[LETTERHEAD OF WILLIAM HAWKINS, SYSCAN]
June 1, 2006
VIA EDGAR--CORRESPONDENCE
Jason Niethamer
Division of Corporate Finance
United States Securities and Exchange Commission
Mail Stop 4561
100 F Street, N.E.
Washington, DC 20549
RE: SYSCAN IMAGING, INC.
FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FORM 10-QSB FOR FISCAL QUARTER ENDED MARCH 31, 2006
FILE NO. 000-25839
Dear Mr. Niethamer:
We are submitting this correspondence via the EDGAR system in response to
a comment letter issued by the Securities and Exchange Commission ("SEC") on May
24, 2006. In connection with that comment letter, the SEC had asked that we
amend certain filings, and such filings will be amended after you have reviewed
our responses to the comment letter. We believe most of the comments do not
warrant a revision to our filings; however we understand that the purpose of
your review process is to assist us in our compliance with the applicable
disclosure requirements and to enhance the overall disclosure in our filings. We
look forward to fully cooperating with you in these respects. If, after
reviewing our responses, you determine further amendments should be made, we
welcome any comments or guidance in areas where you think we should revise our
documents in response to these comments. As such, no filings have been amended
simultaneously with submitting this correspondence.
In addition, the comment letter sought certain declarations from the company. As
such, we hereby declare and acknowledge the following:
o the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the SEC from taking any action with
respect to the filing; and
o the company may not assert staff comments as a defense in any
proceeding initiated by the SEC or any person under the federal
securities laws of the United States.
Please see below for our responses to the SEC's comments.
Form 10-KSB for the Year Ended December 31, 2005
Consolidated Statement of Operations, page F-3
1. Response - We recognized the entire intrinsic value of the 3.7 million
options at the grant date based on the following factors: (1) since the options
were so far in money at the grant date, we considered their value to be upfront
compensation and (2) since the options were granted to the Company's officers
and key employees, where the possibility of them leaving the company prior to
the vesting date was considered remote, the presumption was that all options
would vest.
As summarized in SFAS 123, "most fixed stock option plans--the most common type
of stock compensation plan--have no intrinsic value at grant date, and under
Opinion 25 no compensation cost is recognized for them." The fact that the
Company didn't even try to issue the stock at fair market value or a reasonable
discount thereto and given the fact that the Company recently became a reporting
company through a reverse merger in April 2004 and market for the Company's
stock was thinly traded for the 12-month period prior to the grant date in 2005
and therefore its trading ability was limited, led to strong indication of
upfront compensation.
We further expected all shares would vest and therefore recognition of
compensation cost was based on our best available estimate of the number of
options expected to vest (SFAS 123 para. 28). Since the options were issued at
such a cheap price ($0.01), there is a very remote possibility that the
grantee's would walk away from the equity. In the case of very cheap stock, the
vesting period is really a "formality" that is secondary to the compensation
calculation/option grant and therefore, wasn't considered applicable under these
circumstances when assessing the compensation cost and related accounting
recognition due to the underlying factors described above.
We considered our accounting recognition conservative for the immediate
expensing in the period that the decision was made to grant the stock because
the Company benefited during the period the options were granted based on our
presumption that employees added more value and worked harder based on the grant
and not the vesting schedule, especially due to the fact that the options were
so far "in the money" from the grant date.
Upon further analysis, we agree to reclassify our stock-based compensation costs
as part of operating expenses since these costs did relate to the compensation
of employees and accordingly, we will revise the 2005 Form 10-KSB and March 31,
2006 Form 10-QSB.
2. Response - Gross proceeds from the private placement offering are treated as
derivatives for accounting purposes (a liability) and accordingly total offering
costs are expensed because to debit (offset these costs) against the derivative
(private placement) would understate the liability. Theoretically, if there is
no equity account credited for the gross proceeds, then expensing is the only
option. Our accounting treatment was discussed with our auditors and their
outside concurring reviewer who had experienced an almost identical situation
with regard to one of their registrant's, Lighting Science Corporation.
According to our auditors understanding with its concurring reviewer, this
registrant underwent an extensive accounting review process with the SEC in
connection with its SB-2 filing and although no accounting literature was cited
by the accounting review staff at the SEC, the accounting reviewers, Mark Mahar
and Timothy Kviz, required the costs to be expensed. Therefore, we do not feel
any revision is required or necessary.
3. Response - Both classifications in question represent non-cash charges to the
statement of operations and were not considered to be activities that
constituted the Company's ongoing major or central operations. The nature of the
items included in other income (expense) are as follows: (i) "write-back of
provision for bad debts" represent the accounting recognition resulting from the
over-provision of allowance for doubtful accounts in the previous year (2003)
and (ii) "loss on disposal of fixed assets" represents the accounting
recognition resulting from the net book value of fixed assets disposed of that
were no longer in use by the Company.
Per FASB Statement of Financial Accounting Concepts No. 6, "Elements of
Financial Statements," expenses and losses are defined as follows:
o paragraph 80 defines expenses as "outflows or other using up of
assets or incurrences of liabilities (or a combination of both) from
delivering or producing goods, rendering services, or carrying out
other activities that constitute the entity's ongoing major or
central operations." Paragraph 81 provides characteristics of
expenses as "actual or expected cash outflows that have occurred or
will eventuate as a result of the entity's ongoing major or central
operations."
o paragraph 83 defines losses in general as "decreases in equity (net
assets) from peripheral or incidental transactions of an entity and
from all other transactions and other events and circumstances
affecting the entity except those that result from expenses or
distributions to owners." Paragraph 85 describes or classifies
losses that result from (i) peripheral or incidental transactions,
such as from the loss on disposal of fixed assets and (ii) holding
assets or liabilities while their values change, which would include
provision for doubtful accounts.
Although FASB concept No. 6 provides broad guidance to the definitions of
expenses and losses, it does not distinguish precisely between expenses and
losses, which depends to a significant extent on the nature of the entity, its
operations, and its other activities. Per paragraph 89, the primary purpose of
distinguishing losses from expenses is to make displays of information about an
enterprise's sources of comprehensive income as useful as possible and fine
distinctions between expenses and losses are principally matters of display or
reporting. Therefore, we consider the classification outside of operating
activities to be appropriate.
Item 8A. Controls and Procedures, page 40
4. Response - Our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures were effective based
upon the full definition of Rule 13a-15(e) as of the end of each of the periods
ended December 31, 2005 and March 31, 2006. We will confirm in future filings
whether our officers concluded that our controls and procedures are effective to
ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is also accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
to allow timely decisions regarding required disclosure.
Below please find the Controls and Procedures disclosure that we will include in
our future filings, if true:
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.
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.
Form 10-QSB for the Quarterly Period Ended March 31, 2006
Notes to Condensed Consolidated Financial Statements
Note 11 - Restatement of March 31, 2005 Interim Results for Correction of an
Error, page 13
5. Response - The error was discovered in connection with the audit of our 2005
financial statements during the first quarter of 2006. Since the audit of our
2005 financial statements included the proper accounting treatment and any
reasonable and prudent investor would have access to the audited financial
statements and would have relied on those financial statements in making an
informed decision as opposed to the prior quarterly reports for 2005, we
determined that filing a Form 8-K pursuant to Item 4.02 was unnecessary.
Although the three months ended March 31, 2005 financial statements were
"restated" we did not believe that the restatement, since it was a below the
line (non-cash) adjustment, was material to an investor or that the financial
statements for any of the 2005 quarterly periods were unreliable. Since our
March 31, 2006 10-QSB included the revised March 31, 2005 financial statements,
we determined that filing a Form 8-K pursuant to Item 4.02 was unnecessary.
Further, we did not consider the restatement for each of the 2005 quarterly
periods to be necessary as the restatement will be included in the comparative
restated financials for the same periods in 2005 included in the 2006 quarterly
filings.
* * * *
If you have any further questions, please feel free to contact me directly at
anytime at 408-217-3707.
Very truly yours,
/s/ William Hawkins
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William (Bill) Hawkins, CFO
Syscan Imaging, Inc.
cc: Jody R. Samuels, Esq.