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, 2007
|_| 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 October 31, 2007 was
14,933,754.
-------------------------------------------
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,
2007 2006
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 2,137 $ 1,333
Trade receivables 1,931 1,813
Inventories 1,356 1,642
Prepaid expenses and other current assets 86 73
-------- --------
Total current assets 5,510 4,861
Fixed assets, net 143 108
Long-term investment 160 160
-------- --------
Total assets $ 5,813 $ 5,129
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank line of credit $ -- $ 1,013
Current portion of long-term debt and
related warrant liability 1,350 --
Trade payables to related parties 602 952
Trade payables and other current liabilities 621 704
Accrued dividends on Series A 5% cumulative
convertible preferred stock 161 152
-------- --------
Total current liabilities 2,734 2,821
Long-term bank line of credit 2,000 --
Long-term loan, net of current portion 3 --
Other liabilities:
Liability under derivative contracts 692 229
-------- --------
Total liabilities 5,429 3,050
Commitments and contingencies (Note 9)
Convertible preferred stock, $.001 par value,
2,000 authorized:
Series A 5% cumulative convertible preferred
stock, 11.5 and 16 shares 983 957
issued and outstanding at September 30, 2007
and December 31, 2006,
respectively; liquidation value of $1,150
and $1,565 at September 30,
2007 and December 31, 2006, respectively
Series B convertible preferred stock, 11.2
and 11.5 shares issued and 415 152
outstanding at September 30, 2007 and
December 31, 2006, respectively;
liquidation value of $1,120 and $1,150 at
September 30, 2007 and
December 31, 2006, respectively
Stockholders' (deficit) equity:
Common stock $.001par value, 50,000 authorized,
14,934 shares issued 14 24
and 14,434 outstanding at September 30, 2007
and 24,642 shares issued
and 24,142 outstanding at December 31, 2006
(500 shares held in escrow)
Additional paid-in capital 29,622 29,651
Accumulated deficit (30,650) (28,705)
-------- --------
Total stockholders' (deficit) equity (1,014) 970
-------- --------
Total liabilities and stockholders'
(deficit) equity $ 5,813 $ 5,129
======== ========
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
Net sales $ 3,296 $ 4,098 $ 11,119 $ 9,075
Cost of sales 1,975 2,700 6,609 5,976
-------- -------- -------- --------
Gross profit 1,321 1,398 4,510 3,099
Operating expenses:
Selling and marketing 310 307 1,072 900
General and administrative 610 676 2,138 1,963
Research and development 526 584 2,052 1,449
-------- -------- -------- --------
Total operating expenses 1,446 1,567 5,262 4,312
-------- -------- -------- --------
Operating loss (125) (169) (752) (1,213)
-------- -------- -------- --------
Other income (expense)
Fair value of common stock warrants issued
in connection with equity financing -- (173) -- (173)
Preferred stock issuance costs -- (80) -- (80)
Change in fair value of derivative instruments (464) 955 (501) 645
Other 13 (15) 33 (45)
-------- -------- -------- --------
Total other income (expense) (451) 687 (468) 347
-------- -------- -------- --------
Net income (loss) before income taxes (576) 518 (1,220) (866)
Provision for income taxes 2 -- 4 --
-------- -------- -------- --------
Net income (loss) (578) 518 (1,224) (866)
Dividend on Series A and accretion of
Series A and Series B preferred stock
redemption value (237) (209) (721) (504)
-------- -------- -------- --------
Net income (loss) available to
common stockholders $ (815) $ 309 $ (1,945) $ (1,370)
======== ======== ======== ========
Net income (loss) per common share -
basic and diluted $ (0.04) $ 0.01 $ (0.09) $ (0.06)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 21,717 24,093 22,445 24,092
======== ======== ======== ========
Diluted 21,717 24,316 22,445 24,092
======== ======== ======== ========
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,
----------------------
2007 2006
------- -------
OPERATING ACTIVITIES
Net loss available to common stockholders $(1,945) $(1,370)
Adjustments to reconcile net loss to net cash
used by Operating activities:
Depreciation expense 32 33
Stock-based compensation cost - options 1,272 977
Fair value of common stock warrants issued
for services rendered 14 --
Interest expense attributable to amortization
of debt issuance costs 2 --
Change in fair value of derivative instruments 501 (645)
Fair value of common stock warrants in
connection with equity financing -- 173
Accretion of Series A and Series B preferred stock
redemption value 657 445
Changes in operating assets and liabilities:
Trade receivables (118) (801)
Inventories 286 (247)
Prepaid expenses and other current assets (13) (82)
Accrued dividends on Series A 5%
cumulative convertible stock 64 59
Trade payables to related parties (350) 327
Trade payables and other current liabilities (18) 183
------- -------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 384 (948)
------- -------
INVESTING ACTIVITIES
Capital expenditures (67) (209)
------- -------
CASH USED BY INVESTING ACTIVITIES (67) (209)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock -- 1,150
Payoff of existing bank line of credit (1,013) --
Advances on replacement bank line of credit 1,500 --
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 487 1,150
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 804 (7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,333 1,426
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,137 $ 1,419
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Restricted common stock acquired from
related party $ 2 $ --
======= =======
Conversion of convertible preferred
stock to common stock $ 525 $ 30
======= =======
Issuance of preferred stock warrants in
connection with debt financing $ 399 $ --
======= =======
Purchase of restricted common stock for retirement $ 2,000 $ --
======= =======
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
ORGANIZATION
Sysview Technology, Inc. ("Sysview" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices ("SOHO"), professional practices as well as consumers
(referred to herein collectively as "Enterprises"). Sysview is a market-leader
in providing USB-powered scanning solutions to a wide variety of industries and
market applications. The Company's patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed in both business
and personal use. In addition, Sysview is involved in the research and
development of certain technologies related to the field of high definition
("HD") display.
Syscan, Inc., the Company's wholly-owned subsidiary, was incorporated in
California in 1995 to develop and manufacture a new generation of contact image
sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging
sensor devices. During the late 1990s, the Company established many technical
milestones and was granted numerous patents for its linear imaging technology.
The Company's patented CIS and mobile imaging scanner technology provides high
quality images at extremely low power consumption levels allowing delivery of
compact scanners in a form ideally suited for laptop or desktop computer users
who need a small light weight device to scan or fax documents.
The Company's business model was developed around intellectual property ("IP")
driven products sold primarily to original equipment manufacturers ("OEM"),
private label brands and value added resellers ("VAR") and can be found in a
variety of applications, including but not limited, to the following:
o Document and information management;
o Identification card scanners;
o Passport security scanners;
o Bank note and check verification;
o Business card readers;
o Barcode scanning; and
o Optical mark readers used in lottery terminals.
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
("GAAP").
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, 2007 are not necessarily
indicative of the operating results that may be expected for the entire year
ending December 31, 2007. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2006, filed with the Securities and
Exchange Commission ("SEC") on April 3, 2007.
The consolidated financial statements include the accounts of Sysview and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
6
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Certain accounts have been reclassified to conform to the current period
presentation. Such reclassifications did not affect total net sales, operating
income (loss) or net income (loss) available to common stockholders.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS 133 AND 140,
("SFAS 155"). SFAS 155 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. Sysview adopted SFAS 155 on January
1, 2007 and will apply the standard to any new hybrid financial instruments
issued subsequent to January 1, 2007. However, as allowed by paragraph 4(c) of
SFAS 155, Sysview did not elect to apply SFAS 155 to previously existing hybrid
financial instruments including the Company's Series A 5% Cumulative Convertible
Preferred Stock ("Series A Stock") and Series B Convertible Preferred Stock
("Series B Stock"). As such, the adoption of SFAS 155 had no impact to the
Company's consolidated financial position, results of operations or cash flows.
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 will more likely than not be sustained on audit,
based on the technical merits of the position. Sysview adopted FIN 48 on January
1, 2007. The adoption had no impact to the Company's consolidated financial
position, results of operations or cash flows.
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 Generally Accepted
Accounting Principle ("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 the Company January 1, 2008. The Company is currently
evaluating the potential impact this standard may have on its consolidated
financial position, cash flows and results of operations, but does not believe
the impact of the adoption will be material.
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES-INCLUDING AN AMENDMENT OF FASB STATEMENT NO.
115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value, with unrealized gains and losses related
to these financial instruments reported in earnings at each subsequent reporting
date. SFAS 159 will be effective for financial statements issued for fiscal
years beginning after November 15, 2007, and will be adopted by the Company
January 1, 2008. The Company does not expect the adoption of SFAS 159 to result
in a significant impact on its consolidated financial position, cash flows and
results of operations.
In June 2007, the FASB ratified the Emerging Issues Task Force ("EITF") Issue
No. 07-3, "ACCOUNTING FOR NONREFUNDABLE ADVANCE PAYMENTS FOR GOODS OR SERVICES
TO BE USED IN FUTURE RESEARCH AND DEVELOPMENT Activities" ("EITF 07-3"). EITF
07-3 requires non-refundable advance payments for goods and services to be used
in future research and development activities to be recorded as an asset and the
payments to be expensed when the research and development activities are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal years
beginning after December 15, 2007 and will be adopted in the first quarter of
fiscal 2008. The Company is currently evaluating the potential impact this
standard may have on its consolidated financial position, cash flows and results
of operations, but does not believe the impact of the adoption will be material.
7
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Other recent accounting pronouncements issued by the FASB (including its 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
RELATED-PARTY PURCHASES
The Company purchases the majority of its finished scanner imaging products from
Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of Sysview's majority stockholder.
The Company's Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He
resigned from STH effective December 2004.
Purchases from SLL totaled $1,780,000 and $6,101,000 for the three and nine
months ended September 30, 2007, respectively, and $2,669,000 and $5,923,000 for
the three and nine months ended September 30, 2006, respectively. All purchases
from SLL were carried out in the normal course of business. As a result of these
purchases, the Company was liable to SLL for $602,000 and $952,000 at September
30, 2007 and December 31, 2006, respectively.
COMMON STOCK ACQUIRED FROM RELATED PARTY
On March 21, 2007, the Company entered into an agreement with STH whereby the
Company agreed to forego any further collection efforts, including legal action,
related to loans that were previously made by the Company to STH, which were
never repaid by STH. In exchange, STH agreed to the cancellation of 2,600,000
shares of the Company's restricted common stock beneficially owned by STH. In
addition, both parties mutually agreed to release and discharge any and all
claims that each may have against the other party. The stock certificates were
subsequently cancelled by the Company's transfer agent. The Company recorded the
stock acquisition as a decrease to common stock with the corresponding offset to
additional paid-in capital during the first quarter of fiscal 2007.
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, 2007, the Company had consolidated balances of
approximately $1,835,000, which were not guaranteed by the 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. Customers that exceeded 10% of total revenues and accounts
receivable were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2007 2006 2007 2006
------------ ------------ ----------- ----------
Customer A 26% 51% 28% 43%
Customer B 23 10 13 10
Customer C 19 * 15 11
Customer D 11 * * *
Customer E * 17 14 16
* Customer accounted for less than 10% for the period indicated.
8
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Trade receivables from these customers totaled $1,728,000 at September 30, 2007.
As of September 30, 2007, all the Company's trade receivables were unsecured.
NOTE 5 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all finished scanner imaging products from
one vendor that is also a wholly-owned subsidiary of the parent company of its
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.
NOTE 6 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Sysview has several stock-based employee compensation plans, which are more
fully described in the Company's 2006 Annual Report on Form 10-KSB.
Effective January 1, 2006 Sysview adopted the fair value recognition provisions
of SFAS 123R, SHARE-BASED PAYMENTS ("SFAS 123R"), using the modified prospective
application method. Under this transition method, compensation cost recognized
for the three and nine months ended September 30, 2007 and 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 the Accounting Principles Board ("APB") 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES ("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
123R).
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,
-------------------------- --------------------------
2007 2006 2007 2006
----------- ----------- ------------ ----------
Selling and marketing $ 15 $ 13 $ 107 $ 38
General and administrative 71 227 709 788
Research and development 106 96 456 151
----------- ----------- ------------ ----------
Total $192 $336 $ 1,272 $977
=========== =========== ============ ==========
At September 30, 2007, the Company had approximately $991,000 of total
unrecognized compensation cost related to stock options. This cost is expected
to be recognized over a weighted-average period of approximately 18 months.
9
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
STOCK OPTIONS
The following table summarizes stock option activity and related information for
the nine months ended September 30, 2007:
WEIGHTED-AVERAGE
EXERCISE
OPTIONS PRICE
------------- -------------
Outstanding at December 31, 2006 4,890,000 $0.18
Granted 3,036,000 0.70
Exercised (300,000) (0.01)
Cancelled (163,450) (0.84)
------------- -------------
Outstanding at September 30, 2007 7,462,550 $0.39
============= =============
The following table summarizes all options outstanding and exercisable by price
range as of September 30, 2007:
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 3,696,550 4.57 $0.01 3,696,550 $0.01
$0.65 - $0.70 3,186,000 9.43 $0.70 1,042,833 $0.70
$1.01 580,000 8.64 $1.01 276,667 $1.01
NOTE 7 - BASIC AND DILUTED NET INCOME (LOSS) PER COMMON 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 three and nine months ended September 30, 2007 or for the
nine months ended September 30, 2006 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 available to common stockholders $ 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
==========
10
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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.
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
As previously discussed in Note 3, the Company acquired 2,600,000 shares of the
Company's restricted common stock during the first quarter of fiscal 2007. The
Company's transfer agent subsequently cancelled the shares.
During the second quarter of 2007, the Company issued 300,000 shares of common
stock upon the exercise of employee stock options by the Company's principal
officers in a cashless exercise.
During the second quarter of 2007, the Company issued 30,927 shares of common
stock resulting from the conversion of $26,500 (265 shares) of Series A 5%
cumulative convertible preferred stock ("Series A Stock") and the related
accrued dividend shares of 4,427 as discussed below.
During the third quarter of 2007, the Company issued 560,734 shares of common
stock resulting from the conversion of (i) $388,500 (3,885 shares) of Series A
Stock and the related accrued dividend shares of 55,527 and penalty shares of
86,707 and (ii) $30,000 (300 shares) of Series B Stock as discussed below.
During the third quarter of 2007, the Company repurchased 8,000,000 of its
restricted common stock from its majority shareholder for $2,000,000 less
related transaction fees. Of the $2,000,000 consideration, $500,000 was paid
through the Company's newly established credit line with a commercial bank, and
the remainder was financed through a $1,500,000 loan from Montage Capital, LLC a
private investment group. See Note 9. Additionally, the Company agreed that if
its HD display business is sold to a certain party, specifically identified in
the repurchase agreement, and receives stock of the buyer as consideration, then
it will transfer a portion of that stock to the majority stockholder. The
Company repurchased the 8,000,000 shares for the purpose of retiring the shares.
As such, the Company accounted for the repurchase under the Accounting Research
Bulletin ("ARB") 43, RESTATEMENT AND REVISION OF ACCOUNTING RESEARCH BULLETINS
("ARB 43") by recording a reduction to common stock and additional paid-in
capital. As of the date of this report, the physical stock certificate was being
held by the Company's transfer agent and was in the process of being retired.
PREFERRED STOCK ACTIVITY
SERIES A 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
During the second quarter of 2007, 265 shares of Series A Stock ($26,500) and
the related accrued dividend shares of 4,427 were converted into shares of
common stock.
During the third quarter of 2007, 3,885 shares of Series A Stock ($388,500) and
the related accrued dividend shares of 55,527 were converted into shares of
common stock.
11
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
SERIES B CONVERTIBLE PREFERRED STOCK
During the third quarter of 2007, 300 shares of Series A Stock ($30,000) were
converted into shares of common stock.
SERIES A STOCK DIVIDENDS
The Company's Series A Stock accrues cumulative dividends at a rate of 5% per
year, 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 cash dividends. During the three and nine months ended September 30,
2007, Series A Stock dividends were approximately $20,000 and $64,000,
respectively. During the three and nine months ended September 30, 2006, Series
A Stock dividends were approximately $22,000 and $59,000, respectively. Series A
Stock dividends are included as a non-operating expense on the Company's
consolidated 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 and are
disclosed as a non-operating expense on the Company's consolidated statement of
operations. Accretion of the preferred stock redemption value, for both Series A
and Series B, for the three and nine months ended September 30, 2007 was
approximately $217,000 and $657,000, respectively. Accretion of the Series A
preferred stock redemption value for the three and nine months ended September
30, 2006 was approximately $187,000 and $445,000, respectively.
The increase (decrease) in the fair value of the liability for derivative
contracts, both Series A and Series B, totaled approximately $464,000 and
$501,000 for the three and nine months ended September 30, 2007, respectively.
The decrease in the fair value of the liability for the Series A and Series B
derivative contract totaled approximately ($955,000) and ($645,000) for the
three and nine months ended September 30, 2006, respectively. The offsetting
adjustment to the change in the fair value of the liability for derivative
contracts is 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.
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 and Series B Stock derivative liabilities as of September 30,
2007 and 2006 are as follows:
SEPTEMBER 30,
---------------------------
2007 2006
----------- ------------
Weighted average estimated values per share $0.16 $0.15
Expected life in years 3.0 3.0
Expected volatility 32% 42%
Expected dividend yield 0% 0%
Risk free interest rate 5.3% 5.3%
12
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 as of September
30, 2007 are as follows (IN THOUSANDS):
FUTURE
MINIMUM
YEAR ENDING LEASE
SEPTEMBER 30, PAYMENTS
----------------- -----------
2008 $ 288
2009 51
2010 1
-----------
Total $ 340
===========
BANK LINE OF CREDIT
During September 2007, Sysview replaced its existing $2,500,000 line of credit
at a commercial bank with a similar line of credit ("LOC") at a different
commercial bank. The new LOC initial maximum available credit is $2,000,000 and
will automatically increase to $3,000,000 on the later of (i) December 12, 2007
if the Company remains in compliance with all debt covenants, or (ii) Sysview
pays down its subordinate debt (as discussed in the following paragraph) below
$1,000,000. Borrowings under the LOC are limited to 80% of eligible accounts
receivable and 40% of eligible inventory, as defined in the LOC agreement. The
LOC bears an annual interest rate of prime (7.75% at September 30, 2007) plus
1.25% for advances drawn against accounts receivables and prime plus 2.25% for
advances drawn against inventory. Interest payments are due monthly and all
unpaid interest and principal is due in full on September 13, 2009. Upon certain
events of default, the default variable interest rate increases to prime plus
5%. The Company did not have any borrowing capacity on the LOC at September 30,
2007.
As of September 30, 2007, Sysview was in compliance with all LOC debt covenants.
LONG-TERM LOAN
On September 27, 2007 the Company entered into a $1,500,000 term loan agreement
("Loan Agreement") with Montage Capital, LLC ("Lender") in an arm's length
transaction. The Company received $1,500,000, less closing costs, and was
restricted under the Loan Agreement, to use the funds for repurchasing shares of
the Company's common stock as previously discussed at Note 8. Sysview granted
the Lender a continuing security interest, and pledged to the Lender, all of its
assets to secure payment and performance of its obligations under the Loan
Agreement. The Loan Agreement and the security interest are subordinate to
Sysview's LOC.
The Loan Agreement bears an annual interest rate of 15% with interest-only
payments due monthly starting from initial funding through October 31, 2007.
Thereafter, principal of $100,000 per month plus accrued interest is due at the
end of each month through the loan's maturity date of November 30, 2008. The
remaining principal balance and accrued interest is due on the maturity date. If
the Company sells any assets outside the ordinary course of business and
receives cash proceeds from such sale, the Lender must be paid 20% of such
proceeds as pre-payment of the outstanding principal.
13
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The Lender has the right to declare all of the amounts due under the Loan
Agreement immediately due and payable for any of the following reasons:
o Sysview fails to make any payment of principal or interest on its due date,
or pay any other amount due to the Lender within ten days after such amount
is due and payable;
o Sysview fails or neglects to perform, keep, or observe any term, provision,
condition, covenant, or agreement contained in the Loan Agreement, subject
in some cases to a ten-day grace period;
o Sysview or any person acting on behalf of Sysview makes any warranty,
representation, or other statement that is incorrect in any material
respect when made;
o A default or event of default occurs under any agreement to which Sysview
is a party or by which it is bound, including Sysview's LOC (as discussed
above) (i) resulting in a right by the other party or parties, whether or
not exercised, to accelerate the maturity of any indebtedness in excess of
$50,000 or (ii) the occurrence of a material adverse effect. A material
adverse effect is defined as a change in Sysview's business, prospects,
operations, results of operations, assets, liabilities, or financial or
other condition, (ii) the material impairment of the prospect of repayment
of any portion of the amounts due the Lender by Sysview, or (iii) a
material adverse change in the value of the collateral securing the amounts
due under the Loan Agreement;
o Any portion of Sysview's assets is attached, seized, or levied upon, or a
judgment for more than $50,000 is awarded against Sysview and is not stayed
within ten days;
o If Sysview dissolves or begins a bankruptcy or other insolvency proceeding;
or
o A bankruptcy or other insolvency proceeding is begun against Sysview and is
not dismissed or stayed within sixty days.
In connection with the Loan Agreement, the Company issued warrants ("Loan
Warrants") to purchase up to 650,000 shares of Sysview's common stock at an
initial exercise price of $0.60 per share. The Loan Warrants vested immediately
and expire September 2012. Subsequent to the initial funding of the Loan
Agreement, the warrant holders may require the Company to purchase the warrant
for a maximum of $250,000. And if any amount remains outstanding under the Loan
Agreement after March 31, 2008, the warrant repurchase price increases to a
maximum of $350,000.
Under the Black-Scholes pricing model, the fair value of the Loan Warrant on the
issuance date was $399,000. Because the warrants were immediately redeemable for
$250,000 cash at the warrant holder's request, the Company accounted for the
$250,000 warrant redemption value as a current liability and the $149,000 excess
fair value over the warrant redemption value as additional paid-in capital. The
Company will accrete the entire $399,000 debt discount to interest expense over
the life of the Loan Agreement. The Company recorded interest expense for the
year ended September 30, 2007 of $2,000 in connection with the Loan Warrants.
Future annual repayment obligations as of September 30, 2007 were as follows
(IN THOUSANDS):
Principal payments due less than 12 months $ 1,100
Principal payments due more than 12 months 400
Loan Warrants redemption value 250
-----------
Total obligations 1,750
Less unamortized debt discount (397)
Less current portion (1,350)
-----------
Long-term loan, net of current portion $ 3
===========
14
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The Company calculated the initial fair value of all its warrants under the
Black-Scholes pricing model with the following assumptions: contractual term of
five years, 5.3% risk-free interest rate, expected volatility of 90% and
expected dividend yield of 0%.
The Loan Warrant includes registration rights that require the Company to file a
registration statement with the Securities and Exchange Commission (the "SEC")
registering the shares of common stock underlying the Loan Warrant within 120
days after the issue date and to have such registration statement declared
effective within 165 days after the issue date. For any 30 day period during
which the registration obligations are unfulfilled, the Lender may acquire an
additional 27,500 shares under the Loan Warrant. The Company accounts for the
Loan Warrant registrations rights under EITF-00-19-2, ACCOUNTING FOR
REGISTRATION PAYMENT ARRANGEMENTS ("EITF-00-19-2"). EITF-00-19-2 requires the
contingent liability under the registration payment arrangement to be included
in the allocation of proceeds from the related debt financing transaction if
payment is probable and can be reasonably estimated at inception. In
management's opinion, payment of the Loan Warrant registrations rights
contingent liability is not probable, and therefore, not reflected in the
Company's financials statements as of September 30, 2007. The Company will
continue to evaluate the registration rights contingent liability and the
probability of the occurrence of payment under the registration rights at each
reporting period to determine if the liability should be reflected in the
Company's financial statements.
Upon the occurrence of an event of default under the Loan Agreement, the Lender
may acquire 13,750 shares under the Loan Warrant on the date of such occurrence
and an additional 13,750 shares on the first day of each 30 day period after
such event of default until all amounts under the Loan Agreement have been paid
in full.
The Loan Warrant provides for weighted average anti-dilution price adjustments
if the Company issues common stock (or securities convertible into common stock)
for consideration less than the then-effective exercise price; provided that if
the Company sells or issues its equity securities within one year after the
issue date in an offering in which the Company receives gross proceeds of at
least $1,000,000 ("Equity Event"), then, at the option of the Lender, the shares
into which the Loan Warrant is convertible will be of the type and series of
stock issued in the Equity Event, the exercise price shall be equal to the price
per share paid in the Equity Event, and the Lender shall have the rights given
to the purchasers in the Equity Event.
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, 2007 termination payments
totaling $484,000 are in effect.
CONSULTING AGREEMENT
The Company entered into an Investor Relations Consulting Agreement dated
December 5, 2006, for a term of one year beginning January 1, 2007, payable
monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for
April, May and June; (iii) $8,500 for July, August and September; and (iv)
$9,000 for October, November, and December. Additionally, the Company agreed to
pay the consultant 90,000 warrants with an exercise price of $0.65 per share,
expiring in three years, with immediate vesting on January 1, 2007, and
exercisable at the rate of 7,500 options the first day of each month during
calendar 2007. In April 2007, the Company entered a separate warrant agreement
that amended terms of the warrants awarded in the December 5, 2006 agreement.
Under the April 2007 agreement, the warrants shall vest 7,500 per month on the
first day of each month commencing on January 1, 2007 and are immediately
exercisable upon vesting. In the event the consulting agreement is terminated
prior to December 1, 2007, all unvested warrants shall be immediately cancelled.
The warrants will not be registered under federal or state securities laws. The
fair value of these warrants, as determined by the Black-Scholes valuation
model, totaled approximately $18,000 and is amortized ratably over the vesting
period. As such, $5,000 and $13,000 was charged to general and administrative
expense and credited to additional paid-in capital during the three and nine
months ended September 30, 2007, respectively.
15
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
SERIES B PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of a registration rights agreement ("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 following August 8, 2006 and to
have the registration statement declared effective by December 6, 2006, which is
120 days following August 8, 2006. If the registration statement was not timely
filed, or declared effective within the timeframe described, or if the
registration was suspended other than as permitted in the Registration Rights
Agreement, the Company was 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. Because the SEC did
not declare the SB-2 effective until January 18, 2007, the Company accrued
approximately $7,000, included in general and administrative expense, for
damages during the first quarter of fiscal 2007.
LITIGATION, CLAIMS AND ASSESSMENTS
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.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Sysview currently 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, 2007 and 2006, 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,
------------------------------------------------------------------------------
2007 2006 2007 2006
------------------------------------------------------------------------------
U.S. $ 3,103 $ 3,910 $ 10,642 $ 8,497
Asia 7 111 7 317
Europe and other 186 77 470 261
------------------------------------------------------------------------------
$ 3,296 $ 4,098 $ 11,119 $ 9,075
==============================================================================
16
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Presented below is information regarding identifiable assets, classified by
operations located in the U.S., Europe and Asia (IN THOUSANDS):
SEPTEMBER 30, DECEMBER
2007 31, 2006
-------------------------------
U.S. $ 5,508 $ 4,986
Asia 119 84
Europe 186 59
-------------------------------
$ 5,813 $ 5,129
===============================
Assets located in Asia relate to tooling equipment required to manufacture
Sysview's product. Assets located in Europe relate to the Company's field
service, sales, distribution and inventory management in the Netherlands.
NOTE 11 - SUBSEQUENT EVENT
During October 2007, 50,000 shares of Series B Stock ($500,000) were converted
into 500,000 shares of common stock. As of November 14, 2007, the remaining
liquidation value of Series B Stock was $620,000.
During November 2007, the Company suspended its HD display research and
development efforts. The Company does not expect to expend any additional effort
or funds to further develop and deploy its HD technology. The Company has been
and will continue to evaluate different strategic opportunities related to its
in-process HD technology and intellectual property, including but not limited to
the sale of all HD-related assets.
17
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, 2006 as
filed with the Securities and Exchange Commission on April 3, 2007. We undertake
no duty to update any forward-looking statement to conform the statement to
actual results or changes in our expectations.
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, 2007 compared
to the three and nine months ended September 30, 2006. 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, 2007 as compared to the nine months ended September 30, 2006.
OVERVIEW
We are in the business of designing, developing and delivering imaging
technology solutions. Our technology is protected under multiple patents. We
focus our research and development toward new deliverable and marketable
technologies. We sell our products to customers throughout the world, including
the United States, Canada, Europe, South America, Australia and Asia.
Our strategy includes a plan to expand our document/image-capture product line
and technology while leveraging our assets in other areas of the imaging
industry. We are actively shipping six groups of image-capture products. We have
expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future 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.
During September 2007, we engaged an independent investment firm to explore and
evaluate a range of strategic opportunities to enhance shareholder value,
including, but not limited to, combinations, partnerships, sales or mergers of
our operations or assets with another entity and/or a recapitalization. As of
the date of this filing, we continue to evaluate different strategic
opportunities.
18
During November 2007, we suspended our HD display research and development
efforts. We do not expect to expend any additional effort or funds to further
develop and deploy our HD technology. We have been and will continue to evaluate
different strategic opportunities related to our in-process HD technology and
intellectual property, including but not limited to the sale of all HD-related
assets.
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 we believe are 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, optical image chips and
other optoelectronic products. Revenue is recognized when the product is shipped
or delivered and the risks, rewards and title of ownership have transferred to
the customer. We recognize some shipping and handling fees as revenue, and the
related expenses as a component of cost of sales. All internal handling charges
are included with 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, 2007, we had no inventory reserve. Currently, we
purchase the majority of our finished scanner imaging products from Syscan Lab
Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited
("STH"), the parent company of our majority stockholder. SLL 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, SLL 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 SLL, Sysview does
not record a product warranty reserve.
RELATED-PARTY TRANSACTIONS
We have significant related-party transactions and agreements, which we believe
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
The Company purchases the majority of its finished scanner imaging products from
SLL as discussed above. Our Chairman and CEO, Darwin Hu, was formerly the CEO of
STH. He resigned from STH effective December 2004.
19
Purchases from SLL totaled $1,780,000 and $6,101,000 for the three and nine
months ended September 30, 2007, respectively, and $2,669,000 and $5,923,000 for
the three and nine months ended September 30, 2006, respectively. All purchases
from SLL were carried out in the normal course of business. As a result of these
purchases, the Company was liable to SLL for $602,000 and $952,000 at September
30, 2007 and December 31, 2006, respectively.
COMMON STOCK ACQUIRED FROM RELATED PARTY
On March 21, 2007, we entered into an agreement with STH whereby we agreed to
forego any further collection efforts, including legal action, related to loans
that we previously made to STH, which were never repaid by STH. In exchange, STH
agreed to the cancellation of 2,600,000 shares of our restricted common stock
beneficially owned by STH. In addition, both parties mutually agreed to release
and discharge any and all claims that each may have against the other party. The
stock certificates were subsequently cancelled by the Company's transfer agent.
INTANGIBLE AND LONG-LIVED ASSETS
We evaluate our intangible assets and long-lived assets, 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 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 or nine months ended
September 30, 2007.
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, 2007.
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, we have 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 SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS
133") and the Emerging Issues Task Force ("EITF") Abstract 00-19, ACCOUNTING FOR
20
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.
ACCOUNTING FOR CERTAIN REGISTRATION RIGHTS RELATED TO WARRANTS ISSUED IN
CONNECTION WITH DEBT
We account for certain warrant registrations rights under EITF-00-19-2,
ACCOUNTING FOR REGISTRATION PAYMENT ARRANGEMENTS ("EITF-00-19-2"). EITF-00-19-2
requires the contingent liability under the registration payment arrangement to
be included in the allocation of proceeds from the related debt financing
transaction if payment is probable and can be reasonably estimated at inception.
In management's opinion, payment of the Loan Warrant registrations rights
contingent liability is not probable, and therefore, not reflected in our
financials statements as of September 30, 2007. We will continue to evaluate the
registration rights contingent liability and the probability of the occurrence
of payment under the registration rights at each reporting period to determine
if the liability should be reflected in our financial statements.
STOCK-BASED COMPENSATION EXPENSE
Effective January 1, 2006, we adopted SFAS 123R, SHARE-BASED PAYMENTS ("SFAS
123R"). SFAS 123R requires all share-based payments, including grants of
employee stock options and warrants, to be recognized in our financial
statements based on their respective grant date fair values. Under this
standard, the fair value of each share-based payment award is estimated on the
date of grant using an option pricing model that meets certain requirements. We
currently use the Black-Scholes option pricing model to estimate the fair value
of our share-based payment awards. The Black-Scholes model meets the
requirements of SFAS 123R; however, the fair values generated by the model may
not be indicative of the actual fair values of our awards as it does not
consider certain factors important to our awards, such as continued employment,
periodic vesting requirements and limited transferability.
The determination of the fair value of share-based payment awards utilizing the
Black-Scholes model is affected by our stock price and a number of assumptions,
including expected volatility, expected life, risk-free interest rate and
expected dividends. We use the historical volatility for our common stock as the
expected volatility assumption required in the Black-Scholes model, which could
be significantly different than actual volatility. The expected life of the
awards is based on historical and other economic data trended into the future.
The risk-free interest rate assumption is based on observed interest rates
appropriate for the terms of our awards. The dividend yield assumption is based
on our history and expectation of dividend payouts. Forfeitures are estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Stock-based compensation expense recognized in our financial statements
beginning January 1, 2006 and thereafter is based on awards that are ultimately
expected to vest. We evaluate the assumptions used to value our awards on a
quarterly basis. If factors change and we employ different assumptions,
stock-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. Future
stock-based compensation expense and unearned stock-based compensation will
increase to the extent that we grant additional equity awards to employees.
21
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of operations for
the three and nine months ended September 30, 2007 compared to the three and
nine months ended September 30, 2006 (IN THOUSANDS):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ------------------------------------------
2007 2006 $ % 2007 2006 $ %
------- -------- --------- ------- -------- -------- -------- ------
Net sales $ 3,296 $ 4,098 $ (802) (20%) $ 11,119 $ 9,075 $ 2,044 23%
Cost of sales 1,975 2,700 (725) (27) 6,609 5,976 633 11
As a percentage of sales 60% 66% 59% 66%
Selling and marketing expense 310 307 3 1 1,072 900 172 19
General and administrative expense 610 676 (66) (10) 2,138 1,963 175 9
Research and development expense 526 584 (58) (10) 2,052 1,449 603 42
Total other income (expense) (451) 687 NM NM (468) 347 NM NM
Dividend on 5% convertible
preferred stock and accretion of
preferred stock redemption value (237) (209) NM NM (721) (504) NM NM
NM = Not Meaningful
NET SALES
The significant increase in net sales during the nine months ended September 30,
2007 as compared to the nine months ended September 30, 2006 was attributable to
the following:
o The overall growth of the document/image-capture market resulting from
an increased market demand for products that manage how information is
retrieved, stored, shared and disseminated;
o The increased end-user market penetration, including distribution
channel expansion, by both us and our largest customers;
o The expansion of our customer base;
o The increased market acceptance of our more recently introduced
products, which bear higher margins;
o We have experienced a more consistent market delivery of our product,
which is attributable to (i) the growth of our smaller customers and
less dependence on our larger customers, (ii) our management of
customer demand and product delivery and (iii) our movement toward a
just-in-time inventory management product delivery system;
o Our increased use of Value Added Reseller ("VAR") channel
distributions; and
o The growth in the small office home office ("SOHO") markets, and the
result of our efforts to appeal to customers in the SOHO market.
Our sales decreased during the three months ended September 30, 2007 as compared
to the same period during 2006 as a result of the seasonality and abnormally
high sales to one of our largest customers during the three months ended
September 30, 2006.
During the current fiscal year, we have successfully expanded our significant
customer base, which decreases our risk of dependency on a small number of
significant customers. During the three months ended September 30, 2007, only
68% of sales were generated from our top three customers as compared to 79% of
sales generated from our top three customers during the same period in fiscal
2006. During the nine months ended September 30, 2007, only 57% of sales were
generated from our top three customers as compared to 70% of sales generated
from our top three customers during the same period in fiscal 2006. Although we
will continue to focus on expanding our significant customers, we expect that
22
our largest customers will continue to account for a substantial portion of our
net sales in the remainder of fiscal 2007 and for the foreseeable future. The
identities of our largest customer and their respective contributions to our net
sales have varied in the past and will likely continue to vary from period to
period.
Although we expect net sales to increase as we continue to expand our business
and offer additional products in the document/image-capture 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 as a percentage of net sales decreased during both the three and
nine months ended September 30, 2007 as compared to the same periods in 2006 as
a result of a higher proportion of overall net sales being generated from our
most recently introduced and more feature-rich products, including our duplex
scanners (scanners that have the ability to scan both sides of a document at
once). Our duplex scanners, which bear a higher gross margin than our simplex
scanners (scanners that scan only one side of a document) have recently
experienced broader market acceptance.
We expect our cost of sales as a percentage of net sales to fluctuate somewhat
as our product mix fluctuates. Our average selling price and related material
cost used to manufacture our product has been stable and we expect this trend to
continue for the foreseeable future.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of salaries and related costs
of employees, including stock-based compensation costs, engaged in our sales,
marketing and customer account management functions and to a lesser extent,
market development and promotional funds for our retail distribution channels,
tradeshows, website support, warehousing, logistics and certain sales
representative fees. Selling and marketing expense fluctuates depending on the
timing of advertising and promotions of our various new products, including our
attendance at tradeshows, which are key to promoting our products.
The increase in selling and marketing expense during the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006 was
primarily attributable to the stock-based compensation cost (a non-cash charge)
as a result of granting stock options to key employees during the first quarter
of fiscal 2007 and accounting for such option grants under SFAS 123R. See "Note
6: Employee Equity Incentive Plans" in Part I, Item 1 of this Form 10-QSB.
Stock-based compensation cost was $107,000 for the nine months ended September
30, 2007 as compared to $38,000 for the nine months ended September 30, 2006.
To a lesser extent, the increase for the nine months ended September 30, 2007 as
compared to the nine months ended September 30, 2006 was attributable to our
increased staff and related marketing activities to support our expanding
product offerings and the addition of direct sales personnel in Europe and Asia.
Although we expect sales and marketing expenses to fluctuate as a result of the
timing of advertising and promotions of our various new products and stock
option grants, 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. General and
administrative expenses increased during the nine months ended September 30,
2007 as compared to the nine months ended September 30, 2006 in fiscal 2006 as a
result of the following:
23
o The hiring of an outside investor relations firm to manage and enhance
our investor relations function;
o Increased personnel costs to support our expanding business and
related infrastructure; and
o Increased expenses associated with maintaining our public company
status, including the costs of complying with the Sarbanes-Oxley Act.
During the three months ended September 30, 2007 as compared to the three months
ended September 30, 2006, the above increased expenses were more than offset by
the decrease in our stock-based compensation cost (a non-cash charge). We
granted stock options to key employees and directors during the first quarter of
fiscal 2007 and accounted for such option grants under SFAS 123R. See "Note 6:
Employee Equity Incentive Plans" in Part I, Item 1 of this Form 10-QSB.
Stock-based compensation cost was $71,000 during the three months ended
September 30, 2007 as compared to $227,000 during the three months ended
September 30, 2006. We believe this decrease is temporary and we anticipate that
general and administrative expenses will continue to increase 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.
The majority of our research and development expense during all periods
presented was directly attributable to our future products including our HD
display products. The increase during the nine months ended September 30, 2007
as compared to the nine months ended September 30, 2006 is primarily
attributable to (i) the increased amount of expensed equipment required to
support our future HD display product development; and (ii) stock-based
compensation cost (a non-cash charge) as a result of granting stock options to
key employees during the first quarter of fiscal 2007 and accounting for such
option grants under SFAS 123R. See "Note 6: Employee Equity Incentive Plans" in
Part I, Item 1 of this Form 10-QSB. Stock-based compensation cost was $456,000
and $151,000 for the nine months ended September 30, 2007 and 2006,
respectively.
During the three months ended September 30, 2007, we evaluated and refocused our
research and development activities. As a result, we right-sized and reduced our
staff, which directly reduced our research and development expenses during the
three months ended September 30, 2007 as compared to the three months ended
September 30, 2006. Although we plan to continue to invest in product innovation
and development with respect to our document/image-capture products, management
continues to assess research and development efforts, which may result in an
offset to future research and development expenses.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three and nine months ended September 30, 2007
was primarily comprised of the $464,000 and $501,000 increase, respectively, 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).
Other income (expense) for the three and nine months ended September 30, 2006
was primarily comprised of the $955,000 and $645,000 decrease, respectively, 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).
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.
24
DIVIDEND ON SERIES A STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION VALUE
During the three and nine months ended September 30, 2007, the total accretion
on our preferred stock was $217,000 and $657,000, respectively. During the three
and nine months ended September 30, 2006 the total accretion on our preferred
stock was $187,000 and $445,000, respectively. The increases were attributable
to our Series B Stock, which was sold during the third quarter of fiscal 2006.
During the three and nine months ended September 30, 2007, Series A Stock
dividends were approximately $20,000 and $64,000, respectively. During the three
and nine months ended September 30, 2006, Series A Stock dividends were
approximately $22,000 and $59,000, respectively. We do not pay dividends on our
Series B Stock.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, our principal sources of liquidity included cash and cash
equivalents of $2,137,000. We had no unused borrowing capacity under our bank
line of credit.
Operating activities: During the nine months ended September 30, 2007, our
operating activities provided $384,000 of cash. This was primarily a result of
our $1,945,000 net loss, $2,478,000 of net non-cash expenses and accretion of
Series A and Series B preferred stock redemption value, and $149,000 net cash
used by changes in operating assets and liabilities. During the nine months
ended September 30, 2006, our operating activities used $948,000 of cash. This
was primarily a result of our $1,370,000 net loss, $983,000 of net non-cash
expenses and $561,000 net cash used by changes in operating assets and
liabilities. Non-cash items included in net loss available to common
shareholders for both the nine months ended September 30, 2007 and 2006 include
depreciation expense, stock-based compensation cost of options, fair value of
warrants issued for services rendered, change in fair value of derivative
instruments and the accretion of our Series A and Series B preferred stock
redemption value.
Changes in our operating assets and liabilities are a result of the significant
increase in the sales of our product during the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006 and the timing of
purchasing our product to support the increase of sales.
A significant use of cash during the nine months ended September 30, 2007 as
compared to a significant source of cash during the nine months ended September
30, 2006 was attributable to the timing of paying our contract manufacturer
according to normal and customary payment terms. 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.
Investing activities: Our investing activities for both the nine months ended
September 30, 2007 and 2006 were minimal and consisted of purchasing computer
and general equipment during the normal course of business.
Financing activities: During the nine months ended September 30, 2007, our
financing activities consisted of (i) a $500,000 draw against our bank line of
credit to meet short-term obligations, including payment on the purchase of our
product, and (ii) the replacement of our existing line of credit at a commercial
bank with a similar line of credit at a different commercial bank. During the
nine months ended September 30, 2006, cash provided by financing activities was
attributable to the $1,150,000 sale 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 used the proceeds for sales, marketing, research
and development and for working capital and general corporate purposes.
CASH AND WORKING CAPITAL REQUIREMENTS
During September 2007, we repurchased 8,000,000, or approximately 36% of the
then outstanding shares, of our restricted common stock from our majority
shareholder for $2,000,000 less related transaction fees. Of the $2,000,000
consideration, $500,000 was paid through our newly established credit line with
a commercial bank, and the remainder was financed through a $1,500,000 loan from
Montage Capital, LLC a private investment group. Additionally, we agreed that if
we sell our HD display business to a certain party, specifically identified in
the repurchase agreement, and receive stock of the buyer as consideration, then
we will transfer a portion of that stock to the majority stockholder. We
repurchased the 8,000,000 shares for the purpose of retiring the shares. As of
the date of this report, the physical stock certificate was being held by the
Company's transfer agent and was in the process of being retired. The stock
repurchase enhances our strategy of engaging an independent investment firm to
explore and evaluate a range of strategic opportunities to enhance shareholder
value, as previously discussed.
25
As previously discussed, we suspended our HD display research and development
efforts during November 2007. We do not expect to expend any additional effort
or funds to further develop and deploy our HD technology. We have been and will
continue to evaluate different strategic opportunities related to our in-process
HD technology and intellectual property, including but not limited to the sale
of all HD-related assets.
With the suspension of the HD display portion of our business, our future
expenses will be more aligned with our current and projected revenue. If we
successfully re-align our expenses, of which there can be no assurance,
management believes that is current cash and other sources of liquidity are
sufficient to fund normal operations through the next 12 months.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at September 30,
2007, 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
----- -------- ----- -----
Long-term bank line of credit (1) $2,000 $ -- $2,000 $--
Term loan principal payments (2) 1,500 1,100 400 --
Term loan warrant liabilities(3) 250 250 -- --
Operating lease obligations 340 288 52 --
Consulting agreement 27 27 -- --
------ ------ ------ -----
Total contractual cash obligations $4,117 $1,665 $2,452 $--
====== ====== ====== =====
(1) During September 2007, we replaced our existing $2,500,000 line of credit at
a commercial bank with a similar line of credit ("LOC") at a different
commercial bank. The new LOC initial maximum available credit is $2,000,000 and
will automatically increase to $3,000,000 on the later of (i) December 12, 2007
if we remain in compliance with all debt covenants, or (ii) Sysview pays down
our subordinate debt (as discussed in the following paragraph) below $1,000,000.
Borrowings under the LOC are limited to 80% of eligible accounts receivable and
40% of eligible inventory, as defined in the LOC agreement. The LOC bears an
annual interest rate of prime (7.75% at September 30, 2007) plus 1.25% for
advances drawn against accounts receivables and prime plus 2.25% for advances
drawn against inventory. Interest payments are due monthly and all unpaid
interest and principal is due in full on September 13, 2009. Upon certain events
of default, the default variable interest rate increases to prime plus 5%.The
Company did not have any borrowing capacity on the LOC at September 30, 2007.
(2) On September 27, 2007, we entered into a $1,500,000 term loan agreement
("Loan Agreement") with Montage Capital, LLC ("Lender") and used the funds to
repurchase 8,000,000 shares of our restricted common stock as previously
discussed. We granted the Lender a continuing security interest, and pledged to
the Lender, all of our assets to secure payment and performance of its
obligations under the Loan Agreement. The Loan Agreement and the security
interest are subordinate to our LOC.
The Loan Agreement bears an annual interest rate of 15% with interest-only
payments due monthly starting from initial funding through October 31, 2007.
Thereafter, principal of $100,000 per month plus accrued interest is due at the
end of each month through the loan's maturity date of November 30, 2008. The
remaining principal balance and accrued interest is due on the maturity date.
(3) In connection with the Loan Agreement, the Company issued warrants ("Loan
Warrants") to purchase up to 650,000 shares of our common stock at an initial
exercise price of $0.60 per share. The Loan Warrants vested immediately and
expire September 2012. Subsequent to the initial funding of the Loan Agreement,
the warrant holders may require us to purchase the warrant for a maximum of
$250,000. And if any amount remains outstanding under the Loan Agreement after
March 31, 2008, the warrant repurchase price increases to a maximum of $350,000.
26
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2007, 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(c)(2) of SEC
Regulation S-B. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
TRENDS
As of September 30, 2007, to the best of our knowledge, no known trends or
demands, commitments, events or uncertainties existed, which are likely to have
a material effect on our liquidity, except as described in "Note 9: Commitments
and Contingencies" in Part I, Item 1 of this Form 10-QSB.
27
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.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings from time to time in the ordinary
course of business, none of which is required to be disclosed under this Item 1.
ITEM 6 - EXHIBITS
EXHIBIT NUMBER
DESCRIPTION OF EXHIBIT METHOD OF FILING
---------- ------------------------------------------ -------------------
10.1 Shares Buy-back Agreement between Filed herewith
Registrant and Syscan Imaging Limited
10.2 Loan Agreement between Registrant, Syscan, Filed herewith
Inc. and Montage Capital, LLC
10.3 Warrant issued by Registrant to Montage Filed herewith
Capital, LLC
10.4 Warrant issued by Registrant to North Filed herewith
Atlantic Resources Limited
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 - M. Carolyn Ellis
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 - M. Carolyn Ellis
29
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, 2007
/S/ DARWIN HU
-------------
Darwin Hu, Chairman and
Chief Executive Officer
Date: November 14, 2007
/S/ M. CAROLYN ELLIS
--------------------
M. Carolyn Ellis
Chief Financial Officer
30