEDA and related
agreements. The Company recorded the fair value of the shares of common stock
issued to Cornell in relation to the SEDA as stock-based compensation expense
in
the accompanying financial statements. Also on December 23, 2005, the Company
agreed to sell an aggregate of $1,000,000 of convertible debentures to Cornell,
of which $610,000 of the initial $800,000 proceeds was used to repay the
convertible debentures issued to Cornell on October 6, 2005 plus accrued
interest thereon of $10,000. On February 14, 2006, Cornell advanced an
additional $200,000 on a convertible note payable to bring the total borrowing
from Cornell to $1,000,000. Cornell is entitled, at its option, to convert
and
sell all or any part of the principal amount of the $1,000,000 convertible
debentures, plus any and all accrued interest, into shares of the Company's
common stock at a price equal to the lesser of (i) $0.35 or (ii) 90% of the
lowest volume weighted average price of the common stock, as defined, during
the
fifteen trading days immediately preceding the date of conversion as quoted
by
Bloomberg, LP. Also on December 23, 2005, the Company issued a warrant to
Cornell to purchase 600,000 shares of the Company's common stock, at $0.2878
per
share, expiring December 23, 2010.
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.
On
May
24, 2004 (the date of the Merger, see Note 1), the Company issued 2,584,905
shares of its common stock and warrants to purchase up to 47,802,373 shares
of
its common stock, to the shareholders of ACSI in exchange for all the issued
and
outstanding shares of ACSI. In January 2005, the warrants were exercised and
the
47,802,373 shares of common stock were issued.
On
December 4, 2004, the Company granted 7,500,000 shares of its common stock
to
five shareholders in Spectre, including two individuals who are also Directors
of the Company, for providing services to the Company. 1,500,000 shares were
treated as compensatory stock with a fair value $1.20 per share, representing
the most recent OTCBB closing price prior to that date, for a total of
$1,800,000 and was recognized as stock-based compensation expense in the
accompanying financial statements. The remaining 6,000,000 shares were treated
as a stock dividend. All share and per share amounts included herein have been
restated to reflect the effects of the grant as if it had occurred at the date
of the Merger. The 7,500,000 shares of common stock were issued in January
2005.
Effective
June 8, 2004 the Board of Directors initiated a fifteen for one reverse split
of
the common stock. It also increased the authorized number of common stock shares
from 100,000,000 to 180,000,000. All share and per share amounts included herein
have been restated to reflect the effects of the split as if had occurred at
the
beginning of the period.
On
September 3, 2004, the Company negotiated a settlement of an unsecured note
payable for $250,000 that was due March 9, 2004. Terms of the settlement require
the Company to pay $90,000 plus interest at 10% per annum, payable from future
stock offerings. In addition, the Company agreed to issue 200,000 shares of
common stock to the lender. The fair value of the shares to be issued was
determined to be $1.50 per share based on the OTC Bulletin Board (OTCBB) closing
price for the Company’s stock on September 3, 2004, for a total fair value of
$300,000. The Company recorded the difference between the net carrying amount
of
the extinguished note ($250,000) and the settlement price ($390,000) as
settlement costs on note payable of $140,000 as operating expenses in the
accompanying financial statements. 200,000 shares of the Company’s common stock
were issued to the lender on October 20, 2005.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
10
STOCK OPTIONS AND WARRANTS
Stock
Option Plan
The
Company has a stock option plan, which provides for the granting of options
to
employees, independent representatives and directors of the Company. The Company
is authorized to issue 200,000 shares of common stock. The exercise price is
fixed by the plan administrator. The shares vest over 4 years upon the
optionee’s completion of service. The options expire ten years from the date of
grant.
For
the
year ended December 31, 2004, in accordance with APB No. 25, the intrinsic
value
of the 10,000 stock options granted under this plan was $19,800 and was recorded
as deferred compensation and additional paid-in capital in the accompanying
financial statements (and is being amortized over the vesting periods of the
options). No options were granted in 2005. Amortization of the deferred
compensation related to stock options totaled $37,702 and $54,170 in 2005 and
2004, respectively.
At
December 31, 2005, options outstanding are as follows:
|
|
Shares
|
|
Average
Exercise Price
|
|
Balance
at January 1, 2005
|
|
|
96,500
|
|
$
|
.50
|
|
Granted
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
Cancelled
|
|
|
(20,500
|
)
|
|
.50
|
|
Balance
at December 31, 2005
|
|
|
76,000
|
|
$
|
.50
|
|
Additional
information regarding options outstanding as of December 31, 2005 is as follows:
Options
outstanding
|
|
Options
exercisable
|
Exercise
price
|
|
Number
outstanding
|
|
Weighted
average remaining contractual life (years)
|
|
Weighted
average exercise price
|
|
Number
exercisable
|
|
Weighted
average exercise price
|
$0.50
|
|
76,000
|
|
0.5
|
|
$0.50
|
|
76,000
|
|
$0.50
|
Subsequent
to year end, the board of directors approved a new stock option plan. The above
options were converted to 10 options for the Company’s shares for each ACSI
option outstanding and were repriced at the closing price of the Company’s
shares on March 3, 2006.
Warrants
During
2004, in conjunction with the issuance of a note payable, the board of directors
approved the issuance of warrants to purchase a total of 500,000 shares of
ACSI’s common stock. The warrants were exercised in 2005 and upon
conversion of the note payable into the Company’s stock, 14,479,093
shares of the Company’s common stock were recorded as common stock to be
issued.
On
May
24, 2004, as part of the merger between the Company and ACSI, the Company issued
warrants to purchase up to 47,802,373 shares of its common stock. The warrants
were exercised in 2005 at $.0001 per share.
During
2005, in conjunction with the issuance of a note payable, the board of directors
approved the issuance of warrants to purchase a total of 1,286,866 shares of
the
Company’s common stock at prices between $0.2878 and $0.35 per share. The
warrants expire between October 2009 and December 2010.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
At
December 31, 2005, stock purchase warrants outstanding were as follows:
|
|
Shares
|
|
Average
Exercise Price
|
|
Balance
at January 1, 2005
|
|
|
48,618,039
|
|
$
|
.0080
|
|
Granted
|
|
|
1,286,866
|
|
|
.3168
|
|
Exercised
|
|
|
(48,327,373
|
)
|
|
.0055
|
|
Converted
to the Company’s shares
|
|
|
|
|
|
|
|
from
ACSI shares
|
|
|
7,899,489
|
|
|
.0177
|
|
Balance
at December 31, 2005
|
|
|
9,477,021
|
|
$
|
.0584
|
|
Additional
information regarding stock purchase warrants outstanding as of December 31,
2005 is as follows:
Warrants
outstanding
|
|
Warrants
exercisable
|
Exercise
price
|
|
Number
outstanding
|
|
Weighted
average remaining contractual life (years)
|
|
Weighted
average exercise price
|
|
Number
exercisable
|
|
Weighted
average exercise price
|
$0.0177
|
|
8,190,155
|
|
2.7
|
|
$0.0177
|
|
8,190,155
|
|
$0.0177
|
$0.2878
|
|
686,866
|
|
4.9
|
|
$0.2878
|
|
686,866
|
|
$0.2878
|
$0.35
|
|
600,000
|
|
4.8
|
|
$0.35
|
|
600,000
|
|
$0.35
|
NOTE
11
COMMITMENT AND CONTINGENCIES
Operating
Leases
The
Company leases its office and facility through July 31, 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 formerly
shared with TransOptix, but since the bankruptcy of TransOptix the Company
is
liable for the entire lease obligation.
Future
minimum lease commitments at December 31, 2005 are as follows:
Years
ending December 31,
|
|
Amount
|
|
2006
|
|
$
|
250,900
|
|
2007
|
|
|
151,095
|
|
|
|
$
|
401,995
|
|
Rent
expense for the years ended December 31, 2005 and 2004 was $185,924 and $122,907
respectively.
SENSOR
SYSTEM SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NOTE
12
SUBSEQUENT EVENTS
In
January 2006, a note payable for $40,000 was converted from an interest only,
due on demand note into a three-year note with even principal payments due
monthly plus interest.
On
February 3, 2006, a note payable for $50,000 and accrued interest of $4,000
was
converted into a new note for $54,000, due April 3, 2006 with interest payable
at 8% per annum. The note was secured by all assets of the Company. At maturity,
the note was converted into 342,000 shares of the Company’s common
stock.
On
February 14, 2006, Cornell advanced an additional $200,000 on a new convertible
note payable in one year bringing the total borrowing from Cornell to
$1,000,000.
On
February 22, 2006, a note payable for $200,000 was issued to replace a note
that
matured on February 21, 2006. The note is secured by all assets of the Company,
interest is payable at 8% per annum, and the note matures on August 21, 2006.
At
maturity, the note is convertible at the holder’s option at a conversion price
equal to 75% of the average closing bid price of the Company’s common stock for
the month of February 2006. 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 date of notice of exercising.