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 March 31, 2006
or
|_| Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO _________________
Commission File number 0-024828
SENSOR SYSTEM SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 98-0204898
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45 Parker Avenue, Suite A
Irvine, California 92618
(Address of principal executive offices)
(949) 855-6688
(Issuer's telephone number)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes |_| No |X|
As of May 15, 2006 there were 76,586,112 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
Yes |_| No |X|
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements: (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) 1
and December 31, 2005.
Condensed Consolidated Statements of Operations for three months
ended March 31, 2006 and 2005 (unaudited) 2
Condensed Consolidated Statement of Changes in Stockholders'
Deficiency for the three months ended March 31, 2006 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-9
Item 2. Management's Discussion and Analysis or Plan of Operations 10-15
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 16
Item 2. Changes In Securities and Small Business Issuer Purchases of
Equity Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission Of Matters To a Vote Of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 17
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2006 (Unaudited)
and December 31, 2005
ASSETS
March 31, 2006 December 31,
CURRENT ASSETS (Unaudited) 2005
------------- ------------
Cash $ 38,038 $ 172,732
Accounts receivable 416,851 230,440
Inventory 254,127 302,171
Prepaids and other current assets 9,900 46,634
------------ ------------
Total current assets 718,916 751,977
Property and equipment, net 151,167 233,862
Other assets 104,112 104,112
------------ ------------
Total assets $ 974,195 $ 1,089,951
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,331,136 $ 1,313,134
Notes payable 1,228,564 1,060,171
Notes payable, related parties 376,025 368,565
Current portion of capital lease obligations 9,163 8,877
Current portion of deferred rent concession 6,000 6,000
------------ ------------
Total current liabilities 2,950,888 2,756,747
------------ ------------
LONG-TERM LIABILITIES
Non-current portion of notes payable 26,656 --
Capital lease obligations, net of current portion 22,921 25,322
Deferred rent concession, net of current portion 2,272 3,772
------------ ------------
51,849 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, 76,244,112 and 61,705,019 shares issued and outstanding 76,244 61,705
Common stock to be issued (71,875 and 14,479,093 shares) 20,594 550,000
Additional paid-in capital 16,135,735 15,456,834
Deferred compensation -- (26,598)
Accumulated deficit (18,261,115) (17,737,831)
------------ ------------
Total stockholders' deficiency (2,028,542) (1,695,890)
------------ ------------
Total liabilities and stockholders' deficiency $ 974,195 $ 1,089,951
============ ============
See accompanying notes to condensed consolidated financial statements.
1
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2006 and 2005 (Unaudited)
2006 2005
------------ ------------
Sales, net $ 530,098 $ 205,015
Cost of goods sold 332,993 147,274
------------ ------------
Gross profit 197,105 57,741
------------ ------------
Operating expenses 544,817 330,555
Amortization of discount on notes payable 132,448 155,121
Stock-based compensation costs 60,029 --
------------ ------------
Total operating expenses 737,294 485,676
------------ ------------
Gain on sale of equipment to related party 16,905 --
------------ ------------
Net loss $ (523,284) $ (427,935)
============ ============
Loss per common share, basic and diluted
$ (.01) $ (.01)
============ ============
Weighted average shares outstanding, basic and
diluted 66,228,292 59,279,241
============ ============
See accompanying notes to condensed consolidated financial statements.
2
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For the three months ended March 31, 2006 (Unaudited)
Common Stock Common Stock to be issued
---------------------- ------------------------- Additional
paid-in Deferred Accumulated
Shares Amount Shares Amount capital compensation deficit 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 -- -- -- -- 22,635 -- -- 22,635
Compensatory stock
issued 60,000 60 -- -- 16,740 -- -- 16,800
Warrants issued with
notes payable -- -- -- -- 130,603 -- -- 130,603
Common stock issued for
exercise of warrants 14,479,093 14,479 (14,479,093) (550,000) 535,521 -- -- --
Compensatory stock
to be issued -- -- 71,875 20,594 -- -- -- 20,594
Net loss -- -- -- -- -- -- (523,284) (523,284)
----------- -------- ----------- ----------- ----------- ----------- ------------ -----------
Balance March 31, 2006 76,244,112 $ 76,244 71,875 $ 20,594 $16,135,735 $ -- $(18,261,115) $(2,028,542)
=========== ======== =========== =========== =========== =========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
3
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For three months ended March 31, 2006 and 2005 (Unaudited)
2006 2005
--------- ---------
Cash flows from operating activities:
Net loss $(523,284) $(427,935)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation costs 60,029 --
Depreciation and amortization 20,400 25,916
Amortization of discount on notes payable 132,448 155,121
Amortization of deferred compensation -- 11,942
Gain on sale of property and equipment (16,905) --
Changes in operating assets and liabilities:
Accounts receivable (186,411) (30,535)
Inventory 48,044 7,923
Prepaids and other current assets 36,734 19,680
Deferred rent (1,500) (1,500)
Accounts payable and accrued expenses 22,002 21,852
--------- ---------
Net Cash Used In Operating Activities (408,443) (217,536)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 79,200 --
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable 400,000 250,000
Principal payments on notes payable (203,336) --
Principal payments on capital leases (2,115) (1,863)
--------- ---------
Net Cash Provided By Financing Activities 194,549 248,137
--------- ---------
Net (decrease) increase in cash and cash equivalents (134,694) 30,601
Cash and cash equivalents, beginning of period 172,732 17,115
--------- ---------
Cash and cash equivalents, end of period $ 38,038 $ 47,716
========= =========
Supplemental disclosure of cash flow information Cash paid for:
Interest $ 6,762 $ 5,179
========= =========
Taxes $ -- $ 800
========= =========
Non-cash investing and financing activities:
Cancellations and forfeitures of stock options $ 26,598 $ 99,000
Accrued interest added to notes payable principal 4,000 51,013
Discount related to warrants and convertible notes 130,603 160,714
Exercise of warrants for debt outstanding -- 262,500
Conversion of notes payable -- 316,012
See accompanying notes to condensed consolidated financial statements.
4
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 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
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 $523,284 and a negative cash flow from
operations of $408,443 for three months ended March 31, 2006, and had a working
capital deficiency of $2,231,972 and a stockholders' deficiency of $2,028,542 at
March 31, 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 March 31, 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 months ended March 31, 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 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 eliminated 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.
5
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
Had compensation cost for all stock option grants been determined based on their
fair value at the grant dates in the preceding years, consistent with the method
prescribed by SFAS 148 and SFAS 123, the Company's net loss and loss per share
would have been adjusted to the pro forma amounts indicated below:
Three months ended
March 31, 2005
------------------
Net loss $(427,935)
Add: Stock-based expense included in net loss 11,942
Deduct: Fair value based stock-based expense (14,720)
---------
Pro forma net loss $(430,713)
=========
Basic and diluted earnings per share:
As reported $ (.01)
Pro forma under SFAS No. 123 $ (.01)
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 March 31, 2006 and 2005, the Company
had granted stock options for 1,480,000 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 March 31, 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.
NOTE 2 INVENTORY
Inventory consists of the following at:
March 31, 2006 December 31,
(Unaudited) 2005
-------------- ------------
Raw materials $158,443 $204,748
Finished goods 95,684 97,423
-------- --------
$254,127 $302,171
======== ========
6
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
NOTE 3 NOTES PAYABLE
Notes payable consist of the following at March 31, 2006 and December 31, 2005:
March 31,
2006 December 31,
(Unaudited) 2005
------------ -------------
Two lines of credit, unsecured, interest payable monthly at 10.75% and 11.5% per $ 92,983 $ 92,983
annum, due on demand.
Note payable, unsecured, converted to three-year note in 2006 with monthly 36,664 40,000
principal payments of $1,112 plus interest at 1% over prime (currently a total
of 8.5%).
Note payable, unsecured, interest payable monthly at 10% per annum, payable as a 90,000 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 346,907 346,907
annum, 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. 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.
Note payable, secured by all assets of the Company, interest at 10% per annum, 800,000 800,000
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.
Note payable, secured by all assets of the Company, interest at 10% per annum, 200,000 --
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.
Less, remaining debt discount (311,334) (309,719)
---------- -----------
1,255,220 1,060,171
Less, non-current portion of notes (26,656) --
---------- -----------
$1,228,564 $ 1,060,171
========== ===========
7
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
NOTE 4 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following at March 31, 2006 and
December 31, 2005:
March 31,
2006 December 31,
(Unaudited) 2005
----------- ------------
Note payable to the sister of the Company's Chief Executive Officer, secured by $ 190,665 $ 190,665
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. 110,000 110,000
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.
Note payable to an employee of the Company, secured by all assets of the 21,600 21,600
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.
Note payable to shareholder, secured by all assets of the Company, interest at 54,000 50,000
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 was converted into
342,000 shares of common stock at maturity.
Less, remaining debt discount (240) (3,700)
----------- -----------
$ 376,025 $ 368,565
=========== ===========
8
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 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
March 31, 2006. USI has incurred cumulative losses at March 31, 2006 of
approximately $347,000, including $115,000 for the three 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.
During the three months ended March 31, 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.
9
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 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 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.
o INCREASE THE REVENUE OF OUR EXISTING SENSOR COMPONENT BUSINESS. Once
finalized, the majority of our sensor component manufacturing will be
moved to our joint venture in China to help reduce the cost of our
products. We will invest to increase our production capacity and will
qualify offshore suppliers to meet the increasing demands. Substantial
efforts will be invested in sales and marketing in order to expand our
customer base and to secure additional OEM projects.
o DEVELOP SENSOR SOLUTION BUSINESS. By leveraging the advances in technology
and the large industry-wide investments in wireless and telecommunication
in the last decade, we can now offer total sensor solutions at a very
affordable price. These sensor solutions are modules containing sensing
elements, signal conditioning circuitry, software for calibration and
interface, and capability of wireless communication and/or networking.
They will provide information continuously to decision makers in all
phases of business operation.
o 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.
o 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.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
REVENUES
We generated revenues of $530,098 for the three months ended March 31, 2006,
which was $325,083 or a 159% increase from $205,015 for the three months ended
March 31, 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 three months ended March 31, 2006, was $197,105 or 37.2% of
revenues, compared to $57,741 or 28.2% for the three months ended March 31,
2005. The $139,364 increase in gross profit was generated by a decrease in cost
of sales percentage, which was the result of increased productivity and
management's efforts to reduce operating expense, and production tooling
improvement.
TOTAL OPERATING EXPENSES
Operating expenses
Operating expenses increased to $544,817 for the three months ended March 31,
2006 compared to $330,555 for the three months ended March 31, 2005. The
expenses increased $214,262, 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 decreased to $132,448 for the three
months ended March 31, 2006 compared to $155,121 for the three months ended
March 31, 2005. The expense decreased $22,673, or 15%, primarily due to the lack
of the Sino-America convertible loan in 2006.
Stock-based compensation costs
During the three months ended March 31, 2006, the Company recorded $22,635 in
stock-based compensation costs for options issued to employees during the
quarter. Another $37,394 was recorded for compensatory stock issued to
non-employees for services rendered. There were no stock-based compensation
costs in the three months ended March 31, 2005.
NET LOSS
Net loss increased to ($523,284) for the three months ended March 31, 2006
compared to ($427,935) for the three months ended March 31, 2005. The $95,349
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 $523,284 and a negative cash flow from
operations of $408,443 for three months ended March 31, 2006, and had a working
capital deficiency of $2,231,972 and a stockholders' deficiency of $2,028,542 at
March 31, 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.
11
At March 31, 2006, cash was $38,038 as compared to $172,732 at December 31,
2005. The decrease is due to the negative cash flow from operations, primarily
due to funding an increase in accounts receivable of $186,411 created by the
increase in sales. The cash flows from investing and financing activities
totaling $273,749 was not enough to fund the $408,443 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 March 31, 2006 Amount
------------------------------------------------------------ --------------
2006 (nine months) $ 9,549
2007 12,732
2008 12,732
2009 3,903
--------------
38,916
Amount representing interest (6,832)
--------------
Present value of minimum lease payments 32,084
Less: Current portion (9,163)
--------------
$ 22,921
==============
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
March 31, 2006 are as follows:
2006 (nine months) $ 189,625
2007 151,095
--------------
$ 340,720
==============
INFLATION AND CHANGING PRICES
We do not foresee any adverse effects on our earnings as a result of inflation
or changing prices.
12
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
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.
13
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.
14
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
(a) Evaluation of Disclosure Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive and
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB .
Based on this evaluation, our Chief Executive and Financial Officer has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) are inadequate to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. We are developing a plan to ensure that all information will be recorded,
processed, summarized and reported on a timely basis. This plan is dependent, in
part, upon reallocation of responsibilities among various personnel, possibly
hiring additional personnel and additional funding. It should also be noted that
the design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
(b) Changes in Internal Controls.
During the period covered by the Quarterly Report on Form 10-QSB, there were no
significant changes in our internal controls over financial reporting or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
On February 14, 2006, the Company issued a note payable for $200,000, 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.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The $190,665 promissory note due to Tina Young matured on December 31, 2004. The
Company is currently negotiating a settlement.
The $110,000 convertible loan due to Tina Young matured on March 16, 2005. The
Company is currently negotiating a settlement.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
16
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: May 25, 2006 /s/ Michael Young
----------------------------------
Name: Michael Young
Title: Chief Executive Officer and
Principal
Accounting Officer
17