Room 4561
September 16, 2005
Mr. William J. Donovan
Chief Financial Officer
Guardian Technologies International, Inc.
516 Herndon Parkway, Suite A
Herndon, VA 20170
Re: Guardian Technologies International, Inc.
Form 10-KSB for Fiscal Year Ended December 31, 2004
Form 10-KSB/A for Fiscal Year Ended December 31, 2004
Forms 10-QSB for Fiscal Quarters Ended March 31 and June 30, 2005
Forms 8-K filed on March 31 and May 23, 2005
File No. 0-28238
Dear Mr. Donovan:
We have reviewed the above referenced filings and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. We may ask you to
provide us with supplemental information so we may better
understand
your disclosure. Please be as detailed as necessary in your
explanation. After reviewing this information, we may raise
additional comments.
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 filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-KSB/A for the year ended December 31, 2004
Item 1. Description of Business
1. We note, under the "General" subsection, the description of
your
business prior to the reverse acquisition by RJL Marketing
Services,
Inc. in June 2003. In future filings, please consider also
providing
under the "General" subsection a brief description of your current
business, including your current principal products or services,
major customers, and competitive business conditions.
2.
We note your extensive recitation of data from various HSRC
reports,
including information regarding the overall market potential for
baggage screening, people portals, and cargo scanning that total
billions of dollars. In future filings, please discuss the market
potential for your specific business offerings, especially as it
relates to threat detection technologies and your intelligent
imaging
informatics ("3i") technology.
3. Similarly, we note your recitation of data relating to the
healthcare systems market, indicating that this market totals in
the
billion and trillion dollars. In future filings, please discuss
the
market potential for your specific business offerings, especially
as
it relates to your radiology information systems (RIS) and picture
archiving and communication systems (PACS) technologies.
Item 6. Management`s Discussion and Analysis or Plan of
Operations
4. In future filings, please consider including an "Overview"
section
describing the most important matters on which you are focusing in
evaluating your financial condition and operating performance. To
enhance an investor`s understanding of your business, you should
provide insight regarding challenges and risks on which you are
focused in both the short and long term, the steps you are taking
to
address these challenges, as well as material opportunities. See
Section III.A of SEC Release 33-8350. Likewise, include a
discussion
of any going concern opinion issued by your independent accountant
and your ability to meet your financial requirements for the
twelve
months period following the date of the financial statements.
Results of Operations
5. Throughout the Results of Operations section, you refer to two
or
more factors that contributed to material changes over the
reported
periods. In future filings, please quantify the amount of the
changes contributed by each of the factors or events that you
identify. For example, rather than simply using the terms "due in
large part" or "principally due to" in describing changes,
quantify
the amount of the change that is attributable to the primary
source
you identify. See Section III.D of SEC Release 33-6835.
Stock-Based Compensation Expense
6. We note that in 2004 you recognized stock compensation to
outside
consultants of $15,062,291. Your disclosures elsewhere in the
filing
suggest that your accounting for this expense is based on EITF 96-
18
which requires attribution according to FIN 28. Provide us with
your
computations to support that your accounting complies with both
EITF
96-18 and FIN 28. Similarly address your accounting for the
consulting stock compensation recorded in the interim period ended
June 30, 2005.
Selling, General and Administrative Expenses
7. We note that you have concluded that capitalizing staff and
consultancy costs incurred in the development of PinPoint and
FlowPoint was inappropriate because of the difficulty in assigning
costs accurately to the various software products and versions
being
developed. Please tell us how your accounting policy for software
development costs complies with the guidance in SFAS 86. In this
regard, please address when technological feasibility was
established
for these products and how your treatment of these costs is
consistent with paragraphs 3 through 6 of SFAS 86. Please note
that
the difficulty in accurately assigning costs should not change the
accounting required by SFASF 86.
Item 8A. Controls and Procedures
8. Your disclosure in the first paragraph suggests that the
disclosure controls and procedures that were evaluated by your
chief
executive officer and chief financial officer were narrower than
the
disclosure controls and procedures defined by Rules 13a-15(e) and
15d-15(e). Please clarify, if true, that for the period covered
by
the report, your officers concluded that your disclosure controls
and
procedures are effective to ensure that information required to be
disclosed by you in the reports that you file or submit under the
Exchange Act is recorded, processed, summarized and reported,
within
the time periods specified in the Commission`s rules and forms and
to
ensure that information required to be disclosed by an issuer in
the
reports that it files or submits under the Exchange Act is
accumulated and communicated to your management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Tell us how you
considered
Exchange Act Rule 13a-15(e) and 15d-15(e) in your disclosures.
9. We note your statements in the third paragraph of this section
that discuss the limitations on the effectiveness of controls,
including that a "control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that
the objectives of the internal control system are met." Tell us
how
you considered the requirements of Section II.F.4 of Management`s
Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, SEC
Release No. 33-8238 that requires you to indicate that your
disclosure controls and procedures are designed to provide
reasonable
assurance of achieving their objectives and that your principal
executive officer and principal financial officer concluded that
your
disclosure controls and procedures are effective at that
reasonable
assurance level.
10. You disclose that there were no "significant changes" in your
internal controls or in other factors that could significantly
affect
those controls subsequent to the date of their evaluation. In
this
regard, tell us how you considered the disclosure requirements of
Item 308(c) of Regulation S-B and whether there was "any change"
that
"has materially affected or was reasonably likely to materially
affect," your internal controls over financial reporting.
11. Please be advised that the above comments related to Controls
and
Procedures are also applicable for the above-referenced Form 10-
QSBs.
Exhibits
12. Please tell us whether you have written agreements relating to
your product partnerships with IBM, Eizo Nanao Technologies,
Motion
Computing, AVNET, and NeuroStar Solutions for FlowPoint RIS/PACS
and,
if so, provide us with an analysis of the need to file these
agreements.
13. Please file as an exhibit the Exclusive Teaming Agreement with
Lockheed Martin Systems Integrated Division.
Consolidated Statements of Operations
14. Explain why the amortization of intangibles for 2005 is
significantly greater than the expected amortization of the
intangible assets you disclose under the heading GOODWILL AND
INTANGIBLE ASSETS. Also, explain why you have classified all of
your
amortization of intangibles outside of cost of sales, including
the
software technology you acquired in the Wise acquisition. Tell us
how your presentation complies with FASB Staff Implementation
Guide,
Statement 86, Question 17. Similarly address the classification of
the impairment of software technology. Refer by analogy to EITF
96-
9. Also, clarify where you have classified the amortization of
intangibles in your results for the quarter ended June 30, 2005,
as
the amounts included in the line item `amortization of
intangibles`
is significantly less than the expected amortization.
15. Separate income statement classifications based solely on the
form of consideration is not appropriate (i.e., amortization of
stock
compensation). Tell us why you have not classified the stock
compensation costs to the appropriate line items based on the
function of the individual who received the benefit (i.e., cost of
revenue, selling, general and administrative, etc.).
Notes to Consolidated Financial Statements
Stockholders` Equity
16. For each investment transaction described in this footnote, as
well as equity transaction that occurred during the interim period
ended June 30, 2005, tell us whether the equity issuances were
made
at prices below the fair value of your common stock. For
issuances
at prices below fair value, tell us the differences between the
fair
value of the securities issued and consideration received, whether
the Company received any additional value not reflected in the
consideration and the business purpose for the issuances below
fair
value.
Acquisitions
Difference Engines Corporation
17. With regard to the $1,498,731 impairment recognized in 2004,
demonstrate how your disclosures comply with paragraph 46 of SFAS
No.
142.
18. Tell us how you have accounted for the 587,000 shares issued
in
the Difference Engines transaction, which appear to be subject to
redemption that is not solely within your control and explain how
you
have considered the guidance in EITF Topic D-98. We further note
that you released the lock up restrictions on these shares.
Please
tell us more about the changes in the terms of these shares and
how
you have accounted for those changes. Clarify whether the holder
of
these shares continues to have the right to demand redemption of
the
shares.
Wise Systems, Ltd.
19. With regard to the software technology valued at $2,264,630
and
recorded as an intangible asset acquired in the Wise Systems
transaction, we have the following comments:
a. Describe the method used for valuing this intangible asset and
provide us with the analysis supporting the initial valuation.
b. Tell us when you last performed an impairment analysis of your
capitalized software development assets and provide us with your
analysis. Demonstrate that the capitalized software is not
impaired
in light of the limited revenues and negative margins you have
recognized. Refer to paragraph 10 of SFAS 86.
Forms 10-QSB for the quarters ended March 31, 2005 and June 30,
2005
Liquidity and Capital Resources
Cash Flows from Operating Activities, page 16 (March 31, 2005 Form
10-Q) page 17 (June 30, 2005 Form 10-Q)
20. It appears that your measure of "adjusted net loss" is a non-
GAAP
liquidity measure. Tell us how your presentation of this measure
complies with Item 10(h) of Regulation S-B. Similarly address the
presentation of "net loss after adjustment` in your discussion on
net
cash in operations in your Form 10-K.
Item 4. Controls and Procedures
21. We note the conclusion of the chief executive officer and
chief
financial officer that the company`s disclosure controls and
procedures were effective as of the end of each of the periods
ending
March 31, 2005 and June 30, 2005. In reaching this conclusion,
please advise us of the consideration given to the following:
a. that the Form 10-KSB for the year ended December 31, 2004 was
not
timely filed under Rule 12b-25;
b. that the Form 10-KSB for the year ended December 31, 2004 as
originally filed failed to include the company`s financial
statements
and footnotes; and
c. that the Form 10-QSB for the quarter ended March 31, 2005 was
not
timely filed under Rule 12b-25.
As noted in our comment above, disclosure controls and procedures
means controls and procedures designed to ensure that information
required to be disclosed by you in the reports that you file or
submit under the Exchange Act is recorded, processed, summarized
and
reported, within the time periods specified in the Commission`s
rules
and forms.
Forms 8-K filed on March 31, 2005 and May 23, 2005
22. We note your statements that the EGC Agreement includes a $10
million guarantee of revenues over a three-year period of time.
Tell
us how you are accounting for, or intend to account for, the EGC
distributor agreement for revenue recognition purposes in each of
its
three years. Tell us the amounts of revenue recognized as a
result
of this arrangement since its inception. In addition, tell us the
differences between "Rental Licenses" and "Lease-to-Ownership
Licenses" and how your revenue recognition policy differentiates
between them. Given the significance of this agreement, explain
why
there is no apparent discussion of it in your June 30, 2005 Form
10-
QSB.
As appropriate, please amend your filing and respond to these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`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 company acknowledging that:
* the company 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 company 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.
You may contact Tamara Tangen, Staff Accountant, at (202)
551-
3443 or Lisa Mitrovich, Assistant Chief Accountant, at (202) 551-
3453
if you have questions regarding the above comments. If you need
further assistance, you may contact me at (202) 551-3488.
Sincerely,
Stephen G. Krikorian
Branch Chief - Accounting
Mr. William J. Donovan
Guardian Technologies International, Inc.
September 16, 2005
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