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 JUNE 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 August 15, 2006 was
24,092,092.
-------------------------------------------
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
Annual 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)
JUNE 30, DECEMBER 31,
2006 2005
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,068 $ 1,426
Trade receivables 885 1,285
Inventories 878 751
Prepaid expenses and other current assets 349 319
Due from related parties 2,369 2,403
-------- --------
Total current assets 5,549 6,184
Fixed assets, net 360 167
Goodwill 555 555
Long-term investment 998 998
-------- --------
Total assets $ 7,462 $ 7,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line and letter of credit $ 1,013 $ 1,013
Trade payables and other accrued expenses 435 445
Accrued dividends on 5% convertible preferred stock 108 71
-------- --------
Total current liabilities 1,556 1,529
Other liabilities
Liability under derivative contracts 813 503
-------- --------
Total liabilities 2,369 2,032
Commitments and contingencies (note 9)
5% Convertible preferred stock $.001 par value, 2,000 authorized, 726 468
16 shares issued and outstanding at June 30, 2006 and December 31,
2005, liquidation value of $16,150
Stockholders' equity:
Common stock $.001 par value, 50,000 authorized, 24,592 shares issued
and 24,092 shares outstanding at June 30, 2006 and December 31, 24 24
2005 (500 shares held in escrow)
Additional paid-in capital 28,779 28,137
Accumulated deficit (24,436) (22,757)
-------- --------
Total stockholders' equity 4,367 5,404
-------- --------
Total liabilities and stockholders' equity $ 7,462 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $ 2,539 $ 1,487 $ 4,977 $ 3,195
Cost of sales 1,660 883 3,276 1,987
-------- -------- -------- --------
Gross profit 879 604 1,701 1,208
Operating expenses:
Selling and marketing 300 258 593 410
General and administrative 679 1,335 1,287 1,631
Research and development 469 222 865 399
-------- -------- -------- --------
Total operating expenses 1,448 1,815 2,745 2,440
-------- -------- -------- --------
Operating loss (569) (1,211) (1,044) (1,231)
-------- -------- -------- --------
Other income (expense):
Fair value of warrants issued -- -- -- (290)
Preferred stock issuance costs -- -- -- (237)
Change in fair value of derivative instruments (518) 575 (310) 1,661
Other (25) 12 (30) 10
-------- -------- -------- --------
Total other income (expense) (543) 587 (340) 1,144
-------- -------- -------- --------
Net loss before income taxes (1,112) (624) (1,384) (87)
Provision for income taxes -- -- -- 1
-------- -------- -------- --------
Net loss (1,112) (624) (1,384) (88)
Dividend on 5% convertible preferred stock and accretion of
preferred stock redemption value (147) (183) (295) (210)
-------- -------- -------- --------
Net loss available to common stockholders $ (1,259) $ (807) $ (1,679) $ (298)
======== ======== ======== ========
Net loss per common share - basic and diluted: $ (0.05) $ (0.03) $ (0.07) $ (0.01)
======== ======== ======== ========
Weighted average common shares outstanding - basic and diluted 24,092 23,111 24,092 23,111
======== ======== ======== ========
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)
SIX MONTHS ENDED
JUNE 30,
------------------
2006 2005
------- -------
OPERATING ACTIVITIES
Net loss available to common stockholders $(1,679) $ (298)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 22 10
Stock-based compensation cost - options 642 1,104
Preferred stock issuance expenses paid by issuance of warrants -- 290
Change in fair value of derivative instruments 310 (1,661)
Accretion of 5% convertible preferred stock redemption value 258 182
Changes in operating assets and liabilities:
Trade receivables 400 396
Inventories (127) 14
Prepaid expenses and other current assets (30) (29)
Accrued dividends on 5% convertible preferred stock 37 28
Trade payables and other current liabilities (10) (45)
------- -------
Cash used by operating activities (177) (9)
------- -------
INVESTING ACTIVITIES:
Capital expenditures (215) (145)
------- -------
Cash used by investing activities (215) (145)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 1,865
Advances/repayments - related parties 34 (231)
------- -------
Cash provided by financing activities 34 1,634
------- -------
Net increase (decrease) in cash and cash equivalents (358) 1,480
Cash and cash equivalents at beginning of period 1,426 687
------- -------
Cash and cash equivalents at end of period $ 1,068 $ 2,167
======= =======
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. 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
our 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 June 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 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 six months ended June 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 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 assessing
the impact of the statement.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 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.
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.
Related party purchases from entities that are wholly-owned subsidiaries of STH
were $1,845,000 and $3,254,000 for the three and six months ended June 30, 2006,
respectively and $713,000 and $1,979,000 for the three and six months ended June
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):
June 30, December 31,
2006 2005
------------ --------------
STH wholly-owed subsidiaries $1,923 $1,957
STH 346 346
Syscan Imaging Limited 100 100
------------ --------------
$2,369 $2,403
============ ==============
-7-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 June 30, 2006, the Company had consolidated balances of
approximately $733,000, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ------------------------
2006 2005 2006 2005
----------- ------------ ----------- ---------
Customer A 66% 42% 52% 34%
Customer B 4 15 19 15
Customer C 12 7 11 15
Trade receivables from these customers totaled $798,000 at June 30, 2006. As of
June 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.
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.
-8-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following table sets forth the total stock-based compensation expense
included in the Condensed Consolidated Statements of Operations (IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------
2006 2005 2006 2005
--------- --------- ------- --------
Selling and marketing $ 12 $ 60 $ 25 $ 60
General and administrative 290 984 561 984
Research and development 43 60 55 60
At June 30, 2006, the Company had approximately $1,532,000 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 six months ended June 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 -- --
---------- ----------
Outstanding at June 30, 2006 4,950,000 $0.18
========== ==========
The following table summarizes all options outstanding and exercisable by price
range as of June 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 5.82 $0.01 2,666,666 $0.01
$0.65 - $1.17 940,000 9.49 $0.92 50,000 $0.90
$2.50 10,000 0.5 $2.50 10,000 $2.50
NOTE 7 - BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of shares of common stock outstanding during the
period. Diluted net earnings (loss) per share is computed by dividing net 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
six months ended June 30, 2006 and 2005 as their effect would be anti-dilutive.
As a result, for all periods presented, the Company's basic and diluted net loss
per share is the same.
-9-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
There was no common stock activity during the three months ended June 30, 2006.
PREFERRED STOCK ACTIVITY
There was no preferred stock activity during the three months ended June 30,
2006.
PREFERRED STOCK DIVIDENDS
The Company's 5% Convertible Preferred 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 Preferred 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 six months
ended June 30, 2006, preferred stock dividends were approximately $17,000 and
$37,000, 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 5% Convertible Preferred
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 5% Convertible
Preferred Stock. The discount is being accreted from the issuance date, March
15, 2005, through the redemption date, March 15, 2008, adjusted for conversions.
Accretion of the preferred stock redemption value for the three and six months
ended June 30, 2006 was approximately $130,000 and $258,000 and is disclosed as
a non-operating expense on the Company's consolidated statement of operations.
The increase in the fair value of the liability for derivative contracts totaled
approximately $518,000 and $310,000 for the three and six months ended June 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.
-10-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The assumptions used in this model to estimate fair value of each derivative
instrument and the resulting value of the derivative liability as of June 30,
2006 are as follows:
EMBEDDED
CONVERSION
FEATURE
ASSOCIATED WITH
THE 5%
CONVERTIBLE
WARRANTS WARRANTS PREFERRED STOCK
-------- -------- ---------------
Exercise/conversion Price $ 1.00 $ 2.00 $ 1.00
Fair value of the Company's common stock $ 1.07 $ 1.07 $ 1.07
Expected life in years 3.0 3.0 3.0
Expected volatility 64% 64% 64%
Expected dividend yield 0% 0% 0%
Risk free interest rate 5% 5% 5%
Calculated fair value per share $ 0.83 $ 0.58 $ 0.83
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:
FUTURE
MINIMUM LEASE
YEAR ENDING PAYMENTS
JUNE 30,
---------------- ---------------
2007 $ 147
2008 63
2009 1
2010 1
2011 1
---------------
Total $213
===============
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 June 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. Upon certain events of
defaults, the default variable interest rate increases to prime plus 5.5%. The
Company had $1,487,000 available for use at June 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 June 30, 2006 termination payments
totaling $489,000 remain in effect.
-11-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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.
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.
CONVERTIBLE PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of 5% Convertible Preferred Stock, the Company
executed a Registration Rights Agreement (the "Agreement") with the purchasers
thereof under which the Company agreed to register the common shares underlying
the 5% Convertible Preferred 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 5% Convertible
Preferred 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. As such, the Company accrued $32,000, included in general and
administrative expense, for damages during the three months ended June 30, 2006.
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").
-12-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
GEOGRAPHIC INFORMATION
During the three and six months ended June 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------------------------- ---------------------------------
U.S. $ 2,366 $ 1,086 $ 4,587 $ 2,761
Asia 88 273 206 280
Europe and other 85 128 184 154
--------------------------------- ---------------------------------
$ 2,539 $ 1,487 $ 4,977 $ 3,195
================================= =================================
Substantially all Sysview's identifiable assets are located in the U.S.
NOTE 11 - SUBSEQUENT EVENT
On August 8, 2006, the Company sold $1,150,000 of its Series B Convertible
Preferred Stock. Net proceeds of this offering after payment of related
commissions, fees and other expenses were approximately $1,060,000. The Company
intends to use the proceeds for sales, marketing, research and development and
for working capital and general corporate purposes.
-13-
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.
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 six months ended June 30, 2006 compared to the
three months ended June 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 six months ended June
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 intend to expand our
product offerings to include seven 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 second 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.
-14-
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 June 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 $1,845,000 and $3,254,000 for the three and six months
ended June 30, 2006, respectively and $713,000 and $1,979,000 for the three and
six months ended June 30, 2005. The purchases were carried out in the normal
course of business.
-15-
The following table is a summary of unsecured, interest-free and payable upon
demand, amounts due from affiliated entities (IN THOUSANDS):
June 30, December 31,
2006 2005
------------ ----------------
STH wholly-owed subsidiaries $1,923 $1,957
STH 346 346
Syscan Imaging LTD 100 100
------------ ----------------
$2,369 $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 six months ended
June 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 June 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 5% Convertible Preferred 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 No. 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS" ("EITF 00-19"). Accordingly, the embedded conversion
feature associated with the 5% Convertible Preferred Stock and the warrants
issued to the 5% Convertible Preferred Stock purchasers 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 5% Convertible Preferred Stock as our derivative instruments have
characteristics significantly different from traded options.
-16-
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of operations for
the three and six months ended June 30, 2006 compared to the three and six
months ended June 30, 2005 (IN THOUSANDS):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -----------------------------------------
2006 2005 $ % 2006 2005 $ %
---- ---- --- --- ---- ---- --- ----
Net sales $ 2,539 $ 1,487 $ 1,052 71% $ 4,977 $ 3,195 $ 1,782 56%
Cost of sales 1,660 883 777 88 3,276 1,987 1,289 65
As a percentage of sales 65% 59% 66% 62%
Selling and marketing expense 300 258 42 16 593 410 183 45
General and administrative expense 679 1,335 (656) (49) 1,287 1,631 (344) (21)
Research and development expense 469 222 247 111 865 399 467 117
Total other income (expense) (543) 587 NM NM (340) 1,144 NM NM
Dividend on 5% convertible
preferred stock and accretion of (147) (183) NM NM (295) (210) NM NM
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) in the third quarter
of fiscal 2005, which created a broader base of products. Approximately $335,000
and $801,000 of our increased revenue during the three and six months ended June
30, 2006, respectively as compared to the same periods in fiscal 2005 was
attributable to sales of our duplex scanners. 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 82% for both the three and six
months ended June 30, 2006 and 64% for both the three and six months ended June
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.
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.
COST OF SALES, INCLUDING GROSS PROFIT
Cost of goods sold ("COGS") 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. COGS increased in absolute dollars as a result of the increased net
sales during both the three and six months ended June 30, 2006 as compared to
the three and six months ended June 30, 2005. COGS 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.
-17-
Related party purchases from entities that are wholly-owned subsidiaries of STH
were $1,845,000 and $3,254,000 for the three and six months ended June 30, 2006,
respectively and $713,000 and $1,979,000 for the three and six months ended June
30, 2005. These purchases represent a significant portion of our cost of sales,
from one vendor that is also a subsidiary of our majority stockholder. If this
vendor became unable to provide materials in a timely manner and we were unable
to find alternative vendors, our business, operating results and financial
condition would be materially adversely affected.
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 three and six months ended June 30,
2006 as compared to the three and six months ended June 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. 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 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 expect general and administrative expenses to
increase somewhat 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. The decrease in both the three and six
months ended June 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 $290,000 and
$561,000 for the three and six months ended June 30, 2006, respectively, and
$984,000 for both the three and six months ended June 30, 2005.
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 increased during the three months ended June
30, 2006 as compared to June 30, 2005 as we continue to focus on key product
development areas. We expect research and development expenses to increase as we
continue to invest in the future and strengthen our intellectual property
position within our highly competitive market.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three and six months ended June 30, 2006 was
mainly attributable to the $518,000 and $310,000, respectively, increase in the
fair value of the liability for derivative contracts (associated with our 5%
Convertible Series A Preferred Stock). During the three and six months ended
June 30, 2005, the fair value of the liability for derivative contracts
decreased $575,000 and $1,661,000, respectively. 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 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.
-18-
The remaining other income (expense) during the six months ended June 30, 2005
was a result of issuing our 5% Convertible Preferred 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 preferred
stock.
DIVIDEND ON 5% CONVERTIBLE PREFERRED STOCK AND ACCRETION OF PREFERRED STOCK
REDEMPTION VALUE
During the three and six months ended June 30, 2006 accretion on our 5%
Convertible Series A Preferred Stock was approximately $130,000 and $258,000,
respectively. Preferred dividends were $17,000 and $37,000 during the three and
six months ended June 30, 2006, respectively. During the three and six months
ended June 30, 2005 accretion on our 5% Convertible Series A Preferred Stock was
approximately $155,000 and $182,000, respectively. Preferred dividends were
$28,000 for both the three and six months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, our principal sources of liquidity included cash and cash
equivalents of $1,068,000 and unused borrowing capacity of $1,487,000 under our
bank line of credit. We had no significant cash outlays during the six months
ended June 30, 2006.
Operating activities: Cash used by operating activities during the six months
ended June 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 inventory as we anticipate a
growth in future sales. Sources of operating cash include an increase in
accounts receivable and a decrease in accounts payable as a result of managing
our working capital and the normal fluctuation and timing of purchases and
sales. As we have had to ramp up inventory purchases to meet the increased
demand for our products, our cash was somewhat constrained during the six months
ended June 30, 2006. During the six months ended June 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.
Investing activities: For both the six months ended June 30, 2006 and 2005, cash
used in investing activities was attributable to the purchase of capital
equipment and licensed technology.
Financing activities: For the six months ended June 30, 2006, cash provided by
financing activities was a result of payments from related party receivables.
For the six months ended June 30, 2005, cash provided by financing activities
was a result of issuing our 5% Convertible Preferred Stock, somewhat offset by
advances to related parties. All advances to and repayments from related parties
during the six months ended June 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.
-19-
On August 8, 2006, the Company sold $1,150,000 of its Series B Convertible
Preferred Stock. Net proceeds of this offering after payment of related
commissions, fees and other expenses were approximately $1,060,000. The Company
intends to use the proceeds for sales, marketing, research and development and
for working capital and general corporate purposes.
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 Convertible Preferred 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, 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 June 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 213 147 65 1
------ ------ ------ ------
Total contractual cash obligations $1,226 $1,160 $ 65 $ 1
====== ====== ====== ======
(1) We have a line of credit up to $2,500,000, bearing interest at the rate of
prime (8.25% at June 30, 2006) plus 0.5% and secured by all our assets. Interest
payments are due monthly and all unpaid interest and principal is due in full on
October 30, 2006.
OFF-BALANCE SHEET ARRANGEMENTS
At June 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.
TRENDS
As of June 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.
-20-
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.
-21-
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At Sysview Technology, Inc.'s annual stockholders' meeting on June 23, 2006,
stockholders elected each of the director nominees, approved the 2002 Amended
and Restated Stock Option Plan and the 2006 Stock Option Plan, approved the name
change and ratified the selection of our independent registered public
accounting firm.
NUMBER OF SHARES
-----------------------------------------------------------
VOTED BROKER
VOTED FOR AGAINST ABSTAIN NON-VOTES
------------- ---------- -------------- -----------
1. To elect a board of directors to hold office until the
next annual stockholders' meeting or until their
respective successors have been elected or appointed.
Darwin Hu 18,928,997 - 5,663,095 -
David P. Clark 18,928,997 - 5,663,095 -
Lawrence Liang 18,928,997 - 5,663,095 -
2. To approve the 2002 Amended and Restated Stock Option Plan 18,874,387 53,670 1,000 -
3. To approve the 2006 Stock Option Plan 18,874,387 53,670 1,000 -
4. To approve the corporate name change from Syscan Imaging, Inc. to 18,928,837 160 60 -
Sysview Technology, Inc.
5. To ratify the selection of the Company's independent registered 18,928,837 220 - -
public accounting Firm for the year ended December 31, 2006.
ITEM 5. OTHER INFORMATION
The Company has become aware that Syscan Technology Holdings ("STH"), the parent
company of Syscan Imaging Limited ("SIL"), is believed to have entered into an
agreement with Wang Holdings LTD. (HK), whereby Wang Holdings LTD., (HK) may
have agreed to purchase some or all of the capital stock of SIL from STH. SIL
beneficially owns 18,773,514 shares (the "Shares") of the Company's outstanding
common stock, or approximately 54.4% (fully diluted). Since no substantive
details regarding the possible transaction have been made available to the
Company, and SIL continues to beneficially own 100% of the Shares, the Company
does not believe that there has been a change in control of the Company. We do
believe that it is appropriate to fully disclose whatever information that is
directly available to the Company and as soon as more information becomes
available to us we will update through our public filings any such information.
Additionally, we have requested from STH additional documentation or evidence of
this transaction. Until we receive any such information or a Schedule 13D filing
is made, we will continue to assume that STH is still the beneficial owner of
SIL and the Shares. The Company is not aware of any other arrangements or
understandings among members of STH or Wang Holdings LTD. (HK), or their
respective affiliates, with respect to any other matters.
-22-
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 on Form 8-K dated March 21, 2005
Preferred Stock as 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 Filed herewith
Certificate of Incorporation dated June 23,
2006
3.6 Certificate of Designation of Preferences, Incorporated by reference to Exhibit 10.4
Rights and Limitations of Series B on Form 8-K dated August 14, 2006
Preferred Stock as 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, 2005 on Form 8-K dated May 2, 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, on Form 8-K dated May 2, 2005
2005
10.8 2006 Stock Option Plan Filed herewith
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 Warrant Incorporated by reference to Exhibit 10.2
on Form 8-K dated August 14, 2006
10.11 Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.3
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, 2005 Form 10-KSB dated March 31, 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: August 21, 2006
/S/ DARWIN HU
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Darwin Hu, Chairman and
Chief Executive Officer
Date: August 21, 2006
/S/ WILLIAM HAWKINS
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William Hawkins, Acting Chief Financial Officer
Chief Operating Officer and Secretary
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