SYNERGX SYSTEMS INC.
209 Lafayaette Avenue
Syosset, NY 11791
Mr. Larry Spirgel March 14, 2006
Assistant Director
United States
Secutities and Exchange Commission
Washington, DC 20549
Synergx Systems Inc.
Form 10-KSB for Fiscal Year ended September 30, 2005
Filed December 22, 2005
File No. 0-17580
Dear Mr. Spirgel:
This letter is to address your letter of January 31, 2006 and your questions
regarding Revenue Recognition and our Investment in Secure 724 LP.
Form 10-KSB for Fiscal Year Ended September 30, 2005
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Revenue Recognition:
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1. Refer to your disclosure herein that "product sales are allocated
using a constant gross profit percentage over the entire
contract...using the percentage of completion method of accounting."
Considering that revenues from subcontract sales are also recognized
during the entire project using the percentage of completion method,
tell us if you apply the same gross profit percentage to recognize
subcontract revenues arising from the same fixed price contract as the
product sales. In this respect, tell us your consideration of
paragraph 39 of SOP 81-1. We note in your discussion on the results of
operations that actual gross margins for product and subcontract sales
are substantially different.
Response
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In response to this comment please note that we use a different gross profit
percentage to recognize product sales and subcontractor revenues that relate to
the same fixed price contract. The following explains the type of revenue along
with the accounting treatment.
Product sales are generated when we act as a systems integrator to customers
where we supply labor and materials. The labor element for a typical project
would include material design, review of requirements submitted by an outside
professional engineer, specification layout to include devices and wiring
diagram, drafting of wiring diagram for the facility, review of wiring diagram
with the electrical contractor, project engineering (which include preparing
bills of material, selection of vendors, coordination of activity with
electrical contractor customers. programming of system), on site testing by
field technicians, (testing of wiring of devices by the electrical contractor,
test and check out of system), and customer training.
As a system integrator we generally sell our product and service to an
electrical contractor or end user customer. The electrical contractor supplies
installation labor, which includes piping and wiring to the end customer.
From time to time we are requested by the end user customer to act as a general
contractor for the electrical installation (Subcontractor revenue) combined with
the product and service required of the system integrator (Product Sales). In
these instances, we will quote the project showing materials, integrator service
and electrical installation.
The mark-up applied to the electrical installation (Subcontractor Sales), which
is supplied by an independent outside electrical contactor, is limited and
substantially different than the system integrator portion of the project (which
we supply). The end user customer aware of the elements of the contract accepts
the bonafide proposal as a fixed lump sum contract.
We apply separate gross profit percentage to the system integration portion of
the project (Product Sales) and the electrical installation performed by others
(Subcontractor Revenues). This is in accordance with paragraph 39 of SOP 81-1 as
projects involving electrical contracting by others is segmented and revenues
can be assigned to the different elements or phases to achieve different rates
of profitability on the relative value of each element or phase to the estimated
contract. These are shown separately in our MD&A discussions.
We have clarified in our December 31, 2005 Form 10-QSB filing that there are
different gross profit elements when subcontractor revenue (outside electrical
subcontractor work) is recognized.
3. Investment in Secure 724 L.P.
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2. Tell us your conclusion with respect to the value of your investment
in Secure 724 L.P. in light of its recurring losses. Refer to
paragraph 19(h) of APB 18.
3. Tell us the nature of your funding obligations to Secure, if any,
subsequent to your initial investment. Citing paragraph 15 of FIN 46R,
tell us whether you consider Secure to be a variable interest entity
and whether you are a primary beneficiary.
Response
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Value of Investment
At September 30, 2005, the investment in Secure 724 LP was reviewed with respect
to the status of its products and technology, future development and ability to
market its product and fund its operations. At that time, Secure 724 LP was
presenting its products and technology to a Canadian energy services company for
a control/burglary system application and to a large Canadian cable/cell phone
company for a wireless application. In addition, Secure 724 LP had entered into
a letter of intent for a distribution and license agreement with an independent
group for use of its technology in UAE and Egypt. The agreement called for a
future minimum license fee of $225,000 (pending a final agreement) with a
non-refundable deposit of $25,000. This license agreement together with current
sales of Secure 724 LP's product by Avante Security Inc. (a 50 % equity holder
in Secure 724 LP) and a new relationship with the control/burglary company to
promote Secure 724 product as the primary/secondary module to clients (dealers)
for monitoring stations, security guards, etc. should generate sufficient cash
flow to continue marketing.
Assuming no sales at all, the License Fee is essentially equal to the full
selling and administration costs in Secure 724 LP's 2006 budget. Hence, Secure
724 LP could be very close to funding the full staff and management services
just from the licensing fees.
We believe Secure 724 LP will effect at least some of the sales contemplated in
its budget in 2006 (Secure 724 LP believes that its budgeted estimates are
conservative) and believe Secure 724 LP will secure a least one additional
foreign license which would augment the licensing fees.
In sum, the licensing fee plus even a portion of the budgeted hardware and
airtime sales should provide sufficient cash to be able to continue marketing so
that Secure 724 could consummate at least some of the "works in progress."
Accordingly, we do not believe that the investment is impaired and, that in
accordance with paragraph 19(h) of APB 18, the loss in value has been determined
to be temporary.
Funding Obligations
Secure 724 LP has incurred operating losses since inception. In May 2003, when
Synergx Systems acquired its 25% equity interest in Secure 724 LP, Avante
Security Inc. owned 50 % of Secure 724 LP and was determined to be the primary
beneficiary and currently remains the primary beneficiary. Avante Inc. is the
developer of the technology and is also responsible for the day to day
operations of the Secure 724 LP. At inception, Synergx Systems agreed to provide
secured loans of up to $231,000, which took the form of notes payable secured by
the assets and technology of Secure 724 LP. The Company advance $143,000 under
this agreement and was to provide $88,000 of additional funding related to
certain milestones. Eventually the milestones were not met by the various target
dates, but the company elected to provide $20,000 in loans unrelated to the
milestones. The funding by Synergx Systems was discussed in our footnote on
Secure 724 LP. At September 30, 2005, Synergx Systems was not under any
obligation to fund the operations of Secure 724 LP. Secure 724 LP is currently
pursuing additional financing from outside sources.
In addition, Synergx Systems has a 25% ownership interest in Secure 724 LP and
has no obligation or contractual commitment to increase its equity interest in
this entity or to provide additional funding. Since the inception of the 25%
ownership interest in Secure 724 LP, Synergx Systems has not been the primary
beneficiary and has no obligation to absorb the losses of Secure 724 LP beyond
its initial investment.
We also acknowledge that Synergx Systems is responsible for the adequacy and
accuracy of the disclosure in its filings; the staff comments or changes to
disclosure in response to staff comments do not foreclose the Commission from
taking any action with respect to the filings; and the Synergx Systems 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.
Very truly, John A. Poserina Chief
Financial Officer
Cc Daniel Tamkin