UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-25839
SYSVIEW TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3134518
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
1772 TECHNOLOGY DRIVE
SAN JOSE, CALIFORNIA 95110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
408-436-9888 EXT. 207
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of Common Stock outstanding as of November 14, 2006 was
24,142,092.
-------------------------------------------
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2 of Part I
of this report include forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "proposed," "intended," or "continue" or the negative
of these terms or other comparable terminology. You should read statements that
contain these words carefully, because they discuss our expectations about our
future operating results or our future financial condition or state other
"forward-looking" information. There may be events in the future that we are not
able to accurately predict or control. Before you invest in our securities, you
should be aware that the occurrence of any of the events described in this
Quarterly Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events,
the trading price of our securities could decline and you could lose all or part
of your investment. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
growth rates, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report to conform these statements to actual results.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2006 2005
----------- ---------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,419 $ 1,426
Trade receivables 2,086 1,285
Inventories 998 751
Prepaid expenses and other current assets 401 319
Due from affiliated parties 2,076 2,403
-------- --------
Total current assets 6,980 6,184
Fixed assets, net 343 167
Goodwill 555 555
Long-term investment 998 998
-------- --------
Total assets $ 8,876 $ 7,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line and letter of credit $ 1,013 $ 1,013
Trade payables and other accrued expenses 628 445
Accrued dividends on Series A 5% cumulative
convertible preferred stock 130 71
-------- --------
Total current liabilities 1,771 1,529
Other liabilities
Liability under derivative contracts 1,005 503
-------- --------
Total liabilities 2,776 2,032
Commitments and contingencies (note 9)
Preferred stock, $.001 par value, 2,000 authorized:
Series A 5% cumulative convertible preferred stock, 16 shares issued 830 468
and outstanding at September 30, 2006 and December 31, 2005;
liquidation value of $1,565 and $1,615 at September 30, 2006
and December 31, 2005, respectively
Series B convertible preferred stock, 11.5 shares issued and 56 --
outstanding at September 30, 2006, liquidation value of $1,150
Stockholders' equity:
Common stock $.001par value, 50,000 authorized, 24,642 shares and 24,592
shares issued and 24,142 shares and 24,092 outstanding at September 30, 24 24
2006 and December 31, 2005, respectively (500 shares held in escrow)
Additional paid-in capital 29,317 28,137
Accumulated deficit (24,127) (22,757)
-------- --------
Total stockholders' equity 5,214 5,404
-------- --------
Total liabilities and stockholders' equity $ 8,876 $ 7,904
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-3-
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $ 4,098 $ 2,207 $ 9,075 $ 5,402
Cost of sales 2,700 1,417 5,976 3,404
-------- -------- -------- --------
Gross profit 1,398 790 3,099 1,998
Operating expenses:
Selling and marketing 307 332 900 742
General and administrative 676 698 1,963 2,329
Research and development 584 242 1,449 640
-------- -------- -------- --------
Total operating expenses 1,567 1,272 4,312 3,711
-------- -------- -------- --------
Operating loss (169) (482) (1,213) (1,713)
-------- -------- -------- --------
Other income (expense):
Fair value of warrants issued (173) -- (173) (290)
Preferred stock issuance costs (80) -- (80) (237)
Change in fair value of derivative instruments 955 (686) 645 975
Other (15) 6 (45) 16
-------- -------- -------- --------
Total other income (expense) 687 (680) 347 464
-------- -------- -------- --------
Net income (loss) before income taxes 518 (1,162) (866) (1,249)
Provision for income taxes -- -- -- 1
-------- -------- -------- --------
Net income (loss) 518 (1,162) (866) (1,250)
Dividend on Series A and accretion of
Series A and Series B
preferred stock redemption value (209) (184) (504) (394)
-------- -------- -------- --------
Net income (loss) available to
common stockholders $ 309 $ (1,346) $ (1,370) $ (1,644)
======== ======== ======== ========
Net income (loss) per common share -
basic and diluted $ 0.01 $ (0.06) $ (0.06) $ (0.07)
======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 24,093 23,111 24,092 23,118
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-4-
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2006 2005
------- -------
OPERATING ACTIVITIES
Net loss available to common stockholders $(1,370) $(1,644)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation expense 33 21
Stock-based compensation cost - options 977 1,341
Preferred stock issuance expenses paid by
issuance of warrants 173 290
Change in fair value of derivative instruments (645) (975)
Accretion of Series A and Series B preferred
stock redemption value 445 394
Common stock issued for services rendered -- 75
Changes in operating assets and liabilities:
Trade receivables (801) (173)
Inventories (247) (440)
Prepaid expenses and other current assets (82) 69
Accrued dividends on Series A preferred stock 59 51
Trade payables and other current liabilities 183 (45)
------- -------
Cash used by operating activities (1,275) (1,036)
------- -------
INVESTING ACTIVITIES:
Capital expenditures (209) (167)
------- -------
Cash used by investing activities (209) (167)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 1,150 1,865
Net repayments under line of credit
and letters of credit -- (146)
Advances/repayments - related parties 327 91
------- -------
Cash provided by financing activities 1,477 1,810
------- -------
Net increase (decrease) in cash and
cash equivalents (7) 607
Cash and cash equivalents at beginning of period 1,426 687
------- -------
Cash and cash equivalents at end of period $ 1,419 $ 1,294
======= =======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-5-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Sysview Technology, Inc., (referred to herein as "Sysview" or the "Company")
develops, designs and delivers various imaging technology solutions to the
corporate/enterprise, small office-home office ("SOHO"), professional practice
and consumer markets. Sysview is headquartered in San Jose, California, and is
principally engaged in the design/development OEM marketing of mobile/compact
scanners and marketing of Contact Image Sensor ("CIS") modules for use in
scanners and fax machines. Additionally, the Company is currently in the process
of expanding its business to the image display market Sysview's manufacturing is
completed at a China-based facility, which provides a low-cost manufacturing
base for these industrial and consumer products. See Note 3. Sysview's products
are ideally suited for the mobile computer user who needs to scan and/or fax
documents while away from the office.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Sysview have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all information and disclosures necessary for a presentation of
the Company's financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results may differ from these estimates. The results of
operations for the period ended September 30, 2006 are not necessarily
indicative of the operating results that may be expected for the entire year
ending December 31, 2006. The interim financial statements should be read in
conjunction with the financial statements in the Company's Amended Annual Report
on Form 10-KSB/A for the year ended December 31, 2005, filed with the Securities
and Exchange Commission ("SEC") on August 15, 2006.
The consolidated financial statements include the accounts of Sysview and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Certain accounts have been reclassified to conform to the current period
presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 123-R, SHARE-BASED PAYMENT
("SFAS 123(R)"). SFAS 123(R) replaces SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, and supersedes the Accounting Principles Board ("APB") APB Opinion
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"). SFAS 123(R) requires,
among other things, that all share-based payments to employees, including grants
of stock options, be measured based on their grant-date fair value and
recognized as expense. Effective January 1, 2006, Sysview adopted the fair value
recognition provisions of SFAS 123(R) using the modified prospective application
method. Under this transition method, compensation expense recognized for the
three and nine months ended September 30, 2006, includes the applicable amounts
of: (a) compensation expense of all stock-based payments granted prior to, but
not yet vested as of January 1, 2006 (based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123 and APB 25),
and (b) compensation expense for all stock-based payments granted subsequent to
January 1, 2006 (based on the grant-date fair value estimated in accordance with
the new provisions of SFAS 123(R)). Results for periods prior to January 1,
2006, have not been restated. See Note 6.
-6-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
On June 7, 2005, the FASB issued Statement 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION 20 AND FASB STATEMENT 3, ("SFAS 154").
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles were required recognition via a cumulative effect adjustment within
net income (loss) of the period of the change. SFAS 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005. Sysview adopted SFAS 154 on January 1, 2006.
The adoption had no impact to the Company's consolidated financial position,
results of operations or cash flows.
In February 2006, the FASB issued SFAS 155, ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS 133 AND 140, ("SFAS
155"). SFAS will be effective for the Company beginning January 1, 2007. The
statement permits interests in hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation, to be accounted
for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The Company is currently evaluating
the potential impact this standard may have its consolidated financial position,
cash flows and results of operations, but does not believe the impact of the
adoption will be material.
In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a
tax position if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN 48
are effective for the Company on January 1, 2007, with the cumulative effect of
the change in accounting principle, if any, recorded as an adjustment to opening
retained earnings. The Company does not expect there to be any significant
impact of adopting FIN 48 on its consolidated financial position, cash flows and
results of operations.
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS ("SFAS
157"), which provides guidance about how to measure assets and liabilities that
use fair value. SFAS 157 will apply whenever another US GAAP standard requires
(or permits) assets or liabilities to be measured at fair value but does not
expand the use of fair value to any new circumstances. This standard also will
require additional disclosures in both annual and quarterly reports. SFAS 157
will be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and will be adopted by us beginning in the first
quarter of 2008. The Company is currently evaluating the potential impact this
standard may have its consolidated financial position, cash flows and results of
operations, but does not believe the impact of the adoption will be material.
In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") 108,
CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 was
issued to eliminate the diversity of practice in how public companies quantify
misstatements of financial statements, including misstatements that were not
material to prior years' financial statements. The Company will apply the
provisions of SAB 108 to its annual financial statements for the year ending
December 31, 2006. The Company has evaluated the potential impact of SAB 108 and
does not believe the impact of the application of this guidance will be material
to its consolidated financial position, cash flows and results of operations.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force ("EITF")), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company purchases the majority of its finished scanner imaging products from
a wholly-owned subsidiary of its majority stockholder, Syscan Technology
Holdings Limited ("STH"). See Note 5. The Company's Chairman and CEO, Darwin Hu,
was formerly the CEO of STH, and beneficially owns approximately 5.33% of the
issued and outstanding capital stock of STH.
-7-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Related party purchases from entities that are wholly-owned subsidiaries of STH
were $3,254,000 for the nine months ended September 30, 2006, and $1,542,000 and
$3,521,000 for the three and nine months ended September 30, 2005. The purchases
were carried out in the normal course of business.
The following table is a summary of unsecured, interest-free and payable upon
demand, amounts due from affiliated entities (IN THOUSANDS):
SEPTEMBER DECEMBER 31,
30, 2006 2005
------------- ---------------
STH wholly-owed subsidiaries $1,630 $1,957
STH 346 346
Syscan Imaging Limited 100 100
------------- ---------------
$2,076 $2,403
============= ===============
NOTE 4 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk are cash balances
maintained in excess of federal depository insurance limits and trade
receivables.
CASH AND CASH EQUIVALENTS
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up
to $100,000. As of September 30, 2006, the Company had consolidated balances of
approximately $1,013,000, which were not guaranteed by FDIC. The Company has not
experienced any losses in such accounts and believes the exposure is minimal.
MAJOR CUSTOMERS AND TRADE RECEIVABLES
A relatively small number of customers account for a significant percentage of
the Company's sales. The percentage of sales derived from significant customers
is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------- ------------ ----------- ----------
Customer A 68% 29% 59% 32%
Customer B 6 23 13 18
Customer C 10 16 10 14
Customer D - 9 - 12
Trade receivables from these customers totaled $1,853,000 at September 30, 2006.
As of September 30, 2006 all the Company's trade receivables were unsecured.
NOTE 5 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all its finished scanner imaging products
from one vendor that is also a subsidiary of the Company's majority stockholder.
See Note 3. If this vendor became unable to provide materials in a timely manner
and the Company was unable to find alternative vendors, the Company's business,
operating results and financial condition would be materially adversely
affected.
-8-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 6 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Sysview has several stock-based employee compensation plans, which are more
fully described in the 2005 Annual Report on Form 10-KSB/A-1. Prior to January
1, 2006, Sysview accounted for awards granted under those plans following the
recognition and measurement principles of APB 25 and related interpretations.
Accordingly, compensation expense, equal to the difference between the total
exercise price and the total fair market value, for awards granted at an
exercise price less than fair market value of the underlying common stock on the
grant date, was amortized over the vesting period and included in the Condensed
Consolidated Statement of Operations. Effective January 1, 2006, Syscan adopted
the fair value recognition provisions of SFAS 123(R). See Note 2.
The following table sets forth the total stock-based compensation expense
included in the Condensed Consolidated Statements of Operations (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------
2006 2005 2006 2005
---------- -------- ------- -------
Selling and marketing $ 13 $ 13 $ 38 $ 73
General and administrative 227 211 788 1,195
Research and development 96 13 151 73
At September 30, 2006, the Company had approximately $1,197,000 of total
unrecognized compensation cost related to unvested stock options. This cost is
expected to be recognized over a weighted-average period of approximately 18
months.
STOCK OPTIONS
The following table summarizes stock option activity and related information for
the nine months ended September 30, 2006:
WEIGHTED-AVERAGE
EXERCISE
OPTIONS PRICE
----------- -------------
Outstanding at December 31, 2005 3,760,000 $0.01
Granted 1,190,000 0.69
Exercised - -
Cancelled 60,000 1.17
----------- -------------
Outstanding at September 30, 2006 4,890,000 $0.18
=========== =============
-9-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following table summarizes all options outstanding and exercisable by price
range as of September 30, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
OUTSTANDING EXERCISABLE
----------------- --------------- ---------------- ------------- --------------- -------------
$0.01 4,000,000 5.57 $0.01 2,666,666 $0.01
$0.65 - $1.01 890,000 9.64 $0.92 - -
NOTE 7 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.
Common stock equivalents were not considered in calculating diluted net loss per
common share for the nine months ended September 30, 2006 or for the three and
nine months ended September 30, 2005 as their effect would be anti-dilutive.
Common stock equivalents were taken into consideration in calculating diluted
net income per common share for the three months ended September 30, 2006, but
the impact did not change net income per share. As a result, for all periods
presented, the Company's basic and diluted net income (loss) per share is the
same.
The computation of the Company's basic and diluted earnings per share for the
three months ended September 30, 2006 is as follows (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
Net income $ 309
Weighted average common shares outstanding 24,093
Dilutive effect of employee equity incentive plans 223
----------
Weighted average common shares outstanding,
assuming dilution 24,316
==========
Basic earnings per common share $0.01
==========
Diluted earnings per common share $0.01
==========
The diluted earnings per share calculation for the three months ended September
30, 2006 excludes the potential dilutive effect of 2,454,000 of the Company's
options and warrants as the exercise prices of these stock options and warrants
were greater than or equal to the average market value of the common shares and
2,508,000 of the Company's convertible preferred stock as their impact was
anti-dilutive.
-10-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
During the nine months ended September 30, 2006 the Company issued 50,000 shares
of common stock for the conversion of 500 shares of Series A 5% cumulative
convertible preferred stock ("Series A Stock") as discussed below.
PREFERRED STOCK ACTIVITY
SERIES A 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
During the nine months ended September 30, 2006, $50,000 of Series A Stock (500
shares) were converted into 50,000 shares of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
On August 8, 2006, the Company completed a private placement with a group of
accredited investors for the sale of 11,500 shares of the Company's Series B
Convertible Preferred Stock ("Series B Stock") along with warrants, expiring
three years from the date of issuance, to purchase additional shares of the
Company's stock. Pursuant to a registration rights agreement (as discussed
below), the Company filed a Form SB-2 on October 11, 2006, with the Securities
and Exchange Commission ("SEC"), to register the shares of common stock issuable
upon conversion of the Series B Stock and upon exercise of the warrants. As of
the date of this filing, this registration has not yet been declared effective
by the SEC.
Total common stock issuable upon conversions of underlying the Series B Stock
and warrants follows:
Series B Stock (1) 1,150,000
Warrants issued to purchasers in private placement (2) 575,000
Warrants issued to placement agent in the private placement (2) 100,000
----------
1,825,000
==========
(1) Convertible at $1.00 per share, subject to anti-dilution provisions.
(2) Convertible at $1.50 per share, subject to anti-dilution provisions.
The Series B Stock was priced at $100 per share and the Company received
proceeds of $1,150,000 less offering costs and expenses. Starboard Capital
Markets, LLC, a NASD member firm, acted as placement agent in the sale for which
it received $80,000 in commissions and 100,000 warrants to purchase shares of
the Company's common stock at an exercise price equal to $1.50 per share. The
fair value of these warrants totaled $26,000 and such amount was charged to
other income (expense) and credited to additional paid-in capital during the
three months ended September 30, 2006.
The material terms of the Series B Stock are as follows:
SERIES B STOCK CONVERSION RIGHTS. All or any portion of the stated value of the
Series B Stock outstanding may be converted into common stock at anytime by the
Investors. The initial fixed conversion price of the Series B Stock is $1.00 per
share ("Conversion Price"). The Conversion Price is subject to anti-dilution
protection adjustments, on a full ratchet basis, until the date that is twelve
months from the effective date of the Registration Statement required to be
filed pursuant to the Registration Rights Agreement, upon the Company's issuance
of additional shares of common stock, or securities convertible into common
stock, at a price that is less than the then Conversion Price.
REDEMPTION. On August 7, 2009 ("Redemption Date"), all of the outstanding Series
B Stock shall be redeemed for a per share redemption price equal to the stated
value on the Redemption Date ("Redemption Price"). The Redemption Price is
payable by the Company in cash or in shares of common stock at the Company's
discretion and shall be paid within five trading days after the Redemption Date.
In the event the Company elects to pay all or some of the Redemption Price in
shares of common stock, the shares of common stock to be delivered to the
Investors shall be valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Redemption Date.
-11-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
RIGHT TO COMPEL CONVERSION. If, on any date after August 7, 2007, (A) the
closing market price for a share of Common Stock for ten consecutive trading
days equals at least $4.00 (subject to adjustment for certain events), and (B)
the average reported daily trading volume during such ten-day period equals or
exceeds 100,000 shares, then the Company shall have the right, at its option, to
convert, all, but not less than all, of the outstanding shares of the Series B
Stock at the Conversion Price; provided that the Registration Statement shall be
effective at all times during such 10-day period and during the 30-day notice
period to the Investors.
WARRANT TERMS. The Warrants grant Investors the right to purchase up to an
aggregate of 575,000 shares of common stock of the Company at an exercise price
of $1.50 per share. The Warrants expire on August 7, 2009 and must be exercised
by the payment of cash, except if there is no effective registration statement
covering the resale of the shares of common stock underlying the Warrants, at
which time an investor may exercise their Warrants on a cashless basis.
RESTRICTIONS ON CONVERSION OF SERIES B STOCK AND EXERCISE OF WARRANTS. No holder
of the Series B Stock is entitled to receive shares upon conversion of the
Series B Stock held by such holder if such receipt would cause such holder to be
deemed to beneficially own in excess of 4.999% of the outstanding shares of the
Company's common stock on the date of issuance of such shares (this provision
may be waived upon 61 days prior written notice to the Company). In addition, no
individual holder is entitled to receive shares upon conversion of the Series B
Stock if the transaction causes such holder to beneficially own in excess of
9.999% of the outstanding shares of the Company's common stock on the date of
issuance of such shares (this provision may be waived upon 61 days prior written
notice to the Company).
None of the individual holders of the Series B warrants are entitled to exercise
any warrant held by them, if the exercise causes the holder to beneficially own
in excess of 4.999% of the outstanding shares of the Company's Common Stock on
the date of issuance of such shares.
REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights Agreement
between the Investors and the Company, the Company was obligated to file a
registration statement on Form SB-2 (which was filed on October 11, 2006)
registering the resale of shares of the Company's common stock issuable upon
conversion of the Series B Stock and exercise of the related warrants. The
Company was required to file the registration statement within 60 days of August
8, 2006 and have the registration statement declared effective within 120 days
of August 8, 2006. If the registration statement was not timely filed, or
declared effective within the timeframe described, or if the registration is
suspended other than as permitted, in the Registration Rights Agreement, the
Company will be obligated to pay each Investor a fee equal to one percent of
such investor's purchase price of the Series B Stock for each 30 day period
thereafter (pro rated for partial periods), that such registration conditions
are not satisfied, up to a maximum of 12 months.
RIGHT OF FIRST REFUSAL. Subject to certain conditions, the Company has granted
the investors a right of first refusal, for a period of one year from the
effective date of the registration statement required to be filed in connection
with this transaction, to participate in any subsequent financing that the
Company conducts.
VOTING RIGHTS. Holders of the Series B Stock shall have no voting rights.
However, so long as any shares of Series B Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Series B Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series B Stock or alter or amend the
Series B Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a liquidation senior to
or otherwise PARI PASSU with the Series B Stock, (c) amend its certificate or
articles of incorporation or other charter documents so as to affect adversely
any rights of the holders of the Series B Stock, (d) increase the authorized
number of shares of the Series B Stock, or (e) enter into any agreement with
respect to the foregoing.
-12-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, and subject to the rights of the
holders of Series A Stock, the holders of the Series B Stock shall be entitled
to receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Series B Stock an amount equal to the stated value
per share before any distribution or payment shall be made to the holders of any
securities of the Company with rights junior to the Series B Stock, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the holders of the Series B Stock shall
be distributed among such holders ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full.
SERIES A STOCK DIVIDENDS
The Company's Series A Stock accrues cumulative dividends at a rate of five
percent per annum, payable semiannually on July 1 and January 1. Dividends are
payable in cash, by accretion of the stated value or in shares of common stock.
Subject to certain terms and conditions, the decision whether to accrete
dividends to the stated value of the Series A Stock or to pay for dividends in
cash or in shares of common stock, is at the Company's discretion. To date, the
Company has not paid any dividends. During the three and nine months ended
September 30, 2006, Series A Stock dividends were approximately $22,000 and
$59,000, respectively, and recorded as a non-operating expense on the Company's
statement of operations.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS 133") and EITF Abstract No. 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS" ("EITF 00-19"), the Company's Series A Stock and related
warrants and the Series B Stock and related warrants, are deemed derivative
instruments as a result of the embedded conversion feature. Accordingly, the
fair value of these derivative instruments has been recorded in the Company's
consolidated balance sheet as a liability with the corresponding amount as a
discount to the Series A Stock and Series B Stock, respectively. The discounts
are being accreted, on a straight-line basis, from the respective issuance date
through the respective redemption date adjusted for conversions. Accretion of
the preferred stock redemption value, for both Series A and Series B, for the
three and nine months ended September 30, 2006 was approximately $187,000 and
$445,000 and is disclosed as a non-operating expense on the Company's
consolidated statement of operations. The total decrease in the fair value of
the liability for derivative contracts, for both Series A and Series B, totaled
approximately $955,000 and $645,000 for the three and nine months ended
September 30, 2006 with the offsetting adjustment disclosed with other income
(expense) in the consolidated statements of operations.
The Company computes fair value of these derivatives using the Black-Scholes
valuation model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's derivative instruments have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate.
-13-
The assumptions used in the Black-Scholes valuation model to estimate fair value
of each derivative instrument and the resulting weighted average estimated value
of the Series A Stock derivative liability and the Series B Stock derivative
liability as of September 30, 2006 and 2005 are as follows:
SEPTEMBER 30,
-----------------------
2006 2005
---------- ---------
Weighted average estimated values per share $0.34 $0.56
Expected life in years 3.0 3.0
Expected volatility 42% 85%
Expected dividend yield 0% 0%
Risk free interest rate 5.34% 4%
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases which
extend through November 2011. Future minimum rental commitments are as follows
(IN THOUSANDS):
FUTURE
MINIMUM LEASE
YEAR ENDING PAYMENTS
SEPTEMBER 30,
----------------- ---------------
2007 $ 251
2008 269
2009 46
2010 1
2011 1
---------------
Total $568
===============
BANK LINE OF CREDIT
The Company has a line of credit to borrow up to $2,500,000, bearing interest at
the rate of prime (8.25% at September 30, 2006) plus 0.5% and secured by all of
the assets of the Company. Interest payments are due monthly and all unpaid
interest and principal is due in full on October 30, 2006. See Note 11. Upon
certain events of default, the default variable interest rate increases to prime
plus 5.5%. The Company had $1,487,000 available for use at September 30, 2006.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with its executive officers which
extend through 2008. The agreements provide for a base salary, annual bonus to
be determined by the Board of Directors, termination payments, stock options,
non-competition provisions, and other terms and conditions of employment. In
addition, the Company maintains employment agreements with other key employees
with similar terms and conditions. As of September 30, 2006 termination payments
totaling $489,000 remain in effect.
LITIGATION, CLAIMS AND ASSESSMENTS
On May 20, 2003, Syscan, Inc., the Company's wholly-owned subsidiary, filed a
lawsuit named SYSCAN, INC. V. PORTABLE PERIPHERAL CO., LTD. ("PPL"), IMAGING
RECOGNITION INTEGRATED SYSTEMS, INC., CARDREADER INC. AND TARGUS INC. (Case No.
C03-02367 VRW) in United States District Court, Northern District of California.
Syscan, Inc. alleges claims against the above-mentioned parties for patent
infringement of patent nos. 6,054,707, 6,275,309 and 6,459,506, and unfair
competition. Syscan, Inc. expects to continue the case unless a reasonable
settlement amount from the defendants or a licensing agreement to the
satisfaction of Syscan, Inc. is entered.
Syscan, Inc. is seeking: (1) a temporary restraining order, preliminary
injunction and permanent injunction against defendants, restraining defendants
from patent infringement and unfair competition; (2) treble damages due to
defendants' willful infringement; (3) punitive damages; (4) accounting of unjust
enrichment by defendants, resulting from defendants' unfair competition; and (5)
attorney's fees and costs.
-14-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The defendants are jointly represented by PPL's counsel. PPL has initiated
counterclaims against Syscan, Inc. for patent invalidity. Syscan, Inc. has not
yet been able to quantify its damage claim against PPL. Syscan, Inc. intends to
vigorously pursue this claim and denies PPL's counterclaim of patent invalidity.
There was a hearing in the Northern District of California on October 14, 2005,
in which arguments were presented to the court on the patent validity. The court
rendered a claim construction order on March 27, 2006 and a supplemental claim
construction order on July 5, 2006. Syscan has filed and served its final
infringement contentions on August 4, 2006 and a case management conference is
scheduled on August 29, 2006 for determining the discovery and trial calendar.
Syscan, Inc. expects to continue this case unless a reasonable settlement amount
from defendants or a licensing agreement to the satisfaction of Syscan, Inc. is
entered.
The Company experiences routine litigation in the normal course of its business
and does not believe that any pending litigation will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
SERIES A PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of Series A Preferred Stock, the Company
executed a registration rights agreement ("Agreement") with the purchasers
thereof under which the Company agreed to register the common shares underlying
the Series A Stock and related warrants. The Agreement provides for liquidated
damages in the event the registration statement is not maintained continuously
effective for a period of two years following the March 15, 2005 closing date.
The liquidated damages total an amount equal to one percent (pro-rated for
partial months) of the purchase price of the Series A Stock for each thirty day
period effectiveness of a registration statement is not maintained and two
percent for each thirty day period the registration statement ceases to remain
effective. This registration, which was originally declared effective by the SEC
on July 7, 2005, became ineffective April 30, 2006. The Company updated the
original registration statement by filing amendments on June 6, 2006 and August
22, 2006, and the SEC declared the registration effective September 15, 2006. As
a result, the Company accrued $113,000 and $145,000, included in general and
administrative expense, for damages during the three and nine months ended
September 30, 2006, respectively.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Sysview operates in one segment, the design, development and delivery of various
imaging technology solutions, most notably scanners, as defined by SFAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131").
GEOGRAPHIC INFORMATION
During the three and nine months ended September 30, 2006 and 2005, Sysview
recorded net sales throughout the U.S., Asia and Europe as determined by the
final destination of the product. The following table summarizes total net sales
attributable to significant countries (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2006 2005 2006 2005
---------------------------- -----------------------------
U.S. $ 3,910 $ 1,911 $ 8,497 $
4,672
Asia 111 245 317 525
Europe and other 77 51 261 205
---------------------------- -----------------------------
$ 4,098 $ 2,207 $ 9,075 $ 5,402
============================ =============================
-15-
Substantially all Sysview's identifiable assets are located in the U.S.
NOTE 11 - SUBSEQUENT EVENT
BANK LINE OF CREDIT
The Company's line of credit (see Note 9) matured on October 30, 2006. Although
the Company is currently negotiating a new line of credit with the same bank,
the new terms have not been finalized. The bank agreed to extend the Company's
current line of credit for two months with the existing terms while the new
agreement is finalized.
-16-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Sysview Technology,
Inc.'s ("Sysview" or "Company") unaudited condensed consolidated financial
statements and notes included herein. The results described below are not
necessarily indicative of the results to be expected in any future period.
Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements. Readers are referred to
Sysview's Annual Report on Form 10-KSB for the year ended December 31, 2005 as
filed with the Securities and Exchange Commission on April 17, 2006, as amended
on August 16, 2006.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying unaudited
condensed consolidated financial statements and notes to help provide an
understanding of our financial condition, changes in financial condition and
results of operations. The MD&A section is organized as follows:
o OVERVIEW. This section provides a general description of the Company's
business, as well as recent developments that we believe are important in
understanding the results of operations and to anticipate future trends in
those operations.
o CRITICAL ACCOUNTING POLICIES. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
o RESULTS OF OPERATIONS. This section provides an analysis of our results of
operations for the three and nine months ended September 30, 2006 compared
to the three and nine months ended September 30, 2005. A brief description
of certain aspects, transactions and events is provided, including related
party transactions that impact the comparability of the results being
analyzed.
o LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of our
financial condition and cash flows as of and for the nine months ended
September 30, 2006.
OVERVIEW
Our MD&A contains statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors
discussed in this report, as well as factors not within our control. We
undertake no duty to update any forward-looking statement to conform the
statement to actual results or changes in our expectations.
We are in the business of developing, designing and delivering imaging
technology solutions. We currently have 14 patents issued in the United States
and five patents issued in Taiwan. Additionally, we have five patents currently
pending with the United States Patent and Trademark Office, three relate to
image display technology and two relate to image scanning. We focus our research
and development toward new deliverable and marketable technologies. We sell our
products to clients throughout the world, including the United States, Canada,
Europe, South America, Australia and Asia. We intend to leverage our experience,
expertise and current technology in the image capture market by expanding our
business to the image display market, which is deemed to be a much larger
market.
Our strategy is to expand our image capture product line and technology while
leveraging our assets in other areas of the imaging industry. We are actively
shipping six categories of image capture products and have expanded our product
offerings to include six new products during fiscal 2006. During the first three
months of fiscal 2006, we introduced two new products under our Original
Equipment Manufacturers' ("OEM") brand names. During the third quarter of fiscal
2006 we introduced one additional product through one of our OEMs. Our expanded
product line is in response to the increased market demand for faster and
easier-to-use products as well as increased security to meet the growing need
for information protection, including identity and financial transaction
protection. In addition to expanding our image capture product line, we actively
pursue the acquisition of technology and or companies in the image capture and
display industry to complement our business model, improve our competitive
positioning and further expand our product offerings.
-17-
CRITICAL ACCOUNTING POLICIES
Our MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, trade receivables and allowance for
doubtful accounts, inventories, intangible and long-lived assets, and income
taxes. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our consolidated financial
statements:
REVENUE RECOGNITION. Revenues consist of sales of merchandise, including optical
image capturing devices, modules of optical image capturing devices, and chips
and other optoelectronic products. Revenue is recognized when the product is
shipped and the risks and rewards of ownership have transferred to the customer.
We recognize shipping and handling fees as revenue, and the related expenses as
a component of cost of sales. All internal handling charges are charged to
selling and marketing expense. Historically, sales returns have not been
significant. As such, we do not record a reduction to revenue for estimated
product returns in the same period that the related revenue is recorded.
INVENTORY AND WARRANTY RESERVES. We establish inventory reserves for estimated
obsolescence or unmarketable inventory in an amount equal to the difference
between the cost of inventory and its estimated realizable value based upon
assumptions about future demand and market conditions. If actual demand and
market conditions are less favorable than those projected by management,
additional inventory reserves could be required. As of September 30, 2006, we
had no inventory reserve.
Currently, all our products are manufactured by a subsidiary of Syscan
Technology Holdings ("STH"), the parent company of our majority stockholder. STH
warrants the products it manufactures for us against defects in material and
workmanship for a period of 18 months after the completion of manufacture. After
such 18 month period, STH provides product repair services for us at its
customary hourly repair rate plus the cost of any parts, components or items
necessary to repair the products. As a result of the product warranty provided
by STH, Sysview does not record a product warranty reserve.
RELATED PARTY TRANSACTIONS. We have significant related-party transactions and
agreements, including, but not limited to purchasing all our products from STH
as discussed above. We believe such transactions have been accounted for at fair
value. We utilized our best estimate of the value of these transactions and
agreements. Had alternative assumptions been used, the values obtained may have
been different.
Related party purchases from entities that are wholly-owned subsidiaries of STH
were $3,254,000 for the nine months ended September 30, 2006, and $1,542,000 and
$3,521,000 for the three and nine months ended September 30, 2005. The purchases
were carried out in the normal course of business.
-18-
The following table is a summary of unsecured, interest-free and payable upon
demand, amounts due from affiliated entities (IN THOUSANDS):
SEPTEMBER DECEMBER 31,
30, 2006 2005
------------- ---------------
STH wholly-owed subsidiaries $1,630 $1,957
STH 346 346
Syscan Imaging Limited 100 100
------------- ---------------
$2,076 $2,403
============= ===============
INTANGIBLE AND LONG-LIVED ASSETS. We evaluate our intangible assets and
long-lived assets, which represent goodwill, long-term investments, and fixed
assets, for impairment annually or more frequently if we believe indicators of
impairment exist. Significant management judgment is required during the
evaluation, including in the forecasts of future operating results. The
estimates we have used are consistent with the plans and estimates that we use
to manage our business. It is possible, however, that the plans and estimates
used may be incorrect. If our actual results, or the plans and estimates used in
future impairment analyses, are lower than the original estimates used to assess
the recoverability of these assets, we could incur additional impairment
charges. We had no such asset impairments during the three and nine months ended
September 30, 2006.
INCOME TAXES. We utilize the liability method of accounting for income taxes.
Deferred income tax assets and liabilities are calculated as the difference
between the financial statements and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. We record a valuation allowance to reduce our deferred
tax assets to the amount that we believe is more likely than not to be realized.
In assessing the need for a valuation allowance, we consider all positive and
negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies, and recent financial
performance. The application of tax laws and regulations is subject to legal and
factual interpretation, judgment and uncertainty. Tax laws themselves are
subject to change as a result of changes in fiscal policy, changes in
legislation, evolution of regulations and court rulings. Therefore, the actual
income taxes may be materially different from our estimates. As a result of our
analysis, we concluded that a full valuation allowance against our net deferred
tax assets is appropriate at September 30, 2006.
CONTINGENCIES. From time to time, we are involved in disputes, litigation and
other legal proceedings. We record a charge equal to at least the minimum
estimated liability for a loss contingency when both of the following conditions
are met: (i) information available prior to issuance of the financial statements
indicates that it is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and (ii) the range of loss
can be reasonably estimated. However, the actual liability in any such
litigation may be materially different from our estimates, which could result in
the need to record additional costs. Currently, there are no outstanding legal
proceedings or claims, which require a loss contingency.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. We account for our Series A 5% cumulative convertible
preferred stock ("Series A Stock") and our Series B convertible preferred stock
("Series B Stock") pursuant to Statement of Financial Accounting Standards
("SFAS") "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
133") and the Emerging Issues Task Force ("EITF") Abstract 00-19, "ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS" ("EITF 00-19"). Accordingly, the embedded
conversion feature associated with our Series A Stock and related warrants and
our Series B Stock and related warrants have been determined to be derivative
instruments. The fair value of these derivative instruments, as determined by
applying the Black-Scholes valuation model, is adjusted quarterly. The
Black-Scholes valuation model requires the input of highly subjective
assumptions, including the expected stock price volatility. Additionally,
although the Black-Scholes model meets the requirements of SFAS 133, the fair
values generated by the model may not be indicative of the actual fair values of
our Series A Stock and Series B Stock as our derivative instruments have
characteristics significantly different from traded options.
-19-
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of operations for
the three and nine months ended September 30, 2006 compared to the three and
nine months ended September 30, 2005 (IN THOUSANDS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------- ----------------------------------------
2006 2005 $ % 2006 2005 $ %
---- ---- --- --- ---- ---- --- ----
Net sales $4,098 $ 2,207 $1,891 86% $9,075 $ 5,402 $3,673 68%
Cost of sales 2,700 1,417 1,283 91 5,976 3,404 2,572 76
As a percentage of sales 65% 64% 66% 63%
Selling and marketing expense 307 332 (25) (8) 900 742 158 21
General and administrative expense 676 698 (22) (3) 1,963 2,329 (366) (16)
Research and development expense 584 242 342 141 1,449 640 809 126
Total other income (expense) 687 (680) NM NM 347 464 NM NM
Dividend on 5% convertible (209) (184) NM NM (504) (394) NM NM
preferred stock and accretion of
preferred stock redemption value
NM = Not Meaningful
NET SALES
The significant increase in net sales was attributable to our increased product
offerings. We introduced our duplex scanners (DocketPORT) near the end of the
third quarter of fiscal 2005, which created a broader base of products. Sales of
our duplex scanners were approximately $538,000 and $1,143,000 during the three
and nine months ended September 30, 2006, respectively, as compared to $235,000
for both the three and nine months ended September 30, 2005. Our largest
customer has significantly expanded its distribution channels in 2006, which
resulted in a substantial revenue increase during the three months ended
September 30, 2006 as compared to the three months ended September 30, 2005. To
a lesser extent, our net sales were positively impacted by our gradual trending
towards our Value Added Reseller ("VAR") channel distribution and the growth in
the small office home office ("SOHO") markets, which is a result of our efforts
to appeal to customers in these sales channels.
Sales to our three largest customers represented 84% and 82% for the three and
nine months ended September 30, 2006, respectively, and 68% and 64% for the
three and nine months ended September 30, 2005, respectively. We expect that our
largest customers will continue to account for a substantial portion of our net
sales in the remainder of fiscal 2006 and for the foreseeable future. The
identities of our largest customer and their respective contributions to our net
sales have varied and will likely continue to vary from period to period.
Although we expect net sales to increase as we continue to offer additional
products in the image display market and expand to the image display market,
there can be no assurance that our net sales will increase.
COST OF SALES, INCLUDING GROSS PROFIT
Cost of sales includes all direct costs related to the transfer of scanners,
imaging modules and services related to the delivery of those items manufactured
in China, and to a lesser extent engineering services and software royalties.
Cost of sales increased in absolute dollars as a result of the increased net
sales during both the three and nine months ended September 30, 2006 as compared
to the three and nine months ended September 30, 2005. Cost of sales as a
percentage of net sales remained fairly constant as a result of the stability of
our average selling price and related material cost used to manufacture our
products. We expect this trend to continue for the foreseeable future.
-20-
We purchase the majority of our finished scanner imaging products from a
wholly-owned subsidiary of our majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH,
and beneficially owns approximately 5.33% of the issued and outstanding capital
stock of STH.
Related party purchases from entities that are wholly-owned subsidiaries of STH
were $3,254,000 for the nine months ended September 30, 2006, and $1,542,000 and
$3,521,000 for the three and nine months ended September 30, 2005. The purchases
were carried out in the normal course of business.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of salaries and related costs
of employees, including stock-based compensation costs, engaged in the sales,
marketing and customer account management functions and to a lesser extent
market development and promotional funds for our retail distributions channels,
tradeshows, website support, warehousing, logistics and certain sales
representative fees. The increase during the nine months ended September 30,
2006 as compared to the nine months ended September 30, 2005 is primarily
attributable to the increased staff and related marketing activities to support
our expanding products offerings and the addition of direct sales personnel in
Europe and Asia. The slight decrease in selling and marketing expense during the
three months ended September 30, 2006 as compared to the three months ended
September 30, 2005 is a result of the timing of advertising and promotions of
our various new products. Overall, we expect selling and marketing expenses to
increase as we continue to expand our marketing efforts and the number of
products we offer.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of costs associated with
our executive, financial, human resources and information services functions,
including stock-based compensation costs, facilities-related expenses and
outside professional services such as legal and accounting. The slight decrease
in general and administrative expenses during the three months ended September
30, 2006 as compared to the three months ended September 30, 2005 was a result
of decreased costs associated with our investor relations function. We believe
the decrease is temporary and is a result of the timing of certain investor
relations events. The decrease in the nine months ended September 30, 2006 as
compared to the same period in 2005 is mainly attributable to stock-based
compensation cost (a non-cash charge) as a result of granting stock options to
certain executives and key employees at less than fair market value on the grant
date during 2005 and adopting SFAS 123(R). See "Notes to Financial Statements
Note 2." Stock-based compensation cost was $227,000 and $788,000 for the three
and nine months ended September 30, 2006, respectively, and $211,000 and
$1,195,000 for the three and nine months ended September 30, 2005, respectively.
The increase was a result of increased personnel costs to support our expanding
business and related infrastructure and the increased expenses associated with
maintaining our public company status. We anticipate that general and
administrative expenses will continue to increase over the long term as our
business continues to grow and the costs associated with being a public company
continue to increase as a result of our required reporting requirements,
including but not limited to expenses incurred to comply with the Sarbanes-Oxley
Act of 2002.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of salaries and related
costs, including stock-based compensation costs, of employees engaged in product
research, design and development activities, compliance testing, documentation,
prototypes and expenses associated with transitioning the product to production.
Research and development expense significantly increased during both the three
and nine months ended September 30, 2006 as compared to the three and nine
months ended September 30, 2005 as a result of an increase in the number of
employees engaged in research and development activities, resulting from both
direct hiring and acquisitions. We anticipate that research and development
expense will continue to increase over the long term as a result of the growth
and diversification of the products we offer, new product opportunities and our
continued efforts to invest in the future and strengthen our intellectual
property position within our highly competitive market.
-21-
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three and nine months ended September 30, 2006
was mainly attributable to the $955,000 and $645,000, respectively, decrease in
the fair value of the liability for derivative contracts (associated with our
Series A Stock and related warrants and Series B Stock and related warrants).
During the three and nine months ended September 30, 2005, the fair value of the
liability for derivative contracts increased $686,000 and decreased $975,000,
respectively. Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, ("SFAS 133") and EITF Abstract 00-19, ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS ("EITF 00-19"), the increase in the fair value
of the liability for derivative contracts is included as other expense in our
consolidated statements of operations and the decrease in the fair value of the
liability for derivative contracts is included as other income in our
consolidated statements of operations.
The remaining other income (expense) during the nine months ended September 30,
2006 was a result of issuing our Series B Stock as follows:
o Cash paid for issuance costs of $80,000 in connection with our
offering; and
o A non-cash charge of $173,000 representing the fair value of 100,000
warrants issued to the placement agent for the sale of the stock.
The remaining other income (expense) during the nine months ended September 30,
2005 was a result of issuing our Series A Stock as follows:
o Cash paid for issuance costs of $237,000 in connection with our
offering; and
o A non-cash charge of $290,000 representing the fair value of 186,500
warrants issued to the placement agent for the sale of the stock.
DIVIDEND ON SERIES A STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION VALUE
During the three and nine months ended September 30, 2006 accretion on our
preferred stock, both Series A and Series B, totaled approximately $187,000 and
$445,000, respectively. During the three and nine months ended September 30,
2005 accretion on our Series A Stock was approximately $155,000 and $337,000,
respectively. The increase during the three and nine months ended September 30,
2006 as compared to the three and nine months ended September 30, 2005 was
attributable to the sale of our Series B Stock during the three months ended
September 30, 2006. Series A Stock dividends were $22,000 and $59,000 during the
three and nine months ended September 30, 2006, respectively, and $29,000 and
$57,000 for the three and nine months ended September 30, 2005, respectively
We do not pay dividends on our Series B Stock.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, our principal sources of liquidity included cash and cash
equivalents of $1,419,000 and unused borrowing capacity of $1,487,000 under our
bank line of credit. We had no significant cash outlays during the nine months
ended September 30, 2006.
Operating activities: Cash used by operating activities during the nine months
ended September 30, 2006 was primarily to fund our net loss, as adjusted for
non-cash items such as stock-based compensation associated with issuing options
and changes in our derivative instruments and convertible preferred stock.
Additional uses of cash included an increase in trade receivables resulting from
the significant increase in sales of our products during the three months ended
September 30, 2006 and an increase in inventory as we anticipate this growth in
revenues to continue. Sources of operating cash include an increase in accounts
payable as a result of managing our working capital and the normal fluctuation
and timing of purchases. As we have had to ramp up inventory purchases to meet
the increased demand for our products, our cash was somewhat constrained during
the nine months ended September 30, 2006. During the nine months ended September
30, 2005, cash used by operations resulted from funding our net loss, adjusted
for non-cash items such as stock-based compensation associated with issuing
options and changes in our derivative instruments and convertible preferred
stock and changes to trade receivables and inventories. We expect future cash
provided (used) by operating activities to fluctuate, primarily as a result of
fluctuations in our operating results, timing of product shipments, trade
receivables collections, inventory management and timing of vendor payments.
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Investing activities: For both the nine months ended September 30, 2006 and
2005, cash used in investing activities was solely attributable to the purchase
of capital equipment and licensed technology.
Financing activities: On August 8, 2006, we sold $1,150,000 of our Series B
Stock. Net proceeds of this offering after payment of related commissions, fees
and other expenses were approximately $1,070,000. We intend to use the proceeds
for sales, marketing, research and development and for working capital and
general corporate purposes. Other cash provided by financing activities for the
nine months ended September 30, 2006, was a result of payments from related
party receivables. For the nine months ended September 30, 2005, cash provided
by financing activities was a result of issuing our Series A Stock, somewhat
offset by advances to related parties. All advances to and repayments from
related parties during the nine months ended September 30, 2006 and 2005 were
made in the ordinary course of business.
CASH AND WORKING CAPITAL REQUIREMENTS
As previously discussed, we plan to continue increasing our presence in the
image capture market and expand our operations into the image display area,
which may require additional capital. Additionally, we may seek to expand our
operations through acquisitions of companies in the image capture and display
industry that we believe could complement our business model, improve our
competitive positioning and expand our product offerings.
Considering current cash reserves and other sources of liquidity, including our
bank line of credit, borrowing from related parties and the aforementioned funds
raised through the sale of our Series B Stock, management believes that the
Company will have sufficient sources of financing to continue its normal
operations through at least the next twelve months. However, our business
expansion plans may require additional capital through either the incurrence of
debt or the issuance of equity securities, or a combination thereof, depending
on the prevailing market and other conditions. There is no assurance that such
additional funds will be available for us to finance our expansion plans.
Furthermore, there is no assurance the net proceeds from any successful
financing arrangement will be sufficient to cover cash requirements as we expand
our business operations.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at September 30,
2006, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (IN THOUSANDS):
LESS THAN ONE - THREE THREE - FIVE
TOTAL ONE YEAR YEARS YEARS
----------- ------------- -------------- --------------
Line of credit (1) $1,013 $1,013 $ -- $ --
Operating lease obligations 568 251 315 2
------ ------ ------ ------
Total contractual cash obligations $1,581 $1,264 $ 315 $ 2
====== ====== ====== ======
(1) We have a line of credit up to $2,500,000, bearing interest at the rate of
prime (8.25% at September 30, 2006) plus 0.5% and secured by all our assets.
Interest payments are due monthly and all unpaid interest and principal was due
in full on October 30, 2006. Although we are currently negotiating a new line of
credit with the same bank, the new terms have not been finalized. The bank
agreed to extend our current line of credit for two months with the existing
terms while the new agreement is finalized.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2006, we did not have any relationship with unconsolidated
entities or financial partnerships, which other companies have established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
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TRENDS
As of September 30, 2006, to the best of our knowledge, no known trends or
demands, commitments, events or uncertainties, except as described in "NOTES TO
FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS AND CONTINGENCIES" existed, which are
likely to have a material effect on our liquidity.
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ITEM 3 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 as of the end of the period covered by this
report (the "Evaluation Date"). Based upon the evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective. Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. Disclosure controls
include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal controls over financial reporting that
occurred during the quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to the "NOTES TO FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS AND
CONTINGENCIES" for a discussion of the Company's legal proceedings.
ITEM 6 - EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
--------------- --------------------------------------------- ---------------------------------------------
2.1 Share Exchange Agreement Incorporated by reference to Exhibit 99.1
to Form 8-K dated April 19, 2004
3.1 Certificate of Incorporation, dated Incorporated by reference to Exhibit 3.1 on
February 15, 2002 Form 10-KSB dated March 31, 2005
3.2 Certificate of Amendment to the Company's Incorporated by reference to Exhibit 3.2 on
Certificate of Incorporation dated March Form 10-KSB dated March 31, 2005
19, 2004
3.3 Certificate of Designation of Preferences, Incorporated by reference to Exhibit 10.4
Rights and Limitations of Series A Stock as on Form 8-K dated March 21, 2005
filed with the Secretary of State of the
State of Delaware on March 15, 2005
3.4 Amended and Restated Bylaws Incorporated by reference to Exhibit 3.4 on
Form 10-KSB dated March 31, 2005
3.5 Certificate of Amendment to the Company's Incorporated by reference to Exhibit 3.5 on
Certificate of Incorporation dated June 23, Form 10-QSB dated August 21, 2006
2006
3.6 Certificate of Designation of Preferences, Incorporated by reference to Exhibit 10.4
Rights and Limitations of Series B Stock as on Form 8-K dated August 14, 2006
filed with the Secretary of State of the
State of Delaware on June 10, 2006
10.1 Form of Convertible Preferred Stock and Incorporated by reference to Exhibit 10.1
Common Stock Warrant Purchase Agreement on Form 8-K dated March 21, 2005
entered into by and between the Company and
the purchasers
10.2 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 10.2
on Form 8-K dated March 21, 2005
10.3 Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.3
on Form 8-K dated March 21, 2005
10.4 2002 Amended and Restated Stock Option Plan Incorporated by reference to Exhibit 10.4
on Form 10-KSB dated March 31, 2005
10.5 Employment Agreement entered between the Incorporated by reference to Exhibit 10.5
Company and Darwin Hu on April 26, on Form 8-K dated May 2, 2005
2005
10.6 Employment Agreement entered between the Incorporated by reference to Exhibit 10.6
Company and William Hawkins on April 26, on Form 8-K dated May 2, 2005
2005
10.7 Employment Agreement entered between the Incorporated by reference to Exhibit 10.7
Company and David P. Clark on April 26, 2005 on Form 8-K dated May 2, 2005
10.8 2006 Stock Option Incorporated by reference to Exhibit 10.8
Plan on Form 10-QSB dated August 21, 2006
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
---------------- --------------------------------------------- ---------------------------------------------
10.9 Form of Convertible Preferred Stock and Incorporated by reference to Exhibit 10.1
Common Stock Warrant Purchase Agreement on Form 8-K dated August 14, 2006
entered into by and between the Company and
the purchasers
10.10 Form of Common Stock Purchase Incorporated by reference to Exhibit 10.2
Warrant on Form 8-K dated August 14, 2006
10.11 Form of Registration Rights Incorporated by reference to Exhibit 10.3
Agreement on Form 8-K dated August 14, 2006
14 Code of Ethics adopted by the Company's Incorporated by reference to Exhibit 14 on
board of directors on March 28, Form 10-KSB dated March 31, 2005
2005
31.1 Certification Pursuant to Section 302 of Filed herewith
the Sarbanes-Oxley Act - Darwin Hu
31.2 Certification Pursuant to Section 302 of Filed herewith
the Sarbanes-Oxley Act - William Hawkins
32.1 Certifications Pursuant to Section 906 of Filed herewith
the Sarbanes-Oxley Act - Darwin Hu
32.2 Certifications Pursuant to Section 906 of Filed herewith
the Sarbanes-Oxley Act - William Hawkins
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Sysview
Technology, Inc has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSVIEW TECHNOLOGY, INC.
Date: November 14, 2006
/S/ DARWIN HU
Darwin Hu, Chairman and Chief Executive Officer
Date: November 14, 2006
/S/ WILLIAM HAWKINS
William Hawkins, Acting Chief Financial Officer
Chief Operating Officer and Secretary
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