As filed with the Securities and Exchange Commission on June 15, 2007
Registration No. 333-124313
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SYSVIEW TECHNOLOGY, INC.
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(Name of small business issuer in its charter)
Delaware 3679 59-3134518
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1772 Technology Drive
San Jose, California 95110
(408) 436-9888
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(Address and telephone number of principal executive offices)
Darwin Hu
1772 Technology Drive
San Jose, California 95110
(408) 436-9888
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(Name, address and telephone number of agent for service)
Copies to:
Jody R. Samuels, Esq.
Richardson & Patel LLP
The Chrysler Building
405 Lexington Avenue, 26th Floor
New York, New York 10174
(212) 907-6686
Approximate date of proposed sale to the public: As soon as practicable, after
this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
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common stock, par value $0.01 per share, 1,844,750 shares(1) $1.00 (2) $1,844,750 $56.64
underlying preferred stock
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common stock, par value $0.01 per share,
underlying warrants 932,500 shares(1) $2.00 (2) $1,865,000 $57.26
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common stock, par value $0.01 per share,
underlying warrants 186,500 shares(1) $1.00(2) $ 186,500 $5.73
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TOTAL 2,963,750 shares(1) $3,896,250 $119.63(3)
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(1) The Registrant has completed a private placement to accredited investors
of units consisting of shares of the Registrant's Series A Convertible
Preferred Stock and Warrants to purchase shares of the Registrant's
Common Stock (the "Private Placement"). The Registrant is registering for
resale (i) 1,565,000 shares of Common Stock issuable upon conversion of
shares of the Series A Convertible Preferred Stock, (ii) 279,750 shares
of Common Stock, representing the Registrant's estimate of the maximum
number of shares of Common Stock issuable upon conversion of accrued
dividends on the shares of Series A Convertible Preferred Stock, (iii)
932,500 shares of Common Stock issuable upon exercise of the Common Stock
Purchase Warrants issued to the purchasers in the Private Placement, and
(iv) 186,500 shares of Common Stock issuable upon the exercise of the
Common Stock Purchase Warrants issued to the placement agent in the
Private Placement. Pursuant to Rule 416 under the Securities Act, the
shares being registered hereunder include such indeterminate number of
shares of Common Stock as may be issuable with respect to the shares
being registered hereunder as a result of stock splits, stock dividends
or similar transactions affecting the shares to be offered by the selling
shareholders.
(2) Represents the higher of: (i) the exercise prices of the convertible
security and (ii) the offering price of securities of the same class as
the common stock underlying the convertible security calculated in
accordance with Rule 457(c) under the Securities Act, for the purpose of
calculating the registration fee pursuant to Rule 457(g) under the
Securities Act.
(3) All of which has previously been paid.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a) may determine.
SYSVIEW TECHNOLOGY, INC.
2,963,750 SHARES OF COMMON STOCK
This prospectus relates to the public offering of up to 2,963,750
shares of our common stock, par value $0.001 per share, for sale by the selling
stockholders for their own account. These shares include up to 1,565,000 shares
of common stock issuable upon conversion of the Series A Convertible Preferred
Stock, 279,750 shares of common stock issuable as a result of the conversion of
accrued dividends on the shares of Series A Convertible Preferred Stock and up
to 1,119,000 shares of common stock issuable upon the exercise of warrants. We
will pay the expenses of registering these shares.
Our common stock is quoted on the NASD's Over the Counter Bulletin
Board (OTCBB) under the symbol "SYVT". On June 8, 2007, the closing sales price
for the common stock on the OTCBB was $0.85 per share.
To the extent they wish to sell their shares of our common stock as
provided for herein, the selling stockholders may offer and sell such shares on
a continuous or delayed basis in the future. These sales may be conducted in the
open market or in privately negotiated transactions and at market prices, fixed
prices or negotiated prices. We will not receive any of the proceeds from the
sale of the shares of common stock owned by the selling stockholders, but we
will receive funds from the exercise of their warrants upon exercise. Any such
proceeds will be used by us for working capital and general corporate purposes.
Prospective investors should read this prospectus and any amendment or
supplement hereto together with additional information described under the
heading "Available Information."
Our principal executive offices are located at 1772 Technology Drive,
San Jose, California 95110. Our telephone number is (408) 436-9888.
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AN INVESTMENT IN THE SHARES OF OUR COMMON STOCK BEING OFFERED BY THIS
PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 4 BEFORE YOU DECIDE TO PURCHASE ANY SHARES OF OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2007.
TABLE OF CONTENTS
PAGE
Prospectus Summary............................................................1
Risk Factors..................................................................4
Note on Forward Looking Statements...........................................14
Business.....................................................................15
Use of Proceeds..............................................................25
Selling Stockholders.........................................................25
Plan of Distribution.........................................................30
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(A) of the Exchange Act............................32
Security Ownership of Management.............................................35
Description of Securities....................................................37
Management's Discussion and Analysis or Plan of Operation....................44
Certain Relationships and Related Transactions...............................62
Market for Comon Equity and Related Stockholder Matters......................62
Executive Compensation.......................................................62
Financial Statements.........................................................75
Legal Matters................................................................75
Experts......................................................................75
Available Information........................................................75
You should rely only upon the information contained in this prospectus
and the registration statement of which this prospectus is a part. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date. This prospectus is based on
information provided by us and other sources that we believe are reliable. We
have summarized certain documents and other information in a manner we believe
to be accurate, but we refer you to the actual documents for a more complete
understanding of what we discuss in this prospectus. In making an investment
decision, you must rely on your own examination of our business and the terms of
the offering, including the merits and risks involved.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN THE SECURITIES. BEFORE MAKING AN INVESTMENT
DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK
FACTORS SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS. IN THIS PROSPECTUS AND ANY AMENDMENT OR SUPPLEMENT HERETO, UNLESS
OTHERWISE INDICATED, THE TERMS "SYSVIEW TECHNOLOGY, INC.", "SYVT", "WE", "US",
AND "OUR" REFER AND RELATE TO SYSVIEW TECHNOLOGY, INC. AND ITS CONSOLIDATED
SUBSIDIARIES. ON JUNE 27, 2006, WE CHANGED OUR NAME FROM SYSCAN IMAGING, INC. TO
SYSVIEW TECHNOLOGY, INC.
OUR BUSINESS
We are in the business of developing, designing and delivering imaging
technology solutions. We currently have 14 issued patents held by us, all of
which are U.S. patents. Our technology is also covered by 5 issued patents in
Taiwan. We also have 5 patent applications currently pending with the US Patent
& Trademark Office, 4 of which relate to image display technology and 1 of which
relates to image scanning. 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.
Our wholly-owned operating subsidiary, Syscan, Inc. ("SI"), was
incorporated on May 1, 1995, under the laws of the State of California and is
headquartered in San Jose with additional strategic offices in Arnhem (the
Netherlands) and Hong Kong. Our majority stockholder is Syscan Imaging Limited,
which is wholly-owned by Syscan Technology Holdings Limited. Syscan Technology
Holdings Limited is a publicly-held company incorporated in Bermuda whose shares
are listed on The Growth Enterprise Market of the Stock Exchange of Hong Kong
Limited.
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 under several "house
brands" or their OEM counterparts. We introduced our duplex scanners
(DocketPORT) near the end of the third quarter of 2005, which created a broader
base of products. Sales of our duplex scanners were approximately $1,936,000
during the year ended December 31, 2006 as compared to $674,000 for the year
ended December 31, 2005. In addition to the finished scanner product line, we
also design, configure and sell the Contact Image Sensor (CIS) Modules that we
use in our products separately as an OEM component to manufacturers.
While we continue to grow our presence in image capture technology, we
have begun creating, through acquisition and 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
HDTV television market. We believe that these HDTV products will provide
advanced image quality at a highly competitive price point, creating a value
point product.
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,
all 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.
-1-
We intend to finance our research and development, commercialization
and distribution efforts and our working capital needs primarily through cash
flow generated from operations, our line of credit and through funding from
other sources, including debt financing and equity financing. While there can be
no assurance that such sources will provide adequate funding for our operations,
management believes such sources will be available to us.
Our principal executive offices are located at 1772 Technology Drive,
San Jose, California 95110 and our phone number (408) 436-9888.
SERIES A PREFERRED STOCK FINANCING
On March 15, 2005, we sold $1.865 million of our Series A Preferred
Stock to accredited investors. Net proceeds from the financing will be used for
marketing and sales, research and development opportunities and for general
working capital purposes.
The Series A Preferred Stock is convertible into shares of our common
stock at a conversion price of $1.00 per share and each holder is entitled to
receive interest at a rate of 5.0% per annum. As of June 11, 2007, 3,000 shares
of Series A Preferred Stock were converted into shares of our common stock. In
connection with the financing, we also issued to the selling stockholders common
stock purchase warrants to purchase up to 932,500 shares of our common stock at
a price equal to $2.00 per share. Starboard Capital Markets, LLC, an NASD member
firm, acted as placement agent in the sale of our Series A Preferred Stock and
received a cash commission of $186,500 and warrants to purchase up to 186,500
shares of our common stock at an exercise price of $1.00 per share.
We have agreed, pursuant to a registration rights agreement, to
register the shares of common stock underlying the Series A Preferred Stock and
warrants, and are fulfilling our agreement by filing the registration statement
of which this prospectus is a part with the Securities and Exchange Commission.
THE OFFERING
Outstanding Common Stock 21,842,092 shares as of June 11, 2007
Common Stock Offered Up to 2,963,750 shares of common stock,
including up to 1,565,000 shares of common stock
issuable upon conversion of the Series A
Preferred Stock, 279,750 shares of common stock
issuable as a result of the conversion of accrued
dividends on the shares of Series A Convertible
Preferred Stock, up to 932,500 shares of common
stock issuable upon the exercise of warrants,
which warrants have an exercise price of $2.00
per share, and up to 186,500 shares of common
stock issuable upon the exercise of warrants,
which have an exercise price of $1.00 per share.
Proceeds We will not receive any proceeds from the sale of
the common stock issuable upon conversion of the
Series A Preferred Stock that may be sold
pursuant to this prospectus. We will, however,
receive proceeds upon the exercise of the
warrants which, if all such warrants are
exercised in full, would be $2,051,500. The
selling stockholders are under no obligation to
exercise their warrants. Proceeds, if any,
received from the exercise of warrants will be
used for general corporate purposes.
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Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors."
OTC Bulletin Board Symbol SYVT
[remainder of page intentionally left blank]
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS EXTREMELY RISKY. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE OUR SECURITIES. IF ANY
OF THE FOLLOWING RISKS ACTUALLY MATERIALIZE, OUR BUSINESS AND PROSPECTS COULD BE
SERIOUSLY HARMED, THE PRICE AND VALUE OF OUR SECURITIES COULD DECLINE AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
BECAUSE WE DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS, OUR BUSINESS COULD BE
ADVERSELY AFFECTED IF WE FAIL TO RETAIN THESE CLIENTS AND/OR OBTAIN NEW CLIENTS
AT A LEVEL SUFFICIENT TO SUPPORT OUR OPERATIONS AND/OR BROADEN OUR CLIENT BASE.
During the year ended December 31, 2006 four of our customers accounted
for approximately 81% of total revenues and during the three months ended March
31, 2007 three of our customers accounted for approximately 68% of total
revenues. During the year ended December 31, 2005, four of our customers
accounted collectively for approximately 79% of total revenues. The loss of any
of our largest clients could have a material adverse effect on our business.
FOR EACH OF THE YEAR ENDED DECEMBER 31, 2006 AND THE THREE MONTHS ENDED MARCH
31, 2007 WE SUFFERED A NET LOSS AND WE MAY CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
During the year ended December 31, 2006 and the three months ended
March 31, 2007, we had an increase in revenues compared to the previous prior
period, but we sustained an operating loss and cannot be sure that we will again
operate profitably in the future. During the year ended December 31, 2006, our
revenues increased by $4.62 million (58.9%) from $7.85 million for the year
ended December 31, 2005 to $12.47 million for the year ended December 31, 2006.
In addition, we had a net loss of $5.19 million for the year ended December 31,
2006, as compared to net loss of $1.49 million for the year ended December 31,
2005. During the three months ended March 31, 2007, our revenues increased by
$1.69 million (69.3%) from $2.44 million for the three months ended March 31,
2006 to $4.13 million for the three months ended March 31, 2007. In addition, we
had a net loss of approximately $808,000 for the three months ended March 31,
2007, as compared to net loss of approximately $272,000 for the three months
ended March 31, 2006.
WE OUTSOURCE THE MANUFACTURING OF OUR IMAGE SCANNING PRODUCTS TO SYSCAN
TECHNOLOGY HOLDINGS LIMITED (STH), THE PARENT COMPANY OF OUR MAJORITY
SHAREHOLDER, AND IF THE OPERATIONS OF STH ARE INTERRUPTED OR IF OUR ORDERS
EXCEED THE MANUFACTURING CAPABILITIES OF STH, WE MAY NOT BE ABLE TO DELIVER OUR
PRODUCTS TO CUSTOMERS ON TIME.
We currently utilize the manufacturing services of STH the parent
company of our majority stockholder to manufacture all of our current products.
STH serves as the exclusive manufacturer of all current and future image capture
products to be produced by us, although there is no written agreement between us
and STH. STH operates a single facility and if our customers place orders for
large quantities of our products, or if STH's other customers place large orders
of products, may not be able to produce our products in sufficient quantities.
In addition, if the operations of STH were halted or restricted, even
temporarily, or they are unable to fulfill large orders, we could experience
business interruption, increased costs, damage to our reputation and loss of our
customers. Although we have the right to utilize other manufacturers at any
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time, identifying and qualifying a new manufacturer to replace STH as the
manufacturer of our products could take several months during which time, we
would likely lose customers and our revenues could be materially delayed and/or
reduced.
BECAUSE OF OUR RELATIONSHIP WITH STH, CONFLICTS OF INTEREST MAY ARISE BETWEEN US
AND STH.
Our majority stockholder is a wholly-owned subsidiary of STH and our
Chairman of the Board and Chief Executive Officer was formerly an officer of
STH. In addition, Darwin Hu our Chairman and Chief Executive Officer serves as a
director of our majority stockholder Syscan Imaging Limited, which is
wholly-owned by STH. This could create, or appear to create, potential conflicts
of interest when members of our senior management are faced with decisions that
could have different implications for us and for STH. For example, conflicts of
interest could arise between us and STH in various areas such as fundraising,
competing for new business opportunities, and other areas. In addition, STH
serves as the exclusive manufacturer of our products. No assurance can be given
as to how potentially conflicted members of our management team will evaluate
their fiduciary duties to us and our majority stockholder, respectively, or how
such individuals will act under such circumstances. Furthermore, the appearance
of conflicts, even if such conflicts do not materialize, might adversely effect
the public's perception of us.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR OUR COMPONENTS AND RAW MATERIALS
AND ANY INTERRUPTION IN THE AVAILABILITY OF THESE COMPONENTS AND RAW MATERIALS
USED IN OUR PRODUCT COULD REDUCE OUR REVENUES.
We rely on a limited number of suppliers for the components and raw
materials used in our image scanning products. Although there are many suppliers
for each of our component parts and raw materials, we are dependent on a single
or limited number of suppliers for many of the significant components and raw
materials. This reliance involves a number of significant risks, including:
- unavailability of materials and interruptions in delivery of
components and raw materials from our suppliers;
- manufacturing delays caused by such unavailability or interruptions in
delivery; and
- fluctuations in the quality and the price of components and raw
materials.
We do not have any long-term or exclusive purchase commitments with any
of our suppliers. Our failure to maintain existing relationships with our
suppliers or to establish new relationships in the future could also negatively
affect our ability to obtain our components and raw materials used in our
products in a timely manner. If we are unable to obtain ample supply of product
from our existing suppliers or alternative sources of supply, we may be unable
to satisfy our customers' orders which could reduce our revenues and adversely
affect our relationships with our customers
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADAPT TO EMERGING AND
EVOLVING MARKETS.
The markets for our products are changing rapidly and evolving and,
therefore, the ultimate level of demand for our products is subject to
substantial uncertainty. Most of our historic revenue was generated from selling
image scanning products only. We expect that our future revenues will be
generated by the sale of image scanning and image display products. We intend to
expend significant resources towards developing our image display products. Any
significant decline in demand for image scanning and/or image display products
could materially and adversely affect our business and prospects.
-5-
IF WE SHOULD EXPERIENCE RAPID GROWTH, SUCH GROWTH COULD STRAIN OUR MANAGERIAL
AND OPERATIONAL RESOURCES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Any rapid growth that we may experience would most likely place a
significant strain on our managerial and operational resources. If we continue
to acquire other companies, we will be required to manage multiple relationships
with various clients, strategic partners and other third parties. Further growth
(organic or by acquisition) or an increase in the number of strategic
relationships may increase this strain on existing managerial and operational
resources, inhibiting our ability to achieve the rapid execution necessary to
implement our growth strategy without incurring additional corporate expenses.
WE DEPEND ON OUR MANAGEMENT. IF WE FAIL TO RETAIN KEY PERSONNEL, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
There is intense competition for qualified personnel in the areas in
which we operate. The loss of existing personnel or the failure to recruit
additional qualified managerial, technical and sales personnel, as well as
expenses in connection with hiring and retaining personnel could adversely
affect our business. We also depend upon the performance of our executive
officers and key employees in particular, Messrs. Darwin Hu and William Hawkins.
Although we have entered into employment agreements with each of Messrs. Hu and
Hawkins, there can be no assurance that we will be able to retain these key
employees, the loss of any of which could have a material adverse effect upon
us. In addition, we have not obtained "key man" life insurance on the lives of
either Messrs. Hu or Hawkins.
We will need to attract, train and retain more employees for
management, engineering, research and development, sales and marketing and
support positions. As noted above, competition for qualified employees,
particularly engineers and research and development personnel, continues to be
intense. Consequently, we may not be able to attract, train and retain the
personnel we need to continue to offer our products to current and future
customers in a cost effective manner, if at all.
IF WE FAIL TO RAISE CAPITAL THAT WE MAY NEED TO SUPPORT AND INCREASE OUR
OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our future capital uses and requirements will depend on numerous factors,
including:
- the extent to which our products gain market acceptance;
- the level of revenues from current and future products;
- the expansion of operations;
- the costs and timing of product developments and sales and marketing
activities;
- the costs related to acquisitions of technology or businesses; and
- competitive developments.
We may require additional capital in order to continue to support and
increase our sales and marketing efforts, continue to expand and enhance the
products we offer to current and future customers and fund potential
acquisitions. This capital may not be available on terms acceptable to us, if at
all. In addition, we may be required to spend greater-than-anticipated funds if
unforeseen difficulties arise in the course of these or other aspects of our
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business. As a consequence, we will be required to raise additional capital
through public or private equity or debt financings, collaborative
relationships, bank facilities or other arrangements. We cannot assure you that
such additional capital will be available on terms acceptable to us, if at all.
Any additional equity financing is expected to be dilutive to our stockholders,
and debt financing, if available, may involve restrictive covenants and
increased interest costs. Our inability to obtain sufficient financing may
require us to delay, scale back or eliminate some or all of our expansion
programs or to limit the marketing of our products. This could have a material
and adverse effect on our business.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE, AND ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF YOUR STOCK.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future and any return on investment may be limited to the value of your stock.
We plan to retain any future earnings to finance growth.
OUR MAJORITY STOCKHOLDER, SYSCAN IMAGING LIMITED, AND ITS PARENT COMPANY STH OWN
AND CONTROL A SIGNIFICANT NUMBER OF THE OUTSTANDING SHARES OF OUR COMMON STOCK
AND WILL CONTINUE TO HAVE SIGNIFICANT OWNERSHIP OF OUR VOTING SECURITIES FOR THE
FORESEEABLE FUTURE.
Syscan Imaging Limited, our majority stockholder, and STH its parent
company, beneficially own approximately 75.1% of our outstanding common stock.
As a result, these entities will have the ability to control our affairs and
business, including the election of directors and subject to certain
limitations, approval or preclusion of fundamental corporate transactions. This
concentration of ownership of our common stock may:
- delay or prevent a change in the control;
- impede a merger, consolidation, takeover or other transaction
involving us; or
- discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
THE AUTHORIZATION AND ISSUANCE OF "BLANK CHECK" PREFERRED STOCK COULD HAVE AN
ANTI-TAKEOVER EFFECT DETRIMENTAL TO THE INTERESTS OF OUR STOCKHOLDERS.
Our certificate of incorporation allows the Board of Directors to issue
preferred stock with rights and preferences set by our board without further
stockholder approval. The issuance of shares of this "blank check preferred"
under particular circumstances could have an anti-takeover effect. For example,
in the event of a hostile takeover attempt, it may be possible for management
and the board to endeavor to impede the attempt by issuing shares of blank check
preferred, thereby diluting or impairing the voting power of the other
outstanding shares of common stock and increasing the potential costs to acquire
control of us. Our Board of Directors has the right to issue blank check
preferred without first offering them to holders of our common stock, as the
holders of our common stock have no preemptive rights.
WE MAY NOT BE ABLE TO COMPLY WITH THE SARBANES-OXLEY ACT.
The enactment of the Sarbanes-Oxley Act in July 2002 created a
significant number of new corporate governance requirements and additional
requirements may be enacted in the future. Although we expect to implement the
requisite changes to become compliant with existing and new requirements when
they do apply to us, we may not be able to do so, or to do so in a timely
manner.
-7-
RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY WILL
ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our success and competitive position depend in large part on our
ability to obtain and maintain intellectual property rights protecting our
products. We currently and may in the future rely on a combination of patents,
copyrights, trademarks, service marks, trade secrets, confidentiality provisions
and licensing arrangements to establish and protect our intellectual property
and proprietary rights. Unauthorized parties may attempt to copy aspects of our
products or to obtain, license, sell or otherwise use information that we regard
as proprietary. Policing unauthorized use of our products is difficult and we
may not be able to protect our technology from unauthorized use. Additionally,
our competitors may independently develop technologies that are substantially
the same or superior to ours and that do not infringe our rights. In these
cases, we would be unable to prevent our competitors from selling or licensing
these similar or superior technologies. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States.
Third parties have claimed and may claim in the future that we are
infringing their intellectual property, and we could be exposed to significant
litigation or licensing expenses or be prevented from selling our products if
such claims are successful. From time to time, we are subject to claims that we
or our customers may be infringing or contributing to the infringement of the
intellectual property rights of others. We may be unaware of intellectual
property rights of others that may cover some of our technologies and products.
If it appears necessary or desirable, we may seek licenses for these
intellectual property rights. However, we may not be able to obtain licenses
from some or all claimants, the terms of any offered licenses may not be
acceptable to us, and we may not be able to resolve disputes without litigation.
Any litigation regarding intellectual property could be costly and
time-consuming and could divert the attention of our management and key
personnel from our business operations. In the event of a claim of intellectual
property infringement, we may be required to enter into costly royalty or
license agreements. Third parties claiming intellectual property infringement
may be able to obtain injunctive or other equitable relief that could
effectively block our ability to develop and sell our products.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING, AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.
There are a number of companies that develop or may develop products
that compete in our targeted markets; however, currently there is no single
company that competes with us in all of our product areas. The individual
markets in which we compete are highly competitive, and are subject to rapid
technological change. Within image capture, we compete directly with Plustek,
Mustek and Silitek. Within Image Display, we will compete with Sony, Samsung,
Sharp, Sanyo and Phillips. In image scanning, we compete with numerous
companies, some of which are our private label partners. In addition, a number
of smaller companies in both image scanning and image display technologies are
in some markets competitive with our solutions. Current and potential
competitors have established, or may establish, cooperative relationships among
themselves or with third parties to increase the ability of their technologies
to address the needs of our prospective customers. Most of our competitors in
each of the markets in which we compete have significantly greater financial,
technical and marketing resources than us. These competitors may be able to
respond more rapidly than we can to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of products than we do.
-8-
The market for image scanning and image display products is rapidly
evolving. Significant technological changes could render our products obsolete.
We must adapt to this rapidly changing market by continually improving the
functionality and features of our products to meet clients' needs. If we are
unable to develop new products and enhance functionalities or technologies to
adapt to these changes in a cost-effective and timely manner, our business could
be materially and adversely affected.
RISKS RELATING TO ACQUISITIONS
ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION TO OUR EXISTING SHAREHOLDERS
AND COULD BE DIFFICULT TO INTEGRATE WHICH COULD CAUSE DIFFICULTIES IN MANAGING
OUR BUSINESS, RESULTING IN A DECREASE THE VALUE OF YOUR INVESTMENT.
We believe that we will need to make strategic acquisitions of other
businesses in order to achieve growth and profitability. Evaluating acquisition
targets is difficult and acquiring other businesses involves risk. Our
consummation of the acquisition of other businesses would subject us to a number
of risks, including the following:
- difficulty in integrating the acquired operations and retaining
acquired personnel;
- limitations on our ability to retain acquired sales and distribution
channels and customers;
- diversion of management's attention and disruption of our ongoing
business; and
- limitations on our ability to incorporate acquired technology and
rights into our product offerings and maintain uniform standards,
controls, procedures and policies.
Furthermore, we may incur indebtedness or issue equity securities to
pay for future acquisitions. The issuance of equity or convertible debt
securities would be dilutive to our then existing shareholders.
RISKS RELATING TO OUR COMMON STOCK
THE LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE POSSIBLE VOLATILITY
IN OUR STOCK PRICE.
There has only been a limited public market for our securities and
there can be no assurance that an active trading market in our securities will
be maintained. The Over The Counter Bulletin Board (OTCBB) is an unorganized,
inter-dealer, over-the-counter market which provides significantly less
liquidity than NASDAQ and the national securities exchange, and quotes for
securities quoted on the OTCBB are not listed in the financial sections of
newspapers as are those for NASDAQ and the national securities exchange. In
addition, the overall market for securities in recent years has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many smaller companies. The trading price of our common stock is
expected to be subject to significant fluctuations including, but not limited
to, the following:
- quarterly variations in operating results and achievement of key
business metrics;
- changes in earnings estimates by securities analysts, if any;
-9-
- any differences between reported results and securities analysts'
published or unpublished expectations;
- announcements of new products by us or our competitors;
- market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors;
- demand for our products;
- shares being sold pursuant to Rule 144 or upon exercise of warrants
and options or conversion of Series A Preferred Stock or Series B
Preferred Stock; and
- general economic or stock market conditions unrelated to our operating
performance.
These fluctuations, as well as general economic and market conditions,
may have a material or adverse effect on the market price of our common stock.
THERE ARE LIMITATIONS IN CONNECTION WITH THE AVAILABILITY OF QUOTES AND ORDER
INFORMATION ON THE OTCBB.
Trades and quotations on the OTCBB involve a manual process and the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmation may be delayed significantly.
Consequently, one may not able to sell shares of our common stock at the optimum
trading prices.
THERE ARE DELAYS IN ORDER COMMUNICATION ON THE OTCBB.
Electronic processing of orders is not available for securities traded
on the OTCBB and high order volume and communication risks may prevent or delay
the execution of one's OTCBB trading orders. This lack of automated order
processing may affect the timeliness of order execution reporting and the
availability of firm quotes for shares of our common stock. Heavy market volume
may lead to a delay in the processing of OTCBB security orders for shares of our
common stock, due to the manual nature of the market. Consequently, one may not
able to sell shares of our common stock at the optimum trading prices.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.
The SEC has adopted regulations which generally define a "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. As a result, our shares of common stock are subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established clients and "accredited
investors". For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
-10-
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our shares of common stock and
may affect the ability of investors to sell such shares of common stock in the
secondary market and the price at which such investors can sell any of such
shares.
Investors should be aware that, according to the SEC, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
- control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer;
- manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
- "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
- the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level,
along with the inevitable collapse of those prices with consequent
investor losses.
Our management is aware of the abuses that have occurred historically
in the penny stock market.
THERE IS A RISK OF MARKET FRAUD.
OTCBB securities are frequent targets of fraud or market manipulation.
Not only because of their generally low price, but also because the OTCBB
reporting requirements for these securities are less stringent than for listed
or NASDAQ traded securities, and no exchange requirements are imposed. Dealers
may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
the market price for shares of our common stock.
THERE IS LIMITED LIQUIDITY ON THE OTCBB.
When fewer shares of a security are being traded on the OTCBB,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Due to lower trading volumes in shares of
our common stock, there may be a lower likelihood of one's orders for shares of
our common stock being executed, and current prices may differ significantly
from the price one was quoted by the OTCBB at the time of one's order entry.
THERE IS A LIMITATION IN CONNECTION WITH THE EDITING AND CANCELING OF ORDERS ON
THE OTCBB.
Orders for OTCBB securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTCBB. Due to the manual order processing
involved in handling OTCBB trades, order processing and reporting may be
delayed, and one may not be able to cancel or edit one's order. Consequently,
one may not able to sell shares of our common stock at the optimum trading
prices.
-11-
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT THE STOCK PRICE.
The dealer's spread (the difference between the bid and ask prices) may
be large and may result in substantial losses to the seller of shares of our
common stock on the OTCBB if the stock must be sold immediately. Further,
purchasers of shares of our common stock may incur an immediate "paper" loss due
to the price spread. Moreover, dealers trading on the OTCBB may not have a bid
price for shares of our common stock on the OTCBB. Due to the foregoing, demand
for shares of our common stock on the OTCBB may be decreased or eliminated.
ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AND PREFERRED STOCK AVAILABLE
FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET.
We are authorized to issue 50,000,000 shares of our common stock. As of
June 11, 2007, there were 24,642,092 and 21,842,092 shares of common stock
issued and outstanding, respectively. However, the total number of shares of our
common stock issued and outstanding does not include shares reserved in
anticipation of the exercise of options or warrants or the conversion of our
Series A Preferred Stock or our Series B Preferred Stock. As of June 11, 2007,
we had outstanding 15,650 shares of Series A Preferred Stock, 11,500 shares of
Series B Preferred Stock, stock options to purchase up to approximately
7,542,550 shares of our common stock at exercise prices of between $0.01 and
$1.01 per share, warrants to purchase up to approximately 1,884,000 shares of
our common stock at conversion prices of between $0.65 and $2.00 per share, and
of which 45,000 are subject to future vesting, and we have reserved shares of
our common stock for issuance in connection with the potential exercise thereof.
Of the reserved shares, a total of 4,700,000 shares are currently reserved for
issuance in connection with our stock option plans, of which options to purchase
an aggregate of 3,846,000 shares have been issued under the plans. Also of the
reserved shares, a total of 3,696,550 shares are currently reserved for issuance
in connection with certain non-qualified stock options of which options to
purchase that same number of shares have been issued to our officers, directors,
key employees and consultants. A significant number of such options and warrants
contain provisions for cashless exercise. To the extent such options or warrants
are exercised, the holders of our common stock will experience further dilution.
In addition, in the event that any future financing should be in the form of, be
convertible into or exchangeable for, equity securities, and upon the exercise
of options and warrants, investors may experience additional dilution.
The exercise of the outstanding derivative securities will reduce the
percentage of common stock held by our stockholders. Further, the terms on which
we could obtain additional capital during the life of the derivative securities
may be adversely affected, and it should be expected that the holders of the
derivative securities would exercise them at a time when we would be able to
obtain equity capital on terms more favorable than those provided for by such
derivative securities. As a result, any issuance of additional shares of common
stock may cause our current stockholders to suffer significant dilution which
may adversely affect the market.
In addition to the above-referenced shares of common stock which may be
issued without stockholder approval, we have 2,000,000 shares of authorized
preferred stock, the terms of which may be fixed by our Board of Directors. We
currently have 60,000 shares of Series A Preferred Stock authorized, 15,650 of
which are issued and outstanding and 30,000 shares of Series B Preferred Stock
authorized, 11,500 of which are issued and outstanding. While we have no present
plans to issue any shares of preferred stock other than the Series A Preferred
Stock and the Series B Preferred Stock, our Board of Directors has the
authority, without stockholder approval, to create and issue one or more series
of such preferred stock and to determine the voting, dividend and other rights
of holders of such preferred stock. The issuance of any of such series of
preferred stock may have an adverse effect on the holders of common stock.
-12-
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
From time to time, certain of our stockholders may be eligible to sell
all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933 (Securities Act), subject to certain limitations. In
general, pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitation, by our stockholders that are
non-affiliates that have satisfied a two-year holding period. Any substantial
sale of our common stock pursuant to Rule 144 or pursuant to any resale
prospectus may have material adverse effect on the market price of our
securities.
DIRECTOR AND OFFICER LIABILITY IS LIMITED.
As permitted by Delaware law, our certificate of incorporation limits
the liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty. In addition, our
certificate of incorporation provides that we shall indemnify our directors and
officers to the fullest extent permitted by law.
-13-
NOTE ON FORWARD LOOKING STATEMENTS
Certain statements contained in this prospectus constitute
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission and within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. The words "believe," "expect," "anticipate," "intend," "estimate,"
"plan" and other expressions which are predictions of or indicate future events
and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause our actual results, performance or achievements to
differ materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, among other things, those listed under
"Risk Factors" and elsewhere in this prospectus.
We operate in a very competitive and rapidly changing environment. New
risks emerge from time to time and it is not possible for our management to
predict all risks, nor can we assess the impact of all risks on our business or
the extent to which any risk, or combination of risks, may cause actual results
to differ from those contained in any forward-looking statements. All
forward-looking statements included in this prospectus are based on information
available to us on the date of this prospectus. Except to the extent required by
applicable laws or rules, we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this prospectus.
-14-
BUSINESS
GENERAL
Sysview Technology, Inc. (referred to herein as "we", "us", "our",
"Sysview" or "Company") through our wholly-owned operating subsidiaries
develops, designs and delivers various imaging technology solutions to the
corporate/enterprise, small office-home office (SOHO), professional practice and
consumer markets. We are a provider of USB powered, scanning solutions to a wide
variety of industries and market applications. Our proprietary page-imaging
devices facilitate the way information is stored, shared and managed in both
business and personal use. We market and distribute our products indirectly
through a global network of Original Equipment Manufacturers (OEM), private
label business channels, system integrators, value-added resellers (VAR's), and
distributors. 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, document security, financial services, legal and government.
We have always developed our business model around intellectual
property (IP) driven products sold primarily to OEM's, Private Label brands and
VAR's. In keeping with this business model, our wholly owned subsidiary Sysview
Technologies, Inc. is currently in the process of developing multiple new
technologies related to the High Definition TV (HDTV) market, including an
innovative line of large format (42-60 inches) high definition television
products that incorporate liquid crystal on silicon (LCoS) rear projection
display technology (RPDT). Our core engineering-to-manufacturing experience and
resources lend themselves to developing this new technology. Going forward we
plan on leveraging certain patents and inventions related to RPDT to forge
industry relationships and market channels.
Our world-wide corporate headquarters and logistics center is currently
located at 1772 Technology Drive, San Jose, California 95110. We have additional
offices and warehousing facilities in The Netherlands and Southern China. Our
Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Proxy
Statements relating to our annual meetings of stockholders, Current Reports on
Form 8-K and amendments to these reports are available free of charge on our
website at www.syscaninc.com, as well as from the SEC's website at www.sec.gov.
BACKGROUND
Our wholly-owned subsidiary, Syscan Inc., was founded in Silicon Valley
in 1995 to develop and manufacture a new generation of CIS (Contact Image
Sensors) that are CMOS-Complimentary Metal Oxide Silicon imaging sensor devices.
During the late 1990's, we established many technical milestones and were
granted numerous patents based on our 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 laptop computer
users or desktop computer users who need a small "footprint", light weight
device to scan and/or fax documents.
This "enabling" technology is found in a variety of applications such
as document management, ID card and passport security scanners, bank note/check
verification, business card readers, scanning bar codes and optical mark readers
used in lottery terminals. In the past ten years we have grown to be one of the
largest OEM - VAR - private label manufacturers of page-fed scanning systems and
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contact image sensor modules for several hundred companies including major
brands such as VISIONEER, PENTAX, CARDSCAN, AMBIR TECHNOLOGY, DIGIMARC, BANKSERV
and OMRON. Our vertically integrated design and manufacturing model allows rapid
time-to-market for these leading companies. Our manufacturing is completed in
China by a wholly-owned subsidiary of the parent company of our majority
stockholder, which provides a low-cost manufacturing base for these industrial
and consumer products.
MARKET OPPORTUNITIES
IMAGE CAPTURE TECHNOLOGY
In the past decade, information has become an increasingly important
source of capital for businesses and enterprises, and the speed and
sophistication of information exchange is often a defining characteristic of the
most successful entities worldwide. Many organizations define their strategy,
assess their ability to compete and manage their customer relationships based on
the quality, diversity and availability of their information products, services
and resources. The medium and optimal format for vital business information is
wide and varied, and includes paper, electronic files and Web content.
Confronted by exponentially increasing information through more and
more channels, consumers and business personnel employ a variety of resources
for retrieving information, conducting transactions and performing their jobs.
The Internet and related corporate infrastructure have emerged as a powerful
global communications network and channel for business. These electronic systems
have fundamentally changed the way organizations and consumers obtain
information, communicate, purchase goods and conduct business.
Businesses around the world share a common motivation to improve
operating efficiency and enhance customer service. Customer satisfaction,
employee productivity and company operating results can often be linked to an
organization's ability to effectively manage, utilize and communicate
information.
We believe there is a significant opportunity for our solutions to help
simplify the way people access, share, manage and use information in business
and in daily life. Our strategy is to deliver premier, comprehensive imaging
technologies. Our imaging solutions eliminate the need to manually reproduce
documents, automate the integration of documents into business systems, and
enable the use of electronic documents and forms over the Internet, through
mobile faxing and other business applications. Our products and technologies
deliver a measurable return on investment to our customers.
OUR IMAGE CAPTURE MARKET SOLUTION
As a manufacturer of USB powered imaging devices, we set out in late
2004 to create a new opportunity within our own market. We found through our
existing sales channels that there was a growing demand for duplex page imaging
products that allowed the end-user to scan both sides of a document
simultaneously. The overall growth of this market is being propelled by paper
conservation cycles that require two-sided printing of official documents and
forms. The added availability of duplex printers in the office and home has
accelerated the demand for duplex imaging devices. Our introduction in June of
2005, of the world's first duplex image capture device under 2 pounds in weight,
allow users to incorporate two-sided images and documents into digital
applications, systems and devices. Our new duplex products highly automate the
document capture process and help enterprises, professionals and consumers
increase productivity, reduce costs and save time. We plan to substantially
expand our product offerings in the duplex imaging scanning market and plan to
further expand our business to include a wider base of software development
tools for our existing patented products used throughout the image capture
market.
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IMAGE DISPLAY TECHNOLOGY
Until the year 2001, home televisions have changed very little relying
(almost) exclusively on the Cathode Ray Tube (CRT). This technology provided a
good quality picture based on the broadcasting (and cable operators) signal
limitations, but weight and size limited the screen size to around forty (40)
inches. With the relatively new introduction of high definition television
(HDTV) the consumer (and commercial) markets are dramatically increasing the
demand for larger screen sizes in order to bring the movie theater experience
into the home. In response to this demand various types of liquid crystal
display (LCD) and plasma display panel (PDP) models have been introduced to the
marketplace. These LCD and PDP models solved the screen size issue, but the
picture quality could not achieve the HDTV standard of 1080 active lines (1080p)
and the comparatively high pricing versus CRT models allowed them limited
consumer market penetration.
To date PDP technology has been the leader in delivering a price
performance value in the larger format screen sizes typically 42" and up. In the
past year, Digital Light Processing(TM) (DLP) by Texas Instruments has emerged
as the strongest challenger to PDP products, typically offering 720p picture
resolution, acceptable brightness characteristics and generally a price tag 20%
- 30% below comparable PDP products. Plasma technology continues to be
vulnerable to both the LCD and DLP formats as the size and performance to price
ratios converge. We recognize that the television display market is in the
process of a major transition, as several technologies challenge plasma
technology as the dominant force in large format displays. The current top eight
leaders (Samsung, Sony, Sanyo, Toshiba, LG, SAMPO, Panasonic and Hitachi)
compete under the different brand names but are frequently in collaboration with
each other as well as regional brands in the international markets. The local
brand - private label (tier 2) competitors add another 15-20 competitors to the
marketplace. In short, there are roughly 30 different competitors worldwide in
the large format TV market worldwide. Several of the major suppliers have
already announced introduction of "true" 1080p HDTV technology, but they
struggle with the reality that plasma, LCD and DLP technology still have
difficulty achieving the price performance ratio being demanded by the consumer
market.
OUR DISPLAY MARKET SOLUTION
While continuing R&D on multiple HDTV technology solutions, in October
of 2005, Syscan expanded its Sysview HDTV display technology group through the
purchase of Nanodisplay Inc., the holder of key intellectual property related to
LCoS (liquid crystal on silicon) HDTV technology. Nanodisplay has multiple
patents pending surrounding its proprietary methods and technologies that
utilize CNT (Carbon Nanotube) technology and advanced assemblage and integration
processes. Nanodisplay is in late stage research and development for the
production of an advanced high yield LCoS chip with true 1080P resolution. Upon
completion of this innovative LCoS technology, of which there can be no
assurance, it is expected that technology upgrades to even greater resolutions
are likely possible at an accelerated pace. Our ultimate goal is to achieve
superior visual performance and resolution at a significant value in large
screen format HDTV's.
Nanodisplay co-founder Dr. Gihong Kim brings a tremendous amount of
experience to Syscan and Sysview alike. Dr. Kim has been a research and
development engineer in the field of semiconductor materials, process
integration and devices, for the majority of his career. He attributes the
genesis of his solutions to solving key LCoS challenges and limitations to his
involvement with LCoS since the technologies initial R&D stages. To his credit
Dr. Kim has over 20 patents issued and has had 13 papers published in the field
of semiconductor technology.
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OUR COMPETITIVE STRENGTHS
CORE TECHNOLOGY ASSETS. In recent years, we have developed and acquired
technology assets, intellectual property and industry expertise in both the
image capture and image display markets. We believe a significant investment in
capital and time would be necessary for competitors to replicate our current
capabilities. We continue to invest in the advancement of our technologies to
maintain our market as well as to develop new markets/products. As of March 31,
2007, we had 25 (64%) full-time employees involved in the research and
development of our products and our technologies that continue to add to the
existing issued patents that we hold in the U.S. and Foreign territories.
BROAD DISTRIBUTION CHANNELS. We maintain an extensive network of distribution
channels to address the needs of specific markets such as financial, legal,
healthcare and government. We believe that our extensive channel relationships
increase the difficulty for competitors to develop a similar channel network and
make it difficult for our products to be displaced. In addition, our
far-reaching channel network enables us to introduce new products quickly and
effectively throughout the global marketplace.
CAPTURING MARKET SHARE. We believe we continue to be a manufacturing leader in
USB powered image capture devices. Our customers tend to look to established,
experienced vendors when making product selections and as an established
manufacturer in our markets, we believe we can target and win more partnership
arrangements and new customers than our competition.
INTERNATIONAL FOCUS. Our international experience and diverse heritage allow us
to efficiently compete on a global basis. We have established effective bases of
operations in the USA, European Union and Asia Pacific. We recognize cultural
and language benefits in manufacturing, warehousing and time-to-market sales.
OUR STRATEGY
PURSUE HIGH GROWTH MARKETS IN IMAGE SCANNING. We intend to leverage our
technologies and market leadership to expand our opportunities in mobile and
other markets. We also intend to pursue emerging opportunities to use our
technology within consumer devices, and other wide spread devices. To expand our
position in mobile image capture, we intend to continue to introduce new
versions of our products and applications; complete new license agreements with
customers and partners that will resell our technologies; and make strategic
acquisitions that we believe complement our existing solutions and resources in
various evolving markets.
EXPAND IMAGE SCANNING SOLUTIONS. We intend to enhance the value of our imaging
scanning solutions for enterprises to address the proliferation of security
related applications, the expanded use of content management systems, and the
widespread adoption of networked multifunction and digital image scanning
devices. We intend to introduce new products or new versions of existing
products to take advantage of these growth opportunities. We also plan to
enhance our software development toolkits so our technologies can be integrated
with more third-party solutions.
FOCUS ON SPECIFIC VERTICAL MARKETS. We intend to focus our marketing and sales
resources to generate demand and deliver solutions in specific vertical markets.
The value of our solutions is best realized in vertical markets that are
information and process intensive, such as healthcare, telecommunications,
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financial services, legal and government. In addition, we intend to offer custom
versions of certain applications and products for specific vertical markets such
as medical, legal and utilities.
EXPAND WORLDWIDE CHANNELS. We intend to expand our global channel network and
build upon our existing distribution channels, especially in Europe, Asia and
Latin America. In particular, we intend to replicate our successful North
American value-added reseller channel in Europe. Along these lines, we intend to
add sales employees in different geographic regions and launch programs and
events to help recruit new partners for our channel network.
PURSUE STRATEGIC ACQUISITIONS. We will selectively pursue strategic acquisitions
of 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.
We have begun focusing our sales and marketing efforts substantially
towards the vertical markets such as the Value Added Reseller (VAR) and
small-office-home-office (SOHO) markets. We believe focusing on these markets is
the most effective way to showcase our technological capabilities and
manufacturing efficiencies, while enabling us to maintain higher margins, and
require fewer resources than working directly with the mass retailers.
For the HDTV market, we are currently concentrating our efforts and
investment towards the completion and mass market delivery of the Nanodisplay
LCoS HDTV solution. Although there can be no assurances, we intend to initiate a
relationship in the near future with a partner that may allow us to provide a
proprietary low cost light engine component which would be used to drive the
Nanodisplay imager/chip. We believe that by co-designing and combining these two
critical components we will be able to deliver a complete, low cost high
performance, LCoS solution to the market. Separately, we also recognize that
there are other viable non-TV applications for the Nanodisplay LCoS imager and
expect to explore those possibilities.
Beyond our LCoS initiative we continue development of an LCD product
that uses RGB (red, green, and blue) LED's controlled sequentially as an
alternative longer life backlight source with visual performance benefits. Most
of our LCD HDTV strategy is leveraged on core technologies and market synergy
that we established in the image capture (scanning) market since our scanner
devices utilize LED's as a light source, and the precise control of this light
source is a critical capability in the performance and ultimate market success
of this new technology. It is not expected that there will be mass acceptance of
variations of this technology until late 2007. In order to meet the competitive
requirements, we believe that we will need a collaborator (or partner) that has
significant experience in the FPD panel design and tooling. A partner will also
reduce the time-to-market and overall risk associated with entry into the
marketplace.
PRODUCTS
IMAGE SCANNING PRODUCTS
We offer several different image scanning product groups to meet the
diverse needs of our customers. Although all our products are based on the same
patented and proprietary technology, our product groups vary from one another by
features and configurations. Our most popular product groups include our
DocketPORT and TravelScan line of products.
-19-
DOCKETPORT
Our DocketPORT product group is our fourth generation of compact
document/image-capture devices. Specific features of this product group include:
- High Speed-Universal Serial Bus (USB) powered;
- Several models capable of true duplex scans (both sides of a two-sided
document at once);
- 600 dots per inch (DPI) optical resolution;
- Minimal power consumption;
- Extremely lightweight;
- Restriction of Hazardous Substance (RoHS) and Waste Electrical and
Electronic Equipment (WEEE) compliant;
- Internal 48-bit analog-to-digital conversion for three-color channels
(red, green and blue);
- No power adapter required; and
- Scans any size document from business cards to legal size documents.
TRAVELSCAN
Our TravelScan products are the ideal document management devices for
busy professionals and executives. These lightweight and convenient scanners are
powered using only the USB port, an exclusive Syscan patent. Our TravelScan
products can be conveniently carried alongside laptops and requires a minimal
footprint in your work area. These products enable users to fax, email and
organize all business documents with the "touch of a button." Specific features
include:
- Full-Speed USB powered;
- 600 dots per inch ("DPI") optical resolution;
- Minimal power consumption;
- Extremely lightweight; and
- RoHS and WEEE compliant.
CONTACT IMAGE SENSOR (CIS) MODULES
In addition to the finished scanner product line, we also design,
configure and sell the Contact Image Sensor (CIS) Modules that we use in our
products and separately as an OEM component to other manufacturers.
PRODUCTS IN DEVELOPMENT
We have a product development program currently in place to add new
products in 2007. These new products are being introduced as both Syscan branded
and OEM/VAR branded products. Many of these new scanners are being driven by
increased market demand for duplex, faster and easier-to-use products. They will
also concentrate more on the identity-security and financial transaction market
needs.
-20-
IMAGE DISPLAY PRODUCTS
SYSVIEW TECHNOLOGY
During 2005 we saw the establishment of SysView Technology Inc., a
wholly owned subsidiary of ours that is focused on introducing breakthrough
price-performance technology in the HDTV display market. As part of this
objective, we acquired Nanodisplay Inc. in October 2005. Nanodisplay is a
leading designer of LCoS HDTV technology and we believe that the acquired
technology and personnel will contribute significantly to our efforts in the
display market. The light engine is the optics component that actually projects
the image that the chip (Nanodisplay) creates. We believe that it is important
that both of these technologies be vertically integrated and co-designed in
order to offer the best and most cost-effective complete solution.
In addition we are in various stages of development on two other HDTV
initiatives. The first is the design and implementation of a unique backlighting
system for large format LCD screens. Through the use of RGB (red, green and
blue) LED's we will attempt to replace the current industry standard CCFL (cold
cathode florescent light). The expected end result is both extended product life
and enhanced visual performance. The ultimate success of this technology is
based on the ability to sequentially manage the timing of the independent
colored LED's appropriately. We believe that we have a unique understanding of
this process as it is used in our patented mobile image scanning devices.
We are also currently investing in the R&D of what we call ITV or
intelligent TV. We believe that the step will ultimately become less passive and
more interactive. To that end we are working on a host of hardware and software
applications that would allow for that interactivity. Our goal is to deliver the
hardware component of this technology at a price that would allow for it to be
transparently included in new TV's. We also recognize the importance of making
the technology seamless and simple to use. Tivo is an example of how the
consumer is beginning to accept the idea of greater functionality in their TV.
SALES, DISTRIBUTION AND FULFILLMENT
We market and distribute our products indirectly through a global
network of OEM's, system integrators, value-added resellers and regional
distributors.
We have established relationships with more than 40 channel partners
throughout North America, Europe and Asia, including leading system vendors,
value-added resellers and regional distributors. In addition our products are
sold through a variety of retail and web-based channels.
MANUFACTURING
All of our products are currently manufactured by a subsidiary of
Syscan Technology Holdings (STH), the parent company of our majority
stockholder. We and STH have established an internal-pricing agreement that is
updated on a semi-annual basis. STH serves as the exclusive manufacturer of all
current and future image capture products to be produced by us. We believe, for
quality control and pricing reasons that this type of relationship is more
favorable than could be attained from unaffiliated third-parties. STH purchases
the raw materials, parts and components and other items, with the exception of
certain critical components and tooling, that are required to manufacture our
products.
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 has agreed to provide repair
services for the products to us at its customary hourly repair rate plus the
cost of any parts, components or items necessary to repair the products.
-21-
Since STH is the primary manufacturer of all of our current
products, if the operations of STH are interrupted or if our orders or orders of
other STH clients exceed the manufacturing capabilities of STH, STH may not be
able to deliver our products to us on time and we may not be able to deliver our
products to our customers on time, which could adversely affect our business,
reduce our revenues and significantly harm our relationship with our customers.
We have the right at anytime to engage third parties to manufacture some or all
of our products.
We believe that it could take approximately three to six months to secure
a third-party manufacturer to supplement STH's manufacturing capabilities and
approximately six to twelve months to replace STH as our sole manufacturer.
Although we believe that there are a number of third-party manufacturers (other
than STH) available to us, there can be no assurances that we would be able to
secure another manufacturer on terms favorable to us, or at all, or how long it
would take us to secure such manufacturing.
SUPPLIERS
STH purchases the raw materials, parts and components and other items,
with the exception of certain critical components and tooling, that are required
to manufacture our products. A limited number of components included in our
products are obtained from a single supplier or a small group of suppliers. We
have some controller chips that are sole-sourced, as they are specialized
devices that can effectively control the cost of our product. We do not have any
long-term or exclusive purchase commitments with any of our suppliers. Where
possible, we work with secondary suppliers to qualify additional sources of
supply. To reduce the risk associated with using a sole supplier, we attempt to
maintain strategic inventories of these sole-sourced components. To date we have
been able to obtain adequate supplies of the components used in the production
of our documents/image-capture products in a timely manner from existing
sources. If in the future we are unable to obtain sufficient quantities of
required materials, components or subassemblies, or if such items do not meet
our quality standards, delays or reductions in product shipments could occur
which could harm our business, financial condition and results of operations.
PROPRIETARY TECHNOLOGY
We exploit our proprietary technology, trade secrets, know-how,
continuing technological innovations and licensing opportunities to maintain our
competitive position. We rely on patent law, copyright law, trade secret laws,
secrecy, technical measures, licensee agreements and non-disclosure agreements
to protect our technology, trade secrets and other proprietary rights. Our
policy is to file patent applications to protect technology, inventions and
improvements that are important to the development of our business, to maintain
a technological advantage over our competitors and to in some cases generate
licensing revenue. In this regard, we have obtained patents that directly relate
to our products. Our mobile imaging scanning technologies are covered by
numerous patents and patent applications owned by us. We currently have 14
issued (granted) patents and 5 patents issued in Taiwan. We currently have 5
pending patents in the United States, of which 4 are related to image display
technologies and 1 related to image scanning. These patents expire on various
dates between 2017 and 2022.
We require our employees to execute confidentiality and invention
assignment agreements in order to protect our proprietary technology and other
proprietary rights. We also rely on trade secrets and proprietary know-how to
protect our proprietary rights.
-22-
RESEARCH AND DEVELOPMENT
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. As a
result, we believe that our future growth is highly dependent on the timely and
efficient introduction of new and updated products and technology. As of
December 31, 2006, we employed or directly contracted 25 people in research and
development, 8 of whom are located in international locations. Our employees
based in overseas facilities extend our global focus while often lowering our
overall cost of research and development. To promote efficiency in our research
and development efforts, we have organized the effective use of global
development teams and a comprehensively integrated development process. In
addition, we have developed and refined our time-to-market process, which
contributes to cost-effective resource management while promoting technology
sharing across programs.
Our future success will depend in part on our ability to anticipate
changes, enhance our current products, develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of our clients. Our research and development expenses for
the twelve months ending December 31, 2006 and the twelve months ended December
31, 2005 were approximately $3.084 million and $951,000, respectively. We expect
that we will continue to commit significant resources to research and
development in the future, specifically with respect to the HDTV market. To date
we have not capitalized any research and development expenses and all costs have
been expensed as incurred.
INTERNATIONAL OPERATIONS
Our international operations include research and development, customer
support and sales and marketing. Our international research and development is
conducted in the US and China. Additionally sales and support offices are
located in the US, the Netherlands, Korea and China to support our current
international customers and to expand our international revenue opportunities.
Geographic net sales classification is based on the country in which
the sale is invoiced.Net sales for the twelve months ended December 31, 2006
were 94% in North America, 3% in Asia and 3% in the European market. This is
compared to the 2005 geographic net sales of 87% in North America, 9% in Asia
and 4% in Europe.
Additional financial information relating to foreign and domestic sales
and operations for each of the twelve months ended December 31, 2006 and the
year ended in the period ended December 31, 2005 is set forth in Note 11,
"Segment and Geographic Information" of the Notes to Consolidated Financial
Statements.
COMPETITION
We have several direct competitors to our document/image-capture
products, in major worldwide markets (North America, Europe and Asia). While
there is currently no single company that competes with us in all of our product
areas, within Image Display we compete with Sony, Samsung, Sharp, Sanyo and LG,
and our HDTV products could compete with some of these same companies' products
as well, however, we intend to enter into OEM and private label relationships
with some of these competitors. In addition, there are several smaller
vertically positioned companies in the image display technologies that may be
competitive with our solutions.
-23-
To maintain our competitive advantage we maintain a high level of
investment in research and development and focus on factory efficiency allowing
us to provide superior time-to-market product cycles with the goal of
manufacturing and delivering products to customers virtually defect free. We
believe that our competitive strengths include:
- Patented and proprietary-based products;
- Favorable and well established reputation, experience and presence in
the USB-powered document/image-capture devices market;
- Superior customer relationships that allow us to identify and work
closely with customers to meet market demands;
- Vertical integration design and manufacturing business model which
reduces the time to introduce a new or improved product to the market;
- Broad distribution channels; and
- Product quality and performance.
Nonetheless, current and potential competitors have established, or may
establish, cooperative relationships among themselves or with third parties to
increase the ability of their technologies to address the needs of our
prospective customers. Most of our competitors in each of the markets in which
we compete have significantly greater financial, technical and marketing
resources than us. These competitors may be able to respond more rapidly than we
can to new or emerging technologies or changes in customer requirements. They
may also devote greater resources to the development, promotion and sale of
products than we do.
COMPLIANCE WITH ENVIRONMENTAL, HEALTH, AND SAFETY REGULATIONS
In July 2006, the European Union ("EU") began requiring all electronics
products sold within the EU to be RoHS compliant pursuant to the European
Directive 2002/95/EC. Beginning in January 2006, all our products are RoHS
compliant.
EMPLOYEES
As of June 1, 2007, we employed 36 people on a full-time basis, 23 in
the United States and 13 internationally. Of the total, 25 were in product
research and development, 4 in sales and marketing and 7 in general
administration. None of our employees located in the United States or
internationally are represented by unions or collective bargaining agreements.
We have experienced no work stoppages and believe that our employee relations
are good. We have utilized the services of consultants, third-party developers,
and other vendors in our sales, development, manufacturing activities and
finance and administration functions.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Commission's public
reference rooms at 100 F Street, N.E., Washington, D.C. 20549, 233 Broadway, New
York, New York 10279, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Commission filings are
also available to the public from the Commission's Website at
"http://www.sec.gov." We make available free of charge our annual, quarterly and
current reports, proxy statements and other information upon request. To request
such materials, please contact our Corporate Secretary at our address as set
forth above.
-24-
We maintain a Website at "http://www.syscaninc.com" (this is not a
hyperlink, you must visit this website through an internet browser). Our Website
and the information contained therein or connected thereto are not incorporated
into this Prospectus.
DESCRIPTION OF PROPERTY
At March 31, 2007 details of our property were as follows:
LEASE TOTAL
LOCATION EXPIRATION SQUARE FOOTAGE PRIMARY USAGE
-------- ---------- -------------- -------------
San Jose, CA November 2008 10,700 Corporate headquarters, research and
development lab
San Jose, CA Month to month 2,300 Inventory management and distribution
Arnhem, Netherlands Month to month 250 Field service and sales office
Arnhem, Netherlands Month to month 1,400 Inventory management and distribution
Brisbane, Australia Month to month 1,100 Inventory management and distribution
Shenzhen, China Month to month 2,100 Inventory management and distribution
We believe our properties are adequate for our current needs and will be
sufficient to serve the needs of our operations for the foreseeable future.
LEGAL PROCEEDINGS
As of the date of this prospectus, there were no pending material
legal proceedings to which we were a party and we are not aware that any were
contemplated. There can be no assurance, however, that we may not from time to
time be made a party to litigation in the normal course of our business, and any
finding of liability imposed against us could have a material adverse effect on
our financial condition, results of operations or cash flows.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock issuable upon conversion of the Series A Preferred Stock by the
selling stockholders. If and when all of the warrants held by the selling
stockholders are exercised, we will receive the proceeds from the exercise of
those warrants. If these warrants are exercised in full by the selling
stockholders, we may receive up to $2,051,500, which we intend to use for
working capital and other general corporate purposes.
SELLING STOCKHOLDERS
Up to an aggregate of 2,963,750 shares of common stock may be offered
under this prospectus consisting of up to (i) 1,565,000 shares of common stock
issuable upon conversion of Series A Preferred Stock, (ii) 279,750 shares of
Common Stock, representing our estimate of the maximum number of shares of
Common Stock issuable upon conversion of accrued dividends on the shares of
Series A Convertible Preferred Stock, and (iii) up to 1,119,000 shares of common
stock issuable upon the exercise of warrants.
-25-
All proceeds of this offering will be received by the selling
stockholders for their own account. We may receive proceeds in connection with
the exercise of the warrants, the underlying shares associated with which may,
in turn, be sold by the selling stockholders. As used in this prospectus, the
term "selling stockholder" includes the selling stockholders listed below and
their transferees, assignees, pledgees, donees or other successors.
On March 15, 2005, we consummated the sale of 18,650 shares of our
Series A Preferred Stock for gross proceeds of $1,865,000. The Series A
Preferred Stock bears interest at a rate equal to 5% per annum. The Series A
Preferred Stock is convertible, under certain conditions, into shares of our
common stock at a price equal to $1.00 per share. In connection with the
financing, we also issued to the purchasers of the Series A Preferred Stock
common stock purchase warrants to purchase up to 932,500 shares of our common
stock at a price equal to $2.00 per share. We also issued an aggregate of
186,500 warrants to Starboard Capital Markets, LLC and its affiliates, to
purchase common stock at a price equal to $1.00 per share, as compensation for
its services as placement agent in our Series A Preferred Stock offering. For
its services as placement agent in our Series A Preferred Stock offering,
Starboard Capital Markets, LLC received a ten percent (10%) cash commission and
warrants to purchase up to ten percent (10%) of the number of shares of common
stock into which the Series A Preferred Stock sold in the offering was initially
convertible, at an exercise price equal to the initial conversion price of the
Series A Preferred Stock. Of the 186,500 warrants to which Starboard Capital
Markets, LLC was entitled to receive as compensation for its placement agent
services, it allocated an aggregate of 139,875 warrants to two of its registered
representatives: Michael Hamblett (93,250 warrants) and Anthony Spatacco (46,625
warrants). Each of Messrs. Hamblett and Spatacco acquired the warrants in their
ordinary course of business and at the time of their acquisition of the warrants
they did not have any agreements, understandings or arrangements with any other
persons, either directly or indirectly, to dispose of the warrants or the shares
of common stock issuable upon exercise of the warrants.
The following table sets forth, to our knowledge, certain information
about the selling stockholders as of the date of this prospectus. None of the
selling stockholders, other than Starboard Capital Markets, LLC, is a registered
broker-dealer.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally includes
voting or investment power with respect to securities. In computing the number
of shares beneficially owned by the holder and the percentage ownership of the
holder, shares of common stock issuable upon conversion of the note and upon
exercise of the warrant held by the holder that are currently convertible or are
exercisable within 60 days after the date of the table are deemed outstanding.
The percent of beneficial ownership for the selling stockholder is
based on 21,842,092 shares of common stock outstanding as of the date hereof.
Shares of common stock subject to warrants, options and other convertible
securities that are currently exercisable or exercisable within 60 days of the
date hereof, are considered outstanding and beneficially owned by a selling
stockholder who holds those warrants, options or other convertible securities
for the purpose of computing the percentage ownership of that selling
stockholder but are not treated as outstanding for the purpose of computing the
percentage ownership of any other stockholder.
The following table sets forth information as of that date regarding
beneficial ownership of our common stock by each of the selling stockholders
before and immediately after the offering. Actual ownership of the shares is
subject to conversion of the Series A Preferred Stock and exercise of the
warrants.
-26-
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the account of
the selling stockholders.
After the date of effectiveness of the registration statement of which
this prospectus is a part, the selling stockholders may have sold or
transferred, in transactions covered by this prospectus or in transactions
exempt from the registration requirements of the Securities Act, some or all of
its common stock. Information about the selling stockholders may change over
time.
Any changed information will be set forth in an amendment to the
registration statement or supplement to this prospectus, to the extent required
by law.
NUMBER OF SHARES OF
COMMON STOCK, NOT
POSITION, OFFICE OR INCLUDING SHARES ISSUABLE NUMBER OF SHARES TOTAL NUMBER OF
OTHER MATERIAL ON CONVERSION OF REPRESENTED BY SHARES OF COMMON
RELATIONSHIP WITH PREFERRED STOCK OR PREFERRED STOCK AND STOCK
US DURING PAST WARRANTS, BENEFICIALLY WARRANTS, BENEFICIALLY
NAME THREE YEARS OWNED BENEFICIALLY OWNED OWNED
Iron Horse Capital LLC (3) None -0- 12,500 12,500
Maloney & Company, LLC (4) None -0- 12,500 12,500
Gordon Gregoretti (5) None -0- 12,500 12,500
Whalehaven Capital Fund (6) None -0- 600,000 600,000
Basso Multi-Strategy
Holding Fund Ltd. (7) None -0- 877,500 877,500
Basso Private Opportunity
Holding Fund Ltd. (8) None -0- 247,500 247,500
AJW Partners, LLC (9) None -0- 16,000 16,000
AJW Qualified Partners,
LLC (10) None -0- 37,000 37,000
AJW Offshore LTD (11) None -0- 45,000 45,000
New Millenium Capital
Partners II, LLC (12) None -0- 2,000 2,000
Gerard Caviston (13) None -0- 12,500 12,500
Enable Growth Partners (14) None -0- 600,000 600,000
Michael Hamblett (15) (14) -0- 93,250 93,250
Anthony Spatacco (16) (15) -0- 46,625 46,625
Starboard Capital
Markets, LLC (17) (16) -0- 46,625 46,625
Sean F. Moran (18) None -0- 22,500 22,500
NUMBER OF SHARES NUMBER OF
TO BE OFFERED SHARES TO BE PERCENTAGE TO BE
FOR THE ACCOUNT OWNED AFTER BENEFICIALLY OWNED
OF THE SELLING THIS OFFERING AFTER THIS
STOCKHOLDER(1) (2) OFFERING (2)
Iron Horse Capital LLC (3) 12,500 -0- -0-
Maloney & Company, LLC (4) 12,500 -0- -0-
Gordon Gregoretti (5) 12,500 -0- -0-
Whalehaven Capital Fund (6) 600,000 -0- -0-
Basso Multi-Strategy
Holding Fund Ltd. (7) 877,500 -0- -0-
Basso Private Opportunity
Holding Fund Ltd. (8) 247,500 -0- -0-
AJW Partners, LLC (9) 16,000 -0- -0-
AJW Qualified Partners,
LLC (10) 37,000 -0- -0-
AJW Offshore LTD (11) 45,000 -0- -0-
New Millenium Capital
Partners II, LLC (12) 2,000 -0- -0-
Gerard Caviston (13) 12,500 -0- -0-
Enable Growth Partners (14) 600,000 -0- -0-
Michael Hamblett (15) 93,250 -0- -0-
Anthony Spatacco (16) 46,625 -0- -0-
Starboard Capital
Markets, LLC (17) 46,625 -0- -0-
Sean F. Moran (18) 22,500 -0- -0-
------------------
* Less than one percent.
-27-
(1) Does not include the shares potentially issuable to each selling
shareholder as a result of the conversion of accrued dividends on the
shares of Series A Preferred Stock. Such dividends accrue on a daily basis
from the date of issuance of the shares of Series A Preferred Stock at an
annual rate of 5%. At our election, we may elect to pay such dividends in
cash or in shares of our Common Stock. The actual number of shares to be
issued cannot be determined until the conversion date.
(2) Assumes that all shares of common stock offered in this prospectus and
otherwise beneficially owned will be sold.
(3) The address for Iron Horse Capital LLC is 429 Corber Street, New Canaan, CT
06840. Kevin Arnone, the managing member of Iron Horse Capital LLC, has
voting and investment power over the shares held by Iron Horse Capital LLC.
The number of shares being registered for Iron Horse Capital LLC includes
12,500 shares issuable upon the exercise of warrants.
(4) The address for Maloney & Company, LLC is 762 Boston Post Road, Madison, CT
06443. Michael J. Maloney, a member of Maloney & Company, LLC has voting
and investment power over the shares held by Maloney & Company, LLC. The
number of shares being registered for Maloney & Company, LLC includes
12,500 shares issuable upon the exercise of warrants.
(5) The number of shares being registered for Mr. Gregoretti includes 12,500
shares issuable upon the exercise of warrants.
(6) The address for Whalehaven Capital Fund Limited is 3rd Floor, 14
Par-La-Ville Road, P.O. Box HM 1027, Hamilton HMDX Bermuda. Evan
Schemenauer, Arthur Jones and Jennifer Kelly share voting and investment
power over the shares held by Whalehaven Capital Fund Limited. The number
of shares being registered for Whalehaven Capital Fund Limited includes
400,000 shares issuable upon the conversion of preferred stock and 200,000
shares issuable upon the exercise of warrants.
(7) The address for Basso Multi-Strategy Holding Fund Ltd. is 1266 East Main
Street, Stamford, CT 06902. Howard I. Fischer is a managing member of the
general partner of the investment manager of Basso Multi-Strategy Holding
Fund Ltd. and has voting and investment control over the shares held by
Basso Multi-Strategy Holding Fund Ltd. Mr. Fischer disclaims beneficial
ownership over the shares owned by Basso Multi-Strategy Holding Fund Ltd.
The number of shares being registered for Basso Multi-Strategy Holding Fund
Ltd. includes 585,000 shares issuable upon the conversion of preferred
stock and 292,500 shares issuable upon the exercise of warrants.
(8) The address for Basso Private Opportunity Holding Fund Ltd. is 1266 East
Main Street, Stamford, CT 06902. Howard I. Fischer is a managing member of
the general partner of the investment manager of Basso Private Opportunity
Holding Fund Ltd. and has voting and investment control over the shares
held by Basso Private Opportunity Holding Fund Ltd. Mr. Fischer disclaims
beneficial ownership over the shares owned by Basso Private Opportunity
Holding Fund Ltd. The number of shares being registered for Basso Private
Opportunity Holding Fund Ltd. includes 165,000 shares issuable upon the
conversion of preferred stock and 82,500 shares issuable upon the exercise
of warrants.
(9) The address for AJW Partners LLC is c/o The NIR Group, 1044 Northern
Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting and
investment control over the shares held by AJW Partners LLC. The number of
shares being registered for AJW Partners LLC includes 16,000 shares
issuable upon the exercise of warrants.
(10) The address for AJW Qualified Partners LLC is c/o The NIR Group, 1044
Northern Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting
and investment control over the shares held by AJW Qualified Partners LLC.
The number of shares being registered for AJW Qualified Partners LLC
includes 37,000 shares issuable upon the exercise of warrants.
(11) The address for AJW Offshore LTD is c/o The NIR Group, 1044 Northern
Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting and
investment control over the shares held by AJW Offshore LTD. The number of
shares being registered for AJW Offshore LTD includes 45,000 shares
issuable upon the exercise of warrants.
(12) The address for New Millenium Capital Partners II, LLC is c/o The NIR
Group, 1044 Northern Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky
has voting and investment control over the shares held by New Millenium
Capital Partners II, LLC. The number of shares being registered for
Millenium Capital Partners II, LLC includes 2,000 shares issuable upon the
exercise of warrants.
(13) The number of shares being registered for Mr. Caviston includes 12,500
shares issuable upon the exercise of warrants.
-28-
(14) The address for Enable Growth Partners is One Ferry Bldg., Suite 255, San
Francisco, CA 94111. Mitch Levine, the managing partner of Enable Growth
Partners, has voting and investment control over the shares held by Enable
Growth Partners. The number of shares being registered for Enable Growth
Partners includes 400,000 shares issuable upon the conversion of preferred
stock and 200,000 shares issuable upon the exercise of warrants.
(15) Mr. Hamblett is a registered representative with Starboard Capital Markets,
LLC, an NASD member firm. Mr. Hamblett's address is c/o Starboard Capital
Markets, LLC, 736 Boston Post Road, Madison, CT 06443. The number of shares
being registered for Mr. Hamblett includes 93,250 shares issuable upon the
exercise of warrants.
(16) Mr. Spatacco is a registered representative with Starboard Capital Markets,
LLC, an NASD member firm. Mr. Spatacco's address is c/o Starboard Capital
Markets, LLC, One Logan Square, Suite 2650, Philadelphia, PA 19103. The
number of shares being registered for Mr. Spatacco includes 46,625 shares
issuable upon the exercise of warrants.
(17) Starboard Capital Markets, LLC acted as our placement agent in connection
with the sale of the Series A Preferred Stock and Warrants sold by us in
the Series A Preferred Stock offering. Starboard Capital Markets, LLC
received the shares of our common stock in the ordinary course of their
business and at the time that they received the shares of our common stock
had no agreements, understandings, directly or indirectly, with any person
to distribute the securities. Starboard Capital Markets, LLC's address is
One Logan Square, Suite 2650, Philadelphia, PA 19103. James Dotzman, a
managing director of Starboard Capital Markets, LLC, has voting and
investment control over the shares held by Starboard Capital Markets, LLC.
The number of shares being registered for Starboard Capital Markets, LLC
includes 46,625 shares issuable upon the exercise of warrants.
(18) The number of shares being registered for Mr. Moran includes 15,000 shares
issuable upon the conversion of preferred stock and 7,500 shares issuable
upon the exercise of warrants.
The selling stockholders and we are not making any representation that
any shares covered by the prospectus will or will not be offered for sale or
resale. The selling stockholders reserve the right to accept or reject, in whole
or in part, any proposed sale of shares. The shares offered by this prospectus
may be offered from time to time by the selling stockholder named above.
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PLAN OF DISTRIBUTION
Selling stockholders may offer and sell, from time to time, the shares
of our common stock covered by this prospectus. The term selling stockholders
includes donees, pledgees, transferees or other successors-in-interest selling
securities received after the date of this prospectus from a selling stockholder
as a gift, pledge, partnership distribution or other non-sale related transfer.
The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Sales may be made on one or
more exchanges or in the over-the-counter market or otherwise, at prices and
under terms then prevailing or at prices related to the then current market
price or in negotiated transactions. The selling stockholders may sell their
securities by one or more of, or a combination of, the following methods:
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o an over-the-counter distribution in accordance with the rules of the
NASDAQ National Market;
o in making short sales or in transactions to cover short sales;
o in put or call option transactions relating to the shares;
o in privately negotiated transactions; and
o in options, swaps or derivatives transactions.
The selling stockholders may effect these transactions by selling
shares directly to purchasers or to or through broker-dealers, which may act as
agents or principals. These broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the selling stockholders and/or
the purchasers of shares for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The selling
stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities.
To the extent required, we may amend or supplement this prospectus to
describe a specific plan of distribution. In connection with distributions of
the securities or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with those transactions, broker-dealers or other financial institutions may
engage in short sales of shares of our common stock in the course of hedging the
positions they assume with selling stockholders. The selling stockholders may
also sell shares of our common stock short and redeliver the securities to close
out their short positions. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions that
require the delivery to the broker-dealer or other financial institution of
securities offered by this prospectus, which securities the broker-dealer or
other financial institution may resell pursuant to this prospectus, as
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supplemented or amended to reflect the transaction. The selling stockholders may
also loan or pledge securities to a broker-dealer or other financial
institution, and, upon a default, the broker-dealer or other financial
institution, may affect sales of the loaned or pledged securities pursuant to
this prospectus, as supplemented or amended to reflect the transaction.
The selling stockholders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus. In
effecting sales, broker-dealers or agents engaged by the selling stockholders
may arrange for other broker-dealers to participate. Broker-dealers or agents
may receive commissions, discounts or concessions from the selling stockholders
in amounts to be negotiated immediately prior to the sale.
In offering the securities covered by this prospectus, the selling
stockholders and any broker-dealers who execute sales for the selling
stockholders may be treated as "underwriters" within the meaning of the
Securities Act in connection with sales. Any profits realized by the selling
stockholders and the compensation of any broker-dealer may be treated as
underwriting discounts and commissions.
The selling stockholders and any other person participating in a
distribution will be subject to the Securities Exchange Act of 1934 (Exchange
Act). The Exchange Act rules include, without limitation, Regulation M, which
may limit the timing of purchases and sales of any of the securities by the
selling stockholders and other participating persons. In addition, Regulation M
may restrict the ability of any person engaged in the distribution of the
securities to engage in market-making activities with respect to the particular
security being distributed for a period of up to five business days prior to the
commencement of the distribution. This may affect the marketability of the
securities and the ability of any person or entity to engage in market-making
activities with respect to the securities. We have informed the selling
stockholders that the anti-manipulation rules of the SEC, including Regulation M
promulgated under the Exchange Act, may apply to their sales in the market.
We will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the securities against
certain liabilities, including liabilities arising under the Securities Act. We
have agreed to indemnify the selling stockholders and the selling stockholders
have agreed to indemnify us against certain liabilities in connection with the
offering of the shares, including liabilities arising under the Securities Act.
At the time a particular offer of securities is made, if required, a
prospectus supplement will be distributed that will set forth the number of
securities being offered and the terms of the offering, including the name of
any underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount, commission and other item constituting compensation, any discount,
commission or concession allowed or re-allowed or paid to any dealer, and the
proposed selling price to the public.
We are paying all expenses and fees in connection with the registration of
the shares. The selling stockholders will bear all brokerage or underwriting
discounts or commissions paid to broker-dealers in connection with the sale of
their shares.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names and ages our current directors
and executive officers, the principal offices and positions with us held by each
person and the date such person became a director or executive officer. Each
year the stockholders elect the members of our Board of Directors.
Our directors and executive officers are as follows:
------------------ ------------------------ --------- --------------------------
YEAR FIRST ELECTED AS AN
NAME OFFICER OR DIRECTOR AGE POSITION(S) HELD
------------------ ------------------------ --------- --------------------------
Darwin Hu 2004 54 President, Chief Executive
Officer and Chairman
------------------ ------------------------ --------- --------------------------
William Hawkins 2004 51 Chief Operating Officer,
Acting Chief Financial
Officer, Secretary and
Director
------------------ ------------------------ --------- --------------------------
David Clark 2004 39 Senior Vice President of
Business Development and
Director
------------------ ------------------------ --------- --------------------------
Lawrence Liang 2004 71 Director
------------------ ------------------------ --------- --------------------------
There are no family relationships between any director, executive officer, or
person nominated or chosen to become a director or executive officer.
DARWIN HU became our Chairman, President and Chief Executive Officer on April 2,
2004, in connection with our acquisition of Syscan, Inc. Prior thereto, Mr. Hu
was the President and Chief Executive Officer of Syscan, Inc., our wholly-owned
subsidiary. Mr. Hu has over 22 years of experience in the high-tech industry and
has held various management related positions within organizations related to
color graphic imaging input scanning, display output and imaging communication
product development, manufacturing and sales and marketing. Before joining
Syscan, Inc. in April 1998, Mr. Hu held senior management positions at Microtek,
Xerox, OKI, AVR, DEST, Olivetti and Grundig. Mr. Hu holds a bachelor's degree in
Engineering Science from National Cheng-Kung University, Taiwan, and a master's
degree in Computer Science and Engineering from California State University,
Chico, USA.
WILLIAM HAWKINS became our Chief Operating Officer and Secretary on April 2,
2004, in connection with our acquisition of Syscan, Inc. On April 1, 2005 he
became our interim Chief Financial Officer, after the departure of our former
CFO, and on June 8, 2007 he was appointed to our board of directors. Mr. Hawkins
has held various management positions at Syscan, Inc., the Company's
wholly-owned subsidiary, since 1999, including V.P. of Sales and Marketing,
President and General Manager Syscan Imaging Group. Prior thereto, Mr. Hawkins'
product focus has been primarily in the imaging systems and computer peripheral
markets, including senior positions with General Electric (UK), Kaman Aerospace,
British Aerospace Engineering, Gartner Research and Per Scholas. Mr. Hawkins
received a bachelor's degree in physics from the University of Maryland in 1978
and an MBA from Johns Hopkins University in Management of Technology
Concentration (MOT).
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DAVID CLARK has been our Senior Vice President of Business Development and a
director since July 15, 2004. In July 2005, Mr. Clark was appointed President of
Sysview Technology Inc., our wholly owned subsidiary. From October, 2003 to
July, 2004 Mr. Clark was President of Nautical Vision, Inc. a market specific
image display company where he created and implemented the company's business
plan which involved product sourcing, sales and marketing and general
management. From June, 2001 to October, 2003, Mr. Clark actively invested in and
consulted to a diverse group of companies in addition to being involved in
residential development. Mr. Clark was President and CEO of Homebytes.com from
November, 1998 to May of 2001, where he was primarily responsible for raising in
excess of twenty five million dollars in funding from investors including
America Online, FBR Technology Venture Partners, PNC Bank, and Bank of America,
as well as being instrumental in the acquisition of a key competitor of
Homebytes.com. Prior thereto Mr. Clark was the head of distribution and a
director of Take Two Interactive (NASDAQ:TTWO) which was a result of TTWO's
acquisition of Inventory Management Systems, Inc. (I.M.S.I.), of which Mr. Clark
was a co-founder and President. Prior to founding I.M.S.I., Mr. Clark held
various management positions with Acclaim Entertainment (NASDAQ:AKLM), and the
Imagesoft division of SONY Music (NYSE:SNE). Mr. Clark received a B.S. in
Business from the State University of New York at Binghamton in 1990.
LAWRENCE LIANG has been a director since April 2, 2004. Since 1984 Mr. Liang has
been the President and Vice President of Genoa Systems Corporation, a graphics
company that developed the flicker free and true color technologies in the late
1980's, the President of Telecom Marketing, a marketing consultant for
telecommunications infrastructure, and the President of Cwaves Technology, a
wireless LAN/WAN company. Mr. Liang has also worked for IBM's Technology
Component Division to help develop semiconductor products and RISC CPU
Instruction sets. Mr. Liang also spent five years in IBM's Disk Drive division
in Silicon Valley where he held various management positions. Mr. Liang holds a
master's degree in Applied Mathematics from the City University of New York.
BOARD COMMITTEES
Our board of directors does not currently have any committees. We
intend to establish an audit committee which we expect will be comprised of a
majority of our independent directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that our directors and executive officers and persons who beneficially
own more than 10% of our common stock (referred to herein as the "reporting
persons") file with the SEC various reports as to their ownership of and
activities relating to our common stock. Such reporting persons are required by
the SEC regulations to furnish us with copies of all Section 16(a) reports they
file. Based solely upon a review of copies of Section 16(a) reports and
representations received by us from reporting persons, and without conducting
any independent investigation of our own, in 2006, we believe all Forms 3, 4 and
5 were timely filed with the SEC by such reporting persons.
CODE OF ETHICS
Our Board of Directors has adopted a Code of Ethics which is applicable
to all of our chief executive officers, senior financial officers and members of
our board of directors, including our principal executive officer and principal
financial officer, principal accounting officer or controller, or other persons
performing similar functions.
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Any amendment of our Code of Ethics or waiver thereof applicable to
any of our principal executive officer, principal financial officer and
controller, principal accounting officer, directors or persons performing
similar functions will be disclosed on our website within 5 days of the date of
such amendment or waiver. In the case of a waiver, the nature of the waiver, the
name of the person to whom the waiver was granted and the date of the waiver
will also be disclosed.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information regarding securities authorized for issuance under
Equity Compensation Plans, and the equity compensation plan information table
see "Market for Common Equity and Related Stockholder Matters."
-34-
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 11, 2007, information
regarding the beneficial ownership of our common stock based upon the most
recent information available to us for: (i) each person known by us to own
beneficially more than five (5%) percent of our outstanding common stock, (ii)
each of our officers and directors, and (iii) all of our officers and directors
as a group. Unless otherwise indicated, each of the persons listed below has
sole voting and investment power with respect to the shares beneficially owned
by them. As of June 11, 2007 there were 21,842,092 shares of our common stock
outstanding.
NUMBER OF COMMON PERCENTAGE OF COMMON
NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY
BENEFICIAL OWNER(1) OWNED(2) OWNED
Darwin Hu (3) 1,683,333 7.7%
William Hawkins (4) 1,133,333 5.2%
David Clark (5) 983,333 4.5%
Lawrence Liang (6) 26,667 *
Syscan Imaging Limited (7) 16,173,514 74.1%
All Directors and
Officers as a group 3,826,666 17.5%
(4 persons) (3)-(6)
* less than one percent
(1) Unless otherwise indicated, the address of each person listed below is c/o
Sysview Technology, Inc., 1772 Technology Drive, San Jose, California 95110.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person shown in the
table.
(3) Includes 1,398,850 shares of common stock issuable upon the exercise of
options issued to Mr. Hu in connection with his employment agreement with us.
Also includes 183,333 shares issuable upon the exercise of options granted
pursuant to our 2006 Stock Option Plan. Does not include 366,667 shares issuable
upon the exercise of options granted pursuant to our 2006 Stock Option Plan, all
of which are not exercisable within 60 days of the date hereof.
(4) Includes 898,850 shares of common stock issuable upon the exercise of
options issued to Mr. Hawkins in connection with his employment agreement with
us. Also includes 133,333 shares issuable upon the exercise of options granted
pursuant to our 2006 Stock Option Plan. Does not include 266,667 shares issuable
upon the exercise of options granted pursuant to our 2006 Stock Option Plan, all
of which are not exercisable within 60 days of the date hereof.
(5) Includes 50,000 shares of common stock and 698,850 shares of common stock
issuable upon the exercise of options issued to Mr. Clark in connection with his
employment agreement with us. Also includes 133,333 shares issuable upon the
exercise of options granted pursuant to our 2006 Stock Option Plan. Does not
include 266,667 shares issuable upon the exercise of options granted pursuant to
our 2006 Stock Option Plan, all of which are not exercisable within 60 days of
the date hereof.
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(6) Includes 26,667 shares issuable upon the exercise of options granted
pursuant to our 2006 Stock Option Plan. Does not include 53,333 shares issuable
upon the exercise of options granted pursuant to our 2006 Stock Option Plan, all
of which are not exercisable within 60 days of the date hereof.
(7) The sole shareholder of Syscan Imaging Limited is Syscan Technology Holdings
Limited, a publicly-held company whose shares are listed on The Growth
Enterprise Market of The Stock Exchange of Hong Kong Limited. The address for
Syscan Imaging Limited is Unit 808, 8th floor, K. Wah Centre, 191 Java Road,
North Point Hong Kong.
-36-
DESCRIPTION OF SECURITIES
GENERAL
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the applicable
provisions of Delaware law.
Our authorized capital stock consists of 50,000,000 shares of common
stock, and 2,000,000 shares of blank-check preferred stock, 60,000 of which have
been designated Series A Preferred Stock and 30,000 of which have been
designated Series B Preferred Stock. As of the date of this prospectus, our
outstanding capital stock consists of 21,842,092 shares of common stock, $.001
par value, 15,650 shares of Series A Preferred Stock, $.001 par value and 11,500
shares of Series B Preferred Stock. These figures do not include securities to
be issued pursuant to our Amended and Restated 2002 Stock Option Plan or our
2006 Stock Option Plan.
COMMON STOCK
As of the date of this prospectus, we have 21,842,092 shares of common
stock outstanding, held of record by approximately 364 stockholders. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferential rights
with respect to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and
satisfaction of preferential rights of any outstanding preferred stock.
Our common stock has no preemptive or conversion rights or other
subscription rights. There are no sinking fund provisions applicable to the
common stock. The outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
We have authorized 2,000,000 shares of preferred stock, of which an
aggregate of 60,000 have been designated Series A Preferred Stock, of which
15,650 are outstanding as of the date of this prospectus, and 30,000 have been
designated Series B Preferred Stock, of which 11,500 are outstanding as of the
date of this prospectus. As of June 11, 2007, 3,000 shares of Series A Preferred
Stock were converted into shares of our common stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the voting power of
the holders of common stock, including voting rights, of the holders of common
stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the common stock. Notwithstanding the broad
discretion granted to our Board of Directors with respect to designating the
terms and conditions of any series of preferred stock, our Board of Directors
has agreed to refrain from issuing shares of preferred stock, unless such
designation and issuance are approved by a majority of our independent directors
who do not have an interest in the transactions and who have access to and
consulted with (at our expense) our counsel or counsel of their choosing.
-37-
SERIES A PREFERRED STOCK
In March 2005, we sold an aggregate of 18,650 shares of our Series A
Preferred Stock, 3,000 of which have been converted into shares of our common
stock as of June 11, 2007, the material terms of which are described below:
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.
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).
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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.
SERIES B PREFERRED STOCK
On August 8, 2006, we sold an aggregate of 11,500 shares of our Series
B Preferred Stock, the material terms of which are described below:
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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 Investors. 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, until the date
that is twelve months from the effective date of the Registration Statement
required to be filed pursuant to the Registration Rights Agreement, upon the
Company's issuance of additional shares of Common Stock, or securities
convertible into Common Stock, at a price that is less than the then Conversion
Price.
REDEMPTION. On August 7, 2009 (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 the Company in cash or in shares of Common Stock
at the Company's discretion and shall be paid within five trading days after the
Redemption Date. In the event the Company elects to pay all or some of the
Redemption Price in shares of Common Stock, the shares of Common Stock to be
delivered to the Investors shall be valued at 85% of the fifteen-day volume
weighted average price of the Common Stock on the Redemption Date.
RIGHT TO COMPEL CONVERSION. If, on any date after August 7, 2007,
(A) the closing market price for a share of Common Stock for ten (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 the Company shall have the
right, at its option, to convert, all, but not less than all, of the outstanding
shares of Preferred Stock at the Conversion Price; provided that the
Registration Statement shall be effective at all times during such 10-day period
and during the 30-day notice period to the Investors.
WARRANT TERMS. The Warrants grant Investors the right to purchase up
to an aggregate of 575,000 shares of common stock of the Company at an exercise
price of $1.50 per share. The Warrants expire on August 7, 2009 and must be
exercised by the payment of cash, except if there is no effective registration
statement covering the resale of the shares of Common Stock underlying the
Warrants, at which time an investor may exercise their Warrants on a cashless
basis.
RESTRICTIONS ON CONVERSION OF PREFERRED STOCK AND EXERCISE OF
WARRANT. No individual Investor is entitled to receive shares upon conversion of
the Preferred Stock held by such Investor if such receipt would cause such
Investor 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 Investor upon 61 days prior written notice to
the Company). In addition, no individual Investor is entitled to receive shares
upon conversion of the Preferred Stock held by such Investor if such receipt
would cause such Investor 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 Investor upon 61 days prior written
notice to the Company).
None of the individual holders of the Warrants are entitled to
exercise any such Warrant held by them, if such exercise would cause such
Investor 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.
REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights
Agreement between the Investors and the Company, the Company is obligated to
file a registration statement on Form SB-2 (or if Form SB-2 is not available
another appropriate form) registering the resale of shares of the Company's
Common Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants. The Company is required to file the registration statement within 60
days of August 8, 2006 and have the registration statement declared effective
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within 120 days of August 8, 2006. If the registration statement is not timely
filed, or declared effective within the timeframe described, or if the
registration is suspended other than as permitted, in the Registration Rights
Agreement, the Company will be obligated to pay each Investor a fee equal to
1.0% of such Investor's purchase price of the Preferred Stock for each 30 day
period thereafter (pro rated for partial periods), that such registration
conditions are not satisfied, up to a maximum of 12 months.
RIGHT OF FIRST REFUSAL. Subject to certain conditions, the Company
has granted the Investors a right of first refusal, for a period of one (1) year
from the effective date of the registration statement required to be filed in
connection with this transaction, to participate in any subsequent financing
that the Company conducts.
VOTING RIGHTS. Holders of the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company 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 B Certificate of Designation, (b) authorize or create
any class of stock ranking as to dividends or distribution of assets upon a
liquidation senior to or otherwise PARI PASSU with the Preferred Stock, (c)
amend its certificate or articles of incorporation or other charter documents so
as to affect adversely any rights of the holders of the 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 any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary (a "Liquidation"), the
holders of the Preferred Stock shall be entitled to receive out of the assets of
the Company, 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 securities of the
Company with rights junior to the Preferred Stock, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of the 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.
WARRANTS
We have outstanding warrants to purchase an aggregate of up to
1,884,000 shares of our common stock. 932,500 of such warrants are exercisable
at $2.00 per share, 675,000 of such warrants are exercisable at $1.50 per share,
186,500 of such warrants are exercisable at $1.00 per share, and 90,000 of such
warrants are exercisable at $0.65 per share, 1,119,000 of which were issued in
connection with our Series A Preferred Stock financing, 675,000 of which were
issued in connection with our Series B Preferred Stock financing and 90,000 of
which were issued in connection with our entry into a certain investor relations
consulting agreement on December 5, 2006. 90,000 of the warrants are exercisable
at a rate of 7,500 per month over the period of January 1, 2007 through December
1, 2007. 1,119,000 of the warrants are exercisable through March 15, 2010 and
675,000 of the warrants are exercisable through August 7, 2009 and must be
exercised by the payment of cash, except if there is no effective registration
statement covering the resale of the shares of Common stock underlying the
warrants, a holder may exercise their warrants on a cashless basis.
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Holders of the 675,000 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 all 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.
ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which restricts certain transactions and business combinations between a
corporation and an "interested stockholder" (as defined in Section 203) owning
15% or more of the corporation's outstanding voting stock, for a period of three
years from the date the stockholder becomes an interested stockholder. Subject
to certain exceptions, unless the transaction is approved by the board of
directors and the holders of at least two-thirds of our outstanding voting stock
(excluding shares held by the interested stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans).
TRANSFER AGENT AND REGISTRAR
Interwest Transfer Company is the transfer agent for our common stock.
The address for Interwest Trust Company is 1981 East Murray Holladay Road, Salt
Lake City, Utah 84117.
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that all our directors,
officers, employees and agents shall be entitled to be indemnified by us to the
fullest extent permitted under the Delaware General Corporation Law, provided
that they acted in good faith and that they reasoned their conduct or action was
in, or not opposed to, the best interest of our company.
Our Bylaws provide for indemnification of our officers, directors and
others who become a party to an action on our behalf by us to the fullest extent
not prohibited under the Delaware General Corporation Law. Further, we maintain
officer and director liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment of expenses incurred or paid by a director, officer or controlling
person in a successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS,
UNCERTAINTIES AND ASSUMPTIONS. THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE WHICH ARE NOT WITHIN OUR CONTROL.
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 three months ended March 31, 2007
compared to the same period in 2006 and the year ended December 31,
2006 compared to the same period in 2005. 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, 2007 and as of and for the year ended December 31, 2006.
The following management's discussion and analysis should be read in
conjunction with our consolidated unaudited financial statements for the three
months ended March 31, 2007 and 2006, the consolidated audited financial
statements for the fiscal years ended December 31, 2006 and 2005 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 this prospectus, 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 issued patents held by us, all of
which are U.S. patents. Our technology is also covered by 5 issued patents in
Taiwan. We also have 5 patent applications currently pending with the US Patent
& Trademark Office, 4 of which relate to image display technology and 1 of which
relate to image scanning. Our approach to research and development (R&D) is
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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.
Our wholly-owned operating subsidiary, Syscan, Inc. ("SI"), was
incorporated on May 1, 1995, under the laws of the State of California and is
headquartered in San Jose with additional strategic offices in Arnhem (the
Netherlands), Brisbane (Australia), Shenzhen (China) and Hong Kong. Our majority
stockholder is Syscan Imaging Limited, which is wholly-owned by Syscan
Technology Holdings Limited. Syscan Technology Holdings Limited is a
publicly-held company incorporated in Bermuda whose shares are listed on The
Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.
Our strategy is to expand our document/image-capture product line and
technology while leveraging our assets in other areas of the imaging industry.
We are actively shipping six groups of image-capture products and have expanded
our product offerings to include six new products during the year ended December
31, 2006. During the first three months of 2006, we introduced two new products
under our Original Equipment Manufacturers' (OEM) brand names and two new
products under the DocketPORT brand name. During the third quarter of 2006 we
introduced two additional products through two different OEM customers.
We intend to continue to expand our image capture product line in 2007.
Many of these new scanners are being driven by increased market demand for
faster and easier-to-use products. They will also concentrate more on the
identity-security and financial transaction market needs.
While we continue to grow our presence in image capture technology, we
have begun creating, through acquisition and 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
HDTV television market. We believe that these HDTV products will provide
advanced image quality at a highly competitive price point, creating a value
point product.
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,
all 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.
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An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, and if different estimates
that reasonably could have been used or changes in the accounting estimate that
are reasonably likely to occur could materially change the financial statements.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
REVENUE RECOGNITION
Revenues consist of sales of merchandise, including optical image
capturing devices, modules of optical image capturing devices, optical image
chips and other optoelectronic products. Revenue is recognized when the product
is shipped or delivered and the risks, rewards and title of ownership have
transferred to the customer. We recognize some shipping and handling fees as
revenue, and the related expenses as a component of cost of sales. All internal
handling charges are included with selling and marketing expense. Historically,
sales returns have not been significant. As such, we do not record a reduction
to revenue for estimated product returns in the same period that the related
revenue is recorded.
INVENTORY AND WARRANTY RESERVES
We establish inventory reserves for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and its estimated realizable value based upon assumptions about future
demand and market conditions. If actual demand and market conditions are less
favorable than those projected by management, additional inventory reserves
could be required. As of December 31, 2006, we had no inventory reserve.
Currently, we purchase the majority of our finished scanner imaging products
from Syscan Lab Limited (SLL), a wholly-owned subsidiary of Syscan Technology
Holdings Limited (STH), the parent company of our majority stockholder SLL
warrants the products it manufactures for us against defects in material and
workmanship for a period of 18 months after the completion of manufacture. After
such 18 month period, SLL provides product repair services for us at its
customary hourly repair rate plus the cost of any parts, components or items
necessary to repair the products. As a result of the product warranty provided
by SLL, we do not record a product warranty reserve.
RELATED-PARTY TRANSACTIONS
We have significant related-party transactions and agreements, which we
believe have been accounted for at fair value. We utilized our best estimate of
the value of these transactions and agreements. Had alternative assumptions been
used, the values obtained may have been different.
RELATED-PARTY PURCHASES
We purchase the majority of our finished scanner imaging products from
SLL as discussed above. Our Chairman and CEO, Darwin Hu, was formerly the CEO of
STH. He resigned from STH effective December 2004.
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Purchases from SLL totaled $8,620,000 during the year ended December
31, 2006 and $4,915,000 during the year ended December 31, 2005. All purchases
from SLL were carried out in the normal course of business. As a result of these
purchases, the Company was liable to SLL for $952,000 and $203,000 at December
31, 2006 and 2005, respectively.
RELATED-PARTY LOANS
In the normal course of business, we made interest-free loans to
several related parties for the purpose of purchasing capital equipment,
including tooling equipment required to manufacture our product. These loans
totaled $2,606,000 at December 31, 2006 and 2005. During the fourth quarter of
2006, we booked an allowance of $2,606,000 to fully reserve amounts due from
related parties as it became apparent to management that such parties may not
have the financial resources to repay amounts due. On March 21, 2007, we entered
into an agreement with Syscan Technology Holdings, LTD whereby we agreed to
forego any further collections efforts, including legal action, in exchange for
the cancellation of 2,600,000 shares of our common stock beneficially owned by
Syscan Technology Holdings, LTD. In addition, both parties mutually agreed to
release and discharge any and all claims that each may have against the other
party.
INTANGIBLE AND LONG-LIVED ASSETS
We evaluate our intangible and long-lived 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. During the fourth quarter
of 2006, we performed an annual review of our identified intangible assets.
Based on this review, we reclassified our intangible assets from non-amortizing
to amortizing intangible assets. As a result, we booked $555,000 of intangible
asset amortization expense, which is included with research and development
expenses, during the fourth quarter of 2006. Additionally, we recorded an
impairment charge of $838,000 related to our long-term investment during that
same period, which was also a result of our annual review of asset impairment.
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 December 31, 2006.
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CONTINGENCIES
From time to time, we are involved in disputes, litigation and other
legal proceedings. We record a charge equal to at least the minimum estimated
liability for a loss contingency when both of the following conditions are met:
(i) information available prior to issuance of the financial statements
indicates that it is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and (ii) the range of loss
can be reasonably estimated. However, the actual liability in any such
litigation may be materially different from our estimates, which could result in
the need to record additional costs. Currently, we have no outstanding legal
proceedings or claims, which require a loss contingency.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
We account for our Series A 5% cumulative convertible preferred stock
("Series A Stock") and our Series B convertible preferred stock ("Series B
Stock") pursuant to Statement of Financial Accounting Standards ("SFAS")
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133") and
the Emerging Issues Task Force ("EITF") Abstract 00-19, ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS ("EITF 00-19"). Accordingly, the embedded
conversion feature associated with our Series A Stock and related warrants and
our Series B Stock and related warrants have been determined to be derivative
instruments. The fair value of these derivative instruments, as determined by
applying the Black-Scholes valuation model, is adjusted quarterly. The
Black-Scholes valuation model requires the input of highly subjective
assumptions, including the expected stock price volatility. Additionally,
although the Black-Scholes model meets the requirements of SFAS 133, the fair
values generated by the model may not be indicative of the actual fair values of
our Series A Stock and Series B Stock as our derivative instruments have
characteristics significantly different from traded options.
STOCK-BASED COMPENSATION EXPENSE
Effective January 1, 2006 we adopted SFAS 123R, Share-Based Payments
("SFAS 123R"). SFAS 123R, which requires all share-based payments, including
grants of employee stock options and warrants, to be recognized in our financial
statements based on their respective grant date fair values. Under this
standard, the fair value of each share-based payment award is estimated on the
date of grant using an option pricing model that meets certain requirements. We
currently use the Black-Scholes option pricing model to estimate the fair value
of our share-based payment awards. The Black-Scholes model meets the
requirements of SFAS 123R; however, the fair values generated by the model may
not be indicative of the actual fair values of our awards as it does not
consider certain factors important to our awards, such as continued employment,
periodic vesting requirements and limited transferability.
The determination of the fair value of share-based payment awards
utilizing the Black-Scholes model is affected by our stock price and a number of
assumptions, including expected volatility, expected life, risk-free interest
rate and expected dividends. We use the historical volatility for our common
stock as the expected volatility assumption required in the Black-Scholes model,
which could be significantly different than actual volatility. The expected life
of the awards is based on historical and other economic data trended into the
future. The risk-free interest rate assumption is based on observed interest
rates appropriate for the terms of our awards. The dividend yield assumption is
based on our history and expectation of dividend payouts. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
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Stock-based compensation expense recognized in our financial statements
beginning January 1, 2006 and thereafter is based on awards that are ultimately
expected to vest. We evaluate the assumptions used to value our awards on a
quarterly basis. If factors change and we employ different assumptions,
stock-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. Future
stock-based compensation expense and unearned stock-based compensation will
increase to the extent that we grant additional equity awards to employees.
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO MARCH 31, 2006
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of
operations for the three months ended March 31, 2007 compared to the three
months ended March 31, 2006 (IN THOUSANDS):
THREE MONTHS
ENDED MARCH 31,
--------------------
2007 2006 $ CHANGE % CHANGE
---- ---- -------- --------
Net sales $ 4,127 $ 2,438 $ 1,689 69%
Cost of sales 2,484 1,616 868 54
As a percentage of sales 60% 66%
Selling and marketing expense 400 293 107 37
General and administrative expense 915 608 307 50
Research and development expense 777 396 381 96
Total other income (expense) (359) 203 NM NM
Dividend on 5% convertible preferred
stock and accretion of preferred (241) (148) NM NM
stock redemption value
Net loss available to common (1,049) (420) (629) (150)
Stockholders
NM = Not Meaningful
NET SALES
The significant increase in net sales during the three months ended
March 31, 2007 as compared to the three months ended March 31, 2006 was
attributable to the following:
o The overall growth of the document/image capture market resulting from
an increased market demand for products that manage information,
including how information is retrieved, stored, shared and
disseminated;
o The increased end user market penetration, including distribution
channel expansion, by both us and our largest customers;
o The increased market acceptance of our more recently introduced
products;
o Our sales during the three months ended March 31, 2007 experienced
substantially less of a cyclical downturn as compared to the three
months ended March 31, 2006. We attribute this more consistent market
delivery of our product to (i) the growth of our smaller customers and
less dependence on our larger customers, (ii) our management of
customer demand and product delivery and (iii) our movement toward a
just-in-time inventory management product delivery system;
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o Our increased usage of Value Added Reseller (VAR) channel
distributions; and
o The growth in the small office home office (SOHO) markets, and the
result of our efforts to appeal to customers in the SOHO market.
Sales to our three largest customers represented 68% and 73% for the
three months ended March 31, 2007 and 2006, respectively. We expect that our
largest customers will continue to account for a substantial portion of our net
sales in the remainder of fiscal 2007 and for the foreseeable future. The
identities of our largest customer and their respective contributions to our net
sales have varied and will likely continue to vary from period to period.
Although we expect net sales to increase as we continue to offer
additional products in the document/image-capture market and expand to the HD
display market, there can be no assurance that our net sales will increase.
COST OF SALES, INCLUDING GROSS PROFIT
Cost of sales includes all direct costs related to the transfer of
scanners, imaging modules and services related to the delivery of those items
manufactured in China, and to a lesser extent engineering services and software
royalties. Cost of sales increased in absolute dollars as a result of the
increased net sales during the three months ended March 31, 2007 as compared to
the three months ended March 31, 2006. Cost of sales as a percentage of net
sales decreased as a result of a higher proportion of overall net sales being
generated from our most recently introduced and more feature rich products,
including our duplex scanners (scanners that have the ability to scan both sides
of a document at once). Our duplex scanners, which bear a higher gross margin
than our simplex scanners (scanners that scan only one side of a document) have
recently experienced broader market acceptance.
We expect our cost of sales as a percentage of net sales to fluctuate
somewhat as our product mix fluctuates. Our average selling price and related
material cost used to manufacture our product has been stable and we expect this
trend to continue for the foreseeable future.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of salaries and
related costs of employees, including stock-based compensation costs, engaged in
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 months ended March 31, 2007
as compared to the three months ended March 31, 2006 is primarily attributable
to stock-based compensation cost (a non-cash charge) as a result of granting
stock options to key employees during the three months ended March 31, 2007 and
accounting for such option grants under SFAS 123R. Stock-based compensation cost
was $73,000 for the three months ended March 31, 2007 as compared to $12,000 for
the three months ended March 31, 2006. To a lesser extent, the increase during
the three months ended March 31, 2007 as compared to the three months ended
March 31, 2006 was 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. Although we expect sales and
marketing expenses to fluctuate as a result of the timing of advertising and
promotions of our various new products and stock option grants, overall we
expect selling and marketing expenses to increase as we continue to expand our
marketing efforts and the number of products we offer.
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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 during the three months ended March 31, 2007 as compared to the three
months ended March 31, 2006 is primarily attributable to stock-based
compensation cost (a non-cash charge) as a result of granting stock options to
key employees and directors during the three months ended March 31, 2007 and
accounting for such option grants under SFAS 123R. Stock-based compensation cost
was $508,000 for the three months ended March 31, 2007 as compared to $271,000
for the three months ended March 31, 2006. Additionally, our general and
administrative expenses increased during the three months ended March 31, 2007
as compared to the three months ended March 31, 2006 as a result of hiring an
outside investor relations firm to manage and enhance our investor relations
function. The remaining 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.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of salaries and
related costs, including stock-based compensation costs, of employees engaged in
product research, design and development activities, compliance testing,
documentation, prototypes and expenses associated with transitioning the product
to production. The increase during the three months ended March 31, 2007 as
compared to the three months ended March 31, 2006 is primarily attributable to
stock-based compensation cost (a non-cash charge) as a result of granting stock
options to key employees during the three months ended March 31, 2007 and
accounting for such option grants under SFAS 123R. Stock-based compensation cost
was $233,000 for the three months ended March 31, 2007 as compared to $12,000
for the three months ended March 31, 2006. The remaining increase is a result of
increased number of employees engaged in research and development activities,
resulting from both direct hiring and acquisitions, and the increased amount of
expensed equipment required to support our future product development. The
majority of our research and development expenses during both the three months
ended March 31, 2007 and 2006 were directly attributable to our future products
which include HD display. We anticipate that research and development expense
will continue to increase over the long term as a result of the growth and
diversification of the products we offer, new product opportunities and our
continued efforts to invest in the future and strengthen our intellectual
property position within our highly competitive market.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended March 31, 2007 was
mainly attributable to the $368,000 increase in the fair value of the liability
for derivative contracts (associated with our 5% Convertible Series A Preferred
Stock and related warrants and Convertible Series B Preferred Stock and related
warrants). Other income (expense) for the three months ended March 31, 2006 was
mainly attributable to the $208,000 decrease in the fair value of the liability
for derivative contracts (associated with our 5% Convertible Series A Preferred
Stock k and related warrants). Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE
-51-
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.
DIVIDEND ON SERIES A PREFERRED STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION
VALUE
During the three months ended March 31, 2007 and 2006 the total
accretion on our preferred stock was approximately $220,000 and $128,000,
respectively. The increase is attributable to our Series B Stock, which was
outstanding during the three months ended March 31, 2007 but was not outstanding
during the three months ended March 31, 2006. During the three months ended
March 31, 2007 and 2006, Series A Stock dividends were approximately $21,000 and
$20,000, respectively, and recorded as a non-operating expense on the Company's
statement of operations. We do not pay dividends on our Series B Stock.
TWELVE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of
operations for the year ended December 31, 2006 compared to December 31, 2005
(IN THOUSANDS):
FISCAL 2006 FISCAL 2005 $ CHANGE % CHANGE
----------- ----------- -------- --------
Net sales $ 12,469 $ 7,848 $ 4,621 59%
Cost of sales 8,221 4,989 3,232 65
As a percentage of sales 66% 64%
Selling and marketing expense 1,240 1,037 203 20
General and administrative expense 5,361 2,918 2,443 84
Research and development expense 3,084 951 2,133 224
Impairment of long-term asset 838 -- NM NM
Total other income (expense) 1,079 557 NM NM
Dividend on 5% convertible preferred
stock and accretion of preferred (749) (546) NM NM
stock redemption value
Net loss available to common 5,948 2,039 3,909 192
Stockholders
NM = Not Meaningful
NET SALES
The significant increase in our net sales was attributable in large
part to our increased product offerings. We introduced our duplex scanners
(DocketPORT) near the end of the third quarter of 2005, which created a broader
base of products. Sales of our duplex scanners were approximately $1,936,000
during the year ended December 31, 2006 as compared to $674,000 for the year
ended December 31, 2005. Our largest customer significantly expanded its
distribution channels during 2006, which resulted in a substantial increase to
our revenue during the year ended December 31, 2006 as compared to 2005. To a
lesser extent, our net sales were positively impacted by our gradual trending
towards our Value Added Reseller (VAR) distribution channels and the growth in
-52-
the small office home office (SOHO) markets, which is a result of our efforts to
appeal to customers in these sales channels. During both the years ended
December 31, 2006 and 2005, our average selling price remained stable as a
result of the proprietary nature of our products and the minimal impact of
direct competition to our products.
Sales to our four largest customers represented 81% and 79% of net
sales during the year ended December 31, 2006 and the year ended December 31,
2005, respectively. We expect that our largest customers will continue to
account for a substantial portion of our net sales for the foreseeable future.
The identities of our largest five (5) customers and their respective
contributions to our net sales have varied and will likely continue to vary from
period to period.
Although we expect net sales to increase as we continue to expand our
business and offer additional products in the document/image-capture market and
expand to the HD display market, there can be no assurance that our net sales
will increase
COST OF SALES, INCLUDING GROSS PROFIT
Cost of sales includes all direct product costs and services related to the
delivery of our products, and to a lesser extent engineering services and
software royalties. Cost of sales increased in absolute dollars as a result of
the increased net sales during the year ended December 31, 2006 as compared to
the year ended December 31, 2005. Cost of sales as a percentage of net sales
remained for the most part constant as a result of the stability of our average
selling price and related material cost used to manufacture our products. We
expect our gross profit percentage to remain for the most part constant for the
foreseeable future.
SELLING AND MARKETING EXPENSE
Selling and marketing expense consists primarily of compensation costs,
including stock-based compensation, of employees engaged in the sales, marketing
and customer account management functions. To a lesser extent, these expenses
also include market development and promotional costs provided to our retail
distribution channels, tradeshows, website support, warehousing, logistics and
certain sales representative fees. The increase during the year ended December
31, 2006 as compared to the year ended December 31, 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. Overall, we expect selling and marketing expenses to increase
as we continue to expand our marketing efforts and the number of products we
offer in both image scanning and HD display.
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, facilities-related
expenses and outside professional services such as legal and accounting. The
increase in general and administrative expenses during the year ended December
31, 2006 as compared to the year ended December 31, 2005 was a result of
recording a $2,606,000 allowance against amounts due from related parties as it
became apparent to management during the fourth quarter of the year ended
December 31, 2006 that such parties may not have the financial resources to
repay amounts due. Other increases to our general and administrative expenses
during the year ended December 31, 2006 as compared to the year ended December
31, 2005 were attributable to increased personnel costs to support our expanding
-53-
business and related infrastructure and the increased expenses associated with
maintaining our public company status. The increase was somewhat offset by the
decrease from our 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 the year ended December 31, 2005 and
adopting SFAS 123(R). Stock-based compensation cost was $1,015,000 during the
year ended December 31, 2006 as compared to $1,407,000 during the year ended
December 31, 2005. We anticipate that general and administrative expenses will
continue to increase over the long term as our business continues to grow and
the costs associated with being a public company continue to increase as a
result of our required reporting requirements, including but not limited to
expenses incurred to comply with the Sarbanes-Oxley Act of 2002.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of compensation
costs, including stock-based compensation, of employees engaged in product
research, design and development activities, compliance testing, documentation,
prototypes and expenses associated with transitioning the product to production.
Research and development expense significantly increased during the fiscal year
ended December 31, 2006 as compared to the fiscal year ended December 31, 2005
as a result of an increase in the number of employees engaged in research and
development activities, resulting from both direct hiring and acquisitions.
Additionally, during the fourth quarter of the fiscal year ended December 31,
2006, we had a one-time amortization of our research and development-related
intangible assets that totaled $555,000 during the fiscal year ended December
31, 2006. There was no amortization of intangible assets during the fiscal year
ended December 31, 2005. As of December 31, 2006 all research and
development-related intangible assets were fully amortized. The majority of our
research and development expenses during the year ended December 31, 2006 were
directly attributable to our future products which include HD display. We
anticipate that research and development expense will continue to increase over
the long term as we enhance existing products and develop new products as part
of our continued efforts to invest in the future.
IMPAIRMENT OF LONG-TERM ASSET
Our long-term investment consists of an equity interest in CMOS Sensor,
Inc. (CMOS), a California corporation, which is principally engaged in the
research and development of infrared sensors and CMOS sensors. As of the year
ended December 31, 2006, we owned 16.1% of CMOS and accounted for the investment
using the cost method of accounting. As we performed our annual review of
long-lived assets, we perceived indicators of the investment's value. As such,
during the year ended December 31, 2006 we recorded an impairment charge of
$838,000 related to our investment in CMOS. We believe the long-term
investment's new cost basis of $160,000 is reflective of the long-term
investment's underlying value at December 31, 2006.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the year ended December 31, 2006 and for the
year ended December 31, 2005 was mainly attributable to the $1,421,000 and
$1,112,000, respectively, decrease in the fair value of the liability for
derivative contracts associated with our Series A Stock and related warrants and
Series B Stock and related warrants. Pursuant to SFAS 133 and 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.
-54-
The remaining other income (expense) during the year ended December 31,
2006 was a result of issuing our Series B Stock as follows:
o Cash paid for issuance costs of $88,000 in connection with our
offering; and
o A non-cash charge of $173,000 representing the fair value of 100,000
warrants issued to the placement agent for the sale of the stock.
The remaining other income (expense) during the year ended December 31,
2005 was a result of issuing our Series A Stock as follows:
o Cash paid for issuance costs of $237,000 in connection with our
offering; and
o A non-cash charge of $290,000 representing the fair value of 186,500
warrants issued to the placement agent for the sale of the stock.
DIVIDEND ON SERIES A STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION VALUE
During the year ended December 31, 2006, accretion on our preferred
stock, both Series A and Series B, totaled approximately $668,000. During the
year ended December 31, 2005, accretion on our Series A Stock was approximately
$468,000. The increase in accretion of preferred stock during the year ended
December 31, 2006 as compared to 2005 was attributable to the sale of our Series
B Stock during the third quarter of fiscal 2006. Series A Stock dividends were
$81,000 and $78,000 during the years ended December 31, 2006 and 2005,
respectively.
RELATED PARTY TRANSACTIONS
We purchase significantly all of our finished scanner imaging products
from the parent company of our majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH.
The following is a summary of significant related party transactions, which were
carried out in the normal course of the Company's business, during the years
ended December 31, 2006 and 2005:
The following is a summary of significant related party purchases from
entities that are wholly-owned subsidiaries of STH. The transactions were
carried out in the normal course of our business.
2005 2004
---- ----
SYSCAN Intervision Limited,
a wholly-owned subsidiary of STH (purchases) $8.620M $4.915M
====== ======
As of the year ended December 31, 2006 amounts due from related parties
were unsecured, interest-free and repayable on demand and totaled approximately
$2,606,000. On March 21, 2007 we entered into a certain settlement and release
agreement with STH whereby we agreed to forego any further collections efforts,
including legal action against STH, in exchange for the cancellation of
2,600,000 shares of our common stock beneficially owned by STH.
-55-
LIQUIDITY AND CAPITAL RESOURCES
MARCH 31, 2007
At March 31, 2007, our principal sources of liquidity included cash and
cash equivalents of approximately $864,000 and unused borrowing capacity of
approximately $987,000 under our bank line of credit. We had no significant cash
outlays, except as part of our normal operations, during the three months ended
March 31, 2007.
OPERATING ACTIVITIES
During the three months ended March 31, 2007, our operating activities
used $937,000 of cash. This was primarily a result of our $1,049,000 net loss,
$1,415,000 of net non-cash expenses and $1,303,000 net cash used by changes in
operating assets and liabilities. During the three months ended March 31, 2006,
our operating activities used $382,000 of cash. This was primarily a result of
our $420,000 net loss, $226,000 of net non-cash expenses and $188,000 net cash
used by changes in operating assets and liabilities. Non-cash items included in
net loss for both the three months ended March 31, 2007 and 2006 include
depreciation expense, stock-based compensation cost of options, fair value of
warrants issued for services rendered, change in fair value of derivative
instruments and the accretion of our 5% Series A Preferred Stock and Series B
Preferred Stock redemption value.
Our trade receivables increased during both the three months ended
March 31, 2007 and 2006 as a result of the significant increase in sales of our
product. Our inventory decreased during both the three months ended March 31,
2007 and March 31, 2006 due to the timing of purchasing our product and
inventory management.
The most significant use of cash during the three months ended March
31, 2007 was attributable to paying our contract manufacturer according to the
specified payments terms. We expect future cash provided (used) by operating
activities to fluctuate, primarily as a result of fluctuations in our operating
results, timing of product shipments, trade receivables collections, inventory
management and timing of vendor payments.
INVESTING ACTIVITIES
Our investing activities for both the three months ended March 31, 2007
and 2006 were minimal and consisted of purchasing computer equipment in the
normal course of business.
FINANCING ACTIVITIES
During the three months ended March 31, 2007, our financing activities
consisted solely of a $500,000 draw against our bank line of credit to meet
short term obligations, including payment on the purchase of our product. We
anticipate the additional $500,000 draw to be temporary to meet short term
working capital needs. We had no financing activities during the three months
ended March 31, 2006.
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.
-56-
Considering current cash reserves and other sources of liquidity,
including our bank line of credit, management believes that the Company will
have sufficient sources of financing to continue its normal operations through
at least the next twelve months. However, our business expansion plans may
require additional capital through either the incurrence of debt or the issuance
of equity securities, or a combination thereof, depending on the prevailing
market and other conditions. There is no assurance that such additional funds
will be available for us to finance our expansion plans. Furthermore, there is
no assurance the net proceeds from any successful financing arrangement will be
sufficient to cover cash requirements as we expand our business operations.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at March 31,
2007, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (IN THOUSANDS):
ONE - THREE -
LESS THAN THREE FIVE
TOTAL ONE YEAR YEARS YEARS
------- -------- -------- -------
Line of credit (1) $1,513 $1,513 $ -- $ --
Operating lease
obligations 480 283 196 1
Consulting agreement 75 75 -- --
------ ------ ------ ------
Total contractual cash
obligations $2,068 $1,871 $ 196 $ 1
====== ====== ====== ======
(1) We have a line of credit agreement ("LOC Agreement") to borrow up to
$2,500,000, bearing interest at the rate of prime (8.25% at March 31, 2007) plus
0.5% and secured by all of our assets. Interest payments are due monthly and all
unpaid interest and principal is due in full on October 30, 2007. Upon certain
events of default, the default variable interest rate increases to prime plus
5.5%. We had $987,000 available for use at March 31, 2007.
At March 31, 2007, we were not in compliance with all of the LOC
Agreement debt covenants. Pursuant to a waiver letter from the lender dated May
14, 2007, the lender agreed to forbear from exercising its rights and remedies
with respect to existing defaults under the LOC Agreement from the date of the
LOC Agreement through March 31, 2007. The Company is currently renegotiating
certain debt covenants defined by the LOC Agreement to more accurately assess
the Company's financial position.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2007, we did not have any relationship with unconsolidated
entities or financial partnerships, which other companies have established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes as defined in Item 303(c)(2) of SEC
Regulation S-B. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
TRENDS
As of March 31, 2007, 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.
-57-
DECEMBER 31, 2006
At December 31, 2006, our principal sources of liquidity included cash
and cash equivalents of $1,333,000 and unused borrowing capacity of $1,487,000
under our bank line of credit. We had no significant cash outlays during the
year ended December 31, 2006.
OPERATING ACTIVITIES
Net cash flows used in operating activities totaled approximately
$1.239 million and approximately $598,000 for the years ended December 31, 2006
and 2005, respectively. Net cash used in operating activities for the year ended
December 31, 2006 primarily reflects net loss adjusted by non-cash items such as
stock-based compensation cost associated with issuing stock options, impairment
of long-term investment, allowance for doubtful accounts, changes in our
derivative instruments and the accretion of our convertible preferred stock.
Additional uses of cash included an increase in trade receivables resulting from
the significant increase in product sales during the last quarter of fiscal 2006
and an increase in inventory as we anticipate this growth in sales to continue.
Sources of operating cash include an increase in accounts payable, both our
trade payables and our trade payables to related parties, as a result of
managing our working capital and the normal fluctuation and timing of purchases.
As we have had to ramp up inventory purchases to meet the increased demand for
our products, our cash was somewhat constrained during the year ended December
31, 2006. During the year ended December 31, 2005, cash used by operations
resulted from funding our net loss, adjusted for non-cash items such as
stock-based compensation cost associated with issuing stock options, 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.
Net cash flows used in investing activities for the year ended December
31, 2006 was solely attributable to the purchase of capital equipment. During
the year ended December 31, 2005, the majority of cash used in investing
activities was attributable to the purchase of capital equipment. To a lesser
extent we used cash during the year ended December 31, 2005 to purchase a
company to facilitate our HD display research and development efforts.
FINANCING ACTIVITIES.
Net cash flows provided by financing activities for the year ended
December 31, 2006 resulted from the sale of $1,150,000 of our Series B
Convertible Preferred Stock, less preferred stock issuance costs of $88,000 for
payment of related commissions, fees and other expenses. During the year ended
December 31, 2005, cash provided by financing activities primarily resulted from
the sales of $1,865,000 of our 5% Series A Convertible Preferred Stock, less
preferred stock issuance costs of $237,000 for payment of related commissions,
fees and other expenses. Other financing activities for 2005 included advances
of approximately $341,000 made to related parties during the ordinary course of
business and loan activity under our bank line of credit, which was used to help
fund working capital requirements, as necessary.
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CASH AND WORKING CAPITAL REQUIREMENTS
As previously discussed, we plan to continue increasing our presence in
the document/image-capture market and expand our operations into the HD display
market, which may require additional capital. Additionally, we may seek to
expand our operations through acquisitions of companies in the
document/image-capture and HD display industry that we believe could complement
our business model, improve our competitive positioning and expand our product
offerings.
Considering cash reserves and other sources of liquidity, including our
bank line of credit and the aforementioned funds raised through the sale of our
Series B Stock, as of the year ended December 31, 2006 management believed that
the Company would have sufficient sources of financing to continue its normal
operations through at least the next twelve months. However, our business
expansion plans may require additional capital through either the incurrence of
debt or the issuance of equity securities, or a combination thereof, depending
on the prevailing market and other conditions. There is no assurance that such
additional funds will be available for us to finance our expansion plans.
Furthermore, there is no assurance the net proceeds from any successful
financing arrangement will be sufficient to cover cash requirements as we expand
our business operations.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at December
31, 2006, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods (IN THOUSANDS):
ONE - THREE -
LESS THAN THREE FIVE
TOTAL ONE YEAR YEARS YEARS
------- -------- -------- -------
Line of credit (1) $1,013 $1,013 $ -- $ --
Operating lease
obligations 512 261 250 1
Consulting agreement (2) 90 90 -- --
------ ------ ------ ------
Total contractual cash
obligations $1,615 $1,364 $ 250 $ 1
====== ====== ====== ======
(1) We have a line of credit agreement ("LOC Agreement") to borrow up to
$2,500,000, bearing interest at the rate of prime (8.25% at December 31, 2006)
plus 0.5%, which is secured by all our assets. Interest payments are due monthly
and all unpaid interest and principal was originally due in full on October 30,
2006. On December 18, 2006, we extended the loan ("Extended Agreement") with the
same terms, for 12 months. The new maturity date is October 30, 2007. Upon
certain events of default, the default variable interest rate increases to prime
plus 5.5%. We had $1,487,000 available for use at December 31, 2006.
At December 31, 2006, we were not in compliance with all of the Extended
Agreement debt covenants. Pursuant to a waiver letter from the lender dated
March 28, 2007, the lender agreed to forbear from exercising its rights and
remedies with respect to existing defaults under the Extended Agreement from the
date of the Extended Agreement through December 31, 2006.
(2) We have an agreement for investor relations services for a term of one year
beginning January 1, 2007, payable monthly as follows: (i) $5,000 for January,
February and March; (ii) $7,500 for April, May and June; (iii) $8,500 for July,
August and September; and (iv) $9,000 for October, November, and December.
Additionally, we agreed to pay the consultant 90,000 warrants with an exercise
price of $0.65 per share, expiring in three years, with immediate vesting on
January 1, 2007, and exercisable at the rate of 7,500 the first day of each
month during calendar 2007. The warrants will not be registered under federal or
state securities laws.
-59-
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 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(c)(2) of
SEC Regulation S-B. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
TRENDS
As of December 31, 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 10 - Commitments and Contingencies" existed, which
are likely to have a material effect on our liquidity.
-60-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANUFACTURING
All of our products are currently manufactured by a subsidiary of
Syscan Technology Holdings (STH), the parent company of our majority
stockholder. We and STH have established an internal-pricing agreement that is
updated on a semi-annual basis. STH serves as the exclusive manufacturer of all
current and future image capture products to be produced by us. We believe, for
quality control and pricing reasons that this type of relationship is more
favorable than could be attained from unaffiliated third-parties. STH purchases
the raw materials, parts and components and other items, with the exception of
certain critical components and tooling, that are required to manufacture our
products.
We purchase significantly all of our finished scanner imaging products
from the parent company of our majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH.
The following is a summary of significant related party transactions, which were
carried out in the normal course of the Company's business, during the years
ended December 31, 2006 and 2005:
The following is a summary of significant related party purchase
transactions, which were carried out in the normal course of our business during
the years ended December 31, 2006 and 2005, and the three months ended March 31,
2007 and 2006:
YEAR ENDED DECEMBER 31,
----------------------------
2006 2005
-------- -------
SYSCAN Intervision Limited,
a wholly-owned subsidiary of
STH (purchases) $8.620M $4.915M
====== ======
YEAR ENDED MARCH 31,
----------------------------
2006 2005
-------- -------
SYSCAN Intervision Limited,
a wholly-owned subsidiary of
STH (purchases) $2.178M $1.409M
====== ======
Additionally, as a result of certain purchases made from STH, during
the years ended December 31, 2006 and 2005 we were liable to STH in the
aggregate amount of $952,000 and $203,000, respectively.
As of the year ended December 31, 2006 amounts due from related parties
were unsecured, interest-free and repayable on demand and totaled approximately
$2,606,000. On March 21, 2007 we entered into a certain settlement and release
agreement with STH whereby we agreed to forego any further collections efforts,
including legal action against STH, in exchange for the cancellation of
2,600,000 shares of our common stock beneficially owned by STH.
-61-
In April 2005 we entered into employment agreements with each of Darwin
Hu, our Chief Executive Officer, William Hawkins, our Chief Operating Officer
and Acting Chief Financial Officer, and David Clark, our Senior Vice President
of Business Development. In connection therewith we granted options to each of
Messrs. Hu, Hawkins and Clark to purchase 1,500,000, 1,000,000 and 800,000
shares of our common stock, respectively, at an exercise price of $0.01 per
share. Such options vested one-third on the execution date of the employment
agreement, one-third on April 3, 2006 and one-third on April 2, 2007. Pursuant
to such employment agreements, each of Messrs. Hu, Hawkins and Clark shall be
entitled to receive annual salaries of $200,000, $160,000 and $150,000,
respectively.
Other than those described above, we have no material transactions
which involved or are planned to involve a direct or indirect interest of a
director, executive officer, greater than 5% stockholder or any family member of
such parties.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions between us and our officers, directors
and principal shareholders and their affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by the independent members of our board of directors.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION.
Our common stock has been listed and quoted on the OTC Bulletin Board
since December 1998. From January 1, 2003 through April 1, 2004 our common stock
traded under the symbol "BKET", from April 2, 2004 through June 26, 2006 under
the symbol "SYII" and since June 27, 2006 under the symbol "SYVT". All prices
reflected herein have been adjusted to reflect the 1-for-10 reverse split of our
common stock that was effected on April 2, 2004.
The following chart sets forth the high and low sale prices for each
quarter during the fiscal years ended December 31, 2004 and 2005, respectively,
and the second quarter ended June 30, 2006. Such prices represent quotations
between dealers, without dealer markup, markdown or commissions, and may not
represent actual transactions.
HIGH LOW
---- ---
2005 BY QUARTER
January 1 - March 31 $3.25 $1.20
April 1 - June 30 $1.30 $0.53
July 1 - September 30 $1.15 $0.30
October 1 - December 31 $0.98 $0.35
2006 BY QUARTER
January 1 - March 31 $0.80 $0.55
April 1 - June 30 $1.55 $0.65
July 1 - September 30 $1.49 $0.75
October 1 - December 31 $0.85 $0.45
2007 BY QUARTER
January 1 - March 31 $1.00 $0.55
-62-
On June 8, 2007, the closing sale price for shares of our common stock
in the over-the-counter market, as reported by NASD's OTCBB was $0.85.
No prediction can be made as to the effect, if any, that future sales
of shares of our common stock or the availability of our common stock for future
sale will have on the market price of our common stock prevailing from
time-to-time. Sales of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price of our common stock.
RECORD HOLDERS
As of the date hereof there were 364 record holders of our common
stock. As of the date hereof there were 21,842,092 shares of common stock
outstanding.
DIVIDENDS
We have not paid dividends on our common stock in the past and do not
anticipate doing so in the foreseeable future. We currently intend to retain
future earnings, if any, to fund the development and growth of our business. The
holders of our Series A Preferred Stock are entitled to receive dividends at a
rate of 5% per annum, payable in cash or shares of our common stock, on a
cumulative basis.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information, as of December 31,
2006, concerning shares of common stock authorized for issuance under the
Company's existing equity compensation plans.
Number of Weighted Number of securities
securities to average remaining available
be issued upon exercise for future issuance
exercise of price of under equity
outstanding outstanding compensation plans
options, options, (excluding securities
warrants and warrants and reflected in
rights rights column (a))
(a) (b) (c)
--------------------- ----------------------------------------------------------
Equity compensation 890,000 $0.92 3,810,000
plans approved
by security
holders
--------------------- ----------------------------------------------------------
Equity compensation 4,000,000 $0.01 -0-
plans not approved
by security holders
--------------------- ----------------------------------------------------------
Total 4,890,000 $0.18 3,810,000
--------------------- ----------------------------------------------------------
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EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by, or paid to the following named executive
officers: (i) for the fiscal years ended December 31, 2005 and 2006 individuals
who served as, or acted in the capacity of, our principal executive officer;
(ii) for the fiscal year ended December 31, 2005 our other most highly
compensated executive officers, who together with the principal executive
officer are our most highly compensated officers whose salary and bonus exceeded
$100,000 and who were employed by us at the end of fiscal year 2005; and (iii)
for the fiscal year ended December 31, 2006 our two most highly compensated
executive officers who earned more than $100,000.
SUMMARY COMPENSATION TABLE*
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
NAME AND ----------------------------- ---------------------- ---------------------------
PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
COMPENSATION STOCK UNDERLYING PAYOUTS COMPENSATION
AWARD(S) OPTIONS/SARS
($) ($) ($) ($) (#) ($) ($)
Darwin Hu,
Chief Executive
Officer and 2006 200,000 -- 7,292(1) -- -- -- --
Chairman.
2005 200,000 -- -- -- 1,500,000(2) -- --
William Hawkins 2006 160,000 -- 6,133(1) -- -- -- --
Chief Operating Officer,
Acting Chief Financial
Officer and Secretary.
2005 160,000 -- -- -- 1,000,000(2) -- --
David Clark 2006 150,000 -- -- -- -- -- --
Senior Vice President
of Business 2005 150,000 -- -- -- 800,000(2) -- --
Development.
-------------------------
* Salary reflects total compensation paid to these executives.
(1) Represents the Company's match on the named executive's 401(k) contribution.
(2) As of the date hereof such options have fully vested.
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The following table sets forth certain information regarding outstanding equity
awards at December 31, 2006 for each named executive officer:
OUTSTANDING EQUITY AWARDS TABLE (1)
OPTION AWARDS
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS
------------------------------
NAME AND EXERCISE EXPIRATION
PRINCIPAL POSITION EXERCISABLE UNEXERCISABLE PRICE DATE
--------------------------------------------------------------------------------
Darwin Hu 1,000,000 500,000 $0.01 4/26/2012
Chief Executive Officer
and Chairman
William Hawkins 666,667 333,333 $0.01 4/26/2012
Chief Operating Officer,
Acting Chief Financial
Officer and Secretary
David Clark 533,333 266,667 $0.01 4/26/2012
Senior VP of Business
Development
No named executive has any stock awards outstanding at December 31, 2006.
As of June 11, 2007, options to purchase a total of 3,200,000 shares of
common stock were granted under our 2002 Amended and Restated Stock Option Plan,
at exercise prices of $0.65 to $1.01 per share, and options to purchase a total
of 646,000 shares of common stock were granted under our 2006 Stock Option Plan,
at exercise prices of $0.70 per share. Under our 2002 Amended and Restated Stock
Option Plan, one-fourth of the options granted vest on the first anniversary,
one-fourth of the options granted vest on the second anniversary, one-fourth of
the options granted vest on the third anniversary and one-fourth of the options
vest on the fourth anniversary. Under our 2006 Stock Option Plan, one-third of
the options vested upon grant, one-third of the options granted vest on the
first anniversary and one-third of the options granted vest on the second
anniversary. The options expire on the ten year anniversary of their grant date.
2002 AMENDED AND RESTATED STOCK OPTION PLAN
DESCRIPTION OF THE 2002 PLAN
THE PURPOSE OF THE 2002 PLAN
The purpose of the 2002 Plan is to provide additional incentive to our
directors, officers, employees and consultants to us who are primarily
responsible for our management and growth. Each option shall be designated at
the time of grant as either an incentive stock option (an "ISO") or as a
non-qualified stock option (a "NQSO").
Each option shall be designated at the time of grant as either an
incentive stock option (an "ISO") or a non-qualified stock option (a "NQSO").
The Board of Directors believes that the ability to grant stock options to
employees which qualify for ISO treatment provides an additional material
incentive to certain key employees. The Internal Revenue Code requires that ISOs
be granted pursuant to an option plan that receives shareholder approval within
one year of its adoption. We adopted the 2002 Plan in order to comply with this
statutory requirement and preserve its ability to grant ISOs.
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The benefits to be derived from the 2002 Plan, if any, are not
quantifiable or determinable.
ADMINISTRATION OF THE PLAN
The 2002 Plan shall be administered by the Board of Directors, or by
any committee that we may in the future form and to which the Board of Directors
may delegate the authority to perform such functions (in either case, the
"Administrator"). The Board of Directors shall appoint and remove members of the
committee in its discretion in accordance with applicable laws. In the event
that we establish such a committee and are required to comply with Rule 16b-3
under the Exchange Act and Section 162(m) of the Internal Revenue Code (the
"Code"), the committee shall, in the Board of Director's discretion, be
comprised solely of "non-employee directors" within the meaning of said Rule
16b-3 and "outside directors" within the meaning of Section 162(m) of the Code.
Notwithstanding the foregoing, the Administrator may delegate non-discretionary
administrative duties to any of our employees as it deems proper and the Board
of Directors, in its absolute discretion, may at any time and from time to time
exercise any and all rights and duties of the Administrator under the 2002 Plan.
Subject to the other provisions of the 2002 Plan, the Administrator
shall have the authority, in its discretion: (i) to grant options; (ii) to
determine the fair market value of the Common Stock subject to options; (iii) to
determine the exercise price of options granted; (iv) to determine the persons
to whom, and the time or times at which, options shall be granted, and the
number of shares subject to each option; (v) to interpret the 2002 Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to the 2002 Plan;
(vii) to determine the terms and provisions of each option granted (which need
not be identical), including but not limited to, the time or times at which
options shall be exercisable; (viii) with the consent of the optionee, to modify
or amend any option; (ix) to defer (with the consent of the optionee) the
exercise date of any option; (x) to authorize any person to execute on our
behalf any instrument evidencing the grant of an option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of the
2002 Plan. The Administrator may delegate non-discretionary administrative
duties to any of our employees as it deems proper.
SHARES OF STOCK SUBJECT TO THE 2002 PLAN
Subject to the conditions outlined below, the total number of shares of
stock which may be issued under options granted pursuant to the 2002 Plan shall
not exceed 3,200,000 shares of Common Stock, $.001 par value per share.
The number of shares of Common Stock subject to options granted
pursuant to the 2002 Plan may be adjusted under certain conditions. If our stock
changed by reason of a stock split, reverse stock split, stock dividend,
recapitalization, combination or reclassification, appropriate adjustments shall
be made by the Board of Directors in (i) the number and class of shares of stock
subject to the 2002 Plan, and (ii) the exercise price of each outstanding
option; provided, however, that we shall not be required to issue fractional
shares as a result of any such adjustments. Each such adjustment shall be
subject to approval by the Board of Directors in its sole discretion.
In the event of the proposed dissolution or liquidation of us, the
Administrator shall notify each optionee at least thirty days prior to such
proposed action. To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed action;
provided, however, that the Administrator, in the exercise of its sole
discretion, may permit exercise of any options prior to their termination, even
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if such options were not otherwise exercisable. In the event that we merge or
consolidate with or into another corporation or entity in which we do not
survive, or in the event of a sale of all or substantially all of our assets in
which our shareholders receive securities of the acquiring entity or an
affiliate thereof, all options shall be assumed or equivalent options shall be
substituted by the successor corporation (or other entity) or a parent or
subsidiary of such successor corporation (or other entity); provided, however,
that if such successor does not agree to assume the options or to substitute
equivalent options therefor, the Administrator, in the exercise of its sole
discretion, may permit the exercise of any of the options prior to consummation
of such event, even if such options were not otherwise exercisable.
PARTICIPATION
Every person who at the date of grant of an option is an employee of
ours or of any Affiliate (as defined below) of ours is eligible to receive NQSOs
or ISOs under the 2002 Plan. Every person who at the date of grant is a
consultant to, or non-employee director of, us or any Affiliate (as defined
below) of us is eligible to receive NQSOs under the 2002 Plan. The term
"Affiliate" as used in the 2002 Plan means a parent or subsidiary corporation as
defined in the applicable provisions (currently Sections 424(e) and (f),
respectively) of the Code. The term "employee" includes an officer or director
who is an employee of ours. The term "consultant" includes persons employed by,
or otherwise affiliated with, a consultant.
OPTION PRICE
The exercise price of a NQSO shall be not less than 85% of the fair
market value of the stock subject to the option on the date of grant. To the
extent required by applicable laws, rules and regulations, the exercise price of
a NQSO granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all of our classes of stock or of any Affiliate (a "10%
Shareholder") shall in no event be less than 110% of the fair market value of
the stock covered by the option at the time the option is granted. The exercise
price of an ISO shall be determined in accordance with the applicable provisions
of the Code and shall in no event be less than the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO granted to any 10% Percent Shareholder shall in no event be less
than 110% of the fair market value of the stock covered by the Option at the
time the Option is granted.
TERM OF THE OPTIONS
The Administrator, in its sole discretion, shall fix the term of each
option, provided that the maximum term of an option shall be ten years. ISOs
granted to a 10% Shareholder shall expire not more than five years after the
date of grant. The 2002 Plan provides for the earlier expiration of options in
the event of certain terminations of employment of the holder.
RESTRICTIONS ON GRANT AND EXERCISE
Except with the express written approval of the Administrator which
approval the Administrator is authorized to give only with respect to NQSOs, no
option granted under the 2002 Plan shall be assignable or otherwise transferable
by the optionee except by will or by operation of law. During the life of the
optionee, an option shall be exercisable only by the optionee.
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TERMINATION OF THE 2002 PLAN
The 2002 Plan shall become effective upon adoption by the Board or
Directors; provided, however, that no option shall be exercisable unless and
until written consent of the our shareholders, or approval of our shareholders
voting at a validly called shareholders meeting, is obtained within twelve
months after adoption by the Board of Directors. If such shareholder approval is
not obtained within such time, options granted pursuant to the 2002 Plan shall
be of the same force and effect as if such approval was obtained except that all
ISOs granted pursuant to the 2002 Plan shall be treated as NQSOs. Options may be
granted and exercised under the 2002 Plan only after there has been compliance
with all applicable federal and state securities laws. The 2002 Plan shall
terminate within ten years from the date of its adoption by the Board of
Directors.
TERMINATION OF EMPLOYMENT
If for any reason other than death or permanent and total disability,
an optionee ceases to be employed by us or any of our Affiliates (such event
being called a "Termination"), options held at the date of Termination (to the
extent then exercisable) may be exercised in whole or in part at any time within
three months of the date of such Termination, or such other period of not less
than thirty days after the date of such Termination as is specified in the
Option Agreement or by amendment thereof (but in no event after the expiration
date of the option (the "Expiration Date")); provided, however, that if such
exercise of the option would result in liability for the optionee under Section
16(b) of the Exchange Act, then such three-month period automatically shall be
extended until the tenth day following the last date upon which optionee has any
liability under Section 16(b) (but in no event after the Expiration Date). If an
optionee dies or becomes permanently and totally disabled (within the meaning of
Section 22(e)(3) of the Code) while employed by us or an Affiliate or within the
period that the option remains exercisable after Termination, options then held
(to the extent then exercisable) may be exercised, in whole or in part, by the
optionee, by the optionee's personal representative or by the person to whom the
option is transferred by devise or the laws of descent and distribution, at any
time within twelve months after the death or twelve months after the permanent
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and total disability of the optionee or any longer period specified in the
Option Agreement or by amendment thereof (but in no event after the Expiration
Date). "Employment" includes service as a director or as a consultant. For
purposes of the 2002 Plan, an optionee's employment shall not be deemed to
terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if the optionee's right to reemployment by us or any
Affiliate is guaranteed either contractually or by statute.
AMENDMENTS TO THE PLAN
The Board of Directors may at any time amend, alter, suspend or
discontinue the 2002 Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the 2002 Plan and ISOs granted under the 2002 Plan to
the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance shall require Shareholder approval
unless (i) shareholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the Board of Directors
otherwise concludes that shareholder approval is advisable.
TAX TREATMENT OF THE OPTIONS
Under the Code, neither the grant nor the exercise of an ISO is a
taxable event to the optionee (except to the extent an optionee may be subject
to alternative minimum tax); rather, the optionee is subject to tax only upon
the sale of the Common Stock acquired upon exercise of the ISO. Upon such a
sale, the entire difference between the amount realized upon the sale and the
exercise price of the option will be taxable to the optionee. Subject to certain
holding period requirements, such difference will be taxed as a capital gain
rather than as ordinary income. Optionees who receive NQSOs will be subject to
taxation upon exercise of such options on the spread between the fair market
value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and we are
permitted to deduct as an employee expense a corresponding amount. NQSOs do not
give rise to a tax preference item subject to the alternative minimum tax.
2006 STOCK OPTION PLAN
DESCRIPTION OF THE PLAN
THE PURPOSE OF THE PLAN
The purpose of the Plan is to provide additional incentive to the
directors, officers, employees and consultants of the Company who are primarily
responsible for the management and growth of the Company. Each option shall be
designated at the time of grant as either an incentive stock option (an "ISO")
or as a non-qualified stock option (a "NQSO").
The Board of Directors believes that the ability to grant stock
options to employees which qualify for ISO treatment provides an additional
material incentive to certain key employees. The Internal Revenue Code requires
that ISOs be granted pursuant to an option plan that receives stockholder
approval within one year of its adoption. The Company adopted the Plan in order
to comply with this statutory requirement and preserve its ability to grant
ISOs.
The benefits to be derived from the Plan, if any, are not
quantifiable or determinable.
ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Board of Directors of the
Company, or by any committee that the Company may in the future form and to
which the Board of Directors may delegate the authority to perform such
functions (in either case, the "Administrator"). The Board of Directors shall
appoint and remove members of the committee in its discretion in accordance with
applicable laws. In the event that the Company establishes such a committee and
is required to comply with Rule 16b-3 under the Exchange Act and Section 162(m)
of the Internal Revenue Code (the "Code"), the committee shall, in the Board of
Director's discretion, be comprised solely of "non-employee directors" within
the meaning of said Rule 16b-3 and "outside directors" within the meaning of
Section 162(m) of the Code. Notwithstanding the foregoing, the Administrator may
delegate non-discretionary administrative duties to such employees of the
Company as it deems proper and the Board of Directors, in its absolute
discretion, may at any time and from time to time exercise any and all rights
and duties of the Administrator under the Plan.
Subject to the other provisions of the Plan, the Administrator shall
have the authority, in its discretion: (i) to grant options; (ii) to determine
the fair market value of the Common Stock subject to options; (iii) to determine
the exercise price of options granted; (iv) to determine the persons to whom,
and the time or times at which, options shall be granted, and the number of
shares subject to each option; (v) to interpret the Plan; (vi) to prescribe,
amend, and rescind rules and regulations relating to the Plan; (vii) to
determine the terms and provisions of each option granted (which need not be
identical), including but not limited to, the time or times at which options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any option; (ix) to defer (with the consent of the optionee) the exercise
date of any option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of the
Plan. The Administrator may delegate non-discretionary administrative duties to
such employees of the Company as it deems proper.
-69-
SHARES OF STOCK SUBJECT TO THE PLAN
Subject to the conditions outlined below, the total number of shares
of stock which may be issued under options granted pursuant to the Plan shall
not exceed 1,500,000 shares of Common Stock, $.001 par value per share.
The number of shares of Common Stock subject to options granted
pursuant to the Plan may be adjusted under certain conditions. If the stock of
the Company is changed by reason of a stock split, reverse stock split, stock
dividend, recapitalization, combination or reclassification, appropriate
adjustments shall be made by the Board of Directors in (i) the number and class
of shares of stock subject to the Plan, and (ii) the exercise price of each
outstanding option; provided, however, that the Company shall not be required to
issue fractional shares as a result of any such adjustments. Each such
adjustment shall be subject to approval by the Board of Directors in its sole
discretion.
In the event of the proposed dissolution or liquidation of the
Company, the Administrator shall notify each optionee at least thirty days prior
to such proposed action. To the extent not previously exercised, all options
will terminate immediately prior to the consummation of such proposed action;
provided, however, that the Administrator, in the exercise of its sole
discretion, may permit exercise of any options prior to their termination, even
if such options were not otherwise exercisable. In the event of a merger or
consolidation of the Company with or into another corporation or entity in which
the Company does not survive, or in the event of a sale of all or substantially
all of the assets of the Company in which the Stockholders of the Company
receive securities of the acquiring entity or an affiliate thereof, all options
shall be assumed or equivalent options shall be substituted by the successor
corporation (or other entity) or a parent or subsidiary of such successor
corporation (or other entity); provided, however, that if such successor does
not agree to assume the options or to substitute equivalent options therefor,
the Administrator, in the exercise of its sole discretion, may permit the
exercise of any of the options prior to consummation of such event, even if such
options were not otherwise exercisable.
PARTICIPATION
Every person who at the date of grant of an option is an employee of
the Company or of any Affiliate (as defined below) of the Company is eligible to
receive NQSOs or ISOs under the Plan. Every person who at the date of grant is a
consultant to, or non-employee director of, the Company or any Affiliate (as
defined below) of the Company is eligible to receive NQSOs under the Plan. The
term "Affiliate" as used in the Plan means a parent or subsidiary corporation as
defined in the applicable provisions (currently Sections 424(e) and (f),
respectively) of the Code. The term "employee" includes an officer or director
who is an employee of the Company. The term "consultant" includes persons
employed by, or otherwise affiliated with, a consultant.
OPTION PRICE
The exercise price of a NQSO shall be not less than 85% of the fair
market value of the stock subject to the option on the date of grant. To the
extent required by applicable laws, rules and regulations, the exercise price of
a NQSO granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any Affiliate (a "10%
-70-
Stockholder") shall in no event be less than 110% of the fair market value of
the stock covered by the option at the time the option is granted. The exercise
price of an ISO shall be determined in accordance with the applicable provisions
of the Code and shall in no event be less than the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO granted to any 10% Stockholder shall in no event be less than
110% of the fair market value of the stock covered by the Option at the time the
Option is granted.
TERM OF THE OPTIONS
The Administrator, in its sole discretion, shall fix the term of
each option, provided that the maximum term of an option shall be ten years.
ISOs granted to a 10% Stockholder shall expire not more than five years after
the date of grant. The Plan provides for the earlier expiration of options in
the event of certain terminations of employment of the holder.
RESTRICTIONS ON GRANT AND EXERCISE
Except with the express written approval of the Administrator which
approval the Administrator is authorized to give only with respect to NQSOs, no
option granted under the Plan shall be assignable or otherwise transferable by
the optionee except by will or by operation of law. During the life of the
optionee, an option shall be exercisable only by the optionee.
TERMINATION OF THE PLAN
The Plan shall become effective upon adoption by the Board or
Directors; provided, however, that no option shall be exercisable unless and
until written consent of the Stockholders of the Company, or approval of
Stockholders of the Company voting at a validly called Stockholders' meeting, is
obtained within twelve months after adoption by the Board of Directors. If such
Stockholder approval is not obtained within such time, options granted pursuant
to the Plan shall be of the same force and effect as if such approval was
obtained except that all ISOs granted pursuant to the Plan shall be treated as
NQSOs. Options may be granted and exercised under the Plan only after there has
been compliance with all applicable federal and state securities laws. The Plan
shall terminate within ten years from the date of its adoption by the Board of
Directors.
TERMINATION OF EMPLOYMENT
If for any reason other than death or permanent and total
disability, an optionee ceases to be employed by the Company or any of its
Affiliates (such event being called a "Termination"), options held at the date
of Termination (to the extent then exercisable) may be exercised in whole or in
part at any time within three months of the date of such Termination, or such
other period of not less than thirty days after the date of such Termination as
is specified in the Option Agreement or by amendment thereof (but in no event
after the expiration date of the option (the "Expiration Date")); provided,
however, that if such exercise of the option would result in liability for the
optionee under Section 16(b) of the Exchange Act, then such three-month period
automatically shall be extended until the tenth day following the last date upon
which optionee has any liability under Section 16(b) (but in no event after the
Expiration Date). If an optionee dies or becomes permanently and totally
disabled (within the meaning of Section 22(e)(3) of the Code) while employed by
the Company or an Affiliate or within the period that the option remains
exercisable after Termination, options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the option is
transferred by devise or the laws of descent and distribution, at any time
within twelve months after the death or twelve months after the permanent and
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total disability of the optionee or any longer period specified in the Option
Agreement or by amendment thereof (but in no event after the Expiration Date).
"Employment" includes service as a director or as a consultant. For purposes of
the Plan, an optionee's employment shall not be deemed to terminate by reason of
sick leave, military leave or other leave of absence approved by the
Administrator, if the period of any such leave does not exceed 90 days or, if
longer, if the optionee's right to reemployment by the Company or any Affiliate
is guaranteed either contractually or by statute.
AMENDMENTS TO THE PLAN
The Board of Directors may at any time amend, alter, suspend or
discontinue the Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the Plan and ISOs granted under the Plan to the
requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance shall require Stockholder approval
unless (i) stockholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the Board of Directors
otherwise concludes that stockholder approval is advisable.
TAX TREATMENT OF THE OPTIONS
Under the Code, neither the grant nor the exercise of an ISO is a
taxable event to the optionee (except to the extent an optionee may be subject
to alternative minimum tax); rather, the optionee is subject to tax only upon
the sale of the Common Stock acquired upon exercise of the ISO. Upon such a
sale, the entire difference between the amount realized upon the sale and the
exercise price of the option will be taxable to the optionee. Subject to certain
holding period requirements, such difference will be taxed as a capital gain
rather than as ordinary income. Optionees who receive NQSOs will be subject to
taxation upon exercise of such options on the spread between the fair market
value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and the
Company is permitted to deduct as an employee expense a corresponding amount.
NQSOs do not give rise to a tax preference item subject to the alternative
minimum tax.
EMPLOYMENT AGREEMENTS
In April 2005, we entered into an employment agreement with Mr. Darwin
Hu pursuant to which he will serve as our President and Chief Executive Officer.
The agreement provides for an initial term of three years, an annual salary to
Mr. Hu of $200,000 and an annual bonus to be determined by our board of
directors. In connection with the agreement, Mr. Hu was issued non-qualified
options to purchase up to 1,500,000 shares of our common stock at an exercise
price of $0.01 per share. One-third of the options vested immediately upon the
execution of the employment agreement, one-third vested on April 3, 2006 and
one-third vested on April 2, 2007. The agreement also provides for the
executive's ability to participate in our health insurance program. In the event
that Mr. Hu's employment is terminated other than with good cause, he will
receive a payment of the lesser of his then remaining salary due pursuant to the
employment agreement or six months of base salary at his then current annual
salary.
In April 2005, we entered into an employment agreement with Mr. William
Hawkins pursuant to which he will serve as our Chief Operating Officer. The
agreement provides an initial term of three years, an annual salary to Mr.
Hawkins of $160,000 and an annual bonus to be determined by our board of
directors. In connection with the agreement, Mr. Hawkins was issued
non-qualified options to purchase up to 1,000,000 shares of our common stock at
an exercise price of $0.01 per share. One-third of the options vested
immediately upon the execution of the employment agreement, one-third vested on
April 3, 2006 and one-third vested on April 2, 2007. The agreement also provides
for the executive's ability to participate in our health insurance program. In
the event that Mr. Hawkins' employment is terminated other than with good cause,
he will receive a payment of the lesser of his then remaining salary due
pursuant to the employment agreement or six months of base salary at his then
current annual salary.
In April 2005, we entered into an employment agreement with Mr. David
Clark pursuant to which he will serve as our Senior Vice President of Business
Development. The agreement provides for an initial term of three years, an
annual salary to Mr. Clark of $150,000 and an annual bonus to be determined by
our board of directors. In connection with the agreement, Mr. Clark was issued
non-qualified options to purchase up to 800,000 shares of our common stock at an
exercise price of $0.01 per share. One-third of the options vested immediately
-72-
upon the execution of the employment agreement, one-third vested on April 3,
2006 and one-third vested on April 2, 2007. The agreement also provides for the
executive's ability to participate in our health insurance program. In the event
that Mr. Clark's employment is terminated other than with good cause, he will
receive a payment of the lesser of his then remaining salary due pursuant to the
employment agreement or six months of base salary at his then current annual
salary.
-73-
FINANCIAL STATEMENTS
See Financial Statements beginning on Page F-1.
LEGAL MATTERS
The law firm of Richardson & Patel LLP, of New York, New York, is
passing on the validity of our common stock. A partner of the firm beneficially
owns 16,667 shares of our common stock, which shares were issued to such partner
in exchange for legal services rendered when such partner was employed by a
prior law firm.
EXPERTS
The financial statements as of and for the years ended December 31,
2006 and 2005 included in this prospectus have been included in reliance on the
report of Clancy and Co., P.L.L.C., independent registered public accounting
firm, given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the Commission's public reference rooms at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We
also make available free of charge our annual, quarterly and current reports,
proxy statements and other information upon request. To request such materials,
please contact William Hawkins at 1772 Technology Drive, San Jose, California
95110. Additionally, please note that we file our SEC reports electronically.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov. Our Internet address is
http://www.syscaninc.com. Our website and the information contained therein or
connected thereto are not incorporated into this prospectus.
We have filed with the Commission post-effective amendment #3 to a
registration statement (which contains this prospectus) on Form SB-2 under the
Securities Act relating to the common stock being offered pursuant to this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. Please refer to the registration statement and its exhibits and
schedules for further information with respect to us and the common stock.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, we refer you
to the copy of that contract or document filed as an exhibit to the registration
statement. You may read and obtain a copy of the registration statement and its
exhibits and schedules from the SEC.
[remainder of page intentionally left blank]
-74-
SYSVIEW TECHNOLOGY, INC.
INTERIM FINANCIAL INFORMATION
Consolidated Balance Sheet as of March 31, 2007 F-2
Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 F-3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006 F-4
Condensed Notes to Consolidated Financial Statements F-5
ANNUAL FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm -
Clancy and Co., P.L.L.C. F-13
Consolidated Balance Sheet as of December 31, 2006 F-14
Consolidated Statements of Operations for the years ended
December 31, 2006 and 2005 F-15
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2006 and 2005 F-16
Consolidated Statements of Cash Flows for the years ended
December 31, 2006 and 2005 F-17
Notes to Consolidated Financial Statements F-19
F-1
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2007 2006
------------ -----------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 864 $ 1,333
Trade receivables 2,502 1,813
Inventories 1,310 1,642
Prepaid expenses and other current assets 151 73
-------- --------
TOTAL CURRENT ASSETS 4,827 4,861
Fixed assets, net 131 108
Long-term investment 160 160
-------- --------
TOTAL ASSETS $ 5,118 $ 5,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 1,513 $ 1,013
Trade payables to related parties 172 952
Trade payables 286 198
Other payables and accruals 309 506
Accrued dividends on Series A 5%
cumulative convertible preferred stock 173 152
-------- --------
TOTAL CURRENT LIABILITIES 2,453 2,821
Other liabilities:
Liability under derivative contracts 597 229
-------- --------
TOTAL LIABILITIES 3,050 3,050
Commitments and contingencies (note 9)
Convertible preferred stock, $.001 par value, 2,000 authorized:
Series A 5% cumulative convertible preferred stock, 16 shares issued and 1,082 957
outstanding at March 31, 2007 and December 31, 2006; liquidation value
of $1,565 at March 31, 2007 and December 31, 2006
Series B convertible preferred stock, 11.5 shares issued and outstanding at 247 152
March 31, 2007 and December 31, 2006; liquidation value of
$1,150 at March 31, 2007 and December 31, 2006
Stockholders' equity:
Common stock $.001 par value, 50,000 authorized, 22,042 shares issued 22 24
and 21,542 outstanding at March 31, 2007 and 24,642 shares issued
and 24,142 outstanding at December 31, 2006 (500 shares held in escrow)
Additional paid-in capital 30,471 29,651
Accumulated deficit (29,754) (28,705)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 739 970
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,118 $ 5,129
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-2
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
-------- --------
NET SALES $ 4,127 $ 2,438
COST OF SALES 2,484 1,616
-------- --------
GROSS PROFIT 1,643 822
Operating expenses:
Selling and marketing 400 293
General and administrative 915 608
Research and development 777 396
-------- --------
TOTAL OPERATING EXPENSES 2,092 1,297
-------- --------
OPERATING LOSS (449) (475)
-------- --------
OTHER INCOME (EXPENSE)
Change in fair value of
derivative instruments (368) 208
Other 9 (5)
-------- --------
TOTAL OTHER INCOME (EXPENSE) (359) 203
-------- --------
Net loss before income taxes (808) (272)
Provision for income taxes -- --
-------- --------
Net loss (808) (272)
Dividend on Series A and accretion of
Series A and Series B preferred
stock redemption value (241) (148)
-------- --------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,049) $ (420)
======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.04) $ (0.02)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 23,850 24,092
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-3
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
2007 2006
------- -------
OPERATING ACTIVITIES
Net loss available to common stockholders $(1,049) $ (420)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 9 11
Stock-based compensation cost - options 814 295
Fair value of warrants issued for services rendered 4 --
Change in fair value of derivative instruments 368 (208)
Accretion of Series A and Series B preferred stock redemption value 220 128
Changes in operating assets and liabilities:
Trade receivables (689) (430)
Inventories 332 134
Prepaid expenses and other current assets (78) (83)
Accrued dividends on Series A 5% cumulative convertible stock 21 20
Trade payables to related parties (780) 449
Trade payables and other current liabilities (109) (278)
------- -------
CASH USED BY OPERATING ACTIVITIES (937) (382)
------- -------
INVESTING ACTIVITIES
Capital expenditures (32) (4)
------- -------
CASH USED BY INVESTING ACTIVITIES (32) (4)
------- -------
FINANCING ACTIVITIES
Advances on bank line of credit 500 --
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 500 --
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (469) (386)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,333 1,426
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 864 $ 1,040
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock acquired from related party $ 2 $ --
======= =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-4
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
ORGANIZATION
Sysview Technology. Inc. ("Sysview" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices ("SOHO"), professional practices as well as consumers
(referred to herein collectively as "Enterprises"). Sysview is a market-leader
in providing USB-powered scanning solutions to a wide variety of industries and
market applications. The Company's patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed in both business
and personal use. In addition, Sysview is involved in the research and
development of certain technologies related to the field of high definition
("HD") display.
Syscan, Inc., the Company's wholly-owned subsidiary, was incorporated in
California in 1995 to develop and manufacture a new generation of contact image
sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging
sensor devices. During the late 1990s, the Company established many technical
milestones and was granted numerous patents for its linear imaging technology.
The Company's patented CIS and mobile imaging scanner technology provides high
quality images at extremely low power consumption levels allowing delivery of
compact scanners in a form ideally suited for laptop or desktop computer users
who need a small light weight device to scan or fax documents.
The Company's business model was developed around intellectual property ("IP")
driven products sold primarily to original equipment manufacturers ("OEM"),
private label brands and value added resellers ("VAR") and can be found in a
variety of applications, including but not limited, to the following:
o Document and information management;
o Identification card scanners;
o Passport security scanners;
o Bank note and check verification;
o Business card readers;
o Barcode scanning; and
o Optical mark readers used in lottery terminals.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Sysview have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all information and disclosures necessary for a presentation of
the Company's financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States
("GAAP").
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results may differ from these estimates. The results of
operations for the period ended March 31, 2007 are not necessarily indicative of
the operating results that may be expected for the entire year ending December
31, 2007. The interim financial statements should be read in conjunction with
the financial statements in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2006, filed with the Securities and Exchange Commission
("SEC") on April 3, 2007.
The consolidated financial statements include the accounts of Sysview and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
F-5
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Certain accounts have been reclassified to conform to the current period
presentation. Such reclassifications did not affect total net sales, operating
loss or net loss available to common stockholders.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS 133 AND 140,
("SFAS 155"). SFAS 155 permits interests in hybrid financial instruments that
contain an embedded derivative that would otherwise require bifurcation, to be
accounted for as a single financial instrument at fair value, with changes in
fair value recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. Sysview adopted SFAS 155 on January
1, 2007 and will apply the standard to any new hybrid financial instruments
issued subsequent to January 1, 2007. However, as allowed by paragraph 4(c) of
SFAS 155, Sysview did not elect to apply SFAS 155 to previously existing hybrid
financial instruments including the Company's Series A 5% cumulative convertible
preferred stock ("Series A Stock") and Series B Convertible Preferred Stock
("Series B Stock"). As such, the adoption of SFAS 155 had no impact to the
Company's consolidated financial position, results of operations or cash flows.
In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a
tax position if that position will more likely than not be sustained on audit,
based on the technical merits of the position. Sysview adopted FIN 48 on January
1, 2007. The adoption had no impact to the Company's consolidated financial
position, results of operations or cash flows.
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS ("SFAS
157"), which provides guidance about how to measure assets and liabilities that
use fair value. SFAS 157 will apply whenever another US Generally Accepted
Accounting Principle ("GAAP) standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also will require additional
disclosures in both annual and quarterly reports. SFAS 157 will be effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and will be adopted by the Company January 1, 2008. The Company is currently
evaluating the potential impact this standard may have on its consolidated
financial position, cash flows and results of operations, but does not believe
the impact of the adoption will be material.
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES-INCLUDING AN AMENDMENT OF FASB STATEMENT NO.
115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value, with unrealized gains and losses related
to these financial instruments reported in earnings at each subsequent reporting
date. SFAS 159 will be effective for financial statements issued for fiscal
years beginning after November 15, 2007, and will be adopted by the Company
January 1, 2008. The Company does not expect the adoption of SFAS 159 to result
in a significant impact on its consolidated financial position, cash flows and
results of operations.
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
RELATED-PARTY PURCHASES
The Company purchases the majority of its finished scanner imaging products from
Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of Sysview's majority stockholder.
The Company's Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He
resigned from STH effective December 2004.
F-6
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Purchases from SLL totaled $2,178,000 and $1,409,000 for the three months ended
March 31, 2007 and 2006, respectively. All purchases from SLL were carried out
in the normal course of business. As a result of these purchases, the Company
was liable to SLL for $172,000 and $952,000 at March 31, 2007 and December 31,
2006, respectively.
COMMON STOCK ACQUIRED FROM RELATED PARTY
On March 21, 2007, the Company entered into an agreement with STH whereby the
Company agreed to forego any further collections efforts related to loans that
were previously made by the Company to STH, which were never repaid by STH,
including legal action, in exchange for the cancellation of 2,600,000 shares of
the Company's common stock beneficially owned by STH. In addition, both parties
mutually agreed to release and discharge any and all claims that each may have
against the other party. The stock certificates were subsequently cancelled by
the Company's transfer agent. The Company recorded the stock acquisition as a
decrease to common stock with the corresponding offset to additional paid in
capital during the three months ended March 31, 2007.
NOTE 4 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk are cash balances
maintained in excess of federal depository insurance limits and trade
receivables.
CASH AND CASH EQUIVALENTS
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up
to $100,000. As of March 31, 2007, the Company had consolidated balances of
approximately $480,000, 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 MARCH 31,
-------------------------------
2007 2006
------------ --------------
Customer A 32% 37%
Customer B 21 --
Customer C 15 36
Trade receivables from these customers totaled $1,748,000 at March 31, 2007. As
of March 31, 2007 all the Company's trade receivables were unsecured.
NOTE 5 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all finished scanner imaging products from
one vendor that is also a wholly-owned subsidiary of the parent company of its
majority stockholder. See Note 3. If this vendor became unable to provide
materials in a timely manner and the Company was unable to find alternative
vendors, the Company's business, operating results and financial condition would
be materially adversely affected.
F-7
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 6 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Sysview has several stock-based employee compensation plans, which are more
fully described in the Company's 2006 Annual Report on Form 10-KSB.
Effective January 1, 2006 Sysview adopted the fair value recognition provisions
of SFAS 123R, SHARE-BASED Payments, ("SFAS 123R") using the modified prospective
application method. Under this transition method, compensation cost recognized
for the three months ended March 31, 2007 and 2006, includes the applicable
amounts of: (a) compensation expense of all stock-based payments granted prior
to, but not yet vested as of January 1, 2006 (based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123 and the
Accounting Principles Board ("APB") 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
("APB 25")), and (b) compensation expense for all stock-based payments granted
subsequent to January 1, 2006 (based on the grant-date fair value estimated in
accordance with the new provisions of SFAS 123R).
The following table sets forth the total stock-based compensation expense
included in the Condensed Consolidated Statements of Operations (IN THOUSANDS):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2007 2006
--------------- --------------
Selling and marketing $ 73 $ 12
General and administrative 508 271
Research and development 233 12
At March 31, 2007, the Company had approximately $1,500,000 of total
unrecognized compensation cost related to unvested stock options. This cost is
expected to be recognized over a weighted-average period of approximately 22
months.
STOCK OPTIONS
The following table summarizes stock option activity and related information for
the three months ended March 31, 2007:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------------ ----------------
Outstanding at December 31, 2006 4,890,000 $0.18
Granted 3,036,000 0.70
Exercised -- --
Cancelled -- --
------------ ----------------
Outstanding at March 31, 2007 7,926,000 $0.38
============ ================
F-8
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following table summarizes all options outstanding and exercisable by price
range as of March 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING WEIGHTED- AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE PRICE
------------------ -------------- ---------------- ---------------- ------------- --------
$0.01 4,000,000 5.07 $0.01 2,666,666 $0.01
$0.65 - $0.70 3,266,000 9.93 $0.70 1,069,500 $0.70
$1.01 660,000 9.14 $1.01 -- --
NOTE 7 - BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted net income (loss) per common 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 the Company's diluted net loss per common
share for the three months ended March 31, 2007 and 2006 as their effect would
be anti-dilutive. As a result, for all periods presented, the Company's basic
and diluted net loss per common share is the same.
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
As previously discussed in Note 3, the Company acquired 2,600,000 shares of the
Company's common stock during the three months ended March 31, 2007. The
Company's transfer agent subsequently cancelled the shares.
PREFERRED STOCK ACTIVITY
The Company had no preferred stock activity during the three months ended March
31, 2007.
SERIES A STOCK DIVIDENDS
The Company's Series A Stock accrues cumulative dividends at a rate of five
percent per annum, payable semiannually on July 1 and January 1. Dividends are
payable in cash, by accretion of the stated value or in shares of common stock.
Subject to certain terms and conditions, the decision whether to accrete
dividends to the stated value of the Series A Stock or to pay for dividends in
cash or in shares of common stock, is at the Company's discretion. To date, the
Company has not paid any dividends. During the three months ended March 31, 2007
and 2006, Series A Stock dividends were approximately $21,000 and $20,000,
respectively, and recorded as a non-operating expense on the Company's
consolidated statement of operations.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS 133") and EITF Abstract No. 00-19, ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS ("EITF 00-19"), the Company's Series A Stock and related
warrants and the Series B Stock and related warrants, are deemed derivative
instruments as a result of the embedded conversion feature. Accordingly, the
fair value of these derivative instruments has been recorded in the Company's
consolidated balance sheet as a liability with the corresponding amount as a
F-9
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
discount to the Series A Stock and Series B Stock, respectively. The discounts
are being accreted, on a straight-line basis, from the respective issuance date
through the respective redemption date adjusted for conversions and are
disclosed as a non-operating expense on the Company's consolidated statement of
operations. Accretion of the preferred stock redemption value, for both Series A
and Series B, for the three months ended March 31, 2007 was approximately
$220,000. Accretion of the Series A preferred stock redemption value for the
three months ended March 31, 2006 was approximately $128,000. There was no
Series B accretion during the three months ended March 31, 2006 as the stock was
not issued until August 2006.
The increase in the fair value of the liability for derivative contracts, for
both Series A and Series B, totaled approximately $368,000 for the three months
ended March 31, 2007. The decrease in the fair value of the liability for the
Series A derivative contract totaled approximately $208,000 for the three months
ended March 31, 2006. The offsetting adjustment to the change in the fair value
of the liability for derivative contracts is disclosed with other income
(expense) in the consolidated statements of operations.
The Company computes fair value of these derivatives using the Black-Scholes
valuation model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's derivative instruments have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate.
The assumptions used in the Black-Scholes valuation model to estimate fair value
of each derivative instrument and the resulting weighted average estimated value
of the Series A Stock derivative liability and the Series B Stock derivative
liability as of March 31, 2007 and 2006 are as follows:
MARCH 31,
----------------------
2007 2006
-------- ---------
Weighted average estimated values per share $0.27 $0.36
Expected life in years 3.0 3.0
Expected volatility 51% 42%
Expected dividend yield 0% 0%
Risk free interest rate 5.3% 5%
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases which
extend through November 2011. Future minimum rental commitments as of March 31,
2007 are as follows (IN THOUSANDS):
YEAR ENDING FUTURE MINIMUM
MARCH 31, LEASE PAYMENTS
------------ ----------------
2008 $ 283
2009 195
2010 1
2011 1
----------------
Total $ 480
================
F-10
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
BANK LINE OF CREDIT
The Company has a line of credit agreement ("LOC Agreement") to borrow up to
$2,500,000, bearing interest at the rate of prime (8.25% at March 31, 2007) 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,
2007. Upon certain events of default, the default variable interest rate
increases to prime plus 5.5%. The Company had $987,000 available for use at
March 31, 2007.
At March 31, 2007, Sysview was not in compliance with all of the LOC Agreement
debt covenants. Pursuant to a waiver letter from the lender dated May 14, 2007,
the lender agreed to forebear from exercising its rights and remedies with
respect to existing defaults under the LOC Agreement from the date of the LOC
Agreement through March 31, 2007. The Company is currently renegotiating certain
debt covenants defined by the LOC Agreement to more accurately assess the
Company's financial position.
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 March 31, 2007 termination payments
totaling $490,000 remain in effect.
CONSULTING AGREEMENT
The Company entered into an Investor Relations Consulting Agreement dated
December 5, 2006, for a term of one year beginning January 1, 2007, payable
monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for
April, May and June; (iii) $8,500 for July, August and September; and (iv)
$9,000 for October, November, and December. Additionally, the Company agreed to
pay the consultant 90,000 warrants with an exercise price of $0.65 per share,
expiring in three years, with immediate vesting on January 1, 2007, and
exercisable at the rate of 7,500 options the first day of each month during
calendar 2007. In April 2007, the Company entered a separate warrant agreement
that amended terms of the warrants awarded in the December 5, 2006 agreement.
Under the April 2007 agreement, the warrants shall vest 7,500 per month on the
first day of each month commencing on January 1, 2007 and are immediately
exercisable upon vesting. In the event the consulting agreement is terminated
prior to December 1, 2007, all unvested warrants shall be immediately cancelled.
The warrants will not be registered under federal or state securities laws. The
fair value of these warrants, as determined by the Black-Scholes valuation
model, totaled $18,000 and is amortized ratably over the vesting period. As
such, $4,000 was charged to general and administrative expense and credited to
additional paid-in capital during the three months ended March 31, 2007.
SERIES B PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of a registration rights agreement ("Agreement") between
the investors and the Company, the Company was obligated to file a registration
statement on Form SB-2 (which was filed on October 11, 2006) registering the
resale of shares of the Company's common stock issuable upon conversion of the
Series B Stock and exercise of the related warrants. The Company was required to
file the registration statement within 60 days following August 8, 2006 and to
have the registration statement declared effective by December 6, 2006, which is
120 days following August 8, 2006. If the registration statement was not timely
filed, or declared effective within the timeframe described, or if the
registration was suspended other than as permitted, in the Registration Rights
Agreement, the Company was obligated to pay each Investor a fee equal to one
percent of such investor's purchase price of the Series B Stock for each 30 day
period thereafter (pro rated for partial periods), that such registration
conditions are not satisfied, up to a maximum of 12 months. Because the SEC did
not declare the SB-2 effective until January 18, 2007, the Company accrued
approximately $7,000, included in general and administrative expense, for
damages during the three months ended March 31, 2007.
F-11
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
LITIGATION, CLAIMS AND ASSESSMENTS
The Company experiences routine litigation in the normal course of its business
and does not believe that any pending litigation will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Sysview currently operates in one segment, the design, development and
delivery of various imaging technology solutions, most notably scanners, as
defined by SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("SFAS 131").
GEOGRAPHIC INFORMATION
During the three months ended March 31, 2007 and 2006, Sysview recorded
net sales throughout the U.S., Asia and Europe as determined by the final
destination of the product. The following table summarizes total net sales
attributable to significant countries (IN THOUSANDS):
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2007 2006
---------------------------------
U.S. $ 4,001 $ 2,221
Asia -- 118
Europe and other 126 99
---------------------------------
$ 4,127 $ 2,438
=================================
identifiable assets, classified by operations located in the U.S. and Asia
(IN THOUSANDS):
MARCH 31, 2007 DECEMBER 31, 2006
---------------------------------------
U.S. $ 5,013 $ 5,045
Asia 105 84
---------------------------------------
$ 5,118 $ 5,129
=======================================
Assets located in Asia relate to tooling equipment required to manufacture
Sysview's product.
[END OF INTERIM FINANCIAL INFORMATION]
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sysview Technology, Inc.
We have audited the accompanying consolidated balance sheets of Sysview
Technology, Inc. and subsidiaries (the "Company") as of December 31, 2006 and
2005, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 2006 and 2005. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sysview
Technology, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2006 and 2005, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred substantial net losses in recent
years resulting in an accumulated deficit. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are described in Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Clancy and Co., P.L.L.C.
----------------------------
Clancy and Co., P.L.L.C.
Scottsdale, Arizona
March 29, 2007
F-13
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
2006 2005
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,333 $ 1,426
Trade receivables 1,813 1,285
Inventories 1,642 751
Prepaid expenses and other current assets 73 319
-------- --------
TOTAL CURRENT ASSETS 4,861 3,781
Fixed assets, net 108 167
Intangible assets, net -- 555
Due from related parties, net -- 2,606
Long-term investment 160 998
-------- --------
TOTAL ASSETS $ 5,129 $ 8,107
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line and letter of credit $ 1,013 $ 1,013
Trade payables to related parties 952 203
Trade payables 198 259
Other payables and accruals 506 185
Accrued dividends on Series A 5%
cumulative convertible stock preferred stock 152 71
-------- --------
TOTAL CURRENT LIABILITIES 2,821 1,731
Liability under derivative contracts 229 503
-------- --------
TOTAL LIABILITIES 3,050 2,234
Commitments and contingencies (Note 10)
Convertible preferred stock, $.001 par value, 2,000 authorized:
Series A 5% cumulative convertible preferred stock, 16 shares 957 468
issued and outstanding at December 31, 2006 and December
31, 2005; liquidation value of $1,565 and $1,615 at
December 31, 2006 and December 31, 2005, respectively
Series B convertible preferred stock, 11.5 shares issued and 152 --
outstanding at December 31, 2006, liquidation value of
$ 1,150
Stockholders' equity:
Common stock $.001 par value, 50,000 authorized, 24,642 24 24
shares issued and 24,142 outstanding at December 31, 2006 and
24,592 shares issued and 24,092 outstanding at December 31,
2005 (500 shares held in escrow)
Additional paid-in capital 29,651 28,138
Accumulated deficit (28,705) (22,757)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 970 5,405
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,129 $ 8,107
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------
2006 2005
-------- --------
NET SALES $ 12,469 $ 7,848
COST OF SALES 8,221 4,989
-------- --------
GROSS PROFIT 4,248 2,859
OPERATING EXPENSES:
Selling and marketing 1,240 1,037
General and administrative 5,361 2,918
Research and development 3,084 951
Impairment of long-term investment 838 --
-------- --------
TOTAL OPERATING EXPENSES 10,523 4,906
-------- --------
OPERATING LOSS (6,275) (2,047)
-------- --------
OTHER INCOME (EXPENSE):
Change in fair value of derivative instruments 1,421 1,112
Fair value of warrants issued (173) (290)
Preferred stock issuance costs (88) (237)
Interest income 28 24
Interest expense (92) (57)
Loss on disposal of fixed assets and other (17) 5
-------- --------
TOTAL OTHER INCOME (EXPENSE) 1,079 557
-------- --------
Net loss before income taxes (5,196) (1,490)
Provision for income taxes 3 3
-------- --------
Net loss (5,199) (1,493)
Dividend on Series A and accretion of Series A and Series B
preferred stock redemption value (749) (546)
-------- --------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (5,948) $ (2,039)
======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.25) $ (0.09)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 24,105 23,279
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
Balances At December 31, 2004 23,110 $ 23 $ 25,478 $(20,718) $ 4,783
Issuance of Common Stock Upon
Conversion of Preferred Stock 257 -- 257 -- 257
Issuance of Common Stock for
Services Rendered 225 -- 157 -- 157
Stock Base Compensation Cost -
Options -- -- 1,577 -- 1,577
Fair Value of Warrants Issued for
Payment of Preferred Stock -- -- 290 -- 290
Issuance Expenses
Common Stock Issued for Acquisition
of Subsidiary, 1,000,000 500 1 379 -- 380
Shares Less 500,000 Held
in Escrow
Net Loss -- -- -- (2,039) (2,039)
-------- -------- -------- -------- --------
Balances At December 31, 2005 24,092 $ 24 $ 28,138 $(22,757) $ 5,405
-------- -------- -------- -------- --------
Issuance of Common Stock Upon
Conversion of Preferred Stock 50 -- 29 -- 29
Stock Base Compensation Cost - Options -- -- 1,311 -- 1,311
Fair Value of Warrants Issued for
Payment of Preferred Stock -- -- 173 -- 173
Issuance Expenses
Net Loss -- -- -- (5,948) (5,948)
-------- -------- -------- -------- --------
Balances At December 31, 2006 24,142 $ 24 $ 29,651 $(28,705) $ 970
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------
2006 2005
------- -------
OPERATING ACTIVITIES
Net loss $(5,948) $(2,039)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization 597 31
Common stock issued for services -- 157
Stock base compensation cost - options 1,311 1,577
Change in fair value of derivative instruments (1,421) (1,112)
Accretion of Series A and Series B preferred stock redemption value 668 468
Preferred stock issuance expenses paid by issuance of warrants 173 290
Allowance for doubtful accounts 2,606 --
Impairment of long-term investment 838 --
Conversion of Series A preferred stock dividends for common stock -- 7
Loss on disposal of assets 17 --
Changes in operating assets and liabilities:
Trade receivables (528) (157)
Inventories (891) (255)
Prepaid expenses and other current assets 246 (101)
Trade payables (61) 197
Trade payables to related parties 749 203
Other payables and accruals 324 65
Accrued dividends on Series A 5% cumulative convertible stock 81 71
------- -------
CASH USED BY OPERATING ACTIVITIES (1,239) (598)
------- -------
INVESTING ACTIVITIES
Cash paid for subsidiary -- (98)
Capital expenditures (4) (169)
------- -------
CASH USED BY INVESTING ACTIVITIES (4) (267)
------- -------
FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock 1,150 1,865
Net repayments under bank lines of credit -- (100)
Advances under bank letters of credit -- 180
Advances to related parties -- (341)
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 1,150 1,604
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (93) 739
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,426 687
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,333 $ 1,426
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 92 $ 57
======= =======
Income taxes $ 3 $ 3
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A Preferred Stock for Common Stock $ 30 $ 257
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-17
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sysview Technology. Inc. ("Sysview" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices ("SOHO"), professional practices as well as consumers
(referred to herein collectively as "Enterprises"). Sysview is a market-leader
in providing USB-powered scanning solutions to a wide variety of industries and
market applications. The Company's patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed in both business
and personal use. In addition, Sysview is involved in the research and
development of certain technologies related to the field of high definition
("HD") display.
Syscan, Inc., the Company's wholly-owned subsidiary, was incorporated in
California in 1995 to develop and manufacture a new generation of contact image
sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging
sensor devices. During the late 1990s, the Company established many technical
milestones and was granted numerous patents for its linear imaging technology.
The Company's patented CIS and mobile imaging scanner technology provides high
quality images at extremely low power consumption levels allowing delivery of
compact scanners in a form ideally suited for laptop or desktop computer users
who need a small light weight device to scan or fax documents.
The Company's business model was developed around intellectual property ("IP")
driven products sold primarily to original equipment manufacturers ("OEM"),
private label brands and value added resellers ("VAR") and can be found in a
variety of applications, including but not limited, to the following:
o Document and information management;
o Identification card scanners;
o Passport security scanners;
o Bank note and check verification;
o Business card readers;
o Barcode scanning; and
o Optical mark readers used in lottery terminals.
BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Sysview and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated. United States (U.S.) dollar is the functional currency for the
Company therefore no translation adjustment recorded through accumulated other
comprehensive income (loss). Monetary accounts denominated in non-U.S.
currencies, such as cash or payables to vendors, have been re-measured to the
U.S. dollar. Gains and losses resulting from foreign currency transactions are
included in the results of operations. Certain accounts have been reclassified
to conform to the current period presentation. Such reclassifications did not
affect total net sales, operating loss or net loss available to common
stockholders.
LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
during the years ended December 31, 2006 and 2005, the Company incurred net
losses of $5,948,000 and $2,039,000, respectively, of which approximately
$4,789,000 and $1,425,000, respectively, is attributed to non-cash items. In
addition, cash flows used in operations were $1,239,000 and $598,000,
respectively, and at December 31, 2006, the Company was not in compliance with
all of its Extended Agreement debt covenants. See Notes 10 and 12. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
Management believes the Company's ability to continue as a going concern is
mitigated because the Company's current sources of liquidity as of February 28,
2007, which include approximately $1,500,000 in cash and cash equivalents, and a
$987,000 line of credit available for use under its current line of credit
facility, are sufficient to satisfy its cash requirements over the next twelve
months. Management also believes that it has the ability to borrow additional
funds from third parties such as financial institutions or will be successful in
F-18
a debt or equity financing that will be sufficient to fund its operations for
the next twelve months. Additionally, management will be reviewing all aspects
of its business and making adjustments as needed to those considered
unprofitable. Therefore, for at least the next twelve months, the Company can
continue to operate as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or any
other adjustment that might be necessary should the Company be unable to
continue as a going concern.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes its best estimate of the ultimate outcome for
these items based on historical trends and other information available when the
financial statements are prepared. Changes in estimates are recognized in
accordance with the accounting rules for the estimate, which is typically in the
period when new information becomes available to management. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments. Highly
liquid investments include debt securities with remaining maturities of three
months or less when acquired. They are stated at cost, which approximates market
value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables and payables,
prepaid expenses and other current assets, amounts due to and from related
parties, and other payables and accruals approximates fair value due to the
short period of time to maturity.
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 December 31, 2006, the Company had
consolidated balances of approximately $932,000, 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:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2006 2005
---------------------------------------------------
Customer A 42% 33%
---------------------------------------------------
Customer B 14 18
---------------------------------------------------
Customer C 13 16
---------------------------------------------------
Customer D 12 12
---------------------------------------------------
Trade receivables from these customers totaled $1,652,000 at December 31, 2006.
As of December 31, 2006 all the Company's trade receivables were unsecured. The
risk with respect to trade receivables is mitigated by credit evaluations
performed on customers and the short duration of payment terms extended to
customers.
F-19
CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all its finished scanner imaging products
from one vendor that is also a wholly-owned subsidiary of the parent company of
our 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.
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 (reversal) is recognized as a component
of cost of sales in the period the provision (reversal) occurs. There was no
provision recorded at December 31, 2006 or 2005.
FIXED ASSETS
Fixed assets, stated at cost, are depreciated over the estimated useful lives of
the assets using the straight-line method over periods ranging from three to
seven years. Significant improvements and betterments are capitalized. Routine
repairs and maintenance are expensed when incurred. Gains and losses on disposal
of fixed assets are recognized in the statement of operations based on the net
disposal proceeds less the carrying amount of the assets.
INTANGIBLE ASSETS
Acquisition-related intangibles include 1.) intellectual property, which has
reached technological feasibility, to be integrated into the Company's future
products and 2.) technological expertise required to complete the integration.
Intangible assets are amortized on a straight-line basis over the periods of
benefit. The Company performs an annual review of its identified intangible
assets to determine if facts and circumstances exist which indicate that the
assets' useful life is shorter than originally estimated or that the assets'
carrying amount may not be recoverable. If such facts and circumstances do
exist, the Company assesses the recoverability of identified intangible assets
by comparing the projected undiscounted net cash flows associated with the
related asset or group of assets over their remaining lives against their
respective carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets.
LONG-TERM INVESTMENTS
Long-term investments are carried at cost less provision for any impairment in
value. Income from long-term investments is accounted for to the extent of
dividends received or receivable. Upon disposal of investments, any profit and
loss thereon is accounted for in the statement of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), if
indicators of impairment exist, the Company assesses the recoverability of the
affected long-lived assets by determining whether the carrying value of such
assets can be recovered through the undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such impairment by
comparing the assets' carrying value to the assets' present value of the
expected future cash flows. As such, the Company recognized $838,000 of
impairment losses during the year ended December 31, 2006. The underlying asset
is used in the Company's operations. Therefore, the impairment loss is included
with operating expenses on the Company's statement of operations. See Note 7.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS 133") and the Emerging Issues Task Force ("EITF") EITF 00-19,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS, ("EITF 00-19"), the Company's
Series A 5% cumulative convertible preferred stock ("Series A Stock") and
related warrants and the Series B Convertible Preferred Stock ("Series B Stock")
and related warrants are deemed derivative instruments as a result of the
embedded conversion feature. Accordingly, the fair value of these derivative
instruments has been recorded in the Company's consolidated balance sheet as a
liability with the corresponding amount as a discount to the Series A Stock and
Series B Stock, respectively. The discounts are being accreted, on a
F-20
straight-line basis, from the respective issuance date through the respective
redemption date adjusted for conversions. Accretion of the preferred stock
redemption value, for both Series A and Series B, for the years ended December
31, 2006 and 2005 totaled approximately $668,000 and $468,000, respectively, and
is disclosed as a non-operating expense on the Company's consolidated statements
of operations. The total decrease in the fair value of the liability for
derivative contracts, for both Series A and Series B, totaled approximately
$1,421,000 and $1,112,000 for the years ended December 31, 2006 and 2005,
respectively, with the offsetting adjustment disclosed as non-operating income
on the Company's consolidated statements of operations.
The Company computes fair value of these derivatives using the Black-Scholes
valuation model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's derivative instruments have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate.
The assumptions used in the Black-Scholes valuation model to estimate fair value
of each derivative instrument and the resulting weighted average estimated value
of the Series A Stock derivative liability and the Series B Stock derivative
liability as of December 31, 2006 and 2005 are as follows:
DECEMBER 31,
--------------------------------------------- -------------------------
2006 2005
--------------------------------------------- -------------------------
Weighted average estimated values per share $0.13 $0.43
--------------------------------------------- -------------------------
Expected life in years 3.0 3.0
--------------------------------------------- -------------------------
Expected volatility 37.95% 99.77%
--------------------------------------------- -------------------------
Expected dividend yield 0% 0%
--------------------------------------------- -------------------------
Risk free interest rate 5.17% 4%
--------------------------------------------- -------------------------
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS ALLOWANCES
Revenues. Revenues consist of product sales including the sale of 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.
Shipping charges billed to customers are included in net sales and the related
shipping costs are included in cost of sales. All internal handling charges are
included with selling and marketing expenses.
Allowance for doubtful accounts and return allowances. The Company presents
trade receivables, net of allowances for doubtful accounts and returns, to
ensure trade receivable are not overstated due to uncollectibility. Allowances,
when required, are calculated based on detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting
the Company's customer base. The Company reviews a customer's credit history
before extending credit. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. There was no allowance for doubtful
accounts at December 31, 2006 or 2005 as management believes all of its trade
receivables are collectible.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were immaterial for both periods
presented.
F-21
EMPLOYEE EQUITY INCENTIVE PROGRAMS
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
year December 31, 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 4.
INCOME TAXES
The Company accounts for income taxes under the liability method of accounting
for income taxes in accordance with the provisions of SFAS 109, ACCOUNTING FOR
INCOME TAXES, ("SFAS 109"). Current income tax expense or benefit is the amount
of income taxes expected to be payable or refundable for the current year. A
deferred income tax asset or liability is computed for the expected future
impact of differences between the financial reporting and tax basis of assets
and liabilities and for the expected future tax benefit to be derived from tax
credits and loss carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
net 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. As the Company incurred net losses for the years ended December 31,
2006 and 2005, common stock equivalents were excluded from diluted net loss per
share 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.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 7, 2005, the FASB issued Statement 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION 20 AND FASB STATEMENT 3, ("SFAS 154").
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles were required recognition via a cumulative effect adjustment within
net income (loss) of the period of the change. SFAS 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005. Sysview adopted SFAS 154 on January 1, 2006.
The adoption had no impact to the Company's consolidated financial position,
results of operations or cash flows.
In February 2006, the FASB issued SFAS 155, ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS 133 AND 140, ("SFAS
155"). SFAS will be effective for the Company beginning January 1, 2007. The
statement permits interests in hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation, to be accounted
for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The Company is currently evaluating
the potential impact this standard may have on its consolidated financial
position, cash flows and results of operations, but does not believe the impact
of the adoption will be material.
In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN
INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"), which
clarifies the accounting for uncertainty in tax positions. This Interpretation
requires that the Company recognize in its financial statements the impact of a
tax position if that position will 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.
F-22
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS ("SFAS
157"), which provides guidance about how to measure assets and liabilities that
use fair value. SFAS 157 will apply whenever another US GAAP standard requires
(or permits) assets or liabilities to be measured at fair value but does not
expand the use of fair value to any new circumstances. This standard also will
require additional disclosures in both annual and quarterly reports. SFAS 157
will be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and will be adopted by the Company January 1, 2008. The
Company is currently evaluating the potential impact this standard may have on
its consolidated financial position, cash flows and results of operations, but
does not believe the impact of the adoption will be material.
In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") 108,
CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 was
issued to eliminate the diversity of practice in how public companies quantify
misstatements of financial statements, including misstatements that were not
material to prior years' financial statements. The Company applied the
provisions of SAB 108 to its annual financial statements for the year ending
December 31, 2006 included herein. The adoption had no impact to the Company's
consolidated financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB (including the 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 2 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal year 2006, the Company's management
continued to monitor and evaluate the collectibility and potential impairment of
its assets, in particular, intangible assets, amounts due from related parties
and long-term investments. In connection therewith, the following adjustments
were recorded in the fourth quarter:
INTANGIBLE ASSETS
During the fourth quarter of fiscal year 2006, the Company performed an annual
review of its identified intangible assets. Based on this review, Sysview
management reclassified its intangible assets from non-amortizing to amortizing
intangible assets. As a result, Sysview booked $555,000 of intangible asset
amortization expense, which is included with research and development expenses,
during the fourth quarter of fiscal year 2006. See Note 6.
DUE FROM RELATED PARTIES
The Company booked an allowance of $2,606,000 to fully reserve amounts due from
related parties as it became apparent to management that such parties may not
have the financial resources to repay amounts due. The Company does not plan to
continue its collection efforts. See Note 12.
LONG-TERM INVESTMENT
During the fourth quarter, the Company recorded an impairment charge of $838,000
related to its long-term investment. See Note 7.
It is management's opinion that these adjustments are properly recorded in the
fourth quarter of fiscal year 2006 based upon the facts and circumstances that
became available during that period.
NOTE 3 - RELATED-PARTY TRANSACTIONS
RELATED-PARTY PURCHASES
The Company purchases the majority of its finished scanner imaging products from
Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of Sysview' majority stockholder.
See Note 1. The Company's Chairman and CEO, Darwin Hu, was formerly the CEO of
STH. He resigned from STH effective December 2004.
F-23
Purchases from SLL totaled $8,620,000 and $4,915,000 for the years ended
December 31, 2006 and 2005, respectively. All purchases from SLL were carried
out in the normal course of business. As a result of these purchases, the
Company was liable to SLL for $952,000 and $203,000 at December 31, 2006 and
2005, respectively.
RELATED-PARTY LOANS
In the normal course of business, the Company made interest-free loans to
several related parties for the purpose of purchasing capital equipment,
including tooling equipment required to manufacture the Company's product. These
loans totaled $2,606,000 at December 31, 2006 and 2005. As discussed in Note 2,
these loans were fully reserved during the fourth quarter of fiscal year 2006.
See Note 12.
NOTE 4 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Prior to January 1, 2006, Sysview accounted for its stock-based employee
compensation 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 Consolidated Statement of Operations. Effective
January 1, 2006, Syscan adopted the fair value recognition provisions of SFAS
123(R). See Note 1.
The following table sets forth the total stock-based compensation expense
included in the consolidated statements of operations (IN THOUSANDS):
YEAR ENDED DECEMBER 31,
-------------------------------- --------------- ---------------
2006 2005
-------------------------------- --------------- ---------------
Selling and marketing $ 51 $ 85
-------------------------------- --------------- ---------------
General and administrative 1,015 1,407
-------------------------------- --------------- ---------------
Research and development 245 85
-------------------------------- --------------- ---------------
At December 31, 2006, the Company had approximately $863,000 of total
unrecognized compensation cost related to unvested stock options. This cost is
expected to be recognized over a weighted-average period of approximately 16
months.
STOCK OPTIONS
The Company issues options under two different stock option plans (both approved
by shareholders) as well as through employment agreements with key employees,
executives and consultants (approved by the board of directors on a case-by-case
basis). The following table sets forth, by the respective option plan, certain
aspects of the Company's stock options as of December 31, 2006:
OPTION APPROVAL METHOD OPTIONS OUTSTANDING AND OPTIONS AVAILABLE
------------------------------------- ------------------------------------------
BOARD OF AVAILABLE
DIRECTORS FOR
BOARD OF AND FUTURE
DESCRIPTION DIRECTORS SHAREHOLDERS TOTAL OUTSTANDING GRANT TOTAL
----------- --------- ------------ ----- ----------- ----- -----
2002 Amended and
Restated Stock -- 3,200,000 3,200,000 890,000 2,310,000 3,200,000
Option Plan
Key Personnel
Option Grants 4,000,000 -- 4,000,000 4,000,000 -- 4,000,000
2006 Stock
Option Plan 1,500,00 1,500,000 -- 1,500,000 1,500,000
--------- --------- --------- --------- --------- ---------
Total 4,000,000 4,700,000 8,700,000 4,890,000 3,810,000 8,700,000
========= ========= ========= ========= ========= =========
F-24
The following table summarizes stock option activity and related information as
of and for the year ended December 31, 2006:
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ------------------
Outstanding at December 31, 2005 3,760,000 $0.01
Granted 1,190,000 0.69
Exercised -- --
Cancelled 60,000 1.17
---------- ------------------
Outstanding at December 31, 2006 4,890,000 $0.18
========== ==================
The following table summarizes all options outstanding and exercisable by price
range as of December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) NUMBER EXERCISABLE
---------------- ------------ ------------ ------------------ -------------------- -----------------
$0.01 4,000,000 5.32 $0.01 2,666,666 $0.01
$0.65 - $1.01 890,000 9.38 $0.92 57,500 $0.65
NOTE 5 - FIXED ASSETS
Fixed assets are summarized as follows (IN THOUSANDS):
DECEMBER 31,
--------------------------------------
2006 2005
-------------- ------------------
Computer and office equipment $ 37 $62
Furniture and fixtures 3 3
Tooling and product design 127 137
-------------- ------------------
167 202
Less: accumulated depreciation (59) (35)
-------------- ------------------
$108 $167
============== ==================
Total fixed asset depreciation expense totaled $42,000 and $31,000 for the years
ended December 31, 2006 and 2005, respectively
NOTE 6 - BUSINESS ACQUISITION AND INTANGIBLE ASSETS
The Company's intangible assets were recorded primarily as a result of the
acquisition of Nanodisplay, Inc ("Nano") in November 2005. Nano was purchased to
facilitate the Company's anticipated entry into the display market as Nano was a
leading designer of liquid crystal on silicon ("LCOS") HDTV technology and
maintained a workforce with the technical expertise required to integrate Nano's
technology into the Company's technology.
The aggregate purchase price was $478,000 including $98,000 of cash and
1,000,000 shares of common stock (500,000 shares were not valued at the
acquisition date because they were, and still are as of December 31, 2006, held
in escrow until certain milestones and conditions are met) valued at $380,000,
calculated using the average market price of the Company's common shares for one
week before and one week after the terms of the agreement were finalized. Nano's
financial information is incorporated into the consolidation of the Company
effective November 17, 2005, the effective date of the merger.
F-25
The following represents the PRELIMINARY allocation of the purchase price at
December 31, 2005 (IN THOUSANDS):
Fixed assets $ 5
Goodwill 542
-------------
Total assets acquired 547
Accounts payable and accrued liabilities (69)
-------------
Fair value of net assets acquired $ 478
=============
As previously discussed in Note 2, management performed an annual review of its
identified intangible assets during the fourth quarter of fiscal year 2006. In
connection with this review, Sysview management completed its final analysis,
which included re-assessing its preliminary allocation of the Nano purchase
price, and determining that the purchase price was more accurately allocated to
developed technology and technological expertise required to integrate the
developed technology into the Company's technology. Therefore, the Company
finalized the purchase price allocation at December 31, 2006 as follows (IN
THOUSANDS):
Fixed assets $ 5
Developed technology (estimated useful life of one year) 463
Technical integration expertise
(estimated useful life of one year) 79
-------------
Total assets acquired 547
Accounts payable and accrued liabilities (69)
-------------
Fair value of net assets acquired $ 478
=============
Amortization of intangible assets, included in research and development
expenses, totaled $555,000 for the year ended December 31, 2006. There was no
amortization of intangible assets for the year ended December 31, 2005.
After management's review and reallocation of intangible assets performed in the
fourth quarter of fiscal year 2006, the following summarizes the components of
intangible assets (IN THOUSANDS):
AS OF DECEMBER 31, 2006 AS OF DECEMBER 31, 2005
----------------------------- ----------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net Life
----- ------------ --- ----- ------------ --- ----
Developed technology $ 463 $(463) $-- $ 463 $-- $ 463 1 Year
Technical integration expertise 79 (79) -- 79 -- 79 1 Year
Other 13 (13) -- 13 -- 13 1 Year
----- --- ----- ---- ----- ------
Total $ 555 $(555) $-- $555 $-- $ 555
===== === ===== ==== ===== ======
PRO FORMA INFORMATION (UNAUDITED)
Nano's actual results of operations are included in the consolidated financial
statements from the date of acquisition. The Company's unaudited pro forma
statement of operations data set forth below (IN THOUSANDS, EXCEPT PER SHARE
DATA) gives effect to this acquisition using the purchase method as if Nano was
purchased on January 1, 2005. This pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the combined
financial position or results of operations for future periods or the financial
position or result of operations that would have been realized had the
acquisition occurred on January 1, 2005.
2006 2005
------------ ----------
Net sales $ 12,469 $ 7,848
Net loss (4,991) (3,349)
Basic and diluted net loss per share $ (0.21) $ (0.14)
F-26
NOTE 7 - LONG-TERM INVESTMENT
Long-term investment consists of an equity interest in CMOS Sensor, Inc.
("CMOS"), a California corporation, which is principally engaged in the research
and development of infrared sensors and CMOS sensors. During all periods
presented, the Company owned 16.1% of CMOS and accounted for the investment
using the cost method of accounting. As previously discussed in Note 2, the
Company recorded an impairment charge of $838,000 related to its investment in
CMOS. The Company's management and directors are of the opinion that the
long-term investment's new cost basis of $160,000 is reflective of the long-term
investment's underlying value at December 31, 2006.
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
During the year ended December 31, 2006 the Company issued 50,000 shares of
common stock for the conversion of 500 shares of Series A Stock as discussed
below.
PREFERRED STOCK ACTIVITY
SERIES A 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK INITIAL ISSUANCE AND ACTIVITY
On March 15, 2005, the Company completed a private placement with a group of
accredited investors for the sale of 18,650 shares of the Company's 5% Series A
Stock along with warrants, expiring five years from the date of issuance, to
purchase additional shares of the Company's common stock. The Series A Stock has
no voting rights.
The Series A Stock was priced at $100 per share and the Company received
proceeds of $1,865,000 less offering costs and expenses. Starboard Capital
Markets, LLC, a NASD member firm, acted as placement agent in the sale for which
it received $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. The
fair value of these warrants totaled $290,000 and such amount was charged to
other income (expense) and credited to additional paid-in capital during 2005.
The Company also incurred cash expenses totaling $50,000.
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 the Company's common stock on the
date of issuance of such shares.
At the time of issuance, total common stock issuable upon conversions of the
underlying Series A Stock and related warrants follows:
Series A Stock (1) 1,865,000
Maximum accrued dividends on the shares of Series A Stock (1) 279,750
Warrants issued to purchasers in private placement (2) 932,500
Warrants issued to placement agent in the private placement (1) 186,500
----------
3,263,750
==========
(1) Convertible at $1.00 per share, subject to anti-dilution provisions.
(2) Convertible at $2.00 per share, subject to anti-dilution provisions.
During the year ended December 31, 2006, $50,000 of Series A Stock (500 shares)
were converted into 50,000 shares of common stock.
F-27
SERIES A STOCK DIVIDENDS
The Company's Series A Stock accrues cumulative dividends at a rate of five
percent per annum, payable semiannually on July 1 and January 1. Dividends are
payable in cash, by accretion of the stated value or in shares of common stock.
Subject to certain terms and conditions, the decision whether to accrete
dividends to the stated value of the Series A Stock or to pay for dividends in
cash or in shares of common stock, is at the Company's discretion. To date, the
Company has not paid any cash dividends. During the years ended December 31,
2006 and 2005, Series A Stock dividends were approximately $81,000 and $78,000,
respectively, and recorded as a non-operating expense on the Company's statement
of operations.
SERIES B CONVERTIBLE PREFERRED STOCK
On August 8, 2006, the Company completed a private placement with a group of
accredited investors for the sale of 11,500 shares of the Company's Series B
Stock along with warrants, expiring three years from the date of issuance, to
purchase additional shares of the Company's stock. Pursuant to a registration
rights agreement (as discussed below), the Company filed a Form SB-2 on October
11, 2006, with the Securities and Exchange Commission ("SEC"), to register the
shares of common stock issuable upon conversion of the Series B Stock and upon
exercise of the warrants. The SEC declared the SB-2 effective on January 18,
2007.
At the time of issuance, total common stock issuable upon conversions of
underlying Series B Stock and related warrants follows:
Series B Stock (1) 1,150,000
Warrants issued to purchasers in private placement (2) 575,000
Warrants issued to placement agent in the private placement (2) 100,000
-----------
1,825,000
===========
(1) Convertible at $1.00 per share, subject to anti-dilution provisions.
(2) Convertible at $1.50 per share, subject to anti-dilution provisions.
The Series B Stock was priced at $100 per share and the Company received
proceeds of $1,150,000 less offering costs and expenses. Starboard Capital
Markets, LLC, a NASD member firm, acted as placement agent in the sale for which
it received $80,000 in commissions and 100,000 warrants to purchase shares of
the Company's common stock at an exercise price equal to $1.50 per share. The
fair value of these warrants totaled $26,000 and such amount was charged to
other income (expense) and credited to additional paid-in capital during the
year ended December 31, 2006.
The material terms of the Series B Stock are as follows:
SERIES B STOCK CONVERSION RIGHTS. All or any portion of the stated value of the
Series B Stock outstanding may be converted into common stock at anytime by the
investors. The initial fixed conversion price of the Series B Stock is $1.00 per
share ("Conversion Price"). The Conversion Price is subject to anti-dilution
protection adjustments, on a full ratchet basis, until the date that is twelve
months from the effective date of the Registration Statement required to be
filed pursuant to the Registration Rights Agreement, upon the Company's issuance
of additional shares of common stock, or securities convertible into common
stock, at a price that is less than the then Conversion Price.
REDEMPTION. On August 7, 2009 ("Redemption Date"), all of the outstanding Series
B Stock shall be redeemed for a per share redemption price equal to the stated
value on the Redemption Date ("Redemption Price"). The Redemption Price is
payable by the Company in cash or in shares of common stock at the Company's
discretion and shall be paid within five trading days after the Redemption Date.
In the event the Company elects to pay all or some of the Redemption Price in
shares of common stock, the shares of common stock to be delivered to the
Investors shall be valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Redemption Date.
RIGHT TO COMPEL CONVERSION. If, on any date after August 7, 2007, (A) the
closing market price for a share of the Company's common stock for ten
consecutive trading days equals at least $4.00 (subject to adjustment for
certain events), and (B) the average reported daily trading volume during such
ten-day period equals or exceeds 100,000 shares, then the Company shall have the
right, at its option, to convert, all, but not less than all, of the outstanding
shares of the Series B Stock at the Conversion Price; provided that the
Registration Statement shall be effective at all times during such 10-day period
and during the 30-day notice period to the Investors.
F-28
WARRANT TERMS. The Warrants grant Investors the right to purchase up to an
aggregate of 575,000 shares of common stock of the Company at an exercise price
of $1.50 per share. The Warrants expire on August 7, 2009 and must be exercised
by the payment of cash, except if there is no effective registration statement
covering the resale of the shares of common stock underlying the Warrants, at
which time an investor may exercise their Warrants on a cashless basis.
RESTRICTIONS ON CONVERSION OF SERIES B STOCK AND EXERCISE OF WARRANTS. No holder
of the Series B Stock is entitled to receive shares upon conversion of the
Series B Stock held by such holder if such receipt would cause such holder to be
deemed to beneficially own in excess of 4.999% of the outstanding shares of the
Company's common stock on the date of issuance of such shares (this provision
may be waived upon 61 days prior written notice to the Company). In addition, no
individual holder is entitled to receive shares upon conversion of the Series B
Stock if the transaction causes such holder to beneficially own in excess of
9.999% of the outstanding shares of the Company's common stock on the date of
issuance of such shares (this provision may be waived upon 61 days prior written
notice to the Company).
None of the individual holders of the Series B warrants are entitled to exercise
any warrant held by them, if the exercise causes the holder to beneficially own
in excess of 4.999% of the outstanding shares of the Company's common stock on
the date of issuance of such shares.
REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights Agreement
between the investors and the Company, the Company was obligated to file a
registration statement on Form SB-2 (which was filed on October 11, 2006)
registering the resale of shares of the Company's common stock issuable upon
conversion of the Series B Stock and exercise of the related warrants. The
Company was required to file the registration statement within 60 days following
August 8, 2006 and to have the registration statement declared effective by
December 6, 2006, which is 120 days following August 8, 2006. If the
registration statement was not timely filed, or declared effective within the
timeframe described, or if the registration is suspended other than as
permitted, in the Registration Rights Agreement, the Company will be obligated
to pay each Investor a fee equal to one percent of such investor's purchase
price of the Series B Stock for each 30 day period thereafter (pro rated for
partial periods), that such registration conditions are not satisfied, up to a
maximum of 12 months. Because the SEC did not declare the SB-2 effective until
January 18, 2007, the Company accrued $10,000, included in general and
administrative expense, for damages during the year ended December 31, 2006.
RIGHT OF FIRST REFUSAL. Subject to certain conditions, the Company has granted
the investors a right of first refusal, for a period of one year from the
effective date of the registration statement required to be filed in connection
with this transaction, to participate in any subsequent financing that the
Company conducts.
VOTING RIGHTS. Holders of the Series B Stock shall have no voting rights.
However, so long as any shares of Series B Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Series B Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series B Stock or alter or amend the
Series B Certificate of Designation, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a liquidation senior to
or otherwise PARI PASSU with the Series B Stock, (c) amend its certificate or
articles of incorporation or other charter documents so as to affect adversely
any rights of the holders of the Series B Stock, (d) increase the authorized
number of shares of the Series B Stock, or (e) enter into any agreement with
respect to the foregoing.
LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, and subject to the rights of the
holders of Series A Stock, the holders of the Series B Stock shall be entitled
to receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Series B Stock an amount equal to the stated value
per share before any distribution or payment shall be made to the holders of any
securities of the Company with rights junior to the Series B Stock, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the holders of the Series B Stock shall
be distributed among such holders ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full.
F-29
NOTE 9 - INCOME TAX
Provision for income taxes for all periods presented represents the minimum
franchise tax due, $800 per annum, in the State of California for each
California entity of the consolidated entity and prior years franchise taxes
paid in current periods. No provision for Hong Kong Profits Tax has been made
for the periods presented as the Company and its subsidiaries operating in Hong
Kong have no assessable profits during the years being reported.
The Company believes sufficient uncertainty exists regarding the realization of
net operating loss carryforwards and other timing differences for the periods
presented. Accordingly, a valuation allowance has been provided for the entire
amount related thereto. The valuation allowance increased by approximately
$1,029,000 and $596,000 during the years ended December 31, 2006 and 2005,
respectively.
As of December 31, 2006, the Company has available net operating loss
carryforwards for federal and state income tax purposes of approximately
$22,200,000 and $19,700,000 which expire principally through 2026 and 2011,
respectively. State net operating loss carryforwards are based on federal net
operating losses, which are limited to certain percentages and carryover periods
based on the year incurred. Pursuant to the Tax Reform Act of 1986, annual
utilization of the Company's net operating loss carryforwards may be limited if
a cumulative change in ownership of more than 50% is deemed to occur within any
three-year period.
The following table reconciles the statutory rates to the Company's
effective rate:
2006 2005
----------- -----------
U.S. and California statutory rate (%) (43.0) (43.0)
Change in valuation allowance 43.0 43.0
----------- -----------
- -
=========== ===========
The net deferred income tax asset consisted of the following:
2006 2005
------------ ------------
Deferred tax assets
Federal net operating loss carryforwards $ 7,791,000 $ 6,975,000
State net operating loss carryforwards 1,746,000 1,540,000
Capitalized R&D Expenses 932,000 932,000
Tax credit carryforwards 708,000 708,000
------------ ------------
11,177,000 10,155,000
Less valuation allowance 11,177,000 10,148,000
------------ ------------
-- 7,000
Deferred tax liability
Excess tax over book depreciation -- (7,000)
------------ ------------
Net deferred income tax asset $ -- $ --
============ ============
F-30
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases which
extend through November 2011. As of December 31, 2006, future minimum rental
commitments are as follows (IN THOUSANDS):
YEAR ENDING FUTURE MINIMUM
DECEMBER 31, LEASE PAYMENTS
---------------- --------------
2007 $ 261
2008 248
2009 1
2010 1
2011 1
--------------
Total $512
===============
BANK LINE OF CREDIT
The Company has a line of credit agreement ("LOC Agreement") to borrow up to
$2,500,000, bearing interest at the rate of prime (8.25% at December 31, 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 was originally due in full on
October 30, 2006. On December 18, 2006, Sysview extended the loan ("Extended
Agreement"), with the same terms, for 12 months. The new maturity date is
October 30, 2007. Upon certain events of default, the default variable interest
rate increases to prime plus 5.5%. The Company had $1,487,000 available for use
at December 31, 2006.
At December 31, 2006, Sysview was not in compliance with all of the Extended
Agreement debt covenants. Pursuant to a waiver letter from the lender dated
March 28, 2007, the lender agreed to forbear from exercising its rights and
remedies with respect to existing defaults under the Extended Agreement from the
date of the Extended Agreement through December 31, 2006. See Notes 1 and 12.
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 December 31, 2006 termination payments
totaling $490,000 remain in effect.
CONSULTING AGREEMENT
The Company entered into an Investor Relations Consulting Agreement dated
December 5, 2006, for a term of one year beginning January 1, 2007, payable
monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for
April, May and June; (iii) $8,500 for July, August and September; and (iv)
$9,000 for October, November, and December. Additionally, the Company agreed to
pay the consultant 90,000 warrants with an exercise price of $0.65 per share,
expiring in three years, with immediate vesting on January 1, 2007, and
exercisable at the rate of 7,500 the first day of each month during calendar
2007. The warrants will not be registered under federal or state securities
laws.
LITIGATION, CLAIMS AND ASSESSMENTS
The Company experiences routine litigation in the normal course of its business
and does not believe that any pending litigation will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
SERIES A PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of Series A Preferred Stock, the Company
executed a registration rights agreement ("Agreement") with the purchasers
thereof under which the Company agreed to register the common shares underlying
the Series A Stock and related warrants. The Agreement provides for liquidated
damages in the event the registration statement is not maintained continuously
effective for a period of two years following the March 15, 2005 closing date.
F-31
The liquidated damages total an amount equal to one percent (pro-rated for
partial months) of the purchase price of the Series A Stock for each thirty day
period effectiveness of a registration statement is not maintained and two
percent for each thirty day period the registration statement ceases to remain
effective. This registration, which was originally declared effective by the SEC
on July 7, 2005, became ineffective April 30, 2006. The Company updated the
original registration statement by filing amendments on June 6, 2006 and August
22, 2006, and the SEC declared the registration effective September 15, 2006. As
a result, the Company accrued $145,000, included in general and administrative
expense, for damages during the year ended December 31, 2006.
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Sysview operates in one segment, the design, development and delivery of various
imaging technology solutions, most notably scanners, as defined by SFAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131").
GEOGRAPHIC INFORMATION
During the years ended December 31, 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):
YEAR ENDED DECEMBER 31,
-----------------------------------
2006 2005
-------------- -----------------
U.S. $ 11,677 $ 6,828
Asia 405 706
Europe and other 387 314
-------------- -----------------
$ 12,469 $ 7,848
============== =================
Substantially all Sysview's identifiable assets are located in the U.S.
NOTE 12 - SUBSEQUENT EVENTS
COMMON STOCK TRANSACTIONS
On March 21, 2007, the Company entered into an agreement with Syscan Technology
Holdings, LTD whereby the Company agreed to forego any further collections
efforts, including legal action, in exchange for the cancellation of 2,600,000
shares of the Company's common stock beneficially owned by Syscan Technology
Holdings, LTD. In addition, both parties mutually agreed to release and
discharge any and all claims that each may have against the other party. The
Company's transfer agent cancelled the shares on March 29, 2007
LINE OF CREDIT
As previously discussed in Note 10, Sysview was not in compliance with all of
the Extended Agreement debt covenants at December 31, 2006. The Company has
remained out of compliance with the Extended Agreement debt covenants through
the date of this filing. Although the Company is currently working with the
lender to extend the waiver, the lender has not agreed to waive any debt
covenant violations subsequent to December 31, 2006. The Company had $987,000
available for use at March 29, 2007.
STOCK OPTION GRANTS
On March 28, 2007, the Board of Directors approved the issuance of 3,036,000
options to purchase the Company's common stock for employees and directors. One
third of the options vested immediately, one third vest on March 28, 2008 and
one third vest on March 28, 2009.
[END OF ANNUAL FINANCIAL INFORMATION]
F-32
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN OR THAT ARE
CURRENTLY DEEMED IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. THE
RISKS AND UNCERTAINTIES DESCRIBED IN THIS DOCUMENT AND OTHER RISKS AND
UNCERTAINTIES WHICH WE MAY FACE IN THE FUTURE WILL HAVE A GREATER IMPACT ON
THOSE WHO PURCHASE OUR COMMON STOCK. THESE PURCHASERS WILL PURCHASE OUR
COMMON STOCK AT THE MARKET PRICE OR AT A PRIVATELY NEGOTIATED PRICE AND WILL
RUN THE RISK OF LOSING THEIR ENTIRE INVESTMENT.
SYSVIEW TECHNOLOGY, INC.
2,963,750
SHARES OF COMMON STOCK
---------------
PROSPECTUS
----------------
_________________, 2007
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation provides that all our directors,
officers, employees and agents shall be entitled to be indemnified by us to the
fullest extent permitted under the Delaware General Corporation Law, provided
that they acted in good faith and that they reasoned their conduct or action was
in, or not opposed to, the best interest of our company.
Our Bylaws provide for indemnification of our officers, directors and
others who become a party to an action on our behalf by us to the fullest extent
not prohibited under the Delaware General Corporation Law. Further, we maintain
officer and director liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All such expenses will be paid by us.
Securities and Exchange Commission Registration Fee......... $ 493.92
Printing and Engraving Expenses............................. $ 1,000
Accounting Fees and Expenses................................ $ 10,000
Legal Fees and Expenses..................................... $ 35,000
Blue Sky Qualification Fees and Expenses.................... $ -0-
Miscellaneous............................................... $ 506.08
TOTAL....................................................... $47,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years, we sold the following unregistered securities:
On April 26, 2005 and March 30, 2006, we granted non-qualified options
to purchase up to a total of 3,700,000 and 300,000 shares of common stock,
respectively, to certain of our officers, directors, employees and consultants.
The options are exercisable for a period of seven years from the date of grant
at an exercise price of $0.01 per share. One-third of the options vested upon
grant, one-third vested on April 3, 2006 and one-third vested on April 2, 2007.
On April 9, 2007, pursuant to a net cashless exercise provision, we issued
100,000 of the shares underlying the options to each of Darwin Hu, William
Hawkins and David Clark, respectively. As of June 11, 2007 there remain
3,696,550 shares reserved for issuance in connection with non-qualified options.
On October 24, 2005, we issued an aggregate of 500,000 shares of our
common stock to the former shareholders of Nanodisplay, Inc., a California
corporation, in connection with an Agreement and Plan of Merger and
Reorganization by and among us, Nano Acquisition Corp. (our wholly-owned
subsidiary), Nanodisplay, Inc. and the shareholders of Nanodisplay, Inc.,
pursuant to which we acquired all of the issued and outstanding capital stock of
Nanodisplay, Inc.
II-1
On October 6, 2005, we issued 125,000 restricted shares to FG
Management Inc. ("FGM") for public/investor relations services. Subsequently, on
August 24, 2006, we entered into a certain letter agreement with FGM, pursuant
to the terms of which FGM agreed to the cancellation of such shares. As of the
date hereof, we have placed a stop order on the books of our transfer agent with
respect to such shares, which will be cancelled immediately upon our receipt of
the certificate representing the shares from FGM.
During the period from July 1, 2005 through September 30, 2005, we
issued an aggregate of 99,996 restricted shares to Investor Relations Group for
public/investor relations services.
On March 15, 2005, we sold $1,865,000 of our Series A Convertible
Preferred Stock. Starboard Capital Markets, LLC, an 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 our common
stock, par value $.001 per share at an exercise price equal $1.00 per share.
In connection with the financing, we also issued to the purchasers
common stock purchase warrants to purchase up to an aggregate of 932,500 shares
of our 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. We have
agreed, pursuant to a registration rights agreement, to register 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 May 18, 2006, we granted options to purchase up to a total of
660,000 shares of common stock to our officers, directors and employees pursuant
to our 2002 Amended and Restated Stock Option Plan. The options are exercisable
for a period of ten years from the date of grant at an exercise price of $1.01
per share. One-fourth of the options granted vest on the first anniversary,
one-fourth of the options granted vest on the second anniversary, one-fourth of
the options granted vest on the third anniversary and one-fourth of the options
vest on the fourth anniversary.
On May 16, 2006, we granted options to purchase up to a total of
230,000 shares of common stock to our officers, directors and employees pursuant
to our 2002 Amended and Restated Stock Option Plan. The options are exercisable
for a period of ten years from the date of grant at an exercise price of $0.65
per share. One-fourth of the options granted vest on the first anniversary,
one-fourth of the options granted vest on the second anniversary, one-fourth of
the options granted vest on the third anniversary and one-fourth of the options
vest on the fourth anniversary.
On August 8, 2006, we sold $1,150,000 of our Series B Convertible
Preferred Stock. Starboard Capital Markets, LLC, an NASD member firm, acted as
placement agent in the sale of the Preferred Stock, for which it received
$80,000 in commissions and 100,000 warrants to purchase shares of our common
stock, par value $.001 per share at an exercise price equal $1.50 per share.
In connection with the financing, we also issued to the purchasers
common stock purchase warrants to purchase up to an aggregate of 575,000 shares
of our Common Stock at an exercise price of $1.50 per share. The Warrants are
exercisable for a period of three years from the date of issuance. We have
agreed, pursuant to a registration rights agreement, to register 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 March 28, 2007, we granted options to purchase up to a total of
2,310,000 and 646,000 shares of common stock to our officers, directors and
employees pursuant to our 2002 Amended and Restated Stock Option Plan and 2006
Stock Option Plan, respectively. The options are exercisable for a period of ten
years from the date of grant at an exercise price of $0.70 per share. Under our
2002 Amended and Restated Stock Option Plan, one-fourth of the options granted
vest on the first anniversary, one-fourth of the options granted vest on the
second anniversary, one-fourth of the options granted vest on the third
II-2
anniversary and one-fourth of the options vest on the fourth anniversary. Under
our 2006 Stock Option Plan, one-third of the options vested upon grant,
one-third of the options granted vest on the first anniversary and one-third of
the options granted vest on the second anniversary.
Other than as specifically set forth above, all of the above offerings
and sales were deemed to be exempt under Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. In
each instance, the offerings and sales were made to a limited number of persons,
who were either (i) accredited investors, (ii) business associates of ours,
(iii) our employees, or (iv) our executive officers or directors. In addition,
the transfer of such securities was restricted by us in accordance with the
requirements of the Securities Act. With respect to the issuances to accredited
investors, in addition to representations by them, we have made independent
determinations that they were accredited or sophisticated investors, capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment. With respect to our business associates,
employees and executive officers or directors, in addition to representations by
them, they were provided with detailed information and had access to all
material information about us, and we have made independent determinations that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our filings
with the Securities and Exchange Commission.
ITEM 27. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed with this registration statement.
--------------------------------------------------------------------------------
2.1 Share Exchange Agreement (previously filed as exhibit 99.1 on
Form 8-K dated April 19, 2004).
3.1 Certificate of Incorporation dated February 15, 2002 (previously
filed as exhibit 3.1 on Form 10-KSB dated March 31, 2005).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation dated March 19, 2004 (previously filed as exhibit
3.2 on Form 10-KSB dated March 31, 2005).
3.3 Certificate of Designation of Preferences, Rights and Limitations
of Series A Preferred Stock as filed with the Secretary of State
of the State of Delaware on March 15, 2005 (previously filed as
exhibit 10.4 on Form 8-K dated March 21, 2005)
3.4 Amended and Restated Bylaws (previously filed as exhibit 3.4 on
Form 10-KSB dated March 31, 2005).
3.5 Certificate of Amendment to the Company's Certificate of
Incorporation dated June 23, 2006 (previously filed as exhibit
3.5 on Form 10-QSB dated August 21, 2006).
3.6 Certificate of Designation of Preferences, Rights and Limitations
of Series B Preferred Stock as filed with the Secretary of State
of the State of Delaware on June 10, 2006 (previously filed as
exhibit 10.4 on Form 8-K dated August 14, 2006)
5.1* Opinion of Richardson & Patel, LLP
II-3
10.1 Form of Convertible Preferred Stock and Common Stock Warrant
Purchase Agreement entered into by and between the Company and
the purchasers (previously filed as exhibit 10.1 on Form 8-K
dated March 21, 2005).
10.2 Form of Common Stock Purchase Warrant (previously filed as
exhibit 10.2 on Form 8-K dated March 21, 2005).
10.3 Form of Registration Rights Agreement (previously filed as
exhibit 10.3 on Form 8-K dated March 21, 2005).
10.4 2002 Amended and Restated Stock Option Plan (previously filed as
exhibit 10.4 on Form 10-KSB dated March 31, 2005).
10.5 Employment Agreement entered between the Company and Darwin Hu on
April 26, 2005 (previously filed as exhibit 10.5 on Form 8-K
dated May 2, 2005).
10.6 Employment Agreement entered between the Company and William
Hawkins on April 26, 2005 (previously filed as exhibit 10.6 on
Form 8-K dated May 2, 2005).
10.7 Employment Agreement entered between the Company and David Clark
on April 26, 2005 (previously filed as exhibit 10.7 on Form 8-K
dated May 2, 2005).
10.8 2006 Stock Option Plan (previously filed as exhibit 10.8 on Form
10-QSB dated August 21, 2006).
10.9 Form of Convertible Preferred Stock and Common Stock Warrant
Purchase Agreement entered into by and between the Company and
the purchasers (previously filed as exhibit 10.1 on Form 8-K
dated August 14, 2006).
10.10 Form of Common Stock Purchase Warrant (previously filed as
exhibit 10.2 on Form 8-K dated August 14, 2006).
10.11 Form of Registration Rights Agreement (previously filed as
exhibit 10.3 on Form 8-K dated August 14, 2006).
10.12 Lease Agreement by and between the Company and Airport II
Property Management, LLC dated August 9, 2006 (previously filed
as exhibit 10.12 on Form 10-KSB dated April 3, 2007).
14 Code of Ethics adopted by the Company's board of directors on
March 28, 2005 (previously filed as exhibit 14 on Form 10-KSB
dated March 31, 2005).
21 Subsidiaries of the Company (previously filed as exhibit 21 on
Form 10-KSB dated March 31, 2005).
23.1 Consent of Richardson & Patel, LLP (contained in Exhibit 5.1)
23.2* Consent of Clancy and Co., P.L.L.C.
--------------------------------------------------------------------------------
* Filed herewith
II-4
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
i. Include any prospectus required by section 10(a)(3) of the
Securities Act;
ii. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
From the low or high end of the estimated maximum offering range may be
reflected in the form of prospects filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
iii. include any additional or changed material information on the
plan of distribution.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of San
Jose, State of California on June 15, 2007.
SYSVIEW TECHNOLOGY, INC.
By: /s/ Darwin Hu
---------------------
Name: Darwin Hu
Title: Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates stated.
----------------------- --------------------------------------- ----------------
Person Capacity Date
----------------------- -------------------------------------- ----------------
/S/ DARWIN HU Chairman and Chief Executive Officer June 15, 2007
------------- (Principal Executive Officer)
Darwin Hu
/S/ WILLIAM HAWKINS Chief Operating Officer, June 15,2007
------------------- Principal Accounting Officer,
William Hawkins Acting Chief Financial Officer,
Secretary and Director
/S/ DAVID CLARK Senior Vice President of June 15, 2007
--------------- Business Development and Director
David Clark
_*____________ Director June 15, 2007
--------------
Lawrence Liang
*By: DARWIN HU
Darwin Hu, attorney-in fact