As filed with the Securities and Exchange Commission on February 13, 2006
Registration No. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Nevada Sensor System Solutions, Inc. 98-0226032
------ ----------------------------- ----------
(State or Other Jurisdiction of (Name of Registrant in Our Charter) (I.R.S. Employer Identification No.)
Incorporation
or Organization)
Michael Young
45 Parker Avenue, Suite A 45 Parker Avenue, Suite A
Irvine, California 92618 Irvine, California 92618
(949) 855-6688 7389 7389 (949) 855-6688
(Address and telephone number of Principal (Primary Standard Industrial (Name, address and telephone number
Executive Offices and Principal Place of Classification Code Number) of agent for service)
Business)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP Kirkpatrick & Lockhart Nicholson Graham LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305)539-3300 Telephone: (305)539-3300
Telecopier: (305)358-7095 Telecopier: (305)358-7095
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee
----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.001 per share 20,636,866 shares (2) $0.32 $607.24
TOTAL 20,636,866 shares (2) $0.32 $5,159,216.50 $607.24
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of a recent date.
(2) Of these shares, 17,850,000 shares are being registered under secured
convertible debentures, 1,471,429 shares were received as a one-time
commitment fee under a now-terminated Standby Equity Distribution
Agreement, 28,571 shares are being registered as a placement agent fee
issued in connection with a now-terminated Standby Equity Distribution
Agreement, and 1,286,866 shares are being registered upon the exercise of
warrants.
----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the United States Securities and Exchange Commission
(the "Commission"), acting pursuant to said Section 8(a), may determine.
PROSPECTUS
Subject to completion,
dated February 13, 2006
SENSOR SYSTEM SOLUTIONS, INC.
20,636,866 shares of Common Stock
This Prospectus relates to the sale of up to 20,636,866 shares of common
stock of Sensor System Solutions, Inc. ("Sensor System" or the "Company") by
certain persons who are, or will become, stockholders of the Company including
Cornell Capital Partners, LP ("Cornell Capital Partners"). The selling
stockholders consist of:
o Cornell Capital Partners, LP, which may sell up to (i) 17,850,000 shares
of common stock underlying secured convertible debentures, (ii) 1,471,429
shares of common stock received from the Company on October 6, 2005 as a
one-time commitment fee under that certain Standby Equity Distribution
Agreement, dated October 6, 2005, and subsequently terminated on December
23, 2005 and (iii) 1,200,000 shares of common stock to be issued upon the
exercise of warrants;
o Monitor Capital, Inc., which may sell up to 28,571 shares of common stock
received from the Company on October 6, 2005 as a placement agent fee
under a now-terminated Standby Equity Distribution Agreement; and
o Trenwith Securities, Inc., which may sell up to 86,866 shares of common
stock under a warrant issued by the Company to Trenwith Securities, Inc.
on December 27, 2005.
Please refer to "Selling Stockholders" beginning on page 13. Sensor System
is not selling any shares of common stock in this offering and therefore will
not receive any proceeds from this offering. Sensor System received gross
proceeds in the total principal amount of $1,000,000, which have been used to
repay outstanding debt and for general working capital. All costs associated
with this registration will be borne by the Company.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On February 3, 2006, the last reported sale price of
our common stock was $0.25 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "SSYO.OB." The price per share
of our common stock will fluctuate based on the demand for the shares of common
stock.
On December 23, 2005, the Company entered into a Securities Purchase
Agreement with Cornell Capital Partners, pursuant to which the Company issued to
Cornell Capital Partners secured convertible debentures in the principal amount
of $1,000,000. The convertible debentures are secured by substantially all of
the Company's assets, have a one year term and accrue interest at 10% per annum.
Cornell Capital Partners is entitled, at its option, to convert and sell all or
any part of the principal amount of the convertible debentures, plus any and all
accrued interest, into shares of the Company's common stock at a price equal to
the lesser of (i) $0.35 and (ii) ninety percent (90%) of the lowest volume
weighted average price of the common stock during the fifteen (15) trading days
immediately preceding the date of conversion as quoted by Bloomberg, LP. In this
registration statement, we are registering 17,850,000 shares of common stock
under the secured convertible debentures.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 5.
No underwriter or person has been engaged to facilitate the sale of shares
of common stock in this offering. This offering will terminate 24 months after
the companying registration statement is declared effective by the Commission.
The information in this Prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Commission is effective. This prospectus is not an
offer to buy these securities in any state where the offer or sale is not
permitted.
The Commission and state securities regulators have not approved or
disapproved of these securities, or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is __________, 2006
1
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................3
SUMMARY FINANCIAL DATA.........................................................5
RISK FACTORS...................................................................9
FORWARD-LOOKING STATEMENTS....................................................17
SELLING STOCKHOLDERS..........................................................18
PLAN OF DISTRIBUTION..........................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................25
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..................................................................34
DESCRIPTION OF BUSINESS.......................................................35
MANAGEMENT....................................................................41
PRINCIPAL STOCKHOLDERS........................................................46
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS.........................................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................50
DESCRIPTION OF CAPITAL STOCK..................................................51
EXPERTS.......................................................................55
VALIDITY OF SECURITIES........................................................55
INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS...........................55
HOW TO GET MORE INFORMATION...................................................55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES.....................F-i
PART II.....................................................................II-1
SIGNATURES..................................................................II-9
i
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements
and the notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision.
Our Company
Sensor System Solutions, Inc. ("Sensor System") 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. Sensor System
offers a variety of Digital Pressure Gauges, Pressure Transducers, Pressure
Sensors, Force Beams, Load Cells, Strain Gauges and Sensor Kits. Sensor System
produces or supplies a family of nearly thirty (30) distinctive products. Sensor
System set up a volume production line with an ISO 9000 partner in Taiwan in
2002 to penetrate high-volume consumer markets that are price sensitive. On
April 12, 2005, we entered into a Joint Venture Agreement with China Automotive
Systems, Inc. ("CAAS"), pursuant to which the parties agreed to develop, produce
and sale sensor and related electronic products throughout China. To that end,
in 2005, the parties established Universal Sensors, Inc. ("USI") in the Wuhan
East lake development zone, in Hubei, China. Pursuant to the Joint Venture
Agreement, the parties agreed to invest $10,000,000, out of which we will invest
$3,000,000 in technology and assets. USI has been in operations since 2005, and
we have been in the process of transferring technology to them for the
production and development of sensor products.
Sensor System is a supplier of thin-film and micro-machined force and
pressure sensors to the medical, chemical, oil, and gas industries. Sensor
System believes that its technology will enable it to become a global supplier
of advanced MEMS/Microelectronic products in myriad developing markets. Sensor
System'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.
Going Concern
In their report in connection with our 2004 financial statements, our
auditors included an explanatory paragraph stating that, because we have
incurred a net loss of $3,662,390 and a negative cash flow from operations of
$594,293 for the year ended December 31, 2004, and had a working capital
deficiency of $1,353,308 and a stockholders' deficiency of $1,023,191 at
December 31, 2004, there is substantial doubt about our ability to continue as a
going concern.
The Company incurred a net loss of $1,158,375 (unaudited) and a negative
cash flow from operations of $291,608 (unaudited) for the nine months ended
September 30, 2005, and had a working capital deficiency of $1,682,673
(unaudited) and a stockholders' deficiency of $1,407,752 (unaudited) at
September 30, 2005. At September 30, 2005, cash was $11,981 (unaudited) as
compared to $17,115 at December 31, 2004. This decrease of 30% is due to the
increase in operating expense.
The Company had a substantial working capital deficit. On October 6, 2005,
the Company secured a total of $15,600,000 in financing with Cornell Capital
Partners to support the continued development and growth of the Company. Cornell
Capital Partners had committed to provide up to $15 million of funding in the
form of a Standby Equity Distribution Agreement to be drawn down over a 24-month
period at Sensor System' discretion. In addition, Sensor System sold an
aggregate of $600,000 of fixed price secured convertible debentures to Cornell
Capital Partners. The Standby Equity Distribution Agreement was subsequently
terminated on December 23, 2005. The Company did not register any shares in
connection with the Standby Equity Distribution Agreement, and did not draw down
any advances thereunder. On December 23, 2005, the Company entered into a
Securities Purchase Agreement with Cornell Capital Partners pursuant to which it
sold an aggregate of $1,000,000 of secured convertible debentures to Cornell
Capital Partners. Out of the total principal amount of $1,000,000, $610,000 of
the initial $800,000 proceeds was used to repay the principal and accrued
interest on the secured convertible debentures issued to Cornell Capital
Partners in October 2005. The remaining $200,000, representing the second
tranche of the gross proceeds, is to be funded in February, 2006.
The Company is also seeking an additional $1,000,000 in bridge financing
to further develop into a fully-equipped public company. However, no assurance
can be given that such funds will be available or the term thereof.
The Company's ability to implement its strategic plan related to
acquisitions and production of new products as well as to continue operations
will require additional capital. Therefore, the Company is actively seeking
additional funds in the form of debt or equity or combination thereof. However,
no assurance can be given that such funds will be available or the term thereof.
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.
1
About Us
Our principal executive offices are located at 45 Parker Avenue, Suite A,
Irvine, California 92618. Our telephone number is (949) 855-6688.
2
THE OFFERING
The selling stockholders consist of:
o Cornell Capital Partners, LP, which may sell up to (i) 17,850,000
shares of common stock underlying secured convertible debentures,
(ii) 1,471,429 shares of common stock received from the Company on
October 6, 2005 as a one-time commitment fee under that certain
Standby Equity Distribution Agreement, dated October 6, 2005, and
subsequently terminated on December 23, 2005 and (iii) 1,200,000
shares of common stock to be issued upon the exercise of warrants;
o Monitor Capital, Inc., which may sell up to 28,571 shares of common
stock received from the Company on October 6, 2005 as a placement
agent fee under a now-terminated Standby Equity Distribution
Agreement; and
o Trenwith Securities, Inc., which may sell up to 86,866 shares of
common stock to be issued upon exercise of a warrant issued by the
Company to Trenwith Securities, Inc. on December 27, 2005.
We engaged Monitor Capital, Inc., an unaffiliated registered
broker-dealer, to advise us in connection with the now-terminated Standby Equity
Distribution Agreement, dated October 6, 2005. Hsiao-Wen Kao, Monitor Capital,
Inc.'s President, makes the investment decisions on behalf of and controls
Monitor Capital, Inc. For its services in connection with a now-terminated
Standby Equity Distribution Agreement, between Sensor System and Cornell Capital
Partners, Monitor Capital, Inc. received a fee of 28,571 shares of unregistered
common stock, on October 6, 2005. Monitor Capital, Inc. is not participating as
an underwriter in this offering.
Common Stock Offered 20,636,866 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering(1) 61,705,019 shares as of February 3, 2006
Use of Proceeds Sensor System will not receive any proceeds from the shares
offered by the selling stockholders.
Risk Factors The securities offered hereby involve a high degree of risk
and immediate substantial dilution. See "Risk Factors" and
"Dilution."
Over-the-Counter Bulletin Board Symbol SSYO.OB
---------------
1 Excludes up to 17,850,000 shares of common stock issuable upon the
conversion of convertible debentures, and up to 1,286,866 shares issuable
upon the exercise of warrants.
3
SUMMARY FINANCIAL DATA
The following selected financial data have been derived from the Company's
consolidated financial statements which have been audited by Weinberg & Company,
P.A., an independent registered public accounting firm, as of and for the year
ended December 31, 2004 and which audit report is on file with the Company's
2004 10-KSB filing with the Securities and Exchange Commission. The financial
data as of and for the three months and nine months ended September 30, 2005 is
derived from our unaudited consolidated financials included elsewhere in this
prospectus. The summary condensed consolidated financial data as of and for the
nine months ended September 30, 2004 and 2005, are derived from our unaudited
consolidated financial statements, which are included elsewhere in this
prospectus. The unaudited condensed consolidated financial statements have been
prepared on the same basis as our audited consolidated financial statements and
include all adjustments, consisting of normal and recurring adjustments, that we
consider necessary for a fair presentation of our financial position and
operating results for the unaudited periods. The summary historical financial
and operating data as of and for the nine months ended September 30, 2005, are
not necessarily indicative of the results that may be obtained for a fully year.
The following data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in this
Prospectus and the Consolidated Financial Statements and notes thereto included
in this Prospectus.
For three months ended For nine months ended For the Years Ended
September 30 September 30, December 31,
---------------------- --------------------- -------------------
2005 2004 2005 2004 2004 2003
---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
Sales, net $ 347,061 $ 161,726 $ 855,332 $ 465,202 $ 661,340 $ 436,071
Cost of goods sold 191,545 211,701 565,389 423,484 579,790 401,697
------------ ------------ ------------ ------------ ------------ ------------
Gross profit (loss) 155,516 (49,975) 289,943 41,718 81,550 34,374
------------ ------------ ------------ ------------ ------------ ------------
Operating expenses 405,733 355,494 1,169,982 760,810 1,292,072 874,506
Amortization of discount on notes
payable and finance costs 86,876 197,267 278,336 415,713 651,868 121,223
Stock-based compensation costs -- -- -- -- 1,800,000 --
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 492,609 552,761 1,448,318 1,176,523 3,743,940 995,729
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (337,093) $ (602,736) $ (1,158,375) $ (1,134,805) $ (3,662,390) $ (961,355)
============ ============ ============ ============ ============ ============
Loss per common share, basic and
fully diluted $ (.01) $ (.05) $ (.02) $ (.17) $ (0.46) $ (.39)
============ ============ ============ ============ ============ ============
Weighted average shares
outstanding, basic and diluted
including effects of in-kind stock
splits 59,279,241 11,476,868 59,279,241 6,734,483 7,920,079 2,486,539
============ ============ ============ ============ ============ ============
4
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
SUMMARY OF CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 (Unaudited)
and December 31, 2004
ASSETS
September 30,
2005 December 31,
(Unaudited) 2004
------------ ------------
CURRENT ASSETS
Cash $ 11,981 $ 17,115
Accounts receivable 139,230 100,530
Inventory 278,788 220,445
Prepaids and other current assets 14,148 24,552
------------ ------------
Total current assets 444,147 362,642
------------ ------------
Property and equipment, net 255,753 320,717
Other assets 54,112 54,112
------------ ------------
Total assets $ 754,012 $ 737,471
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,250,822 $ 720,817
Notes payable 505,347 263,923
Notes payable, related parties 358,076 718,133
Current portion of capital lease obligations 7,819 7,819
Current portion of deferred rent concession 4,757 5,258
------------ ------------
Total current liabilities 2,126,821 1,715,950
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 28,429 34,199
Deferred rent concession, net of current portion 6,514 10,513
------------ ------------
34,943 44,712
------------ ------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value, 20,000,000 shares authorized, none outstanding -- --
Common stock, $.001 par value, 180,000,000 shares authorized, 59,279,241 and
3,976,868 shares issued and outstanding 59,279 3,977
Common stock to be issued (15,404,871 and 7,700,000 shares) 878,512 9,300,000
Additional paid-in capital 13,861,002 4,867,790
Deferred compensation (39,612) (186,400)
Accumulated deficit (16,166,933) (15,008,558)
------------ ------------
Total stockholders' deficiency (1,407,752) (1,023,191)
------------ ------------
------------ ------------
Total liabilities and stockholders' deficiency $ 754,012 $ 737,471
============ ============
5
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. You should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
Our Obligations Under The Secured Convertible Debentures Are Secured By All of
Our Assets Which Cause Our Operations To Cease If We Default
Our obligations under the secured convertible debentures issued to Cornell
Capital Partners are secured by all of our assets. As a result, if we default
under the terms of the secured convertible debentures, Cornell Capital Partners
could foreclose its security interest and liquidate all of our assets. This
would cause us to cease operations.
The Company Has Been The Subject Of A Going Concern Opinion From Its Independent
Auditors
In their report in connection with our 2004 financial statements, our
auditors included an explanatory paragraph stating that, because we have
incurred a net loss of $3,662,390 and a negative cash flow from operations of
$594,293 for the year ended December 31, 2004, and had a working capital
deficiency of $1,353,308 and a stockholders' deficiency of $1,023,191 at
December 31, 2004, there is substantial doubt about our ability to continue as a
going concern. The Company has incurred significant losses since inception, has
minimal revenues and has a working capital deficit of $1,682,673 at September
30, 2005. These factors, along with others, may indicate that we will be unable
to continue as a going concern for a period of twelve months or less. We will
have to raise additional funds to meet its current obligations and to cover
operating expenses through the year ending December 31, 2005. If we are not
successful in raising additional capital we may not be able to continue as a
going concern for a period of twelve months or less. On October 6, 2005, the
Company secured a total of $15,600,000 in financing with Cornell Capital
Partners to support the continued development and growth of the Company. Cornell
Capital Partners had committed to provide up to $15 million of funding in the
form of a Standby Equity Distribution Agreement to be drawn down over a 24-month
period at Sensor System' discretion. In addition, Sensor System sold an
aggregate of $600,000 of fixed price secured convertible debentures to Cornell
Capital Partners. The Standby Equity Distribution Agreement was subsequently
terminated on December 23, 2005. The Company did not register any shares in
connection with the Standby Equity Distribution Agreement, and did not draw down
any advances thereunder. On December 23, 2005, the Company entered into a
Securities Purchase Agreement with Cornell Capital Partners pursuant to which it
sold an aggregate of $1,000,000 of secured convertible debentures to Cornell
Capital Partners. Out of the total principal amount of $1,000,000, $610,000 of
the initial $800,000 proceeds was used to repay the principal and accrued
interest on the secured convertible debentures issued to Cornell Capital
Partners in October 2005. The remaining $200,000, representing the second
tranche of the gross proceeds, is to be funded in February, 2006. Additional
financing may not be available to it, or, if available, the terms may not be
satisfactory.
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.
We have 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;
6
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. Additional funding may not be available
to us, and, even if it is available, such financing may be (i) extremely costly,
(ii) dilutive to existing stockholders and/or (iii) restrictive to our ongoing
operations. If we are unable to obtain such additional capital, we may be
required to reduce the scope of its anticipated expansion, which could adversely
affect our business, financial condition and results of operations or cease
operations. 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.
We Have A Working Capital Deficit, Which Means That Our Current Assets On
September 30, 2005 Were Not Sufficient To Satisfy Our Current Liabilities On
That Date
We had a working capital deficit of $1,682,673 at September 30, 2005,
which means that our current liabilities exceeded our current assets on
September 30, 2005 by that amount. Current assets are assets that are expected
to be converted into cash within one year and, therefore, may be used to pay
current liabilities as they become due. Our working capital deficit means that
our current assets on September 30, 2005 were not sufficient to satisfy all of
our current liabilities on that date.
We Have A Limited Operating History Upon Which You Can Evaluate Our Business
We are subject to the inherent challenges and risks of establishing a new
business enterprise. We may not be successful in addressing such risks. Our
limited operating history makes the prediction of future results of operations
difficult or impossible. We introduced our first sensor product in 1997 and have
continued to add sensor components to our product portfolio since then. We now
have more than thirty sensor products in production. However, 2005 is the first
year that we introduced sensor solution modules containing sensing elements,
signal conditioning circuitry, software for calibration and interface, and
capability of wireless and/or networking. We do not have any feedback on how the
market will accept them.
Fluctuations Or Decreases In The Trading Price Of Our Common Stock May Adversely
Affect The Liquidity Of The Stock's Trading Market And Our Ability To Raise
Capital Through Future Offerings Of Capital Stock
The stock market from time to time experiences extreme price and volume
fluctuations which are often unrelated to the operating performance of
particular companies. The market price of our common stock has been volatile,
and it may continue to be volatile in the future. Fluctuations or decreases in
the trading price of our common stock may adversely affect the liquidity of the
stock's trading market and our ability to raise capital through future offerings
of capital stock. Recently, when the market price of a stock has been volatile,
holders of that stock have often instituted securities class action litigation
against the company that issued the stock. If any of our stockholders brought
such a class action lawsuit against us, we could incur substantial costs
defending the lawsuit. Such a lawsuit could also divert the time and attention
of our management.
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.
7
Our Projected International Revenues Are Subject To Risks Inherent In
International Business Activities
Currently, we have about 10% of our revenue stream from foreign accounts.
However, we expect in the future sales of our products and services in foreign
countries to account for a greater portion of our revenues. These sales are
subject to risks inherent in international business activities, including:
o any adverse change in the political or economic environments in
these countries;
o economic instability;
o any adverse change in tax, tariff and trade or other regulations;
o the absence or significant lack of legal protection for intellectual
property rights;
o exposure to exchange rate risk for revenues which are denominated in
currencies other than U.S. dollars; and
o difficulties in managing joint venture businesses spread over
various jurisdictions.
Our revenues could be substantially less than we expect if these risks
affect our ability to successfully sell our products in the international
market.
Our Products May Be Perceived Poorly By Consumers, Which Could Have An Adverse
Affect On Our Business
Our success depends substantially on our ability to design and develop
sensor modules with wireless capability. Although we believe that our products
offer advantages over existing sensor products, our products may also possess
characteristics that consumers could perceive as too difficult to incorporate.
If we do not attract and maintain our customers, we could be forced to curtail
or cease our business operations.
Third Parties May Infringe Our Patents, New Products That We Develop May Not Be
Covered By Our Existing Patents And We Could Suffer An Adverse Determination In
A Patent Infringement Proceeding, Which Could Allow Our Competitors To Duplicate
Our Products Without Having Had To Incur The Research And Development Costs We
Have Incurred And Therefore Allow Them To Produce And Market Those Products More
Profitably Than Sensor System
Our ability to compete effectively will depend, in part, on our ability to
protect 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. Even if we obtain
patents on our proprietary technology, the duration of patents is limited, may
not be validly held and others may try to circumvent or infringe those patents.
We also rely on trade secrets and proprietary know-how that we try to protect in
part by confidentiality agreements with our manufacturers, joint venture
partners, employees and consultants. These agreements have limited terms and
these agreements may be breached, we may not have adequate remedies for any
breach and our competitors may learn our trade secrets or independently develop
them. It is necessary for us to litigate from time to time to enforce patents
issued or licensed to us, to protect our trade secrets or know-how and to
determine the enforceability, scope and validity of the proprietary rights of
others.
We believe that we own or have the rights to use all of the technology
that we expect to incorporate into our products, but an adverse determination in
litigation or infringement proceedings to which we are or may become a party
could subject us to significant liabilities and costs to third parties or
require us to seek licenses from third parties. Although patent and intellectual
property disputes are often settled through licensing or similar arrangements,
costs associated with those arrangements could be substantial and could include
ongoing royalties. Furthermore, we may not obtain the necessary licenses on
satisfactory terms or at all. We could incur substantial costs attempting to
enforce our licensed patents against third party infringement, or the
unauthorized use of our trade secrets and proprietary know-how or in defending
ourselves against claims of infringement by others. Accordingly, if we suffered
an adverse determination in a judicial or administrative proceeding or failed to
obtain necessary licenses, it would prevent us from manufacturing or licensing
others to manufacture some of our products.
8
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.
RISKS RELATED TO THIS OFFERING
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 61,705,019 shares of common stock outstanding as of February 3, 2006,
6,976,868 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 54,728,151 shares of common stock, which
will be held by existing stockholders, including the officers and directors, are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144.
Existing Shareholders Will Experience Significant Dilution From The Conversion
Of The Secured Convertible Debentures
Cornell Capital Partners may convert the Secured convertible debentures
described herein into shares of Sensor System's common stock, at a conversion
price which is at a 10% discount to the market price. The subsequent sale of
such shares by Cornell Capital Partners could cause significant downward
pressure on the price of Sensor System's common stock. This is especially the
case if the shares being placed into the market exceed the market's demand for
the shares of Sensor System's common stock. As the stock price of Sensor
System's common stock declines, Cornell Capital Partners will be entitled to
receive an increasing number of shares under the convertible debentures. The
sale of such increasing number of shares by Cornell Capital Partners could cause
further downward pressure on the stock price to the detriment and dilution of
existing investors, as well as investors in this offering.
Further, there is no maximum number of shares Sensor System might be
required to issue under securities with market-price based conversion or
exercise prices, such as securities issued in connection with the secured
convertible debentures, except for the 4.99% limitation on Cornell Capital
Partner's ownership interest in Sensor System at any one time. However, Cornell
Capital Partners may acquire and sell a number of shares that far exceeds this
limit, through the continual purchase and sale of shares.
As a result, our net income per share could decrease in future periods,
and the market price of our common stock could decline. In addition, the lower
our stock price, the more shares of common stock we will have to issue upon
conversion of the secured convertible debentures. If our stock price is lower,
then our existing stockholders would experience greater dilution.
9
The Selling Stockholders May Sell Their Shares Of Common Stock In The Market,
Which Sales May Cause Our Stock Price To Decline
The selling stockholders may sell in the public market up to 20,636,866
shares of common stock being registered in this offering. That means that up to
20,636,866 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. The officers and directors of the
Company and those shareholders who are significant shareholders as defined by
the Securities and Exchange Commission will continue to be subject to the
provisions of various insider trading and rule 144 regulations.
The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties
In many circumstances the issuance of convertible securities for companies
that are traded on the Over-the-Counter Bulletin Board has the potential to
cause a significant downward pressure on the price of common stock. This is
especially the case if the shares being placed into the market exceed the
market's ability to take up the increased stock or if Sensor System has not
performed in such a manner to show that the debt raised will be used to grow
Sensor System. Such an event could place further downward pressure on the price
of common stock.
The outstanding the secured convertible debentures are convertible at a
10% discount to the market price of our common stock. As a result, the
opportunity exists for short sellers and others to contribute to the future
decline of the Company's stock price. Persons engaging in short sales first sell
shares that they do not own, and thereafter, purchase shares to cover their
previous sales. To the extent the stock price declines between the time the
person sells the shares and subsequently purchases the shares, the person
engaging in short sales will profit from the transaction, and the greater the
decline in the stock, the greater the profit to the person engaging in such
short-sales. Because the secured convertible secured are convertible at a
discount to market, it is possible that the debentures could be converted if the
market price of our common stock declines, thus, supplying any short sellers
with the opportunity to cover their short positions. By contrast, a person
owning a long position in a stock, such as an investor purchasing shares in this
offering, first purchases the shares at the then market price, if the stock
price declines while the person owns the shares, then upon the sale of such
shares the person maintaining the long position will incur a loss, and the
greater the decline in the stock price, the greater the loss which is incurred
by the person owning a long position in the stock.
If there are significant short sales of our stock, the price decline that
would result from this activity will cause our share price to decline more so
which in turn may cause long holders of our stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for our stock the price will decline. It is not possible
to predict if the circumstances where by a short sales could materialize or to
what our share price could drop. In some companies that have been subjected to
short sales their stock price has dropped to near zero. We cannot provide any
assurances that this situation will not happen to us.
The Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This Offering
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system;
o (Nasdaq listed stock must still have a price of not less than $5.00
per share); or
10
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
11
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Business," as well as
in this prospectus generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under "Risk Factors"
and matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
12
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling shareholder's relationship to Sensor
System and how each selling shareholder acquired the shares to be sold in this
offering is detailed in the information immediately following this table.
Shares Percentage of
Beneficially Outstanding Shares Percentage of Shares
Owned Before Beneficially Owned Shares to be Sold in Beneficially Owned
Selling Stockholder Offering Before Offering (1) the Offering After Offering (1)
------------------- ------------ ------------------- -------------------- ------------------
Cornell Capital Partners, LP 3,079,080(2) 4.99% 20,521,429(3) 0%
Trenwith Securities, Inc. 86,866(4) --* 86,866 0%
Monitor Capital, Inc. 28,571 0%* 28,571 0%*
------------- ------------------- -------------------- ------------------
Total 3,107,651 4.99% 20,636,866 0%
============= =================== ==================== ==================
-----------------------------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 61,705,019 shares of common
stock outstanding as of February 3, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
February 3, 2006, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of February 3, 2006 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(2) Includes 1,471,429 shares of common stock received by Cornell Capital
Partners as a one-time commitment fee under a now-terminated Standby
Equity Distribution Agreement and 1,607,651 shares of common stock to be
issuable upon the conversion of the secured convertible debentures held by
Cornell Capital Partners that are convertible into shares of common stock
within 60 days of February 3, 2006, such that the number of shares
beneficially owned by Cornell Capital Partners, upon giving effect to the
conversion under the Secured Convertible Debentures, would not cause the
aggregate number of shares beneficially owned by Cornell Capital Partners
and its affiliates to exceed 4.99% of the total outstanding shares of
Sensor System.
(3) Includes 1,471,429 shares of common stock received as a one-time
commitment fee under a now-terminated Standby Equity Distribution
Agreement, dated October 6, 2005; 17,850,000 shares of common stock
underlying secured convertible debentures; and 1,200,000 shares to be
issued upon the exercise of warrants issued to Cornell Capital Partners.
(4) Includes 86,866 shares of common stock to be issuable upon the exercise of
a warrant issued to Trenwith Securities, Inc., which may be redeemed into
shares of common stock within 60 days of February 3, 2006.
The following information contains a description of each selling
shareholder's relationship to Sensor System and how each selling shareholder
acquired the shares to be sold in this offering is detailed below. None of the
selling stockholders have held a position or office, or had any other material
relationship, with the Company, except as follows:
Shares Acquired In Financing Transactions With Sensor System
Cornell Capital Partners, LP. Cornell Capital Partners is the holder of
secured convertible debentures and a warrant. All investment decisions of, and
control of, Cornell Capital Partners are held by its general partner, Yorkville
Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the
investment decisions on behalf of and controls Yorkville Advisors. Cornell
Capital Partners acquired all shares being registered in this offering in
financing transactions with Sensor System. Those transactions are explained
below:
o Standby Equity Distribution Agreement. On October 6, 2005, we entered into
a Standby Equity Distribution Agreement with Cornell Capital Partners.
Pursuant to the Standby Equity Distribution Agreement, we could have, at
our discretion, periodically sold to Cornell Capital Partners shares of
common stock for a total purchase price of up to $15 million. Pursuant to
the Standby Equity Distribution Agreement, Cornell Capital Partners was
entitled to purchase shares of Sensor System's common stock at a total
discount equal to 10%. For each share of common stock purchased under the
Standby Equity Distribution Agreement, Cornell Capital Partners would have
paid us 95% of or a 5% discount to, the lowest closing bid price of our
common stock on the Over-the-Counter Bulletin Board or other principal
market on which our common stock is traded for the five days immediately
following the notice date. Further, Cornell Capital Partners would have
retained 5% of each advance under the Standby Equity Distribution
Agreement. In connection with the Standby Equity Distribution Agreement,
Cornell Capital Partners received a one-time commitment fee in the form of
1,471,429 shares of common stock. On December 23, 2005, the Company
entered into a Termination Agreement with Cornell Capital Partners,
pursuant to which the Standby Equity Distribution Agreement, as well as
the related Registration Rights Agreement and the Placement Agent
Agreement, each dated as of October 6, 2005, were terminated. The
1,471,429 shares of common stock issued as a one-time commitment in
connection with the Standby Equity Distribution Agreement have not been
cancelled and have piggy-back registration rights. These shares are being
registered in this registration statement.
13
o Secured Convertible Debentures. On October 6, 2005, we entered into a
Securities Purchase Agreement pursuant to which we sold to Cornell Capital
Partners convertible debentures in the aggregate principal amount of
$600,000, plus accrued interest, which was convertible, at Cornell Capital
Partner's discretion, into our common stock. The convertible debentures
were convertible, in whole or in part, at any time and from time to time
before maturity at the option of the holder at a fixed price of $0.245 per
share, subject to certain limitations as provided therein. The convertible
debentures had a term of a one-year, possessed registration rights,
accrued interest at a rate equal to 10% per year, and were secured by
Sensor System's assets. On December 23, 2005, the Company repaid a total
amount of $610,000, representing principal and accrued interest on the
secured convertible debenture issued to Cornell Capital Partners on
October 6, 2005.
o Warrant. On October 6, 2005, in connection with the issuance of the
secured convertible debentures, we issued a warrant to Cornell Capital
Partners to purchase 600,000 shares of our common stock, at a fixed
exercise price of $0.35 per share, or as subsequently adjusted pursuant to
the terms of the warrant. The warrant expires four years from the date of
issuance. We are registering 600,000 shares in this registration statement
under the warrant issued to Cornell Capital Partners on October 6, 2005.
o Secured Convertible Debentures. On December 23, 2005, we entered into a
Securities Purchase Agreement pursuant to which we sold to Cornell Capital
Partners convertible debentures in the aggregate principal amount of
$1,000,000, plus accrued interest, which is convertible, at Cornell
Capital Partner's discretion, into shares of our common stock. Out of the
total principal amount of $1,000,000, in December 2005, we received gross
proceeds of $800,000, and the remaining $200,000, representing the second
tranche of the gross proceeds, is to be funded in February, 2006. In
December 2005, we received $143,000 representing the net proceeds from the
issuance of secured convertible debentures to Cornell Capital Partners
under the Securities Purchase Agreement, dated December 23, 2005. The
total net proceeds are net of expenses in the amount of $47,000 and the
payment of $610,000 to Cornell Capital Partners for the repayment of
principal and accrued interest on the secured convertible debentures
issued to Cornell Capital Partners on October 6, 2005. In February 2006,
we are to receive the second tranche of the proceeds in the net amount of
approximately $164,000. The secured convertible debentures are secured by
substantially all of our assets, have a one year term and accrue interest
at 10% per annum. Cornell Capital Partners is entitled, at its option, to
convert and sell all or any part of the principal amount of the
convertible debentures, plus any and all accrued interest, into shares of
common stock at a price equal to the lesser of (i) $0.35 and (ii) ninety
percent (90%) of the lowest volume weighted average price of the common
stock during the fifteen (15) trading days immediately preceding the date
of conversion as quoted by Bloomberg, LP. We are registering 17,850,000
shares of common stock in this registration statement under the secured
convertible debentures.
o Warrant. On December 23, 2005, we issued a warrant to Cornell Capital
Partners to purchase 600,000 shares of our common stock, at a fixed
exercise price of $0.2878 per share, or as subsequently adjusted pursuant
to the terms of the warrant. The warrant expires five years from the date
of issuance. We are registering 600,000 shares in this registration
statement under the warrant issued to Cornell Capital Partners on December
23, 2005.
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares will be issued based on discount to the market
rate. As a result, the lower the stock price around the time Cornell
Capital Partners is issued shares, the greater chance that Cornell Capital
Partners gets more shares. This could result in substantial dilution to
the interests of other holders of common stock.
14
o To the extent Cornell Capital Partners sells its common stock, the common
stock price may decrease due to the additional shares in the market. This
could allow Cornell Capital Partners to sell greater amounts of common
stock, the sales of which would further depress the stock price.
o The significant downward pressure on the price of the common stock as
Cornell Capital Partners sells material amounts of common stocks could
encourage short sales by third parties. This could place further downward
pressure on the price of the common stock.
Other Selling Shareholders
Trenwith Securities, Inc. Trenwith Securities, Inc. ("Trenwith") is an
unaffiliated registered broker-dealer that has been retained by us. Doug Ivan
makes the investment decisions on behalf of and controls Trenwith. The Company
and Trenwith entered into an engagement agreement, dated August 10, 2005, (the
"Engagement Agreement") pursuant to which we engaged Trenwith as a Placement
Agent in connection with a private placement offering of up to $20,000,000
shares of the Company's common stock. In consideration of Trenwith's
performances as managing placement agent, and upon the closing of the private
placement transaction, the Company agreed to issue to Trenwith warrants for the
purchase of the Company's Common Stock subject to the terms and conditions of
the Engagement Agreement.
On November 16, 2005, in connection with the Engagement Agreement, and the
entry into the Standby Equity Distribution Agreement and related agreements
dated October 6, 2005, with Cornell Capital Partners, the Company issued to
Trenwith a warrant (the "November Warrant") to purchase up to 511,607 of the
Company's common stock. The November Warrant was cancelled on December 27, 2005.
On December 27, 2005, in connection with the Securities Purchase
Agreement, dated December 23, 2005, the Company issued to Trenwith a new warrant
(the "New Warrant") to purchase up 86,866 shares of the Company's Common Stock
at an exercise price of $0.2878 per share. The New Warrant expires on December
23, 2009. In this registration statement, the Company is registering 86,866
shares under the New Warrant.
Monitor Capital, Inc. Monitor Capital, Inc. is an unaffiliated registered
broker-dealer that has been retained by us. Hsiao-Wen Kao, Monitor Capital,
Inc.'s President, makes the investment decisions on behalf of and controls
Monitor Capital, Inc. For its services in connection with a now-terminated
Standby Equity Distribution Agreement, dated October 6, 2005, between Sensor
System and Cornell Capital Partners, Monitor Capital, Inc. received a fee of
28,571 shares of unregistered common stock, on October 6, 2005. These shares are
being registered in this offering.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding the Company so as to make an informed investment decision. More
specifically, we had a reasonable basis to believe that each purchaser was an
"accredited investor" as defined in Regulation D of the 1933 Act and otherwise
had the requisite sophistication to make an investment in our securities.
15
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
Out of the total principal amount of $1,000,000, in December 2005, we
received gross proceeds of $800,000, and the remaining $200,000, representing
the second tranche of the gross proceeds, is to be funded in February. In
December 2005, we received $143,000 representing net proceeds from the issuance
of $800,000 of the secured convertible debentures to Cornell Capital Partners
under the Securities Purchase Agreement, dated December 23, 2005. The total net
proceeds are net of expenses of $47,000 and the payment of $610,000 to Cornell
Capital Partners for the repayment of principal and accrued interest on the
secured convertible debentures issued to Cornell Capital Partners on October 6,
2005.
We have represented to Cornell that the net proceeds under the secured
convertible debentures will be used for general corporate and working capital
purposes only.
16
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the on the
Over-the-Counter Bulletin Board or in any other market on which the price of our
shares of common stock are quoted or (ii) in transactions otherwise than on the
Over-the-Counter Bulletin Board or in any other market on which the price of our
shares of common stock are quoted. Any of such transactions may be effected at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at varying prices determined at the time of sale or at
negotiated or fixed prices, in each case as determined by the selling
stockholders or by agreement between the selling stockholders and underwriters,
brokers, dealers or agents, or purchasers. If the selling stockholders effect
such transactions by selling their shares of common stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved).
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in our stock or to otherwise engage in stabilizing
or other transactions intended to help support the stock price. Prospective
investors should take these factors into consideration before purchasing our
common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. If
any of these other expenses exists, Sensor System expects the selling
stockholders to pay these expenses. We have agreed to indemnify Cornell Capital
Partners and its controlling persons against certain liabilities, including
liabilities under the 1933 Act. We estimate that the expenses of the offering to
be borne by us will be approximately $85,000. The estimated offering expenses
consist of: (i) a SEC registration fee of $600.00, (ii) printing expenses of
$2,500; (iii) accounting fees of $20,000, (iv) legal fees of $50,000; and (v)
miscellaneous expenses of $11,900.00. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders.
The selling stockholders are subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and its regulations, including,
Regulation M. Under Registration M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. Pursuant to the requirements of Item 512 of
Regulation S-B and as stated in Part II of this Registration Statement, the
Company must file a post-effective amendment to the accompanying Registration
Statement once informed of a material change from the information set forth with
respect to the Plan of Distribution.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of results of operations and
financial condition are based on our financial statements. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The following discussion
should be read in conjunction with the Company's Financial Statements and Notes
thereto, included elsewhere within this registration statement.
Overview
On May 24, 2004, we acquired all of the issued and outstanding equity
interests of Advanced Custom Sensors, Inc. ("ACSI"). Until we acquired ACSI, we
had only nominal assets and liabilities and limited business operations.
Although ACSI became our wholly-owned subsidiary following the acquisition,
because the acquisition resulted in a change of control, the acquisition was
recorded as a "reverse merger" whereby ACSI is considered to be the accounting
acquirer. We changed our company name to Sensor System Solutions, Inc. in
December 2004 to better represent our new focus. As such, the following results
of operations are those of ACSI.
Sensor System 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. Sensor
System offers a variety of Digital Pressure Gauges, Pressure Transducers,
Pressure Sensors, Force Beams, Load Cells, Strain Gauges and Sensor Kits.
Sensor System commenced operations as a private company in September of
1996. Sensor System is headquartered in Irvine, California where Sensor System
occupies a 25,000 square foot facility fully equipped with fabrication
capability.
Sensor System has 17 full-time employees in the United States, and
utilizes a network of independent contractors and consultants throughout the
United States and Asia. Sensor System produces or supplies a family of nearly 30
distinctive products. Sensor System set up a volume production line with an ISO
9000 partner in Taiwan in 2002 to penetrate high-volume consumer markets that
are price sensitive. On April 12, 2005, we entered into a Joint Venture
Agreement with CAAS pursuant to which the parties agreed to develop, produce and
sale sensor and related electronic products throughout China. To that end, in
2005, the parties established Universal Sensors, Inc., or USI, in the Wuhan East
lake development zone, in Hubei, China. Pursuant to the Joint Venture Agreement,
the parties agreed to invest $10,000,000, out of which we will invest $3,000,000
in technology and assets. USI has been in operations since 2005, and we have
been in the process of transferring technology to them for the production and
development of sensor products.
Sensor System is a supplier of thin-film and micro-machined force and
pressure sensors to the medical, chemical, oil, and gas industries. Sensor
System believes that its technology will enable it to become a global supplier
of advanced MEMS/Microelectronic products in myriad developing markets. Sensor
System'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.
Critical Accounting Assumptions
Revenue Recognition
Generally the Company recognizes revenue when risk of loss and title to
the product is transferred to the customer, which occurs at shipment.
18
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures" as well as those outlined in SFAS No.
123, "Accounting for Stock-Based Compensation". As permitted by SFAS 148 and
SFAS 123, the Company continues to apply the provisions of Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock issued to Employees" and
related interpretations in accounting for the Company's stock option plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the
grant, over the amount an employee must pay to acquire the stock. Stock based
awards for non-employees are accounted for at fair value equal to the excess of
the estimated fair value of the Company's stock over the option price using an
estimated interest rate to calculate the fair value of the option
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs". This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility
costs, excessive spoilage, double freight and rehandling costs to be expensed in
the current period, regardless if they are abnormal amounts or not. This
Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on the
company's consolidated financial statements.
In December 2004, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based
Payment" ("SFAS 123 (R)"). SFAS 123 (R) revises SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123 (R) requires companies to
recognize in the statement of operations the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions). SFAS 123 (R) is effective as of the
first interim or annual reporting period of the first fiscal year that begins
after June 15, 2005 for non-small business issuers, and after the first fiscal
year that begins after December 15, 2005 for small business issuers.
Accordingly, the Company will adopt SFAS 123 (R) in its quarter ending March 31,
2006.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method. Accordingly,
adoption of SFAS 123R's fair value method will have an effect on results of
operations, although it will have no impact on overall financial position. The
impact of adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had
SFAS 123R been adopted in prior periods, the effect would have approximated the
SFAS 123 pro forma net loss and loss per share disclosures as shown above. SFAS
123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as currently required, thereby reducing net operating cash
flows and increasing net financing cash flows in periods after adoption
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. This Statement replaces APB No. 20, Accounting Changes and FASB No.
3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies it all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement includes specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This Statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. The adoption of SFAS No. 154 is not
expected to have an impact on the Company's consolidated financial statements.
19
Plan of Operation
We plan to grow our business in four areas:
Increase the revenue of existing sensor component business. The majority
of our sensor component manufacturing will be moved to our joint venture in
China to help reduce the cost of our products. We will invest to increase our
production capacity and will qualify offshore suppliers to meet the increasing
demands. Substantial efforts will be invested in sales and marketing in order to
expand our customer base and to secure more OEM projects.
Develop sensor solution business. With the rapid advance in technology and
huge investment in wireless and telecommunication in the last decades, we can
now offer total sensor solutions at a very affordable price. These sensor
solutions are modules containing sensing elements, signal conditioning
circuitry, software for calibration and interface, and capability of wireless
and/or networking. These sensor solutions will provide information continuously
to decision makers in all phases of business operation.
Penetrate automotive sensor market through China. By leveraging the
marketing channel of our joint venture partner, we will have access to the
automotive market in China immediately. We plan use the next three years to
build up our production capacity, product offerings, and technical team there.
We plan to import automotive sensors produced by our joint venture to North
America and Europe around 2008.
Strategic acquisitions Being a public company and having better access to
the capital markets that this affords, provides us with the means to grow our
business through acquisitions as well as through internal growth. We will
actively seek equity or debt funding to bring in the necessary resources to
execute this plan.
Results Of Operations
Results of Operations For The Three-Month Period Ended September 30, 2005
Compared To The Same Period Ended September 30, 2004
Revenues
We generated revenues of $347,061 for the three months ended September 30,
2005, which was an increase of $185,335 or 115% from the $161,726 for the three
months ended September 30, 2004. The increase is the result of the continuing
sales efforts, the addition of new sales representatives and the introduction of
new products.
Gross Profit
Gross profit for the three months ended September 30, 2005, was $155,516
or 44.8% of revenues, compared to ($49,975) or (30.9%) for the three months
ended September 30, 2004. The $205,491 increase in gross profit was mainly due
to the increase in sales and lower fixed costs included in cost of goods sold
for the current quarter versus the third quarter in the prior year.
Total Operating Expenses
Operating Expenses
Operating expenses increased 14% to $405,733 for the three months ended
September 30, 2005 compared to $355,494 for the three months ended September 30,
2004. The expenses increased $50,239, primarily as a result of an increase in
payroll costs.
Amortization Of Discount On Notes Payable And Finance Costs
Amortization of discount on notes payable and finance costs decreased to
$86,876 for the three months ended September 30, 2005 compared to $197,267 for
the three months ended September 30, 2004. The expense decreased $110,391, or
56%, primarily due to the settlement of two notes payable, Sino-American, Inc
and Pei Jen Hsu.
Net Loss
Net loss from operations decreased to ($337,093) for the three months
ended September 30, 2005 compared to ($602,736) for the three months ended
September 30, 2004. The $265,643 decrease in net loss was primarily due to the
increase in revenue and resulting improvement in gross profit.
20
Results of Operations For The Nine-Month Period Ended September 30, 2005
Compared To The Same Period Ended September 30, 2004
Revenues
We increased revenues 84% to $855,332 for the nine months ended September
30, 2005, which was an increase of $390,130, when compared to revenues of
$465,202 for the same period last year. The increase was the result of the
continuing sales efforts, the addition of new sales representatives and the
introduction of new products.
Gross Profit
Gross profit for the nine months ended September 30, 2005 grew to
$289,943 or 34% of revenues, compared to $41,718 or 9% for the nine months ended
September 30, 2004. The $248,225 increase in gross profit was generated by the
increase in revenues and higher utilization of production capacity.
Total Operating Expenses
Operating Expenses
Operating expenses increased to $1,169,982 for the nine months ended
September 30, 2005 compared to $760,810 for the nine months ended September 30,
2004. The expenses increased $409,172, primarily as a result of an increase in
interest expense and additional investment in R&D personnel and development, and
professional fees for a public company.
Amortization Of Discount On Notes Payable And Finance Costs
Amortization of discount on notes payable and finance costs decreased to
$278,336 for the nine months ended September 30, 2005 compared to $415,713 for
the nine months ended September 30, 2004. The expense decreased $137,377, or
33%, primarily due to the settlement of two notes payable, Sino-American, Inc
and Pei Jen Hsu.
Net Loss
Net loss increased to ($1,158,375) for the nine months ended September 30,
2005 compared to ($1,134,805) for the nine months ended September 30, 2004. The
small increase of $23,570 in net loss was primarily due to the $224,230 increase
in gross profit, a $137,377 decrease in finance cost expense, and offset by
increases in interest expense, additional investment in R&D, and professional
fees associated with being a public company.
Results of Operations For The Year Ended December 31, 2004, As Compared To
The Year Ended December 31, 2003
Revenues. We generated revenues of $661,340 for the year ended December
31, 2004. which was a $225,269 or a 51.7% increase from $436,071 for the year
ended December 31, 2003. 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 twelve months ended December 31, 2004,
was $81,550 or 12.3% of revenues, compared to $34,374 or 7.9% for the year ended
December 31, 2003. The $47,176 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 expense. Operating expense increased to $1,292,072 for the year
ended December 31, 2004 compared to $874,506 for the year ended December 31,
2003. The expense increased $417,566, or 47.7%, from 2003, primarily as a result
of an increase in interest expense and additional investment in R&D personnel
and development.
Amortization of discount on notes payable. Amortization of discount on
notes payable increased to $651,868 for the year ended December 31, 2004
compared to $121,223 for the year ended December 31, 2003. The expense increased
$530,646, or 437.7%, primarily due to the convertible loans from Sino-America
and Tina Young.
21
Non-cash compensation costs. On May 24, 2004, the Company issued 2,584,905
shares of its common stock and warrants (the Merger Warrants) to purchase up to
47,802,373 shares of its common stock, to the shareholders of ACSI in exchange
for all the issued and outstanding shares of ACSI. On May 24, 2004, the OTCBB
closing price for the Company's common stock was $3.15 per share, resulting in a
valuation of $12,527,134 (the Merger Valuation) for the 3,976,868 shares of
common stock outstanding immediately following the Merger. On December 4, 2004,
the Company granted 7,500,000 shares of its common stock to five shareholders in
Spectre, including two individuals who are also Directors of the Company, for
providing services to the Company. The fair value of the shares granted was
determined to be $ 0.24 per share for a total of $1,800,000 and is recognized as
stock-based compensation expense in the accompanying financial statements. The
fair value was based on the Merger Valuation and adjusted as if the 3,976,868
shares of common stock and the 47,802,373 shares of common stock issued upon
exercise of the Merger Warrants, had all been outstanding at the date of the
Merger.
Net Loss. Net loss increased to ($3,662,390) for the year ended December
31, 2004 compared to ($961,355) for the year ended December 31, 2003. The loss
increased $2,701,035, or 281%, from 2003, primarily as a result of $1,800,000 of
stock compensation expense and $651,869 of notes payable - debt discount costs
along with increase in investment in R&D and production capacity, and additional
cost for being a public company.
Liquidity and Capital Resources
Going Concern
The Company incurred a net loss of $1,158,375 and a negative cash flow
from operations of $291,608 for the nine months ended September 30, 2005, and
had a working capital deficiency of $1,682,674 and a stockholders' deficiency of
$1,407,752 at September 30, 2005. At September 30, 2005, cash was $11,981 as
compared to $17,115 at December 31, 2004. The decrease is due to the increase in
operating expense.
The Company had a substantial working capital deficit. On October 6, 2005,
the Company secured a total of $15,600,000 in financing with Cornell Capital
Partners to support the continued development and growth of the Company. Cornell
committed to provide up to $15 million of funding in the form of a Standby
Equity Distribution Agreement (SEDA) to be drawn down over a 24-month period at
Sensor System's discretion. In addition, Sensor System sold an aggregate of
$600,000 of fixed price secured convertible debentures to Cornell Capital
Partners. The SEDA was subsequently terminated on December 23, 2005. The Company
did not register any share in connection with the SEDA, and did not draw down
any advances thereunder. On December 23, 2005, the Company entered into a
Securities Purchase Agreement with Cornell Capital Partners pursuant to which it
sold an aggregate of $1,000,000 of secured convertible debentures to Cornell
Capital Partners, of which $610,000 of the proceeds were used for the repayment
of principal and interest of the secured convertible debentures issued to
Cornell Capital Partners on October 6, 2005.
The Company is also seeking an additional $1,000,000 in bridge financing
to further develop into a fully-equipped public company. However, no assurance
can be given that such funds will be available or the term thereof.
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:
Amount
------------
Three months ended December 31, 2005 $ 3,183
Year ended 2006 12,732
Year ended 2007 12,732
Year ended 2008 12,732
Year ended 2009 3,543
------------
44,922
Amount representing interest (8,674)
------------
Present value of minimum lease payments 36,248
Less: Current portion (7,819)
------------
$ 28,429
============
22
The Company leases its office and facility through 2007 under a long term
operating lease agreement. Under terms of the lease, the Company pays the cost
of repairs and maintenance. The office and warehouse facility was shared with
TransOptix, which signed the lease as co-tenant with the Company. The Company
and TransOptix had entered into an agreement stipulating each entities share of
the rent. However, TransOptix has filed for Chapter 7 bankruptcy and the Company
has taken over the whole facility and is liable for the full amount of the
lease.
Future minimum lease commitments for this lease at September 30, 2005 are
as follows:
Amount
-------------
Three months ended December 31, 2005 $ 61,275
Year ended 2006 250,900
Year ended 2007 151,095
-------------
$ 463,270
=============
Inflation And Changing Prices
We do not foresee any adverse effects on our earnings as a result of
inflation or changing prices.
On October 6, 2005, we entered into a Securities Purchase Agreement
pursuant to which we issued to Cornell Capital Partners convertible debentures
in the aggregate principal amount of $600,000. The principal amount, plus
accrued interest, was able to be convertible, at Cornell Capital Partner's
discretion, into our common stock. The convertible debentures were convertible,
in whole or in part, at any time and from time to time before maturity at the
option of the holder at a fixed price of $0.245 per share, subject to certain
limitations as provided therein. The convertible debentures had a term of a
one-year, possessed registration rights, accrued interest at a rate equal to 10%
per year, and were secured by Sensor System's assets. The Company repaid to
Cornell Capital Partners a total amount of $610,000, representing principal and
accrued interest, on December 23, 2005.
On December 23, 2005, the Company entered into a Securities Purchase
Agreement with Cornell Capital Partners, pursuant to which the Company issued to
Cornell secured convertible debentures in the principal amount of $1,000,000.
Out of the total principal amount of $1,000,000, in December 2005, we received
gross proceeds of $800,000, and the remaining $200,000, representing the second
tranche of the gross proceeds, was funded two business days prior to the date
this registration statement is filed with the Commission. In December 2005, we
received $143,000 representing the net proceeds from the issuance of secured
convertible debentures to Cornell Capital Partners under the Securities Purchase
Agreement, dated December 23, 2005. The total net proceeds take into account
estimated expenses in the amount of $47,000 and the payment of $610,000 to
Cornell Capital Partners for the repayment of the secured convertible debentures
issued to Cornell Capital Partners on October 6, 2005. In February 2005, we
received the second tranche of the proceeds in the net amount of $164,037.19.
The Convertible Debentures are secured by substantially all of the Company's
assets, have a one year term and accrue interest at 10% per annum. Cornell is
entitled, at its option, to convert and sell all or any part of the principal
amount of the Convertible Debentures, plus any and all accrued interest, into
shares of Common Stock at a price equal to the lesser of (i) $0.35 and (ii)
ninety percent (90%) of the lowest volume weighted average price of the Common
Stock during the fifteen (15) trading days immediately preceding the date of
conversion as quoted by Bloomberg, LP.
23
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
N/A
24
DESCRIPTION OF BUSINESS
The Company
Sensor System Solutions, Inc. ("Sensor System" or the "Company") was
incorporated in Nevada in April 1982 under the name The Enchanted Village, Inc.
As the result of the March 13, 2004 acquisition of Advanced Custom Sensors,
Inc., a California corporation, Sensor System is now in the business of design
and manufacturing sensors and signal conditioning modules.
Acquisition of Advanced Custom Sensors. Pursuant to an Agreement and Plan
of Merger dated as of March 13, 2004, by and among the Company, Spectre Merger
Sub, Inc., a California corporation and wholly owned subsidiary of the Company
("Merger Sub"), Ian S. Grant and Advanced Custom Sensors, Inc. ("ACSI"), on May
24, 2004, Merger Sub merged with and into ACSI. As a result of this merger, ACSI
became a subsidiary of the Company. As consideration for the merger, the Company
issued 2,584,906 shares of common stock and warrants to purchase up to
47,802,373 shares of common stock to the shareholders of ACSI. The terms of the
Merger were determined through arms-length negotiations between the management
of the Company and management of ACSI. We changed our company name to Sensor
System Solutions, Inc. in December 2004 to better represent our new focus. As
such, the following results of operations are those of ACSI.
Until we acquired ACSI, we had only nominal assets and liabilities and
limited business operations. Although ACSI became our wholly-owned subsidiary
following the acquisition, because the acquisition resulted in a change of
control, the acquisition was recorded as a "reverse merger" whereby ACSI is
considered to be the accounting acquirer. Also, as a result of the acquisition,
we have had a change of our financial position and our business. Sensor System
is now a holding company and after the Spin-Off, defined below, will have no
significant operations or assets other than its interest in ACSI. Since the
acquisition of ACSI, the Company has been engaged in the development,
manufacturing, marketing and distribution of high quality sensors and
transducers at an economical price by employing innovative designs and creative
manufacturing methods.
Spin-Off of Spectre Holdings. On December 15, 2004, in consideration for
making and guaranteeing certain representations, warranties and obligation in
connection with the Agreement and Plan of Merger dated March 13, 2004 by and
between the Company and ACSI, the Company transferred 20,878,081 shares of
common stock (the "Shares"), which are all of the issued and outstanding shares
of Spectre Holdings, Inc., our wholly-owned subsidiary to Ian Grant. After the
distribution of the Shares, the Company no longer owns any stock of Spectre
Holdings, Inc. In addition, we will not have any common board members after the
distribution.
Advanced Custom Sensors. ACSI was founded by an engineering management
team with over 50 years of Micro-electro-mechanical-systems or "MEMS" transducer
experience. Its objective is to provide high quality sensors and transducers at
an economical price by employing innovative designs and creative manufacturing
methods. Through ACSI, Sensor System offers a variety of Digital Pressure
Gauges, Pressure Transducers, Pressure Sensors, Force Beams, Load Cells, Strain
Gauges and Sensor Kits.
Sensor System produces or supplies a family of nearly thirty (30)
distinctive products. Sensor System has a volume production line with an ISO
9000 certified partner in Taiwan in 2002. This allows Sensor System to penetrate
high-volume consumer markets that are very price sensitive. On April 12, 2005,
we entered into a Joint Venture Agreement with CAAS pursuant to which the
parties agreed to develop, produce and sale sensor and related electronic
products throughout China. To that end, in 2005, the parties established
Universal Sensors, Inc., or USI, in the Wuhan East lake development zone, in
Hubei, China. Pursuant to the Joint Venture Agreement, the parties agreed to
invest $10,000,000, out of which we will invest $3,000,000 in technology and
assets. USI has been in operations since 2005, and we have been in the process
of transferring technology to them for the production and development of sensor
products.
Sensor System is a supplier of thin-film and micro-machined force and
pressure sensors to the medical, chemical, oil, and gas industries. Sensor
System believes that its technology will enable it to become a global supplier
of advanced MEMS/Microelectronic products in myriad developing markets. Sensor
System'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.
25
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. These sensor solutions will provide
information continuously to decision makers in all phases of
business operation.
o Penetrate the automotive sensor market in China. By leveraging the
marketing channel of our joint venture partner, we will have access
to the automotive market in China immediately. We plan to use the
next three years to build up our production capacity, product
offerings, and technical team there. We will import automotive
sensors produced by our joint venture to North America and Europe
around 2008.
o Strategic acquisition. Being a public company gives us an additional
tool to grow our business through acquisition besides internal
growth. We will actively seek equity or debt funding to bring in the
necessary resources to execute this plan.
Industry Overview. Micro-Electro-Mechanical Systems, or MEMS, is the
integration of mechanical elements, sensors, actuators, and electronics on a
common silicon substrate through the utilization of microfabrication technology.
MEMS is an enabling technology, allowing the development of smart products by
augmenting the computational ability of microelectronics with the perception and
control capabilities of microsensors and microactuators. MEMS is also an
extremely diverse and fertile technology, both with regard to applications, and
the methodology of how electronic devices are designed and manufactured.
Microelectronic integrated circuits ("ICs") can be thought of as the
"brains" of systems and MEMS augments this decision-making capability with
"eyes" and "arms", to allow microsystems to sense and control the environment.
In its most basic form, the sensors gather information from the environment
through measuring mechanical, thermal, biological, chemical, optical, and
magnetic phenomena; the electronics process the information derived from the
sensors and through some decision making capability direct the actuators to
respond by moving, positioning, regulating, pumping, and filtering, thereby,
controlling the environment for some desired outcome or purpose. Since MEMS
devices are manufactured using batch fabrication techniques, similar to ICs,
unprecedented levels of functionality, reliability, and sophistication can be
placed on a small silicon chip at a relatively low cost.
Market Size and Viability. The total MEMS market size is about $2.7
billion with following distribution in 1991, according to an MIRC market study
report. MEMS pressure sensor, currently the focus of Sensor System's operations,
owns the largest market share of $6 billion in 2000. According to MIRC, MEMS
Silicon Pressure Sensors will grow to about 80% of the total market and become
the main stream of this industry. The applications of MEMS Pressure Sensors can
be separated into five categories: Automotive, Process Control, Medical,
Consumer /Appliances and Aerospace. Currently, the market in Consumer
Electronics is enjoying the fast growth. Due to its versatility, MEMS is taking
the lead in the various fast-growing electronic applications in addition to its
excellent performance and price ratio. The total MEMS sensor market was $800
millions in 1990 with an annual growth rate of 20%. It is expected to grow to $1
billion by 2005.
Products. Our future technology strategy is to develop and/or acquire core
intellectual property that will place it in a leadership position to manufacture
and market MEMS sensors. Sensor System has filed two (2) provisional patents
with the United States Patent and Trademark Office ("USPTO"). In addition, we
have developed many proprietary techniques/processes. These serve as the
foundation to further develop our MEMS business.
We produce or supply a family of nearly thirty (30) distinctive products.
These products employ or utilize the latest state-of-the-art technologies. The
products are primarily electro-mechanical sensing devices and are identified
under the following categories: Pressure Transducers, Pressure Transmitters,
Pressure Switches, Force Sensors, Load Cells, Strain Gages, and MEMS Sensors. It
is expanding its product offering to include intelligent embedded systems that
combine the attributes of both intelligent sensor and host systems
26
We use sputtered thin film, bonded foil, semi-conductor gages and
piezoresistive strain gage technologies primarily in the design, development and
manufacture of its general sensor products, although other technology options
are also available. All of our products employ proven technologies with little,
or no risk involved with their manufacture. What sets our products apart from
their competitors is their ability to optimize the performance of their products
by efficient application of their diverse technologies into unique design
concepts and utilizing sophisticated materials in construction and packaging
techniques.
Customers. We supply our sensors mainly to the medical and automation
industries. In general customers are divided into three groups: original
equipment manufacturers ("OEMs"), end users and catalogs, each of which one
accounted for about one third of our revenue in 2004.
Our revenue mainly was from end users before the hiring of our sales
manager in March 2004. We moved our focus to OEM account since then. The success
is obvious since we started 2005 with an OEM backlog of around $600K.
We have established a wide presence in the catalog houses through our
Model 1200 in 2004. This penetration will allow us to increase our revenue by
moving other products through the same channel.
Sales and Marketing. We use sales representatives to promote our product
since sensors are quite complicated devices. We have a network of nine sales
representatives to cover North America and six international representatives. In
addition to our sales reps network, we also have a network of distributors to
handle products that do not require much technical support. Both networks are
managed by our Sales Manager.
We are seeking new distribution channels for our Sensor Modules and we are
working to leverage existing market intelligence. We will hire a Marketing
Manager in 2005 to assist us in capturing the market opportunity in our Sensor
Modules.
Research and Development. We hired two key engineers in October of 2004.
Together, they have sixty years of combined experience in designing creative
sensor modules. To date, two series of sensor modules have been designed, models
have been constructed and beta-site tested. The modules were released to
production in the fourth quarter of 2005. We project that the unit price of
these modules will be at least ten times higher than our current sensor
component's sale price. We expect an increase in our sales from these two
product lines.
Our Goals. We plan to integrate proprietary techniques and processes
developed by Sensor System that serve as the foundation to develop the Company's
MEMS business. These MEMS core competences include MEMS front-end wafer design
and processing, volume assembly and testing, application-specific environmental
protection, and cost modeling. Combined with Sensor System's expansion plans to
increase marketing and sales efforts, these technologies present the Company
with opportunities to further grow the business in international markets such as
China. The Company has also partnered on or about November 2001 with an
established production partner, Powertip Technology Corporate, in Taiwan to
address production requirements. Sensor System also has MEMS wafer fabrication
partners in China and Taiwan, allowing the Company to maintain sensor wafer
supplies as well as to continue MEMS device research.
We intend to upgrade from sensor component business to system solution
business. It will be focused on providing complete data management solutions
that can accommodate the needs of a wide range of industries and businesses.
These solutions include a comprehensive set of products and services that
establish the infrastructure necessary for manufacturing process partners to
proactively participate in sustaining and optimizing the operation.
We are striving to be a provider of sensor solutions with built-in network
connectivity to supply critical data continuously for enterprises to monitor and
control:
o Machine conditions
o Manufacturing processes
o Business Transactions
We plan to develop and integrate various core intellectual properties in
the areas of MEMS sensors, intelligent sensor interface electronics, intelligent
embedded control systems and meters, wireless communication network interfaces,
data appliances and mobile devices that facilitate machine-to-business data
sharing, software & hardware to support web-based device diagnostics and data
collection/data distribution, and web-based data management.
27
We are actively seeking funding to expand its design, development and
marketing of MEMS based thin-film and micro-machined force and pressure sensors
to the medical, chemical, oil, and gas industries. The Company believes that
MEMS is an enabling technology allowing the development of smart products by
augmenting the computational ability of microelectronics with the sensing and
control capabilities of microsensors and microactuators.
Our strategy includes the hiring of engineering and sales and marketing
team coupled with off-shore joint ventures, such as the one entered into with
CAAS.
Strategy. Our goals include:
o Penetrate automotive and appliance markets through the Joint Venture
with CAAS in China;
o Leverage the cost performance of above alliance to penetrate
industrial and medical markets in North America and Europe;
o Complete development of sensor-based systems; and
o Seek complementary merger and acquisition candidates.
Competition. Our products and services are affected by varying degrees of
competition. We compete with other companies in most markets we serve, many of
which have far greater sales volumes and financial resources. The principal
competitive factors in the commercial markets in which we participate are
product performance, service and price. Part of product performance requires
expenditures in research and development that lead to product improvement. The
market for many of our products may be affected by rapid and significant
technological changes and new product introduction. Our principal competitors
include Honeywell, GE and MSI in our sensor component segment, and Delphi,
Bosch, and Denso in automotive sensor segment. There is no major competitor in
the market in which Sensor System Solutions operates at the current time.
Employees and employment agreements. We currently employ 17 full-time
employees. There are no employment agreements with any of the employees.
Description Of Property
Our headquarters are located 45 Parker Avenue, Suite A, Irvine, California
92618. The facilities include 25,000 square feet of office, production and
warehouse, which we lease from Irvine Company under a five year lease. Annual
rental payments for this lease are listed in the MD&A Section. We believe that
these facilities have the capacity to meet its manufacturing and assembly needs
for the foreseeable future.
Legal Proceedings
We are not a party to any pending litigation and none is contemplated or
threatened.
28
MANAGEMENT
Executive Officers
The following table sets forth the names, ages and positions of each of
the Company's executive officers. Subject to rights under any employment
agreements, officers of the Company serve at the pleasure of the Board of
Directors.
Name Age Position
---- --- --------
Michael Young 47 Chief Executive Officer, Acting Chief Financial
Officer and Chairman
Hanlin Chen 48 Director
All directors have a term of office expiring at the next annual general
meeting, unless re-elected or earlier vacated in accordance with the Bylaws. All
officers have a term of office lasting until their removal or replacement by the
Board of Directors.
The following is a biographical summary of the experience of each of the
executive officers:
Michael Young founded Sensor System in 1986 and has served for seven years
as CEO of Sensor System. His responsibilities include overseeing day-to-day
operations and developing and implementing the Company's overall strategy
including the development of strategic partnerships and funding. His career in
this industry has spun over 20 years. He has previously been with Rosemount,
Endevco, Hughes Aircraft and other firms, and has been involved with MEMS
design, fabrication, packaging and applications development. He is responsible
for leading Sensor System given his technical expertise and a broad range of
business experiences with Sensor System. He holds a Master of Science degree in
Mechanical Engineering from Stanford University.
Hanlin Chen began serving as the Chairman and CEO of China Automotive
Systems, Inc. in 2003. Prior to this appointment, Mr. Chen was the general
manager of Jiulong Power Steering Company Limited from 1992 to 1997. Mr. Chen
holds a MBA from Barrington University and serves as a board member of Political
Consulting Committee of Jingzhou city and vice president of Foreign Investors
Association.
Committees Of The Board Of Directors
Currently, the Board does not have any committees.
Compensation Of Directors
All directors receive no compensation from the Company.
Family Relationships
There are no family relationships on the Board of Directors.
Involvement in Certain Legal Proceedings
Michael Young served as the CEO of TransOptiX from August, 2000 to August,
2005. On August 6, 2005, TransOptiX filed Chapter 7 bankruptcy/ To our
knowledge, during the past five years other than this event, our officers and
directors have not filed a petition under the federal bankruptcy laws or any
state insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or present of such a person, or any
partnership in which he was a general partner at or within two years before the
time of such filing, or any corporation or business association of which he was
an executive officer within two years before the time of such filing; were not
convicted in a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses); were not the
subject of any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining him from or otherwise limiting their respective activities.
29
Compliance with Section 16 (a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us pursuant to Rule 16a-3(e) under the Securities Exchange Act of
1934 during our most recent fiscal year and Forms 5 and amendments thereto
furnished to us with respect to our most recent fiscal year, all officers,
directors and owners of 10% or more of our outstanding shares have filed all
Forms 3, 4 and 5 required by Section 16(a) of the Securities Exchange Act of
1934.
Code Of Ethics
We have adopted a corporate code of ethics on February 13, 2004. We
believe our code of ethics is reasonably designed to deter wrongdoing and
promote honest and ethical conduct; provide full, fair, accurate, timely and
understandable disclosure in public reports; comply with applicable laws; ensure
prompt internal reporting of code violations; and provide accountability for
adherence to the code.
Executive Compensation
The following table sets forth certain information with respect to the
compensation of the Named Executive Officers. The "Named Executive Officers"
include, (i) the Company's Chief Executive Officer (ii) the Company's executive
officers as of December 31, 2004 (iii) two additional individuals who were not
executive officers as of the year ended December 31, 2004. The Company did not
grant any restricted stock awards or stock appreciation rights or make any
long-term incentive plan payouts during the periods set forth below.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
------------------------------------------- ----------------------
Fiscal year Other Annual
Name and Ended Salary Bonus Compensation Securities Underlying
Principal Position December 31 ($)* ($) ($) Options (#)
------------------ ----------- -------- --------- ------------ ---------------------
Michael Young, CEO 2004 71,123 -- -- --
2003 61,506 -- -- --
2002 -- -- -- --
There are no stock option, retirement, pension, or profit sharing plans
for the benefit of our officers and directors.
Option/SAR Grants
No individual grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to any
executive officer or any director since our inception, accordingly, no stock
options have been exercised by any of the officers or directors in fiscal 2004.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation
intended to serve as incentive for performance to occur over a period longer
than one fiscal year, whether such performance is measured by reference to our
financial performance, our stock price, or any other measure.
Compensation of Directors
The directors did not receive any other compensation for serving as
members of the board of directors. The Board has not implemented a plan to award
options. There are no contractual arrangements with any member of the board of
directors.
We do not intend to pay any additional compensation to our directors. As
of the date hereof, we have not entered into employment contracts with any of
our officers and we do not intend to enter into any employment contracts until
such time as it profitable to do so.
30
Indemnification
Nevada corporation law provides that:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper; and
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, the corporation
shall indemnify him against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
Our bylaws provide that we will advance all expenses incurred to any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suite or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was our director or officer, or is or was serving at our request as a director
or executive officer of another company, partnership, joint venture, trust or
other enterprise, prior to the final disposition of the proceeding, promptly
following request. This advanced of expenses is to be made upon receipt of an
undertaking by or on behalf of such person to repay said amounts should it be
ultimately determined that the person was not entitled to be indemnified under
our bylaws or otherwise.
Our bylaws also provide that no advance shall be made by us to any officer
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made: (a) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to the proceeding; or (b) if such quorum is not obtainable, or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, that the facts known to the
decision-making party at the time such determination is made demonstrate clearly
and convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to our best interests.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of our company under
Nevada law or otherwise, we have been advised the opinion of the Securities and
Exchange Commission is that such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event a claim
for indemnification against such liabilities (other than payment by us for
expenses incurred or paid by a director, officer or controlling person of our
company in successful defense of any action, suit, or proceeding) is asserted by
a director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question of whether such indemnification by it is against
public policy in said Act and will be governed by the final adjudication of such
issue.
31
Employment Agreements And Arrangements
The Board of Directors adopted on September 1, 2005 a resolution setting
forth Michael Young's compensation. The terms of the arrangement included a
three-year tenure, with a base salary of $150,000 per annum, a $20,000 signing
bonus, a $1,000,000 life insurance policy and a $1,000 per month automobile
expense. If Michael Young is terminated without cause, the Company would be
obligated to pay him $300,000 cash compensation. As of February 3, 2006, no
employment agreement has been executed between the Company and Michael Young.
32
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of each class of the Company's voting securities as of
February 3, 2006, by (i) each person or company known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding shares, (ii) each
director of the Company or any nominee for directorship, (iii) the Chief
Executive Officer of the Company and each of the other Named Executive Officers
and (iv) all directors and Named Executive Officers of the Company as a group.
Name of Beneficial Owner Amount and Nature Percent
and Address(1) Beneficial Owner Position of Class (1)
------------------------ ---------------- -------- -----------
Officers and Directors
Michael Young 10,620,186 Chief Executive Officer and Chairman 17.21%
Hanlin Chen -- Director 0%
---------------- -----------
Officers and Directors as a Group
(2 persons) 10,620,186 17.21%
Principal Shareholders
------------------------
Andy Ju(2) 3,374,729 5.47%
Jeffrey Ju(2) 3,374,729 5.47%
---------------
* Indicates ownership of less than 1%.
(1) Applicable percentage of ownership is based on 61,705,019 shares of common
stock outstanding as of February 3, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
February 3, 2006, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of February 3, 2006 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(2) The address of all individuals, entities and stockholder groups listed in
the table is c/o Sensor System Solutions, Inc., 45 Parker Avenue, Suite A,
Irvine, CA 92618.
33
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
The Company's common stock is currently listed on the Bulletin Board
published by the National Quotation Bureau, Inc. The Company's common stock
trades under the symbol "SSYO.OB" For the periods indicated, the following table
presents the range of high and low closing sale prices for the Company's common
stock.
High Low
($) ($)
----- -----
Year ended December 31, 2006:
First Quarter (January 3 to February 3, 2006) $0.32 $0.28
Year ended December 31, 2005:
First Quarter $2.40 $1.20
Second Quarter $2.10 $0.50
Third Quarter $1.25 $0.30
Fourth Quarter $0.18 $0.51
Year ended December 31, 2004:
First Quarter $3.15 $0.45
Second Quarter $2.40 $1.20
Third Quarter $2.40 $1.20
Fourth Quarter $2.75 $0.51
Year ended December 31, 2003:
First Quarter $2.25 $1.35
Second Quarter $1.50 $1.05
Third Quarter $1.05 $0.30
Fourth Quarter $0.90 $0.60
Quotations since the Company's stock began trading on the Over-the-Counter
Bulletin Board may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The number of stockholders of record of the Company's common stock at
February 3, 2006 was 136. This number does not include shares held by brokerage
clearing houses, depositories or otherwise in unregistered form.
Dividends
We have not declared any cash dividends, nor do we intend to do so. We are
not subject to any legal restrictions respecting the payment of dividends,
except that they may not be paid to render us insolvent.
Securities Authorized For Issuance Under Equity Compensation Plans
We have not issued any securities under equity compensation plans.
Sales Of Unregistered Securities
During the past three years the registrant has issued the following
securities without registration under the Securities Act of 1933:
On December 23, 2005, the Company issued to Cornell Capital Partners
secured convertible debentures in the principal amount of $1,000,000. The
Convertible Debentures are secured by substantially all of the Company's assets,
have a one year term and accrue interest at 10% per annum. Cornell is entitled,
at its option, to convert and sell all or any part of the principal amount of
the Convertible Debentures, plus any and all accrued interest, into shares of
Common Stock at a price equal to the lesser of (i) $0.35 and (ii) ninety percent
(90%) of the lowest volume weighted average price of the Common Stock during the
fifteen (15) trading days immediately preceding the date of conversion as quoted
by Bloomberg, LP. Out of the total principal amount of $1,000,000, in December
2005, we received gross proceeds of $800,000, and the remaining $200,000,
representing the second tranche of the gross proceeds, was funded two business
days prior to the date this registration statement is filed with the Commission.
In December 2005, we received $143,000 representing the net proceeds from the
issuance of secured convertible debentures to Cornell Capital Partners under the
Securities Purchase Agreement, dated December 23, 2005. The total net proceeds
take into account estimated expenses in the amount of $47,000 and the payment of
$610,000 to Cornell Capital Partners for the repayment of the secured
convertible debentures issued to Cornell Capital Partners on October 6, 2005. In
February 2005, we received the second tranche of the proceeds in the net amount
of $164,037.19.
34
On October 6, 2005, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the Standby Equity
Distribution Agreement, we could have, at our discretion, periodically sold to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $15 million. Pursuant to the Standby Equity Distribution Agreement, Cornell
Capital Partners was entitled to purchase shares of Sensor System's common stock
at a total discount equal to 10%. For each share of common stock purchased under
the Standby Equity Distribution Agreement, Cornell Capital Partners would have
paid us 95% of or a 5% discount to, the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the five days immediately following the notice
date. Further, Cornell Capital Partners would have retained 5% of each advance
under the Standby Equity Distribution Agreement. In connection with the Standby
Equity Distribution Agreement, Cornell Capital Partners received a one-time
commitment fee in the form of 1,471,429 shares of common stock. On December 23,
2005, the Company entered into a Termination Agreement with Cornell Capital
Partners, pursuant to which the Standby Equity Distribution Agreement, as well
as the related Registration Rights Agreement and the Placement Agent Agreement,
were terminated.
On October 6, 2005, we entered into a Securities Purchase Agreement
pursuant to which we issued to Cornell Capital Partners convertible debentures
in the aggregate principal amount of $600,000. The principal amount, plus
accrued interest, was able to be convertible in whole or in part, at Cornell
Capital Partner's discretion, into our common stock at any time and from time to
time before maturity at a fixed price of $0.245 per share, subject to certain
limitations as provided therein. The convertible debentures had a term of a
one-year, possessed registration rights, accrued interest at a rate equal to 10%
per year, and were secured by Sensor System's assets. The Company repaid to
Cornell Capital Partners a total amount of $610,000, representing principal
amount and accrued interest, on December 23, 2005.
On October 19, 2005, the Company issued 200,000 shares of Rule 144 stock
to Duke Capital as a compensation for its consulting service in the merger
transaction between ACSI and Spectre Industries, Inc.
On October 19, 2005, the Company issued 725,778 shares of Rule 144 stock
to Pei Jen Hsu for a warrant exercise and loan conversion exercised by Hsu in
March 2005.
On February 10, 2005, the Company issued 3,000,000 shares of S-8 stock as
compensation to ex-directors, Ian Grant and Matthew Markin. 2,400,000 shares
were treated as a stock dividend.
On January 25, 2005, the Company issued 4,500,000 shares of Rule 144 stock
to Quantum Economic Development, Inc., Frank Demille, Foxir Communications Inc,
Ian Grant and Matthew Markin for their services in connection with the merger
transaction pursuant to the merger agreement. 3,600,000 shares were treated as a
stock dividend.
On January 25, 2005, the Company issued 47,802,373 shares of Rule 144
stock for the warrant exercise of ACSI shareholders per its merger agreement
with Spectre Industries, Inc.
On May 24, 2004, the Company issued 2,584,906 shares of Rule 144 stock to
the shareholders of ACSI Merger Agreement, dated March 13, 2004, between Spectre
Industries, Inc., Spectre Merger Sub, Inc., Ian S. Grant and Advanced Custom
Sensors, Inc.
On April 5, 2004, the Company issued 13,334 shares Olof Hildebrand.
On May 30, 2003, the Company issued 1,367 shares to Markus Hugelshofer.
On November 15, 2002, the Company issued 667 shares to Margrit Oppliger.
On September 24, 2002, the Company issues 67 shares to Andrew Yachnowitz.
On August 26, 2002, the Company issued 3,334 shares to Ken Grant.
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Hanlin Chen, a Director of the Company is the Chief Executive Officer
of CAAS. On April 12, 2005, we entered into a Joint Venture Agreement with CAAS
pursuant to which the parties would develop, produce and sale sensor and related
electronic products throughout China. To that end, in 2005, the parties
established Universal Sensors, Inc. ("USI") in the Wuhan East lake development
zone, in Hubei, China. Pursuant to the Joint Venture Agreement, the parties
agreed to invest $10,000,000, out of which we will invest $3,000,000 in
technology and assets. USI has been in operation since 2005, and we have been in
the process of transferring technology to them for the production and
development of sensor products.
36
DESCRIPTION OF CAPITAL STOCK
Common Stock
Sensor System is authorized to issue 180,000,000 shares of common stock
$0.001 par value, of which 61,705,019 were issued and outstanding at February 3,
2006. The securities being offered hereby are common stock, with one vote per
share on all matters to be voted on by shareholders, without any right to
accumulate their votes. Shareholders have no preemptive rights and have no
liability for further calls or assessments on their shares. The shares of common
stock are not subject to repurchase by the Company or conversion into any other
security. All outstanding shares of common stock are fully paid and non
assessable.
Shareholders are entitled to receive such dividends as may be declared by
the Board of Directors of the Sensor System out of funds legally available
therefore and, upon the liquidation, dissolution or winding up of the Company,
are entitled to share ratably in all net assets available for distribution to
such holders after satisfaction of all of our obligations, including stock
preferences. It is not anticipated that we will pay any dividends in the
foreseeable future since we intend to follow the policy of retaining its
earnings to finance the growth of its business. Future dividend policies will
depend upon the Company's earnings, financial needs and other pertinent factors.
Preferred Stock
The Board of Directors has the authority, without further action by
stockholders, to issue up to 20,000,000 shares of preferred stock in one or more
series and to fix the powers, designations, rights, preferences, privileges,
qualifications and restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the common stock. The Board of Directors, without stockholder approval, can
issue preferred stock with voting, conversion, and other rights which could
adversely affect the voting power and other rights of the holders of Common
Stock. The issuance of preferred stock in certain circumstances may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action by the stockholders, may discourage bids for the
Company's common stock at a premium over the market price of the common stock,
and may adversely affect the market price of the common stock.
Warrants
During the 2003, 2004 and 2005 fiscal years, the Company issued the
following warrants under the terms specified below:
Loan Amount Date Maturity Date Warrant Terms
---------------- ----------- -------- ------------- --------------
1. Tina Young $190,666.00 7/1/2003 9/17/2008 Warrants to purchase 190,666 shares of
ACSI common stock at $0.50 per share.
(the ACSI warrants are convertible into
5,372,940 shares of the Company's common
stock.)
2. Tina Young $110,000.00 9/16/2003 9/17/2008 Warrants to purchase 100,000 shares of
ACSI common stock at $0.50 per share (the
ACSI warrants are convertible into
2,817,215 shares of the Company's common
stock.) plus warrants that, once the note
is converted, are callable for three years
and allow the holder to purchase the
Company's common stock at 85% average
trading price.
37
Loan Amount Date Maturity Date Warrant Terms
---------------- ----------- -------- ------------- --------------
3. Pei Jen Hsu $27,500.00 10/2/2003 10/1/2008 Warrants to purchase 25,000 shares of ACSI
common stock at $0.50 per share (the ACSI
warrants were exercised on 3/15/2005 and
converted into 704,425 shares of the
Company's common stock which were issued
on 10/19/2005.) plus warrants that, once
the note is converted, are callable for
three years and allow the holder to
purchase the Company's common stock at 85%
average trading price.
4. Sino-American $500,000.00 2/11/2004 2/10/2009 Warrants to purchase 500,000 shares of
ACSI common stock at $0.50 per share (the
ACSI warrants were exercised on 3/15/2005,
and converted into 14,088,865 shares of
the Company's common stock. The shares
have not been issued).
5. Edwin Liou $60,000.00 10/18/2004 10/17/2008 Warrants that, once the note is converted,
are callable for three years and allow the
holder to purchase the Company's common
stock at 85% average trading price.
6. Tung Ho Liu $50,000.00 2/3/2005 2/2/2009 Warrants that, once the note is converted,
are callable for three years and allow the
holder to purchase the Company's common
stock at 85% average trading price.
7. Evan Chuang $30,000.00 12/20/2004 12/19/2008 Warrants that, once the note is converted,
are callable for three years and allow the
holder to purchase the Company's common
stock at 85% average trading price.
8. Jun Jye Huang $200,000.00 2/22/2005 2/21/2009 Warrants that, once the note is converted,
are callable for three years and allow the
holder to purchase the Company's common
stock at 85% average trading price.
9. Jay Liang $20,000.00 11/12/2004 11/11/2008 Warrants that, once the note is converted,
are callable for three years and allow the
holder to purchase the Company's common
stock at 85% average trading price.
10. Cornell Capital $600,000.00 10/6/2005 10/6/2009 Warrant to purchase 600,000 shares of the
Partners Company's common stock, at $0.27 per share.
11. Cornell Capital $600,000.00 12/23/2005 12/23/2010 Warrant to purchase 600,000 shares of the
Partners Company's common stock, at $0.2878 per
share.
12. Trenwith Securities $25,000.00 12/27/2005 12/23/2009 Warrant to purchase 86,886 shares of the
Inc. Company's common stock, at $0.2878 per
share.
38
Options
In December 2001, the Company adopted a Stock Option Plan/Stock Issuance
Plan (the "Plan") whereby the Board of Directors can issue both incentive stock
options and nonqualified options to directors, employees, and consultants as an
incentive of them to continue in the employ and service of the Company. Under
the Plan, 200,000 shares of the Company's stock are reserved for options to be
issued, at a price fixed by the plan administrator. As of February 3, 2006,
there are 76,000 options outstanding at an average exercise price of $0.50.
Transfer Agent
Our transfer agent is Worldwide Stock Transfer, LLC. Its address is 885
Queen Anne Road, Teaneck, NJ, 07666 and its telephone number is (201) 357-4809.
Reports To Shareholders
We intend to furnish our shareholders with annual reports which will
describe the nature and scope of our business and operations for the prior year
and will contain a copy of the Company's audited financial statements for its
most recent fiscal year.
Limitation Of Liability: Indemnification
The Company's Articles of Incorporation limits the liability of directors
to the maximum extent permitted by Nevada law. Nevada law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as under Nevada law, or (iv) any transaction from
which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its
officers, directors, employees and other agents to the maximum extent permitted
by Nevada law. The Company's Bylaws also permit it to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the Bylaws would
permit indemnification.
The Company believes that the provisions in its Articles of Incorporation
and its Bylaws are necessary to attract and retain qualified persons as officers
and directors.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of Sensor System
pursuant to the foregoing, or otherwise, the Company has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
Anti-Takeover Effects of Provisions of The Articles of Incorporation
The Company's Certificate of Incorporation and Bylaws include a number of
provisions which may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. These provisions include limitations on
stockholder action initiated by Interested Stockholders, a prohibition on the
call of special meetings of stockholders by persons other than the Board of
Directors, and a requirement of advance notice for the submission of stockholder
proposals or director nominees.
39
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement for the fiscal year ended December 31, 2004 has
been audited by Weinberg & Company, P.A. The reports of Weinberg & Company, P.A.
are included in this prospectus in reliance upon the authority of this firm as
experts in accounting and auditing. The report of Weinberg & Company, P.A.
contained elsewhere in this prospectus contain an explanatory paragraph
regarding its ability to continue as a going concern.
VALIDITY OF SECURITIES
The validity of the shares offered herein will be opined on for us by
Burton, Bartlett & Glogovac, which has acted as our outside legal counsel in
relation to certain, restricted tasks.
INTERESTS OF NAMED EXPERT AND COUNSEL
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for us
by Burton, Bartlett & Glogovac, Reno, Nevada. Burton, Bartlett & Glogovac does
not have any interests in Sensor System and has never been employed by Sensor
System on a contingent basis.
The audited consolidated financial statements of the Company for the year
ended December 31, 2004 has been audited by Weinberg & Company, P.A. Weinberg &
Company, P.A. does not have any interests in Sensor System and have never been
employed by Sensor System on a contingent basis.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the 1933 Act with respect to the securities offered
by this prospectus. This prospectus, which forms a part of the registration
statement, does not contain all the information set forth in the registration
statement, as permitted by the rules and regulations of the Commission. For
further information with respect to us and the securities offered by this
prospectus, reference is made to the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document that we have filed as an exhibit to the registration statement are
qualified in their entirety by reference to the to the exhibits for a complete
statement of their terms and conditions. The registration statement and other
information may be read and copied at the Commission's Public Reference Room at
100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission.
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS FOR SEPTEMBER 30, 2005
Index to Consolidated Financial Statements and Schedules................................................................F-i
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004........................F-1
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005
and September 30, 2004 (unaudited)....................................................................................F-2
Condensed Consolidated Statement of Changes in Stockholders Deficiency for the nine months ended
September 30, 2005 (unaudited)........................................................................................F-3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and
September 30, 2004 (unaudited)........................................................................................F-4
Notes to Condensed Consolidated Financial Statements (unaudited)........................................................F-5
FINANCIAL STATEMENTS FOR DECEMBER 31, 2004
Report of Independent Registered Public Accounting Firm................................................................F-12
Consolidated Balance Sheet as of December 31, 2004.....................................................................F-13
Statements of Operations for the years ended December 31, 2004 (consolidated) and 2003 ................................F-14
Statement of Changes in Stockholders' Deficiency for the years ended
December 31, 2004 (consolidated) and 2003 ...........................................................................F-15
Statements of Cash Flows for the years ended December 31, 2004 (consolidated) and 2003 ................................F-16
Notes to Financial Statements for the years ended December 31, 2004 (consolidated) and 2003 ...........................F-17
F-i
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 (Unaudited) and December 31, 2004
September 30,
2005 December 31,
ASSETS (Unaudited) 2004
------------ ------------
CURRENT ASSETS
Cash $ 11,981 $ 17,115
Accounts receivable, net 139,230 100,530
Inventory 278,788 220,445
Prepaids and other current assets 14,148 24,552
------------ ------------
Total current assets 444,147 362,642
------------ ------------
Property and equipment, net 255,753 320,717
Other assets 54,112 54,112
------------ ------------
Total assets $ 754,012 $ 737,471
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,250,822 $ 720,817
Notes payable 505,347 263,923
Notes payable, related parties 358,076 718,133
Current portion of capital lease obligations 7,819 7,819
Current portion of deferred rent concession 4,757 5,258
------------ ------------
Total current liabilities 2,126,821 1,715,950
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 28,429 34,199
Deferred rent concession, net of current portion 6,514 10,513
------------ ------------
34,943 44,712
------------ ------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value, 20,000,000 shares authorized, none
outstanding -- --
Common stock, $.001 par value, 180,000,000 shares authorized, 59,279,241
and 3,976,868 shares issued and outstanding 59,279 3,977
Common stock to be issued (15,404,871 and 7,700,000 shares) 878,512 9,300,000
Additional paid-in capital 13,861,002 4,867,790
Deferred compensation (39,612) (186,400)
Accumulated deficit (16,166,933) (15,008,558)
------------ ------------
Total stockholders' deficiency (1,407,752) (1,023,191)
------------ ------------
Total liabilities and stockholders' deficiency $ 754,012 $ 737,471
============ ============
See accompanying notes to condensed financial statements.
F-1
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For three and nine months ended September 30, 2005 and 2004 (Unaudited)
For three months ended For nine months ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales, net $ 347,061 $ 161,726 $ 855,332 $ 465,202
Cost of goods sold 191,545 211,701 565,389 423,484
------------ ------------ ------------ ------------
Gross profit (loss) 155,516 (49,975) 289,943 41,718
------------ ------------ ------------ ------------
Operating expenses 405,733 355,494 1,169,982 760,810
Amortization of discount on notes payable and
finance costs 86,876 197,267 278,336 415,713
------------ ------------ ------------ ------------
Total operating expenses 492,609 552,761 1,448,318 1,176,523
------------ ------------ ------------ ------------
Net loss $ (337,093) $ (602,736) $ (1,158,375) $ (1,134,805)
============ ============ ============ ============
Loss per common share, basic and diluted $ (.01) $ (.05) $ (.02) $ (.17)
============ ============ ============ ============
Weighted average shares outstanding, basic and
diluted, including effects of in-kind stock splits 59,279,241 11,476,868 59,279,241 6,734,483
============ ============ ============ ============
See accompanying notes to condensed financial statements.
F-2
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For nine months ended September 30, 2005 (Unaudited)
Common Stock to be
Common Stock issued
----------------- -------------------
Additional
paid-in Deferred Accumulated
Shares Amount Shares Amount capital compensation deficit Total
------ ------ ------ ------ ------- ------------ ------- -----
Balance January 1, 2005 3,976,868 $ 3,977 7,700,000 $9,300,000 $ 4,867,790 $(186,400) $(15,008,558) $(1,023,191)
Forfeiture of stock
options -- -- -- -- (112,200) 112,200 -- --
Compensatory stock
issued 1,500,000 1,500 (1,500,000) (1,800,000) 1,798,500 -- -- --
Stock dividend issued 6,000,000 6,000 (6,000,000) (7,200,000) 7,194,000 -- -- --
Warrants exercised by
shareholders from
merger 47,802,373 47,802 -- -- (47,802) -- -- --
Common stock to be
issued for
settlement of debt -- -- 14,793,290 262,500 -- -- -- 262,500
Common stock to be
issued for
settlement of debt -- -- 411,581 316,012 -- -- -- 316,012
Intrinsic value of
common stock
warrants issued with
note payable -- -- -- -- 160,714 -- -- 160,714
Amortization of
deferred
Compensation -- -- -- -- -- 34,588 -- 34,588
Net loss -- -- -- -- -- -- (1,158,375) (1,158,375)
--------- ------- --------- ---------- ------------ --------- ------------ -----------
Balance September 30,
2005 59,279,241 $59,279 15,404,871 $ 878,512 $ 13,861,002 $ (39,612) $(16,166,933) $(1,407,752)
========== ======= ========== ========== ============ ========= ============ ===========
See accompanying notes to condensed financial statements.
F-3
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(1,158,375) $(1,134,805)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 71,464 83,807
Amortization of discount on notes payable 270,837 400,646
Amortization of deferred compensation 34,588 58,204
Net loss from assets held for disposal -- 29,216
Changes in operating assets and liabilities:
Accounts receivable (38,700) (59,448)
Inventory (58,343) (6,340)
Prepaids and other current assets 10,404 (29,864)
Deferred rent (4,500) --
Accounts payable and accrued expenses 581,017 222,562
----------- -----------
Net Cash Used In Operating Activities (291,608) (436,022)
----------- -----------
Cash flows from investing activities:
Deposit -- (29,377)
Purchase of property and equipment (6,500) (51,927)
----------- -----------
Net Cash Used In Investing Activities (6,500) (81,304)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 298,744 500,000
Principal payments on capital leases (5,770) 43,823
----------- -----------
Net Cash Provided By Financing Activities 292,974 543,823
----------- -----------
Net (decrease) increase in cash and cash equivalents (5,134) 26,497
Cash and cash equivalents, beginning of period 17,115 10,712
----------- -----------
Cash and cash equivalents, end of period $ 11,981 $ 37,209
=========== ===========
Supplemental disclosure of cash flow information Cash paid for:
Interest $ 9,914 $ 10,131
=========== ===========
Taxes $ 800 $ 800
=========== ===========
Non-cash investing and financing activities:
Forfeiture of stock options $ 112,200 $ --
Compensatory stock issued 1,800,000 --
Warrants exercised by shareholders from merger 47,802 --
Conversion of notes payable to common stock to be issued 578,512 --
Accrued interest added to notes payable principal 51,012 60,663
Discount related to warrants and convertible notes 160,714 278,730
Acquisition of equipment through capital lease obligations -- 47,365
See accompanying notes to condensed financial statements.
F-4
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information included herein is unaudited. The interim
consolidated financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, considered
necessary for a fair presentation of the Company's consolidated financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes presented in the Company's Form 10-KSB for the
year ended December 31, 2004. Interim operating results are not necessarily
indicative of operating results expected for the entire year.
Description of business
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 $1,158,375 and a negative cash flow
from operations of $291,608 for nine months ended September 30, 2005, and had a
working capital deficiency of $1,682,674 and a stockholders' deficiency of
$1,407,752 at September 30, 2005. These matters raise substantial doubt about
its ability to continue as a going concern. Without realization of additional
capital, it would be unlikely for the Company to continue as a going concern.
Management believes that actions are presently being taken to revise the
Company's operating and financial requirements in order to improve the Company's
financial position and operating results. However, given the levels of its cash
resources and working capital deficiency at September 30, 2005, management
believes cash to be generated by operations will not be sufficient to meet
anticipated cash requirements for operations, working capital, and capital
expenditures during 2005.
On October 6, 2005, the Cornell Capital Partners, LP (Cornell)
committed to provide up to $15 million of funding in the form of a Standby
Equity Distribution Agreement (SEDA). In addition, On October 6, 2005, the
Company issued $600,000 of convertible debentures to Cornell. On December 23,
2005, the SEDA and related agreements were terminated and the Company entered
into a Securities Purchase Agreement with Cornell in which the Company agreed to
sell an aggregate of $1,000,000 of convertible debentures to Cornell, of which
$610,000 of the initial $800,000 proceeds was used to repay principal and
accrued interest on the convertible debentures issued to Cornell on October 6,
2005. The remaining $200,000, representing the second tranche of gross proceeds,
is to be funded in February, 2006. The $1,000,000 convertible debentures are
secured by substantially all of the Company's assets, have a one year term and
accrue interest at 10% per annum. Cornell is entitled, at its option, to convert
and sell all or any part of the principal amount of the $1,000,000 convertible
debentures, plus any and all accrued interest, into shares of the Company's
common stock at a price equal to the lesser of (i) $0.35 and (ii) 90% of the
lowest volume weighted average price of the common stock, as defined, during the
fifteen trading days immediately preceding the date of conversion as quoted by
Bloomberg, LP.
The Company is also seeking an additional $1,000,000 bridge financing to
further develop into a fully-equipped public company. However, no assurance can
be given that such funds will be available or the term thereof. The accompanying
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles of consolidation
The consolidated financial statements for the nine months ended September
30, 2005 and 2004 include the accounts and operations of Sensor Systems
Solutions Inc. and its wholly owned subsidiary. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock - based compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures" as well as those outlined in SFAS No.
123, "Accounting for Stock-Based Compensation". As permitted by SFAS 148 and
SFAS 123, the Company continues to apply the provisions of Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock issued to Employees" and
related interpretations in accounting for the Company's stock option plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the
grant, over the amount an employee must pay to acquire the stock. Stock based
awards for non-employees are accounted for at fair value equal to the excess of
the estimated fair value of the Company's stock over the option price using an
estimated interest rate to calculate the fair value of the option. There were no
stock based awards to non-employees for the nine months ended September 30,
2005.
F-5
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
Had compensation cost for all stock option grants been determined based on
their fair value at the grant dates, consistent with the method prescribed by
SFAS 148 and SFAS 123, our net loss and loss per share would have been adjusted
to the pro forma amounts indicated below:
Nine months ended September 30:
2005 2004
----------- -----------
Net loss $(1,158,375) $(1,134,805)
Add: Stock-based expense included in net loss 34,588 58,204
Deduct: Fair value based stock-based expense (39,160) (26,900)
Pro forma net loss $(1,162,947) $(1,103,501)
Basic and diluted earnings per share:
As reported $ (.02) $ (.17)
Pro forma under SFAS No. 123 $ (.02) $ (.16)
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, 2005 and 2004, the
Company had granted stock options for 96,500 and 136,500 shares of common stock,
respectively, that are potentially dilutive common shares but are not included
in the computation of loss per share because their effect would be
anti-dilutive. The exercise of the shareholder warrants was accounted for in
earnings per share as a stock split, retroactive to the May 24, 2004 merger as
discussed in Note 5.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs". This Statement amends the guidance in ARB
No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility
costs, excessive spoilage, double freight and rehandling costs to be expensed in
the current period, regardless if they are abnormal amounts or not. This
Statement will become effective for us in the first quarter of 2006. The
adoption of SFAS No. 151 is not expected to have a material impact on the
Company's consolidated financial statement.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (R), "Share-Based
Payment" ("SFAS 123(R)"). SFAS No. 123 (R) revises SFAS 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123 (R) requires companies to
recognize in the statement of operations the cost of employee services received
in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions). SFAS 123 (R) is effective as of the
first interim or annual reporting period of the first fiscal year that begins
after June 15, 2005 for small business issuers. Accordingly, the Company will
adopt SFAS 123 (R) in its quarter ending March 31, 2006.
As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method. Accordingly,
adoption of SFAS 123R's fair value method will have an effect on results of
operations, although it will have no impact on overall financial position. The
impact of adoption of SFAS 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had
SFAS 123R been adopted in prior periods, the effect would have approximated the
SFAS 123 pro forma net loss and loss per share disclosures as shown above. SFAS
123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as currently required, thereby reducing net operating cash
flows and increasing net financing cash flows in periods after adoption.
F-6
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This Statement replaces APB No. 20, "Accounting Changes" and FASB
No. 3, "Reporting Accounting Changes in Interim Financial Statements", and
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement includes specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. This Statement requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The adoption of
SFAS No. 154 did not have an impact on the Company's consolidated financial
statements.
NOTE 2. INVENTORY
Inventory consists of the following:
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Raw materials $ 154,390 $ 149,840
Work in process -- 1,749
Finished goods 124,398 68,856
----------- -----------
$ 278,788 $ 220,445
=========== ===========
NOTE 3. NOTES PAYABLE
Notes payable consist of the following:
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Two lines of credit, unsecured, interest payable monthly at 9.25% and 10.0%
per annum, due on demand. $ 92,984 $ 92,984
Note payable, unsecured, interest payable monthly at prime + 3% per annum
(prime rate at September 30, 2005 was 6.75%), due on demand. 40,000 40,000
Note payable, unsecured, interest payable monthly at 10% per annum,
payable as a percentage of any future private or public stock offerings. 90,000 90,000
Note payable, unsecured, interest payable at 8% per annum, due on maturity date 48,745 --
F-7
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Three notes payable, secured by all assets of the Company, interest at 8% per
annum, payable at various maturities through February 21, 2006. At December 31,
2004, there were two notes payable totaling $ 90,000. On February 22, 2005, a
note payable for $200,000 was issued. At maturity, the notes are convertible at
the holder's option at a conversion price equal to 70% of the weighted average
price of the common stock for the 30 trading days immediately preceding the
conversion date. In addition, each note has warrants attached that, once the
note is converted into stock, allow the holder to purchase stock at 85% of the
weighted average price of the common stock for the 30 trading days immediately
preceding the conversion date. The aggregate intrinsic value of the beneficial
conversion feature of the notes and warrants, valued at $186,571 (of which
$128,571 is related to the note issued in 2005), has been recorded as loan
discount costs and are being amortized over the life of the respective note as
additional interest cost. 290,000 90,000
Less remaining debt discount (56,382) (49,061)
--------- -------
$ 505,347 263,923
========= =======
NOTE 4. NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following:
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Note payable to the sister of the Company's Chief Executive Officer, secured by
all assets of the Company, interest at 14.25% per annum, due December 31, 2004.
The note payable was originally issued by Advanced Custom Sensors, Inc. (ACSI),
which merged with the company in 2004. In connection with the note payable, the
ACSI issued warrants expiring September 17, 2008, to purchase 190,665 shares of
ACSI's common stock at $0.50 per share (the ACSI warrant is convertible into
5,372,940 shares of the Company's stock). The intrinsic value of the warrants
($190,665) has been recorded as loan discount costs and is being amortized over
the life of the note as additional interest cost. The Company is currently
negotiating an extension of this note. $ 190,665 $ 190,665
F-8
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Note payable to the sister of the Company's Chief Executive Officer, secured by
all assets of the Company, interest at 10.0% per annum, due March 15, 2005. The
note payable was originally issued by ACSI in 2003, at which time ACSI issued a
warrant expiring September 17, 2008, to purchase 100,000 shares of stock at $.50
per share (the ACSI warrant is convertible into 2,817,215 shares of the
Company's common stock. The intrinsic value of the original warrant ($100,000)
recorded as a loan discount cost, and was amortized over the life of the
original note as additional interest cost. The original note was due September
16, 2204. On September 16, 2004, a new note was issued to replace the original
note. At maturity, the new note is convertible at the holder's option at a
conversion price equal to 80% of the weighted average price of the common stock
for the 30 trading days immediately preceding the conversion date. In addition,
the note has warrants attached that, once the note is converted into stock,
allow the holder to purchase stock at 85% of the weighted average price of the
common stock for the 30 trading days immediately preceding the conversion date.
The intrinsic value of the beneficial conversion feature of the note and
warrants, valued at $48,125, has been recorded as loan discount costs and is
being amortized over the life of the note as additional interest cost. The
Company is currently negotiating an extension of this note. 110,000 110,000
Note payable to an employee of the Company, secured by all assets of the
Company, interest at 8.0% per annum, due November 11, 2005. At maturity, the
note is convertible at the holder's option at a conversion price equal to 70% of
the weighted average price of the common stock for the 30 trading days
immediately preceding the conversion date. In addition, the note has warrants
attached that, once the note is converted into stock, allow the holder to
purchase stock at 85% of the weighted average price of the common stock for the
30 trading days immediately preceding the conversion date. The intrinsic value
of the beneficial conversion feature of the note and warrants, valued at
$12,857, has been recorded as loan discount costs and is being amortized over
the life of the note as additional interest cost. 20,000 20,000
Note payable to shareholder, secured by all assets of the Company, interest at
8.0% per annum, due February 3, 2006. At maturity the note is convertible at the
holder's option at a conversion price equal to 70% of the weighted average price
of the common stock for the 30 trading days immediately preceding the conversion
date. In addition, the note has warrants attached that, once the note is
converted into stock, allow the holder to purchase stock at 85% of the weighted
average price of the common stock for the 30 trading days immediately preceding
the conversion date. The intrinsic value of the beneficial conversion feature of
the note and warrants, valued at $32,143, has been recorded as loan discount
costs and is being amortized over the life of the note as additional interest
cost. 50,000 --
Note payable, secured by accounts receivable of the Company, interest at 10%,
due February 11, 2005. The note payable was originally issued by ACSI. In
connection with the note payable, ACSI issued a warrant to purchase 500,000
shares of stock at$.50 per share (the ACSI warrant is convertible into
14,088,865 shares of the Company's common stock). The note was payable to
Sino-American, Inc., a company controlled by Mr. Hanlin Chen, a director of the
Company. On March 15, 2005, the warrant was exercised for $250,000 of the debt
outstanding. The balance of the note payable and accrued interest ($300,000) was
exchanged for 390,228 shares of the Company's common stock at approximately
$0.77 per share, which approximated the market value of the stock on March 15,
2005. -- 500,000
F-9
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
September 30,
2005 December 31,
(unaudited) 2004
----------- -----------
Notes payable, secured by all assets of the Company, interest at 8% per annum,
due October 1, 2005. The note payable was originally issued by ACSI in 2003, at
which time ACSI issued a warrant to purchase 25,000 shares of stock at $.50 per
share (the ACSI shares are convertible into 704,425 shares of the Company's
common stock). The intrinsic value of the original warrant was valued at
$25,000, recorded as loan discount cost, and was amortized over the life of the
original note as additional interest cost. The original note was due September
16, 2004. On October 2, 2004, a new note was issued to replace the original
note. The intrinsic value of the beneficial conversion feature of the new note
and new warrant, valued at $17,679, has been recorded as loan discount costs and
is amortized over the life of the new note. On March 18, 2005, the ACSI warrant
was exercised for $12,500 of the debt outstanding. The balance of the note
payable and accrued interest ($16,012) was exchanged for 21,353 shares of the
Company's common stock at approximately $0.77 per share, which approximated the
market value of the stock on March 15, 2005. -- 27,500
Less remaining debt discount (12,589) (130,032)
--------- ----------
$ 358,076 $ 718,133
========= ==========
NOTE 5. STOCKHOLDERS' EQUITY
On May 29, 2003, Advanced Custom Sensors, Inc. (ACSI) signed an agreement
with Duke Capital to retain its consulting service for merger transaction with
Spectre Industries and to obtain a $250,000 unsecured bridge financing in order
to finance all the expense in merger. However, Duke failed to perform to ACSI's
expectation; ACSI decided to cancel its agreement with Duke before the merger
was completed. On September 3, 2004, the Company agreed to issue 200,000 shares
of common stock for the settlement this agreement. As an agreement was
consummated and an exchange of debt had taken place, the Company recorded the
stock to be issued as an equity transaction. This is a fixed number and will not
change with market value.
On May 24, 2004, Sensor System Solutions (formerly known as Spectre
Industries, Inc.) a Nevada corporation, entered into an agreement and plan of
merger with ACSI. Sensor issued 2,584,906 shares of its common stock and
warrants to purchase up to 47,802,373 shares of its common stock to the
shareholders of ACSI in exchange for all the issued and outstanding shares of
ACSI. On January 29, 2005, warrants for the 47,802,464 shares of common stock
were exercised. The Company recorded the par value of the stock issued ($47,802)
as an increase in common stock and a reduction to additional paid in capital in
the accompanying financial statements.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company leases its office and facility through 2007 under a long term
operating lease agreement. The office and warehouse facility is shared with
TransOptix Inc. (TransOptix), who signed the lease as co-tenant with the
Company. The Company and TransOptix had entered into an agreement stipulating
each entity's share of the rent. The Company owns 7.5% of TransOptix. The
Company's Chief Executive Officer is also the Chief Executive Officer of
TransOptix and owns 12% of TransOptix. On August 26, 2006, TansOptix filed for
Chapter 7 bankruptcy and the Company has taken over the whole facility and is
liable for the full amount of the lease. The total lease commitment as of
September 30, 2005 for which the Company was liable with the default of
TransOptix increased from approximately $196,000 to approximately $463,000.
F-10
SENSOR SYSTEMS SOLUTIONS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
A Director of the Company is the Chief Executive Officer of CAAS. On April
12, 2005, the Company entered into a Joint Venture Agreement with CAAS pursuant
to which the parties would develop, produce and sale sensor and related
electronic products throughout China. To that end, in 2005, the parties
established Universal Sensors, Inc. ("USI") in the Wuhan East lake development
zone, in Hubei, China. Pursuant to the Joint Venture Agreement, the parties
agreed to invest $10,000,000, out of which the Company will invest $3,000,000 in
technology and assets. USI has been in operation since 2005, and we have been in
the process of transferring technology to them for the production and
development of sensor products.
NOTE 7. SUBSEQUENT EVENTS
On October 6, 2005, the Company secured a total of $15,600,000 in
financing with Cornell Capital Partners, LP (Cornell) to support the continued
development and growth of the Company. Cornell committed to provide up to $15
million of funding in the form of a Standby Equity Distribution Agreement
(SEDA). In addition, the Company sold an aggregate of $600,000 of convertible
debentures to Cornell. In connection with the SEDA and related agreements,
Company issued 1,471,429 shares of the Company's common stock to Cornell and
28,571 shares of the Company's common stock to Monitor Capital for fees. In
connection with the convertible debentures, the Company issued a warrant to
Cornell to purchase 600,000 shares of the Company's common stock, at $0.27 per
share, expiring October 6, 2009.
On October 19, 2005, the Company issued 200,000 shares of common stock to
a lender as part of the Company's payment agreement with the lender in 2004.
On October 19, 2005, the Company issued 725,778 shares of common stock to
a lender for warrants exercised by the lender in March 2005. The shares are
shown as common stock to be issued at September 30, 2005.
On December 23, 2005, the Company entered into a termination agreement
with Cornell, whereby the SEDA and related agreements were terminated. Also on
December 23, 2005, the Company entered into a Securities Purchase Agreement in
which the Company agreed to sell an aggregate of $1,000,000 of convertible
debentures to Cornell, of which $610,000 of the initial $800,000 proceeds was
used to repay the convertible debentures issued to Cornell on October 6, 2005.
The remaining $200,000, representing the second tranche of the gross proceeds,
is to be funded in February, 2006. The $1,000,000 convertible debentures are
secured by substantially all of the Company's assets, have a one year term and
accrue interest at 10% per annum. Cornell is entitled, at its option, to convert
and sell all or any part of the principal amount of the $1,000,000 convertible
debentures, plus any and all accrued interest, into shares of the Company's
common stock at a price equal to the lesser of (i) $0.35 and (ii) 90% of the
lowest volume weighted average price of the common stock, as defined, during the
fifteen trading days immediately preceding the date of conversion as quoted by
Bloomberg, LP. Also on December 23, 2005, the Company issued a warrant to
Cornell to purchase 600,000 shares of the Company's common stock, at $0.2878 per
share, expiring December 23, 2010.
On December 27, 2005, in connection with the Securities Purchase
Agreement, the Company issued a warrant to Trenwith Securities to purchase up
86,866 shares of the Company's common stock at an exercise price of $0.2878 per
share. The warrant expires on December 23, 2009.
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Sensor System Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Sensor
System Solutions, Inc. and subsidiary as of December 31, 2004, and the related
statements of operations, changes in stockholders' deficiency, and cash flows
for the years ended December 31, 2004 (consolidated) and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sensor System
Solutions, Inc. and subsidiary as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004
(consolidated) and 2003, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated 2004 financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company incurred a net loss of
$3,662,390 and a negative cash flow from operations of $594,293 for the year
ended December 31, 2004, and had a working capital deficiency of $1,353,308 and
a stockholders' deficiency of $1,023,191 at December 31, 2004. These matters
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 4, 2005, except for note 9, as to which the date is February 8, 2006.
F-12
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of December 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 17,115
Accounts receivable 100,530
Inventory 220,445
Prepaids and other current assets 24,552
------------
Total current assets 362,642
------------
Property and equipment, net 320,717
------------
Other assets 54,112
------------
Total assets $ 737,471
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 720,817
Notes payable 692,692
Notes payable, related parties 289,365
Current portion of capital lease obligations 7,819
Current portion of deferred rent concession 5,257
------------
Total current liabilities 1,715,950
------------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 34,199
Deferred rent concession, net of current portion 10,513
------------
44,712
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value, 20,000,000 shares authorized, none outstanding --
Common stock, $.001 par value, 180,000,000 shares authorized, 3,976,868 issued
and outstanding 3,977
Common stock to be issued (7,700,000 shares) 9,300,000
Additional paid-in capital 4,867,790
Deferred compensation (186,400)
Accumulated deficit (15,008,558)
------------
Total stockholders' deficiency (1,023,191)
------------
Total liabilities and stockholders' deficiency $ 737,471
============
See accompanying notes to financial statements
F-13
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the years ended December 31, 2004 (Consolidated) and 2003
2004 2003
------------- ------------
(Consolidated)
Sale, net $ 661,340 $ 436,071
Cost of goods sold 579,790 401,697
------------ ------------
Gross profit 81,550 34,374
------------ ------------
Operating expenses 1,292,072 874,506
Amortization of discount on notes payable 651,868 121,223
Stock-based compensation costs 1,800,000 --
------------ ------------
Total operating expenses 3,743,940 995,729
------------ ------------
Net loss $ (3,662,390) $ (961,355)
============ ============
Loss per common share, basic and diluted $ (0.46) $ (0.39)
============ ============
Weighted average shares outstanding, basic and diluted 7,920,079 2,486,539
============ ============
See accompanying notes to financial statements.
F-14
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
For the years ended December 31, 2004 (Consolidated) and 2003
Sensor Sensor ACSI ACSI
common common common common Common
stock stock stock stock stock to
shares amount shares amount be issued
--------- ---------- ---------- ----------- ----------
Balance January 1, 2003 -- $ -- 2,466,868 $ 3,433,679 $ --
Issuance of stock
for settlement of
amount due to
vendor -- -- 82,969 160,000 --
Issuance of stock
for settlement of
accounts payable -- -- 35,058 45,834 --
Intrinsic value of
common stock
issued with notes
payable -- -- -- -- --
Issuance of stock
options -- -- -- -- --
Amortization of
deferred
compensation -- -- -- -- --
Net loss -- -- -- -- --
--------- ----------- ----------- ----------- ----------
Balance December
31, 2003 -- -- 2,584,895 3,639,513 --
Common stock of
Sensor
outstanding when
Advanced Custom
Sensors, Inc was
merged into
Sensor, Inc. 1,391,962 1,392 -- -- --
Exchange of
Advanced Custom
Sensors, Inc.
common stock for
Sensor, Inc.
common stock 2,584,906 2,585 (2,584,895) (3,639,513) --
Stock options
issued to
employees -- -- -- -- --
Common stock
warrants issued
with notes payable -- -- -- -- --
Amortization of
deferred
compensation -- -- -- -- --
Stock to be issued
(200,000 shares)
for settlement of
note payable 300,000
Compensatory stock
to be issued
(1,500,000 shares) 1,800,000
Stock dividend to
be issued
(6,000,000 shares) 7,200,000
Net loss -- -- -- -- --
--------- ----------- ----------- ----------- ----------
Balance December
31, 2004 3,976,868 $ 3,977 $ -- $ -- $9,300,000
========= =========== =========== =========== ==========
Additional
Treasury paid-in Deferred Accumulated
stock capital compensation deficit Total
----------- ----------- ------------ ----------- -------
Balance January 1, 2003 $ (10,000) $ 198,000 (198,000) (3,184,813) 238,866
Issuance of stock
for settlement of
amount due to
vendor -- -- -- -- 160,000
Issuance of stock
for settlement of
accounts payable -- -- -- -- 45,834
Intrinsic value of
common stock
issued with notes
payable -- 315,666 -- -- 315,666
Issuance of stock
options -- 72,270 (72,270) -- --
Amortization of
deferred
compensation -- -- 49,500 -- 49,500
Net loss -- -- -- (961,355) (961,355)
----------- ----------- ----------- ------------ -----------
Balance December
31, 2003 (10,000) 585,936 (220,770) (4,146,168) (151,489)
Common stock of
Sensor
outstanding when
Advanced Custom
Sensors, Inc was
merged into
Sensor, Inc. -- (1,392) -- -- --
Exchange of
Advanced Custom
Sensors, Inc.
common stock for
Sensor, Inc.
common stock 10,000 3,626,928 -- -- --
Stock options
issued to
employees -- 19,800 (19,800) -- --
Common stock
warrants issued
with notes payable -- 636,518 -- 636,518
Amortization of
deferred
compensation -- -- 54,170 -- 54,170
Stock to be issued
(200,000 shares)
for settlement of
note payable -- -- -- -- 300,000
Compensatory stock
to be issued
(1,500,000 shares) -- -- -- -- 1,800,000
Stock dividend to
be issued
(6,000,000 shares) ( 7,200,000) --
Net loss -- -- (3,662,390) (3,662,390)
----------- ----------- ----------- ------------ -----------
Balance December
31, 2004 $ -- $ 4,867,790 $ (186,400) $(15,008,558) $(1,023,191)
=========== =========== =========== ============ ===========
See accompanying notes to financial statements.
F-15
SENSOR SYSTEM SOLUTIONS, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004 (Consolidated) and 2003
2004 2003
------------- ---------
(Consolidated)
Cash flows from operating activities:
Net loss $(3,662,390) $(961,355)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation costs 1,800,000 --
Costs related to settlement of note payable 140,000 --
Depreciation and amortization 109,954 113,927
Amortization of discount cost on notes payable 651,868 121,223
Amortization of deferred compensation 54,170 49,500
Changes in operating assets and liabilities:
Accounts receivable (32,992) (24,059)
Inventories (20,913) (31,333)
Prepaids and other current assets (20,445) (4,001)
Accounts payable and accrued expenses 370,685 234,399
Deferred rent concession 15,770 --
----------- ---------
Net Cash Used In Operating Activities (594,293) (501,699)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (3,957) (1,289)
Cash flows from financing activities:
Proceeds from notes payable 590,000 407,984
Proceeds from notes payable, related parties 20,000 100,000
Principal payments on capital leases (5,347) --
----------- ---------
Net Cash Provided By Financing Activities 604,653 507,984
----------- ---------
Net increase in cash and cash equivalents 6,403 4,996
Cash and cash equivalents, beginning of the year 10,712 5,716
----------- ---------
Cash and cash equivalents, end of the year $ 17,115 $ 10,712
=========== =========
Cash paid for:
Interest $ 14,458 $ 7,715
=========== =========
Taxes 800 800
=========== =========
Non-cash investing and financing activities:
Acquisition of equipment through capital lease obligations $ 47,365 $ --
Issuance of stock options 19,800 72.270
Interest payable added to principal amount of notes payable 12,500 --
Discount related to warrants and convertible notes 636,518 316,666
Issuance of stock for settlement of due to vendor -- (160,000)
Issuance of stock for settlement of accounts payable -- (45,834
See accompanying notes to financial statements.
F-16
SENSOR SYSTEMS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Merger
On May 24, 2004, Sensor System Solutions (formerly known as Spectre Industries,
Inc.,) a Nevada corporation, entered into an agreement and plan of merger (the
Merger) with Advanced Custom Sensors, Inc. (ACSI). Sensor issued 2,584,906
shares of its common stock and warrants (the Merger Warrants) to purchase up to
47,802,373 shares of its common stock to the shareholders of ACSI in exchange
for all the issued and outstanding shares of ACSI. The transaction was accounted
for as a recapitalization with ACSI deemed to be the accounting acquirer and
Spectre the legal acquirer. All financial information included in these
financial statements prior to the Merger is that of ACSI, as if ACSI had been
the registrant. The financial information since the Merger is that of ACSI and
Sensor consolidated.
All references to "Sensor", "Spectre" and "ACSI", mean Spectre or ACSI
separately prior to the Merger and Sensor (the Company) after the Merger.
The Company agreed that it would "spin-off" certain assets and liabilities
included in Spectre in connection with the Merger on May 24, 2004. These assets
and liabilities were transferred to Spectre Holdings, Inc. (Spectre Holdings), a
wholly-owned subsidiary of the Company. On December 15, 2004, in consideration
for making and guaranteeing certain representations, warranties and obligation
in connection with the Agreement and Plan of Merger dated March 13, 2004 by and
between the Company and ACSI, the Company transferred 20,878,081 shares of
common stock, which are all of the issued and outstanding shares of Spectre
Holdings to Ian Grant, a Director of the Company and shareholder in Spectre. As
the Company never had direct or indirect control of those assets and
liabilities, Spectre Holdings was not considered owned at the date of the
Merger.
Going concern
The Company incurred a net loss of $3,662,390 and a negative cash flow from
operations of $594,293 for the year ended December 31, 2004, and had a working
capital deficiency of $1,353,308 and a stockholders' deficiency of $1,023,191 at
December 31, 2004. These matters raise substantial doubt about its ability to
continue as a going concern. Without realization of additional capital, it would
be unlikely for the Company to continue as a going concern. Management believes
that actions are presently being taken to revise the Company's operating and
financial requirements in order to improve the Company's financial position and
operating results. However, given the levels of its cash resources and working
capital deficiency at December 31, 2004, management believes cash to be
generated by operations will not be sufficient to meet anticipated cash
requirements for operations, working capital, and capital expenditures during
2005. The Company completed a merger and recapitalization on May 20, 2004, with
Spectre Industries, Inc., a public company, to gain access to the United States
and European capital markets, but there can be no assurances that the Company
will ultimately be successful in this regard. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Principles of consolidation
The 2004 consolidated financial statements include the accounts and operations
of Sensor System Solutions Inc. and its wholly owned subsidiary. Intercompany
accounts and transactions have been eliminated in consolidation.
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.
F-17
Accounts receivable
The company performs ongoing credit evaluations of its customers and generally
does not require collateral. An appropriate allowance for doubtful accounts is
included in accounts receivable.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Expenditures for additions, renewals, and improvements are
capitalized. Costs of repairs and maintenance are expensed when incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Leasehold
improvements are amortized over the shorter of the lease term or the asset's
useful life.
Impairment of long-lived assets
Property and equipment and other long-lived assets are evaluated for impairment
whenever events or conditions indicate that the carrying value of an asset may
not be recoverable. If the sum of the expected undiscounted cash flows is less
than the carrying value of the related asset or group of assets, a loss is
recognized for the difference between the fair value and carrying value of the
asset or group of assets. Such analyses necessarily involve significant
judgment. There were no impairment losses recorded in 2004 or 2003.
Note payable-debt discount cost
The Company has issued warrants to investors and related parties in conjunction
with notes payable. The discounts allocated to the warrants are being treated as
additional consideration for notes payable and are being amortized over the life
of the note as additional interest cost.
Revenue Recognition
The Company recognizes revenue when risk of loss and title to the product is
transferred to the customer, which occurs at shipment
Income taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized and
measured using enacted tax rates at the balance sheet date. Deferred tax expense
or benefit is the result of changes in deferred tax assets and liabilities.
Valuation allowances are established when necessary to reduce net deferred taxes
to amounts that are more likely than not to be realized.
Stock - based compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosures" as well as those outlined in SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by SFAS 148 and SFAS
123, the Company continues to apply the provisions of Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock issued to Employees" and
related interpretations in accounting for the Company's stock option plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the
grant, over the amount an employee must pay to acquire the stock. Stock based
awards for non-employees are accounted for at fair value equal to the excess of
the estimated fair value of the Company's stock over the option price using an
estimated interest rate to calculate the fair value of the option. There were no
stock based awards to non-employees in 2004 or 2003.
F-18
Had compensation cost for all stock option grants been determined based on their
fair value at the grant dates, consistent with the method prescribed by SFAS 148
and SFAS 123, our net loss and loss per share would have been adjusted to the
pro forma amounts indicated below:
Year ended December 31:
2004 2003
----------- ---------
Net loss $(3,662,390) $(961,355)
Add: Stock-based expense included in net loss 54,170 49,500
Deduct: Fair value based stock-based expense (58,880) (51,750)
----------- ---------
Pro forma net loss $(3,667,100) $(963,605)
=========== =========
Basic and diluted earnings per share:
As reported $ (0.46) $ (0.39)
Pro forma under SFAS No. 123 $ (0.46) $ (0.39)
Earnings (loss) per share
Basic earnings (loss) per common share (EPS) are based on the weighted average
number of common shares outstanding during each period (see Note 9). Diluted
earnings per common share are based on shares outstanding (computed as under
basic EPS) and potentially dilutive common shares. As of December 31, 2004 and
2003, the Company had granted stock options for 96,500 and 136,500 shares of
common stock, respectively, that are potentially dilutive common shares but are
not included in the computation of loss per share because their effect would be
anti-dilutive.
Comprehensive income (loss)
The Company has no items of other comprehensive income (loss) for the years
ended December 31, 2004 and 2003.
Fair value of financial instruments
The Company believes that the carrying value of its cash, accounts receivable,
accounts payable, accrued liabilities, notes payable, and notes payable to
related parties as of December 31, 2004 approximates their respective fair
values due to the demand or short-term nature of those instruments. The carrying
value of long-term obligations approximates the fair value based on the
effective interest rates compared to current market rates.
Concentration of Credit Risk
Financial instruments that are exposed to concentrations of credit risk consist
principally of cash and accounts receivable. The Company places its cash in what
it believes to be credit-worthy financial institutions. However, cash balances
may have exceeded federally insured levels at various times during the year. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risk in cash.
The Company had four customers that accounted for 29% and 42% of sales in the
years ended December 31, 2004 and 2003, respectively. Approximately 90% and 10%
of the Company's sales in the years ended December 31, 2004 and 2003 were to
customers in North America and Asia respectively.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Recent Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs". This Statement amends the guidance in ARB No. 43
Chapter 4 Inventory Pricing, to require items such as idle facility costs,
excessive spoilage, double freight and rehandling costs to be expensed in the
current period, regardless if they are abnormal amounts or not. This Statement
will become effective for us in the first quarter of 2006. The adoption of SFAS
No. 151 is not expected to have a material impact on our financial condition,
results of operations, or cash flows.
F-19
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R), which revises SFAS No. 123. 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. SFAS 123R must be adopted no later than July 1, 2005.
Early adoption is permitted.
The Company is currently evaluating the timing and manner in which it will adopt
SFAS 123R. As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method.
Accordingly, adoption of SFAS 123R's fair value method will have an effect on
results of operations, although it will have no impact on overall financial
position. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had SFAS 123R been adopted in prior periods, the effect would have
approximated the SFAS 123 pro forma net loss and loss per share disclosures as
shown above. SFAS 123R also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as currently required, thereby reducing net
operating cash flows and increasing net financing cash flows in periods after
adoption.
NOTE 2. INVENTORY
Inventory consists of the following as of December 31, 2004:
Raw materials $149,840
Work in process 1,749
Finished goods 68,856
--------
$220,445
========
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 2004:
Machinery and equipment $ 586,812
Office equipment 2,636
Furniture and fixtures 17,398
Equipment under capital leases 47,365
Leasehold improvements 143,637
---------
797,848
Less accumulated depreciation and amortization (477,131)
---------
$ 320,717
=========
Depreciation and amortization expense of $109,954 and $113,927 is reflected in
the accompanying Statement of Operations for the years ended December 31, 2004
and 2003, respectively.
As of December 31, 2004 the Company maintained tooling assets with a net book
value of approximately $160,000 at their main supplier located in Taiwan.
Although this country is considered politically and economically stable, it is
possible that unanticipated events in this foreign country could disrupt the
operations of the Company because their main supplier is located there, has
possession of the tooling assets, and manufactures certain products.
NOTE 4. INVESTMENT IN AFFILIATED ENTITY
F-20
The Company owns 7.5% of TransOptix, Inc. (TransOptix), a company involved in
the design and manufacturing of optical switches for telecommunication. The
Company's Chief Executive Officer is also the Chief Executive Officer of
TransOptix and owns 12% of TransOptix. At December 31, 2003, the Company and the
Company's Chief Executive Officer owned 14.3% and 15%, respectively, in
TransOptix. These percentages were reduced in 2004 when additional investments
were made from its board members. As a result of the combined equity holdings of
TransOptix by the Company and its Chief Executive Officer, the Company accounts
for this investment under the equity method of accounting. The Company
discontinued applying the equity method in 2002 when Company's share of losses
of TransOptix exceeded its investment in TransOptix. The Company did not record
any income or loss from TransOptix in 2004 or 2003. The Company and TransOptix
share the same office and facility. There were no transactions between the
Company and TransOptix in 2004 or 2003.
Summarized unaudited financial information for TransOptix, Inc. is as follows:
December 31,
2004
------------
Current assets $ 363,082
Fixed assets, net 359,011
Other Assets 23,079
------------
$ 745,172
============
Current liabilities $ 37,905
Note payable - stockholder 12,488
Note payable 2,249,920
Stockholders' deficiency (1,555,141)
------------
$ 745,172
============
Year ended Year ended
December 31, December 31,
2004 2003
------------ ------------
Revenues $ 674,702 $ 94,099
Cost of revenues 441,861 26,893
------------ ------------
Gross profit 232,841 67,206
Operating expenses 1,399,446 1,002,491
------------ ------------
Net loss $ (1,166,605) $ (935,285)
============ ============
F-21
NOTE 5. NOTES PAYABLE
Notes payable consist of the following at December 31, 2004:
Two lines of credit, unsecured, interest payable monthly at 8.5% and 9.5% per
annum, due on demand $ 92,983
Note Payable, unsecured, interest payable monthly at Prime + 3% per annum (prime
rate at December 31, 2004 was 5.25%), due on demand 40,000
Note payable, unsecured, interest payable monthly at 10% per annum, payable as a
percentage of any future private or public stock offerings (see Note 9 with
regard to the September 3, 2004 settlement agreement) 90,000
Note payable, secured by accounts receivable of the Company, interest at 10%,
due February 11, 2005. In connection with this loan, the Company issued warrants
to purchase 500,000 shares of ACSI's common stock at $.50 per share. The
intrinsic value of the warrants was valued at $500,000 has been recorded as loan
discount costs and is being amortized over the life of the note as additional
interest cost. After maturity, the lender agreed to convert the loan into shares
of the Company's stock. On March 15, 2005, an agreement was made to convert the
note payable and warrant into 500,000 shares of commons stock 500,000
Three notes payable, secured by all assets of the Company, interest at 8% per
annum, payable at various maturities through October 18, 2005. 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 intrinsic value
of the beneficial conversion feature of the notes and warrants, valued at
$75,536, have been recorded as loan discount costs and are being amortized over
the life of the respective note as additional interest cost 117,500
Less remaining debt discount (147,791)
--------
$692,692
--------
F-22
NOTE 6. NOTES PAYABLE, RELATED PARTIES
Notes payable to related parties consist of the following at December 31, 2004:
Note payable to the sister of the Company's Chief Executive Officer, secured by
all assets of the Company, interest at 14.25% per annum, due December 31, 2004
In connection with the note payable, the Company issued warrants to purchase
190,665 shares of ACSI's common stock at $.50 per share and 110,000 shares of
Spectre's common stock at a price equal to 85% of the average trading price of
the Company common stock at March 16, 2005. The intrinsic value of the warrants,
valued at $190,665, has been recorded as loan discount costs and are being
amortized over the life of the note as additional interest cost. The Company is
currently negotiating an extension of this note $ 190,665
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. At
maturity, the note is convertible at the holder's option at a conversion price
equal to 80% of the weighted average price of the common stock for the 30
trading days immediately preceding the conversion date. In addition, the note
has warrants attached that, once the note is converted into stock, allow the
holder to purchase stock at 85% of the weighted average price of the common
stock for the 30 trading days immediately preceding the conversion date. The
intrinsic value of the beneficial conversion feature of the note and warrants,
valued at $48,125, has been recorded as loan discount costs and is being
amortized over the life of the note as additional interest cost. The Company is
currently negotiating an extension of this note 110,000
Note payable to an employee of the Company, secured by all assets of the
Company, interest at 10.0% per annum, due March 15, 2005. At maturity, the 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 $12,857, has been
recorded as loan discount costs and is being amortized over the life of the note
as additional interest cost 20,000
Less remaining debt discount (31,300)
---------
$ 289,365
=========
F-23
NOTE 7. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under two capital leases with monthly
payments of $360 and $701, respectively, including interest at 12.75% per annum.
Future minimum annual rental payments for capitalized leases are as follows:
Years ending December 31, Amount
-------------------------------------------------------------------- --------
2005 $ 12,732
2006 12,732
2007 12,732
2008 12,732
2009 3,543
--------
54,471
Amount representing interest (12,453)
--------
Present value of minimum lease payments 42,018
Less: Current portion (7,819)
--------
$ 34,199
========
NOTE 8. INCOME TAXES
There is no income tax provision due to continuing tax losses.
Significant components of the Company's deferred income tax assets at December
31, 2004 and 2003 are as follows:
2004 2003
----------- ---------
Deferred income tax asset:
Net operating loss carry forward $ 1,716,000 $ 850,000
Valuation allowance (1,716,000) (850,000)
----------- ---------
Net deferred income tax asset $ -- $ --
=========== =========
Reconciliation of the effective income tax rate to the U. S. statutory rate is
as follows:
2004 2003
----------- ---------
Tax expense at the U.S. statutory
income tax rate (34.0)% (34.0)%
Increase in the valuation allowance 34.0 34.0
----------- ---------
Effective income tax rate -- % -- %
=========== =========
Deferred taxes are recorded to give recognition to temporary differences between
the tax bases of assets or liabilities and their reported amounts in the
financial statements. Deferred tax assets generally represent items that can be
used as a tax deduction or credit in future years. Deferred tax liabilities
generally represent items that we have taken a tax deduction for, but have not
yet recorded in the Consolidated Statement of Operations.
Net operating loss carryforwards totaling approximately $3.5 million federal and
$1 million state amounts at December 31, 2004 are being carried forward. The net
operating loss carryforwards expire at various dates through 2024 for federal
purposes and 2015 for state purposes.
A full valuation allowance has been established due to the lack of earnings as
support for recognition of the deferred tax assets recorded.
F-24
NOTE 9. STOCKHOLDERS' EQUITY
On May 24, 2004 (the date of the Merger, see Note 1), the Company issued
2,584,905 shares of its common stock and warrants to purchase up to 47,802,373
shares of its common stock (see Note 12), to the shareholders of ACSI in
exchange for all the issued and outstanding shares of ACSI. On December 4, 2004,
the Company granted 7,500,000 shares of its common stock (which are included in
the weighted average shares computation from May 24, 2004) to five current
shareholders who were shareholders in Spectre, including two individuals who are
also Directors of the Company, for providing services to the Company. Of the
shares granted on December 4, 2004, 1,500,000 shares represented stock-based
compensation in the amount of $1,800,000 and 6,000,000 shares were deemed to be
a stock dividend. The fair value of the shares granted was based on the most
recent closing stock price of $1.20 per share prior to the grant.
Effective June 8, 2004 the Board of Directors initiated a fifteen for one
reverse split of the common stock. It also increased the authorized number of
common stock shares from 100,000,000 to 180,000,000. All share and per share
amounts included herein have been restated to reflect the effects of the split
and the stock dividend as if they had occurred at the beginning of the period.
On September 3, 2004, the Company negotiated a settlement of an unsecured note
payable for $250,000 that was due March 9, 2004. Terms of the settlement require
the Company to pay $90,000 plus interest at 10% per annum, payable from future
stock offerings. In addition, the Company is to issue 200,000 shares of common
stock to the lender. The fair value of the shares to be issued was determined to
be $1.50 per share based on the OTC Bulletin Board (OTCBB) closing price for the
Company's stock on September 3, 2004, for a total fair value of $300,000. The
Company recorded the difference between the net carrying amount of the
extinguished note ($250,000) and the settlement price ($390,000) as settlement
costs on note payable of $140,000 in the accompanying financial statements.
NOTE 10. STOCK OPTIONS AND WARRANTS
Stock Option Plan
The Company has a stock option plan, which provides for the granting of options
to employees, independent representatives and directors of the Company. The
Company is authorized to issue 200,000 shares of common stock. The exercise
price is fixed by the plan administrator. The shares vest over 4 years upon the
optionee's completion of service. The options expire ten years from the date of
grant.
For the year ended December 31, 2004, in accordance with APB No. 25, the
intrinsic value of the 10,000 stock options granted under this plan was $19,800
and was recorded as deferred compensation and additional paid-in capital in the
accompanying financial statements (and is being amortized over the vesting
periods of the options.) Amortization of the deferred compensation related to
these stock options totaled $4,125.
At December 31, 2004, options outstanding are as follows:
Average
Shares Exercise Price
-------- --------------
Balance at January 1, 2004 136,500 $ .50
Granted 10,000 $ .50
Exercised --
Cancelled (50,000) $ .50
-------- --------------
Balance at December 31, 2004 96,500 $ .50
======== ==============
F-25
Additional information regarding options outstanding as of December 31, 2004 is
as follows:
Options outstanding Options exercisable
------------------------------ ----------------------
Weighted average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Exercise price outstanding life (years) price exercisable price
-------------- ----------- ---------------- -------- ----------- --------
$0.50 96,500 1.5 $ 0.50 -- --
Warrants
During 2003, in conjunction with the issuance of certain notes payable, the
board of directors approved the issuance of warrants to purchase a total of
315,666 shares of the Company's common stock. The warrants are exercisable at
$.50 per share, are exercisable upon issuance, and expire in five years from
issuance. The warrants had a total fair value of $315,666, which has been
accounted for as notes payable - debt discount cost and is being amortized over
the life of the related debt.
During 2004, in conjunction with the issuance of a note payable, the board of
directors approved the issuance of warrants to purchase a total of 500,000
shares of the Company's common stock. The warrants are exercisable at $.50 per
share, are exercisable upon issuance, and expire in five years from issuance.
The warrants had a total fair value of $500,000, which has been accounted for as
note payable-debt discount cost and is being amortized over the life of the
related debt.
On May 24, 2004, as part of the merger between the Company and ACSI, the Company
issued warrants to purchase up to 47,802,464 shares of its common stock. The
warrants are exercisable at $.0001 per share, are exercisable six months after
the merger closing date, and expire three years from issuance.
At December 31, 2004, stock purchase warrants outstanding were as follows:
Average
Shares Exercise Price
---------- --------------
Balance at January 1, 2004 315,666 $ .50
Granted 48,302,373 $ .005
Exercised --
Cancelled --
---------- --------------
Balance at December 31, 2004 48,618,039 $ .008
========== ==============
Additional information regarding stock purchase warrants outstanding as of
December 31, 2004 is as follows:
Warrants outstanding Warrants exercisable
--------------------------------- ----------------------
Weighted average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Exercise price outstanding life (years) price exercisable price
-------------- ----------- ---------------- -------- ----------- --------
$ 0.50 815,666 4.5 0.50 816,666 $ 0.50
$.0001 47,802,373(A) 3.0 .0001 47,802,373 $ .0001
(A) See Note 12 for subsequent exercise of warrants
NOTE 11. COMMITMENT AND CONTINGENCIES
Operating Leases
F-26
The Company leases its office and facility through 2007 under a long term
operating lease agreement. Under terms of the lease, the Company pays the cost
of repairs and maintenance. The office and warehouse facility is shared with
TransOptix, who signed the lease as co-tenant with the Company. The Company and
TransOptix have entered into an agreement stipulating each entities share of the
rent, however, in event of default by TransOptix, the Company could contingently
be liable for the full amount of the rent.
Future minimum lease commitments for the Company's share under this lease at
December 31, 2004 are as follows:
Year Ended December 31,
--------------------------------------------------------------------
2005 $104,131
2006 104,906
2007 91,520
-------------------------------------------------------------------- --------
$300,557
========
The total lease commitment as of December 31, 2004 for which the Company could
be contingently liable in the event of default of TransOptix is approximately
$650,000. Rent expense for the years ended December 31, 2004 and 2003 was
$122,905 and $116,588 respectively.
NOTE 12. SUBSEQUENT EVENTS
On January 26, 2005, in relation to the Merger, warrants for 47,802,373 shares
of common stock were exercised for .0001 per share.
On February 3, 2005 and February 22, 2005, two notes payable for $50,000 and
$200,000, respectively, were issued. The notes are secured by all assets of the
Company, interest is payable at 8% per annum, and the notes mature February 3,
2006 and February 22, 2006, respectively. 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.
F-27
We have not authorized any dealer, salesperson or other person to provide any
information or make any representations about Sensor System Solutions, Inc.
except the information or representations contained in this prospectus. You
should not rely on any additional information or representations if made.
-----------------------
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
|_| except the common stock offered by this prospectus;
|_| in any jurisdiction in which the offer or solicitation is not
authorized;
|_| in any jurisdiction where the dealer or other salesperson is not
qualified to make the offer or solicitation;
|_| to any person to whom it is unlawful to make the offer or
solicitation; or
|_| to any person who is not a United States resident or who is outside
the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
|_| there have been no changes in the affairs of Sensor System
Solutions, Inc. after the date of this prospectus; or
|_| the information contained in this prospectus is correct after the
date of this prospectus.
-----------------------
Until _________, 2006, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
----------------------
PROSPECTUS
---------------------
20,636,866 Shares of Common Stock
SENSOR SYSTEM SOLUTIONS, INC.
______________, 2006
F-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limits the liability of directors
to the maximum extent permitted by Nevada law. Nevada law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided under Nevada law, or (iv) any transaction
from which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its
officers, directors, employees and other agents to the maximum extent permitted
by Delaware law. The Company's Bylaws also permit it to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
Bylaws would permit indemnification.
The Company believes that the provisions in its Articles of Incorporation
and its Bylaws are necessary to attract and retain qualified persons as officers
and directors.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of Sensor System
pursuant to the foregoing, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. Sensor System will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $ 600.00
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $20,000.00
Legal Fees and Expenses $50,000.00
Miscellaneous $11,900.00
TOTAL $85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
During the past three years the registrant has issued the following
securities without registration under the Securities Act of 1933:
On December 23, 2005, the Company issued to Cornell Capital Partners
secured convertible debentures in the principal amount of $1,000,000. The
Convertible Debentures are secured by substantially all of the Company's assets,
have a one year term and accrue interest at 10% per annum. Cornell is entitled,
at its option, to convert and sell all or any part of the principal amount of
the Convertible Debentures, plus any and all accrued interest, into shares of
Common Stock at a price equal to the lesser of (i) $0.35 and (ii) ninety percent
(90%) of the lowest volume weighted average price of the Common Stock during the
fifteen (15) trading days immediately preceding the date of conversion as quoted
by Bloomberg, LP. Out of the total principal amount of $1,000,000, in December
2005, we received gross proceeds of $800,000, and the remaining $200,000,
representing the second tranche of the gross proceeds, is to be funded in
February 2006. In December 2005, we received $143,000 representing the net
proceeds from the issuance of secured convertible debentures to Cornell Capital
Partners under the Securities Purchase Agreement, dated December 23, 2005. The
total proceeds were net of $47,000 in expenses and the payment of $610,000 to
Cornell Capital Partners for the repayment of principal and interest of the
secured convertible debentures issued to Cornell Capital Partners on October 6,
2005
II-1
On October 6, 2005, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the Standby Equity
Distribution Agreement, we could have, at our discretion, periodically sold to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $15 million. Pursuant to the Standby Equity Distribution Agreement, Cornell
Capital Partners was entitled to purchase shares of Sensor System's common stock
at a total discount equal to 10%. For each share of common stock purchased under
the Standby Equity Distribution Agreement, Cornell Capital Partners would have
paid us 95% of or a 5% discount to, the lowest closing bid price of our common
stock on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the five days immediately following the notice
date. Further, Cornell Capital Partners would have retained 5% of each advance
under the Standby Equity Distribution Agreement. In connection with the Standby
Equity Distribution Agreement, Cornell Capital Partners received a one-time
commitment fee in the form of 1,471,429 shares of common stock. On December 23,
2005, the Company entered into a Termination Agreement with Cornell Capital
Partners, pursuant to which the Standby Equity Distribution Agreement, as well
as the related Registration Rights Agreement and the Placement Agent Agreement,
were terminated.
On October 6, 2005, we entered into a Securities Purchase Agreement
pursuant to which we issued to Cornell Capital Partners convertible debentures
in the aggregate principal amount of $600,000. The principal amount, plus
accrued interest, was able to be convertible in whole or in part,, at Cornell
Capital Partner's discretion, into our common stock at any time and from time to
time before maturity at a fixed price of $0.245 per share, subject to certain
limitations as provided therein. The convertible debentures had a term of a
one-year, possessed registration rights, accrued interest at a rate equal to 10%
per year, and were secured by Sensor System's assets. The Company repaid to
Cornell Capital Partners a total amount of $610,000, representing principal
amount and accrued interest, on December 23, 2005.
On October 19, 2005, the Company issued 200,000 shares of Rule 144 stock
to Duke Capital as a compensation for its consulting service in the merger
transaction between ACSI and Spectre Industries, Inc.
On October 19, 2005, the Company issued 725,778 shares of Rule 144 stock
to Pei Jen Hsu for a warrant exercise and loan conversion exercised by Hsu in
March 2005.
On February 10, 2005, the Company issued 3,000,000 shares of S-8 stock as
compensation to ex-directors, Ian Grant and Matthew Markin. 2,400,000 shares
were treated as a stock dividend.
On January 25, 2005, the Company issued 4,500,000 shares of Rule 144 stock
to Quantum Economic Development, Inc., Frank Demille, Foxir Communications Inc,
Ian Grant and Matthew Markin for their services in connection with the merger
transaction pursuant to the merger agreement. 3,600,000 shares were treated as a
stock dividend.
On January 25, 2005, the Company issued 47,802,373 shares of Rule 144
stock for the warrant exercise of ACSI shareholders per its merger agreement
with Spectre Industries, Inc.
On May 24, 2004, the Company issued 2,584,896 shares of Rule 144 stock to
the shareholders of ACSI Merger Agreement, dated March 13, 2004, between Spectre
Industries, Inc., Spectre Merger Sub, Inc., Ian S. Grant and Advanced Custom
Sensors, Inc.
On April 5, 2004, the Company issued 13,334 shares Olof Hildebrand.
On May 30, 2003, the Company issued 1,367 shares to Markus Hugelshofer.
On November 15, 2002, the Company issued 667 shares to Margrit Oppliger.
II-2
On September 24, 2002, the Company issues 67 shares to Andrew Yachnowitz.
On August 26, 2002, the Company issued 3,334 shares to Ken Grant.
ITEM 27. EXHIBITS
Exhibits Required By Item 601 of Regulation S-B
The exhibits listed below and designated as "provided herewith" (rather
than incorporated by reference) follow the signature page to this Prospectus in
sequential order.
DESIGNATION OF EXHIBIT AS
SET FORTH IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
------------------------- ----------------------------------------------- ---------------------------------------------
2.1 Merger Agreement, dated March 13, 2004, Incorporated by reference as Exhibit 2.1 to
between Spectre Industries, Inc., Spectre the Current Report on Form 8-K filed on
Merger Sub, Inc., Ian S. Grant and Advanced June 9, 2004
Custom Sensors, Inc.
3.1 Articles of Incorporation of Abercrombie, Incorporated by reference as Exhibit 3.1 to
Inc., dated May 8, 1986 the current Form 10-SB filed on May 8, 2000
3.2 Amended Articles of Incorporation, dated June Incorporated by reference as Exhibit 3.2 to
1, 1995 the current Form 10-SB filed on May 8, 2000
3.3 Amended Articles of Incorporation of Spectra Incorporated by reference as Exhibit 3.3 to
Motor Cars Inc., dated October 5, 1997 the current Form 10-SB filed on May 8, 2000
3.4 Bylaws of Abercrombie, Inc., dated May 16, 1986 Incorporated by reference as Exhibit 3.4 to
the current Form 10-SB filed on May 8, 2000
5.1 Legal Opinion of Burton, Bartlett & Glogovac To be filed by amendment
re: legality
10.1 Joint Venture Agreement, dated as January 28, Provided herewith
2005, among HX, a Chinese Company, Sensor
System Solutions, Inc. and China Automotive
Systems, Inc.
10.2 Technology Transfer Contract, dated as Provided herewith
January 28, 2005, among HX, a Chinese Company,
Sensor System Solutions, Inc. and China
Automotive Systems, Inc.
10.3 Engagement Agreement, dated August 10, 2005, Incorporated by reference as Exhibit 10.1 to
by and between Sensor System Solutions and the Current Report on Form 8-K filed on
Trenwith Securities, LLC November 18, 2005
10.4 Warrant, dated as of December 27, 2005, issued Incorporated by reference as Exhibit 10.2 to
by Sensor System Solutions, Inc. to Trenwith the Current Report on Form 8-K filed on
Securities, LP February 3, 2006
II-3
DESIGNATION OF EXHIBIT AS
SET FORTH IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
------------------------- ----------------------------------------------- ---------------------------------------------
10.5 Securities Purchase Agreement, dated as of Incorporated by reference as Exhibit 99.3 to
October 6, 2005, by and between the Company the Current Report on Form 8-K filed on
and Cornell Capital Partners, LP October 12, 2005
10.6 Secured Convertible Debenture, dated October Incorporated by reference as Exhibit 99.10
6, 2005, issued by Sensor System Solutions, to the Current Report on Form 8-K filed on
Inc. to Cornell Capital Partners, LP October 12, 2005
10.7 Security Agreement, dated as of October 6, Incorporated by reference as Exhibit 99.6 to
2005, by and between the Company and Cornell the Current Report on Form 8-K filed on
Capital Partners, LP October 12, 2005
10.8 Escrow Agreement, dated as of October 6, 2005,
by and among the Company, Cornell Capital Incorporated by reference as Exhibit 99.5 to
Partners, LP and David Gonzalez, Esq., as the Current Report on Form 8-K filed on
escrow agent October 12, 2005
10.9 Insider Pledge and Escrow Agreement, dated as
of October 6, 2005, by and among the Company, Incorporated by reference as Exhibit 99.7 to
Cornell Capital Partners, LP and David the Current Report on Form 8-K filed on
Gonzalez, Esq., as escrow agent October 12, 2005
10.10 Irrevocable Transfer Agent Instructions, dated
as of October 6, 2005, by and among the Incorporated by reference as Exhibit 99.8 to
Company, David Gonzalez, Esq. and Worldwide the Current Report on Form 8-K filed on
Stock Transfer, LLC October 12, 2005
10.11 Sensor System Solutions, Inc. Placement Agent Incorporated by reference as Exhibit 10.2 to
Agreement, dated as of October 6, 2005, by and the Current Report on Form 8-K filed on
among Sensor System Solutions, Inc., Cornell November 18, 2005
Capital Partners, LP and Monitor Capital,
Inc., as placement agent
10.12 Securities Purchase Agreement dated as of Incorporated by reference as Exhibit 10.1 to
December 23, 2005, by and between Sensor System the Current Report on Form 8-K filed on
Solutions, Inc. and Cornell Capital Partners, January 4, 2006
LP
10.13 Investor Registration Rights Agreement dated Incorporated by reference as Exhibit 10.2 to
as of December 23, 2005 by and between Sensor the Current Report on Form 8-K filed on
System Solutions, Inc. and Cornell Capital January 4, 2006
Partners, LP
10.14 Secured Convertible Debenture dated as of Incorporated by reference as Exhibit 10.3 to
December 23, 2005, issued to Cornell Capital the Current Report on Form 8-K filed on
Partners, LP January 4, 2006
10.15 Security Agreement dated as of December 23, Incorporated by reference as Exhibit 10.4 to
2005, by and between Sensor System Solutions, the Current Report on Form 8-K filed on
Inc. and Cornell Capital Partners, LP January 4, 2006
II-4
DESIGNATION OF EXHIBIT AS
SET FORTH IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
------------------------- ----------------------------------------------- ---------------------------------------------
10.16 Warrant dated as of December 23, 2005 issued Incorporated by reference as Exhibit 10.5 to
to Cornell Capital Partners, LP the Current Report on Form 8-K filed on
January 4, 2006
10.17 Insider Pledge and Escrow Agreement dated as Incorporated by reference as Exhibit 10.6 to
of December 23, 2005 among Sensor System the Current Report on Form 8-K filed on
Solutions, Inc., Cornell Capital Partners, LP January 4, 2006
and David Gonzalez, Esq.
10.18 Escrow Agreement dated December 23, 2005 among Incorporated by reference as Exhibit 10.7 to
Sensor System Solutions, Inc., Cornell Capital the Current Report on Form 8-K filed on
Partners, LP and David Gonzalez, Esq. January 4, 2006
10.19 Irrevocable Transfer Agent Instructions dated Incorporated by reference as Exhibit 10.8 to
as of December 23, 2005, by and between Sensor the Current Report on Form 8-K filed on
System Solutions, Inc. and Cornell Capital January 4, 2006
Partners LP
10.20 Termination Agreement dated as of December 23, Incorporated by reference as Exhibit 10.9 to
2005, by and between Sensor System Solutions, the Current Report on Form 8-K filed on
Inc. and Cornell Capital Partners, LP January 4, 2006
10.21 Management of Foreign Joint Venture Contract Provided herewith
14.01 Code of Ethics, dated February 13, 2004 Incorporated by reference to as Exhibit 4.3
to the Current Report on Form-10KSB filed on
April 30, 2004
23.1 Consent of Weinberg & Company, P.A. Provided herewith
23.2 Consent of Burton, Bartlett & Glogovac Included in Exhibit 5.1 (To be filed by
amendment)
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the 1933
Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
(iii) Include any additional or changed information on the plan of
distribution.
II-5
(2) For determining liability under the 1933 Act, the Company will treat
each such post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For determining liability of the undersigned small business issuer
under the 1933 Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
Registration Statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or used or referred to
by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned small
business issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the 1933 Act, as
amended, may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the 1933 Act, as
amended, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act, as amended, and will be
governed by the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on February 13, 2006.
SENSOR SYSTEM SOLUTIONS, INC.
Date: February 13, 2006 By: /s/ Michael Young
--------------------------------
Name: Michael Young
Title: Chief Executive Officer,
Acting Chief Financial
Officer and Principal
Accounting Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Michael Young. Date: February 13, 2006
---------------------------------------
Michael Young
Chief Executive Officer, Acting Chief
Financial Officer, Principal Accounting
Officer and Director
/s/ Hanlin Chen... Date: February 13, 2006
---------------------------------------
Hanlin Chen
Director
II-7