Room 4561
January 31, 2006
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, June 30 and
September 30, 2005
Forms 8-K filed on March 31 and May 23, 2005
File No. 0-28238
Dear Mr. Donovan:
We have reviewed your responses to the comments raised in
our
letter dated September 16, 2005 and have the following comments.
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.
Prior comment 6
1. Expand your disclosures within the Significant Accounting
Policies
footnote in order to fully describe how you account for stock
compensation to non-employees, including the identification of the
specific accounting pronouncements you have applied.
2. It is difficult for us to determine how your calculations
comply
with the respective accounting literature absent an understanding
of
the nature of the services, performance commitment, vesting terms,
service period and other relevant information. Please provide us
a
summary of the arrangements where you recorded stock compensation
to
non-employees and for each arrangement, include an accounting
analysis to explain how your accounting complies with generally
accepted accounting principles.
Prior comment 7
3. In your response to prior comment 7 you state that
technological
feasibility has not been established for your PinPoint product.
This
statement is inconsistent with disclosures within your Form 10-KSB
wherein you describe this product as having been commercially
available to customers in October 2004. Tell us the date on which
you
established technological feasibility for the PinPoint product.
Also
tell us the dates on which this product became available for sale
to
customers and when you began recognizing amortization expense
related
to this product.
4. Your response to prior comment 7 did not address the apparent
difference between your statement 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" and your accounting policy under SFAS
86.
Please tell us how you believe your accounting complies with SFAS
86
when your statement suggests that you have chosen not to
capitalize
certain costs because of complexity in the allocation of those
costs.
Please explain why "technical and development staffs [being] moved
from product to product and version to version on a regular basis"
would have any impact on your accounting for software development
costs in accordance with SFAS 86.
Prior comment 8:
5. We note in your prospective disclosure that you intend to state
that disclosure controls and procedures were effective "to ensure
that material information is recorded, processed, summarized and
reported by management of the Company on a timely basis in order
to
comply with the Company`s disclosure obligations under the
Exchange
Act, and the rules and regulations promulgated thereunder." Please
address the effectiveness of your disclosure controls and
procedures
with respect to the other elements of the definition found in Rule
13a-15. That is, you should state whether 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. Revise accordingly.
Prior comment 14
6. We note from your response to prior comment 14 that
amortization
of software products (DE Vision) under development was charged to
SG&A. Further clarify the nature of the software products under
development. Explain why you believe it was appropriate to
capitalize this software under development at the time you
acquired
it. Indicate the development stage of the software when you
acquired
it and whether it had an alternative future use. Also, address if
and when technological feasibility was achieved. Address why you
do
not believe this was in-process research and development at the
time
you acquired it. Refer to SFAS 2, FIN 4 and SFAS 86.
7. Your response suggests that the impaired software (we assume
the
DE Vision software) was not being marketed for sale to others. If
so, tell us what the software was being used for and whether you
ever
expected/intended it to be sold, leased or otherwise marketed for
sale to others. Was this software used internally? Clarify
whether
you initially capitalized this software product under SFAS 86 or
SOP
98-1 and support your accounting accordingly.
8. If you continue to believe that capitalization was appropriate,
please tell us how your amortization of a product that was still
in
development complies with SFAS 86 or SOP 98-1, respectively.
Refer
to paragraph 8 of SFAS 86 which requires that amortization begins
when a product is available for general release to customers.
Also
refer to SOP 98-1, paragraph 38, which indicates that amortization
begins when the software is ready for its intended use.
9. We also note from your response that amortization of intangible
assets in 2004 included the intangible software asset acquired
from
Wise systems. You further indicate that the amortization of the
Wise
software "was expensed to the Cost of Goods Sold in the first two
quarters" of 2005. According to FASB Staff Implementation Guide,
Statement 86, Question 17, amortization of software products
should
be presented in cost of sales. Revise your presentation to
consistently present amortization from this product in both 2004
and
2005.
10. Similarly, by analogy to EITF 96-9, we believe that the
impairment of a software product that is sold, leased or otherwise
marketed should also be classified as cost of sales. Revise
accordingly.
11. We note in a July 27, 2004 press release that you described
Wise
Systems` Picture Archiving Communication Systems Software as being
"in the final stages" of development at the time of the
acquisition.
Tell us about the various software products you acquired from Wise
and how you determined that all of the products should have been
capitalized rather than expensed as IPR&D.
Prior Comment 15
12. Notwithstanding your response, the Staff believes you should
present the expense related to share-based payment arrangements in
the same line or lines as cash compensation paid to the same
parties.
Refer to SAB Topic 14.F.
Prior comment 16
13. With regard to your various issuances of warrants, convertible
preferred stock and convertible debt, tell us how you considered
the
guidance in SFAS 133 and EITF 00-19 in determining how to classify
and measure these instruments in your financial statements. Your
response should clearly set forth your analysis of all of the
terms
of each transaction, including any associated registration rights
and
liquidated damages, and how your accounting and classification
complies with the applicable accounting guidance. Refer to Staff
guidance on this topic in Section II.B. of Current Accounting and
Disclosure Issues in the Division of Corporation Finance,
available
on our website at
http://www.sec.gov/divisions/corpfin/acctdis120105.pdf.
14. Tell us whether any of the private placement or direct
investments were made by employees and/or related parties.
Further
explain why you agreed to sell your shares at amounts that are
substantially below the fair market value of your common stock.
Prior comment 17
15. Refer to your response to prior comment 17 and tell us the
dates
on which the following events occurred:
a. The date on which "all development activities had ceased with
respect to the asset."
b. The date on which you determined that the DE Visions asset "had
no
standalone market resale value."
c. The date on which you first "no longer contemplated that the
asset
would be incorporated into other Guardian products."
d. The date when management determined that it "could not envision
any revenue producing circumstance" related to this asset.
16. Your response suggests that you complied with the guidance
that
requires an asset be reviewed for impairment when circumstances
indicate that the carrying amount is not recoverable, which
appears
to be in accordance with SFAS 142 and paragraph 8 of SFAS 144.
However, if the intangible asset that was impaired was software
technology subject to SFAS 86, than please explain how your
impairment policy is consistent with paragraph 10 of that
standard.
Provide us with a comparison of the net realizable value of the DE
Vision asset to its carrying value in accordance with SFAS 86 for
each balance sheet date, beginning with December 31, 2003. Refer
to
paragraph 8(i) of SFAS 142.
Prior comment 18
17. With regard to the 587,000 shares issued in the Difference
Engines transaction, as previously requested, tell us how you have
considered the guidance in EITF Topic D-98. That is, explain how
your classification of these shares within permanent equity is
appropriate following the release or expiration of the associated
lock up period. Your response should specifically address how
provisions that appear to permit the holders to redeem the shares
upon the occurrence of events that are not solely within your
control
permit classification in permanent equity. Please address your
classification as of both December 31, 2004 and 2005.
Prior comment 19a
18. We note your response to prior comment 19a wherein you state
that
you "estimated that 95% of the purchase price was for the
acquisition
of the intangible software asset and the remaining 5% represented
goodwill in the form of trademarks, copyrights, and the value of
the
Wise Systems name." It is not clear from your response how you
determined that 95% of the purchase price is equal to the
estimated
fair value of the software acquired. As we previously requested,
tell us the method used for valuation of the software and provide
us
with your supporting analysis. That is, if you relied upon an
independent appraisal or if you computed the estimated fair value
using a present value model, tell us about the underlying
assumptions
on which the valuation was based and provide us with copies of the
valuation calculations. An arbitrary allocation based on a
percentage does not appear to provide persuasive evidence or
analysis
to support the fair value of the underlying software asset.
19. Your response indicates that the "remaining 5% represented
goodwill in the form of trademarks, copyrights, and value of the
Wise
Systems name." Tell us how you considered the guidance in
paragraph
A14 of SFAS 141 in determining the identifiable intangible assets
to
which you allocated a portion of the purchase price. That is, tell
us
how you considered the criteria in paragraph 39 of SFAS 141 in
determining that no recognition was appropriate.
Prior comment 19b
20. As previously requested, tell us when you last performed the
impairment analysis of software acquired from Wise Systems and
provide us with your analysis. That is, tell us the specific
dates
on which you assessed impairment and provide us copies of the
projections which led to your determination that no impairment
existed. We note from your response that "management prepared a
detailed projection of revenues and cash flow." Provide us with
copies of these projections. Explain the reasons for material
differences in management projections and your actual results.
Prior comment 20:
21. Please refer to your response to prior comment 20 where you
liken
the non-GAAP measure "adjusted net loss" to the "cash burn rate",
a
liquidity measure. Given this analogy, please justify why you have
reconciled this measure to net loss, a performance measure, when
your
response suggests that cash flows from operations may be the most
directly comparable financial measure calculated in accordance
with
GAAP.
22. Your response indicates that you present this measure to
"clarify
for investors the amounts and uses of cash". It appears that a
more
meaningful liquidity discussion could be provided by describing
the
specific sources and uses of cash, for example, cash receipts from
customers, cash paid to employees, etc. See Section IV.B.1.of SEC
Release 33-8350 and revise accordingly.
Prior comment 21:
23. We note your response to prior comment 21, that your
Certifying
Officers have concluded that, as of June 30, 2005, certain of the
Company`s disclosure controls and procedures were not effective as
they relate to timely filing. Please tell us whether your
disclosure
controls and procedures were effective with respect to the other
elements of the definition found in Rule 13a-15(e), such as with
respect to ensuring that information required to be disclosed in
your
reports that are filed or submitted under the Exchange Act are
accumulated and communicated to your management as appropriate to
allow timely decisions regarding required disclosure.
24. In addition, please explain your statement that "Based on
these
changes, our Certifying Officers concluded that as of the end of
the
period covered by this Report that our disclosure controls and
procedures will become effective." The period covered by the Form
10-Q is the period ended June 30, 2005, for which you state that
your
disclosure controls and procedures were not effective with respect
to
timely filing. That period has ended. Please revise or advise.
Prior comment 22:
25. With regard to your response to prior comment 22 we have the
following comments:
a. Your response indicates that Rental Licenses and Lease to
Ownership Licenses will be accounted for in accordance with SFAS
13.
Tell us how you considered the guidance in paragraph 4 of SOP 97-2
in
determining your accounting for these arrangements. That is, tell
us
how you determined that these arrangements to sell software should
be
accounted for outside the scope of SOP 97-2.
b. Tell us whether the Rental Licenses and Lease to Ownership
Licenses are entered into by Guardian or EGC and the end user.
c. We note that a portion of Appendix A to the EGC Distributor
Agreement, filed as an Exhibit to the Form 10-Q/A filed on October
17, 2005, appears in a language other than English. Please amend
your filing so that Appendix A complies with Rule 306 of
Regulation
S-T.
d. Your response proposed to provide a discussion of the
significance
of the Distributor Agreement in future filings commencing with the
Form 10-Q for the quarter ended September 30, 2005, however, we
note
no such discussion in that filing. Tell us whether you still
consider this agreement to be significant and why you have not
made
disclosures consistent with your statement in the response. To
the
extent that revenue from the EGC agreement is material, or differs
from expectations previously communicated in your periodic
reports,
expand your disclosures to include your revenue recognition
policies
to reflect these arrangements. Revise accordingly.
As appropriate, please amend your filings 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.
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.
January 31, 2006
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