Unassociated Document
U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
x
Quarterly Report
Pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For
the
quarterly period ended June 30, 2006
or
o
Transition Report
Pursuant to Section 13 of 15(d) of the Securities
Exchange
Act of 1934
For
the Transition Period From ____________________ to
_________________
Commission
File number 0-024828
SENSOR
SYSTEM SOLUTIONS, INC.
(Exact
name of small business issuer as specified in its charter)
NEVADA
|
98-0204898
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification No.)
|
45
Parker
Avenue, Suite A
Irvine,
California 92618
(Address
of principal executive offices)
(949)
855-6688
(Issuer's
telephone number)
Check
whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file
such
reports), and (2) has been subject to such filing requirements for the past
90
days.
Yes
x
No o
As
of
August 7, 2006 there were 77,371,640 shares of Common Stock
outstanding.
Transitional
Small Business Disclosure Format
Yes
o
No x
INDEX
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1. Condensed Consolidated Financial Statements:
(unaudited)
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2006
(unaudited)
|
|
|
|
|
and
December 31, 2005.
|
|
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three and six
|
|
|
|
|
months
ended June 30, 2006 and 2005 (unaudited)
|
|
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Changes in Stockholders'
|
|
|
|
|
Deficiency
for the six months ended March 31, 2006 (unaudited)
|
|
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months
|
|
|
|
|
ended
June 30, 2006 and 2005 (unaudited)
|
|
|
4
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
|
|
5-11
|
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis or Plan of
Operations
|
|
|
12-18
|
|
|
|
|
|
|
Item
3. Controls and Procedures
|
|
|
18
|
|
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
|
19
|
|
|
|
|
|
|
Item
2. Changes in Securities and Small Business Issuer Purchases
of
|
|
|
|
|
Equity
Securities
|
|
|
19
|
|
|
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
|
19
|
|
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
|
|
19
|
|
|
|
|
|
|
Item
5. Other Information
|
|
|
19
|
|
|
|
|
|
|
Item
6. Exhibits
|
|
|
19
|
|
|
|
|
|
|
SIGNATURES
|
|
|
20
|
|
FINANCIAL
INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
As
of
June 30, 2006 (Unaudited) and December 31, 2005
|
|
|
June
30, 2006
|
|
|
December
31,
|
|
|
|
|
(Unaudited)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,534
|
|
$
|
172,732
|
|
Accounts
receivable
|
|
|
137,824
|
|
|
228,750
|
|
Accounts
receivable, related party
|
|
|
51,565
|
|
|
1,690
|
|
Inventory
|
|
|
304,956
|
|
|
302,171
|
|
Prepaids
and other current assets
|
|
|
5,197
|
|
|
46,634
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
511,076
|
|
|
751,977
|
|
Property
and equipment, net
|
|
|
134,768
|
|
|
233,862
|
|
Other
assets
|
|
|
104,112
|
|
|
104,112
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
749,956
|
|
$
|
1,089,951
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,366,756
|
|
$
|
1,283,825
|
|
Accounts
payable, related party
|
|
|
157,565
|
|
|
29,309
|
|
Notes
payable
|
|
|
1,362,224
|
|
|
1,060,171
|
|
Notes
payable, related parties
|
|
|
322,265
|
|
|
368,565
|
|
Current
portion of capital lease obligations
|
|
|
9,458
|
|
|
8,877
|
|
Current
portion of deferred rent concession
|
|
|
6,000
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,224,268
|
|
|
2,756,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Non-current
portion of notes payable
|
|
|
23,320
|
|
|
--
|
|
Capital
lease obligations, net of current portion
|
|
|
20,443
|
|
|
25,322
|
|
Deferred
rent concession, net of current portion
|
|
|
772
|
|
|
3,772
|
|
|
|
|
|
|
|
|
|
|
|
|
44,535
|
|
|
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,
|
|
|
|
|
|
|
|
76,737,737
and 61,705,019 shares issued and outstanding
|
|
|
76,738
|
|
|
61,705
|
|
Common
stock to be issued (none and 14,479,093 shares)
|
|
|
--
|
|
|
550,000
|
|
Additional
paid-in capital
|
|
|
16,265,876
|
|
|
15,456,834
|
|
Deferred
compensation
|
|
|
--
|
|
|
(26,598
|
)
|
Accumulated
deficit
|
|
|
(18,861,461
|
)
|
|
(17,737,831
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' deficiency
|
|
|
(2,518,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' deficiency
|
|
$
|
749,956
|
|
$
|
1,089,951
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the
three and six months ended June 30, 2006 and 2005 (Unaudited)
|
|
|
For
the three months ended
June
30,
|
|
|
For
the six months ended
June
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$
|
287,162
|
|
$
|
303,256
|
|
$
|
817,260
|
|
$
|
508,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
154,380
|
|
|
226,570
|
|
|
487,373
|
|
|
373,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
132,782
|
|
|
76,686
|
|
|
329,887
|
|
|
134,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
542,169
|
|
|
433,693
|
|
|
1,086,986
|
|
|
764,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of discount on notes payable
|
|
|
135,638
|
|
|
36,339
|
|
|
268,086
|
|
|
191,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation costs
|
|
|
55,321
|
|
|
--
|
|
|
115,350
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
733,128
|
|
|
470,032
|
|
|
1,470,422
|
|
|
955,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of equipment to related party
|
|
|
--
|
|
|
--
|
|
|
16,905
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(600,346
|
)
|
$
|
(393,346
|
)
|
|
|
|
$
|
(821,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
$
|
(.01
|
)
|
$
|
(.01
|
)
|
$
|
(.02
|
)
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
|
76,478,851
|
|
|
59,279,241
|
|
|
71,353,572
|
|
|
59,279,241
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For
the
six months ended June 30, 2006 (Unaudited)
|
|
|
Common
Stock
|
|
|
|
Common
Stock to be issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2006
|
|
|
61,705,019
|
|
|
$
|
61,705
|
|
|
|
14,479,093
|
|
|
$
|
550,000
|
|
|
$
|
15,456,834
|
|
|
$
|
(26,598
|
)
|
|
$
|
(17,737,831
|
)
|
|
$
|
(1,695,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of stock
options
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(26,598
|
)
|
|
|
26,598
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
70,442
|
|
|
|
--
|
|
|
|
--
|
|
|
|
70,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory
stock issued
|
|
|
211,625
|
|
|
|
212
|
|
|
|
--
|
|
|
|
--
|
|
|
|
44,696
|
|
|
|
--
|
|
|
|
--
|
|
|
|
44,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with notes payable
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
130,603
|
|
|
|
-- |
|
|
|
-- |
|
|
|
130,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for
warrants exercised
in prior year
|
|
|
14,479,093
|
|
|
|
14,479
|
|
|
|
(14,479,093
|
)
|
|
|
(550,000
|
)
|
|
|
535,521
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for settlement of
notes payable
|
|
|
342,000
|
|
|
|
342
|
|
|
|
--
|
|
|
|
--
|
|
|
|
54,378
|
|
|
|
--
|
|
|
|
--
|
|
|
|
54,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
--
|
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,123,630 |
) |
|
|
(1,123,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2006
|
|
|
76,737,737
|
|
|
$
|
76,738
|
|
|
|
--
|
|
|
$
|
--
|
|
|
$
|
16,265,876
|
|
|
$
|
--
|
|
|
$
|
(18,861,461
|
)
|
|
$
|
(2,518,847
|
)
|
See accompanying notes to condensed consolidated financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the
six months ended June 30, 2006 and 2005 (Unaudited)
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,123,630
|
)
|
|
$
|
(821,282
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation costs
|
|
|
115,350
|
|
|
|
--
|
|
Depreciation
and amortization
|
|
|
36,799
|
|
|
|
51,832
|
|
Amortization
of discount on notes payable
|
|
|
268,086
|
|
|
|
191,460
|
|
Amortization
of deferred compensation
|
|
|
--
|
|
|
|
23,884
|
|
Gain
on sale of property and equipment
|
|
|
(16,905
|
)
|
|
|
--
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
41,051
|
|
|
|
(15,796
|
)
|
Inventory
|
|
|
(2,785
|
)
|
|
|
(34,249
|
)
|
Prepaids
and other current assets
|
|
|
41,437
|
|
|
|
24,552
|
|
Deferred
rent
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Accounts
payable and accrued expenses
|
|
|
215,907
|
|
|
|
324,387
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Operating Activities
|
|
|
(427,690
|
)
|
|
|
(258,212
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
79,200
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
200,000
|
|
|
|
250,000
|
|
Principal
payments on notes payable
|
|
|
(8,410
|
)
|
|
|
--
|
|
Principal
payments on capital leases
|
|
|
(4,298
|
)
|
|
|
(3,785
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By Financing Activities
|
|
|
187,292
|
|
|
|
246,215
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(161,198
|
)
|
|
|
(11,997
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
172,732
|
|
|
|
17,115
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
|
|
|
$
|
5,118
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
$
|
9,914
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
--
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Cancellations
and forfeitures of stock options
|
|
$
|
|
|
|
$
|
99,000
|
|
Compensatory
stock issued
|
|
|
--
|
|
|
|
1,800,000
|
|
Warrants
exercised by shareholders from merger
|
|
|
--
|
|
|
|
47,802
|
|
Accrued
interest added to notes payable principal
|
|
|
4,720
|
|
|
|
51,012
|
|
Discount
related to warrants and convertible notes
|
|
|
130,603
|
|
|
|
160,714
|
|
Conversion
of notes payable
|
|
|
54,720
|
|
|
|
578,512
|
|
See
accompanying notes to condensed consolidated financial statements.
SENSOR
SYSTEMS SOLUTIONS, INC.
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
financial information included herein is unaudited. The interim consolidated
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, considered necessary for a
fair
presentation of the Company's consolidated financial position and results of
operations for the periods presented. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes presented in the Company's Form 10-KSB for the year ended December 31,
2005. Interim operating results are not necessarily indicative of operating
results expected for the entire year.
Description
of business
Sensor
Systems 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.
Going
concern
The
Company incurred a net loss of $1,123,630 and a negative cash flow from
operations of $427,690 for the six months ended June 30, 2006, and had a working
capital deficiency of $2,713,192 and a stockholders’ deficiency of $2,518,847 at
June 30, 2006. These matters raise substantial doubt about its ability to
continue as a going concern. Without realization of additional capital, it
would
be unlikely for the Company to continue as a going concern. Management believes
that actions are presently being taken to revise the Company's operating and
financial requirements in order to improve the Company's financial position
and
operating results. However, given the levels of its cash resources and working
capital deficiency at June 30, 2006, 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.
Principles
of consolidation
The
consolidated financial statements for the three and six months ended June 30,
2006 and 2005 include the accounts and operations of Sensor Systems Solutions
Inc. and its wholly-owned subsidiary. Intercompany accounts and transactions
have been eliminated in consolidation.
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Stock-based
compensation
The
Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(SFAS 123R), which revises SFAS No. 123 effective January 1, 2006. SFAS
123R also supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. Effective January 1, 2006, SFAS 123R requires that the Company measure
the cost of employee services received in exchange for equity awards based
on
the grant date fair value of the awards, with the cost to be recognized as
compensation expense in the Company’s financial statements over the vesting
period of the awards.
SENSOR
SYSTEMS SOLUTIONS, INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
Accordingly,
the Company will recognize compensation cost for equity-based compensation
for
all new or modified grants issued after December 31, 2005. Although SFAS 123R
would also require the Company to recognize the unvested portion of the grant
date fair value of awards issued prior to adoption of SFAS 123R based on the
fair values previously calculated for disclosure purposes over the remaining
vesting period of the outstanding stock options and warrants, there are none
because all options issued prior to January 1, 2006 were cancelled in the first
quarter of 2006 (see Note 6).
The
Company is using the modified prospective method in which compensation cost
is
recognized beginning with the effective date based on the requirements of SFAS
123R for all share-based payments granted after the effective date.
The
total
stock-based compensation expense for the three and six months ended June 30,
2006 was $55,321 and $115,350, respectively, of which $22,635 and $47,807 was
from stock options granted during 2006. The balance was from common shares
issued in lieu of cash. At June 30, 2006, the unamortized value of these option
awards was $221,191 which will be amortized in future periods as the options
vest. The fair value of options was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for the periods indicated.
|
|
|
Three
months
|
|
|
Six
months
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
June
30, 2006
|
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
|
4.9
|
%
|
Expected
volatility
|
|
|
230
|
%
|
|
212
|
%
|
Expected
life of options (years)
|
|
|
6.0
|
|
|
5.7
|
|
Prior
to
the adoption of SFAS 123R, the Company elected to account for its employee
and
director stock-based awards under the provisions of Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and it provided
the pro-forma disclosures required under SFAS 123 and SFAS 148. Pro-forma
information for the three and six months ended June 30, 2005 is as
follows:
|
|
|
Three
months
|
|
|
Six
months
|
|
|
|
|
ended
|
|
|
ended
|
|
|
|
|
June
30, 2005
|
|
|
June
30, 2005
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(393,346
|
)
|
$
|
(821,282
|
)
|
Add:
Stock-based expense included in net loss
|
|
|
11,942
|
|
|
23,884
|
|
Deduct:
Fair value based stock-based expense
|
|
|
(11,240
|
)
|
|
(25,960
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(392,644
|
)
|
$
|
(823,358
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(.01
|
)
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
Pro
forma under SFAS No. 123
|
|
$
|
(.01
|
)
|
$
|
(.01
|
)
|
SENSOR
SYSTEMS SOLUTIONS, INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
Earnings
(loss) per share
Basic
earnings (loss) per common share (EPS) are based on the weighted average number
of common shares outstanding during each period. Diluted earnings per common
share are based on shares outstanding (computed as under basic EPS) and
potentially dilutive common shares. As of June 30, 2006 and 2005, the Company
had granted stock options for 1,610,000 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. As of June 30, 2006 and 2005, the Company had granted warrants
for 9,477,021 and 8,190,155 shares of common stock, respectively, that are
potentially dilutive common shares but are not included in the computation
of
loss per share because their effect would be anti-dilutive.
Recent
Accounting Pronouncements
During
the first quarter of 2006, the Company adopted 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. The adoption
of SFAS No. 151 did not have a material impact on our financial condition,
results of operations, or cash flows.
In
May
2005, the FASB issued Statement No. 154 (SFAS 154) “Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.”
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. SFAS 154 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. In the event of such impracticality, SFAS 154 provides
for
other means of application. In the event the Company changes accounting
principles, it will evaluate the impact of SFAS 154.
NOTE
2
INVENTORY
Inventory
consists of the following at:
|
|
|
June
30, 2006
|
|
|
December
31,
|
|
|
|
|
(Unaudited)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
148,403
|
|
$
|
204,748
|
|
Finished
goods
|
|
|
156,553
|
|
|
97,423
|
|
|
|
$
|
304,956
|
|
$
|
302,171
|
|
SENSOR
SYSTEMS SOLUTIONS, INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS
Notes
payable consist of the following at June 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
Two
lines of credit, unsecured, interest payable monthly at 10.75% and
11.5%
per annum, due on demand.
|
$91,245
|
|
$92,983
|
Note
payable, unsecured, converted to three-year note in 2006 with monthly
principal payments of $1,112 plus interest at 1% over prime (currently
a
total of 8.5%).
|
33,328
|
|
40,000
|
Note
payable, unsecured, interest payable monthly at 10% per annum, payable
as
a percentage of any future private or public stock
offerings.
|
90,000
|
|
90,000
|
Four
notes payable, secured by all assets of the Company, interest at
8% per
annum, payable at various maturities through August 21, 2006. One
note for
$200,000 was due February 21, 2006 and was converted into a note
due
August 21, 2006. The other notes for $64,800, $32,400 and $47,707
were due
on April 18, 2006, April 20, 2006 and May 30, 2006, respectively.
The
Company is currently negotiating an extension of these notes. At
maturity,
the notes are convertible at the holder's option at a conversion
price
equal to 70% of the weighted average price of the common stock for
the 30
trading days immediately preceding the conversion date. In addition,
each
note has warrants attached that, once the note is converted into
stock,
allow the holder to purchase stock at 85% of the weighted average
price of
the common stock for the 30 trading days immediately preceding the
conversion date. The aggregate intrinsic value of the beneficial
conversion feature of these notes and warrants, valued at $329,679,
has
been recorded as loan discount costs and is being amortized over
the life
of the respective note as additional interest cost.
|
346,907
|
|
346,907
|
Note
payable, secured by all assets of the Company, interest at 10% per
annum,
payable on 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.
|
800,000
|
|
800,000
|
Note
payable, secured by all assets of the Company, interest at 10% per
annum,
payable on February 14, 2007. 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.
|
200,000
|
|
--
|
Less,
remaining debt discount
|
(175,936)
|
|
(309,719)
|
|
|
|
|
|
1,385,544
|
|
1,060,171
|
Less,
non-current portion of notes
|
(23,320)
|
|
--
|
|
$1,362,224
|
|
$1,060,171
|
CONDENSED
NOTES TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
Notes
payable to related parties consist of the following at June 30, 2006 and
December 31, 2005:
|
June
30,
2006
(Unaudited)
|
|
December
31,
2005
|
|
|
|
|
Note
payable to the sister of the Company's Chief Executive Officer, secured
by
all assets of the Company, interest at 14.25% per annum, due December
31,
2004. The note payable was originally issued by Advanced Custom Sensors,
Inc. (ACSI), which merged with the company in 2004. In connection
with the
note payable, 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 warrant ($190,665) has been recorded as loan
discount costs and is being amortized over the life of the note as
additional interest cost. The Company is currently negotiating an
extension of this note.
|
$190,665
|
|
$190,665
|
Note
payable to the sister of the Company's Chief Executive Officer, secured
by
all assets of the Company, interest at 10.0% per annum, due March
15,
2005. The note payable was originally issued by ACSI in 2003, at
which
time ACSI issued a warrant expiring September 17, 2008, to purchase
100,000 shares of stock at $.50 per share (the ACSI warrant is convertible
into 2,817,215 shares of the Company's common stock). The intrinsic
value
of the original warrant ($100,000) was recorded as a loan discount
cost,
and was amortized over the life of the original note as additional
interest cost. The original note was due September 16, 2004. On September
16, 2004, a new note was issued to replace the original note. At
maturity,
the new note is convertible at the holder's option at a conversion
price
equal to 80% of the weighted average price of the common stock for
the 30
trading days immediately preceding the conversion date. In addition,
the
note has warrants attached that, once the note is converted into
stock,
allow the holder to purchase stock at 85% of the weighted average
price of
the common stock for the 30 trading days immediately preceding the
conversion date. The intrinsic value of the beneficial conversion
feature
of the note and warrants, valued at $48,125, has been recorded as
loan
discount costs and is being amortized over the life of the note as
additional interest cost. The Company is currently negotiating an
extension of this note.
|
110,000
|
|
110,000
|
Note
payable to an employee of the Company, secured by all assets of the
Company, interest at 8.0%per annum, due 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. The Company is currently negotiating an extension of this
note.
|
21,600
|
|
21,600
|
Note
payable to shareholder, secured by all assets of the Company, interest
at
8.0% per annum at 8.0% per annum, due April 3, 2006. At maturity
the note
is convertible at the holder's option at a conversion price equal
to 70%
of the weighted average price of the common stock for the 30 trading
days
immediately preceding the conversion date. In addition, the note
has
warrants attached that, once the note is converted into stock, allow
the
holder to purchase stock at 85% of the weighted average price of
the
common stock for the 30 trading days immediately preceding the conversion
date. The intrinsic value of the beneficial conversion feature of
the note
and warrants, valued at $32,143, has been recorded as loan discount
costs
and is being amortized over the life of the note as additional interest
cost. This note and accrued interest of $4,720 was converted into
342,000
shares of common stock at maturity.
|
--
|
|
50,000
|
Less,
remaining debt discount
|
--
|
|
(3,700)
|
|
|
|
|
|
$322,265
|
|
$368,565
|
CONDENSED
NOTES TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE
5
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 will contribute 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 June
30,
2006. USI has incurred cumulative losses at June 30, 2006 of approximately
$484,000, including $252,000 for the six months then ended. 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. The Company has no liability for future cash payments to USI if
necessary to fund its operations or pay its debts.
As
of
June 30, 2006, the Company also had trade accounts receivable and payable due
from and to USI in the amounts of $51,565 and $157,565,
respectively.
During
the six months ended June 30, 2006, the Company sold some of its tooling
equipment to USI. The equipment had an original cost and remaining book value
of
approximately $118,000 and $62,000, respectively. The Company recorded a gain
on
the sale of $16,905.
NOTE
6
STOCK OPTIONS
The
Company had a stock option plan, which provided for the granting of options
to
employees, independent representatives and directors of the Company. The Company
was authorized to issue 200,000 shares of common stock of Advanced Custom
Sensors, Inc. (ACSI) which merged with Sensor System Solutions, Inc. in 2004.
The exercise price was fixed by the plan administrator, shares vested over
four
years upon the optionee’s completion of service and the options expired ten
years from the date of grant. At January 1, 2006, there were options for 76,000
shares outstanding with an exercise price of $.50. In the first quarter of
2006,
the Board of Directors cancelled this plan and all outstanding options. The
Board then approved a new stock compensation plan which includes stock options
and other forms of stock-based awards. The Company is authorized to issue
5,000,000 shares of common stock under this plan. The first grant of stock
options was to the employees whose ACSI stock options were cancelled. They
were
granted options for 760,000 shares on March 3, 2006 at the closing price on
that
date with a vesting period of one year.
At
June
30, 2006, options outstanding are as follows:
|
|
Shares
|
|
Average
Exercise Price
|
|
Balance
at January 1, 2006
|
|
|
76,000
|
|
$
|
.50
|
|
Cancelled
|
|
|
(76,000
|
)
|
|
.50
|
|
Replacement
options
|
|
|
760,000
|
|
|
.21
|
|
Granted
|
|
|
850,000
|
|
|
.19
|
|
Exercised
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
1,610,000
|
|
$
|
.20
|
|
SENSOR
SYSTEMS SOLUTIONS, INC.
CONDENSED
NOTES TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE
7
COMMITMENTS AND CONTINGENCIES
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:
As
of June 30, 2006
|
|
|
Amount
|
|
2006
(six months)
|
|
$
|
6,366
|
|
2007
|
|
|
12,732
|
|
2008
|
|
|
12,732
|
|
2009
|
|
|
3,903
|
|
|
|
|
35,733
|
|
Amount
representing interest
|
|
|
(5,832
|
)
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
29,901
|
|
Less:
Current portion
|
|
|
(9,458
|
)
|
|
|
$
|
20,443
|
|
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.
Future
minimum lease commitments for the Company's share under this lease at June
30,
2006 are as follows:
2006
(six months)
|
|
$
|
128,350
|
|
2007
|
|
|
151,095
|
|
|
|
$
|
279,445
|
|
Item
2. Management’s Discussion And Analysis or Plan of
Operation.
Cautionary
Statement
Statements
in this report on Form 10-QSB that are forward-looking are based on current
expectations. Actual results may differ materially. Forward-looking statements
involve numerous risks and uncertainties including, but not limited to, the
possibility that the demand for our products may decline as a result of possible
changes in general and industry specific economic conditions, the effects of
competitive pricing and such other risks and uncertainties as are described
in
this report on Form 10-QSB and other documents previously filed or hereafter
filed by us from time to time with the Securities and Exchange Commission.
All
forward-looking statements speak only as of the date made, and we undertake
no
obligation to update these forward-looking statements .
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
Sensor
System Solutions, Inc. (3S) was founded by an engineering management team with
over 50 years of Micro-electro-mechanical-systems or "MEMS" transducer
experience. Its objective is to provide high quality sensors and transducers
at
an economical price by employing innovative designs and creative manufacturing
methods. 3S offers a variety of digital pressure gauges, pressure transducers,
pressure sensors, force beams, load cells, intelligent sensor interface
electronics, intelligent embedded control systems, and wireless communication
network interfaces.
3S
has 14
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
of
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.
3S
commenced operations as a private company in September of 1996. 3S is
headquartered in Irvine, California where 3S occupies a 25,000 square foot
facility fully equipped with fabrication capability.
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 twoyears
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 bring in the necessary resources to execute
this
plan.
|
RESULTS
OF OPERATIONS
Three
months Ended June 30, 2006 and 2005
Revenues
We
generated revenues of $287,162 for the three months ended June 30, 2006, which
was a decrease of $16,094 or 6% from $303,256 for the three months ended June
30, 2005. The decrease is primarily the result of a temporary lapse in ordering
by one of the Company’s largest customers in order to work off its inventory
level. This customer has issued a new purchase order subsequent to the end
of
the quarter for approximately $600,000 worth of products to be delivered over
the next two years.
Gross
Profit
Gross
profit for the three months ended June 30, 2006, was $132,782 or 46.3% of
revenues, compared to $76,686 or 25.3% for the three months ended June 30,
2005.
The $56,096 increase in gross profit was generated by a decrease in cost of
sales percentage, which was the result of increased productivity and
management’s efforts to reduce operating expense, and production tooling
improvement.
Total
Expenses
Operating
expenses
Operating
expenses increased to $542,169 for the three months ended June 30, 2006 compared
to $433,693 for the three months ended June 30, 2005. The expenses
increased $108,476, primarily as a result of an increase in interest expense,
rent, additional investment in R&D and sales personnel, and professional
fees for a public company.
Amortization
of discount on notes payable
Amortization
of discount on notes payable increased to $135,638 for the three months ended
June 30, 2006 compared to $36,339 for the three months ended June 30, 2005.
The
expense increased $99,299, or 273%, primarily due to the Cornell Capital
Partners borrowings of $800,000 in December 2005 and $200,000 in February
2006.
Stock-based
compensation costs
During
the three months ended June 30, 2006, the Company recorded $47,807 in
stock-based compensation costs for options issued to employees during the
quarter. Another $7,514 was recorded for compensatory stock issued to
non-employees for services rendered. There were no stock-based compensation
costs in the three months ended June 30, 2005.
Net
Loss
Net
loss
increased to ($600,346) for the three months ended June 30, 2006 compared to
($393,346) for the three months ended June 30, 2005. The $207,000 increase
in
net loss is due to the increase in operating expenses exceeding the increase
in
gross profit.
Six
months Ended June 30, 2006 and 2005
Revenues
We
generated revenues of $817,260 for the six months ended June 30, 2006, which
was
$308,989 or a 61% increase from $508,271 for the six months ended June 30,
2005.
The increase is the result of the hiring of a full-time sales manager, the
addition of new sales representatives and the introduction of new products.
Gross
Profit
Gross
profit for the six months ended June 30, 2006, was $329,887 or 40.4% of
revenues, compared to $134,427 or 26.4% for the six months ended June 30, 2005.
The $195,460 increase in gross profit was generated by a decrease in cost of
sales percentage, which was the result of increased productivity and
management’s efforts to reduce operating expense, and production tooling
improvement.
Total
Expenses
Operating
expenses
Operating
expenses increased to $1,086,986 for the six months ended June 30, 2006 compared
to $764,249 for the six months ended June 30, 2005. The expenses increased
$322,737, primarily as a result of an increase in interest expense, rent,
additional investment in R&D personnel and development, and professional
fees for a public company.
Amortization
of discount on notes payable
Amortization
of discount on notes payable increased to $268,086 for the six months ended
June
30, 2006 compared to $191,460 for the six months ended June 30, 2005. The
expense increased $76,626, or 40%, primarily due to the Cornell Capital Partners
borrowings of $800,000 in December 2005 and $200,000 in February
2006.
Stock-based
compensation costs
During
the six months ended June 30, 2006, the Company recorded $70,442 in stock-based
compensation costs for options issued to employees during the quarter. Another
$44,908 was recorded for compensatory stock issued to non-employees for services
rendered. There were no stock-based compensation costs in the six months ended
June 30, 2005.
Net
Loss
Net
loss
increased to ($1,123,630) for the six months ended June 30, 2006 compared to
($821,282) for the six months ended June 30, 2005. The $302,348 increase in
net
loss is primarily due to the increase in operating expenses exceeding the
increase in gross profit and is partially offset by the $16,905 gain on sale
of
equipment to related party.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
Going
Concern
The
Company incurred a net loss of $1,123,630 and a negative cash flow from
operations of $427,690 for the six months ended June 30, 2006, and had a working
capital deficiency of $2,713,192 and a stockholders’ deficiency of $2,518,847 at
June 30, 2006. These matters raise substantial doubt about its 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 an additional $200,000 on a convertible loan from an
outside source in February 2006, bringing the total owed to that lender to
$1
million. This allowed the company to pay off some of the debt and continue
its
operation. Current cash on hand will allow the company to continue its operation
for only a short period of time.
At
June
30, 2006, cash was $11,534 as compared to $172,732 at December 31, 2005. The
decrease is due to the negative cash flow from operations, primarily due to
the
net loss of $1,123,630 reduced by $420,235 in non-cash expenditures for
stock-based compensation, amortization of debt discount costs and depreciation
and amortization. Changes in operating assets and liabilities contributed an
additional $296,610 in cash, primarily from a decrease in accounts payable
of
$215,907. The cash flows from investing and financing activities totaling
$266,492 was not enough to fund the $427,690 in net cash used in operations.
We
have a substantial working capital deficit. We require $3,000,000 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, its operations curtailed or protection under bankruptcy/
reorganization laws sought.
We
are
addressing our liquidity requirements by the following actions: Continue our
programs for selling products; continue to seek investment capital through
the
public markets. However, there is no guarantee that these strategies will enable
us to meet our obligations for the foreseeable future.
Commitments
and Contingencies
We
have
the following material contractual obligations and capital expenditure
commitments:
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:
As
of June 30, 2006
|
|
|
Amount
|
|
2006
(six months)
|
|
$
|
6,366
|
|
2007
|
|
|
12,732
|
|
2008
|
|
|
12,732
|
|
2009
|
|
|
3,903
|
|
|
|
|
35,733
|
|
Amount
representing interest
|
|
|
(5,832
|
)
|
Present
value of minimum lease payments
|
|
|
29,901
|
|
Less:
Current portion
|
|
|
(9,458
|
)
|
|
|
$
|
20,443
|
|
Future
minimum lease commitments for the Company's share under this lease at June
30,
2006 are as follows:
2006
(six months)
|
|
$
|
128,350
|
|
2007
|
|
|
151,095
|
|
|
|
$
|
|
|
Inflation
and Changing Prices
We
do not
foresee any adverse effects on our earnings as a result of inflation or changing
prices.
CRITICAL
ACCOUNTING POLICIES
Revenue
Recognition
The
Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment.
Stock
- based compensation
The
Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(SFAS 123R), which revises SFAS No. 123 in the first quarter of 2006. SFAS
123R also supersedes APB No. 25 and amends SFAS No. 95, “Statement of Cash
Flows”. In general, the accounting required by SFAS 123R is similar to that of
SFAS No. 123. However, SFAS No. 123 gave companies a choice to either
recognize the fair value of stock options in their income statements or disclose
the pro forma income statement effect of the fair value of stock options in
the
notes to the financial statements. SFAS 123R eliminates that choice and requires
the fair value of all share-based payments to employees, including the fair
value of grants of employee stock options, be recognized in the income
statement, generally over the option vesting period.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or
market.
Recent
Accounting Pronouncements
During
the first quarter of 2006, the Company adopted Statement No. 151 (SFAS 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. The adoption of SFAS
151
did not have a material impact on the Company’s financial condition, results of
operations or cash flows.
In
May
2005, the FASB issued Statement No. 154 (SFAS 154) “Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.”
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. APB Opinion 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the
new
accounting principle. SFAS 154 requires retrospective application to prior
periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects of the cumulative
effect of the change. In the event of such impracticality, SFAS 154 provides
for
other means of application. In the event the Company changes accounting
principles, it will evaluate the impact of SFAS 154.
RISKS
RELATED TO OUR BUSINESS
We
have had negative cash flows from operations. Our business operations may fail
if our actual cash requirements exceed our estimates, and we are not able to
obtain further financing.
Our
company has had negative cash flows from operations. To date, we have incurred
significant expenses in product development and administration in order to
ready
our products for market. Our business plan calls for additional significant
expenses necessary to bring our products to market. We believe we do not have
sufficient funds to satisfy our short-term cash requirements. There is no
assurance that actual cash requirements will not exceed our estimates, in which
case we will require additional financing to bring our products into commercial
operation, finance working capital and pay for operating expenses and capital
requirements until we achieve a positive cash flow. In particular, additional
capital may be required in the event that:
o
we
incur unexpected costs in completing the development of our technology or
encounter any unexpected technical or other difficulties;
o
we
incur delays and additional expenses as a result of technology failure;
o
we are
unable to create a substantial market for our product and services; or
o
we
incur any significant unanticipated expenses.
We
may
not be able to obtain additional equity or debt financing on acceptable terms
if
and when we need it. Even if financing is available it may not be available
on
terms that are favorable to us or in sufficient amounts to satisfy our
requirements. If we require, but are unable to obtain, additional financing
in
the future, we may be unable to implement our business plan and our growth
strategies, respond to changing business or economic conditions, withstand
adverse operating results, and compete effectively. More importantly, if we
are
unable to raise further financing when required, our continued operations may
have to be scaled down or even ceased and our ability to generate revenues
would
be negatively affected.
A
decline in the price of our common stock could affect our ability to raise
further working capital and adversely impact our operations.
A
prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because our operations have been primarily financed through the sale
of
equity securities, a decline in the price of our common stock could be
especially detrimental to our liquidity and our continued operations. Any
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 March 31, 2006, we have incurred aggregate net losses. There
is no assurance that we will operate profitably or will generate positive cash
flow in the future. In addition, our operating results in the future may be
subject to significant fluctuations due to many factors not within our control,
such as market acceptance of our products, the unpredictability of when
customers will order products, the size of customers' orders, the demand for
our
products, and the level of competition and general economic conditions.
Although
we anticipate that we will be able to increase revenues during the next 9
months, we also expect an increase in development and operating costs.
Consequently, we expect to incur operating losses and net cash outflow unless
and until our existing products, and/or any new products that we may develop,
gain market acceptance sufficient to generate a commercially viable and
sustainable level of sales.
Unless
we can establish significant sales of our current products, our potential
revenues may be significantly reduced.
We
expect
that a substantial portion, if not all, of our future revenue will be derived
from the sale of our sensor products. We expect that these product offerings
and
their extensions and derivatives will account for a majority, if not all, of
our
revenue for the foreseeable future. The successful introduction and broad market
acceptance of our sensor products - as well as the development, introduction
and
market acceptance of any future enhancements - are, therefore, critical to
our
future success and our ability to generate revenues. Unfortunately, there can
be
no assurance that we will be successful in marketing our current product
offerings, or any new product offerings, applications or enhancements. Failure
to achieve broad market acceptance of our sensor products, as a result of
competition, technological change, or otherwise, would significantly harm our
business.
We
could lose our competitive advantages if we are not able to protect any
proprietary technology and intellectual property rights against infringement,
and any related litigation could be time-consuming and costly.
Our
success and ability to compete depends to a significant degree on our
proprietary technology incorporated in our products. We have taken limited
action to protect our proprietary technology and proprietary computer software.
If any of our competitors copies or otherwise gains access to our proprietary
technology or software or develops similar technologies independently, we would
not be able to compete as effectively.
Further,
the laws of foreign countries may provide inadequate protection of such
intellectual property rights. We may need to bring legal claims to enforce
or
protect such intellectual property rights. Any litigation, whether successful
or
unsuccessful, could result in substantial costs and diversions of resources.
In
addition, notwithstanding any rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed
on
their intellectual property rights, including claims based upon the content
we
license from third parties or claims that our intellectual property right
interests are not valid. Any claims against us, with or without merit, could
be
time consuming and costly to defend or litigate, divert our attention and
resources, result in the loss of goodwill associated with our service marks
or
require us to make changes to our website or other of our technologies.
Our
products may become obsolete and unmarketable if we are unable to respond
adequately to rapidly changing technology and customer demands.
Our
industry is characterized by rapid changes in technology and customer demands.
As a result, our products may quickly become obsolete and unmarketable. Our
future success will depend on our ability to adapt to technological advances,
anticipate customer demands, develop new products and enhance our current
products on a timely and cost-effective basis. Further, our products must remain
competitive with those of other companies with substantially greater resources.
We may experience technical or other difficulties that could delay or prevent
the development, introduction or marketing of new products or enhanced versions
of existing products. Also, we may not be able to adapt new or enhanced products
to emerging industry standards, and our new products may not be favorably
received.
If
we fail to effectively manage our growth our future business results could
be
harmed and our managerial and operational resources may be strained
.
As
we
proceed with the commercialization of our products, we expect to experience
significant and rapid growth in the scope and complexity of our business. We
will need to add staff to market our products, manage operations, handle sales
and marketing efforts and perform finance and accounting functions. We will
be
required to hire a broad range of additional personnel in order to successfully
advance our operations. This growth is likely to place a strain on our
management and operational resources. The failure to develop and implement
effective systems, or to hire and retain sufficient personnel for the
performance of all of the functions necessary to effectively service and manage
our potential business, or the failure to manage growth effectively, could
have
a materially adverse effect on our business and financial condition.
OFF
BALACE SHEET ARRANGMENTS
There
are
no Off-Balance Sheet Arrangements to report.
Item
3. Controls And Procedures
Our
management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB
.
Based on this evaluation, our Chief Executive and Financial Officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) are inadequate to ensure that information required to be disclosed by
us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. We are developing a plan to ensure that all information will be recorded,
processed, summarized and reported on a timely basis. This plan is dependent,
in
part, upon reallocation of responsibilities among various personnel, possibly
hiring additional personnel and additional funding. It should also be noted
that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
(b)
Changes
in Internal Controls.
During
the period covered by the Quarterly Report on Form 10-QSB, there were no
significant changes in our internal controls over financial reporting or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART
II
OTHER
INFORMATION
Item
1.
Legal
Proceedings.
None.
Item
2.
Changes
In Securities and Small Business Issuer Purchases of Equity
Securities.
On
February 22, 2006, the Company issued a note payable for $200,000, secured
by
all assets of the Company, interest at 8% per annum, payable on August 21,
2006.
The note is convertible at the holder’s option at a conversion price equal to
the 75% of the average closing bid price of the common stock for the month
of
February 2006. The note has 3-year warrants attached that allow the holder,
if
he converts, to purchase an identical number of shares at 85% of the average
bid
price of the common stock for the 30 trading days preceding
exercise.
On
May 1,
2006, the Company issued 342,000 shares of its common stock in payment of a
$54,000 note payable plus accrued interest of $720.
Item
3.
Defaults
Upon Senior Securities.
The
$190,665 promissory note due to Tina Young matured on December 31, 2004. The
Company is currently negotiating a settlement.
The
$110,000 convertible loan due to Tina Young matured on March 15, 2005. The
Company is currently negotiating a settlement.
A
$64,800
convertible loan matured on April 18, 2006. The Company is currently negotiating
an extension of the note.
A
$32,400
convertible loan matured on April 20, 2006. The Company is currently negotiating
an extension of the note.
A
$47,707
convertible loan matured on May 30, 2006. The Company is currently negotiating
an extension of the note.
A
$21,600
convertible loan matured on May 30, 2006. The Company is currently negotiating
an extension of the note.
None.
Item
5.
Other
Information.
Item 6.
Exhibits
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SENSOR
SYSTEM SOLUTIONS, INC.
|
|
|
|
|
|
Dated:
August 14, 2006 |
|
/s/ Michael
Young |
|
Name:
Michael Young
Title:
Chief Executive Officer and
Principal
Accounting
Officer
|
|
|