Dror Ortho-Design, Inc. - Annual Report: 2008 (Form 10-K)

ITEM 1.      BUSINESS

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, which  refers to the 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 report 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. We intend, however, 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 that 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 was available through retailers, including Fry’s, Tiger Direct, and J&R Music Store.  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 and engaging additional retailers and distributors over time to sell the product to the public.  Additionally, in the fourth quarter of 2007, we opened our online store for the sale of computer games integrated to work with the Falcon.  Customers can download games for use with the Falcon by going to our website 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.  We currently have over 45 titles available for customers.  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. Although our longer term goal is to focus primarily on the video games industry, in 2009, we expect to expand our efforts in obtaining funded contracts for high-end haptics-based development within our Advanced Products Group (APG).  We also plan to release the first of our big AAA titles in the second quarter of 2009.  We believe that revenue generated from both the APG and the release of our bigger Falcon-enabled games will help to sustain our operations and allow us to expand our sales.

 

Recent Developments

 

In February and March 2009, we received $220,000 for three promissory note totaling $275,000, with 150% warrant coverage.  The exercise price on the warrants was $1.00 per share with a 5-year term.  The notes are secured with our assets and intellectual property.  The notes have no stated interest rate, and principal and interest is due in February 2010.  These notes are considered original issue discount notes whereby the discount will be amortized over the lives of the notes.  If the notes are prepaid, the exercise price of the warrants will adjust to the fair market value of our stock at the time of prepayment, subject to a floor of $0.20 and a ceiling of $1.00.  If an investor sells any shares of our stock during 120 days prior to the maturity date of the note, the strike price will automatically reset to $2.00. If the notes are not paid back by the maturity date, then we will have the right but not the obligation to refinance the notes with new notes equaling the principal and accrued interest from the first note, with a new maturity date one year later and an annual interest rate of five percent (5%).  The new note is convertible into common stock at a rate of $0.0625 per share on the principal balance only.  The conversion rate is subject to change based upon the provisions in the note.

 

On April 15, 2008, we closed a $3,750,000 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 39 accredited investors.  Each subscriber acquired an unsecured convertible note in the principal amount invested and a warrant to purchase shares of our 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. 

 

On May 6, 2008, we closed a second round of  the financing described above with 9 accredited investors for the sale of our 7% unsecured convertible notes and warrants for an aggregate purchase price of $703,280.  In connection with this round of financing, we were required to notify, and did notify, the investors who had participated in the prior round of their right to participate in the second round of financing.  These investors had the option of participating in the financing by providing written notice to the Company by May 15, 2008 of their intent to participate, but no investors exercised this option.

On June 9, 2008, we closed the third round of this financing with 6 accredited investors for the sale of our 7% unsecured convertible notes and warrants for an aggregate purchase price of $781,817.

On December 2, 2008, we commenced a private offering to accredited investors of up to a maximum of $3,000,000 8% Senior Secured Promissory Notes and warrants, plus up to an additional $1,250,000 from accredited investors who are qualifying game publishers, developers, or other strategic investors.  The offering was to terminate on February 9, 2009, unless we terminated the offering earlier or extended the termination date up to an additional 45 days.  Between December 4, 2008 and December 9, 2008, we accepted subscriptions for an aggregate purchase price of $600,000. As of December 31, 2008, $300,000 of the $600,000 committed was delivered to us. With respect to each subscriber, the number of shares of common stock underlying the warrants equals the principal amount of the note purchased by the subscriber divided by $1.00.  The warrants are exercisable for a term of five (5) years at an exercise price of $1.00 per share.  The offering terminated on December 9, 2008. 

 

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Principal Products

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.

  

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.

 

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 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, Valve, and Eidos to modify several popular game titles for use with our technology.  We make no assurances that any further meetings will be successful in forging relationships with other leading developers and publishers.  We 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 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 a game developer, which is a role Novint often fills, to best suit the game play that they intended.

 

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 provide a gun handle, a pistol grip, to better simulate the role the consumer is playing in the game.  There is a great opportunity to develop and sell many more grips over time.  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.

 

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.

 

Software and Games Development for the Novint Falcon

 

For the software component of the solution, we develop software and games to work with the Falcon.  We have over 45 game titles currently available for sale on our website and expect to expand the available games across all genres of game play over time.

One of the ways that we create 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.

Another way that we have been able to provide 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 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.

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 both internally and by 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 and a collection of sports games as part of the base package.

 

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 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 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.

 

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 in September 2007.  The VTech Agreement automatically renews every twelve (12) months unless either party gives at least 120 days’ prior written notice of termination to the other party.  Under the VTech 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 2006 and accepted delivery of the first Falcon units in March 2007.  The Falcon is now being sold on-line through our website directly to consumers in the United States and online through other websites, including Amazon.com.  We also sell the Falcon through retailers, including Fry’s and Tiger Direct,and the Falcon and the associative haptics enabled software online via our website.  We will add more titles for sale as they become integrated with the Falcon, and we will sell grips through our on-line store and retailers as well. 

 

Distribution

 

We currently distribute our products through direct online sales through our website and established web-sale sites, such as Amazon.com. Our products are also sold in retail stores, such as Fry’s and Tiger Direct. We are currently evaluating the expansion of our distribution channels to more retail stores.  We also plan to sell our products through catalogues that cater to the same demographic that we are targeting.    

 

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Other Haptic Companies and Competition

 

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 is a significant event in the field of haptics and gives 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.  Following is a list of other haptic companies:

·

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 in the past.

 

·

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.

  

	·		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, produces haptics software.

 

Customers

During the fiscal year ended December 31, 2008, our revenues were substantially attributable to a few customers.  During that period, our largest customers were Simquest, LLC, The Falk Group, D&H Distributing, Reachin Technologies AB, and Tiger Direct, Inc, which represented 18%, 14%, 12%, 14%, and 14% of our total revenues, respectively.

Intellectual Properties and Licenses

 

Patents   

We own, or have rights to, the following inventions, patent applications, and patents:

 

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Title		Application No.	Filing Date	Patent No.	Issue Date
These patent applications are owned by Novint.  They concern a technology that allows efficient and intuitive interaction in a three-dimensional world with familiar two-dimensional controls.  This group of applications 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.
Human-computer interface including efficient three dimensional controls		09/690,343	10/17/2000	6,727,924	4/27/2004
Human-computer interface including efficient three dimensional controls		10/831,682	4/22/2004
Human-computer interface including efficient three dimensional controls		12/062,306	4/3/2008
This application concerns methods for utilizing haptics in computer animation.
Force frames in animation		10/226,462	8/23/2002
These patent applications are owned by Novint.  This group of applications concern specific methods of communicating between a computer and a haptic interface device.
Communications Between a Computer and a Haptic Interface Device; Computer, Device, and System		61/027,953	2/12/2008
Communications Between a Computer and a Haptic Interface Device; Computer, Device, and System		12/173,014	7/14/2008	7,486,273	2/3/2009
Communications with a Haptic Interface Device from a Host Computer		12/363,720	1/31/2009
These patent applications are owned by Novint or licensed by Novint from Sandia National Laboratories.  They concern a user interface that provides consistent, intuitive control interface to any application. This group of applications describes mechanisms for the concept of a personal space.  This is a valuable and core component of e-Touch, our professional Application Programming Interface, that allows users to customize their own personal space while intuitively allowing interaction with a variety of applications or virtual environments.
Human-computer interface incorporating personal and application domains		09/649,853	8/29/2000	6,724,400	4/20/2004
Human-computer interface incorporating personal and application domains		10/801,756	3/16/2004
These patent applications are owned by Novint by assignment from Force Dimension.  This group of applications concerns implementation of the Falcon haptic interface device. Counterparts in CA, EP, JP, US.
Device for transmitting a movement having a parallel kinematics transmission structure providing three translational degrees of freedom		PCT/EP2004/007588	7/9/2004
Device for transmitting movements and components thereof		PCT/EP2006/001245	2/10/2006
Device for transmitting movements and components thereof		PCT/EP2006/001246	2/10/2006
These patent applications are owned by Novint.  They concern 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.
Coordinating haptics with visual images in a human-computer interface		09/971,379	10/4/2001	7,225,115	5/29/2007
Coordinating haptics with visual images in a human-computer interface		PCT/US02/31536	10/2/2002
Coordinating haptics with visual images in a human-computer interface		11/754,279	5/26/2007
These patent applications are owned by Novint or licensed by Novint from Sandia National Laboratories.  They concern a haptics technology that allows intuitive interaction with boundaries between interface domains.  These patent applications describe a specific type of haptics object that enables transitions between separate domains by breaking through it.
Human computer interfaces		60/202,448	5/6/2000
Human-computer interface		09/638,186	8/14/2000	6,833,826	12/21/2004

 

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Human-computer interface including haptically controlled interactions		09/785,696	2/16/2001	6,954,899	10/11/2005
These patent applications are owned by Novint.  They concern a number of haptics techniques particularly applicable to computer games.
Human-computer interfaces incorporating haptics		60/431,060	12/5/2002
Computer Interface Methods and Apparatuses		60/681,007	5/12/2005
Bimodal user interaction with a simulated object		11/433,173	5/13/2006
Bimodal user interaction with a simulated object		PCT/US2006/042557	10/30/2006
This patent application is owned by Novint.  It concerns 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 three-dimensional positional input devices with force feedback.
Human-Computer Interfaces Incorporating Haptics And Path-Based Interaction		10/729,574	12/4/2003
These patent applications are licensed by Novint from Sandia National Laboratories. They concern a variety of navigation techniques and control objects that utilize haptics, including techniques 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.
Multidimensional Display Controller		08/834,616	4/14/1997	6,208,349	3/27/2001
Multidimensional Navigational Controller		08/834,642	4/14/1997
Navigation and Viewing in a multidimensional space		11/244,584	10/6/2005
Navigation and Viewing in a multidimensional space		11/283,969	11/21/2005

 

The following are patents licensed to us by Force Dimension, LLC: 

 

Country		Filing Date		Application No.		Registration Date		Patent No.		Maximum 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

 

Copyrights

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

 

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

 

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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

 

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, registration number 3469325; application for Federal Principal Register serial number 77447596, registration number 3469325; application for Federal Principal Register serial number 77447596.

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, serial number 3496648; application for Federal Principal Register serial number 77402492, serial number 3496648; application for Federal Principal Register serial number 77402492.

8.

TOUCHCITY, application for Federal Principal Register, serial number 77483553.

 

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9.

FALCON, application for Federal Principal Register, serial number 77447585.

10.

N TOUCH, application for Federal Principal Register, serial number 77457633.

Licenses

 

We currently hold licenses, exclusive in our fields of use, to application software, including the following:

 

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

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

 

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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

 

We are party 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.

 

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.

 

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.

Government Approval and Regulation

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, or any government approval of our principal products, due to the specific nature of our business operations.

Research and Development

Research and development costs are expensed as incurred and amounted to $1,096,120 and $1,142,986 for the years ended December 31, 2008 and 2007, respectively.

Employees

 

As of April 9, 2009, we had a total of 4 employees, all of whom are full-time employees.

 

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ITEM 1A.      RISK FACTORS

The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.  If any of the following risks actually occurs, our business, financial condition, or results of operations could be harmed.

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 we and/or our 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 for that portion of our revenue.  Dependence on a few customers could 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.

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

 

We anticipate our expenses will increase dramatically to 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, WHILE OUR CURRENT 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, 2008 and 2007, 32% and 43%, 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 currently do not have any licenses, and 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.

 

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WE HAVE ESTABLISHED A DIRECT MANUFACTURING CONTRACT AND DIRECT SOFTWARE DEVELOPMENT CONTRACTS, BOTH OF WHICH 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 may impact our revenues.  We have limited 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.

 

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.  Haptics-enabled products, however, are likely to be more expensive to consumers than products that are not Haptic-enabled.  The greater expense of products containing our technologies may be a significant barrier to their widespread adoption and success in consumer markets.  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 WITH WHOM WE HAVE ENTERED INTO AN AGREEMENT 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 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

We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial holder of more than 5% of our voting securities, or any associate of such persons, is an adverse party or has a material interest adverse to our company.

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

There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

 

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ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “NVNT.”  The following table sets forth, for the periods indicated, the reported high and low bid information for our common stock as reported on the OTCBB.  The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.

Quarter Ended		High Bid				Low Bid
December 31, 2008		$	0.75			$	0.23
September 30, 2008		$	0.98			$	0.68
June 30, 2008		$	1.59			$	0.75
March 31, 2008		$	1.02			$	0.76
December 31, 2007		$	1.02			$	0.71
September 30, 2007		$	1.19			$	0.71
June 30, 2007		$	1.40			$	0.87
March 31, 2007		$	1.50			$	0.95

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

Not applicable.

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

There have been no changes in or disagreements with our independent auditors, A.J. Robbins, P.C.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our 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.

Our 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 our assets that could have a material effect on our 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 our internal control over financial reporting at December 31, 2008.  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, 2008, internal controls over financial reporting was effective:

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

 

Current Management

Our directors and executive officers, their ages, their respective offices and positions, and their respective dates of election or appointment are as follows:   

 

Name		Age		Position Held		Officer/Director since
Tom Anderson		34		Chief Executive Officer, President, Chief Financial Officer, Chairman of the Board and Director		2000
Walter Aviles		49		Chief Technical Officer		2000
Marvin Maslow		71		Director		2000
V. Gerald Grafe		45		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

·

Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, or to be associated with persons engaged in any such activity;

·

Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated ; or

·

Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.

 

 

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ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

The following describes all transactions since the beginning of our last fiscal year, and all proposed transactions, in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest.

 

Hisey Grafe, P.C. (“Hisey”) was retained as general counsel for the Company.  Mr. Grafe, a member of our Board of Directors and a stockholder of the Company, is a partner at Hisey. Hisey earned fees of $146,079.28 and $132,520 in 2008 and 2007, respectively, for legal services rendered to the Company, of which we paid Hisey $123,588.44 and $106,729 in 2008 and 2007, respectively.

In March 2004, Normandie New Mexico Corporation (“Normandie), which is owned by Mr. Maslow, who is a member of our Board of Directors, entered into an agreement with the Company to provide consulting services in relation to business development and marketing support.  Fees per the agreement are $6,250 per month.  For the years ended December 31, 2008 and 2007, we paid $56,250 and $140,625, respectively, for these services.  As of December 31, 2008, we owed $25,000 to Normandie under the agreement.

 

Director Independence 

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2008 and December 31, 2007 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,				December 31,
		2008				2007
(i)     Audit Fees		$	184,651			$	131,194
(ii)    Audit Related Fees			―				―
(iii)   Tax Fees			15,000				5,000
(iv)  All Other Fees			―				―
Total fees		$	199,651			$	136,194

Audit Fees.  Consists of the aggregate fees billed for each of the last two fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in the Company’s Form 10-Q and 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.

 

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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 our 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.

Pre-Approval Policies and Procedures of the Audit Committee

We do not currently have a separately designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.

 

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PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statements; Schedules

Our financial statements for the years ended December 31, 2008 and 2007 begin on page F-1 of this annual report on Form 10-K.  We are not required to file any financial statement schedules.

Exhibits

 

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NOVINT TECHNOLOGIES, INC.
Dated: April 15, 2009	By:	/s/ Tom Anderson
		Tom Anderson,
		President, Chief Executive Officer, and Chief Financial Officer

 

In accordance with the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME		TITLE		DATE
/s/ Tom Anderson		Chairman of the Board, Principal Executive Officer, and Principal Financial		April 15, 2009
Tom Anderson		and Accounting Officer
/s/ Marvin Maslow		Director		April 15, 2009
Marvin Maslow
/s/ V. Gerald Grafe		Director		April 15, 2009
V. Gerald Grafe

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