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 September 30, 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 |X| No |_|
As of November 7, 2006 there were 78,828,002 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements: (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited)
and December 31, 2005. 1
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2006 and 2005 (unaudited) 2
Condensed Consolidated Statement of Changes in Stockholders'
Deficiency for the nine months ended September 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-12
Item 2. Management's Discussion and Analysis or Plan of Operations 13-19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Small Business Issuer Purchases of
Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2006 (Unaudited) and December 31, 2005
September 30, 2006 December 31,
(Unaudited) 2005
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 31,417 $ 172,732
Accounts receivable 100,441 228,750
Accounts receivable, related party 53,628 1,690
Inventory 263,865 302,171
Prepaids and other current assets 2,588 46,634
------------ ------------
Total current assets 451,939 751,977
Property and equipment, net 119,861 233,862
Other assets 104,112 104,112
------------ ------------
Total assets $ 675,912 $ 1,089,951
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,555,224 $ 1,283,825
Accounts payable, related party 187,218 29,309
Notes payable 1,423,877 1,060,171
Notes payable, related parties 315,853 368,565
Current portion of capital lease obligations 9,763 8,877
Current portion of deferred rent concession 5,272 6,000
------------ ------------
Total current liabilities 3,497,207 2,756,747
------------ ------------
LONG-TERM LIABILITIES
Non-current portion of notes payable 19,984 --
Capital lease obligations, net of current portion 17,885 25,322
Deferred rent concession, net of current portion -- 3,772
------------ ------------
37,869 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,
78,087,261 and 61,705,019 shares issued and outstanding 78,088 61,705
Common stock to be issued (none and 14,479,093 shares) -- 550,000
Additional paid-in capital 16,404,768 15,456,834
Deferred compensation -- (26,598)
Accumulated deficit (19,342,020) (17,737,831)
------------ ------------
Total stockholders' deficiency (2,859,164) (1,695,890)
------------ ------------
Total liabilities and stockholders' deficiency $ 675,912 $ 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 and nine months ended September 30, 2006 and 2005 (Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales, net $ 288,379 $ 347,061 $ 1,105,639 $ 855,332
Cost of goods sold 183,412 191,545 670,785 565,389
------------ ------------ ------------ ------------
Gross profit 104,967 155,516 434,854 289,943
------------ ------------ ------------ ------------
Operating expenses 428,349 405,733 1,515,335 1,169,982
Amortization of discount on notes payable 108,721 86,876 376,807 278,336
Stock-based compensation costs 48,456 -- 163,806 --
------------ ------------ ------------ ------------
Total expenses 585,525 492,609 2,055,948 1,448,318
------------ ------------ ------------ ------------
Gain on sale of equipment to related party -- -- 16,905 --
------------ ------------ ------------ ------------
Net loss $ (480,558) $ (337,093) $ (1,604,189) $ (1,158,375)
============ ============ ============ ============
Loss per common share, basic and diluted $ (.01) $ (.01) $ (.02) $ (.02)
============ ============ ============ ============
Weighted average shares outstanding,
basic and diluted 77,416,571 59,279,241 73,374,571 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 nine months ended
September 30, 2006 (Unaudited)
Common Stock Common Stock to be issued
-------------------------- --------------------------
Additional
paid-in Deferred Accumulated
Shares Amount Shares Amount capital compensation deficit
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance
January 1, 2006 61,705,019 $ 61,705 14,479,093 $550,000 $15,456,834 (26,598) $(17,737,831)
Cancellation of
stock options -- -- -- -- (26,598) 26,598 --
Stock option expense -- -- -- -- 118,898 -- --
Compensatory stock
issued 211,625 212 -- -- 44,696 -- --
Warrants issued with
notes payable -- -- -- -- 172,389 -- --
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 1,691,524 1,692 -- -- 103,028 -- --
Net loss -- -- -- -- -- -- (1,604,189)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance
September 30, 2006 78,087,261 $ 78,088 -- $ -- $ 16,404,768 $ -- $(19,342,020)
============ ============ ============ ============ ============ ============ ============
Total
------------
Balance
January 1, 2006 $ (1,695,890)
Cancellation of
stock options --
Stock option expense 118,898
Compensatory stock
issued 44,908
Warrants issued with
notes payable 172,389
Stock issued for warrants
exercised in prior year --
Stock issued for settlement
of notes payable 104,720
Net loss (1,604,189)
------------
Balance
September 30, 2006 $ (2,859,164)
============
See accompanying notes to condensed consolidated financial statements.
3
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS For the nine months ended September 30, 2006 and 2005 (Unaudited)
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $(1,604,189) $(1,158,375)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation costs 163,806 --
Depreciation and amortization 53,259 71,464
Amortization of discount on notes payable 376,807 270,837
Amortization of deferred compensation -- 34,588
Gain on sale of property and equipment (16,905) --
Changes in operating assets and liabilities:
Accounts receivable 76,371 (38,700)
Inventory 38,306 (58,343)
Prepaids and other current assets 44,046 10,404
Deferred rent (4,500) (4,500)
Accounts payable and accrued expenses 434,028 581,017
----------- -----------
Net Cash Used in Operating Activities (438,971) (291,608)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (1,553) (6,500)
Proceeds from sale of property and equipment 79,200 --
----------- -----------
Net Cash Provided by (Used in) Financing Activities 77,647 (6,500)
=========== ===========
Cash flows from financing activities:
Proceeds from notes payable 265,000 298,744
Principal payments on notes payable (38,440) --
Principal payments on capital leases (6,551) (5,770)
----------- -----------
Net Cash Provided by Financing Activities 220,009 292,974
----------- -----------
Net decrease in cash and cash equivalents (141,315) (5,134)
Cash and cash equivalents, beginning of period 172,732 17,115
----------- -----------
Cash and cash equivalents, end of period $ 31,417 $ 11,981
=========== ===========
Supplemental disclosure of cash flow information Cash paid for:
Interest $ 21,049 $ 9,914
=========== ===========
Taxes $ -- $ 800
=========== ===========
Non-cash investing and financing activities:
Cancellations and forfeitures of stock options $ 26,598 $ 112,200
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 172,389 160,714
Conversion of notes payable 104,720 578,512
See accompanying notes to condensed consolidated financial statements.
4
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 $1,604,189 and a negative cash flow from
operations of $438,971 for the nine months ended September 30, 2006, and had a
working capital deficiency of $3,045,268 and a stockholders' deficiency of
$2,859,164 at September 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 September 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 the remainder of the year.
Principles of consolidation
The consolidated financial statements for the three and nine months ended
September 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.
5
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 7).
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 nine months ended
September 30, 2006 was $48,456 and $163,806, respectively, of which $48,456 and
$118,898 was from stock options granted during 2006. The balance was from common
shares issued in lieu of cash. At September 30, 2006, the unamortized value of
these option awards was $172,735 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 Nine months
ended ended
Sept. 30, 2006 Sept. 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 nine months ended September
30, 2005 is as follows:
Three months Nine months
ended ended
Sept. 30, 2005 Sept. 30, 2005
----------- -----------
Net loss $ (337,093) $(1,158,375)
Add: Stock-based expense included in net loss 10,704 34,588
Deduct: Fair value based stock-based expense (13,200) (39,160)
----------- -----------
Pro forma net loss $ (335,589) $(1,162,947)
=========== ===========
Basic and diluted earnings per share:
As reported $ (.01) $ (.02)
=========== ===========
Pro forma under SFAS No. 123 $ (.01) $ (.02)
=========== ===========
6
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 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 September 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.
FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, issued in September 2006, establishes a formal framework for
measuring fair value under GAAP. It defines and codifies the many definitions of
fair value included among various other authoritative literature, clarifies and,
in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value
measurements. Although SFAS No. 157 applies to and amends the provisions of
existing FASB and AICPA pronouncements, it does not, of itself, require any new
fair value measurements, nor does it establish valuation standards. SFAS No. 157
applies to all other accounting pronouncements requiring or permitting fair
value measurements, except for; SFAS No. 123 (R), share-based payment and
related pronouncements, the practicability exceptions to fair value
determinations allowed by various other authoritative pronouncements, and AICPA
Statements of Position 97-2 and 98-9 that deal with software revenue
recognition. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.
NOTE 2 SIGNIFICANT EVENT
On September 14, 2006, the Company was evicted from the premises it leases at 45
Parker Avenue in Irvine, CA (see Note 8) by The Irvine Company, the lessor of
the property, for nonpayment of rent. The Company is attempting to obtain
additional funding to pay the back rent and move back in. Alternatively, the
Company may seek a suitable other location for its operations (see Note 9 -
Subsequent Events).
7
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
NOTE 3 INVENTORY
Inventory consists of the following at:
September 30, 2006 December 31,
(Unaudited) 2005
------------ ------------
Raw materials $ 133,641 $ 204,748
Finished goods 130,224 97,423
------------ ------------
$ 263,865 $ 302,171
============ =============
NOTE 4 NOTES PAYABLE
Notes payable consist of the following at September 30, 2006 and December 31,
2005:
September 30,
2006 December 31,
(Unaudited) 2005
------------ ------------
Two lines of credit, unsecured, interest payable monthly at 10.75% and 11.5% per $ 86,151 $ 92,983
annum, due on demand.
Note payable, unsecured, converted to three-year note in 2006 with monthly 29,992 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.
Five notes payable (four at December 31,2006), secured by all assets of the 376,907 346,907
Company, interest at 8% per annum, payable at various maturities through July
20, 2007. 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 $49,707
were due on April 18, 2006, April 20, 2006 and May 30, 2006, respectively. The
Company is currently negotiating an extension of these notes. The fifth note is
for $30,000 and is due July 20, 2007. 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 $348,965, has been
recorded as loan discount costs and is being amortized over the life of the
respective note as additional interest cost.
8
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
Note payable, secured by all assets of the Company, interest at 10% per annum, 750,000 800,000
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. During the
three months ended September 30, 2006, $50,000 of this note was converted into
1,354,524 shares of common stock.
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 (89,189) (309,719)
------------ ------------
1,443,861 1,060,171
Less, non-current portion of notes (19,984) --
------------ ------------
$ 1,423,877 $ 1,060,171
============ ============
NOTE 5 NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following at September 30, 2006
and December 31, 2005:
September 30,
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.
Note payable to the sister of the Company's Chief Executive Officer, secured by 110,000 110,000
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.
9
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
Note payable to an employee of the Company, secured by all assets of the -- 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 -- 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 of $4,720 was
converted into 342,000 shares of common stock at maturity.
Note payable to shareholder, secured by all assets of the Company, interest at 35,000 --
8.0% per annum at 8.0% per annum, due August 17, 2007. 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 $22,500, has been
recorded as loan discount costs and is being amortized over the life of the note
as additional interest cost.
Less, remaining debt discount (19,812) (3,700)
------------ ------------
$ 315,853 $ 368,565
============ ============
NOTE 6 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 was not fully operational as of
September 30, 2006. USI has incurred cumulative losses at September 30, 2006 of
approximately $662,000, including $430,000 for the nine 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 September 30, 2006, the Company also had trade accounts receivable and
payable due from and to USI in the amounts of $53,628 and $187,218,
respectively. During the nine months ended September 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.
10
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
NOTE 7 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 September 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 September 30, 2006 1,610,000 $.20
========== ====
NOTE 8 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 September 30, 2006 Amount
------------------------ ---------
2006 (three months) $ 3,183
2007 12,732
2008 12,732
2009 3,903
---------
32,550
Amount representing interest (4,902)
---------
Present value of minimum lease payments 27,648
Less: Current portion (9,763)
---------
$ 17,885
=========
11
SENSOR SYSTEMS SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
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 (see Notes 2 and 9).
Future minimum lease commitments for the Company's share under this lease at
September 30, 2006 are as follows:
2006 (three months) $ 64,175
2007 151,095
--------
$215,270
========
NOTE 9 SUBSEQUENT EVENTS
On November 15. 2006, a settlement was reached with The Irvine Company to allow
the Company to re-enter the premises and begin limited operations. The
settlement calls for a payment of $100,000 to re-enter the premises and $79,040
of back rent by December 15, 2006. The Company's CEO and two other employees
went through the premises on November 15, 2006 and determined that all inventory
and machinery that was locked up on September 14, 2006 was still there and
nothing was damaged or missing and that all items were fully accounted for.
Cornell Capital has agreed to loan the Company $250,000 under a bridge loan to
pay the back rent and to fund operations for the short term. Cornell Capital has
agreed that once the Company's September 30, 2006 10-QSB is filed, they will
advance the funds necessary for the Company to pay The Irvine Company $100,000.
12
Item 2. Management's Discussion And Analysis or Plan of Operation.
Cautionary Statement
Statements in this report on Form 10-QSB that are forward-looking are based on
current expectations. Actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties including, but not limited
to, the possibility that the demand for our products may decline as a result of
possible changes in general and industry specific economic conditions, the
effects of competitive pricing and such other risks and uncertainties as are
described in this report on Form 10-QSB and other documents previously filed or
hereafter filed by us from time to time with the Securities and Exchange
Commission. All forward-looking statements speak only as of the date made, and
we undertake no obligation to update these forward-looking statements .
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto, included as part of
this Quarterly Report.
OVERVIEW
Sensor System Solutions, Inc. (3S) was founded by an engineering management team
with over 50 years of Micro-electro-mechanical-systems or "MEMS" transducer
experience. Its objective is to provide high quality sensors and transducers at
an economical price by employing innovative designs and creative manufacturing
methods. 3S offers a variety of digital pressure gauges, pressure transducers,
pressure sensors, force beams, load cells, 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 two years to build up our production capacity, product
offerings and technical team there. We expect to import automotive sensors
produced by our joint venture to North America and Europe around 2008.
* Strategic acquisition: Being a public company gives us a supplemental tool
to grow our business through acquisition in addition to internal growth.
We will actively seek equity or debt funding to bring in the necessary
resources to execute this plan.
13
RESULTS OF OPERATIONS
Three months Ended September 30, 2006 and 2005
Revenues
We generated revenues of $288,379 for the three months ended September 30, 2006,
which was a decrease of $58,682 or 17% from $347,061 for the three months ended
September 30, 2005. The decrease is primarily the result of being evicted on
September 14, 2006 from the premises it leases (see Note 2 to the Consolidated
Financial Statements). Revenues will be severely reduced in the fourth quarter
as operations were curtailed through November 2006 (see Note 9 to the
Consolidated Financial Statements).
Gross Profit
Gross profit for the three months ended September 30, 2006, was $104,967 or
36.4% of revenues, compared to $155,516 or 44.8% for the three months ended
September 30, 2005. The $50,549 decrease in gross profit was a result of the
decrease in revenue and the higher cost of sales percentage which was due to
lower productivity caused by the eviction mentioned above.
Total Expenses
Operating expenses
Operating expenses increased to $428,349 for the three months ended September
30, 2006 compared to $405,733 for the three months ended September 30, 2005. The
expenses increased $22,616, primarily as a result of an increase in interest
expense and rent, partially offset by lower payroll and insurance costs.
Amortization of discount on notes payable
Amortization of discount on notes payable increased to $108,721 for the three
months ended September 30, 2006 compared to $86,876 for the three months ended
September 30, 2005. The expense increased $21,845, or 25%, 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 September 30, 2006, the Company recorded $48,456
in stock-based compensation costs for options issued to employees during the
quarter. There were no stock-based compensation costs in the three months ended
September 30, 2005.
Net Loss
Net loss increased to ($480,558) for the three months ended September 30, 2006
compared to ($337,093) for the three months ended September 30, 2005. The
$143,465 increase in net loss is due to the increase in operating expenses and
the decrease in gross profit.
Nine months Ended September 30, 2006 and 2005
Revenues
We generated revenues of $1,105,639 for the nine months ended September 30,
2006, which was $250,307 or a 29% increase from $855,332 for the nine months
ended September 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 nine months ended September 30, 2006, was $434,854 or 39.3%
of revenues, compared to $289,943 or 33.9% for the six months ended September
30, 2005. The $144,911 increase in gross profit was generated by the increase in
revenue and 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.
14
Total Expenses
Operating expenses
Operating expenses increased to $1,515,335 for the nine months ended September
30, 2006 compared to $1,169,982 for the nine months ended September 30, 2005.
The expenses increased $345,353, primarily as a result of an increase in
interest expense, rent, payroll, additional investment in R&D, travel and legal
fees.
Amortization of discount on notes payable
Amortization of discount on notes payable increased to $376,807 for the nine
months ended September 30, 2006 compared to $278,336 for the nine months ended
September 30, 2005. The expense increased $98,471, or 35%, 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 nine months ended September 30, 2006, the Company recorded $118,898
in stock-based compensation costs for options issued to employees. Another
$44,908 was recorded for compensatory stock issued to non-employees for services
rendered. There were no stock-based compensation costs in the nine months ended
September 30, 2005.
Net Loss
Net loss increased to ($1,604,189) for the nine months ended September 30, 2006
compared to ($1,158,375) for the nine months ended September 30, 2005. The
$445,814 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 $1,604,189 and a negative cash flow from
operations of $438,971 for the nine months ended September 30, 2006, and had a
working capital deficiency of $3,045,268 and a stockholders' deficiency of
$2,859,164 at September 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 and received $65,000 in loans during the third quarter. 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 September 30, 2006, cash was $31,417 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 $1,604,189 reduced by $593,872 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 $588,251 in cash, primarily from a decrease in
accounts payable of $434,028. The cash flows from investing and financing
activities totaling $297,656 was not enough to fund the $438,971 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.
15
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 September 30, 2006 Amount
------------------------ ---------
2006 (three months) $ 3,183
2007 12,732
2008 12,732
2009 3,903
---------
32,550
Amount representing interest (4,902)
---------
Present value of minimum lease payments 27,648
Less: Current portion (9,763)
---------
$ 17,885
=========
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 (see Notes 2 and 9 to the Consolidated
Financial Statements).
Future minimum lease commitments for the Company's share under this lease at
September 30, 2006 are as follows:
2006 (three months) $ 64,175
2007 151,095
---------
$ 215,270
=========
Inflation and Changing Prices
We do not foresee any adverse effects on our earnings as a result of inflation
or changing prices.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment.
Stock - based compensation
The Company 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.
16
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.
FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, issued in September 2006, establishes a formal framework for
measuring fair value under GAAP. It defines and codifies the many definitions of
fair value included among various other authoritative literature, clarifies and,
in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value
measurements. Although SFAS No. 157 applies to and amends the provisions of
existing FASB and AICPA pronouncements, it does not, of itself, require any new
fair value measurements, nor does it establish valuation standards. SFAS No. 157
applies to all other accounting pronouncements requiring or permitting fair
value measurements, except for; SFAS No. 123 (R), share-based payment and
related pronouncements, the practicability exceptions to fair value
determinations allowed by various other authoritative pronouncements, and AICPA
Statements of Position 97-2 and 98-9 that deal with software revenue
recognition. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.
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.
17
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 September 30, 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.
18
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
(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.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes In Securities and Small Business Issuer Purchases of Equity
Securities.
On July 20, 2006, the Company issued a note payable for $30,000, secured by all
assets of the Company, interest at 8% per annum, payable on July 20, 2007. The
note is convertible at the holder's option at a conversion price equal to 70% of
the average closing bid price of the common stock for the 30 trading days
immediately preceding the conversion date. 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 August 17, 2006, the Company issued a note payable for $35,000, secured by
all assets of the Company, interest at 8% per annum, payable on August 17, 2007.
The note is convertible at the holder's option at a conversion price equal to
70% of the average closing bid price of the common stock for the 30 trading days
immediately preceding the conversion date. 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 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 $200,000 convertible loan matured on August 21, 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENSOR SYSTEM SOLUTIONS, INC.
Dated: November 17, 2006 /s/ Michael Young
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Name: Michael Young
Title: Chief Executive Officer and Principal
Accounting Officer
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