UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-27773
SYSVIEW TECHNOLOGY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 59-3134518
-------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
1772 TECHNOLOGY DRIVE
SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices, including zip code)
(408) 436-9888
(Issuer's telephone number, including area code)
(Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months,
and (2) has been subject to such filing requirements for the past 90 days. Yes
|X| No |_|
The number of shares outstanding of the issuer's Common Stock, $.001 Par Value,
on May 13, 2005, was 23,110,515 shares
Transitional Small Business Disclosure Format (check one): Yes | | No |X|
================================================================================
EXPLANATORY NOTE
This Quarterly Report on Form 10-QSB/A-2 ("Form 10-QSB/A-2") is being filed as
Amendment No. 2 to our Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2005, which was originally filed with the Securities and Exchange
Commission ("SEC") on May 16, 2005 (the "Original Filing") and amendment No. 1
to the Original Filing was filed with the SEC on June 20, 2005 ("Amendment No.
1"). We are filing this Amendment No. 2 to correct how we accounted for our five
percent (5%) Convertible Preferred Stock and related warrants. We are amending
and restating the following specific items in this Amendment No. 2:
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet as of March 31, 2005
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2005
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005
Certain Notes to Condensed Consolidated Financial Statements:
Note 4 - Preferred Stock
Note 7 - Earnings Per Share
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Critical Accounting Policies - Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity
Results of Operations - THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO
MARCH 31, 2004 SPECIFIC TO OTHER INCOME (EXPENSE), ACCRETION OF PREFERRED
STOCK REDEMPTION VALUE AND NET EARNINGS
PART II. OTHER INFORMATION
Item 6. Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
Darwin Hu
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act -
William Hawkins
32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act -
Darwin Hu
32.2 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act -
William Hawkins
We are therefore amending and restating "Item 1. Financial Statements" and "Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations" in their entirety in this Amendment No. 2 to correct how we account
for our five percent (5%) Convertible Preferred Stock and related warrants. We
are also amending and restating in its entirety "Item 6. Exhibits" to reflect
our inclusion of updated Exhibits 31 and 32 for this filing. Other than the
above specific items, there have been no other changes to the Original Filing or
Amendment No. 1 thereto.
Items included in the Original Filing and Amendment No. 1 that are not included
herein are not amended and remain in effect as of the date of their filings.
Except as noted above, this Form 10-QSB/A-2 does not update information that was
presented in our Original Filing or Amendment No. 1 to reflect recent
developments that have occurred since the date of their filings. Information
concerning recent developments since the filing of our Quarterly Report for
March 31, 2005 can be found in other filings we have made with the SEC since May
16, 2005.
================================================================================
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005 (UNAUDITED)
(IN THOUSANDS)
ASSETS (RESTATED)
------------------------------------------------------
Current assets
Cash and cash equivalents $ 1,801
Trade receivables, net 1,489
Inventories 637
Prepayments, deposits and other current assets 135
Due from related parties 2,157
--------
Total current assets 6,219
Fixed assets, net 134
Intangible assets 13
Long-term investment 998
--------
TOTAL ASSETS $ 7,364
========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------
Current liabilities
Bank line of credit $ 700
Letter of credit 233
Trade payables and accruals 55
--------
Total current liabilities 988
Other liabilities
Liability under derivative contracts 768
Commitments and contingencies
5% Convertible preferred stock $.001 par value, 2,000 authorized, 19 shares 27
issued and outstanding, liquidation value of $18,650
Stockholders' equity
Common stock: $0.001 par value; 50,000,000 shares authorized
and 23,110,515 shares issued and outstanding 23
Additional paid in capital 25,768
Accumulated deficit (20,210)
--------
Total stockholders' equity 5,581
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,364
========
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
(RESTATED)
-------- --------
Net sales $ 1,708 $ 1,506
Cost of sales 1,104 1,038
-------- --------
Gross profit 604 468
Operating expenses:
Selling and marketing 152 194
General and administrative 296 148
Research and development 176 113
-------- --------
Total operating expenses 624 455
-------- --------
Operating earnings (loss) (20) 13
-------- --------
Other income (expense):
Fair value of warrants issued (290) --
Preferred stock issuance costs (237) --
Change in fair value of derivative instruments 1,086
Other (2) 2
-------- --------
Total other income (expense) 557 2
-------- --------
Net earnings before income taxes 537 15
Provision for income taxes
1 --
-------- --------
Net earnings 536 15
Accretion of preferred stock redemption value (27) --
-------- --------
Net earnings available to common stockholders $ 509 $ 15
======== ========
Net earnings per common share - basic and diluted: $ 0.02 $ --
======== ========
Weighted average common shares outstanding - basic and diluted 23,111 21,117
======== ========
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
(RESTATED)
--------- -------
OPERATING ACTIVITIES
Net earnings available to common stockholders $ 509 $ 15
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense 1 2
Preferred stock issuance expenses paid by issuance of warrants 290 --
Change in fair value of derivative instruments (1,086) --
Dividend on 5% convertible preferred stock and accretion of
Preferred stock redemption value 27 --
Changes in operating assets and liabilities:
Trade receivables (361) 603
Inventories (141) (67)
Prepaid expenses and other current assets 83 (50)
Trade payables and other current liabilities (59) (138)
------- -------
Cash provided (used) by operating activities (737) 365
------- -------
INVESTING ACTIVITIES:
Capital expenditures (112) (7)
------- -------
Cash used by investing activities (112) (7)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 1,855 --
Advances/repayments - related parties 108 (846)
------- -------
Cash provided (used) by financing activities 1,963 (846)
------- -------
Net increase (decrease) in cash and cash equivalents 1,114 (488)
Cash and cash equivalents at beginning of period 687 1,020
------- -------
Cash and cash equivalents at end of period $ 1,801 $ 532
======= =======
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
================================================================================
1 - STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited condensed consolidated financial statements of
Sysview Technology, Inc. ("Sysview", "the Company", "we" or "our") 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 March 31, 2005 are not necessarily indicative of
the operating results that may be expected for the entire year ending December
31, 2005. These financial statements should be read in conjunction with the
Management's Discussion and Analysis included in the Company's financial
statements and accompanying notes thereto as of and for the year ended December
31, 2004, filed with the Company's Annual Report on Form 10-KSB.
2 - BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
We develop, design and deliver imaging technology solutions offering businesses
and consumers market-leading USB powered mobile imaging scanning solutions that
facilitate the way information is stored, shared and managed in business and
personal use. We market and distribute our products indirectly through a global
network of resellers, system integrators, value-added resellers, and
distributors; and directly to businesses and consumers through a dedicated
direct sales force. Our products may be viewed on our website at
www.syscaninc.com. We believe that the value of our mobile image scanning
solutions is best realized in vertical markets that are information and process
intensive, such as healthcare, security, financial services, legal and
government.
We have developed our business model around intellectual property (IP) driven
products sold primarily to Private Label brands, Value-Added-Reseller (VAR's)
and Original Equipment Manufacturer's (OEM's). Our core experience, expertise,
and resources lend themselves to developing new technology solutions and
implementing them into useable finished products. Going forward we plan on
leveraging our current IP and these core competencies in other areas of the
imaging market. To that end we have allocated certain resources over the past
year to exploiting various crossover technologies to the LCD display technology
arena and have accordingly filed related patent applications.
Our corporate headquarters and executive offices are located at 1772 Technology
Drive, San Jose, California 95110. Our telephone number is 408-436-6151. We have
additional offices in Arnhem, Netherlands.
On April 2, 2004, we completed our acquisition of 100% of the issued and
outstanding capital stock of Syscan, Inc., ("Syscan") pursuant to a Share
Exchange Agreement ("Agreement") dated March 29, 2004. Pursuant to the
Agreement, the sole shareholder of Syscan, Inc., Syscan Imaging Limited,
received 18,773,514 post-reverse split shares of our common stock in exchange
for all of the issued and outstanding capital stock of Syscan, Inc. In
connection with the issuance of our common stock to Syscan Imaging Limited,
Syscan Imaging Limited beneficially became the owner of 81.2% of our issued and
outstanding voting securities. Upon completion of the reverse acquisition, we
changed our name to Syscan Imaging, Inc. and effectuated a 1-for-10 reverse
split of our common stock.
-6-
Our wholly-owned subsidiary, Syscan Inc., was founded in Silicon Valley in 1995
to develop and manufacture a new generation of CIS (CMOS-Complimentary Metal
Oxide Silicon) imaging sensor devices. During the late 1990's, Syscan Inc.
established many technical milestones and was granted numerous patents based on
their linear imaging technology (Contact Image Sensors). Our patented CIS and
mobile imaging scanner technology provides very high quality images but at
extremely low power consumption, allowing us to deliver very compact scanners in
a form ideally suited for the mobile computer user who needs to scan and/or fax
documents while away from their office. Sysview's manufacturing is completed at
an affiliated China-based facility, which provides a low-cost manufacturing base
for these industrial and consumer products. 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
As a result of the reverse acquisition, the financial statements of the Company
become those of Sysview and thus, the consolidated financial statements of the
Company represent the activities of its 100% owned subsidiary, Syscan. Although
the Company is the legal acquirer, Sysview will be treated as having acquired
the Company for accounting purposes and all of the operations reported represent
the historical financial statements of Sysview. All intercompany transactions
are eliminated in consolidation.
The Company does not have any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
expected to be material.
3 - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to a concentration of
credit risk are as follows:
CASH HELD AT BANKS. We maintain cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
DUE TO GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS. We operate in a single
industry segment - scanner and fax modules. We market our products in the United
States, Europe and the Asia Pacific region through our sales personnel and
independent sales representatives.
Our geographic sales as a percent of total revenue were as follows for the
quarters ended March 31:
2005 2004
-------- ---------
United States 98% 97.6%
Asia Pacific 0.4% 0.1%
Europe and others 1.6% 2.3%
Sales to major customers as a percentage of total revenues were as follows for
the quarters ended March 31:
2005 2004
-------- --------
Customer A 26% 20%
Customer B 26% 33%
Customer C 23% 16%
Customer D 14% 4%
Customer E - 11%
DUE TO ACCOUNTS RECEIVABLE. Financial instruments that potentially subject the
Company to a concentration of credit risk consist primarily of trade
receivables. Our customers are concentrated in the industrial/consumer
electronics channels and with major original equipment manufacturers. As of
March 31, 2005, the concentration was approximately 87% (3 customers). The loss
of any of these customers could have a material adverse effect on our results of
operations, financial position and cash flows.
DUE TO SIGNIFICANT VENDORS. For each of the three months ended March 31, 2005and
2004, our purchases have primarily been concentrated with the wholly-owned
subsidiary of our majority stockholder. If this vendor was 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.
-7-
DUE TO PRODUCT SALES. We had 3 different product categories in the first quarter
of 2005 and 3 different products during the same period in 2004 that each
accounted for more than 10% of sales. If any of these products were to become
obsolete or unmarketable and we were unable to successfully develop and market
alternative products, our business, operating results and financial condition
could be adversely affected.
4 - PREFERRED STOCK
The Company has authorized 2,000,000 shares of preferred stock, of which an
aggregate of 60,000 have been designated Series A Preferred Stock and of which
18,650 shares are outstanding.
On March 15, 2005, the Company sold $1,865,000 of its Series A Convertible
Preferred Stock to institutional and accredited retail investors in a private
offering pursuant to exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). Starboard Capital
Markets, LLC, a NASD member firm, acted as placement agent in the sale of the
Preferred Stock, for which it received $186,500 in commissions and 186,500
warrants to purchase shares of the Company's common stock at an exercise price
equal to $1.00 per share.
In connection with the financing, the Company also issued to the purchasers
common stock purchase warrants to purchase up to an aggregate of 932,500 shares
of the Company's common stock at an exercise price of $2.00 per share. The
warrants are exercisable for a period of five years from the date of issuance.
Pursuant to a registration rights agreement, the Company has registered the
shares of common stock issuable upon conversion of the Preferred Stock and upon
exercise of the warrants with the Securities and Exchange Commission on Form
SB-2.
The warrants must be exercised by the payment of cash, except if there is no
effective registration statement covering the resale of the shares of Common
stock underlying the warrants, a holder may exercise their warrants on a
cashless basis. Holders of the warrants are entitled to full ratchet
anti-dilution protection for issuances of common stock or common stock
equivalents, prior to the effective date of the registration statement covering
the resale of the shares of common stock underlying the Preferred Stock, at less
than the exercise price of such warrants. Holders of warrants also have standard
anti-dilution protection for splits, dividends, subdivisions, distributions,
reclassifications and combinations of our common stock. None of the individual
holders of the Warrants are entitled to exercise any such Warrant held by them,
if such exercise would cause such holder to be deemed to beneficially own in
excess of 4.999% of the outstanding shares of our Common stock on the date of
issuance of such shares.
PREFERRED STOCK CONVERSION RIGHTS. All or any portion of the stated value of
Preferred Stock outstanding may be converted into common stock at anytime by the
purchasers. The initial fixed conversion price of the preferred stock is $1.00
per share ("Conversion Price"). The Conversion Price is subject to anti-dilution
protection adjustments, on a full ratchet basis, at anytime that the preferred
stock is outstanding and prior to the effective date of the registration
statement required to be filed pursuant to the Registration Rights Agreement,
upon our issuance of additional shares of common stock, or securities
convertible into common stock, at a price that is less than the then Conversion
Price.
DIVIDENDS. The Preferred Stock accrues dividends at a rate of 5% per annum,
payable semiannually on July 1 and January 1 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, shall be at our
discretion.
REDEMPTION. On March 15, 2008 (the "Redemption Date"), all of the outstanding
Preferred Stock shall be redeemed for a per share redemption price equal to the
stated value on the Redemption Date (the "Redemption Price"). The Redemption
Price is payable by us in cash or in shares of common stock at our discretion
and shall be paid within five trading days after the Redemption Date. In the
event we elect to pay all or some of the Redemption Price in shares of common
stock, the shares of common stock to be delivered to the purchasers shall be
valued at 85% of the fifteen-day volume weighted average price of the common
stock on the Redemption Date.
RIGHT TO COMPEL CONVERSION. If, on any date after March 15, 2006, (A) the
closing market price per share of our common stock for ten (10) consecutive
trading days equals at least $4.00 (subject to adjustment for certain events),
and (B) the average reported daily trading volume during such ten-day period
equals or exceeds 100,000 shares, then we shall have the right, at our option,
to convert, all, but not less than all, of the outstanding shares of Preferred
Stock at the Conversion Price; provided that there shall be an effective
registration statement covering the resale of the shares of common stock
underlying the preferred stock at all times during such 10-day period and during
the 30-day notice period to the holders thereof.
-8-
RESTRICTIONS ON CONVERSION OF PREFERRED STOCK. No holder of our Preferred Stock
is entitled to receive shares upon payment of dividends on the Preferred Stock,
or upon conversion of the Preferred Stock held by such holder if such receipt
would cause such holder to be deemed to beneficially own in excess of 4.999% of
the outstanding shares of our common stock on the date of issuance of such
shares (such provision may be waived by such holder upon 61 days prior written
notice to us). In addition, no individual holder is entitled to receive shares
upon payment of dividends on the Preferred Stock, or upon conversion of the
Preferred Stock held by such holder if such receipt would cause such holder to
be deemed to beneficially own in excess of 9.999% of the outstanding shares of
our common stock on the date of issuance of such shares (such provision may be
waived by such holder upon 61 days prior written notice to us).
REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights Agreement
between us and the holders of the preferred stock, we are obligated to file a
registration statement on Form SB-2 registering the resale of shares of our
common stock issuable upon conversion of the preferred stock and exercise of the
warrants. We are required to file the registration statement on or before April
24, 2005 and have the registration statement declared effective on or before
July 13, 2005. If the registration statement is not declared effective within
the timeframe described, or if the registration is suspended other than as
permitted in the Registration Rights Agreement, we will be obligated to pay each
holder a fee equal to 1.0% of such holders purchase price of the Preferred Stock
during the first 90 days, and 2.0% for each 30 day period thereafter (pro rated
for partial periods), that such registration conditions are not satisfied.
RIGHT OF FIRST REFUSAL. Subject to certain conditions, we have granted the
holders a right of first refusal, for a period until one (1) year from the
effective date of the registration statement required to be filed in connection
with the purchase of the Preferred Stock, to participate in any subsequent
financing that we conduct.
VOTING RIGHTS. Holders of the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, we shall not,
without the affirmative vote of the holders of a majority of the shares of the
Preferred Stock then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Preferred Stock or alter or amend the Series
A Certificate of Designation, (b) authorize or create any class of stock ranking
as to dividends or distribution of assets upon a liquidation senior to or
otherwise pari passu with the Preferred Stock, (c) amend our certificate or
articles of incorporation or other charter documents so as to affect adversely
any rights of the holders of the Preferred Stock, (d) increase the authorized
number of shares of Preferred Stock, or (e) enter into any agreement with
respect to the foregoing.
LIQUIDATION PREFERENCE. Upon our liquidation, dissolution or winding up, whether
voluntary or involuntary (a "Liquidation"), the holders of the Preferred Stock
shall be entitled to receive out of our assets, whether such assets are capital
or surplus, for each share of Preferred Stock an amount equal to the stated
value per share before any distribution or payment shall be made to the holders
of any of our securities with rights junior to the Preferred Stock, and if our
assets shall be insufficient to pay in full such amounts, then the entire assets
to be distributed to the holders of the Preferred Stock shall be distributed
among such holders ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full.
ANTI-DILUTION. Holders of the Preferred Stock are entitled to full ratchet
anti-dilution protection for issuances of common stock or common stock
equivalents, prior to the effective date of the registration statement covering
the resale of the shares of common stock underlying the Preferred Stock, at less
than the Conversion Price. Holders of Preferred Stock also have standard
anti-dilution protection for splits, dividends, subdivisions, distributions,
reclassifications and combinations of our common stock.
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 months ended March 31, 2005 was approximately
$27,000 and is disclosed as a non-operating expense on the Company's
consolidated statement of operations. The decrease in the fair value of the
liability for derivative contracts totaled approximately $1,086,000 for the
three months ended March 31, 2005 and is included with other income (expense) in
the consolidated statements of operations.
-9-
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 this model to estimate
fair value of each derivative instrument and the resulting value of the
derivative liability as of March 31, 2005 are as follows:
EMBEDDED
CONVERSION
FEATURE
ASSOCIATED
WITH
THE 5%
CONVERTIBLE
PREFERRED
WARRANTS WARRANTS STOCK
-------- -------- ---------
Exercise/conversion Price $ 1.00 $ 2.00 $ 1.00
Fair value of the Company's common stock $ 1.35 $ 1.35 $ 1.35
Expected life in years 3.0 3.0 3.0
Expected volatility 30% 30% 30%
Expected dividend yield 0% 0% 0%
Risk free interest rate 5% 5% 5%
Calculated fair value per share $ 1.14 $ 0.50 $ 1.14
5 - RELATED PARTY TRANSACTIONS
The Company purchases significantly all its finished scanner imaging products
from the parent company of its majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH,
and beneficially owns approximately 5.33% of the issued and outstanding capital
stock of STH.
During the three months ended March 31, 2005 and 2004, related party purchases
from entities that are wholly-owned subsidiaries of STH were $1,266,000 and
$1,084,000, respectively. 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 as of March 31, 2005:
Due from STH $ 346,000
Due from Majority Stockholder 100,000
Due from various subsidiaries wholly-owned by STH 1,711,000
------------
$ 2,157,000
============
6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company is committed under various non-cancelable
operating leases which expire through November 2006. Future minimum rental
commitments are as follows: 2005-$106,000 and 2006-$101,000. Rent expense
charged to operations was approximately $28,000 for the quarter ended March 31,
2005 (2004: $25,000).
LINE OF CREDIT - The Company has a line of credit to borrow up to $1,000,000,
bearing interest at the rate of prime plus 1% 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 August 24, 2005. Upon certain events of defaults as
more fully described in the agreement, the default variable interest rate
increases to prime plus 3%. The Company had $300,000 available for use at March
31, 2005.
LETTERS OF CREDIT - The Company issues letters of credit in the normal course of
business. The amount outstanding as of March 31, 2005, represents one letter of
credit for goods shipped to a related entity.
-10-
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.
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.
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.
7 - EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period.
Diluted net earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents were considered in
calculating diluted net earnings per common share for the three months ended
March 31, 2005, but had no impact on net earnings per share. As a result, the
Company's basic and diluted net earnings per share is the same.
8 - STOCK OPTIONS
STOCK OPTIONS OUTSTANDING
The Company has a stock option plan, the objectives of which include attracting
and retaining the best personnel, providing for additional performance
incentives, and promoting the success of the Company by providing directors,
consultants, and key employees the opportunity to acquire common stock. The plan
is administrated by the Board of Directors, which determine among other things,
those individuals who shall receive options, the time period during which the
options may be partially or fully exercised, the number of common stock to be
issued upon the exercise of the options and the option exercise price.
The maximum term of the plan is ten years and options may be granted to
officers, directors, consultants, employees, and similar parties who provide
their skills and expertise to the Company.
Options granted under the plans have a maximum term of ten years and shall be at
an exercise price that may not be less than 85% of the fair market value of the
common stock on the date of the grant. Options are non-transferable and if a
participant ceases affiliation with the company for a reason other than death or
permanent and total disability, the participant will have 90 days to exercise
the option subject to certain extensions. In the event of death or permanent and
total disability, the option holder or their representative may exercise the
option within one (1) year. Any unexercised options that expire or that
terminate upon an employee's ceasing to be employed by the Company become
available again for issuance under the plan, subject to applicable securities
regulation. The plan may be terminated or amended at any time by the Board of
Directors.
No options were granted, forfeited, canceled or exercised during the three
months ended March 31, 20005. (See Note 9)
-11-
Information about options outstanding and exercisable at March 31, 2005 is
summarized below:
--------------------------- ----------------- ----------------------- -------------------------
Weighted-Average
Remaining Contractual
Range of exercise prices Number Life (Years) Weighted-Average
outstanding Exercise Price
--------------------------- ----------------- ----------------------- -------------------------
$0.90-$2.50 60,000 1.75 $1.17
BOARD OF DIRECTOR APPROVED STOCK OPTIONS SUBJECT TO SHAREHOLDER APPROVAL
On April 2, 2004, the Company's Board of Directors authorized the increase in
the number of stock options available under the 2002 Stock Option Plan (the
"Plan") from 200,000 to 2,200,000. On July 21, 2004, the Company's Board of
Directors further authorized the increase in the number of stock options
available under the 2002 Stock Option Plan from 2,200,000 to 3,200,000. The
subject increases are subject to stockholder ratification at the next annual or
special meeting of stockholders, which has not been obtained as of the date of
issuance of these financial statements.
On April 13, 2004, the Company's Board of Directors authorized an aggregate of
1,700,000 options under the Plan to certain individuals at $1.50 per share, and
expiring through April 2014. These options were canceled by the Board of
Directors on May 7, 2004. On July 21, 2004, the Company's Board of Directors
further authorized an aggregate of 2,200,000 options under the 2002 Stock Option
Plan to be issued to certain individuals at $2.00 per share and expiring through
July 2014, of which 165,000 have been canceled as a result of an employment
termination subsequent to year end and 55,000 options exercisable through May 4,
2005. The grant of the above options are subject to stockholder ratification of
the Company's increase in the number of stock options available for grant under
the Plan. The Company plans to obtain stockholder approval at its annual or
special meeting of stockholders, which has not yet been scheduled as of the date
of issuance of these financial statements.
9 - SUBSEQUENT EVENTS
On April 26, 2005, the Company entered into employment agreements with its
executive officers, the terms of which were previously approved by the
independent members of the Company's board of directors. The employment
agreements extend through 2008 and 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.
Total options granted under the agreements with the Company's executive officers
were 3,300,000, exercisable at $0.01 per share. One-third of the options vest on
the date of execution of the employment agreement, one-third vest on April 3,
2006 and one-third vest on April 2, 2007.
Additionally, the Company issued an aggregate of 400,000 options exercisable at
$0.01 per share to two of its key employees in connection with the execution of
employment agreements with such individuals. One-third of such options vest on
April 26, 2005, one-third vest on April 3, 2006 and one-third vest on April 2,
2007.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO MARCH 31,
2004
Management's discussion and analysis of financial condition and results of
operations (MD&A) is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A is organized as follows:
o OVERVIEW. This section provides a general description of our 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 years ended March 31, 2005 compared to
the same periods in 2004. A brief description is provided of
transactions and events, 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 quarter ended
March 31, 2005.
The following management's discussion and analysis should be read in conjunction
with our consolidated audited financial statements for the fiscal years ended
March 31, 2005 and 2004 and related notes to those financial statements.
OVERVIEW
Management's Discussion and Analysis (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 our Form 10-KSB as filed with
the Securities and Exchange Commission on March 31, 2005, as well as other
factors which we cannot predict and that are 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. Our approach to research and development (R&D) is focused
on creating 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 expand our business and product
offerings into the much larger image display market where we intend to leverage
our experience and expertise. We also believe that we may benefit from a level
of transfer of technologies from image capture to image display.
Sysview Technology, Inc. currently designs and manufactures imaging technology
solutions for a worldwide customer base. Sysview's core business is currently
focused on the manufacturing and worldwide delivery of 20 plus mobile
image-scanning products, which has allowed Sysview to become the largest OEM -
private label manufacturer of USB driven mobile scanning systems for a large
number of major brands. The Company's strong intellectual property portfolio in
the imaging area consists of 19 patents with an additional 3 patents pending.
The Company has 3 patent applications currently pending with the US Patent &
Trademark Office, 2 of which relate to image display technology and one of which
relates to image scanning.
In 2003, Sysview began developing new technologies targeted towards the flat
panel LCD display market. A natural extension of their patented image scanning
technologies multiple products are in development with the first expected to
reach the marketplace in 2006. The products are designed to significantly
enhance picture quality, decrease power consumption, extend product life and
greatly reduce the manufacturing costs associated with flat-panel televisions.
-13-
Our strategy continues to be to expand our image capture product line and
technology while leveraging our assets in other areas of the imaging industry.
We are actively shipping five categories of image capture products under the
Travel Scan marquee or their OEM counterparts. These categories include A4
format document scanners which represented approximately 34% of our sales during
the three month period ended March 31, 2005. The A6 format scanners that are
ideal for ID cards & checks, is our best selling product and represented
approximately 53% of our sales during the three month period ended March 31,
2005. The A8 format that is primarily sold for use as a business card reader
represented approximately 9% of our sales during the three month period ended
March 31, 2005. An A5 format scanner also used for ID cards and security
documents represented approximately 3% of our sales during the three month
period ended March 31, 2005. We also manufacture and sell the Contact Image
Sensor (CIS) Modules that we use in our products and separately as a component
to other manufacturers which represented less than 1% of our overall sales
during the three month period ended March 31, 2005.
For the remainder of this year, we will expand our image capture product line
with three new products. The first product is a true-duplex high-speed A4
scanner in which we have strong market interest. The second product is an A6
scanner that follows in the footsteps of the current 662 but is high speed and
will have the expanded ability of duplex scanning. The third product is a
specialized security document scanner that utilizes infrared light sources to
help in the process of identifying fraudulent or tampered with documents.
While we continue to grow our presence in image capture technology, we have
begun creating, through research and development, new technology solutions for
the substantially larger, image display market. More specifically we are
creating products and technologies to accent and enhance the Liquid Crystal
Display (LCD) television market. Our first image display product, expected to be
available for delivery during 2006 is the Sysview View Tech image/video display
processor. The View Tech control board is a highly integrated, high performance
video processor that combines state-of-the-art scaling and video processing
techniques for displaying analog and digital video/graphics on a LCD-TV/DTV
display. We believe that this product will provide advanced image processing
that will greatly enhance LCD display quality. Its state-of-the-art design
incorporates a system-on-chip (SOC) that improves any pixilated multimedia
video. The next product/technology that we are developing is a Light Emitting
Diode (LED) backlighting solution to replace the industries current standard
Cold Cathode Fluorescent Lamp (CCFL). The principal behind this technology is
related to the proprietary technology used in our image capture products. The
benefits are substantial, including longer life, higher dimming ratio, sharper
contrast, and near high definition resolution without filters, all at a
performance value.
In addition to future products and technologies in various stages of research
and development, one of our objectives is to acquire companies in the image
capture and display industry that could compliment our business model, improve
our competitive positioning and expand our offerings to the marketplace, of
which there can be no assurance. In identifying potential acquisition candidates
we will seek to acquire companies with varied distribution channels, rich
intellectual property (IP) and high caliber engineering personnel.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis is based upon our 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, accounts receivable 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:
-14-
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, general and administrative expenses.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
We present accounts receivable, net of allowances for doubtful accounts, to
ensure accounts receivable are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts, historical rates and an estimation of the overall economic
conditions affecting our customer base. We review a customer's credit history
before extending credit. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. In the event that our trade receivables
became uncollectible after exhausting all available means of collection, we
would be forced to record additional adjustments to receivables to reflect the
amounts at net realizable value. The effect of this entry would be a charge to
income, thereby reducing our net profit. Although we consider the likelihood of
this occurrence to be remote based on past history and the current status of our
accounts, there is a possibility of this occurrence.
INVENTORIES
Inventories consist of finished goods, which are stated at the lower of cost or
net realizable value, with cost computed on a first in, first-out basis.
Provision is made for obsolete, slow-moving or defective items where
appropriate. The amount of any provision of inventories is recognized as an
expense in the period the provision occurs. The amount of any reversal of any
provision is recognized as other income in the period the reversal occurs. Our
inventory purchases and commitments are made in order to build inventory to meet
future shipment schedules based on forecasted demand for our products. We
perform a detailed assessment of inventory for each period, which includes a
review of, among other factors, demand requirements, product life cycle and
development plans, component cost trends, product pricing and quality issues.
Based on this analysis, we record adjustments to inventory for excess,
obsolescence or impairment, when appropriate, to reflect inventory at net
realizable value. Revisions to our inventory adjustments may be required if
actual demand, component costs or product life cycles differ from our estimates.
In the event we were unable to sell our products, the demand for our products
diminished, other competitors offered similar or better technology, and/or the
product life cycles deteriorated causing quality issues, we would be forced to
record an adjustment to inventory for impairment or obsolescence to reflect
inventory at net realizable value. The effect of this entry would be a charge to
income, thereby reducing our net profit. Although we consider the likelihood of
this occurrence to be remote based on our forecasted demand for our products,
there is a possibility of this occurrence.
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 and
when circumstances indicate the carrying value of an asset may not be
recoverable. If impairment exists, an adjustment is made to write the asset down
to its fair value, and a loss is recorded as the difference between the carrying
value and fair value would be charged to operations. We do not believe any
impairment exists for any of these types of assets as of March 31, 2005.
INCOME TAXES
We account for income taxes under the provisions of Statement of Financial
Accounting Standards ("SFAS" No. 109), "Accounting for Income Taxes," whereby
deferred income tax assets and liabilities are computed for differences between
the financial statements and tax bases 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. Valuation allowances are established when necessary to
reduce deferred income tax assets to the amount expected to be realized.
-15-
CONTINGENCIES
Currently, there are no outstanding legal proceedings or claims, other than that
disclosed in Note 8 of the Consolidated Financial Statements. The outcomes of
potential legal proceedings and claims brought against us are subject to
significant uncertainty. SFAS 5, ACCOUNTING FOR CONTINGENCIES, requires that an
estimated loss from a loss contingency such as a legal proceeding or claim
should be accrued by a charge to income if it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated. Disclosure of a contingency is required if there is at
least a reasonable possibility that a loss has been incurred. In determining
whether a loss should be accrued we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially impact
our financial position or results of operations.
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. Accordingly, the results obtained could be significantly
different if other assumptions were used. The effect of this entry would be a
charge to net earnings, thereby either increasing or reducing our net earnings
based upon the results obtained,
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO MARCH 31,
2004
REVENUE
Product revenues increased to $1.708 million for the quarter ended March 31,
2005 from $1.506 million for the same period in fiscal 2004, an increase of
approximately $202,000 or approximately 13.4%. This increase in revenues for the
period is primarily the result of improved product sales and marketing efforts
to shift our business emphasis to less seasonal sensitive channels. Once again,
scanner imaging products represented over 97% of our revenues during the first
quarter. During the quarter ended March 31, 2005 four of our customers accounted
for approximately 90% of total revenues. During the same period ended March 31,
2004, eight customers accounted for approximately 90% of total revenues. The
loss of any of these larger clients could have a material adverse effect on our
business.
COST OF SALES
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. COGS was approximately 64.6% for the quarter ended March
31, 2005 compared to 68.9% for the same period in 2004. Our COGS decreased as a
percentage of revenues primarily as a result of slightly higher gross margins
and better pricing in the VAR channel than originally projected. We expect that
our COGS will remain the same or slightly higher during 2005 as a result of
higher fuel costs in Mainland China.
-16-
GROSS PROFIT
Gross profit increased 4.3 % for the quarter ended March 31, 2005, $604,343 or
35.4% from $467,908 or 31.1% of net revenues for the same period in 2004. This
increase in gross profit is a direct result of increased value-added software
content to our products. We anticipate that our gross profit margins may
continue to increase as we gain better control over our source parts cost and
logistics.
SELLING AND MARKETING
Selling and marketing expenses include payroll, employee benefits and other
costs associated with sales, marketing and account management personnel. Other
direct selling and marketing costs include market development funds and
promotions (retail channels only), tradeshows, website support costs,
warehousing, logistics and certain sales representative fees. Selling and
marketing expenses decreased to $152,100 for the quarter ended March 31, 2005
from $194,300 for the same period in 2004, a decrease of $42,200 or
approximately 21.7%. The decrease during the quarter ended March 31, 2005 is
primarily attributable to better efficiency in our OEM relationships and lower
retail promotion and marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) costs include payroll, employee benefits, and
other headcount-related costs associated with the finance, legal, facilities and
certain human resources, as well as legal and other professional and
administrative fees. General and administrative expenses increased to $296,500
for the quarter ended March 31, 2005 from $147,400 for the same period in fiscal
2004, an increase of $149,100 or approximately 101.1%. The increase for the
quarter ended March 31, 2005 is primarily attributable to additional personnel
costs and outside fees incurred in connection with our public listing compliance
expense.
RESEARCH AND DEVELOPMENT
The Research and Development (R&D) costs include payroll, employee benefits, and
other headcount-related costs associated with the product design, development,
compliance testing, documentation and transition to production. R&D expenses
increased to $176,000 for the quarter ended March 31, 2005 from $113,300 for the
same period in fiscal 2004, an increase of $62,700 or approximately 55.3%. The
increase for the quarter ended March 31, 2005 is primarily attributable to a
greater emphasis on the development of new products than during the same period
in the previous year.
OTHER INCOME (EXPENSE)
During the three months ended March 31, 2005 our other income (expense) was a
result of issuing our 5% Convertible Preferred Stock as follows:
o The $1,086,000 decrease in the fair value of the liability for
derivative contracts (associated with our 5% Convertible Series A
Preferred Stock). 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 decrease in the fair value of the liability for
derivative contracts is included as other income in our consolidated
statements of operations.
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.
Our other income (expense) for the quarters ended March 31, 2004 was immaterial
to the overall financial statements.
ACCRETION OF PREFERRED STOCK REDEMPTION VALUE
During the three months ended March 31, 2005 accretion on our 5% Convertible
Series A Preferred Stock was approximately $27,000. As our 5% Convertible Series
A Preferred Stock was issued at the end of the March 2005, we did not accrue any
accretion during the three months ended March 31, 2004.
-17-
NET EARNINGS
Net earnings for the quarter ended March 31, 2005 were approximately $509,000
compared to net earnings of approximately $15,000 during the same period in
2004. The increase was primarily attributable to the accounting for our
preferred stock as discussed above, which resulted in a net increase to our
earning of $559,000. The positive impact of the accounting for our preferred
stock was somewhat offset by the substantial increase in G&A of $149,100 and R&D
of $62,700 expenses as the Company prepares to meet future revenue growth from
new products.
RELATED PARTY TRANSACTIONS
We purchase significantly all our finished scanner imaging products from the
parent company of its majority stockholder, Syscan Technology Holdings Limited
("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH, and
beneficially owns approximately 5.33% of the issued and outstanding capital
stock of STH.
During the three months ended March 31, 2005 and 2004, related party purchases
from entities that are wholly-owned subsidiaries of STH were $1,266,000 and
$1,084,000, respectively. 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 as of March 31, 2005:
Due from STH $ 346,000
Due from Majority Stockholder 100,000
Due from various subsidiaries wholly-owned by STH 1,711,000
============
$ 2,157,000
-------------
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $1,801,000 as of March 31, 2005
compared to $687,000 at December 31, 2004 and working capital at March 31, 2005
was approximately $5,231,000 compared to $3,747,000 at December 31, 2004. The
increase in cash and working capital is primarily attributable to the cash
proceeds of approximately $1,618,000 received from our convertible preferred
stock offering completed in March 2005.
OPERATING ACTIVITIES. Net cash flows provided (used ) by operating activities
was ($737,000) and $365,000 for the quarter ended March 31, 2005 and 2004,
respectively. Net cash provided by operating activities for both periods
primarily reflects net income and net changes in operating assets and
liabilities such as accounts receivable, inventory and accounts payable. Other
factors affecting net cash used in operating activities for 2005 primarily
reflects net loss adjusted by (i) non-cash accounting entries in connection with
the sale of our 5% Series A Preferred Stock and (ii) non-cash entries in
connection with issuing stock options below fair market value. Cash generated by
operating activities for 2004 is primarily explained by (i) decreases in
accounts receivable representing cash collections from the prior year's fourth
quarter and (ii) increases in inventory levels as we built up inventories to
respond to forecasted demand for our products from the prior year's fourth
quarter. Cash used by operating activities for 2005 is explained by (i)
increases in accounts receivable due to increased sales and (ii) increases in
inventory levels as we built up inventories to respond to forecasted demand for
our products from the prior year's fourth quarter.
INVESTING ACTIVITIES. Net cash flows used in investing activities during the
three months ended March 31, 2005 and 2004 consisted of cash paid for capital
expenditures.
FINANCING ACTIVITIES. Net cash flows provided (used) by financing activities for
the quarter ended March 31, 2005 and 2004 was $1,963,000 and ($846,000),
respectively. Cash flows generated from financing activities for the first
quarter of 2005 primarily represents cash received from the sale of our Series A
preferred stock offering. For periods presented, advances to and/or repayments
from related party receivables and payables were made in the ordinary course of
business.
We have financed our activities primarily with cash flows from operations and
borrowings under our credit facilities. We have a $1,000,000 bank line of
credit, which bears interest at prime plus one percent, which is secured by all
of our general business assets. The subject bank line of credit had $700,000
outstanding as of March 31, 2005. We believe that our line of credit or other
financing arrangements, existing working capital and anticipated cash flows from
operations will be adequate to satisfy our operating and capital requirements
for the next 12 months at our current run rate and without any further
expansion. In order to implement our growth strategy and expansion into the
image display area, additional funds will be required.
-18-
Our plans for the next twelve months include continuing to increase our presence
in the image capture market, heavily investing our resources into the image
display market and adding future products and technologies to our current
product offerings. Additionally, we intend to seek to identify acquisition
candidates in the image capture and display industry that we believe could
compliment our business model, improve our competitive positioning and expand
our offerings to the marketplace, of which there can be no assurance. In
identifying potential acquisition candidates, we will seek to acquire companies
with varied distribution channels, rich intellectual property (IP) and high
caliber engineering personnel.
To finance our business expansion plans, we plan to aggressively pursue
additional sources of funds, the form of which will vary depending on the
prevailing market and other conditions, and may include the issuance and sale of
debt or equity securities. However, 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.
CONCENTRATION OF CREDIT RISK
CONCENTRATION OF CREDIT RISK FOR CASH HELD AT BANKS. We maintain cash balances
at several banks. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000.
CONCENTRATION OF CREDIT RISK DUE TO GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS.
We operate in a single industry segment - scanner and fax modules. We market our
products in the United States, Europe and the Asia Pacific region through our
sales personnel and independent sales representatives.
Our geographic sales as a percent of total revenue were as follows for the
quarters ended March 31:
2005 2004
---------------- --------------
United States 98% 97.6%
Asia Pacific 0.4% 0.1%
Europe and others 1.6% 2.3%
Sales to major customers as a percentage of total revenues were as follows for
the quarters ended March 31:
2005 2004
---------------- --------------
Customer A 26% 20%
Customer B 26% 33%
Customer C 23% 16%
Customer D 14% 4%
Customer E - 11%
CONCENTRATION OF CREDIT RISK DUE TO ACCOUNTS RECEIVABLE. Financial instruments
that potentially subject us to a concentration of credit risk consist primarily
of trade receivables. Our customers are concentrated in the industrial/consumer
electronics channels and with major original equipment manufacturers. As of
March 31, 2005, the concentration was approximately 87% (3 customers). The loss
of any of these customers could have a material adverse effect on our results of
operations, financial position and cash flows.
CONCENTRATION OF CREDIT RISK DUE TO SIGNIFICANT VENDORS. For each of the years
ended March 31, 2005 and 2004, our purchases have primarily been concentrated
with the wholly-owned subsidiary of our majority stockholder. If this vendor was
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.
CONCENTRATION OF CREDIT RISK DUE TO PRODUCT SALES. We had 3 different product
categories in the first quarter of 2005 and 3 different products during the same
period in 2004 that each accounted for more than 10% of sales. If any of these
products were to become obsolete or unmarketable and we were unable to
successfully develop and market alternative products, our business, operating
results and financial condition could be adversely affected.
-19-
PART II. OTHER INFORMATION
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
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
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
-20-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 16, 2006 By: /S/ DARWIN HU
----------------
Name: Darwin Hu
Title: Chief Executive Officer
Dated: August 16, 2006 By: /S/ WILLIAM HAWKINS
---------------------
Name: William Hawkins
Title: Acting Chief Financial
Officer, Chief Operating
Officer and Secretary
-21-