April 19, 2005
Bondy Tan, President
Global Innovative Systems, Inc.
1703, Top Glory Tower
262 Gloucester Road
Causeway Bay, Hong Kong
Re: Global Innovative Systems, Inc.
File No. 0-30299
Forms 8-K filed April 1, 2005
Dear Mr. Tan:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise the filings in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or revision is
unnecessary. Please be as detailed as necessary in your
explanation.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your
filings.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call me at the telephone number
listed
at the end of this letter.
Form 8-K Item 4.01 filed April 1, 2005
1. Item 304(a)(1)(iv)(A) of Regulation S-B requires you to
disclose
whether during the registrant`s two most recent fiscal years and
any
subsequent interim period through the date of resignation,
declination or dismissal there were any disagreements, resolved or
not, with the former accountant on any matter of accounting
principles or practices, financial statement disclosure, or
auditing
scope or procedure, which disagreement(s), if not resolved to the
satisfaction of the former accountant, would have caused it to
make
reference to the subject matter of the disagreement(s) in
connection
with its reports. You state that in connection with the audit and
in
the "subsequent interim period, there were no..." Please revise
the
Form to state the specific period during which there were no
disagreements, etc. The amended Form should also include a letter
from the former accountants indicating whether they agree or
disagree
with the disclosures in the amended 8-K.
Form 8-K/A filed April 1, 2005
Management`s Discussion and Analysis
Results of Operations
2. While your discussion of the results of operations discusses
intermediate effects of certain trends and events on the
operations
of the Company, the analysis generally does not discuss the
reasons
underlying those intermediate effects. For example, the
discussion
of the results of operations, for the period ending December 31,
2004, states revenue increased due to growth in demand of energy
saving products and cost of sales decreased due to a more
efficient
sales distribution network. However, the underlying reasons for
the
growth in demand of energy products are not discussed and you do
not
explain the processes implemented that led to a more efficient
sales
distribution network. Also, you state that improved control over
trade receivables and a reduction in SARS cases helped decrease
general and administrative costs. However, the relationship
between
general and administrative expenses and the trade receivables and
SARS cases does not seem clear. Revise the discussion of results
of
operations for the year ending March 31 and the period ending
December 31 to quantify the impact of the events disclosed and to
describe their underlying causes. For additional guidance, please
refer to the SEC Release 33-8350, available on the SEC website at
www.sec.gov./rules/interp/33-8350.htm.
3. Expand the discussion of selling and marketing expenses to
quantify and describe the types of expenses associated with the
expansion of Tech Team`s business into new sectors and industries.
Describe the new sectors and industries, management`s plans to
expand, and other relevant items.
4. Revise to discuss the nature of the management fee income from
a
related company in the amount of HK $480,000 in 2003. Tell us
supplementally the reason this income is included in operations
but
not included in revenues.
Liquidity and Capital Resources
General
5. Please substantially revise this section to provide the
disclosures required by Item 303(b) of Regulation S-B regarding
liquidity and capital resources. The Management`s Discussion and
Analysis section is a very critical part of this Form. As such,
we
ask that you revise this section in its entirety to discuss the
events, trends, and uncertainties that management views as most
critical to the Company`s financial position and liquidity.
6. Revise MD&A to discuss the Company`s share exchange agreement
with
Global Innovative Systems Inc.
Period ended December 31, 2004
7. Revise to explain why increased sales resulted in increased
working capital requirements and thus reduced liquidity.
8. You state that the Company cut high interest bearing debt in
the
amount of HK $4,478,339. On the statement of cash flows, we note
repayment of debt in the amount of HK $11,570,991. Please
reconcile
these amounts and revise the disclosure to provide and quantify
the
reasons for the difference.
9. You state that the chief executive officer loaned the Company
HK
$6,164,034 as of December 31, 2004. Please tell us
supplementally
where this is accounted for on the statement of cash flows. We
note
that HK $6,164,034 is also the balance of amounts due to a
director
as of December 31, 2004 while the balance at March 31, 2004 was HK
$6,861,956. Revise to clarify the reason for the decrease in the
amount due to director for HK $6,861,956. Revise to disclose all
sources of internal and external liquidity for the period ending
December 31, 2004.
10. In the last paragraph of this section, you state that issued
and
fully paid share capital as of December 31, 2004 and 2003 were
31,044,000 and 55,348,571, respectively. It appears that you have
reversed the balances for the periods disclosed. Please revise to
correct this.
11. Please revise to provide an explanation for the material
changes
in cash from operating, investing and financing activities for the
period ended December 31, 2004, compared to the year ended March
31,
2004 and December 31, 2003.
Year ended March 31, 2004
12. You state that Tech Team`s losses over the past two years are
primarily due to research and development costs as well as other
reasons. Research and development expense is reported as only HK
$156,474 on the statement of operations. Please explain to us
supplementally why this is considered a significant portion of the
Company`s losses.
13. You state that Tech Team repaid bank debt of HK $8,273,075.
However on the statement of cash flows, you state that repayments
of
debt equaled HK $6,745,202. Please reconcile these amounts and
revise the disclosure accordingly.
14. Revise to explain how the SARS outbreak resulted in a decrease
in
trade receivables.
15. Revise to explain the reasons that $159,095 of accounts
receivable were written off during the year ended March 31, 2004.
Explain why management feels no allowance for doubtful accounts is
appropriate as of March 31, and December 31, 2004.
16. Please revise to provide an explanation for the material
changes
in cash from operating, investing and financing activities for the
year ended March 31, 2004, compared to the year ended March 31,
2003.
17. Please update to disclose whether you have any material
commitments for capital expenditures and if so, the expected
sources
of funds for such expenditures as per Item 303 (b) (iii) of
Regulation S-B.
18. In the notes to the financial statements you discuss the
Company`s negative working capital and that continuing losses
could
endanger your viability as a going concern. Revise MD&A to
disclose
your financial difficulties, describe why you have negative
working
capital and losses at the interim financial statement date (e.g.
seasonal matters, recurring trend, etc.) and describe management`s
plans to overcome these difficulties.
Critical Accounting Policies
19. We note that you have not disclosed the Company`s Critical
Accounting Policies. Please address the existence of highly
material
estimates or assumptions and how these matters may affect the
financial statements. Please refer to the Commission`s guidance
concerning Critical Accounting Estimates and revise Management`s
Discussion and Analysis to comply with the required disclosures as
necessary. The guidance is available on the SEC website at
www.sec.gov./rules/interp/33-8350.htm.
Off-Balance Sheet Disclosures
20. Item 303 (c) of Regulation S-B requires a description of off-
balance sheet arrangements. Please revise to include this
disclosure, if material.
Financial Statements
Statement of Operations
21. Basic and diluted net loss per share should be rounded to the
nearest cent in order not to imply a greater degree of precision
than
exists. Please revise the Statement of Operations.
22. Disclose the nature and amount of the major components of
general
and administrative expenses in a note or state them separately on
the
statement of operations for the periods presented. Revise MD&A to
discuss material changes in the components of general and
administrative expenses.
Statement of Cash Flows
23. Revise to present gross realized gains and gross realized
losses
separately as they relate to the gain on disposal of investments
in
accordance with SFAS 115, if material.
Note 3 - Summary of Principal Accounting Policies
Equipment
24. Revise to disclose the nature of the energy savers and their
purpose.
Revenue Recognition
25. Hardware: We note the different kinds of sales agreements in
"Sales and Marketing Strategy - Sales Agreements". Please revise
to
disclose how the Company accounts for the various payments made
under
the "direct sales contracts" and the company`s accounting policy
for
product sales under "trading contracts". Also, you state, "any
cost
of these obligations is accrued when the corresponding revenue is
recognized". Revise to clarify the meaning of this sentence.
26. Services: Revise to disclose the reasons management recognizes
revenue on a completed contract basis for consulting services and
tell us supplementally how this policy complies with generally
accepted accounting principles. Revise to discuss any significant
terms and conditions, including customer acceptance provisions.
Also, you state that the consultancy contracts generally last less
than one year. Revise to disclose the nature of the 60-month term
service contracts mentioned in "Sales and Marketing Strategy -
Sales
Agreements" and the related revenue recognition policies.
27. Financing: Revise to explain what is meant by the phrase
"level
rates of return" as used in your financing recognition disclosure.
28. Please revise to address how the Company recognizes revenue on
sales with multiple deliverables. Refer to EITF 00-21.
Foreign currency translation
29. Revise to include the aggregate foreign currency transaction
gain
or loss included in determining net income for the periods
presented,
as required by paragraph 30 of SFAS 52.
Trade Receivables, Allowances and Returns
30. Please revise to disclose the Company`s accounting policy for
trade receivables and allowance for doubtful accounts. Also,
update
to explain whether the buyer has a right of return and if so, the
Company`s accounting policy for returns.
Note 4 - Net Investment in Sales-type leases
31. Revise to disclose the accumulated allowance for uncollectible
minimum lease payments receivable and a general description of the
lessor`s leasing arrangements as required by Paragraph 23 of SFAS
13.
Also, revise to include the Company`s accounting policy for
investment in sales-type leases and the related allowances in the
notes to the financial statements.
Note 13 - Long Term Debts
32. Please revise to clarify that the bank loan of HKD 7,600,000
is
classified as short term and is discussed in Note 10.
33. We note your violations of the financial covenants and that
you
have $1,494,263 still outstanding as of December 31, 2004. Revise
to
disclose whether any penalties are to be incurred as well as any
other amended terms related to these loans.
Note 15 - Commitments
The Group as lessee
34. You disclose future minimal lease payments as of March 31,
2004
and 2005 instead of as of March 31, 2005 and 2006. Please revise
your disclosure accordingly.
Note 16 - Related Party Transactions
35. You state that no fixed repayment terms for the amounts due to
related companies have been established. Please tell us
supplementally if the director plans on establishing repayment
terms.
If he does not, tell us why you do not consider this a capital
contribution.
36. You state that on December 31, 2004, a director of the Company
"agreed to take up" various receivables of the Company totaling
$2,585,000 HKD. Please revise to clarify the meaning of this
disclosure. Clarify whether the director paid the company cash
for
the receivables, whether the receivables were transferred with or
without recourse, and the Company`s accounting treatment for the
transaction in the financial statements. If this is a non-cash
transaction, revise the supplemental disclosure of cash flows to
describe this transaction as such. Refer to Paragraph 32 of SFAS
95.
Note 20 - Subsequent Events
37. In part (b), you state that 70,512,820 shares were issued to a
director "by capitalization of amount due to the director".
Revise
the note to clarify the meaning of this disclosure. Also, revise
to
describe the nature and timing of the transaction that generated
the
related party payable of HK $11 million. Also, revise MD&A-
Liquidity
to more thoroughly describe this transaction.
Form 10-QSB for the period ended December 31, 2004
Balance Sheet
38. The balance sheet as of December 31, 2004 is out of balance
due
to the fact that the deficit accumulated during the development
stage
does not rollforward from September 30, 2004 to December 31, 2004.
Please revise to correct the statement.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the registrant and its management are
in
possession of all facts relating to a registrant`s disclosure,
they
are responsible for the accuracy and adequacy of the disclosures
they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the registrant acknowledging that:
* the registrant is responsible for the adequacy and accuracy of
the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the registrant may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
Please file the applicable amended Forms and a supplemental
letter in response to these comments on EDGAR on or before May 10,
2005. Please understand that we may have additional comments
after
reviewing your amendment and responses to our comments.
You may contact Babette Cooper at (202) 824-5069 or me at
(202)
942-1902 if you have any questions.
Sincerely,
Tia Jenkins
Senior Assistant Chief
Accountant
Office of Emerging Growth
Companies
Cc: Fax to Chris Doerksen at (360) 671-0896
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Bondy Tan
Global Innovative Systems, Inc.
April 19, 2005
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