NOVINT TECHNOLOGIES, INC.

(name of small business issuer in its charter)

Delaware		85-0461778
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4601 Paradise Boulevard NW, Suite B Albuquerque, New Mexico		87114
(Address of principal executive offices)		(Zip Code)

 

Issuer’s telephone number (866) 298-4420

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value per share		None

 

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  o

 

 

ITEM 1. DESCRIPTION OF BUSINESS

 

This Report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,” “believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this Report, including the matters set forth under the captions “Risk Factors” and in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

 

Although forward-looking statements in this Annual Report on Form 10-KSB reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-KSB. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-KSB. We file reports with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-KSB. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Overview

 

We were initially incorporated in the State of New Mexico as Novint Technologies, Inc. in April 1999. On February 26, 2002, we changed our state of incorporation to Delaware by merging into Novint Technologies, Inc., a Delaware corporation (“Novint”). 

 

We are a technology development and licensing company in the field of haptics. Haptics refers to your sense of touch. We develop, market and sell products, applications and technologies that allow people to use their sense of touch to interact with computers. Our website address is www.novint.com. Information provided on our website, however, is not part of this Annual Report on Form 10-KSB and is not incorporated herein.

 

We historically derived the majority of our revenue developing professional applications for our customers. We have completed work on a number of contracts with companies such as Aramco, Lockheed Martin, Chrysler, Chevron, Sandia National Laboratories, and Woods Hole Oceanographic Institute. However, we intend to generate most of our future revenues from the sale of our Falcon product (described in this section below), the associated “grips,” or handles that are shaped to mirror the application that the product is being used to simulate, e.g. a gun handle, a sword handle, or a steering wheel, and the sale or license of our computer games (designed to be used with the Falcon), and ultimately the license fees from hardware and software companies who support the Falcon. In the third and fourth quarter of 2007, we began shipping the Falcon to commercial retailers and distributors in the U.S. The product is available through retailers such as Fry’s, Tiger Direct, J&R Music Store and others. We intend to further leverage our computer touch technology to exploit opportunities in the consumer console and PC interactive computer games market by establishing relationships with leading video game publishers and developers, engaging additional retailers and distributors to sell the product to the public, and, we believe, in the second half of 2008, expanding our distribution efforts internationally. Additionally, in the fourth quarter of 2007 the Company opened its online store for the sale of computer games integrated to work with the Falcon. Customers can download games for use with the Falcon simply by going to the Company’s web site and purchasing the haptics enabled games. We expect to have a significant number of games across many genres, available for customers to purchase and use with the Falcon over the course of 2008. We had 45 titles either available for customers or in progress at the end of 2007. We expect our software sales to be a significant contributor to our revenues and earnings. Using our haptics technology, games and applications have the crucial missing “third sense” to human computer interaction. Users can directly and intuitively feel the shape, texture, and physical properties of virtual objects using our computer touch software. We have not derived any revenue from the licensure of our technology for consumer console and PC interactive computer games.

 

The Haptics Technology Experience

 

Our computer touch technology allows computer users to realistically feel objects displayed by a computing device using a 3D haptics (or computer-touch) device. A computer user holds onto the handle of a haptics device, which we call a “grip,” which can be moved right-left and forwards-backwards like a mouse, but can also be moved up and down. As the haptics device is moved by the user, it controls a three-dimensional cursor or other pointing icon displayed by the computer (much like a mouse controlling a two-dimensional cursor) and when the cursor makes contact with virtual objects displayed by the computer, the computer registers the contact and updates motors in the haptics device (approximately 1000 times a second) creating feedback to the handle of the haptics device and giving a realistic sense of touch in the user’s hand.

 

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For example, a user can feel the recoil of a gun that has been fired, hit a virtual golf ball, swing a sword at an ogre, throw a football, feel weight and textures of objects, cast a spell by moving a wand, or generally interact with objects displayed by a computer in a more realistic manner by including a detailed and realistic sense of touch. We believe that haptics technology adds another sensory component (the sense of touch) to make games, and other applications, more realistic.

 

Opportunities in the Interactive Computer Game Market

 

The interactive computer game market is a very large and rapidly growing market. According to DFC Intelligence, the worldwide video game and interactive entertainment industry is expected to grow from about $33 billion in 2006 to as much as $47 billion in 2009. The forecast includes revenue from video game hardware and software, dedicated portable system hardware and software, PC games, and online PC and console games. DFC Intelligence also forecasts strong growth in all major categories, including PC games, forecasting that the PC game market will grow to over $13 billion by 2012. The three primary gaming console companies are Sony (Playstation 3), Microsoft (Xbox 360), and Nintendo (Wii). We anticipate developing games and hardware for the console platforms. We have developed the Novint Falcon and will be developing complimentary grips as well as a line of games that work with the Falcon as a way to initially enter the interactive computer game market. We initially and will continue to sell these products directly to consumers over the Internet via our website. In the third and fourth quarter of 2007, we began shipping the Falcon to commercial retailers and distributors in the U.S. The product is available through retailers such as Fry’s, Tiger Direct, J&R Music Store and others. We believe in the second half of 2008 will begin our distribution efforts of the Falcon internationally and have taken initial steps to “localize” the product and its associative documentation in different languages for the packaging, marketing, sale and customer support elements of the product in those regions.

 

Our Interactive Computer Gaming Strategy

 

Our interactive computer gaming strategy is based upon the creation of a fundamentally new way users interact when playing interactive computer games — adding the sense of touch. The introduction of games incorporating the sense of touch involves development of both hardware and software. We anticipate licensing our haptics enabled hardware designs in the future to a number of hardware manufacturers to gain support for the technology. At the same time, once developed, we anticipate licensing our computer touch software to a number of game publishers to create many haptics enabled video games or licensing games developed by us to game publishers for distribution. We have 45 titles currently available for customers or in progress to download from the Company’s web site. We are in active conversation with many of the leading developers and publishers in the industry to integrate the Falcon with their games. We have recently entered into an agreement with Electronics Arts to develop several popular game titles for use with our technology. We make no assurances that any of these meetings will be successful in forging relationships with other leading developers and publishers. We will also distribute “mods” to popular third party games in order to drive the acceptance of the Falcon in the marketplace, by creating a haptics enabled version of these games. A “mod” is a modification to an existing game.

 

Our Haptics Hardware and Software Products

 

To capture our share of the consumer game market we will provide the consumer with the two components necessary for consumers to play with and experience haptics as part of their gaming: hardware and software.

 

The Novint Falcon

 

For the hardware component, we have designed and introduced the Novint Falcon for consumers. The Falcon is our flagship product that enables the consumer/user to navigate, in a 3D space, the game that they are seeing on the screen, and to feel the elements that they are seeing, including the textures, force, centrifugal force, recoil, etc. The degree to which these elements are felt by the user (the amount of force/impact, weight of an object) will be determined by the game developer to best suit the game play that they intended. In the future, we intend to develop software that will enable the consumer to customize the forces felt in the game.

 

We are creating additional hardware devices that work with the Falcon including the handle or “grip” for the device to best mimic the grip that consumers would be using if they were actually participating in the game they are playing. For example, in a shooting game, we will provide a gun handle to better simulate the role the consumer is playing in the game. The number of grips that we have an opportunity to provide is almost limitless. We believe that the consumer will want to purchase several of these grips for each Falcon they purchase. We anticipate that users will gain a greater utility and more realistic sense of touch with these grips, as they are paired with the appropriate games.

 

The Falcon is designed for consumer retail sales and is sold at consumer price points. We acquired rights to the base hardware designs for the Falcon from Force Dimension, LLC (“Force Dimension”) under our development agreement with them. As part of the transaction with Force Dimension, Force Dimension delivered concept models from which we were able to create a consumer design and initiate manufacturing. We contracted with a design firm, Lunar Design, which worked with the initial concept models to design prototypes that could be manufactured for mass sale and distribution. A working prototype from Lunar Design that can be manufactured for mass sale and distribution was finalized in December of 2005. Our agreements with Lunar Design and Force Dimension are described below.

 

We have had discussions with other hardware manufacturers to license our hardware technology for use on their hardware platforms. These discussions are ongoing and while we remain optimistic of their outcome, we do not in any way guarantee an agreement with any of these companies will be reached. We have also had discussions with console manufacturers. We believe these manufacturers may want to license our technology as a competitive advantage against other consoles since our technology adds a haptics aspect to the games, differentiating them from other games and we believe, making them more appealing to consumers. These discussions are ongoing and while we remain optimistic of their outcome, we do not in any way guarantee an agreement with any of these companies will be reached.

 

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We believe we will be able to successfully leverage our computer touch technology to exploit opportunities in the consumer console and PC interactive computer games market. We believe the Novint Falcon, coupled with games developed for it, will provide a significant improvement in experience to gamers. It is our intent to encourage a number of manufacturers to embrace and license the technology and, thereby, preemptively establish ourselves as the de facto haptics standard in the industry.

 

Sales and Marketing Strategy

 

We sell our products directly to consumers, online through our web site, and online through other websites such as Amazon.com, Circuit City, J&R music store and others, and through retailers, such as Fry’s and Tiger Direct, and others. We will add more titles for sale as they become integrated with the Falcon, and we will sell Grips through the Company’s online store and other retailers as well.

 

Consumer Awareness

 

We believe that using and “trying out” the Novint Falcon is an integral component to the purchase decision by the consumer. For this reason we have contracted with our retailers to put the Falcon on display in stores, with associated merchandising collateral, to enable the consumer to try the product in the stores. We also believe that it is the nature of gaming industry enthusiasts that they are a relatively close knit community and they tend to communicate with each other about new products, techniques, companies, etc. A good “buzz” associated within that community with respect to a product would be helpful in ensuring a curiosity about our product and its commercial success. We anticipate that good buzz regarding our product will yield consumer to consumer recommendations to buy it, creating product awareness and demand.

 

We intend to engage in a number of customer awareness and demand creation activities such as attending appropriate trade shows. For example, we attended and demonstrated the Falcon at the Game Development Conference in San Francisco in March of 2007 and attended the GDC again in February of 2008 as well. The Game Development Conference is well attended by the customer demographic targeted by us and strategic partners that we may look to align with. We attended other appropriate trade shows throughout the year such as Digital Life, at the end of September 2007 and E for All, in October of the same year. We also conducted a “Swoop Tour” which was a multi-city event in the U.S., in the fall of 2007, where we co-hosted events with companies targeting similar customers. The target audience in our initial rollout of our products was persons who seek to buy new technologies and core and enthusiast gamers. We believe this target group is composed primarily of 12 to 35 year-old video gamers, with an emphasis of males. As our market presence increases, our target audience will broaden to the 12 to 45 age range, and we believe will have a much more balanced gender split between male and female consumers. Additionally, as our market presence expands, we believe consumers of our products will include casual gamers.

 

We are in the process of identifying events where we anticipate that our targeted demographic will attend, such as University campuses, sporting events, concerts, and similar venues where this audience gathers. This will allow us an opportunity to showcase the Falcon and permit potential buyers and customers an opportunity to try the Falcon, which we believe is a key component of marketing the product and generating demand.

 

As part of our consumer awareness initiative, we have created a blog and message boards on our website that allows customers and potential customers to discuss the product on-line. The intended effect of the blog is to increase awareness of our product and create a forum for users to exchange ideas about how to implement the product in the course of game play. We hope that our online community will create a sense of “belonging” and community in the user base. The blog and message boards are also an effective customer feedback tool for us to understand customer response to our products. We cannot and do not make any guarantees that any of the targeted customers will engage in our online community.

 

As part of our retail strategy, we request that retailers provide a demonstration platform within each store to demonstrate the Falcon product to consumers. Novint will provide training and software for the retail sales people to effectively demonstrate the product in the store. We believe this is a viable channel to introduce the Falcon and provide a chance to demonstrate the product directly to large numbers of consumers.

 

Sales Representatives and Distribution Channel

 

We have engaged manufacturers’ sales representatives, in the U.S. and Canada, comprised of 12 of the premiere representative firms in North America, as a mechanism for providing sales coverage into the various retailers that we are targeting. As our market presence increases, we may create sales and representative positions internally at the company. Each of the representatives that we have engaged with have experience selling to targeted retailers and that are selling products similar to those provided by the company. The representatives are compensated only for sales generated and thus are a cost effective way to get geographic coverage and expert experience with specific retailers without significant costs of overhead and hiring for the company. Each of the representatives has designated geographic and specific retailers and other potential customers for our products within their territory that are assigned to them. They report their activities and progress directly to our management. We will seek to engage representatives with specific experience and relationships within the targeted retailers and customer base that we are trying to penetrate in international geographies as well.

 

These representatives are well trained to demonstrate the product to the retailers. All financial transactions with the retailers, however, are negotiated between us and the retailers directly. The nature of the relationship with the manufacturer’s representatives is that of a consultant and we have structured the arrangements so that they can be terminated at any time with thirty days notice from us.

 

We sell our products through on-line sales markets on our website and through established web sales sites. Future strategic partners in the computer and/or gaming industry may also agree to sell the Falcon on their websites, and through their online markets, and/or through their other distribution outlets. We also plan to sell the product through catalogues that cater to the same demographic that we are targeting.    

 

To provide customer support of product, in the hands of consumers, we provide support through our distribution partners and through our own resources. We provide support information, such as FAQ’s on our web site and through our blog. We also provide a multi-layered support schematic that starts with email support for customers from a trained customer service representative (“CSR”) employed by the company. These CSR’s will also provide the secondary customer support for the customers of our distribution partners. We also have a toll free number for customers to call in and speak with a trained CSR. We believe that customer satisfaction is key to our success. We therefore have and will attempt to maintain a high level of customer satisfaction with all of our products on an ongoing basis, at a global level.

 

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We continue to work on a product roadmap for the base unit, the Falcon, and the grips and anticipate bringing several versions of each to market over time. The timing of the development of these items and the introduction to the market of these new products will depend in large part upon consumer acceptance and demand for the Falcon, grips and related games. These products will utilize the same distribution, fulfillment and support resources that have been described herein.

 

Software and Games Development for the Novint Falcon

 

For the software component of the solution, we are developing software and games to work with the Falcon. We have 45 game titles available currently for sale or in progress on our web site and expect to expand the available games across all genres of game play over time. One of the ways that we are creating games to work with the Falcon is through direct in-house development by our technical staff. We have also entered into several contracts with external game developers to create games designed to showcase the haptics features of the Falcon. In that way, we create games from the ground up that fully use the potential of the Falcon. These games may still be licensed to a publisher, as the publisher’s distribution channels can then be utilized for sales, in which case we would collect a royalty. The other way that we have been able to provide additional games for consumers to use with the Falcon is to integrate haptics into the games of third party publishers/developers that enables game play with the Falcon. We expect to continue to focus our efforts in this area in order to allow AAA-rated games with a significant following and brand recognition to integrate the Falcon with their games. We will market and sell those titles on our website and allow for these publishers/developers to co-market these titles on their web sites as well. We have recently entered into an agreement with Electronics Arts to develop several popular game titles for use with our technology. We have, and expect to continue to offer and provide the publisher/developers with pre-paid royalties for the game titles and a small percentage of the sales, typically between 15% and 20% of the sales after the pre-paid royalties have been fully recouped by the Company through sales of the titles. The size of the pre-paid royalties will vary upon a number of factors including the original release date of the title, number of units sold, geographic penetration of the title, available localized version of the title, whether the title is a part of a bundle or a single title, among other elements to consider. Typically we license a game in the 3D touch field of use. The Company is engaged in discussion with many of the premiere publishers/developers of game titles in the world. The Company cannot and does not guarantee that any of these discussions will be successful beyond the ones that have already been announced and are reflected in the titles on the Company’s web site and the titles that are currently under development with game content developers, such as Electronic Arts.

 

We are continuing to develop and refine our haptics technologies for gaming use by producing initial games to be packaged with the Falcon, technology demonstrations and sample programs, and an Application Programming Interface (“API”) to be used with third party developers and publishers. We have been and are continuing to develop software used to demonstrate basic, fundamental gameplay incorporating haptics technology. For example, we have developed software that demonstrates what it would feel like to throw a basketball, catch a baseball, swordplay, etc. in games. This software forms the basis of our gaming software and is used to prove the concept of using haptics technology for video game play to game publishers and developers. We have expanded on these base technological capabilities and bundle mini games with the Falcon, access to drivers to run Half-Life 2 (a popular PC game title), and a collection of sports games as part of the base package.

 

Another method that we have used to create games is through acquisitions or licenses. We have acquired/licensed several games and are actively looking to acquire/license other games that have gameplay that naturally lends itself to 3D touch interactions, where we can incorporate the Falcon as a controller for the game with the intention to improve the experience of the game as mentioned above.

 

When we license a game, we typically have the exclusive rights to sell the game where it uses 3D touch control. In that type of situation, we typically obtain the exclusive license for the 3D touch field of use, obtain source code, and integrate the Falcon as a controller for the game.

 

 A final way that we intend to create games and applications for the Falcon is by licensing our Software Developer’s Kit (“SDK”) out to game publishers and game developers so that they can incorporate touch into their game, with or without our help and interaction. In some cases we will provide resident experts to assist their developer teams. After we license our SDK to a developer or publisher we would then collect royalties on those game sales, where the game uses the Novint Falcon. We anticipate that over time, as we grow, the majority of all games developed that support the Falcon will be published by third party publishers, and will be distributed through their distribution channels. To date, we have not yet sold any such licenses and have generated no revenues under such arrangements.

 

We anticipate that software titles will be published in one of two forms: (i) those that may be played with traditional mice, joysticks, gamepads, etc., as well as our 3D/6D haptics controllers to enhance the game play; or (ii) those that may be played only with our devices (initially reserved for selected titles in which transcendent game play and experiential dimensions are delivered). Software platform compatibility will conform to the hardware compatibility discussed above.

We continue to have meetings with a number of game developers and publishers, and expect our discussions with them to continue. Our goal is to enter into many agreements with game publishers and developers, to create additional games that will use our 3D touch technology - both on the Novint Falcon and on third-party hardware platforms where our haptics technology has been embedded under license. We have successfully completed licensing agreements or development agreements from those companies and with those games reflected on the Company’s website. We expect this list to continue to grow over time and we will continue to expand this list of companies and games as we continue our efforts in this area.

 

Games for the Falcon and Third Party Games - Current Development Initiatives

 

As part of our strategy of software support for the Falcon, we have done our own internal game development, where our software developers have created games that show the power of the Falcon. In these games we have created the art assets (models, animations) both internally and through externally hired artists and companies. Our internally developed games include games where you launch a duck into ponds, shoot an apple off a monkey’s head, smash cockroaches, shoot bad guys, fish, push penguins like shuffle pucks, shoot basketballs, and throw bolas.

 

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We have also contracted with external game developers to create games to our specifications. In many cases, we incorporate the haptics component after receiving the full source for the game. We own the intellectual property rights underlying these games, as well as the rights to distribute and sell the games that are developed in these contracts. These games include a drumming rhythm game, a boat racing game, an underwater shooting game, a rolling game, an airtable hockey game, a homerun hitting game, a motorcycle racing game, a bowling game, a table tennis game, a snowboarding game, and a golf game.

 

We have also acquired games, or similarly, exclusively licensed the 3D touch field of use for games. After this type of acquisition or license, we receive the source code to a game, and then incorporate touch into the game. Sometimes the acquisition or license includes a development contract to modify the game to better fit our needs. These games include a throwing arcade game, a 3D flying game, a 3D puzzle game, a platform jumping game, and a pinball game, among others listed on our website.

 

We began selling these games in the fourth quarter of 2007 and have generated minimal revenues associated with these games.

 

Manufacturing of the Falcon

 

We have entered into a manufacturing agreement with VTech Communications, Ltd., a contract manufacturer in China (the “Vtech Agreement”) for the production of the Falcon for sale to consumers. VTech manufactures the Falcon to our specification and ships the product to us based upon our purchase orders to them. The lead time to build these products is currently approximately 90 days. The VTech Agreement has a term of eighteen (18) months after the date of the first product delivery to consumer outlets, which was September of 2007. The Agreement will automatically renew every twelve (12) months unless either party gives at least 120 days prior written notice of termination. Under the Agreement, we will periodically submit purchase orders to VTech for product delivery. We placed an initial manufacturing order for 5,000 units with VTech in November of 2006, and accepted delivery of the first Falcon units in March of 2007. The Falcon is now being sold on-line through our website directly to consumers in the United States and online through other websites such as Amazon, Circuit City, J&R music store and others. We also sell the Falcon through retailers, such as Fry’s and Tiger Direct, J&R Music Store, and others. We are selling the Falcon and the associative haptics enabled software online via the Company’s web site. We will add more titles for sale as they become integrated with the Falcon, and we will sell Grips through the Company’s on-line store and retailers as well.

 

Order Fulfillment

 

Orders we and our distribution partners generate are fulfilled by Prolog Logistics, which we engaged in June 2007 as our fulfillment partner in order to outsource the fulfillment function. Prolog Logistics provides such services as inventory maintenance, return to depot, pick and pack capabilities, freight forwarding, and related tasks. They maintain our inventory in two warehouses: one on the west coast in San Diego, California, and one in the mid west in Lexington, Kentucky. We believe that maintaining inventory in these locations allows us to be more efficient, in cost and time, in delivering our products to customers. We will receive economies of scale with our costs as our unit sales volumes increase. We may use other companies for international fulfillment requirements as we expand our distribution efforts overseas.

 

Launch of Our Consumer Game Products

 

We launched these products and entered the gaming market on June 18, 2007. We began accepting pre-orders for the Falcon in January of 2007. We accepted the initial phase of production of these products from our manufacturing partner in March 2007, and we began shipping these products to consumers on June 18, 2007. These products performed well. Since then we have received orders for, and shipped products to retailers, distributors and end users. These products, and the software that we generate and license, also performed well. We conducted consumer surveys to help us further understand any customer issues and confirm that the product performs well in the hands of a customer. While we are very pleased and excited about these early results, we have no track record of being able to manufacture these products in significant quantities and distribute them to consumers on a global basis.

 

Recent Acquisition of Intellectual Property Assets

 

On July 17, 2007, we acquired all of the intellectual property assets of Tournabout Incorporated, including its video game contest and community infrastructure software. The integration of Tournabout’s applications will enable our customers to develop online personas, participate in community message boards and chat rooms, post high scores, and join multiplayer games and online tournaments.

 

On July 24, 2007, Force Dimension assigned to Novint the patent applications described in the section “Assigned to us, subject to certain obligations we have under the agreement with Force Dimension” below, subject to a security interest in and a general lien on such patents.

 

Company History & Development of Haptics Technology

 

Our software technology originated at Sandia National Laboratories (“Sandia”), a multi-billion dollar government research laboratory, which was one of the earliest pioneers in the human-computer haptics interaction field. We were granted a 12-year exclusive license (expiring in 2011), which is non-exclusive after twelve years, by Sandia that encompasses over five years of pioneering research and development in the field of human-computer haptics interfaces at Sandia. We were the first company in which Sandia received capital stock as part of a licensing agreement. Our CEO, Mr. Tom Anderson, was an employee at Sandia.

 

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The software technology utilizes haptic devices to generate computer touch sensations and interactions. The haptic device technology allows the touch sensations commanded by the software to be felt by users. Initially we applied this technology to professional applications, described below. However, the focus of our development and sales strategy will be in consumer gaming.

 

History of Novint Haptics Hardware and Technology

 

In connection with the development of our computer touch or haptic device, we entered into an agreement on January 5, 2004 with Force Dimension. The agreement consists of an exclusive Intellectual Property License Agreement (“Agreement”) with Force Dimension, a company in the Haptics hardware technologies and products arena. Certain portions of this Intellectual Property are in turn sub-licensed by Force Dimension from Prodex. The Agreement provides us with a sublicense to a hardware patent and an assignment of a pending patent from Force Dimension. The Agreement, in turn, provides Force Dimension a security interest in and a general lien on the assigned patent, as well as an irrevocable, exclusive license in the patent that has been assigned to us. We were obligated to make certain milestone payments to Force Dimension as they completed certain milestones under the Agreement.

 

On May 10, 2005, we amended our contract with Force Dimension, Inc. to provide for: a license fee in the amount of $15,000 due on the effective date; the payment of a milestone payment in the amount of $50,000 within ten days of the contract amendment’s effective date; a license fee in the amount of $50,000 within 30 days of our initial public offering of stock; and a support and license fee in the amount of $455,000 due no later than January 5, 2006, for all technical and support services rendered to us during such time period for total payments of $620,000.

 

In addition, we were to issue 250,000 shares of our common stock within 30 days of the contract amendment’s effective date as consideration for extending the payment terms of the agreement. These shares of stock were issued to Force Dimension on May 12, 2005, and have been accounted for as a financing cost related to a modification of our payment terms. The fair value of the stock issued is $250,000 and is reflected as interest expense in the amount of $245,968 for the year ended December 31, 2005, and $4,032 for the year ended December 31, 2006.

 

During the year ended December 31, 2004, we paid $15,000 to Force Dimension for the license fee due on the effective date. During 2005, we paid $140,000 to Force Dimension, representing a portion of the $50,000 milestone payment originally due to Force Dimension upon or before our receipt of the Second Deliverable as described in the original agreement, the $50,000 milestone payment due on the amendment’s effective date, and $50,000 representing a portion of the licensing fees due. We received the Second Deliverable on December 30, 2004. The remaining amount of $465,000 due to Force Dimension was recorded as accrued research and development liabilities as of December 31, 2005 then completely settled in March 2006 through the issuance of 607,500 shares of common stock.

 

The Agreement requires us to pay up to $15 million to Force Dimension, including the amounts above, on a per unit of Licensed Product basis for license fees, royalties and a percentage of product sales after the product becomes technologically feasible. In addition, we are entitled to 5% license fees/royalties for any licensed products sold related to the sublicense we granted to Force Dimension. We have not recorded any fees related to such arrangement. Our obligation to pay royalty or license fees shall terminate upon our payment in total of $15,000,000 to Force Dimension and payment in full of any other obligations arising pursuant to the terms and conditions of this Agreement.

 

Recent Developments

On February 1, 2008, the Company entered into a marketing agreement with Intel Corporation, expiring on December 31, 2009, which sets forth parameters for the further potential development and marketing of the Company’s haptics (touch) technology.

In March 2008, the Company entered into a development agreement with Electronic Arts, a prominent developer of video game content, pursuant to which the Company will develop certain video games modified to work with the Company’s haptics technologies.

 

On March 31, 2008, the Company closed on a $2,000,000 private placement of debt securities under Regulation D promulgated under the Securities Act of 1933 pursuant to the terms of a subscription agreement among the Company and the subscribers signatory thereto (the "Subscription Agreement").  Each Subscriber acquired an unsecured convertible note in the principal amount invested and a warrant to purchase shares of the Company’s common stock with an exercise price of $1.00 per share.  In each case, the number of shares of common stock underlying the warrant equals the principal amount of the unsecured convertible note. Each warrant is exercisable for a term of five (5) years.  The unsecured convertible notes have a three (3) year maturity, require payment of principal and interest in full on the maturity date, and accrue interest at a rate of seven percent (7%) beginning on the first anniversary of their respective dates of issuance. At the option of the holder, principal outstanding under a note may be converted into common stock at the conversion rate then in effect, initially $1.00 per share. Upon conversion, the holder will receive common stock at the conversion price of $1.00 per share and additional warrants to purchase shares of common stock at an exercise price of $1.50 per share.  The number of shares of common stock underlying the additional warrants shall equal one-half (1/2) the principal and interest amounts converted.  The additional warrants shall be exercisable for a term of five (5) years.  Certain existing shareholders of the Company are entitled to purchase notes and warrants under the terms of the Subscription Agreement and the Company may be required to create a second offering of these notes and warrants up to a total aggregate amount of $3,750,000 including the amounts already subscribed for to accommodate such shareholders’ rights to participate.

 

Professional Applications

 

We have developed professional applications for customers such as Aramco, Lockheed Martin, Chevron, Chrysler and Sandia National Laboratories. These efforts have allowed us to build our intellectual property portfolio. We have derived the majority of our revenue developing professional applications for our customers.

 

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Several of the projects we have completed (such as those with Aramco, Lockheed Martin, and Sandia) may grow into other follow up projects. All of our ongoing work in this market will support itself, and much of the intellectual property and software development developed with respect to these contracts will be applicable towards other applications of our technology.

 

We released another product, our Novint sono system. Our Novint sono system, which allows a parent to “virtually” touch their baby before he/she is even born, was chosen as one of Time Magazine’s Coolest Technologies of the Year in November of 2002. We have sold one Novint sono system. We stopped the development and shipment of the sono system in the fall of 2006 to provide more focus to our core business.

 

We have sold professional application products to Deakin University and University of New Mexico each for a collection of our applications for demonstration purposes as well as sales to various entities for Phantom Haptics devices. Other than that, our revenue prior to the launch of the Falcon has derived mainly from project contracts.

 

Aramco Contract

 

We were contracted by Aramco to develop an application to apply haptics interaction techniques in the interpretation and understanding of volumetric reservoir modeling for oil exploration. In this ongoing effort, capabilities were added to support and enhance the oil reservoir and well path modeling process. The project is aimed at demonstrating and validating the use of haptics interaction techniques in the interpretation and understanding of volumetric reservoir modeling data. Our results during the first year and our continued progress have led to the award of yearly contracts. We are refining Aramco’s modeling program to be able to handle full production level oil reservoir model data sets, adding additional visualization support to allow oil company personnel to focus on key areas of their models, developing larger data set visualization and multi-modal interaction to include graphics, haptics and sound.

 

Description of the Aramco Contract Terms:

 

We entered into a Miscellaneous Technical Services Agreement dated April 10, 2001 with Aramco Services Corporation (“ASC”). This Agreement was terminable by each party upon breach of the other. It was also terminable at will by ASC. Under the contract, we performed over a six month period to create haptics interactive software device for geologic volume modeling on a desk top environment. The contract provided for six months to deliver a working prototype. The contact provided for multiple delivery dates for alpha version, test versions, beta release and final functional prototype during the six-month performance period. ASC was provided an evaluation right before final payment was made. Payments were made as follows: 25% ($15,962.50) upon signing, 25% upon delivery of an alpha version, 25% upon delivery of a beta version and 25% (for a total of $63,850) upon final delivery and evaluation of the product by ASC. ASC was granted a perpetual, nonexclusive license and rights to use the developed software internally. The license includes the right to internally enhance software, but no rights to market or sell the software or grant rights to third parties. This contract is paid in full, the work is completed and no further payment or work is pending.

 

There was an Addendum to the contract dated July 10, 2002. The Addendum provided for six months for our development of “Phase II” software for the VNP2 software enhancements (developed under the original contract) in the areas of graphics, sounds, and miscellaneous performance. The Addendum provided for delivery of a beta version in the first 12 weeks of performance. Final deliverables were due within 6 months. Payments were made as follows: $17,947 at signing, $17,947 on beta software delivery, and $18,490 on final delivery. ASC was granted a perpetual, nonexclusive license and rights to use the developed software internally. The license includes the right to internally enhance the software, but no rights to market or sell the software or grant rights to third parties. We were paid a total of $54,385 under the Addendum. This Addendum is paid in full, the work is completed and no further payment or work is pending.

 

There was another Addendum to the contract dated August 22, 2003. Our performance was due on December 31, 2003. We developed Phase III enhancements to VNP2 software together with select hardware upgrades and configurations. Payments were made under the Addendum as follows: $14,710 at signing, $14,710 at installation of initial workstation, $14,710 at delivery of version 1 of the software upgrades, $14,710 upon version 2 of the upgrades, and $14,710 at final delivery and evaluation. ASC was granted a perpetual, nonexclusive license and rights to use the developed software internally. The license includes the right to internally enhance the software, but no rights to market or sell the software or grant rights to third parties. We were paid a total of $73,550 under the Addendum. This Addendum is paid in full, the work is completed and no further payment or work is pending.

 

There was a further Addendum dated May 3, 2004. The Addendum provided for the development of improvements on haptics products previously delivered to ASC under the contract and prior Addendums. Our performance was extended to January 1, 2005. Payment of $75,000 was made at completion. Improvements were made in the areas of global functionality, graphics, sound and miscellaneous performance of the software. ASC was granted a perpetual, nonexclusive license and rights to use the developed software internally. The license includes the right to internally enhance the software, but no rights to market or sell the software or grant rights to third parties. We were paid a total of $75,000 under the Addendum. This Addendum is paid in full, the work is completed and no further payment or work is pending.

 

There was a further Addendum dated September 8, 2005. The Addendum provided for the enhancement of event monitoring capabilities, enabling Haptic Device button operations, and other general enhancements. Deliverables will include an updated version of the VNP2 software for 32 bit Windows, and an updated user manual detailing the new features. Our performance was extended to January 1, 2006. Payment of $75,000 will be made upon written confirmation of acceptance of work from ASC. We received payment in full of $75,000 in February 2006. This Addendum is paid in full, the work is completed and no further payment or work is pending.

 

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Lockheed Martin Contract

 

We had contracts through 2006 with Lockheed Martin to develop a mission planning system for autonomous robotic vehicles. This system allows users to plan, verify, monitor and replay the overall mission for an unmanned underwater vehicle. Our work included extensions for a data manager which provides the user an integrated view of information from real time sonar sensors. Our system allows the user to control the vehicle and understand its status in a straightforward, easy-to-use manner.

 

Description of Lockheed Martin Purchase Orders:

 

We have ten purchase orders and amendments thereto with Lockheed Martin dated June 11, 2002, November 27, 2002, February 7, 2003, June 28, 2004, December 22, 2004, April 1, 2005, April 4, 2005, April 21, 2005, February 16, 2006 and March 23, 2006. All of these Purchase Orders have been completed and paid in full.

 

Development and delivery of software under the first seven purchase orders was for AUV defense mission and planning under specifications agreed to between the parties. The Purchase Orders also provided for the further customization and upgrade of delivered AUV software. Over the course of the first seven Purchase Orders, Lockheed Martin paid an aggregate of $131,774 to us. We have fully performed these purchase orders and delivered the purchased software and upgrades required thereunder. No other payment is due or owing on these Purchase Orders.

 

A Purchase Order was entered into with Lockheed Martin for the development and delivery of a Data Manager and Review Software (DMRS) dated April 21, 2005. The application will be used to investigate the undersea hulls of naval ships to flag any anomalies. The project work has been finished. The Purchase Order amount was $153,865. We fully performed this Purchase Order during 2005 and it was paid in full. A Purchase Order was entered into with Lockheed Martin to provide engineering services for specific haptic related projects on February 16, 2006 at a rate of $96 per hour. The final Purchase Order amount was $104,078. We completed performance under this Purchase Order in 2007 and it was paid in full. A Purchase Order was entered into with Lockheed Martin to enhance certain mission planning and evaluation software on March 23, 2006. The amount of the Purchase Order was $6,100. We completed performance under this Purchase Order in 2007 and it was paid in full.

 

Chrysler Contract

 

We were contracted by DaimlerChrysler Corporation to develop a haptics interaction module for DaimlerChrysler Corporation’s Conceptual Rendering System (CRS). Utilizing a large-scale haptics device, the haptics interaction module adds touch feedback to DaimlerChrysler’s virtual car prototyping capabilities and enables more cost effective and realistic design and evaluation of car ergonomics prior to the manufacture of physical models.

 

Description of the DaimlerChrysler Purchase Order:

 

We had a Purchase Order with DaimlerChrysler dated December 13, 2001. The Purchase Order relates to our development and delivery of a small car platform virtual reality software system. We have fully performed the Purchase Order and no further work is pending. DaimlerChrysler has paid an aggregate of $63,000, in full and no further payment or performance is due or owing.

 

Chevron Contract

 

We were contracted by Chevron to apply haptics interaction to boundary models of important geophysical structures based on seismic and other empirical oil field data. The haptics interaction allows modelers to quickly and precisely designate the location of surfaces, feel as well as see their extent and shape, and directly modifies them using their sense of touch.

 

Description of Chevron Statement of Work:

 

We had a Statement of Work with Chevron dated May 7, 2001. The contract concerned the development and installation of a haptics interface for the GOCAD V2.0 software used to represent geological entities and formations. Deliverables were due under the contract as follows: (i) within one week of commencement specifications finalized; (ii) within two weeks of commencement final statement of work specifications delivered by us; (iii) technical implementation to commence within three weeks of commencement; (iv) initial prototypes for NT operating stations installed in June 2001; (v) within three months of commencement, beta type of software installed and performing; and (vi) within four months of commencement, delivery of final release to Chevron. The amount due from Chevron for completion of the work was $70,000 that was paid in full. The amount was paid in $25,000 installments upon the signing of the agreement and upon delivery of the initial prototype, beta type and then final delivery and completion. We retained all rights associated with the developed software. Chevron’s sole right is a license to use the software internally at Chevron for evaluation and demonstration purposes. The agreement has been paid in full and no further performance is due from us or Chevron.

 

Sandia National Laboratories Contract

 

We were contracted by Sandia Laboratories to develop an architectural walkthrough application. This application allows users to load in large scale, detailed architectural models and to explore their design using our haptic software technology. Haptics technology is used both in the user interface to this application and to allow the user to feel the digital models to get a more precise understanding of their nature and extent. In addition, various touch-enabled programs can be launched as the user navigates in the digital realm.

 

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As a second phase to this contract, we have developed an application, known as Layout, which allows digital objects to be quickly, and unambiguously arranged and placed. Layout was developed for Sandia National Laboratories to aid in the interior layout of buildings. Architectural objects, such as chairs, can be picked up and placed in a touch-enabled manner. The user can feel the shape and weight of these objects and when they collide with other objects in the environment. Using our technology for the placement of 3D digital objects means that objects can be organized much faster than when using a mouse and it also means that their placement in the environment can be much more precise. The user merely has to reach out, “grab” an object and place it to get the job done — just as in the physical world. For example, a user can pick up a virtual vase and place it on a virtual table and know that it is properly placed since he or she will feel the vase placement on the table.

 

In addition, we have developed applications for Sandia with which users can arrange all of their electronic components onto a virtual printed circuit board effectively using their sense of touch. Hundreds of electronic parts such as transistors and capacitors can be represented using this application, and each component displays physical properties that make its placement intuitive and realistic. Users are able to feel collisions between objects that are positioned too closely to one another, feedback that helps ensure proper circuit assembly. This application also allows users to conduct simulated voltage tests that verify the successful operation of their virtual design once completed.

     

Finally, we have developed applications for Sandia to help researchers analyze computational data, such as the detonation of test weaponry or the examination of the effects of a catastrophic fire. This application allows scientists to explore complex data sets—sometimes containing hundreds of variables that are generated from experimental simulations. With this application, users can represent data graphically with 3D surfaces, then use their sense of touch to “feel through” the data set. Because the program is touch-based, this application can represent variables such as temperature or pressure with physical phenomena like viscosity and vibration, allowing users to understand data using more than just their sight.

 

Description of the Sandia Purchase Orders:

 

We had a Purchase Order with Sandia National Laboratories (“Sandia”) dated September 19, 2001 in the amount of $50,437. The Purchase Order related to the development of a multimodal layout and visualization prototype — a form of haptics desktop device with specified software features. The work was to be completed by December 15, 2001. The contract provided for periodic milestones and payments as follows: $10,000 upon project concept review, $17,500 upon demonstration of progress, $12,500 upon delivery of preliminary program executables, $1,470 upon delivery of user documents in “word” compatible format, $1,058 upon delivery of source code, $3,890 upon demonstration of certain functionalities and $4,018 upon final report and delivery. We timely performed the contract in full and Sandia has paid in full. There is no further payment or performance due under the contract.

 

We had a second Purchase Order with Sandia dated February 7, 2002 in the amount of $44,237. Work under the Purchase Order was to be completed by May 2, 2002. The Purchase Order related to the enhancement and further development of the software developed under the September 19, 2001 Purchase Order, including continued development of a multimodal layout and visualization prototype, specifically a standard multimodal file format and refinements to Sandia’s specified layout applications. The contract provided for periodic milestones and payments as follows: $6,635 on commencement and proposal review, $6,635 on delivery of preliminary draft concept papers, $13,271 on delivery of source code and build scripts, $2,211 on delivery of final version of file format, $15,040 upon delivery of refinements to layout application and source code and build scripts, and $442 on delivery of written summary of multimodal file format. We timely performed the contract in full and Sandia has paid in full. There is no further payment or performance due under the contract.

 

We had a third Purchase Order with Sandia dated February 18, 2003 in the amount of $149,808. The Purchase Order related to the development of a distributed component architecture (“DCA”) to allow rapid development of design simulators for use by Sandia on a desktop environment. Work under the Purchase Order included DCA architecture as well as the 3D Electronic Component Layout (“ECL”) application example. The work was to be completed by July 21, 2003. The contract provided for periodic milestones and payments as follows: $14,981 upon commencement, $22,471 upon agreement to specific layout task specifications, $29,962 upon layout software user interface and function verification, $22,417 upon DCA preliminary design delivery, $37,452 upon DCA and layout software progress updates, $22,471 upon final delivery of DCA and layout software. We timely performed the contract in full and Sandia has paid in full. There is no further payment or performance due under the contract.

 

We had a fourth Purchase Order with Sandia dated March 12, 2004 in the amount of $132,890. The Purchase Order related to creating enhancements to the DCA software created under the third Purchase Order. Enhancements included refinements to the 3D ECL application and development of the Multivariate, Multimodal Data Visualization (MMDV) application. Work was to be completed by August 16, 2004. The contract provided for periodic milestones and payments as follows: $29,192 upon delivery of 3DECL applications, $13,269 upon delivery of “MMDV” project plan, $26,538 upon delivery of MMDV prototype, $37,153 upon delivery of MMDV revised prototype, and $26,538 upon delivery of final MMSV version. We timely performed the contract in full and Sandia has paid in full. There is no further payment or performance due under the contract.

 

In connection with each of the above Purchase Orders, we granted to Sandia the right to use the developed software and technology internally and to enhance and develop the software internally. It is a perpetual, royalty free right to use and develop the software. The license rights granted also include the right for Sandia to distribute the software, in executable form only, to third parties. We retain sole rights of ownership and commercial distribution for all software in source code form and its derivative works. Sandia cannot distribute the software in source code form outside of Sandia. Accordingly, we have no right to receive any royalties or other payments on any enhancement developed and used by Sandia.

 

Woods Hole Oceanographic Institute Contract

 

We were contracted by Woods Hole Oceanographic Institute (WHOI) to integrate haptics interaction into undersea exploration systems (i.e., underwater vehicles). We have developed a prototype 3D touch-enabled mission rehearsal system (i.e., simulation) for underwater vehicle operations.

 

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The Falk Group, LLC

 

We had a Purchase Order with the Falk Group, LLC (“Falk”) for $121,688 dated January 16, 2007, which was amended to $123,067. We were engaged to create an interactive “injection clinic” for use at a medical practitioners conference that showcased a new medication, and to assist at the conference. For this contract we developed a customized “grip” (or handle) to simulate an injection. We utilized the services of Lunar Design in fulfilling this contract. We have no further obligations under the Purchase Order. We have been paid $123,067.

 

We had additional purchase orders in 2007 for $16,554 to assist at six conferences. We have no further obligations under these purchase orders. Payment was still outstanding at December 31, 2007.

 

Various Purchase Orders

 

Description of the Deakin University Purchase Order:

We had a Purchase Order with Deakin University dated April 16, 2003 in the amount of $131,196. The Purchase Order concerned the delivery and installation of a phantom haptics interface and related software and drivers. We have completed delivery under this Purchase Order and Deakin University has paid in full. No further payment or performance is due or owing.

 

Description of University of New Mexico Purchase Order:

 

We had a Purchase Order with the University of New Mexico dated March 16, 2004 in the amount of $47,176. The Purchase Order concerned the delivery and installation of a phantom desktop and related software, together with certain device drivers. We have completed delivery under this Purchase Order and University of New Mexico has paid in full. No further payment or performance is due or owing.

 

Description of Robarts Research Purchase Order:

 

We had a Purchase Order with Robarts Research dated September 24, 2004 in the amount of $50,200. The Purchase Order relates to the delivery and installation of a phantom haptic interface and related software and device drivers. We have completed the delivery under this Purchase Order and Robarts Research has paid in full. No further payment or performance is due or owing.

 

Project Revenues

 

Our project revenues were $178,458 and $87,014 for the years ended December 31, 2007 and 2006, respectively. Our project revenues have been from contracts to develop professional applications using our haptics technology, and related haptics devices, for a number of customers, including Chevron, ARAMCO, Woods Hole Oceanographic Institute, Lockheed Martin Perry Technologies, SensAble Technologies, Sandia National Laboratories, Deakin University and Daimler Chrysler Automotive Corporation.

 

Competition/Other Haptic Companies

 

In the past 15 years we believe that there have been approximately a dozen companies involved in haptics hardware and/or software development. Most of these companies are hardware developers. We have been focusing many of our efforts on software development, and we believe that we will maintain our lead in the field in software. With respect to hardware, we believe the consumer release of the Novint Falcon will be a significant event in the field of haptics, and will give us a strong competitive advantage in our licensing strategy. We believe that none of our potential hardware competitors have any experience with a consumer 3D haptics enabled device. 3D haptics hardware devices available now retail for approximately $2,000 to $15,000. Most of these companies are potential partners.

·

SensAble Technologies (www.sensable.com) is a haptics hardware and software developer. Their first product was the Phantom haptics interface. Their primary application focus is their computer aided design products and other high end uses of haptics technology. We have performed software development contracts with SensAble.

 

·

Immersion Corporation (www.immersion.com) is primarily a 1D or 2D haptics (a Haptic computer interaction in which forces are mechanically displayed to a user in 1 or 2 directions of movement; examples are force feedback joysticks and force feedback mice) hardware company. Immersion is a public company, which has acquired other haptics device companies. They have acquired Cybernet, Haptech and Virtual Technologies. Immersion also purchased HT Medical, which is now called Immersion Medical.

 

·

Reach In Technologies (www.reachin.se) is an experienced haptics software company based out of Sweden. They are a partner of Novint's and are creating and modifying video games to support the Novint Falcon.

 

·

MPB (www.mpb-technologies.ca/space/p_freedom6s.html) is a Canadian based haptics hardware company that has developed an interesting high end 3D haptics hardware device, the Freedom 6.

 

·

Microsoft has several haptic devices that simply vibrate and rumble, such as the control pads for their Xbox systems. We believe our technology offers more features and provides a richer haptic experience for the user.

 

·

Force Dimension (www.forcedimension.com), in Switzerland, has unveiled their haptics hardware device, the Delta. Force Dimension has been our partner and helped to develop the Falcon.

 

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	·		FCS Robotics (www.fcs-cs.com/robotics/) developed a large workspace haptics device called the HapticMaster. This is another high-end device that can be used with our software.
	·		Logitech sells haptics mice, wheels, and joysticks that they licensed from Immersion and that are primarily used for gaming. Logitech’s haptics products are two-dimensional and do not offer as many features as our products will.
	·		Sensegraphics, a Swedish company, that produces haptics based software.

 

Intellectual Property

 

Patents

 

We own the following issued and pending patent applications:

 

1. Human-Computer Interface Including Efficient Three-Dimensional Controls. U.S. Patent 6,727,924 issued 4/27/2004. Claims a technology that allows efficient and intuitive interaction in a three-dimensional world with familiar two-dimensional controls. This patent application describes an intuitive type of haptics control object that allows developers to create toolbars and other common types of interface objects. These toolbars are easily accessible and greatly improve user-interface issues related to problems associated with depth perception of a 3D cursor. Tom Anderson assigned the patent to us on February 13, 2004 recorded with the USPTO on February 23, 2004.

 

2. Coordinating Haptics with Visual Images in a Human-Computer Interface. U.S. Patent 7,225,115 issued May 29, 2007. PCT and foreign counterparts also filed. Claims a method for efficiently generating haptics models for use with existing images, without requiring the cost of generating a three dimensional model. The claimed method can effectively add a haptics dimension to the large volume of existing visual content. Assigned by Jake Jones to us dated September 26, 2001, recorded with USPTO on December 7, 2001.

 

3. Human-Computer Interfaces Incorporating Haptics. U.S. Provisional Patent Application 60/431,060. Provides an early priority date for several later utility patent applications. This provisional patent application describes a number of haptics techniques particularly applicable to computer games.

 

4. Human-Computer Interfaces Incorporating Haptics and Path-Based Interaction. U.S. Patent Application pending, some claims already allowable. PCT counterpart also filed. Claims a number of methods and apparatuses related to communication with a user, with specific application to computer games. Examples are drawn from a variety of games, each of which has been implemented to utilize 3 dimensional positional input devices with force feedback.

 

5. Force Frames in Animation, US Patent application pending. Claims methods for utilizing haptics in computer animation. Assigned by Tom Anderson to us on February 13, 2004, recorded with USPTO on February 19, 2004.

 

6. Human-Computer Interface Including Efficient Three-Dimensional Controls. Continuation application of U.S. Patent 6,727,924, 10/831,682 filed 4/22/2004. Claims a technology that allows efficient and intuitive interaction in a three-dimensional world with familiar two-dimensional controls. This patent application describes an intuitive type of haptics control object that allows developers to create toolbars and other common types of interface objects. These toolbars are easily accessible and greatly improve user-interface issues related to problems associated with depth perception of a 3D cursor. Assigned by Tom Anderson to us on February 13, 2004, recorded with USPTO on February 19, 2004.

 

7. Computer Interface Methods and Apparatuses. U.S. Provisional Patent Application 60/681,007. Describes many interface technologies and methods of particular importance to three-dimensional and haptic-enabled computer games.

 

8. Human-Computer Interface Incorporating Personal and Application Domains. Continuation of U.S. Patent 6,724,400, filed 3/16/2004. Claims variations on the user interface.

 

9. Production of a three-dimensional object representative of an in-utero baby. U.S. Provisional Patent Application 60/842,404, filed September 5, 2006. Describes use of three-dimensional and haptic technology to automatically produce three-dimensional objects directly from ultrasound data.

 

10. Bimodal User Interaction with a Simulated Object. U.S. Patent Applications 11/433,173, filed May 13, 2006. Describes many interface technologies and methods of particular importance to three-dimensional and haptic-enabled computer games. Assigned by Tom Anderson to us on November 15, 2006, recorded with USPTO on November 22, 2006.

 

11. Bimodal User Interaction with a Simulated Object. International Application number PCT/US2006/042557. Describes many interface technologies and methods of particular importance to three-dimensional and haptic-enabled computer games.

12. Human-Computer Interface Including Haptically Controlled Interactions. U.S. Patent 6,954,899 issued October 11, 2005. Claims an interface technique that allows haptics control of common interface operations. This patent application describes several scrolling and zooming techniques based around haptics interaction. Assigned by Tom Anderson to us on February 13, 2004, recorded with USPTO on February 19, 2004.

 

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Copyrights

We currently own copyrights in application software and application development tools, including:

 

1. e-Touch, copyright 2000, 2001, 2002, 2003 Novint Technologies, Inc.

 

2. Novint sono software

 

3. Mandrin Pinball computer game

 

4. IncrediBubble computer game

 

5. Super Slam Ball computer game

 

6. Newton’s Monkey Business ™ computer game

 

7. Feelin’ It ™ : Golf computer game

 

8. Feelin’ It ™: Table Tennis computer game

 

9. Feelin’ It ™ : Top Pin Bowling computer game

 

10. Feel the Heat™ computer game

 

11. Bogo™ computer game

 

12. RC Xtreme Impact™ computer game

 

13. Feelin’ It: Blind Games™ computer game

 

14. Newton’s Monkey Business™ V1.5 computer game

 

15. Duck Launch™ computer game

 

16. Top Beat™ computer game

 

17. Feelin’It™: Airtable Hockey computer game

 

18. Feelin’It ArcadeRoller™ computer game

 

19. Roly Poly Rolland’s Pinball Challenge™ computer game

 

20. Haptics-Life 2: Episode 1™ computer game mod

 

21. Second Life Drivers computer game mod

 

22. WoW Drivers computer game mod

 

We currently have licenses, exclusive in our fields of use, to application software, including:

 

1. “Glider” computer game

 

2. “Inago Rage” computer game.

 

3. Impulse Thruster ™ computer game

 

4. Feelin’It ™: Gish computer game

 

5. Feelin’ It ™: Crystal Quest computer game

 

6. Klectit™ computer game

 

7. Feelin’It™:Arctic Stud Poker Run computer game

 

8. Tear Down™ computer game

 

9. Ascension Reborn computer game

 

10. Feelin’It: XLR8™ computer game

 

11. Feelin’It:™: Virtual Pool 3 computer game

 

12. The Ship computer game

 

13. Cell Blast ™ computer game

 

14. Not Cho Cheese™ computer game

 

15. Talon Special Ops ™ computer game

 

16. WWII 76mm ™ computer game

 

17. Force Fighter™ computer game

 

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18. Feelin’ It™: Mahjong computer game

 

19. Chomper™ computer game

 

20. Tobbit™ computer game

 

21. Butter Bean™ computer game

 

22. Cave Brain™ computer game

 

23. Aquabiox™ computer game

 

24. Hook and Sinker Fishing™ computer game

 

25. Tunneler™ computer game

 

26. Mo the Mole™ computer game

 

27. Feelin’ It™: Dominoes computer game

 

28. Space Recoil™ computer game

 

29. The Feel of Steel™ computer game

 

30. Jewel Flipper™ computer game

 

31. Snowbear™ computer game

 

32. Moorhuhn Games from Phenomedia computer game

 

Trademarks

 

We own the following trademarks:

 

1. NOVINT, on the Federal Principal Register, serial number 76061389, registration number 2512087. Branding for multiple products and services.

 

2. FEELIN IT, on the Federal Principal Register, serial number 77075488, registration number 3382564

 

3. Novint logo, common law trademark. Branding for multiple products and services.

 

4. NOVINT FALCON, application for Federal Principal Register, serial number 78561994..

 

5. NEWTON THE MONKEY, application for Federal Principal Register, serial number 77077459.

 

6 NEWTON’S MONKEY BUSINESS, application for Federal Principal Register, serial number 77077460.

 

7. N VENT, application for Federal Principal Register, serial number 77168654.

 

Domain Names

 

We own 145 domain names related to our branding strategy.

 

Patents from the Sandia License

 

1. Multidimensional Display Controller. U.S. Patent 6,208,349 issued 3/27/2001. Claims a control technology allowing intuitive control of multidimensional displays. This patent application was submitted based on the usage of a two handed interface, where the user’s second hand can be used to manipulate the user’s viewpoint within the environment while allowing the user’s first hand to control navigation.

 

2. Multidimensional Navigational Controller, U.S. Patent Application pending. Claims a control technology allowing intuitive navigation through multidimensional spaces. This patent application describes a variety of navigation techniques and control objects that utilize haptics. Navigation in a virtual environment is a significant problem. Sandia did a study examining the benefits of haptically controlled navigation and the results were statistically significant that users were better able to navigate through three separate environments with haptics feedback compared with mouse-based interactions.

 

3. Human Computer Interfaces. U.S. Provisional Patent Application. Provides an early priority date for several later utility patent applications. This provisional patent application describes 34 additional potentially patentable concepts.

 

4. Human-computer Interface. U.S. Patent 6,833,826. Claims a haptics technology that allows intuitive interaction with boundaries between interface domains. This patent application describes a specific type of haptics object that enables transitions between separate domains by breaking through it.

 

5. Human-Computer Interface Incorporating Personal and Application Domains. U.S. Patent 6,724,400 issued 4/20/2004. Claims a user interface that provides consistent, intuitive control interface to any application. This patent application describes mechanisms for the concept of a personal space. This is a valuable and core component of e-Touch, our professional Application Programming Interface, and allows users to customize their own personal space while intuitively allowing interaction with a variety of applications or virtual environments.

 

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6. Human-Computer Interface Incorporating Personal and Application Domains. U.S. Patent Application pending. Continuation of the previous issued patent, claims variations on the user interface.

 

7. Navigation and Viewing in a Multidimensional Space. U.S. Patent Application 11/283,969, filed November 21, 2005. Continuation application of U.S. patent 6,954,899 and others. Claims specific variations on multidimensional navigation techniques.

 

8. Navigation and Viewing in a Multidimensional Space. U.S. Patent Application 11/244,584, filed October 6, 2005. Continuation application of U.S. patent 6,954,899 and others. Claims specific variations on multidimensional navigation techniques.

 

Assigned to us, subject to certain obligations we have under the agreement with Force Dimension:

 

European Patent Office Application Serial No. 03016030.3, filed July 15, 2003 entitled, “Parallel Kinematics Mechanism.” Counterparts in U.S., Japan, and Canada pending. The invention relates in general to movement transmission, and for example, to a device or assembly for transmitting a movement using a parallel kinematics mechanism, to a haptic device or system or a force-reflecting control interface, such as a hand controller for computers, game consoles, simulators or other systems, and to a movement transmission device for a parallel kinematics manipulator or a parallel kinematics measuring system.

 

On July 24, 2007, Force Dimension assigned to Novint the following patent applications:

1. PCT patent application PCT/EP2006/001245, filed Feb. 10, 2006, titled “Device for Transmitting Movements and Components Thereto.” Counterparts in Canada, China, the EPO, Japan, and the US have been filed.

2. PCT patent application PCT/EP2006/001244, filed Feb. 10, 2006, titled “Device for Transmitting Movements and Components Thereto.” Counterparts in Canada, China, the EPO, Japan, and the US have been filed.

3. European Patent Office Application Serial No. 05 002 893.05, filed Feb. 11, 2005 (abandoned).

4. European Patent Office Application Serial No. 05 002 891.9, filed Feb. 11, 2005 (abandoned).

5. European Patent Office Application Serial No. 05 002 892.7, filed Feb. 11, 2005 (abandoned).

 

Licensed to us under the license with Force Dimension (patents licensed by Force Dimension from Prodex):

					Application			Registration						Maximum
Country		Filing Date			Number			Date			Patent No.			Validity
Canada			12-15-86			525321			04-14-1992			1,298,806			04-14-2009
Japan			12-10-86			50331/1986			05-20-1993			1,761,286			12-12-2006
Switzerland			12-16-1985			5348/85-6			10-31-1989			672089-4			12-16-2005
USA			12-10-1986			07/403,987			12-11-1990			4,976,582			12-11-2007
Europe			12-10-1986			86906759,5			07-17-1991			0250470			12-10-2006

 

Other License Agreements

 

MANHATTAN SCIENTIFICS — We are parties to a License and Royalty Agreement with Manhattan Scientifics dated May 16, 2001, one of our shareholders. We had a prior license agreement with Manhattan Scientifics that provided the initial funding of our development of a web browser and content creation tools to which Manhattan Scientifics had an exclusive license from us for specific internet fields of use. No royalties ever became due under the original agreement by either party and no marketable technologies were ever developed. Under our current agreement with Manhattan Scientifics we granted Manhattan Scientifics an exclusive sub license of our haptics technology, within a specified field of use for “Teneo” and other technologies. Under the agreement, Manhattan Scientifics granted to us a license to use the “Teneo” technology that relates to dental training interfaces and oil and gas visualization applications. Manhattan Scientifics also assigned back to us the internet fields of use that were the subject of the first (prior) agreement. No royalties have been paid by either party pursuant to this license to date. No marketable technologies have yet been developed under this agreement. The agreement provides that we would pay to Manhattan Scientifics 5% of the net revenues we derive from the use or sale of the “Teneo” technology. In addition, the agreement provides that Manhattan Scientifics will pay to us 5% of the net revenues they derive from the use of sale of the technology that is the subject of the sub license granted to them. No such revenues have been derived by either party and accordingly, no royalty payments are due or owing by either party. The term of the license granted under the current agreement is intended to be perpetual. In connection with our agreements with Manhattan Scientifics, Manhattan Scientifics has received an aggregate of 4,067,200 shares of our common stock and we have received an aggregate of 1,000,000 shares of Manhattan Scientifics’ common stock.

 

Teneo License — We license: (i) Virtual Reality Dental Training System Software; and (ii) Voxel Notepad Software, from Teneo Computing, Inc., a company acquired by one of our shareholders, Manhattan Scientifics. There are currently no patents covering either the Virtual Reality Dental Training System Software or the Voxel Notepad Software. We believe that the Harvard School of Dentistry filed or will file a patent covering the Virtual Reality Dental Training System Software or the Voxel Notepad Software. In addition to Teneo’s current license, Teneo had an exclusive right to get a license for any patents issued to Harvard School of Dentistry for the Virtual Reality Dental Training System Software or the Voxel Notepad Software. We decided to let this exclusive right lapse and currently have no plans to pursue such a license.

 

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Research and Development

 

Research and development expenses were $1,142,986 and $496,844 for the years ended December 31, 2007 and 2006, respectively.

 

Employees

 

As of March 19, 2008 we have 25 full time employees and 6 consultants.

 

We have an employment agreement with our CEO, Tom Anderson. Under such agreement, he is entitled to an annual base salary of $150,000 per year and cash bonus to be determined by us, is subject to confidentiality provisions and is entitled to a severance of one year base salary if he is terminated by us without cause.

 

We also have an employment agreement with our CTO, Walter Aviles. Under such agreement, he was originally granted options to purchase 400,000 shares of our common stock, but options to purchase 200,000 shares were cancelled, he is entitled to an annual base salary of $155,000 per year and cash bonus to be determined by us, is subject to confidentiality provisions and is entitled to a severance of two months base salary if he is terminated by us without cause.

 

Recruiting efforts will continue as we bring our products to market.

Government Regulations 

The growth and development of the market for Internet commerce may prompt calls for stringent consumer protection laws, such as laws against identity theft that may impose additional burdens on companies like us who conduct business over the Internet. While none of the current laws governing Internet commerce has imposed significant burdens on us to date, in the future our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet, or the application of existing laws to the Internet or Internet-based advertising. We are not aware of any other specific regulatory rules or regulations that we are subject to due to the specific nature of our business operations.

 

Risk Factors

 

An investment in our common stock involves a high degree of risk. In addition to the other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This Report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,” “believe,” “plan,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should review carefully various risks and uncertainties identified in this report, including the matters set forth below and in the Company’s other SEC filings. These risks and uncertainties could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

 

THE MARKET FOR HAPTICS-ENABLED TECHNOLOGIES AND HAPTICS-ENABLED PRODUCTS IS AT AN EARLY STAGE AND IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH.

 

The market for our haptics-enabling technologies and our licensees’ haptics-enabled products is at an early stage. If Novint and its licensees are unable to develop demand for haptics-enabling technologies and haptics-enabled products, we may not achieve or sustain revenue growth. We cannot accurately predict the growth of the markets for these technologies and products, the timing of product introductions or the timing of commercial acceptance of these products.

 

Even if our haptics-enabling technologies and our licensees’ haptics-enabled products are ultimately widely adopted, widespread adoption may take a long time to occur. The timing and amount of royalties and product sales that we receive will depend on whether the products marketed achieve widespread adoption and, if so, how rapidly that adoption occurs. We expect that we will need to pursue extensive and expensive marketing and sales efforts to educate prospective licensees and end users about the uses and benefits of our technologies and to persuade software developers to create software that utilizes our technologies.

 

CURRENTLY OUR REVENUE IS DERIVED FROM A FEW CUSTOMERS AND WE COULD EXPERIENCE SUBSTANTIAL LOSSES IF A SINGLE CUSTOMER STOPS CONDUCTING BUSINESS WITH US.

 

Currently, our revenue is derived from a few customers. Until and unless we secure customer relationships with substantially more customers from our consumer sales of the Falcon and related products, it is likely that we will experience periods during which we will be highly dependent on a limited number of customers. Dependence on a few customers will make it difficult to satisfactorily negotiate attractive prices for our products and will expose us to the risk of substantial losses if a single dominant customer stops conducting business with us; however we do not foresee remaining dependent on our professional applications services for revenue going forward. For the years ended December 31, 2007 and 2006, the Company’s revenues were substantially attributable to a few customers. Following is a summary of the Company’s customers with sales over 10%, and the percentage of these sales to total sales for the years ended December 31, 2007 and 2006:

		December31, 2007			%			December 31, 2006			%
Project Revenue
Lockheed Martin Perry		$	35,836			9		$	74,342			83
The Falk Group			139,612			33			—			—
Aramco			—			—			12,672			14
Product Revenue
CompUSA			51,528			12			—			—

 

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WE ANTICIPATE THAT OUR EXPENSES WILL DRAMATICALLY INCREASE TO EXECUTE OUR BUSINESS PLAN. THUS, WE MAY EXPERIENCE LOSSES IN THE NEAR FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.

 

Our operating losses were $4,057,695 and $8,186,068, respectively, for the 12-month periods ended December 31, 2006 and 2007. Our accumulated deficit as of December 31, 2006 and 2007 was $12,648,907 and $20,745,404, respectively. Our operating expenses totaled $8,116,871 for the 12-month period ended December 31, 2007, compared to $4,084,402 for the 12-month period ended December 31, 2006.

 

We anticipate that our expenses will dramatically increase as we continue to leverage our computer touch technology and to exploit opportunities in the consumer console and PC interactive computer gaming industry. If our revenues do not grow significantly or if our operating expenses exceed expectations, we may not achieve or maintain profitability.

 

OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR CURRENT PRIMARY BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH. HISTORICALLY, OUR PRIMARY BUSINESS HAS BEEN CONTRACTING FOR THE DEVELOPMENT OF PROFESSIONAL APPLICATIONS OF OUR TECHNOLOGIES FOR OUR CUSTOMERS. HOWEVER, OUR PRIMARY BUSINESS STRATEGY FOR ACHIEVING GROWTH IS DEVELOPMENT OF OUR TECHNOLOGIES FOR COMPUTER GAMING USE.

 

Historically, we have derived the substantial majority of our revenue from development contracts. For the 12-month periods ended December 31, 2007 and 2006, 42% and 97%, respectively, of our revenues were from development contracts. While we anticipate that royalty revenue from licensing our technologies and sales of products that we develop, such as the Falcon, grips, and related games, will constitute the majority of our revenue, such royalty and sales revenue may not increase and may decrease in the future. Accordingly, we cannot predict our future revenues based on historical financial information.

 

 

Our primary business strategy with respect to leveraging our computer touch technology to exploit opportunities in the consumer console and PC interactive computer gaming industry is to license our intellectual property to companies that manufacture and sell haptics-enabled products (both hardware and software) and to manufacture and sell our products directly and through retailers. For us to be successful, we will have to attract licensees and our licensees must manufacture and distribute haptics-enabled products in a timely fashion and generate consumer demand through marketing and other promotional activities. We may not be able to attract any or a sufficient number of licensees to generate a significant amount of royalty revenue. If we are not able to attract any or a sufficient number of licensees or our licensees fail to stimulate and capitalize upon market demand for products that generate royalties for us, our revenue with respect to that business segment will not grow. Additionally, we will have to attract retailers who will sell our products to consumers at price points that provide us with revenue. If we are not able to attract a sufficient number of retailers, and if the retailers do not sell to consumers in sufficient quantity or at prices which generate revenues, we may be unable to succeed in the gaming applications we have developed.

 

WE HAVE ESTABLISHED A DIRECT MANUFACTURING CONTRACT AND DIRECT SOFTWARE DEVELOPMENT CONTRACTS; THESE ARE AREAS IN WHICH WE HAVE LITTLE EXPERIENCE.

 

Much of our growth will come from sales in the video game market. To facilitate this part of our strategy we entered into a direct contract manufacturing agreement with VTech Communications, Ltd. in China in 2006 for the manufacture of the Falcon. We are developing our own initial game programs to be packaged with the Falcon. We do not have experience or a track record for creating hardware products or interactive video and computer games. We cannot be sure that the games we develop will appeal to consumers or enhance the sales of the Novint Falcon. In addition, there will be additional risks such as cash flow management, financing materials, and coordinating product distribution and fulfillment either internally or by contract, all of which we have no experience in. If we expend significant resources on these initiatives and are not successful, our business and results of operations could be negatively impacted and the value of our securities could decline.

 

DEMAND FOR PRODUCTS THAT INCORPORATE OUR TECHNOLOGIES ARE GENERALLY SEASONAL AND FAILURE TO DELIVER PRODUCTS TO TAKE ADVANTAGE OF YEAR-END HOLIDAY SEASON DEMAND COULD SUBSTANTIALLY IMPACT ROYALTY REVENUE GENERATED, IF ANY, FROM PRODUCTS THAT INCORPORATE OUR TECHNOLOGIES.

 

Peak demand for products that incorporate our technologies, especially in the gaming market, typically occurs in the fourth calendar quarter as a result of increased demand during the year-end holiday season. If we or our licensees do not succeed in shipping licensed products in a timely fashion or fail to achieve strong sales in the second half of the calendar year, it would impact our revenues. We do not have experience in distributing our own product and we do not control or influence the degree to which our licensees promote our technologies or the prices at which they sell products incorporating our technologies. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance or generate meaningful revenue for us.

 

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IF RETAILERS DO NOT PURCHASE OUR PRODUCT AND GENERATE SALES TO CONSUMERS IT WILL BE DIFFICULT FOR US TO EXECUTE OUR BUSINESS STRATEGIES AND WE MAY NOT ACHIEVE OUR REVENUE GROWTH.

 

An important part of our strategy is to create market acceptance for the Falcon product, and future products and games we may develop, that will generate revenues for us. These potential sales are important not only to generate revenue but to create consumer awareness of our products and create a desire on the part of third-party game and hardware developers to enter into license arrangements with us that will similarly generate revenues. If we cannot generate consumer and potential licensee interests, we will not generate sufficient revenues to support our continued operations or expand our product lines.

 

IF THE CONTRACT MANUFACTURER WE HAVE ENTERED INTO AN AGREEMENT WITH FAILS TO DELIVER PRODUCTS ON TIME, OR DELIVERS PRODUCTS THAT ARE FAULTY, WE MAY NOT ACHIEVE OUR REVENUE GROWTH.

 

We have entered into a manufacturing agreement with VTech Communications, Ltd. to manufacture the Falcon according to our specifications. We have submitted purchase orders to VTech and anticipate submitting additional orders as demand grows. While we believe that VTech will fulfill our orders timely and to specification, we cannot assure that there will not be delays. If we are unable to have our products manufactured and delivered timely and to specifications, we may lose sales and we may be unable to generate revenues.

 

IF INDUSTRY LEADERS DO NOT ADOPT OUR TECHNOLOGIES, IT MAY BE DIFFICULT FOR US TO EXECUTE OUR BUSINESS STRATEGIES AND WE MAY NOT ACHIEVE REVENUE GROWTH.

 

An important part of our strategy is to penetrate new markets by targeting licensees that are leaders in those markets. This strategy is designed to encourage other participants in those markets to also adopt our technologies. If a high profile industry participant adopts our technologies for one or more of their products but fails to achieve success with those products, other industry participants’ perception of our technologies could be adversely affected. Likewise, if a market leader adopts and achieves success with a competing technology, our revenue growth could be limited and other potential licensees may not license our technologies. Finally, if no industry participant adopts our technologies at all, we may not be able to achieve any revenue growth from licensing our technologies.

 

A SIGNIFICANT PORTION OF OUR INTELLECTUAL PROPERTY RIGHTS IS BASED ON OUR LICENSE FROM SANDIA. FAILURE TO COMPLY WITH THE TERMS OF THE SANDIA LICENSE MAY TERMINATE OR MAKE SUCH LICENSE NONEXCLUSIVE, WHICH MAY RESULT IN A MATERIAL NEGATIVE IMPACT ON OUR BUSINESS AND REVENUES.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   

Our common stock is traded on the over-the-counter market on the OTC Bulletin Board under the symbol “NVNT.” The following table sets forth the high and low bid information for our common stock for each quarter within the last two fiscal years as reported on the OTC Bulletin Board.

QUARTER ENDED 2007

HIGH LOW

March 31, 2007		$	1.50		$	0.95
June 30, 2007		$	1.40		$	0.87
September 30, 2007		$	1.19		$	0.71
December 31, 2007		$	1.02		$	0.71

 

QUARTER ENDED 2006

HIGH LOW

March 31, 2006			N/A			N/A
June 30, 2006			N/A			N/A
September 30, 2006		$	1.35		$	0.53
December 31, 2006		$	1.50		$	0.80

 

Securities Authorized for Issuance Under Equity Compensation Plans

Set forth in the table below is information regarding awards made through compensation plans or arrangements through December 31, 2007, the most recently completed fiscal year.

Equity Compensation Plan Information
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)			Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			2,727,500		$	0.78			4,747,500
Equity compensation plans not approved by security holders			10,734,618		$	0.47			400,000
Total			13,462,118						5,147,500

 

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ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

 

           Statements included in this management’s discussion and analysis of financial condition and results of operations, and in future filings by the Company with the SEC, in the Company’s press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are “forward-looking statements” and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. You are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause the Company’s actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the extremely competitive conditions that currently exist in the market for companies similar to the Company and (ii) lack of resources to maintain the Company’s good standing status and requisite filings with the SEC. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The following discussion should be read in conjunction with our financial statements and their explanatory notes included as part of this annual report.

 

OVERVIEW

We were initially incorporated in the State of New Mexico as Novint Technologies, Inc. in April 1999. On February 26, 2002, we changed our state of incorporation to Delaware by merging into Novint Technologies, Inc., a Delaware corporation. We have no subsidiaries and operate our business under Novint Technologies, Inc. We are a haptics technology company (haptics refers to your sense of touch). We develop, market and sell applications and technologies that allow people to use their sense of touch to interact with computers.

We have derived revenues from 3D touch hardware sales, 3D touch software sales, and the development of professional applications for our customers. We launched our Falcon product in June 2007, and are selling it in our on-line store and in a number of retailers and other websites. We launched an on-line game store in November 2007. We also have completed a number of professional application contracts with customers who desire custom developed software.

Novint focuses the majority of its efforts to exploit opportunities in the consumer console and PC interactive games market. Using our haptics technology, games and applications will have the crucial missing “third sense”, touch, to human computer interaction. Users will be able to directly and intuitively feel the shape, texture, and physical properties of virtual objects using our computer touch software. Our haptic technology and related hardware for consumers is now the primary focus of our operations whereas in the past it had been professional applications. We will devote a majority of our resources to further developing this market and seeking new business relationships with video game developers and publishers and hardware manufacturers. We began selling our haptic product, the Novint Falcon, in June 2007 through our website at www.novint.com. We currently are selling one haptic hardware product which is a haptic game controller device called the Novint Falcon marketed in a bundled package which includes several games. We launched an on-line game store in late 2007, where consumers can purchase and download a variety of game titles. Although our sales of the Novint Falcon and games since product launch have been limited, we anticipate sales of the Novint Falcon and games to increase resulting from increased sales and distributions to retailers and release of new software and games in 2008.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

High-quality financial statements require rigorous application of accounting policies. Our policies are discussed in our audited financial statements for the year ended December 31, 2007 and are considered by management to be critical for an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We review the accounting policies we use in reporting our financial results on a regular basis. As part of such review, we assess how changes in our business processes and products may affect how we account for transactions. We have not changed our critical accounting policies or practices during 2007 or through March 20, 2008. New accounting policies and practice were implemented in 2007 as necessary based on the launch of our haptics product sales in June 2007.

REVENUE AND COST RECOGNITION — We recognize revenue from the sale of software products under the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2 generally requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative vendor specific objective evidence of fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. Under SOP 97-2, if the determination of vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence does exist or until all elements of the arrangement are delivered.

Our revenue recognition policy is as follows:

Project revenue consists of programming services provided to unrelated parties under fixed-price contracts. Revenues from fixed price programming contracts are recognized in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and Accounting Research Bulletin 45, Long-Term Construction-Type Contracts, using the percentage-of-completion method, measured by the percentage of costs incurred to date compared with the total estimated costs for each contract. The Company accounts for these measurements in the accompanying balance sheet under costs and estimated earnings in excess of billings on contracts, and billings in excess of costs and estimated earnings on contracts. Provisions for estimated losses on uncompleted contracts are made and recorded in the period in which the loss is identified. As of December 31, 2007 the Company did not have any costs and estimated earnings in excess of billings on contracts or any billings in excess of costs and estimated earnings on contracts. All contracts were 100% complete as of December 31, 2007.

Revenue from product sales relates to the sale of the Falcon, which is a human-computer user interface, and related accessories. The Falcon allows the user to experience sensory information when using a computer and its handle is the approximate size and shape of a racquetball. The Falcons are manufactured by an unrelated party. Revenue from the product sales is recognized when the products are shipped to the customer and the Company has earned the right to receive and retain reasonable assured payments for the products sold and delivered. Consequently, if all these revenue from product sales requirements are not met, such sales will be recorded as deferred revenue until such time as all revenue recognition requirements are met.

 

As of December 31, 2007, the Company had recorded $44,966 of deferred revenue, which represents fees received for product and project revenues that have not met all revenue recognition requirements.

Emerging Issues Task Force (“EITF”) 00-10, Accounting for Shipping and Handling Fees and Costs, requires amounts billed to a customer in a sales transaction related to shipping and handling, if any, to be classified and accounted for as revenues earned for the goods provided whereas shipping and handling costs incurred by a company are required to be classified as cost of sales. The Company’s costs associated with shipping product items to the Company’s customers are included in the Company’s Cost of Goods Sold which for the year ended December 31, 2007 and 2006 approximated $96,000 and $-0-.

 

Arrangements made with certain customers, including slotting fees and co-operative advertising, are accounted for in accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products). These incentives are recognized as a reduction in revenue or as a selling, general, and administrative expense, respectively, when payment is made to a customer (or at the time the Company has incurred the obligation, if earlier) unless the Company receives a benefit over a period of time and the Company meets certain other criteria, such as retailer performance, recoverability and enforceability, in which case the incentive is recorded as an asset and is amortized as a reduction of revenue over the term of the arrangement.

 

EITF 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, requires reimbursements received for out-of-pocket expenses incurred while providing services to be characterized in the statements of operations as revenue. The Company’s out-of-pocket expenses incurred in connection with their project revenues are recognized in revenues based on a computed overhead rate that is included in their project labor costs to derive a project price.

 

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ITEM 7. FINANCIAL STATEMENTS

 

 

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

Grant Thornton LLP, the independent registered public accounting firm who had been engaged by the Company as the principal accountant to audit the Company’s financial statements, was dismissed effective February 21, 2006. On February 21, 2006, the Company’s Board of Directors and Audit Committee approved the engagement of AJ. Robbins, P.C. as the Company’s new principal independent accountant to audit the Company’s financial statements for the year ended December 31, 2005.

 

The decision to change the Company’s independent accountant from Grant Thornton LLP to AJ. Robbins, P.C. was approved by the Company’s Board of Directors and Audit Committee on February 18, 2006.

 

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ITEM 8A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of Tom Anderson, our Chief Executive Officer (“CEO”), President, and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report (December 31, 2007). Based on such evaluation, our Chief Executive Officer, President, and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s CEO, President, and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

Management of Novint Technologies, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting at December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on that assessment under those criteria, management has determined that, at December 31, 2007, the Company’s internal control over financial reporting was effective.

 

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.

 

32

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Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

The directors and executive officers of the Company and their ages at December 31, 2007 are as follows:

 

Name		Age				Position Held		Officer/Director since
Tom Anderson		33				Chief Executive Officer, President, Chief Financial Officer, Chairman of the Board and Director		2000
Walter Aviles		48				Chief Technical Officer		2000
Marvin Maslow		70				Director		2000
V. Gerald Grafe		44				Director		2006

  

The directors named above will serve until the next annual meeting of our stockholders or until their successors are duly elected and have qualified. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board of Directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

 

Biographical Information

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent (10%) of our common stock to file reports of ownership and change in ownership with the SEC and the exchange on which the common stock is listed for trading. Executive officers, directors and more than ten percent (10%) stockholders are required by regulations promulgated under the Exchange Act to furnish us with copies of all Section 16(a) reports filed. On January 5, 2007, we issued 75,000 shares of our common stock and warrants to purchase 25,000 shares of our common stock to Mr. Gerald V. Grafe, who is one of our directors. On March 5, 2007, we issued 25,000 shares of our common stock and warrants to purchase 25,000 shares of our common stock to Mr. Thomas Anderson, who is our Chief Executive Officer and a member of our Board of Directors. On May 10, 2007, we issued 38,637 shares of our common stock to Mr. Gerald V. Grafe, who is one of our directors. The Section 16(a) filing requirement for the aforementioned issuances and dispositions were not timely filed. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representation that no other reports were required, all of the Company’s other officers, directors and greater than ten percent (10%) stockholders complied with all applicable Section 16(a) filing requirements for the fiscal year ended December 31, 2007.

 

Audit Committee

 

We currently have a separately designated Audit Committee. Our Audit Committee is comprised of Mr. Ralph Anderson, who is not a director, or employee, or consultant to the Company. Our Board of Directors has determined that Mr. Anderson is a “financial expert” as that term is defined by the SEC.

 

34

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The purposes of the Audit Committee are:

·		to oversee the quality and integrity of the financial statements and other financial information we provide to any governmental body or the public;
·		to oversee the independent auditors’ qualifications and independence;
·		to oversee the performance of our independent auditors;
·		to oversee our systems of internal controls regarding finance,
·		to oversee accounting, legal compliance and ethics policies that management and the Board of Directors have established or will establish in the future;
·		to establish procedures for the receipt, retention and treatment of employees and executives;
·		to investigate complaints regarding accounting, internal controls, and other auditing matters and to provide for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
·		to provide an open avenue of communication among the independent auditors, financial and senior management, the internal auditing department, and the Board of Directors, always emphasizing that the independent auditors are accountable to the Audit Committee; and
·		to perform such other duties as are directed by the Board of Directors.

 

Code of Ethics

 

(1)

This option was fully vested as of December 31, 2007.

 

36

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(2)		100,000 options vest each year on June 10 starting June 10, 2005.
(3)		200,000 options vest each year on February 18 starting February 18, 2005.

 

Stock Options

 

There were no stock options granted to executive officers during the fiscal year ended December 31, 2007 and there was no exercise of incentive stock options during the last completed fiscal year by the executive officers.

 

Director Compensation

 

DIRECTOR COMPENSATION
Name		Fees Earned or Paid in Cash ($)			Stock Awards ($)			Option Awards ($)			Non-Equity Incentive Plan Compensation ($)			Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($)			Total ($)
Marvin Maslow (1)			—			—						—			—		$	75,000	(3)	$	75,000
V. Gerald Grafe (2)			—		$	15,000	(4)		—			—			—		$	130,166	(2)	$	145,166

(1)		The aggregate number of stock awards and option awards issued to Mr. Maslow and outstanding as of December 31, 2007 is 1,750,000.
(2)		The aggregate number of stock awards and option awards granted to Mr. Grafe and outstanding as of December 31, 2007 is 316,306. Mr. Grafe is a shareholder and practicing attorney at the law firm Hisey Grafe, P.C. (the “Firm”), which represents Novint on intellectual property and other related matters. The Firm accrued $130,166 in legal fees in 2007. Mr. Grafe was issued 25,000 shares of common stock and 25,000 warrants to purchase shares at $1.50 per share as payment for $25,000 of these legal fees. In addition, on January 3, 2008, the Company granted to Mr. Grafe an option to purchase 100,000 shares of common stock at an exercise price of $0.89 per share for services performed in 2007 and for services to be performed for the Company in the future. 3,667 of such options had been earned as of December 31, 2007 and were vested upon grant. The Company recorded $2,354 as expense associated with the 3,667 vested options.
(3)		Compensation earned for strategic advice and investor relations services provided to Novint.
(4)		We granted 13,637 shares to Mr. Grafe on September 20, 2007. The value of the stock award was calculated based on the aggregate grant date fair value computed in accordance with FAS 123R.

 

 

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2007 and December 31, 2006 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other services rendered. 

 

		December 31, 2007			December 31, 2006
(i)     Audit Fees		$	131,194		$	169,698
(ii)    Audit Related Fees			—			—
(iii)   Tax Fees			5,000			6,762
(iv)   All Other Fees			—			—
Total fees		$	136,194		$	176,460

 

Audit Fees. Consists of the aggregate fees billed for each of the last two fiscal years for professional services rendered by the Company’s principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-QSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements in those fiscal years. Includes $24,444 paid to our former principal accountant to review the Company’s regulatory filings during the fiscal year ended December 31, 2006.

 

Audit-Related Fees. Consists of the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the Company’s financial statements.

 

Tax Fees. Consists of the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning.

 

All Other Fees. Consist of the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant other than the services reported above.

42

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INDEX TO FINANCIAL STATEMENTS

 

		PAGE
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm			F-2
Balance Sheet as of December 31, 2007			F-3
Statements of Operations for the years ended December 31, 2007 and 2006			F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2007 and 2006			F-5
Statements of Cash Flows for the years ended December 31, 2007 and 2006			F-6
Notes to financial statements			F-7

 

F-1

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AJ. ROBBINS, P.C.

CERTIFIED PUBLIC ACCOUNTANTS

216 SIXTEENTH STREET

SUITE 600

DENVER, COLORADO 80202

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Novint Technologies, Inc.

Albuquerque, New Mexico

We have audited the accompanying balance sheet of Novint Technologies, Inc. as of December 31, 2007, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 financial position of Novint Technologies, Inc. as of December 31, 2007, and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006, in conformity with generally accepted accounting principles in the United States of America.

 

AJ. ROBBINS, P.C.

CERTIFIED PUBLIC ACCOUNTANTS

Denver, Colorado

March 31, 2008

F-2

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Novint Technologies, Inc.

BALANCE SHEET

 

		December 31, 2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	2,704,367
Accounts receivable, net of allowance for doubtul accounts of $44,000			80,724
Prepaid expenses and other current assets			257,787
Inventory			474,461
Deposit on purchase of inventory			469,644
Total current assets			3,986,983
PROPERTY AND EQUIPMENT, NET			443,576
PREPAID EXPENSES - NET OF CURRENT PORTION			125,706
SOFTWARE DEVELOPMENT COSTS, NET			644,308
INTANGIBLE ASSETS, NET			405,299
DEPOSITS			43,063
Total assets		$	5,648,935
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	230,677
Accrued payroll related liabilities			195,549
Accrued expenses			238,060
Accrued expenses - related parties			22,564
Deferred revenue			44,966
Total current liabilities			731,816
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, authorized 50,000,000 shares, $0.01 par value;
31,898,955 shares issued and outstanding			318,990
Additional paid-in capital			25,348,138
Accumulated deficit			(20,745,404	)
Accumulated other comprehensive loss			(4,605	)
Total stockholders' equity			4,917,119
Total liabilities and stockholders' equity		$	5,648,935

The accompanying notes are an integral part of these financial statements.

 

F-3

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Novint Technologies, Inc.

STATEMENTS OF OPERATIONS

 

		For the Years Ended
		December 31,			December 31,
		2007			2006
Revenue:
Project		$	178,458		$	87,014
Product			236,589			3,095
Total revenue			415,047			90,109
Cost of goods sold:
Project			130,166			63,402
Product			354,078			-
Total cost of goods sold			484,244			63,402
Gross profit			(69,197	)		26,707
Operating expenses
Research and development			1,142,986			496,844
General and administrative			5,266,094			3,329,351
Depreciation and amortization			315,999			106,527
Sales and marketing			1,391,792			151,680
Total operating expenses			8,116,871			4,084,402
Loss from operations			(8,186,068	)		(4,057,695	)
Other (income) expense
Interest income			(236,732	)		(176	)
Interest expense			146,896			212,182
Loss on registration rights agreement			-			40,000
Other (income) expense			265			-
Net other (income) expense			(89,571	)		252,006
Net loss			(8,096,497	)		(4,309,701	)
Preferred stock accretion			-			(170,974	)
Net loss available to common stockholders		$	(8,096,497	)	$	(4,480,675	)
Loss per share, basic and diluted:
Net loss		$	(0.27	)	$	(0.24	)
Net loss available to common stockholders		$	(0.27	)	$	(0.25	)
Weighted-average common shares outstanding,
basic and diluted			29,579,175			17,594,513

The accompanying notes are an integral part of these financial statements.

 

F-4

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Novint Technologies, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2007 and 2006

 

		Conditionally Redeemable,																		Accumulated
		Convertible												Additional						Other
		Preferred Stock						Common Stock						Paid-in			Accumulated			Comprehensive			Unearned
		Shares			Amount			Shares			Amount			Capital			(Deficit)			Loss			Compensation			Total
Balances, December 31, 2005			4,000		$	276,326			14,323,214		$	143,232		$	6,534,975		$	(8,168,232	)	$	(4,605	)	$	(562,898	)	$	(2,057,528	)
Common stock sold for cash, net of offering costs of $14,500			-			-			2,525,000			25,250			2,485,250			-			-			-			2,510,500
Common stock issued to consultants for services			-			-			164,950			1,650			190,910			-			-			-			192,560
Common stock issued related to exercise of options			-			-			55,334			554			(524	)		-			-			-			30
Common stock issued for repayment of notes payable			-			-			1,373,224			13,732			970,114			-			-			-			983,846
Common stock issued for settlement of accrued liabilities			-			-			1,005,069			10,051			657,814			-			-			-			667,865
Options issued to employees services			-			-			-			-			251,399			-			-			40,460			291,859
Options issued to consultants for services			-			-			-			-			1,426,003			-			-			-			1,426,003
Reclassification of unearned compensation			-			-			-			-			(489,954	)		-			-			522,438			32,484
Amortization of unearned compensation			-			-			-			-			-			-			-			-			-
Expense related to re-priced options			-			-			-			-			155,748			-			-			-			155,748
Preferred stock accretion			-			170,974			-			-			-			(170,974	)		-			-			(170,974	)
Preferred stock converted into common stock			(4,000	)		(447,300	)		447,300			4,473			442,827			-			-			-			447,300
Net loss			-			-			-			-			-			(4,309,701	)		-			-			(4,309,701	)
Balances, December 31, 2006			-		$	-			19,894,091		$	198,942		$	12,624,562		$	(12,648,907	)	$	(4,605	)	$	-		$	169,992
Common stock sold for cash, net of offering costs of $439,364			-			-			10,330,000			103,300			9,787,336												9,890,636
Common stock issued related to exercise of options/warrants			-			-			444,811			4,448			132,236												136,684
Common stock issued to consultants for services			-			-			381,018			3,810			430,091												433,901
Common stock issued for repayment of notes payable			-			-			232,627			2,326			355,755												358,081
Common stock issued for settlement of accrued liabilities			-			-			507,701			5,077			595,327												600,404
Options vested for employees services			-			-									433,607												433,607
Options vested to consultants for services			-			-									980,310												980,310
Common stock issued for purchase of licenses			-			-			9,260			93			9,908												10,001
Common stock issued pursuant to previous investment agreements			-			-			99,447			994			(994	)											-
Net loss			-			-												(8,096,497	)								(8,096,497	)
Balances, December 31, 2007			-		$	-			31,898,955		$	318,990		$	25,348,138		$	(20,745,404	)	$	(4,605	)	$	-		$	4,917,119

The accompanying notes are an integral part of these financial statements.

F-5

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Novint Technologies, Inc.

STATEMENTS OF CASH FLOWS

 

		For the Years Ended December 31,
		2007			2006
Cash flows from operating activities:
Net loss		$	(8,096,497	)	$	(4,309,701	)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization			315,999			106,527
Loss on disposal of assets			265			-
Common stock issued for services			384,656			192,560
Options issued to employees for services performed			433,607			324,343
Options issued to consultants for services			980,310			1,426,003
Expense related to re-priced options			-			155,748
Amortization of bond discount			(19,100	)		-
Changes in operating assets and liabilities:
Accounts receivable			(80,724	)		75,140
Prepaid expenses			(163,720	)		(85,886	)
Deferred financing costs			-			(50,322	)
Invenotry			(474,461	)		-
Deposit on purchase of inventory			(186,573	)		(283,071	)
Prepaid expenses, net of current portion			(125,706	)		-
Deposits			(43,063	)		-
Accounts payable and accrued liabilities			190,139			591,056
Accrued interest			-			6,061
Accrued expenses related party			(49,311	)		48,404
Accrued royalties			37,500
Deferred revenues			44,966			-
Billings in excess of costs and estimated earnings on contracts, net			(5,500	)		(7,170	)
Net cash (used in) operating activities			(6,857,213	)		(1,810,308	)
Cash flows from (to) investing activities:
Purchase of licensing rights			(131,711	)		(5,001	)
Capital outlay for software development costs and other intangible assets			(443,840	)		(310,345	)
Capital outlay for investment in debt security held-to-maturity			(1,980,900	)		-
Proceeds from maturity of debt security			2,000,000			-
Proceeds from disposal of fixed assets			12,025			-
Property and equipment acquisitions			(219,880	)		(271,505	)
Net cash provided by (used in) investing activities			(764,306	)		(586,851	)
Cash flows from (to) financing activities:
Proceeds from exercise of options			136,684			-
Proceeds from issuance of common stock			10,330,000			2,525,000
Offering costs			(396,266	)		(14,500	)
Proceeds from notes payable			-			340,000
Repayment of notes payable			-			(240,000	)
Net cash provided by financing activities			10,070,418			2,610,500
Net increase (decrease) in cash and cash equivalents			2,448,899			213,341
Cash and cash equivalents at beginning of period			255,468			42,127
Cash and cash equivalents at end of period		$	2,704,367		$	255,468
Supplemental information:
Interest paid		$	-		$	33,200
Income taxes paid		$	850		$	850
Non-cash investing and financing activities:
Payment of notes payable with 232,627 shares of common stock		$	358,081		$	-
Payment of notes payable with 1,373,224 shares of common stock		$	-		$	983,846
Payment of accrued liabilities with 296,700 shares of common stock		$	333,519		$	-
Payment of accrued liabilities with 1,005,069 shares of common stock		$	-		$	667,839
Purchase of software and other intangible assets with 279,002 shares
of common stock		$	337,386		$	-
Payment for services with 332,100 shares of common stock		$	384,656			-
Conversion of 4,000 shares of preferred stock into 447,300 shares
of common stock		$	-		$	447,300
Fair value accretion on conditionally redeemable, convertible preferred stock		$	-		$	170,974

The accompanying notes are an integral part of these financial statements.

 

F-6

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NOVINT TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

 

NOTE 1 — NATURE OF BUSINESS 

Novint Technologies, Inc. (the “Company” or “Novint”) is a Delaware corporation. The Company currently is engaged in the development and sale of haptics products and equipment, including installation services and support, to production and manufacturing companies in the United States. Haptics refers to one’s sense of touch. The Company’s focus is in the consumer interactive computer gaming market, which is a substantial departure from its business of offering product development services and limited sales of haptic technology. The Company’s operations are based in New Mexico with sales of its consumer haptics products primarily to consumers through the Company’s website at www.novint.com and retail outlets.

Managements Plans

As of December 31, 2007, the Company had total current assets of $3,986,983 and total current liabilities of $731,816, resulting in a working capital surplus of $3,255,167. As of December 31, 2007, the Company had cash and cash equivalents totaling $2,704,367. During the year ended December 31, 2007 as further discussed in Note 9, the Company raised approximately $10,467,000 from the sale of shares of common stock with warrants through an equity agreement and exercise of stock purchase warrants. This recent financing allowed the Company to further develop its haptics technology, and seek and develop strategic partnerships with game publishers and hardware manufacturers to utilize the Company’s haptics technology. Additionally as further discussed in Note 14-Subsequent Events, the Company closed on $2,000,000 of debt financing in March 2008. The Company believes that it has sufficient capital to sustain its operations for twelve months; however, it will require additional working capital in order to fully execute on its business plans with respect to the haptics technology and the further development of the Novint Falcon and related software and accessories.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of the Company’s common stock and the fair value of options and warrants to purchase common stock, allowances for doubtful account, inventory valuation, return and warranty reserves, accounting for income taxes and uncertainty in income taxes and depreciation and amortization.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents.

 

F-7

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NOVINT TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Marketable Equity and Debt Securities

The Company classifies marketable equity securities as available-for-sale. Available-for-sale investments are recorded at fair value determined based on quoted market prices with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive loss in the accompanying statements of operations. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Fair market values are based on quoted market prices. Realized gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Due to the immaterial amount of the marketable equity securities held by the Company at December 31, 2007, they have been reported as prepaid expenses and other current assets in the accompanying balance sheets. The Company did not record any change in the value of these marketable equity securities during the years ended December 31, 2007 or 2006. The Company may at times invest in debt securities, primarily U.S. Treasury Bonds, which may be held to maturity. Held to maturity debt securities investments are recorded at fair value based on quoted market prices with unrealized gains or losses included in earnings in the accompanying statements of operations. As of December 31, 2007 and 2006, the Company held no investments in debt securities.

Accounts Receivable/Concentration of Credit Risk

The Company utilizes the allowance method for accounts receivable valuation, providing for allowances for estimated uncollectible accounts receivable. As of December 31, 2007, the Company recorded an allowance for doubtful accounts totaling $43,000 and bad debt expense of $41,500 and $-0- for the years ended December 31, 2007 and 2006, The Company routinely assesses the financial strength of its customers as part of its consideration of accounts receivable collectibility by performing credit evaluations of customers. Trade receivables are not collateralized. The Company generally grants credit terms to most customers ranging from 20 to 30 days.

The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of uninsured cash, cash equivalents held at commercial banks and institutions primarily in the United States, and trade receivables from the Company’s customers. The Company maintains all cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. At December 31, 2007, the Company’s cash exceeded its financial institution fully insured depository amount by approximately $2,105,000.

For the years ended December 31, 2007 and 2006, the Company’s revenues were substantially attributable to a few customers. Following is a summary of the Company’s customers with sales over 10%, and the percentage of these sales to total sales for the years ended December 31, 2007 and 2006:

		December 31, 2007			%			December 31, 2006			%
Project Revenue
Lockheed Martin Perry		$	35,836			9		$	74,342			83
The Falk Group			139,612			33			—			—
Aramco			—			—			12,672			14
Product Revenue
CompUSA			51,528			12			—			—

The Company’s Falcon haptics interface product (the “Falcon”) is manufactured by a single manufacturer. Consequently, we are dependent on this manufacturer to manufacture and deliver all orders of the Falcon haptics interface product. In the event the manufacturer is unable to manufacture and deliver such product, it will have a detrimental impact on our operations due the inability fulfill customer orders

 

F-8

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NOVINT TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventory

Inventory is comprised of finished goods held for sale and related freight cost related to the Falcon haptics interface product and related accessories and is stated at the lower of cost, determined on an average cost basis, or market. Based on the Company’s assumptions about future demand, market conditions and obsolescence, inventories are written-down to market value. If the Company’s assumptions about future demand change and/or actual market conditions are less favorable than those projected, additional write-downs of inventories may be required.

Deposits on Purchase of Inventory

Deposits on inventory totaling $469,644 at December 31, 2007 relate to prepayments to the Company’s manufacturer of the Falcon. The deposit balance is reduced when products ordered are shipped to the Company.

Fair Value of Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accrued liabilities, accounts payable and notes payable are carried at historical cost, which approximates their fair value because of the short-term maturities or repayment terms of these instruments. Marketable equity and debt securities are carried at fair value.

Sales and Marketing Costs

Sales and marketing costs such as advertising, marketing campaigns and related travel cost are expensed as incurred. The Company incurred sales and marketing costs of $1,391,792 and $151,680 in 2007 and 2006, respectively.

Software Development Costs

The Company accounts for its software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) Number 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level be capitalized and amortized ratably over the estimated life of the product, which is generally 5 years. The Company has capitalized software development costs in connection with its haptics technology beginning in 2000. Amortization is computed on the straight-line basis over the estimated life (5 years) of the haptics technology. As of December 31, 2007, the Company’s capitalized software development costs totaled $644,308 (net of $189,936 of accumulated amortization). The estimated annual amortization expense related to the capitalized software development cost is approximately $150,000 per year. Amortization expense related to software development costs for the years ended December 31, 2007 and 2006 totaled $102,480 and $7,397, respectively.

The Company follows Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of certain costs incurred during the development of internal use software. Through December 31, 2007, capitalizable costs incurred have not been significant for any development projects. Accordingly, the Company has charged all related costs to research and development expense in the periods incurred.

 

F-9

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NOVINT TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment

Property and equipment are stated at cost. Depreciation on property and equipment is calculated on a straight-line depreciation method over the estimated useful lives of the assets, which range from 3 to 5 years for software and computer equipment, 2-5 years for leasehold improvements based upon the life of the lease and 5 years for office equipment and vehicles. Repairs and maintenance costs are expensed as incurred. Depreciation expense was $51,973 and $24,686 for the years ended December 31, 2007 and 2006, respectively.

Intangible Assets

Intangible assets consist of licensing agreements $689,125 and patents $40,706, and are carried at cost less accumulated amortization of $324,532. Amortization is computed using the straight-line method over the economic life of the assets, which range between 3 and 12 years. For the years ended December 31, 2007 and 2006, the Company recognized amortization expense of approximately $161,546 and $74,444, respectively, related to intangible assets.

Annual amortization of intangible assets remaining at December 31, 2007, are as follows:

 

Year Ended December 31,
2008		$	164,110
2009			163,832
2010			74,232
2011			2,500
2012			625
Total		$	405,299

The Company follows the provisions of SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires intangible assets to be tested for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which has been superseded by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company performs a periodic review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over the remaining lives against the respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. After an impairment loss is recognized, the adjusted carrying amount shall be its new accounting basis. No impairment loss was recorded in 2007 or 2006.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No impairment loss was recorded in 2007 or 2006.

 

F-10

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