UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-25839
SYSVIEW TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3134518
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
1772 TECHNOLOGY DRIVE
SAN JOSE, CALIFORNIA 95110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
408-436-9888 EXT. 207
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The number of shares of Common Stock outstanding as of July 31, 2007 was
21,873,019.
-------------------------------------------
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2 of Part I
of this report include forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "proposed," "intended," or "continue" or the negative
of these terms or other comparable terminology. You should read statements that
contain these words carefully, because they discuss our expectations about our
future operating results or our future financial condition or state other
"forward-looking" information. There may be events in the future that we are not
able to accurately predict or control. Before you invest in our securities, you
should be aware that the occurrence of any of the events described in this
Quarterly Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events,
the trading price of our securities could decline and you could lose all or part
of your investment. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
growth rates, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report to conform these statements to actual results.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2007 2006
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 772 $ 1,333
Trade receivables 2,912 1,813
Inventories 1,477 1,642
Prepaid expenses and other current assets 117 73
-------- --------
TOTAL CURRENT ASSETS 5,278 4,861
Fixed assets, net 154 108
Long-term investment 160 160
-------- --------
TOTAL ASSETS $ 5,592 $ 5,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 1,513 $ 1,013
Trade payables to related parties 364 952
Trade payables 452 198
Other payables and accruals 323 506
Accrued dividends on Series A 5% cumulative
convertible preferred stock 191 152
-------- --------
TOTAL CURRENT LIABILITIES 2,843 2,821
Other liabilities:
Liability under derivative contracts 266 229
-------- --------
TOTAL LIABILITIES 3,109 3,050
Commitments and contingencies (Note 9)
Convertible preferred stock, $.001 par value, 2,000 authorized:
Series A 5% cumulative convertible preferred stock, 15 and 16 shares issued 1,187 957
and outstanding at June 30, 2007 and December 31, 2006, respectively;
liquidation value of $1,539 and $1,565 at June 30, 2007 and December 31,
2006, respectively
Series B convertible preferred stock, 11.5 shares issued and outstanding at 342 152
June 30, 2007 and December 31, 2006; liquidation value of
$1,150 at June 30, 2007 and December 31, 2006
Stockholders' equity:
Common stock $.001par value, 50,000 authorized, 22,373 shares issued 22 24
and 21,873 outstanding at June 30, 2007 and 24,642 shares issued
and 24,142 outstanding at December 31, 2006 (500 shares held in escrow)
Additional paid-in capital 30,767 29,651
Accumulated deficit (29,835) (28,705)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 954 970
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,592 $ 5,129
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-3-
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------- ------------------------
2007 2006 2007 2006
-------- -------- -------- --------
NET SALES $ 3,696 $ 2,539 $ 7,823 $ 4,977
COST OF SALES 2,150 1,660 4,634 3,276
-------- -------- -------- --------
GROSS PROFIT 1,546 879 3,189 1,701
Operating expenses:
Selling and marketing 362 300 762 593
General and administrative 613 679 1,528 1,287
Research and development 749 469 1,526 865
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 1,724 1,448 3,816 2,745
-------- -------- -------- --------
OPERATING LOSS (178) (569) (627) (1,044)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Change in fair value of derivative instruments 331 (518) (37) (310)
Other 11 (25) 20 (30)
-------- -------- -------- --------
TOTAL OTHER INCOME (EXPENSE) 342 (543) (17) (340)
-------- -------- -------- --------
Net income (loss) before income taxes 164 (1,112) (644) (1,384)
Provision for income taxes 2 -- 2 --
-------- -------- -------- --------
Net income (loss) 162 (1,112) (646) (1,384)
Dividend on Series A and accretion of Series A
and Series B preferred stock redemption value (243) (147) (484) (295)
-------- -------- -------- --------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (81) $ (1,259) $ (1,130) $ (1,679)
======== ======== ======== ========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.00) $ (0.05) $ (0.05) $ (0.07)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
AND DILUTED 21,805 24,092 22,815 24,092
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-4-
SYSVIEW TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
2007 2006
------- -------
OPERATING ACTIVITIES
Net loss available to common stockholders $(1,130) $(1,679)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation expense 21 22
Stock-based compensation cost - options 1,080 642
Fair value of warrants issued for services rendered 8 --
Change in fair value of derivative instruments 38 310
Accretion of Series A and Series B preferred
stock redemption value 440 258
Changes in operating assets and liabilities:
Trade receivables (1,099) 400
Inventories 165 (127)
Prepaid expenses and other current assets (44) (30)
Accrued dividends on Series A 5% cumulative
convertible stock 44 37
Trade payables to related parties (588) 34
Trade payables and other current liabilities 71 (10)
------- -------
CASH USED BY OPERATING ACTIVITIES (994) (143)
------- -------
INVESTING ACTIVITIES
Capital expenditures (67) (215)
------- -------
CASH USED BY INVESTING ACTIVITIES (67) (215)
------- -------
FINANCING ACTIVITIES
Advances on bank line of credit 500 --
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 500 --
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (561) (358)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,333 1,426
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 772 $ 1,068
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock acquired from related party $ 2 $ --
======= =======
Conversion of series A 5% cumulative
convertible preferred stock to common stock $ 26 $ --
======= =======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
-5-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
ORGANIZATION
Sysview Technology, Inc. ("Sysview" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices ("SOHO"), professional practices as well as consumers
(referred to herein collectively as "Enterprises"). Sysview is a market-leader
in providing USB-powered scanning solutions to a wide variety of industries and
market applications. The Company's patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed in both business
and personal use. In addition, Sysview is involved in the research and
development of certain technologies related to the field of high definition
("HD") display.
Syscan, Inc., the Company's wholly-owned subsidiary, was incorporated in
California in 1995 to develop and manufacture a new generation of contact image
sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging
sensor devices. During the late 1990s, the Company established many technical
milestones and was granted numerous patents for its linear imaging technology.
The Company's patented CIS and mobile imaging scanner technology provides high
quality images at extremely low power consumption levels allowing delivery of
compact scanners in a form ideally suited for laptop or desktop computer users
who need a small light weight device to scan or fax documents.
The Company's business model was developed around intellectual property ("IP")
driven products sold primarily to original equipment manufacturers ("OEM"),
private label brands and value added resellers ("VAR") and can be found in a
variety of applications, including but not limited, to the following:
o Document and information management;
o Identification card scanners;
o Passport security scanners;
o Bank note and check verification;
o Business card readers;
o Barcode scanning; and
o Optical mark readers used in lottery terminals.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Sysview have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all information and disclosures necessary for a presentation of
the Company's financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the United States
("GAAP").
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results may differ from these estimates. The results of
operations for the period ended June 30, 2007 are not necessarily indicative of
the operating results that may be expected for the entire year ending December
31, 2007. The interim financial statements should be read in conjunction with
the financial statements in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2006, filed with the Securities and Exchange Commission
("SEC") on April 3, 2007.
The consolidated financial statements include the accounts of Sysview and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
-6-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Certain accounts have been reclassified to conform to the current period
presentation. Such reclassifications did not affect total net sales, operating
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.
-7-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 3 - RELATED-PARTY TRANSACTIONS
RELATED-PARTY PURCHASES
The Company purchases the majority of its finished scanner imaging products from
Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of Sysview's majority stockholder.
The Company's Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He
resigned from STH effective December 2004.
Purchases from SLL totaled $2,143,000 and $4,321,000 for the three and six
months ended June 30, 2007, respectively and $1,845,000 and $3,254,000 for the
three and six months ended June 30, 2006, respectively. All purchases from SLL
were carried out in the normal course of business. As a result of these
purchases, the Company was liable to SLL for $364,000 and $952,000 at June 30,
2007 and December 31, 2006, respectively.
COMMON STOCK ACQUIRED FROM RELATED PARTY
On March 21, 2007, the Company entered into an agreement with STH whereby the
Company agreed to forego any further collection efforts, including legal action,
related to loans that were previously made by the Company to STH, which were
never repaid by STH. In exchange, STH agreed to the cancellation of 2,600,000
shares of the Company's common stock beneficially owned by STH. In addition,
both parties mutually agreed to release and discharge any and all claims that
each may have against the other party. The stock certificates were subsequently
cancelled by the Company's transfer agent. The Company recorded the stock
acquisition as a decrease to common stock with the corresponding offset to
additional paid in capital during the first quarter of fiscal 2007.
NOTE 4 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk are cash balances
maintained in excess of federal depository insurance limits and trade
receivables.
CASH AND CASH EQUIVALENTS
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up
to $100,000. As of June 30, 2007, the Company had consolidated balances of
approximately $469,000, which were not guaranteed by the FDIC. The Company has
not experienced any losses in such accounts and believes the exposure is
minimal.
MAJOR CUSTOMERS AND TRADE RECEIVABLES
A relatively small number of customers account for a significant percentage of
the Company's sales. The percentage of sales derived from significant customers
is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ------------------------
2007 2006 2007 2006
------------ ------------ ----------- ---------
Customer A 24% 37% 28% 37%
Customer B 13 29 18 15
Customer C 12 4 14 19
Customer D 13 - 11 -
Customer E 12 - 6 -
Customer F 11 12 8 10
Trade receivables from these customers totaled $2,602,000 at June 30, 2007. As
of June 30, 2007 all the Company's trade receivables were unsecured.
NOTE 5 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all finished scanner imaging products from
one vendor that is also a wholly-owned subsidiary of the parent company of its
majority stockholder. See Note 3. If this vendor became unable to provide
materials in a timely manner and the Company was unable to find alternative
vendors, the Company's business, operating results and financial condition would
be materially adversely affected.
-8-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 6 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Sysview has several stock-based employee compensation plans, which are more
fully described in the Company's 2006 Annual Report on Form 10-KSB.
Effective January 1, 2006 Sysview adopted the fair value recognition provisions
of SFAS 123R, SHARE-BASED Payments ("SFAS 123R"), using the modified prospective
application method. Under this transition method, compensation cost recognized
for the three and six months ended June 30, 2007 and 2006, includes the
applicable amounts of: (a) compensation expense of all stock-based payments
granted prior to, but not yet vested as of January 1, 2006 (based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123 and the Accounting Principles Board ("APB") 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES ("APB 25")), and (b) compensation expense for all
stock-based payments granted subsequent to January 1, 2006 (based on the
grant-date fair value estimated in accordance with the new provisions of SFAS
123R).
The following table sets forth the total stock-based compensation expense
included in the Condensed Consolidated Statements of Operations (IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2007 2006 2007 2006
----------- ----------- ------------ ----------
Selling and marketing $ 19 $ 14 $ 92 $ 25
General and administrative 130 290 638 561
Research and development 117 43 350 56
----------- ----------- ------------ ----------
Total $266 $347 $ 1,080 $642
=========== =========== ============ ==========
At June 30, 2007, the Company had approximately $1,210,000 of total unrecognized
compensation cost related to stock options. This cost is expected to be
recognized over a weighted-average period of approximately 20 months.
STOCK OPTIONS
The following table summarizes stock option activity and related information for
the six months ended June 30, 2007:
WEIGHTED-AVERAGE
EXERCISE
OPTIONS PRICE
---------- -------------
Outstanding at December 31, 2006 4,890,000 $0.18
Granted 3,036,000 0.70
Exercised (300,000) (0.01)
Cancelled (83,450) (0.67)
---------- -------------
Outstanding at June 30, 2007 7,542,550 $0.39
========== =============
-9-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
The following table summarizes all options outstanding and exercisable by price
range as of June 30, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
OUTSTANDING EXERCISABLE
------------------ --------------- ---------------- ------------- --------------- -------------
$0.01 3,696,550 4.82 $0.01 3,696,550 $0.01
$0.65 - $0.70 3,186,000 9.68 $0.70 1,042,833 $0.70
$1.01 660,000 8.89 $1.01 303,333 $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 and six months ended June 30, 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 first quarter of fiscal 2007. The Company's
transfer agent subsequently cancelled the shares.
On April 12, 2007, the Company issued 300,000 shares of common stock upon the
exercise of employee stock options by the Company's principal officers in a
cashless exercise.
..
On June 22, 2007, the Company issued 30,927 shares of common stock resulting
from the conversion of $26,500 (265 shares) of Series A 5% cumulative
convertible preferred stock ("Series A Stock") and the related accrued dividend
shares of 4,427 as discussed below.
PREFERRED STOCK ACTIVITY
SERIES A 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On June 22, 2007, 265 shares of Series A Stock ($26,500) and the related accrued
dividend shares of 4,427 were converted into 30,927 shares of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
The Company had no Series B Convertible Preferred Stock ("Series B Stock")
activity during the six months ended June 30, 2007.
-10-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 three and six months ended
June 30, 2007, Series A Stock dividends were approximately $23,000 and $44,000,
respectively. During the three and six months ended June 30, 2006, Series A
Stock dividends were approximately $17,000 and $37,000, respectively. Series A
Stock dividends are included as a non-operating expense on the Company's
consolidated statement of operations.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS 133"), and EITF Abstract No. 00-19, ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS ("EITF 00-19"), the Company's Series A Stock and related
warrants and the Series B Stock and related warrants, are deemed derivative
instruments as a result of the embedded conversion feature. Accordingly, the
fair value of these derivative instruments has been recorded in the Company's
consolidated balance sheet as a liability with the corresponding amount as a
discount to the Series A Stock and Series B Stock, respectively. The discounts
are being accreted, on a straight-line basis, from the respective issuance date
through the respective redemption date adjusted for conversions and are
disclosed as a non-operating expense on the Company's consolidated statement of
operations. Accretion of the preferred stock redemption value, for both Series A
and Series B, for the three and six months ended June 30, 2007 was approximately
$220,000 and $440,000, respectively. Accretion of the Series A preferred stock
redemption value for the three and six months ended June 30, 2006 was
approximately $130,000 and $258,000, respectively. There was no Series B
accretion during the three and six months ended June 30, 2006 as the stock was
not issued until August 2006.
The increase (decrease) in the fair value of the liability for derivative
contracts, for both Series A and Series B, totaled approximately ($331,000) and
$37,000 for the three and six months ended June 30, 2007, respectively. The
increase in the fair value of the liability for the Series A derivative contract
totaled approximately $518,000 and $310,000 for the three and six months ended
June 30, 2006, respectively. The offsetting adjustment to the change in the fair
value of the liability for derivative contracts is disclosed with other income
(expense) in the consolidated statements of operations.
The Company computes fair value of these derivatives using the Black-Scholes
valuation model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's derivative instruments have characteristics significantly different
from traded options, and the input assumptions used in the model can materially
affect the fair value estimate.
The assumptions used in the Black-Scholes valuation model to estimate fair value
of each derivative instrument and the resulting weighted average estimated value
of the Series A Stock derivative liability and the Series B Stock derivative
liability as of June 30, 2007 and 2006 are as follows:
JUNE 30,
--------------------------
2007 2006
------------- ---------
Weighted average estimated values per share $0.06 $0.74
Expected life in years 3.0 3.0
Expected volatility 31% 64%
Expected dividend yield 0% 0%
Risk free interest rate 5.3% 5%
-11-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases which
extend through November 2011. Future minimum rental commitments as of June 30,
2007 are as follows (IN THOUSANDS):
FUTURE
MINIMUM
YEAR ENDING LEASE
JUNE 30, PAYMENTS
----------------- -----------
2008 $ 285
2009 123
2010 1
2011 1
-----------
Total $ 410
===========
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 June 30, 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 June
30, 2007.
At June 30, 2007, Sysview was not in compliance with all of the LOC Agreement
debt covenants. Pursuant to a waiver letter from the lender dated July 26, 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 June 30, 2007. Although the lender redefined certain debt
covenants defined by the LOC Agreement during the second quarter of fiscal 2007,
the Company is working to further redefine additional debt covenants to more
accurately assess the Company's financial position and results of operations.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with its executive officers which
extend through 2008. The agreements provide for a base salary, annual bonus to
be determined by the Board of Directors, termination payments, stock options,
non-competition provisions, and other terms and conditions of employment. In
addition, the Company maintains employment agreements with other key employees
with similar terms and conditions. As of June 30, 2007 termination payments
totaling $484,000 are in effect.
CONSULTING AGREEMENT
The Company entered into an Investor Relations Consulting Agreement dated
December 5, 2006, for a term of one year beginning January 1, 2007, payable
monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for
April, May and June; (iii) $8,500 for July, August and September; and (iv)
$9,000 for October, November, and December. Additionally, the Company agreed to
pay the consultant 90,000 warrants with an exercise price of $0.65 per share,
expiring in three years, with immediate vesting on January 1, 2007, and
exercisable at the rate of 7,500 options the first day of each month during
calendar 2007. In April 2007, the Company entered a separate warrant agreement
that amended terms of the warrants awarded in the December 5, 2006 agreement.
-12-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Under the April 2007 agreement, the warrants shall vest 7,500 per month on the
first day of each month commencing on January 1, 2007 and are immediately
exercisable upon vesting. In the event the consulting agreement is terminated
prior to December 1, 2007, all unvested warrants shall be immediately cancelled.
The warrants will not be registered under federal or state securities laws. The
fair value of these warrants, as determined by the Black-Scholes valuation
model, totaled approximately $18,000 and is amortized ratably over the vesting
period. As such, $4,000 and $8,000 was charged to general and administrative
expense and credited to additional paid-in capital during the three and six
months ended June 30, 2007, respectively.
SERIES B PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of a registration rights agreement ("Agreement") between
the investors and the Company, the Company was obligated to file a registration
statement on Form SB-2 (which was filed on October 11, 2006) registering the
resale of shares of the Company's common stock issuable upon conversion of the
Series B Stock and exercise of the related warrants. The Company was required to
file the registration statement within 60 days following August 8, 2006 and to
have the registration statement declared effective by December 6, 2006, which is
120 days following August 8, 2006. If the registration statement was not timely
filed, or declared effective within the timeframe described, or if the
registration was suspended other than as permitted in the Registration Rights
Agreement, the Company was obligated to pay each Investor a fee equal to one
percent of such investor's purchase price of the Series B Stock for each 30 day
period thereafter (pro rated for partial periods), that such registration
conditions are not satisfied, up to a maximum of 12 months. Because the SEC did
not declare the SB-2 effective until January 18, 2007, the Company accrued
approximately $7,000, included in general and administrative expense, for
damages during the first quarter of fiscal 2007.
LITIGATION, CLAIMS AND ASSESSMENTS
The Company experiences routine litigation in the normal course of its business
and does not believe that any pending litigation will have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Sysview currently operates in one segment, the design, development and delivery
of various imaging technology solutions, most notably scanners, as defined by
SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("SFAS 131").
GEOGRAPHIC INFORMATION
During the three and six months ended June 30, 2007 and 2006, Sysview recorded
net sales throughout the U.S., Asia and Europe as determined by the final
destination of the product. The following table summarizes total net sales
attributable to significant countries (IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------
2007 2006 2007 2006
------------------------------------------------------------------------------
U.S. $ 3,538 $ 2,366 $ 7,539 $ 4,587
Asia - 88 - 206
Europe and other 158 85 284 184
------------------------------------------------------------------------------
$ 3,696 $ 2,539 $ 7,823 $ 4,977
==============================================================================
-13-
SYSVIEW TECHNOLOGY, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Presented below is information regarding identifiable assets, classified by
operations located in the U.S., Europe and Asia (IN THOUSANDS):
JUNE 30, DECEMBER
2007 31, 2006
------------------------------
U.S. $ 5,328 $ 4,986
Asia 128 84
Europe 136 59
------------------------------
$ 5,592 $ 5,129
==============================
Assets located in Asia relate to tooling equipment required to manufacture
Sysview's product. Assets located in Europe relate to the Company's field
service, sales, distribution and inventory management in the Netherlands.
-14-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Sysview Technology,
Inc.'s ("Sysview" or "Company") unaudited condensed consolidated financial
statements and notes included herein. The results described below are not
necessarily indicative of the results to be expected in any future period.
Certain statements in this discussion and analysis, including statements
regarding our strategy, financial performance and revenue sources, are
forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements. Readers are referred to
Sysview's Annual Report on Form 10-KSB for the year ended December 31, 2006 as
filed with the Securities and Exchange Commission on April 3, 2007.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying unaudited
condensed consolidated financial statements and notes to help provide an
understanding of our financial condition, changes in financial condition and
results of operations. The MD&A section is organized as follows:
o OVERVIEW. This section provides a general description of the Company's
business, as well as recent developments that we believe are important in
understanding the results of operations and to anticipate future trends in
those operations.
o CRITICAL ACCOUNTING POLICIES. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
o RESULTS OF OPERATIONS. This section provides an analysis of our results of
operations for the three and six months ended June 30, 2007 compared to the
three and six months ended June 30, 2006. A brief description of certain
aspects, transactions and events is provided, including related-party
transactions that impact the comparability of the results being analyzed.
o LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of our
financial condition and cash flows as of and for the six months ended June
30, 2007 as compared to the six months ended June 30, 2006.
OVERVIEW
Our MD&A contains statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors
discussed in this report, as well as factors not within our control. We
undertake no duty to update any forward-looking statement to conform the
statement to actual results or changes in our expectations.
We are in the business of designing, developing and delivering imaging
technology solutions. We currently have fourteen patents issued in the United
States and five patents issued in Taiwan. Additionally, we have five patents
currently pending with the United States Patent and Trademark Office, four
relate to our high definition ("HD") display technology and one relates to our
document/image-capture technology. We focus our research and development toward
new deliverable and marketable technologies. We sell our products to customers
throughout the world, including the United States, Canada, Europe, South
America, Australia and Asia.
Our strategy includes a plan to expand our document/image-capture product line
and technology while leveraging our assets in other areas of the imaging
industry. We are actively shipping six groups of image-capture products. We have
expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future in response to the increased market
demand for faster and easier-to-use products as well as increased security to
meet the growing need for information protection, including identity and
financial transaction protection.
-15-
CRITICAL ACCOUNTING POLICIES
Our MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, trade receivables and allowance for
doubtful accounts, inventories, intangible and long-lived assets, and income
taxes. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our consolidated financial
statements:
REVENUE RECOGNITION
Revenues consist of sales of merchandise, including optical image capturing
devices, modules of optical image capturing devices, optical image chips and
other optoelectronic products. Revenue is recognized when the product is shipped
or delivered and the risks, rewards and title of ownership have transferred to
the customer. We recognize some shipping and handling fees as revenue, and the
related expenses as a component of cost of sales. All internal handling charges
are included with selling and marketing expense. Historically, sales returns
have not been significant. As such, we do not record a reduction to revenue for
estimated product returns in the same period that the related revenue is
recorded.
INVENTORY AND WARRANTY RESERVES
We establish inventory reserves for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory and
its estimated realizable value based upon assumptions about future demand and
market conditions. If actual demand and market conditions are less favorable
than those projected by management, additional inventory reserves could be
required. As of June 30, 2007, we had no inventory reserve. Currently, we
purchase the majority of our finished scanner imaging products from Syscan Lab
Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited
("STH"), the parent company of our majority stockholder. SLL warrants the
products it manufactures for us against defects in material and workmanship for
a period of 18 months after the completion of manufacture. After such 18 month
period, SLL provides product repair services for us at its customary hourly
repair rate plus the cost of any parts, components, or items necessary to repair
the products. As a result of the product warranty provided by SLL, Sysview does
not record a product warranty reserve.
RELATED-PARTY TRANSACTIONS
We have significant related-party transactions and agreements, which we believe
have been accounted for at fair value. We utilized our best estimate of the
value of these transactions and agreements. Had alternative assumptions been
used, the values obtained may have been different.
RELATED-PARTY PURCHASES
The Company purchases the majority of its finished scanner imaging products from
SLL as discussed above. Our Chairman and CEO, Darwin Hu, was formerly the CEO of
STH. He resigned from STH effective December 2004.
Purchases from SLL totaled $2,143,000 and $4,321,000 for the three and six
months ended June 30, 2007, respectively and $1,845,000 and $3,254,000 for the
three and six months ended June 30, 2006, respectively. All purchases from SLL
were carried out in the normal course of business. As a result of these
purchases, the Company was liable to SLL for $364,000 and $952,000 at June 30,
2007 and December 31, 2006, respectively.
-16-
COMMON STOCK ACQUIRED FROM RELATED PARTY
On March 21, 2007, we entered into an agreement with STH whereby we agreed to
forego any further collection efforts, including legal action, related to loans
that we previously made to STH, which were never repaid by STH. In exchange, STH
agreed to the cancellation of 2,600,000 shares of our common stock beneficially
owned by STH. In addition, both parties mutually agreed to release and discharge
any and all claims that each may have against the other party. The stock
certificates were subsequently cancelled by the Company's transfer agent.
INTANGIBLE AND LONG-LIVED ASSETS
We evaluate our intangible assets and long-lived assets, which represent
goodwill, long-term investments, and fixed assets, for impairment annually or
more frequently if we believe indicators of impairment exist. Significant
management judgment is required during the evaluation, including the forecasts
of future operating results. The estimates we have used are consistent with the
plans and estimates that we use to manage our business. It is possible, however,
that the plans and estimates used may be incorrect. If our actual results, or
the plans and estimates used in future impairment analyses, are lower than the
original estimates used to assess the recoverability of these assets, we could
incur additional impairment charges. We had no such asset impairments during the
three or six months ended June 30, 2007.
INCOME TAXES
We utilize the liability method of accounting for income taxes. Deferred income
tax assets and liabilities are calculated as the difference between the
financial statements and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. We record a valuation allowance to reduce our deferred tax
assets to the amount that we believe is more likely than not to be realized. In
assessing the need for a valuation allowance, we consider all positive and
negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies, and recent financial
performance.
The application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws themselves are subject to
change as a result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the actual income taxes
may be materially different from our estimates. As a result of our analysis, we
concluded that a full valuation allowance against our net deferred tax assets is
appropriate at June 30, 2007.
CONTINGENCIES
From time to time, we are involved in disputes, litigation and other legal
proceedings. We record a charge equal to at least the minimum estimated
liability for a loss contingency when both of the following conditions are met:
(i) information available prior to issuance of the financial statements
indicates that it is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and (ii) the range of loss
can be reasonably estimated. However, the actual liability in any such
litigation may be materially different from our estimates, which could result in
the need to record additional costs. Currently, we have no outstanding legal
proceedings or claims, which require a loss contingency.
-17-
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
We account for our Series A 5% cumulative convertible preferred stock ("Series A
Stock") and our Series B convertible preferred stock ("Series B Stock") pursuant
to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS
133") and the Emerging Issues Task Force ("EITF") Abstract 00-19, ACCOUNTING FOR
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 requires all share-based payments, including grants of
employee stock options and warrants, to be recognized in our financial
statements based on their respective grant date fair values. Under this
standard, the fair value of each share-based payment award is estimated on the
date of grant using an option pricing model that meets certain requirements. We
currently use the Black-Scholes option pricing model to estimate the fair value
of our share-based payment awards. The Black-Scholes model meets the
requirements of SFAS 123R; however, the fair values generated by the model may
not be indicative of the actual fair values of our awards as it does not
consider certain factors important to our awards, such as continued employment,
periodic vesting requirements and limited transferability.
The determination of the fair value of share-based payment awards utilizing the
Black-Scholes model is affected by our stock price and a number of assumptions,
including expected volatility, expected life, risk-free interest rate and
expected dividends. We use the historical volatility for our common stock as the
expected volatility assumption required in the Black-Scholes model, which could
be significantly different than actual volatility. The expected life of the
awards is based on historical and other economic data trended into the future.
The risk-free interest rate assumption is based on observed interest rates
appropriate for the terms of our awards. The dividend yield assumption is based
on our history and expectation of dividend payouts. Forfeitures are estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
Stock-based compensation expense recognized in our financial statements
beginning January 1, 2006 and thereafter is based on awards that are ultimately
expected to vest. We evaluate the assumptions used to value our awards on a
quarterly basis. If factors change and we employ different assumptions,
stock-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. Future
stock-based compensation expense and unearned stock-based compensation will
increase to the extent that we grant additional equity awards to employees.
-18-
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of operations for
the three and six months ended June 30, 2007 compared to the three and six
months ended June 30, 2006 (IN THOUSANDS):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ----------------------------------------
2007 2006 $ % 2007 2006 $ %
---- ---- --- --- ---- ---- --- ----
Net sales $3,696 $ 2,539 $1,157 46% $7,823 $ 4,977 $2,846 57%
Cost of sales 2,150 1,660 490 30 4,634 3,276 1,358 41
As a percentage of sales 58% 65% 59% 66%
Selling and marketing expense 362 300 62 21 762 593 169 28
General and administrative expense 613 679 (66) (10) 1,528 1,287 241 19
Research and development expense 749 469 280 60 1,526 865 661 76
Total other income (expense) 342 (543) NM NM (17) (340) NM NM
Dividend on 5% convertible
preferred stock and accretion of
preferred stock redemption value (243) (147 NM NM (484) (295) NM NM
NM = Not Meaningful
NET SALES
The significant increase in net sales during both the three and the six months
ended June 30, 2007 as compared to the three and six months ended June 30, 2006
was attributable to the following:
o The overall growth of the document/image-capture market resulting from
an increased market demand for products that manage how information is
retrieved, stored, shared and disseminated;
o The increased end-user market penetration, including distribution
channel expansion, by both us and our largest customers;
o The expansion of our customer base;
o The increased market acceptance of our more recently introduced
products, which bear higher margins;
o Our sales during the first two quarters of fiscal 2007 experienced
substantially less of a cyclical downturn as compared to the first two
quarters of fiscal 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;
o Our increased use of Value Added Reseller ("VAR") channel
distributions; and
o The growth in the small office home office ("SOHO") markets, and the
result of our efforts to appeal to customers in the SOHO market.
During the three months ended June 30, 2007, we successfully expanded our
significant customer base, which decreases our risk of dependency on a small
number of significant customers. During the three months ended June 30, 2007,
85% of sales were generated from six customers as compared to 78% of sales
generated from three customers during the same period in fiscal 2006. During the
six months ended June 30, 2007, 85% of our sales were generated from six
customers as compared to 81% of sales generated from three customers during the
same period in fiscal 2006. Although we will continue to focus on expanding our
significant customers, 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 in the past and will
likely continue to vary from period to period.
-19-
Although we expect net sales to increase as we continue to expand our business
and offer additional products in the document/image-capture market, there can be
no assurance that our net sales will increase.
COST OF SALES, INCLUDING GROSS PROFIT
Cost of sales includes all direct costs related to the transfer of scanners,
imaging modules and services related to the delivery of those items manufactured
in China, and to a lesser extent engineering services and software royalties.
Cost of sales increased in absolute dollars as a result of the increased net
sales during both the three and six months ended June 30, 2007 as compared to
the three and six months ended June 30, 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 our sales,
marketing and customer account management functions and to a lesser extent,
market development and promotional funds for our retail distribution channels,
tradeshows, website support, warehousing, logistics and certain sales
representative fees. The increase during the three months ended June 30, 2007 as
compared to the three months ended June 30, 2006 was primarily attributable to
our presence at various trade shows, which are key to the promotion of our
product.
The increase during the six months ended June 30, 2007 as compared to the six
months ended June 30, 2006 was primarily attributable to the stock-based
compensation cost (a non-cash charge) as a result of granting stock options to
key employees during the first quarter of fiscal 2007 and accounting for such
option grants under SFAS 123R. See "Note 6: Employee Equity Incentive Plans" in
Part I, Item 1 of this Form 10-QSB. Stock-based compensation cost was $92,000
for the six months ended June 30, 2007 as compared to $25,000 for the six months
ended June 30, 2006.
To a lesser extent, the increase during both the three and six months ended June
30, 2007 as compared to the same periods in fiscal 2006 was attributable to our
increased staff and related marketing activities to support our expanding
product offerings and the addition of direct sales personnel in Europe and Asia.
Although we expect sales and marketing expenses to fluctuate as a result of the
timing of advertising and promotions of our various new products and stock
option grants, overall we expect selling and marketing expenses to increase as
we continue to expand our marketing efforts and the number of products we offer.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of costs associated with
our executive, financial, human resources and information services functions,
including stock-based compensation costs, facilities-related expenses and
outside professional services such as legal and accounting. General and
administrative expenses increased during the three and six months ended June 30,
2007 as compared to the same periods in fiscal 2006 as a result of the
following:
o The hiring of an outside investor relations firm to manage and enhance
our investor relations function;
o Increased personnel costs to support our expanding business and
related infrastructure; and
o Increased expenses associated with maintaining our public company
status.
-20-
Further increasing our costs during the six months ended June 30, 2007 as
compared to the six months ended June 30, 2006 was our stock-based compensation
cost (a non-cash charge). We granted stock options to key employees and
directors during the first quarter of fiscal 2007 and accounted for such option
grants under SFAS 123R. See "Note 6: Employee Equity Incentive Plans" in Part I,
Item 1 of this Form 10-QSB. Stock-based compensation cost was $638,000 and
$561,000 for the six months ended June 30, 2007 and 2006, respectively.
During the three months ended June 30, 2007 as compared to the same period in
fiscal 2006, we experienced a temporary decrease in general and administrative
expense as a result of our decreased stock-based compensation cost. Stock-based
compensation cost was $130,000 for the three months ended June 30, 2007 as
compared to $290,000 for the same period in fiscal 2006.
We anticipate that general and administrative expenses will continue to increase
as our business continues to grow and the costs associated with being a public
company continue to increase as a result of our required reporting requirements
including, but not limited to, expenses incurred to comply with the
Sarbanes-Oxley Act of 2002.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of salaries and related
costs, including stock-based compensation costs, of employees engaged in product
research, design and development activities, compliance testing, documentation,
prototypes and expenses associated with transitioning the product to production.
The increase during both the three and six months ended June 30, 2007 as
compared to the three and six months ended June 30, 2006 is primarily
attributable to (i) the increased amount of expensed equipment required to
support our future HD display product development; and (ii) stock-based
compensation cost (a non-cash charge) as a result of granting stock options to
key employees during the first quarter of fiscal 2007 and accounting for such
option grants under SFAS 123R. See "Note 6: Employee Equity Incentive Plans" in
Part I, Item 1 of this Form 10-QSB. Stock-based compensation cost was $117,000
and $350,000 for the three and six months ended June 30, 2007, respectively, as
compared to $43,000 and $56,000 for the three and six months ended June 30,
2006, respectively.
The remaining increase is a result of increased number of employees engaged in
research and development activities, resulting from both direct hiring and
acquisitions. The majority of our research and development expense during all
periods presented was directly attributable to our future products including our
HD display products. Although we plan to continue investing in the future and
strengthening our intellectual property position within our highly competitive
market by continuing to fund research and development activities related to our
HD display products. We expect our refocusing efforts to yield a reduction in
research and development expenses.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three and six months ended June 30, 2007 was
primarily comprised of the $331,000 decrease and the $37,000 increase,
respectively, in the fair value of the liability for derivative contracts
(associated with our Series A Stock and related warrants and Series B Stock and
related warrants). Other income (expense) for the three and six months ended
June 30, 2006 was primarily comprised of the $518,000 and $310,000 increase,
respectively, in the fair value of the liability for derivative contracts
(associated with our Series A Stock and related warrants).
Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("SFAS 133"), and EITF Abstract 00-19, ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS ("EITF 00-19"), the increase in the fair value of the
liability for derivative contracts is included as other expense in our
consolidated statements of operations and the decrease in the fair value of the
liability for derivative contracts is included as other income in our
consolidated statements of operations.
-21-
DIVIDEND ON SERIES A STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION VALUE
During the three and six months ended June 30, 2007, the total accretion on our
preferred stock was $220,000 and $440,000, respectively. During the three and
six months ended June 30, 2006 the total accretion on our preferred stock was
$130,000 and $258,000, respectively. The increases are attributable to our
Series B Stock, which was outstanding during the three and six months ended June
30, 2007 but not outstanding during the three and six months ended June 30,
2006.
During the three and six months ended June 30, 2007, Series A Stock dividends
were approximately $23,000 and $44,000, respectively. During the three and six
months ended June 30, 2006, Series A Stock dividends were approximately $17,000
and $37,000, respectively. Preferred dividends are slightly higher in fiscal
2007 as compared to the same periods in fiscal 2006 as the dividends are
cumulative. We do not pay dividends on our Series B Stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2007, our principal sources of liquidity included cash and cash
equivalents of $772,000 and unused borrowing capacity of $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 June 30, 2007.
Operating activities: During the six months ended June 30, 2007, our operating
activities used $994,000 of cash. This was primarily a result of our $1,130,000
net loss, $1,587,000 of net non-cash expenses and $1,451,000 net cash used by
changes in operating assets and liabilities. During the six months ended June
30, 2007, our operating activities used $143,000 of cash. This was primarily a
result of our $1,679,000 net loss, $1,232,000 of net non-cash expenses and
$304,000 net cash provided by changes in operating assets and liabilities.
Non-cash items included in net loss for both the six months ended June 30, 2007
and 2006 include depreciation expense, stock-based compensation cost of options,
fair value of warrants issued for services rendered, change in fair value of
derivative instruments and the accretion of our Series A and Series B preferred
stock redemption value.
Changes in our operating assets and liabilities are a result of the significant
increase in the sales of our product during the six months ended June 30, 2007
compared to the six months ended June 30, 2006 and the timing of purchasing our
product to support the increase of sales.
A significant use of cash during the six months ended June 30, 2007 was
attributable to paying our contract manufacturer according to normal and
customary payment terms. We expect future cash provided (used) by operating
activities to fluctuate, primarily as a result of fluctuations in our operating
results, timing of product shipments, trade receivables collections, inventory
management and timing of vendor payments.
Investing activities: Our investing activities for both the six months ended
June 30, 2007 and 2006 were minimal and consisted of purchasing computer and
general equipment during the normal course of business.
Financing activities: During the six months ended June 30, 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 had no financing activities during the three months ended June 30,
2006.
CASH AND WORKING CAPITAL REQUIREMENTS
As previously discussed, we plan to continue increasing our presence in the
document/image-capture market, which may require additional capital.
Additionally, we may seek to expand our operations through acquisitions of
companies in either the document/image-capture market that we believe could
complement our business model, improve our competitive positioning and expand
our product offerings.
Management believes if we continue to fund research and development efforts at
the current level, including our expansion into the HD display market, that
additional capital through either the incurrence of debt or the issuance of
equity securities, or a combination thereof, may be necessary. There is no
assurance that such additional funds will be available for us to continue 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.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at June 30, 2007, and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods (IN THOUSANDS):
LESS THAN ONE - THREE THREE - FIVE
TOTAL ONE YEAR YEARS YEARS
----------- ------------- -------------- --------------
Line of credit (1) $ 1,513 $ 1,513 $ - $ -
Operating lease obligations 410 285 124 1
Consulting agreement 53 53 - -
----------- ------------- -------------- --------------
Total contractual cash obligations $ 1,976 $ 1,851 $ 124 $ 1
=========== ============= ============== ==============
(1) 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 June 30, 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 June
30, 2007.
At June 30, 2007, Sysview was not in compliance with all of the LOC Agreement
debt covenants. Pursuant to a waiver letter from the lender dated July 26, 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 June 30, 2007. Although the lender redefined certain debt
covenants defined by the LOC Agreement during the second quarter of fiscal 2007,
the Company is working to further redefine additional debt covenants to more
accurately assess the Company's financial position and results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2007, we did not have any relationship with unconsolidated entities
or financial partnerships, which other companies have established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes as defined in Item 303(c)(2) of SEC Regulation S-B.
Therefore, we are not materially exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in such relationships.
TRENDS
As of June 30, 2007, to the best of our knowledge, no known trends or demands,
commitments, events or uncertainties existed, which are likely to have a
material effect on our liquidity, except as described in "Note 9: Commitments
and Contingencies" in Part I, Item 1 of this Form 10-QSB.
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ITEM 3 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 as of the end of the period covered by this
report (the "Evaluation Date"). Based upon the evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective. Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. Disclosure controls
include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal controls over financial reporting that
occurred during the quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings from time to time in the ordinary
course of business, none of which is required to be disclosed under this Item 1.
ITEM 6 - EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING
---------- --------------------------------------------- ----------------
31.1 Certification Pursuant to Section 302 of Filed herewith
the Sarbanes-Oxley Act - Darwin Hu
31.2 Certification Pursuant to Section 302 of Filed herewith
the Sarbanes-Oxley Act - William Hawkins
32.1 Certifications Pursuant to Section 906 of Filed herewith
the Sarbanes-Oxley Act - Darwin Hu
32.2 Certifications Pursuant to Section 906 of Filed herewith
the Sarbanes-Oxley Act - William Hawkins
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Sysview
Technology, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSVIEW TECHNOLOGY, INC.
Date: August 7, 2007
/S/ DARWIN HU
-------------
Darwin Hu, Chairman and Chief Executive Officer
Date: August 7, 2007
/S/ WILLIAM HAWKINS
-------------------
William Hawkins, Acting Chief Financial Officer
Chief Operating Officer and Secretary
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