UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2014
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 000-49746
VISCOUNT SYSTEMS, INC.
(Name of registrant as specified in its charter)
| NEVADA |
88-0498181 |
| (State or other jurisdiction of |
(I.R.S. Employer Identification No.) |
| incorporation or organization) |
|
|
|
| |
|
| 4585 Tillicum Street, Burnaby, British Columbia,
Canada |
V5J 5K9 |
| (Address of principal executive offices) |
(Zip Code) |
Issuer’s telephone number: (604) 327-9446
Securities registered pursuant to Section 12(b) of the Act:
None
| Securities registered pursuant to Section 12(g) of the Act: |
Common Stock |
| |
(Title of class) |
Check whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [
] No [X]
Check whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.
Yes [
] No [X]
Check whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Check whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated filer [ ]
(Do
not check if a smaller reporting company) |
Smaller reporting company [X] |
Check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [
] NO [X]
State issuer’s revenues for its most recent fiscal year:
$4,111,109 as at December 31, 2014 ($4,769,298 in Canadian dollars converted at an exchange rate of
US$1.1601/CDN$1.000).
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter:
$13,861,054 as at June 30,
2014.
State the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date:
126,047,236 shares of common stock as at March 17, 2015.
2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K, which Proxy Statement will be filed within 120 days after the end of the
Registrant's fiscal year ended December 31, 2014.
3
Form 10-K
Table of Contents
4
FORM 10-K
VISCOUNT SYSTEMS, INC.
PART I.
Forward-Looking Statements
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL
ARE FORWARD-LOOKING STATEMENTS. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE" AND SIMILAR EXPRESSIONS OF FUTURE OR
CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY
FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING
STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS
IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE
FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE
FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING
"RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE
DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K,
UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2014. AS USED HEREIN, THE
"COMPANY," "VISCOUNT," "WE," "US," "OUR" AND WORDS OF SIMILAR MEANING REFER TO
VISCOUNT SYSTEMS, INC.
Currency of Financial Information and Exchange Rate Table
The Company maintains its books of account in Canadian dollars
and references to dollar amounts herein are to the lawful currency of Canada
unless otherwise indicated.
The following table sets forth, for the periods indicated,
certain exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of U.S. dollars per one
(1) Canadian dollar. The high and low exchange rates for each month during the
previous 12 months were as follows:
| |
High |
Low |
| December 2014 |
0.8839 |
0.8568 |
| November 2014 |
0.8936 |
0.8732 |
| October 2014 |
0.9017 |
0.8783 |
| September 2014 |
0.9241 |
0.8913 |
| August 2014 |
0.9251 |
0.9103 |
| July 2014 |
0.9416 |
0.9149 |
| June 2014 |
0.9393 |
0.9122 |
| May 2014 |
0.9247 |
0.9085 |
| April 2014 |
0.9210 |
0.9046 |
| March 2014 |
0.9128 |
0.8866 |
| February 2014 |
0.9141 |
0.8932 |
| January 2014 |
0.9444 |
0.8909 |
5
The following table sets out the exchange rate information as
of each of the years ended December 31, 2014 and 2013.
| |
Year Ended December 31 |
| |
|
|
| |
2014 |
2013 |
| Rate at end of Period |
0.8620 |
0.9402 |
| Average Rate during Period |
0.9054 |
0.9710 |
| Low |
0.8568 |
0.9314 |
| High |
0.9444 |
0.9815 |
Item 1. BUSINESS
GENERAL
Viscount Systems, Inc. is a manufacturer of access control and
telephone entry products, which protect buildings from unauthorized access. The
business consists of four segments.
The newest and fastest growing segment, started in 2011, is our
Freedom Access Control software solution (“Freedom”). This enterprise-wide
access control system controls entry doors throughout a business, hospital,
school, or other buildings, and prevents entry by persons unknown or staff
attempting to enter at the wrong time or day. This segment had significant
growth since inception with the highest gross margins of all of the Company’s
segments. It is the focus of the Company’s spending and efforts.
The legacy business, existing since 1969, consists of two
segments, focusing on products and services for high rise residential and office
buildings, generally described as telephone access. These products allow
visitors to contact tenants or offices via a lobby device to gain entry. The
Company has various premier brands in this marketplace, with high end products
called MESH, and lower cost products called Enterphone, selling through dealers
for Canada and the United States. This business has also had reinvestment in
2014 with new products to regain market share.
The last segment is a service division that covers the Province
of British Columbia (the “Service Division”). The primary revenue source for the
Service Division is derived from 1,186 maintenance agreements on Enterphone, EPX
and other systems that are billed on a monthly basis, as well as Time and
Material (“T&M”) billings and installation projects.
BUSINESS OVERVIEW
The Company has been designing, manufacturing and servicing
access control and security products, including intercom and door access control
systems and emergency communications systems, since 1969. With the release of
MESH in 2003 and then Freedom in 2011 the Company has been migrating away from
telecommunications-based systems to large IP based building access systems.
Through this transition, the Company is migrating from a hardware based business
model to software based. To this end, the Company is investing heavily in mobile
and cloud software applications for the Freedom platform and developing a
professional consulting sales force, focused on creating a commercial
marketplace for Freedom. To support its investments, the Company has filed
several patents since 2010, with a total of three patents granted and
approximately 60 patent claims currently pending.
Freedom is a new building security technology that does not
include an embedded decision-making software platform. Traditional systems use
controllers that have a capacity to control from 1 to 8 door access points per
controller. Each controller has embedded software to create door open commands
that are programmed through a PC system user software interface. Freedom
represents a departure from traditional access control and security systems.
Instead, with Freedom, building security decisions are done in the same PC
software, thereby dramatically simplifying the architecture of systems. The
hardware piece of Freedom is the Freedom IP encryption bridge. Each bridge
includes circuitry to trigger locks and monitor alarms and is connected to
networks using switches.
6
The Company has recognized for several years that the sales of
its traditional Enterphone/EPX products would continue to be stagnant or would
fall. Enterphone is a building access control system that uses a building’s
internal phone wiring, thereby avoiding use of telephone utility services. The
reason for the diminished sales of the product mainly relates to new digital
telecommunications alternatives. The Enterphone technology requires access to a
dedicated set of inside wires and is difficult to install and service with the
existence of phone over cable or TV over phone systems. Therefore, the
popularity of the technology has begun to wane.
COMPANY HISTORY
The Company’s current business is operated primarily through
its wholly owned subsidiary Viscount Communication and Control Systems Inc.
(“Viscount Communication”). The business of the Company’s subsidiary began
operations in 1969 as a manufacturer of video switching equipment. In 1970, the
business was acquired by B.C. Telecom Inc. (“BC Tel”), which was acquired by
Telus Corporation in 1999. BC Tel was the telephone utility for British
Columbia, Canada and was controlled by GTE Corporation (now Verizon
Communications Inc.). Under BC Tel, the business operated as an electronics
research laboratory and manufacturing facility. Among the products manufactured
were central office telephone test equipment, telephone demarcation blocks, and
a satellite-based kiosk system used to provide information at airports and other
public facilities.
The Company was incorporated on May 24, 2001 under the laws of
the State of Nevada under the name OMW4 Corp. The Company’s subsidiary, Viscount
Communication, was incorporated in 1997 under the laws of British Columbia,
Canada, for the purposes of carrying on the present access control business. The
Company acquired all of the issued and outstanding shares in the capital of
Viscount Communication on July 27, 2001, in exchange for 10,000,000 shares of
the Company’s common stock, thereby making it our wholly owned subsidiary. As a
result of the acquisition, the former shareholders of Viscount Communication
obtained a controlling interest in OMW4 Corp. In connection with the
acquisition, the Company changed its name to Viscount Systems, Inc. effective
August 27, 2001.
In 2003, the Company acquired certain inventory and 2,165
service agreements from Telus Corporation. The service agreements related to the
maintenance of Enterphone installations throughout Western Canada. The inventory
was comprised of various products and components for installation and repair of
these Enterphone installations. Enterphone is used to provide intercom and
access control functions in buildings. It was originally developed by BC Tel in
1965.
Freedom was released in 2011 and represents the primary focus
for the future, IP-based building security systems. Viscount has also expanded
the capabilities of Freedom to focus on US Federal Government opportunities by
making Freedom FIPS 201 compliant (as more fully described below) and is now
upgrading Freedom further to expand into mobile applications and the cloud.
INDUSTRY OVERVIEW
The Company competes in the building intercom and access
control systems industry. The intercom and access control industry is sometimes
referred to as a segment of the low-voltage systems industry. The Company’s
intercom and access control systems are designed to automate the control of
access to buildings or other restricted access areas. Intercom systems and
access control systems are complementary; however they can also be used
independently depending on user requirements. For example, most modern
residential apartment or condominium buildings have an intercom system for
visitors wishing to communicate with residents. Residents, on the other hand,
are issued access cards that can be used in conjunction with card readers
installed beside gates, parking garages, doors or elevators in order to gain
access.
Access control systems provide two functions for a building.
Building tenants use access cards and readers that control access through doors,
gates or elevators, while visitors use telephone intercoms to be granted
admission by a building occupant or manager. The systems also provide
sophisticated alarm functions such as identifying doors left open or forced
entry. The sophistication of systems ranges from controlling a single door where
records are kept manually to large enterprise systems covering hundreds of
buildings from a dedicated security facility.
7
Freedom and MESH mark a very different business model from the
traditional approach. The building control and security industry has
traditionally been highly segmented based on specific functions designed into
proprietary electronic hardware. This has meant that makers of
heating/ventilation and air-conditioning systems and security card access
systems essentially manufacture input/output systems, while intercom makers
manufacture voice systems, and security camera makers manufacture closed-circuit
video systems. Stated otherwise, audio, video, environment and access control
systems are traditionally all separate building control systems that are
independently controlled, installed, and maintained. There has been strong
convergence of technologies in the computer and telephone-related industries
based on digital standards; however, the building control industry has not as
yet undergone a similar convergence of technologies. Traditionally, where
systems need to be compatible, the industry has relied on integration.
Integration is the use of a host computer and custom software to tie separate
and distinct systems, typically from different manufacturers, together on a
common software platform. However, because Freedom and MESH are based on a
single software platform and database architecture, different systems such as
intercom and building security can be run as a single platform. Furthermore,
with Viscount’s new Active Directory platform, logical and physical security can
run as a unified platform that creates much more secure and flexible systems
that comport with the integration model.
Along with certain other industry participants, the Company has
turned to current high-technology solutions in order to reduce costs of
ownership of security systems while improving functionality. The Company has
developed new system platforms that will permit convergence of the control of
various building functions, such as access control, intercom, closed-circuit
television, and heating/ventilation and air-conditioning. These systems can be
operated on a single commercially available host server and can operate using
standard communications techniques. As a result of using a single full-service
system to replace the three or more separate dedicated systems, each requiring
its own host server, the overall cost of ownership of a security and control
system has been reduced.
Access Control Systems Technology
The enterprise access control industry has traditionally used a
communication technology known as Wiegand. Most of the worlds installed access
systems are based on Wiegand technology. This also includes most smart card and
biometric systems since these devices typically must be converted to some form
of Wiegand to be processed on control panels. Today, these systems are commonly
found in residential, commercial and industrial buildings in the form of access
control cards and card readers. Wiegand was initially developed in 1970 by
Sensor Engineering as an access card technology. The card technology used a
special patented process whereby wires are imbedded in a plastic access card to
encode its data. This data format became a standard for other readers including
Radio Frequency Identification Devices (“RFID”). Most access control readers are
connected to control panels. Each panel holds a card database and software that
creates door unlock and alarm decisions. Panels are typically networked using RS
485, CANBUS or a similar technology. A host controller is programmed to receive
information from the card reader in order to permit access to a building.
Each host controller can operate between 1 to 8 doors.
Accordingly, a building with a large number of controlled access points could
require a large number of host controllers, resulting in greater hardware costs.
Host controllers can in turn be connected to a central server that monitors the
host controllers and collects information on access point usage. The host server
also holds the card holder database to store information and issue cards to
users.
The underlying technology that operates these traditional
access control systems is approximately 30 years old. The readers are considered
“dumb” readers as they simply receive information from the access card and
transmit it to a host controller. The host controller processes the information
in order to determine whether to grant or deny access. If access is granted, the
host controller then transmits a signal to activate a switch to open the access
point where the reader is located. This is a simple input/output-type relay
system which requires a separate host controller for approximately every eight
access points.
There are numerous limitations with the older technology.
Systems are proprietary and expensive. In many ways physical and logic access
control are identical, but the existence of control hardware has precluded
proper unification and convergence. New concerns about the vulnerabilities of
control panels to cyber-attack are prompting some end users to look at
alternatives.
8
Compliance driven change
The Company is participating in this advance in the access
control industry with its proprietary MESH and Freedom intelligent access
control and communication technology systems. Viscount believes the answer to
the issues with the traditional access control model is the Freedom software
application-based approach. After 9-11, the US Department of Homeland Security
was created. An evaluation by FIPS concluded that control panels and cards were
not secure. With it came FIPS 201, an expansion of processes and regulations
designed to update security. An expanded standard, “FIPS-201-2,” is now in
active drafting by FIPS for future implementation. These regulations state that
the vast majority of the existing access control infrastructure needs to be
replaced or upgraded. This presents an enormous opportunity for new lower-cost
and more conformant technologies such as Freedom.
PRODUCTS
The Company is a manufacturer, developer, reseller and service
provider of intercom and access control systems. The Company’s intercom and
access control systems are installed throughout North America for various
applications including: condominium/apartment building access and intercom;
residential intercom; gated home/community access and intercom;
seniors/government housing access, tracking and intercom; elevator access and
tracking; garage or perimeter gate control; and emergency communications.
Enterphone Access Control Products
Historically, the Company’s principal product was the
Enterphone intercom and access control system. The model of the current
generation of Enterphone is EPX. Enterphone is the Company’s patented building
entry control system that uses a building’s internal phone wiring to allow
access control for tenants and intercom and access control between visitors and
tenants. The use of a building’s internal phone wiring by the Company’s
Enterphone system provides an option to using telephone company wiring, thereby
bypassing monthly telephone charges. It also does not require tenants to pay for
an individual phone line to operate their intercom and door access system and is
not affected by interruptions in telephone company service. This makes the
Company’s Enterphone system distinct from other “dial-up” telephone entry
systems that use telephone company lines.
The Enterphone system is sold as a central control panel which
is installed in a building’s telephone control room. The control panel connects
an intercom panel located at an entrance to the building with the telephone of
building tenants. A visitor wishing to gain access to the building dials a one
to four digit number at the entrance panel. The call is directed from the
entrance panel, through the common control equipment and up to the tenant’s
telephone. The tenant hears a unique ring and can unlock the entrance door by
pressing a number on the telephone’s numeric key-pad. Each control panel can
process connections to as many as 840 suites.
The Company also manufactures electronic entry access panels
that can operate using either the Enterphone system or dial-up telephone company
lines. The Company’s panels are manufactured in various sizes and with various
features in order to accommodate varying purposes and building types. For
example, the Company manufactures panels that provide intercom and access
control from one suite to up to 1000 suites; or panels that provide on-screen
name search capabilities; or panels that are streamlined in shape or small in
size. All panels that the Company manufactures incorporate the Enterphone
technology; however, most panels can also be installed to use telephone company
lines.
Enterphone panels can also be combined with other technologies
such as access tracking and control, closed-circuit monitors, infrared and radio
frequency remotes, and Wiegand cards and card readers. The Company purchases
these technologies from other manufacturers and resells them under the Company’s
brand names. Most of the products that the Company resells can be integrated
into our Enterphone access control system.
We have no material principal suppliers with regards to the
Enterphone system.
Enterphone iQ
In late 2014, Viscount completed a new product line, offering a
mid-ranged solution based on our MESH technology. This LCD color video screen,
housed in a smaller footprint at considerable cost savings, is intended to offer Viscount’s high-quality telephone entry system at a price
comparable to our competitors’ black and white, LCD, two to four line display.
This product is complete and will be launched in early April 2015. We expect
considerable sales growth with this product, capturing a price point for which
Viscount had no offering previously. This introduction reflects a re-commitment
to the telephone entry market that had previously been allowed to age in its
technology.
9
MESH and Freedom Access Control Systems
Overview
MESH is a software-based building management system designed to
replace traditional systems that are more hardware intensive. The Company
continues to develop technology that was initially conceptualized in 1998. MESH
was commercially released in late 2003. MESH applications include touch-screen
intercoms, building directories and physical card access and alarms. The first
MESH product releases were touch-screen intercoms designed as an accessory for
the Enterphone/EPX product line. Viscount subsequently enhanced MESH to include
physical card access. For traditional markets such as high-rise condominiums,
MESH intercom systems as well as access control systems have proven to be
complementary. However, in 2012, Viscount split MESH into two components: the
intercom component will continue to be branded as MESH and the access control
component will be branded as Freedom. The purpose of this was to eliminate
market confusion whereby end users looking for a highly secure physical access
system were presented with MESH, which appeared to be primarily an intercom
system.
MESH intercoms use a regular computer motherboard and
off-the-shelf computer accessories such as touch screens to create computerized
building intercom systems and building directories. MESH touch panels are
intercom accessories for the MESH access control and facility management system.
MESH panels can be surface- or flush- mounted. MESH allows building tenants to
communicate with visitors and grant or deny entry. Units can display residential
or commercial building directory listings with a building-specific screen saver.
Options include built-in cameras, card access, and elevator control. Multiple
panels can be connected on a shared database or to central MESH servers for
complete card access and facility management. MESH panels come with 15, 19 or
32” touch screens and can come for wall mounting or as floor-mounted kiosks.
MESH panels, located at entrance doors for visitor access, can
operate independently or as a slave of the MESH server. The basic MESH panel
that the Company has commercially released is a full color screen industrial
computer. The MESH panels may be located at entrance doors for visitor access or
can be on-site managed by security guards as they manage the MESH network. The
master/slave architecture of MESH panels reduces cost, simplifies programming,
and improves data base management.
In designing MESH, much consideration has been made of the many
dissimilar applications requiring a MESH network. In cases where building
control is accomplished with on-site security and concierge staff, limited MESH
hardware or possibly only software may be needed to perform the required
functions. For example, MESH software may be sold as a simple visitor tracking
system for commercial or gated residential sites.
In general, MESH has been designed to allow simple
installations to be performed by small independent alarm contractors. However,
provision has also been made for direct involvement by the Company’s staff in
large campus- wide and enterprise-wide installations.
MESH has many additional benefits, both in terms of building
security and particularly relative to the legacy Wiegand protocol.
MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. The Company has developed
various modules for our MESH technology and intends to develop further modules
which will be released in a series of phases. Some of these product enhancement
modules are described below:
|
• |
The MESH server provides new opportunities to host video
on the unified platform with voice and data. This product enhancement
would represent an entirely new concept in the security industry.
|
10
| • |
The nature of the MESH server makes MESH telephony
products inherently Internet-enabled. Future MESH appliances may include
the MESH television line, which allows residents to view visitors at the
door. MESH panels may be able to connect to web-enabled set-top boxes
being promoted as part of the web TV market. MESH may be able to connect
to videoconferencing telephones that would compete in the large offshore
video intercom business, but at a fraction of the cost by saving on
conduit and cable. |
| |
|
| • |
The distributed intelligence of MESH makes the product
suited to the growing emergency call/nurse call industry. |
| |
|
| • |
MESH networks are built on a proprietary architecture
platform which is functional to integrate with any existing automation
network. |
Freedom
Freedom is the new internet technology (“IT”) platform
developed and released by the Company during the last quarter of 2010. This IT
platform can turn any card reader into an internet protocol (“IP”) device by
connecting the Freedom IP device with built-in input/output to a
Power-Over-Ethernet (“POE”) switch and then every card usage is processed on a
redundant MESH server either in a customer’s building or any remote site.
The software component of Freedom is the web browser security
operating platform. Unlike control panels, the user database and the door
control software is written in IT language located on a server(s), thereby
future-proofing systems from the traditional issue of proprietary hardware
version obsolescence and improving scalability by eliminating the need for
additional hardware every time a reader is added to the system.
Viscount has upgraded Freedom to include unified
physical/logical access control using Microsoft Active Directory, both public
and private cloud-hosted solutions as well as mobile solutions. In 2014, Freedom
was strengthened and hardened, including receiving a prestigious certification
called FICAM 1302 from the US Federal Government. The Freedom solution is so
unique compared to competitors, FICAM 1302 (versus the existing 1301 category)
was created just to display the unique offering from Viscount. Our solution
eliminates significant cost from existing solutions, while still offering the
highest security available. In 2015, Viscount expects FICAM 1302 certification
to drive penetration into other Federal agencies that was previously blocked
until certification.
Liberty
Liberty is a derivation of Freedom, using the same software and
hardware, but downsized for the smaller market, and sold exclusively through
security distribution channels. The functionality is limited to the 1-12 door
market, where 80% of access control systems are sold. By utilizing the exact
same database and software, with features removed, Viscount was able to easily
enter the market without significant additional support costs and the ability to
upgrade and freshen both Freedom and Liberty with one set of software code.
Liberty was launched in the fourth quarter of 2013.
OTHER SERVICES
In addition to sales of the Enterphone, MESH, Freedom, and
Liberty, the Company also services approximately 1,344 existing Enterphone
installations within Western Canada.
PRODUCTION
Viscount has facilities for circuit board manufacture and
mechanical assembly. The Company uses a range of processes to produce its
products. The Company maintains full facilities to assemble through-hole circuit
boards and limited facilities for assembling surface-mount circuits. The Company
has a policy of supporting old products as long as parts are available for
servicing and replacement. We have designed EPX to be backwards compatible with
the 2000 series to improve the longevity and serviceability of both products.
Freedom, MESH and EPX are manufactured using surface-mount technology so are
outsourced with final assembly and software installed at Viscount. This includes
all Freedom IP encryption bridges.
11
Our principal suppliers of card readers are HID Global
Corporation and Veridt.
The MESH and Freedom software platforms are loaded on standard
industrial computer chassis. The Company is not developing hardware internally
for MESH or Freedom since the required hardware controllers are commercially
available at quality and price levels that make internal development
uneconomical. In addition, by using COTS components, the Company improves time
to market, eliminates hardware debugging and increases the Company’s ability to
be technologically flexible in the future. The Company is primarily executing
final mechanical assembly of the MESH and Freedom systems.
RESEARCH AND DEVELOPMENT
Research and development continues to be focused on enhancing
the Freedom/MESH product line. A number of these enhancements were identified in
the “MESH and Freedom Access Control Systems”, “Freedom” and “Other Services”
section of this document. Specific custom Freedom/MESH applications are being
considered, evaluated and implemented. An example of this process would be
active directory integration. Expenditures in connection with research and
development for the years ended December 31, 2014 and 2013 were $703,288 and
$425,016, netting off a one-time $146,502 government grant resulting in $278,514
in each such year, respectively.
MARKET AND MARKETING
The Market
MESH Market:
The Company’s traditional market for the Enterphone product was
apartment and condominium buildings. While the market for telephone entry-type
systems amounts to approximately US$100 million based on internal market
research conducted by the Company, in the past 10 years there has been a strong
trend towards increased building security resulting in much more sophisticated
integrated installations. For example, in 1990, a typical condominium building
would be equipped with an intercom to admit visitors. Today, a typical new
building installation includes telephone entry, card access, closed-circuit
cameras, individual burglar alarms and panic stations. This puts pressure on
manufacturers to provide a comprehensive package and represents an opportunity
for significant revenue growth per system. MESH is the Company’s first in-house
product that addresses these multiple requirements. The modular nature of MESH
also provides the Company with an excellent opportunity to design additional
products on the MESH platform to provide enhanced options for a comprehensive
building security package.
In addition to apartment entrances, MESH is also designed to
provide access control for the rapidly growing gated community market.
Monitor-style directory panels are also used in thousands of commercial
high-rises. The MESH panel provides features previously unavailable for this
market, such as touch screens, multiple language options and color video
displays. The overall effect of these system advances has enhanced the Company’s
core business, while allowing the Company to find applications where the new
features expand the traditional market for such systems.
The Company is targeting upgrades and retrofits to existing
apartments and various government agencies that use traditional telephone wire
intercom access control systems. New construction projects are also part of the
MESH installation market. The low hardware costs and increased functionality of
the MESH system continue to be marketed to building management companies, along
with its turnkey installation as a replacement to existing access control
systems for most modern buildings.
Freedom market:
Freedom moves Viscount into an entirely new market, door
security for enterprise clients. This market has been estimated at $1.2 billion
for access control manufacturers (and approximately $5-10 billion for end users)
according to the Freeman Report, and includes a range of technologies for
securing facilities, including both RFID and biometrics. The access control
market can generally be described as the market for any equipment used to
control passage through a door, gate, parking garage, or other portal. A portion
of this market is comprised of mechanical and electronic door locks that
typically control access through single doors. Many of the single door systems
have been engineered for low security levels for customers who do not desire a
full access control host. The access control market that the Company competes in involves
computerized access control systems that typically control access through
multiple access points.
12
The physical access control industry was once highly
fragmented, but through a process of consolidation, has come to be generally
dominated by a number of multi-nationals, listed below. Physical access control
typically involves two groups – the electronic reader suppliers (RFID readers,
biometrics) and the control suppliers. The control suppliers are typically the
top of the food chain and resell electronic reader devices as part of the
control platform. This is the core segment in which Viscount competes. The
electronic reader part of this industry grew out of old-fashioned door locks. It
is not surprising that at this level the most common companies are ASSA ABLOY
and Stanley. ASSA ABLOY has been the most aggressive over the years and is now
fairly dominant in the area of door control and “entrance systems.” Key
acquisitions included HID Global Corporation (in 2000), which is a leading
provider of access control cards and electronic readers. ASSA ABLOY has made
over 20 acquisitions in the space and has almost 40,000 employees worldwide.
Access control doors require software and hardware to operate.
There are specialized companies in this segment, but most are now part of
massive conglomerates that provide a broad range of related industrial products.
Major players include Lenel, which is part of United Technologies Corporation
(NYSE: UTX), Software House, which is part of Tyco International (NYSE: TYC),
Honeywell (NYSE: HON), Schneider Electric (SU:EN Paris), Johnson Controls (NYSE:
JCI), Cisco (NASDAQ: CSCO), Stanley Industrial and ASSA ABLOY (ASSA-B.ST).
Not only does a Freedom-type unified system represent a viable
adjacent market opportunity that is large enough to be of interest, it may in
fact become critical that these companies move in the direction of Freedom. The
logic is simple: if Freedom can apply logical security rules to physical access,
it can also apply physical security rules to logical access. As unified
platforms become the trend, any of the large identity management companies will
be at a severe disadvantage if they don’t enter the market.
The most clearly focused player so far in combining logical and
physical access is Microsoft, which is now in a position to combine the most
popular enterprise user-management tool, Active Directory, with the cloud
(referred to as “Azure” by Microsoft) to provide a solution for both logical and
physical access control with one infrastructure using Freedom.
Liberty Market
Liberty is sold through security distributors such as ADI
Global Corporation (a division of Honeywell) and Tri-Ed North America (now part
of Anixter International Inc.). Starting in fourth quarter of 2013, Viscount
established long-term contractual relationships with both of these large,
first-tier security distributors. Many of their major stocking hubs hold
Viscount inventory.
Distribution Plan
The Company currently has approximately 450 dealers for its
existing products throughout North America and 70 certified integrators for its
Freedom product line. The Company’s distribution network is not static, and the
Company is constantly seeking additional sales channels.
As previously noted, MESH can serve several different markets,
and the type of dealer serving each may vary. Simple installations may be
performed by small independent dealers, but as the overall scope of the project
increases, the technical ability of the dealer becomes increasingly important.
At the extreme, employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, personnel may
be involved on a co-op basis with large national security, building automation
and heating/ventilation and air-conditioning contractors.
With the addition of our Liberty product line, new security
distributors were added who sell the Liberty line in the open security market or
to smaller dealers on a non-exclusive basis. These new distribution deals, along
with the existing dealer base, gave the Company immediate access to the largest
networks of dealers in the US, Canada and Mexico.
13
During the past year, the Company has been targeting its
existing markets as well as targeting the US Federal Government and large
corporate end users for the sale of Freedom technology. The Company is
concentrating on North America at this time. All sales remain through these
indirect channels, with minimal sales to the end users of the product.
First-line installation and technical support are provided by our dealers and
certified integrators to the end users.
Marketing Strategy
The Company has been using its established distribution
channels, as well as new distribution channels, to access its target markets for
the MESH, Freedom, and Liberty technology. As a unique technology, however,
end-users as well as dealers must be educated about Freedom benefits and
capabilities. It is the Company’s experience that a stronger initial emphasis on
influencing end-user decision-makers and large national system integrators will
be the most effective in developing the Freedom market. The Company sells
through authorized dealers, integrators, value-added-resellers, and distributors
and does not typically sell direct to end users.
Webinars
Viscount has been concentrating on webinars to educate the
industry about Freedom. The response has been excellent with audiences from
several hundred up to 800 registered attendees per webinar.
Advertising
Products are advertised on an ongoing basis in various print
publications, which the Company will continue to do. We have been testing new
publications on a regular basis to evaluate response, sales and readership. All
leads are followed up, and magazines are rated based on a dollar sale per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given the Company a very accurate measure of the effectiveness
of various publications and individual ads.
Trade Shows
During 2014, the Company continued participating in tradeshows
to increase the awareness of MESH and Freedom. During 2015, we will continue to
attend tradeshows to enhance the exposure for MESH, and Freedom.
Direct Marketing
The Company continued educating customers about Freedom
technology by holding Freedom and Liberty training seminars throughout the U.S.
and at our head office via the internet.
Pricing Strategy
The Freedom technology is built on an architecture which can
reduce user costs significantly. The modular nature of the technology amplifies
this effect the larger the system becomes. The Company has been actively
pursuing a pricing model based on substantive margins, but at a price point that
can promote market disruption. Many traditional companies focus on recurring
revenue for software licenses. Viscount has chosen to forgo this in the short
term with a view to creating recurring revenue through cloud sources. In 2014,
the Company introduced a low-cost version of Freedom to address small and
mid-size sites. The access control industry is fragmented with a wide variation
on pricing depending on the size of system and supplier. The new product will be
introduced to allow Viscount to compete for all system sizes.
With a unique product and a position of product leadership, the
Company has devised a strategy of building market share. With the telephony
component, the Company has been targeting a price which provides MESH panels at
a price that is competitive with similar products, but with newer enhanced
features.
COMPETITION
Competitive Summary
14
The security and building control industry is undergoing a
rapid period of consolidation. Large multi-national companies are integrating
vertically by acquiring equipment providers to build house brands. This began
with the purchase of Cardkey by Johnson Controls, Guardall by Chubb and
ADI/Northern Computers by Honeywell. More recent acquisitions include the
purchase of Kantech and Software House by Tyco and the purchase of Lenel and GE
Security by UTC. The access control industry is very segmented with no company
having a dominant market position. Canada has approximately six access control
product manufacturers, while the U.S. has at least fifty. There is a certain
amount of vertical integration in the business, and several large multinational
companies possess their own house brands. Many branches of these multinational
companies often have their own brand preferences and buy outside their internal
distribution channels.
Almost all manufacturers build control hosts based on Wiegand
technology or smart card technology that converts data to Wiegand. Due to these
limitations, most research and development is focused on reducing hardware costs
and making the control hosts more network capable. In most cases, the
manufacturers using traditional Wiegand technology are limited from 1 to 8 doors
per control host.
Competitive Threats
The Company has a strong dealer and distribution plan in place,
and Freedom has positioned it in a market dominated by much larger players. The
higher security Freedom applications are also somewhat outside of the
traditional scope of business, and therefore the Company is rapidly trying to
develop a market for Freedom, and in the process, educating users of Freedom
through training seminars. The Company believes that marketing strategies and
training seminars will provide benefits that will help it achieve market share
that will allow it to remain competitive. There is no guarantee that the Company
will be able to successfully compete against its larger competitors.
While Freedom is still a new product in an established growing
market, technological change can be met with resistance. Some buyers are nervous
about new products and new protocols even more so. Most buyers are familiar with
the benefits of IP-based cameras, and the Company has marketed Freedom from this
point of view; that is, to stress the inevitability of all access control
systems evolving this way.
A key concern is the ability of competitors to imitate the
product and the ability of large imitators to more easily commercialize their
product. The Company’s senior management, having prior experience working for
the Company’s larger competitors, have estimated that the Company still has a
three-year market lead based on the research and development schedules of such
competitors. Fortunately, the wide range of Freedom software applications should
provide the Company with an ongoing lead, as long as it is aggressive with
research and development.
INTELLECTUAL PROPERTY
Viscount actively protects its intellectual property. The
Company has filed patents since 2010, encompassing close to 60 patent claims
under six (6) major patent filings. Viscount was awarded three US patents in
2014. Other patents have not yet been awarded, but the Company intends to
vigorously defend each patent as they are awarded.
The Company relies on a combination of non-disclosure and other
contractual agreements to protect the confidential information, know-how, and
proprietary rights relating to Enterphone, MESH and other Viscount products. The
Company has contractual rights with respect to registered North American
trademark and trade name for Enterphone (word alone). The Company is still
considering or in the process of registering North American trade names for MESH
and Freedom.
The Company has registered active Internet domain names for
www.viscount.com, www.libertyacess.net, www.enterphone.net, and
www.enterphone.org.
Standard employment agreements and license agreements contain
provisions that protect the confidentiality of proprietary technology. All of
our employees and sales agents are required to sign these agreements prior to
their employment or engagement.
15
To date, the Company has not received notification that its
services or products infringe the proprietary rights of third parties. Third
parties could, however, make such claims of infringement in the future. The
Company cannot be certain that others will not develop substantially equivalent
or superior proprietary technology, or that equivalent services will not be
marketed in competition with the Company’s services, thereby substantially
reducing the value of its proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements will provide meaningful protection for its
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.
GOVERNMENT REGULATIONS
There are a number of regulatory and related issues that affect
Viscount’s business. In order to comply with Sarbanes-Oxley and other rules and
regulations, every large public corporate entity is required to have adequate
security measures in place for the purpose of protecting IT data from tampering
by unauthorized personnel. A component of this includes properly securing
physical facilities as well as IT networks. Unfortunately, since control panels
typically use a separate security database from IT, it is very difficult to
relate usage of the systems for the purposes of audit and compliance. With the
Freedom unified platform using Microsoft Active Directory, audits and compliance
issues are simplified using a single set of IT logs.
For US government facilities, Viscount must conform with
FIPS-201 and other federal requirements. A newer standard of FIPS 201-2 is under
final discussion, and a release is expected shortly. The new regulations
positively impact Viscount through our ability to perform traditional hardware
functions with software and may negatively impact existing suppliers since their
existing technology and hardware is non-conformant.
In addition, some of the Company’s Enterphone products are
still under government regulation. The Enterphone is an interposition technology
which, in the U.S., can only be installed where the local public service
commission has designated the original point of entry of a building as the
demarcation point between the telephone company and the building owner’s
responsibility.
SOURCES OF REVENUES
The majority of the Company’s revenues were derived from the
MESH and Freedom product lines. In 2014, MESH sales represented 38.7% of total
revenue, while Freedom product sales represented 33.7% of total revenue. The
balance of the Company’s revenue was derived from service agreements and other
products such as access tracking and control, closed-circuit video, infrared and
radio frequency remotes.
EMPLOYEES
Viscount employs 37 staff members at its production facility
and head office located in Burnaby, British Columbia, Canada, as well as sales
and support personnel in the United States. Viscount also employs two full-time
contract employees.
Board of Directors
Viscount has a current board of directors (the “Board”) of six
members. Viscount’s Board is comprised of its CEO and independent directors with
security industry experience.
Dennis Raefield
Mr. Dennis Raefield, age 67, has served as the President and
Chief Executive Officer of Viscount Systems, Inc. since February 2014, as
non-executive Chairman of the Board from February 2014 to February 2015, and has
served as a director of the Company since November 2011. On February 27, 2015,
Mr. Raefield resigned as non-executive Chairman and was replaced by Director Ned
L. Siegel, to allow Mr. Raefield to focus on the planned rapid expansion of the
Company in 2015. Mr. Raefield remains CEO and President of the Company. Mr.
Raefield has a long and distinguished career in the access control and security
industry. Most recently, Mr. Raefield was CEO and President of Mace Security International, Inc. (OTC: MACE), a
board member of Real Time Immersion, Inc. and an advisory board member for
Building Intelligence Inc. Mr. Raefield was President of Honeywell Access
Systems, a division of Honeywell International, Inc., which manufactures
enterprise-level access control systems for Fortune 100 clients. Prior to that,
Mr. Raefield was President of Pinkerton Systems Integration (now Securitas), a
security system integration business, installing video, access control and
alarms to Fortune 500 clients. During his career, he was CEO or President of the
startups Reach Systems, an access control manufacturer, and Ortega InfoSystems,
an early Physical Security Information Management (“PSIM”) manufacturer. He was
also founder and CEO of Omega Corporate Security, a west coast premier systems
integrator based in the San Francisco Bay area. Mr. Raefield holds a BS degree
in Mechanical Engineering from Santa Clara University and is a member of various
security trade organizations, ASIS, SIA, ESA, ISIO, CAA, and CSAA.
16
Paul Goldenberg
Mr. Goldenberg, age 60, has served as member of the Board since
October 2011. Paul Goldenberg has built a distinguished career as a highly
decorated criminal justice executive with extensive and broad-based experience
in a wide variety of politically sensitive government and NGO environments. In
February 2010, U.S. Department of Homeland Security (“DHS”) Secretary Janet
Napolitano appointed Mr. Goldenberg to the President¹s Homeland Security
Advisory Council’s Countering Violent Extremism Working Group. He is the creator
of the Secure Community Network, which is a DHS-funded organization that advises
churches, synagogues and mosques as to security risks and solutions. Mr.
Goldenberg is currently the Principal Counterterrorism and Homeland Security
Advisor to the American Hotel and Lodging Association, representing over 1,000
hotels in the U.S. and abroad. He is also the Senior Director of National
Security for the County Executives of America, representing over 700 county
mayors and executives. Mr. Goldenberg is currently the Chairman and CEO of
Cardinal Point Strategies, a consulting firm that provides strategic solutions
on high-profile and confidential matters for governments and businesses around
the world.
Robert Liscouski
Mr. Liscouski, age 60, has served as member of the Board since
September 2011. Robert Liscouski was the first Assistant Secretary for
Infrastructure Protection for the Department of Homeland Security, serving from
March 2003 to February 2005 and reporting directly to then Secretary Tom Ridge.
He commanded over a $500 million budget and was responsible for coordinating
authority over the protection of all sectors of the nation’s critical
infrastructure, including agriculture, food, water, public health,
transportation, and hazardous materials as well as key assets such as national
monuments, nuclear power plants, and dams. His private sector experience
includes Director of Information Assurance for The Coca-Cola Company and V.P.,
Law Enforcement Division, for ORION Scientific Systems. His government
experience includes 11 years with the Diplomatic Security Service of the U.S.
Department of State and five years of criminal investigative experience as a
homicide and narcotics investigator in Bergen County, N.J. He is a Senior Fellow
at the Center of Strategic and International Studies in Washington, D.C. and is
an advisor to the U.S. Government on technology matters. Mr. Liscouski holds a
B.S. degree in Criminal Justice from John Jay College of Criminal Justice in New
York and a Masters of Public Administration from the Kennedy School of
Government, Harvard University.
Geoffrey Arens
Mr. Arens, age 50, has served as member of the Board since
December 2014. Mr. Arens has over 22 years of investment experience and is
currently the Managing Partner and Founder of Dendera Capital LP, a New
York-based hedge fund. Previously, Mr. Arens served as Managing Director for ING
Capital LLC, where he ran the bank’s proprietary investing activities including
its event-driven, Global Investment Strategies group. Mr. Arens previously
served on the board of directors of California Coastal Communities, a
residential land development and homebuilding company where he was Chair of the
Compensation Committee and member of the Audit and Nomination Committees. He has
also served on the board of directors of Cadiz Inc., a California-based water
and agricultural resource where he was a member of the Audit and Nomination
Committees. Mr. Arens holds a Master of Business Administration from Columbia
Business School, and a Bachelor of Arts from the University of Virginia.
17
Ned L. Siegel
Mr. Siegel, age 64, has served as member of the Board since
April 2014. On February, 27, 2015, Mr. Siegel was unanimously elected as the new
non-executive Chairman of the Board, replacing Mr. Raefield, who resigned as
Chairman, but remains as CEO and President. Appointed by then President George
W. Bush, Mr. Siegel was the U.S. Ambassador to the Commonwealth of the Bahamas
from October 2007 to January 2009. He was also appointed by President Bush to
serve under Ambassador John R. Bolton at the United Nations in New York, serving
as the Senior Advisor to the U.S. Mission and as the United States
Representative to the 61st Session of the United Nations General Assembly. Prior
to his Ambassadorship, he was appointed to the board of directors of the
Overseas Private Investment Corporation. In addition to his public service,
Ambassador Siegel has over 30 years of entrepreneurial successes. Presently, he
is Chairman of the board of The Siegel Group, a multi-disciplined international
business management advisory firm specializing in infrastructure, real estate,
ports, energy, financial, cyber security and physical security services.
Ambassador Siegel serves on the board of directors and advisory boards of
numerous public and private companies as well as private equity groups. He
graduated Phi Beta Kappa from the University of Connecticut in 1973 and received
a Juris Doctorate from the Dickinson School of Law in 1976.
Alexander Buehler
Mr. Buehler, age 39, has served as member of the Board since
May 2014. Alexander J. Buehler currently serves as the President and Chief
Executive Officer of Energy Maintenance Services USA, Inc. (“EMS”), a private
equity-backed company focused on the construction, maintenance, monitoring, and
automation of oil & gas pipelines throughout North America. Prior to joining
EMS in July of 2014 as the Company’s CFO, Mr. Buehler served as the Chief
Financial Officer of Energy Recovery Inc. since May of 2011. Mr. Buehler is a
highly impactful business executive with years of experience in general
management and strategic planning as well as new product development, sales and
marketing, corporate development, operations management, and manufacturing
process optimization. He currently serves as a board member of Energy Recovery
Inc. (NASDAQ:ERII) and as a director and Chair of the Audit Committee for the
Company.
Prior to Energy Recovery Inc., Mr. Buehler spent seven years in
executive leadership positions at Insituform Technologies, Inc., (now Aegion
Corporation; NASDAQ: AEGN), a global, leading supplier of water infrastructure
technology and services for municipalities and industry, including oil and gas.
While at Insituform, Mr. Buehler held several executive-level positions in the
U.S. and abroad, most recently as Vice President of Europe, where he served as
general manager with full P&L responsibility for all operations in Europe
(spanning 23 countries through wholly-owned subsidiaries, joint ventures,
licensees, and product sales) with consolidated revenue of over $200 million and
a total of over 600 employees.
Prior to joining Insituform, Mr. Buehler worked for five years
in the U.S. Army Corps of Engineers, where he served as project manager in the
construction of basecamps to house U.S. peacekeepers in the Balkans. Mr. Buehler
received a B.S. in Civil Engineering from the United States Military Academy at
West Point and an M.B.A. in Finance from the Wharton School at the University of
Pennsylvania. More recently, Mr. Buehler attended Director’s College at the
Stanford Law School in preparation for board-level positions.
On February 17, 2014, Mr. Stephen Pineau resigned as the
President, Chief Executive Officer, Chief Financial Officer and Corporate
Secretary of Viscount Systems, Inc.
On February 17, 2014, Mr. Dennis Raefield was appointed as the
President, Chief Executive Officer, Chairman, and Corporate Secretary of
Viscount Systems, Inc. Mr. Raefield entered into an employment agreement with
the Company pursuant to which he will receive an initial annual salary of
$175,000, an annual bonus of up to 50% of his base salary, and stock options
equal to 3.99% of the Company’s issued and outstanding on a fully diluted basis.
The Company’s website address is www.viscount.com. The
Company’s periodic and current reports are available, free of charge, on the
Company’s website as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the U.S. Securities and Exchange
Commission (the “SEC”). Electronic or paper copies of the Company’s filings are
also available, free of charge, upon request.
18
The public may read and copy any materials filed by the Company
with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at
www.sec.gov. The contents of the websites referred to above are not incorporated
into this filing. Further, our references to the URLs for these websites are
intended to be inactive textual references only.
Item 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule
12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
and is not required to provide the information under this item.
Item 2. DESCRIPTION OF PROPERTY
PROPERTY
The Company’s executive office and central factory is located
in Burnaby, British Columbia, where the Company currently leases 12,040 square
feet. The Company leases this space under an industry standard operating lease
with a term expiring May 31, 2016, renewable at the option of Viscount. Current
monthly lease obligations are $12,526, including taxes, maintenance and
insurance. The Company believes that its current facilities are adequate and are
suitable for its current use, and that suitable additional facilities will be
available, when needed, upon commercially reasonable terms. The Company’s
facilities are adequately insured against perils in a manner consistent with
industry practice. The Company’s current location is the location for its
manufacturing and service divisions.
Item 3. LEGAL PROCEEDINGS
Viscount filed a Notice of Civil Claim in the Supreme Court of
British Columbia against Stephen Pineau, its former President, CEO and director
on November 19, 2014 alleging that during the term of his employment, Mr. Pineau
had misappropriated more than $200,000 of company funds. The Company is seeking
damages for breach of contract and fiduciary duty, equitable relief, including
restitution and recovery of company funds owed, special, aggravated and punitive
damages, as well as interest and costs, including special costs. Mr. Pineau
denies these allegations, and on January 2, 2015 he filed a counterclaim
alleging that the Company owes him compensation for wrongful termination, bad
faith damages, compensation he claims he is owed by the Company, unpaid
director’s fees and expenses. Viscount denies these allegations and asserts that
Mr. Pineau’s termination, while initially without cause, was changed for cause
post-termination once the Company discovered evidence of Mr. Pineau’s alleged
misappropriation. The case is still on-going.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
|
Item 5. |
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Trades in the Company’s common stock, par value $0.001 per
shares (the “Common Stock”), are quoted on the Over-the-Counter Bulletin Board
(“OTC Bulletin Board”), which is a quotation service administered by the
Financial Industry Regulatory Authority (“FINRA”). The Company’s trading symbol
on this service is “VSYS”.
The OTC Bulletin Board has a limited and sporadic trading
market and does not constitute an established trading market. The Company’s
shares began trading on February 12, 2002. The following table sets forth the
range of high and low price information of the Common Stock as reported on the
OTC Bulletin Board for the last two fiscal years and the subsequent period
ending March 31, 2015. The price information available reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
19
| |
|
High (U.S. $) |
Low (U.S. $) |
| |
|
|
|
| 2014 |
First Quarter
(through March 16, 2015) |
$0.08 |
$0.05 |
| 2013 |
Fourth Quarter |
0.12 |
0.06 |
| |
Third Quarter |
0.11 |
0.07 |
| |
Second Quarter |
0.12 |
0.08 |
| |
First Quarter |
0.13 |
0.06
|
As of March 17, 2015, there were 97 holders of record of the
Company’s Common Stock, holding a total of 126,047,236 shares, and an unknown
number of beneficial holders.
As of March 17, 2015, there were 11,752,075 stock options fully
vested and convertible into Common Stock. As of March 17, 2015, there were
82,372,128 warrants convertible into Common Stock.
The Company has declared quarterly dividends (Payment in Kind)
on its shares of Series A Convertible Redeemable Preferred Stock, par value
US$0.001 per share (the “Series A Stock”), in the last three fiscal years.
The Company’s significant liquidity risk materially limits the
Company’s ability to pay future dividends.
The Company current policy is to not pay any cash dividends on
its Common Stock.
The following table sets forth information detailing the
Company’s equity compensation plans as of December 31, 2014, under which shares
of our Common Stock are authorized to be issued.
Plan Category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) |
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) |
Number of securities
remaining
available for
future issuance under
equity
compensation
plans (excluding
securities reflected
in
column (a))
(c) |
| Equity compensation plans approved by security holders |
92,642,876 |
US$0.09 |
0 |
| Equity compensation plans not approved by security holders
|
0 |
0 |
N/A |
| Total |
92,642,876 |
N/A |
0 |
Under Item 701 of Regulation S-K, other than below, no
securities were sold by the Company within the past three years which were not
registered under the Securities Act of 1933, as amended:
On December 30, 2014, the Company issued each of Dennis Raefield, Robert Liscouski, Paul Brisgone and Paul Goldenberg 250,000 compensation warrants, each warrant exercisable to acquire an additional share of Common Stock at an exercise price of USD$0.09 per share for a period of three years from the date of issuance. The warrants may be exercised on a cashless basis.
On January 20, 2015,
Dendera Capital Fund LP (whose principal is Geoffrey Arens, the Managing Member
of the General Partner) (“Dendera”), purchased a total of 200 shares of Series A
Stock for a purchase price of CAD$234,000 to rectify the prior issuance of
2,925,000 shares of Common Stock by the Company to Dendera on January 20, 2015,
which Series A Stock was issued by the Company to Dendera as was originally
intended.
Item 6. SELECTED FINANCIAL DATA
Not applicable.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discusses the Company’s financial condition and
results of operations based upon its consolidated financial statements which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. It should be read in conjunction with
the Company’s financial statements and the notes thereto included elsewhere
herein. All dollar amounts are in Canadian dollars unless otherwise noted.
20
RESULTS OF OPERATIONS
Sales for the years ended December 31, 2014 and 2013 were
$4,769,298 and $4,134,886, respectively, an increase of $634,412 or 15.3%. This
increase was due to increased Service Division and Freedom Sales.
Freedom sales for the years ended December 31, 2014 and 2013 were
$1,606,114 and $883,680, respectively, an increase of $722,434 or 81.8%. The
bulk of this increase was due to the rapid growth of Freedom sales which were
just starting in 2013. MESH sales for the years ended December 31, 2014 and 2013
were $1,846,671 and $1,974,482, respectively, a decrease of $127,811 or 6.5%.
MESH continued to provide an alternative solution to Freedom for many of our
customers during 2014. Enterphone sales for the years ended
December 31, 2014 and 2013 were $399,115 and $402,709, respectively, a decrease
of $3,594 or 0.9%. Service Division sales for the years ended December 31, 2014
and 2013 were $917,398 and $874,015, respectively, an increase of $43,383 or
5.0%.
For the years ended December 31, 2014 and 2013, Freedom sales
were 33.7% and 21.4%, respectively, of total sales. For the years ended December
31, 2014 and 2013, MESH sales were 38.7% and 47.8%, respectively, of total
sales.
On the legacy business side, MESH sales have continued their
slow decline due to the age of this low-end product, and the lack of a mid-range
product for the marketplace. Only our high-end MESH touch screen product is
continuing to grow. MESH is a convergent technology developed by Viscount that
increases security at a reduced cost of hardware, cabling and installation, and
with simplified database management.
On the new product lines, our Freedom IT platform can turn any
card reader into an IP device by connecting the Freedom IP device with built-in
input/output to a POE switch and then every card usage is processed on a
redundant Freedom server either in the building or any remote site. The software
component of Freedom is a web browser security operating platform. Unlike
control panels, the user database and the door control software is processed in
IT language located on a server(s), thereby future-proofing systems from the
traditional issue of proprietary hardware version obsolescence and improving
scalability by eliminating the need for additional costly hardware every time a
reader is added to the system.
The Company also provides Enterphone support and maintenance
services pursuant to service contracts that were assigned to us from Telus
Corporation in 2003. Sales from the 1,186 existing service contracts continue to
decline slowly as older equipment is removed from service. On average, each
service contract represents ongoing revenues of approximately $38 per month,
inclusive of parts and labor. Monthly fees included equipment sales to those
contracts as well. Typical customers include strata management and building
owners as well as various residential, business and industrial users of
Enterphone access control and security systems. During the twelve months ended
December 31, 2014 and 2013, customer service contracts and new equipment sales
generated aggregate revenues of $1,137,521 and $1,083,481, respectively, an
increase of $54,040 or 5.0%. The decrease in service contracts has been offset
by an increase in time and material billing and new installations.
The intangible assets held by the Company are comprised
primarily of service contracts for our Enterphone 2000 product line. The number
of service agreements held by the Company was 1,186 at December 31, 2014, as
compared to 1,254 at December 31, 2013. The Company continues to amortize the
cost of the service agreements on a straight-line basis over an estimated useful
life of 10 years, which became effective as of April 1, 2005. At December 31,
2014, the cost of the service agreements, net of accumulated amortization, was
$5,224.
Cost of sales and services as a percentage of sales was 51.6%
and 42.1% for the years ended December 31, 2014 and 2013, respectively.
Management has continued to focus on controlling the input costs by using
multiple suppliers to ensure that the best and most cost-effective raw materials
are used in all of our products.
21
Gross profit for the years ended December 31, 2014 and 2013 was
$2,307,921 and $2,392,609, respectively, a decrease of $84,688 or 3.5%. This decrease was due to an adjustment in obsolete inventory which reduced cost of sales in 2013. The
gross margin percentage for the year ended December 31, 2014 of our product
categories of MESH, Freedom, Enterphone, and Service Division were 33.8%, 68.5%,
13.5% and 57.6% respectively. The gross margin percentage for the year ended
December 31, 2013 of our product categories of MESH, Freedom, Enterphone, and
Service Division were 47.7%, 80.2%, 45.0%, and 64.3%, respectively.
Selling, general and administrative expenses for the years
ended December 31, 2014 and 2013 were $5,624,312 and $3,064,786, respectively,
an increase of $2,559,526 or 83.5%. Included in the selling, general and
administrative expenses for the year ended December 31, 2014 was $1,519,950 of
non-cash stock compensation expense for the issuance by the Company of warrants
and stock options to management, staff and consultants. Excluding this non-cash
compensation expense from selling, general and administrative expenses, the year
ending December 31, 2014 would result in a total of $4,104,362, respectively, a
significant reduction in true selling, general and administrative expenses,
excluding the non-cash charges. The inclusion of this expense skews the
percentages for the year ended December 31, 2014 selling, general and
administrative expenses, as a percentage of sales, to be 117.9%, as compared to
the year ended December 31, 2013 being 74.1%. Excluding the non-cash
compensation expense from the selling, general and administrative expenses for
the year ended December 31, 2014 would result in selling, general and
administrative expense as a percentage of total sales to be 86.16%. Consulting
fees for the year ended December 31, 2014 and 2013 were $481,875 and $966,776,
respectively, a decrease of $484,901 or 50.2%. This decrease was due to some
consultants becoming employees of the Company in 2014 and some consulting
services being discontinued.
Research and development costs for the year ended December 31,
2014 and 2013 were gross $703,288 and $425,016, respectively. Government grants
for the year ended December 31, 2013 totaled $146,502, resulting in net research
and development costs of $278,514. Research and development costs have increased
during the year ended December 31, 2014 as compared to the year ended December
31, 2013 due to the hiring of three newly created technical support positions
and not receiving additional government grants in 2014.
Loss before other items for the year ended December 31, 2014
was $4,069,977 as compared to a loss before other items of $974,515 for the year
ended December 31, 2013, an increased loss of $3,095,462. Included in the net
loss for the year ended December 31, 2014 was a non-cash compensation expense of
$1,519,950 for the issuance by the Company of warrants and stock options to
management and staff. Otherwise, excluding this non-cash compensation expense
would result in a loss before other items for the year ended December 31, 2014
of $2,550,027. This adjusted loss before other items of $2,550,027 is an
increased loss of $1,575,511 as compared to the loss before other items of
$974,516 for the year ended December 31, 2013.
Total assets at December 31, 2014 were $1,597,773 and total
financial liabilities, including of derivative financial liabilities, were
$3,970,003. Total Common Stock issued as the dividend payment of the Company’s
Series A Stock for the years ended December 31, 2014 and 2013 were 974,795 and
1,257,523 shares of Common Stock, respectively.
Liquidity and Capital Resources
Cash as of December 31, 2014, as compared to December 31, 2013
was $190,309 and $172,684, respectively, a decrease of $17,625.
On May 17, 2013, the Company completed a private placement of
4,750,000 units at a price of $0.10 per unit for total proceeds of $475,000. On
May 21, 2013, the Company completed an additional private placement of 2,000,000
units at a price of $0.10 per unit for total proceeds of $200,000. Each unit
consists of one share of Common Stock and one-half of one share purchase warrant
of the Company (“Warrant”), with each whole Warrant exercisable to acquire an
additional share of Common Stock at a price of $0.20 for a period of three years
from the closing date.
In connection with the May 17, 2013 and May 21, 2013 offerings,
the Company paid to a registered broker-dealer a cash commission of $7,500 and
issued Warrants to acquire 675,000 shares of Common Stock of the Company at a
price of $0.20 per share for a period of three years from the closing date. The
Warrants may be exercised on a cashless basis.
On March 11, 2014, the Company completed a private placement of
8,333,329 shares of Common Stock at a price of $0.09 per share for total
proceeds of $750,000. The Company also issued a total of 4,166,659 Warrants,
each Warrant exercisable to acquire an additional share of Common Stock at an
exercise price of $0.20 per share for a period of five years from the closing
date.
22
In connection with the March 11, 2014 offering, the Company
paid to a registered broker-dealer a commission of $71,000 in cash and Warrants
to acquire 788,888 shares of Common Stock of the Company at a price of $0.09 per
share for a period of five years from the closing date. The Warrants may be
exercised on a cashless basis.
On March 27, 2014, the Company completed a private placement of
16,502,220 shares of Common Stock at a price of $0.09 per share for total
proceeds of $1,485,200. The Company also issued a total of 8,251,107 Warrants,
each Warrant exercisable to acquire an additional share of Common Stock at an
exercise price of $0.20 per share for a period of five years from the closing
date.
On March 31, 2014, the Company issued an additional 277,778
shares of Common Stock at a price of $0.09 per share for total proceeds of
$25,000. The Company also issued 138,888 Warrants, each Warrant exercisable to
acquire an additional share of Common Stock at an exercise price of $0.20 per
share for a period of five years from the closing date.
In connection with the March 27, 2014 and March 31, 2014
offerings, the Company paid to a registered broker-dealer a commission of
$35,604 in cash and Warrants to acquire 395,599 shares of Common Stock of the
Company at a price of $0.09 per share for a period of five years from the
closing date. The Warrants may be exercised on a cashless basis.
On December 30, 2014, the Company issued each of Dennis Raefield, Robert Liscouski, Paul Brisgone and Paul Goldenberg 250,000 compensation warrants, each warrant exercisable to acquire an additional share of Common Stock at an exercise price of USD$0.09 per share for a period of three years from the date of issuance. The warrants may be exercised on a cashless basis.
Subsequent to the year ended December 31, 2014, on January 20,
2015, the Company completed a private placement of 2,925,000 shares of Common
Stock at a price of CAD$0.08 per share for total proceeds of CAD$234,000. The
Company also issued a total of 1,462,500 Warrants, each Warrant exercisable to
acquire an additional share of Common Stock at an exercise price of CAD$0.16 per
share for a period of five years from the closing date. The Warrants may be
exercised on a cashless basis. This private placement was cancelled on March 16,
2015 and replaced with Series A Stock as described below.
On January 20, 2015, Dendera Capital Fund LP (whose principal
is Geoffrey Arens, the Managing Member of the General Partner) (“Dendera”),
purchased a total of 200 shares of Series A Stock for a purchase price of
CAD$234,000 to rectify the prior issuance of 2,925,000 shares of Common Stock by
the Company to Dendera on January 20, 2015, which Series A Stock was issued by
the Company to Dendera as was originally intended.
At December 31, 2014, the Company had working capital (defined
as current assets less current liabilities) of $290,951 as compared to working
capital of $248,877 at December 31, 2013, an increase of $42,074. The current
ratio at December 31, 2014 was 1.27 as compared with 1.24 at December 31, 2013.
The Company’s financial statements have been prepared on a
going concern basis, which assumes the Company will be able to realize its
assets and discharge its liabilities in the normal course of business for the
foreseeable future. The Company has an accumulated deficit of $12,661,536,
reported a loss for the year ended December 31, 2014 of $990,681 and has working
capital of $290,951 at December 31, 2014. Cash flows used in operating
activities for the year ended December 31, 2014 were $2,123,807. Although
management is confident that the Company believes it can access sufficient
working capital to maintain operations and ultimately generate positive cash
flow from operations, the ability to sustain the current level of operations is
dependent upon growing sales and achieving profits. There can be no assurance
that the Company will be successful in obtaining sufficient working capital and
that actual results will not materially differ from expectations. If working
capital becomes insufficient, the Company will have to reduce spending in
several key areas including research and development and marketing. This would
have a negative impact on the growth prospects of the Company. In the event the
Company hits its sales targets, the Company will have sufficient working capital
for 2015. Management continues actively seeking new investors and developing
customer relationships. These factors raise substantial doubt about the ability
of the Company to continue operations as a going concern.
The outstanding term for our receivables has been increasing
due to a few slower-paying customers. The accounts receivable reserve was
$181,529 at December 31, 2014 as compared to $250,458 at December 31, 2013 due
to more rigorous collection efforts on difficult accounts. The accounts
receivable reserve has decreased by $68,929 or 27.5%, since the year ended
December 31, 2013. Management continues to follow-up on customer accounts to
improve cash flow and to minimize bad debts. There had been no
significant or material business conditions that would warrant further increases
to the reserve at this time.
23
The Company is subject to significant liquidity risk. At
December 31, 2014, the Company’s current assets consist principally of trade
accounts receivables and inventory. The Company intends to conduct capital
raises for Common Stock, preferred shares, convertible debt and factoring.
If the Company’s liquidity increases, we will be purchasing
more inventory and hiring more sales and technical staff to accommodate the
expected increased future sales.
There are no material unused sources of liquid assets.
For the year ended December 31, 2014, the Company invested
$185,714 on capital expenditures, consisting of computers, office furniture and
leasehold improvements.
To date, the Company has not invested in derivative securities
or any other financial instruments that involve a high level of complexity or
risk. The Company expects that in the future, any excess cash will continue to
be invested in high credit quality, interest-bearing securities that is subject
to a Board-approved investment policy.
The Company will likely require additional funds to support the
development and marketing of its new Freedom and Liberty products. There can be
no assurance that additional financing will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be unable to
develop or enhance its products, take advantage of future opportunities, respond
to competitive pressures, and may have to curtail operations.
There are no legal or practical restrictions on the ability to
transfer funds between parent and subsidiary companies.
The Company does not
have any material commitments for capital expenditures as of December 31, 2014.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company’s financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Fourth Quarter
During the fourth quarter of 2014, the Company continued to
experience cash flow challenges. These problems impacted the Company's ability
to perform some marketing activities and were caused by unexpected delays in
orders or payments from U.S. Federal Government contractors. These orders are
expected to be released in the first or second quarter of 2015. The Company’s
sales continued to show strength through continued demand for MESH Touch
Screens, especially Freedom, U.S. Federal Government deployments, and the
addition of several major distributors of its Liberty access control system. The
Company diverted significant engineering resources to the final development of
its U.S. Government FICAM solution and its targeted submission of its new FICAM
topology application, completed in 2014.
Critical Accounting estimates and judgments:
The Company’s discussion and analysis of its financial
condition and results of operations, including the discussion on liquidity and
capital resources, are based upon the Company’s financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management re-evaluates its
estimates and judgments, particularly those related to the determination of the
allowance for doubtful accounts, inventory obsolescence, the estimation for
future warranty costs, the estimated useful lives of equipment and intangible
assets, the deferred tax valuation allowance, and assumptions used to determine
the fair value of stock-based compensation. Details are provided for critical
estimates are as follows:
24
Product revenue is recognized when there is persuasive evidence
of a sale arrangement, delivery to the customer has occurred, the fee is fixed
and determinable, and collectability is considered probable. Sales or transfers
to customers prior to these criteria being met are recorded as deferred revenue.
Revenue from the installation of equipment is recognized when the installation
has been completed, the fee has been fixed and collectability is considered
probable.
The Company follows the cost reduction method of accounting for
investment tax credits and recognizes the estimated net recoverable amount when
reasonable assurance exists as to their collectability. Investment tax credits
claimed are ultimately subject to finalization of a review by Canada Customs and
Revenue Agency. No assurances can be provided that the Company’s investment tax
credit claims will be accepted as filed.
The Company has adopted the fair value method of accounting for
all stock-based compensation expense. Stock-based compensation expense is
recognized in the consoldiated financial statements for granted, modified, or
settled stock options and compensation warrants issued to employees for
services.
Equipment is stated at cost and depreciated over the estimated
useful lives of the assets:
| |
|
|
| Asset |
Basis |
Rate |
| |
|
|
| Automobile |
declining balance |
20% |
| Computer equipment |
declining balance |
30% |
| Leasehold improvements |
declining balance |
20% |
| Office furniture and equipment |
declining balance |
20% |
Intangible assets consist of intercom service agreements that
are considered to have a finite useful life. They are recorded at cost and are
reviewed annually for impairment. On April 1, 2005, the Company began amortizing
the cost on a straight-line basis over an estimated useful life of 10 years.
The Company maintains an allowance for doubtful accounts for
estimated losses that may arise if any of its customers are unable to make
required payments. Management specifically analyzes the age of customer
balances, historical bad debt experience, customer credit-worthiness, and
changes in customer payment terms when making estimates of the un-collectability
of the Company’s trade accounts receivable balances. If the Company determines
that the financial conditions of any of its customers have deteriorated, whether
due to customer specific or general economic issues, increases in the allowance
may be made.
The Company reviews its intangible assets on an annual basis
for impairment. The intangible assets are comprised of Enterphone service
contracts. Management specifically reviews the number of contracts on hand and
if there will be significant future cash flows to be generated from these
contracts. If the Company determines that there is impairment, then a write-down
will be made.
Raw materials, work in process and finished goods are stated at
the lower of average cost and net realizable value. Cost includes direct labor
utilized in assembly and an allocation of plant overhead.
The Company maintains an allowance for inventory obsolescence.
Management reviews the inventory on a quarterly basis by directly testing for
obsolete inventory.
The Company follows the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recognized for the deferred income tax consequences attributable to differences
between the financial statement carrying values of existing assets and
liabilities and their respective income tax bases (temporary differences).
Deferred income tax assets and liabilities are measured using enacted income tax
rates expected to be recovered or settled. The effect on deferred income tax
assets and liabiliites of a change in tax rates is included in income in the
period in which the change occurs. The amount of deferred income tax assets
recognized is limited to the amount that is more likely than not to be realized.
25
Derivative financial instruments that are not classified as
equity and are not used in hedging relationships are measured at fair value.
These include derivative warrant liabilities and derivative conversion option
liabilities. Susequent changes to the estimated fair value are recorded in the
statement of operations.
Recent accounting pronouncements
The Company has implemented all new accounting pronouncements
that are in effect and that may impact its financial statements and does not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on its financial position or results of
operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related notes are attached to this
report following the signature page.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, including its principal executive
officer who was also our principal financial officer in 2014, evaluated the
effectiveness of disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this report. Based on
that evaluation, the principal executive officer and principal financial officer
concluded that as of the end of the period covered by this report, the Company
has maintained effective disclosure controls and procedures in all material
respects, including those necessary to ensure that information required to be
disclosed in reports filed or submitted with the SEC (i) is recorded, processed,
and reported within the time periods specified by the SEC, and (ii) is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, as appropriate to allow for timely
decision regarding required disclosure.
There have been no changes in internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
2013 COSO Framework:
The Company has not transitioned to the 2013 COSO
framework.
Conflict Minerals Rule:
The Company is currently conducting an inquiry to ascertain
whether its products contain minerals covered by this rule, and if so,
determining the country of origin of these minerals.
Management’s Report on Internal Control over Financial
Reporting
The Company’s management is responsible for establishing and
maintaining effective internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act. The Company’s internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
26
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2014 using the criteria set
forth in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2014, the Company’s
internal control over financial reporting is not effective. Management is
working with the audit committee to put processes in place to monitor internal
controls and oversee the reporting process. The following are deficiencies that
management is aware of but do not believe compromise the internal controls or
reporting process.
Deficiencies:
| |
a. |
Roles and responsibilities for the financial reporting
process are not documented in a formalized manner. |
| |
b. |
All employees have full access to inventories.
Inventories are not adequately secured from employees who do not need
access; however, cameras are on site to mitigate any risk of
theft. |
| |
c. |
The accounting department has unrestricted access to all
modules of the general ledger, however, the Controller reviews the ledgers
regularly. |
Management is addressing these deficiencies. It plans to remain
vigilant and to add additional staff and system improvements as resources
permit.
Item 9B. OTHER INFORMATION
None.
PART III.
Items 10–14
Information with respect to Items 10 through 14 will be set
forth in the Proxy Statement that will be filed with the Securities and Exchange
Commission on or before April 30, 2014 and is incorporated herein by reference.
If the definitive Proxy Statement cannot be filed on or before April 30, 2014,
the issuer will instead file an amendment to this Form 10-K disclosing the
information with respect to Items 10 through 14.
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) |
The following financial statements are filed as part of
this Form 10-K: |
| |
|
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statement of Operations
and Comprehensive Loss
Consolidated Statement of Stockholders’ Deficit
Consolidated Statement of Cash Flows
Notes to Consolidated
Financial Statements |
| |
|
| (b) |
Exhibits: |
27
| Exhibit No. |
Description of Exhibit |
|
Manner of Filing |
| |
|
|
|
| 3.1 |
Amended and Restated Articles
of Incorporation |
|
Filed herewith
|
| |
|
|
|
| 3.2 |
Amended and Restated Bylaws |
|
Filed herewith |
| |
|
|
|
| 4.1 |
Certificate of Designation, Preferences and Rights of the
Series A Convertible Redeemable Preferred Stock |
|
Incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-K filed with the SEC on June 11, 2012 |
| |
|
|
|
| 4.2 |
Certificate of Amendment to the Certificate of
Designation, Preferences and Rights of the Series A Convertible Redeemable
Preferred Stock |
|
Incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-K filed with the SEC on October 23, 2012 |
| |
|
|
|
| 4.3 |
Certificate of Second Amendment to the Certificate of
Designation, Preferences and Rights of the Series A Convertible Redeemable
Preferred Stock |
|
Incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-K filed with the SEC on March 26, 2014 |
| |
|
|
|
| 4.4 |
Certificate of Third Amendment to the Certificate of
Designation, Preferences and Rights of the Series A Convertible Redeemable
Preferred Stock |
|
Incorporated by reference to Exhibit 4.1 to the Company’s
Form 8-K filed with the SEC on February 20, 2015 |
| |
|
|
|
| 10.1 |
Employment Agreement with Dennis Raefield, dated as of
February 17, 2014 |
|
Filed herewith |
| |
|
|
|
| 10.2 |
2003 Stock Option Plan |
|
Incorporated by reference to Appendix A to the Proxy
Statement on Schedule 14A filed with the SEC on April 30, 2003 |
| |
|
|
|
| 21.1 |
Subsidiaries of the registrant |
|
Incorporated by reference to Exhibit 21.1 to the Form
SB-2 |
| |
|
|
|
| 31.1 |
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of
the U.S. Securities Exchange Act of 1934 |
|
Filed herewith |
| |
|
|
|
| 32.1 |
Section 1350 Certification of the Principal Executive
Officer and Principal Financial Officer |
|
Furnished herewith |
28
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
26, 2015.
| |
VISCOUNT SYSTEMS, INC. |
| |
|
| |
By:
/s/ Dennis Raefield |
| |
Dennis Raefield |
| |
|
|
President, Secretary, Principal Executive
Officer, Principal Financial Officer, and Director |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the dates indicated.
| |
Signature |
|
Title |
Date |
| |
|
|
|
|
| By: |
/s/
Dennis Raefield |
|
President, Secretary, |
March 26, 2015 |
| |
Dennis Raefield |
|
Principal Executive Officer, Principal Financial
Officer and Director |
|
| |
|
|
|
|
| By: |
/s/
Les Fong |
|
Controller (Acting as Principal Accounting |
March 26, 2015 |
| |
Les Fong |
|
Officer) |
|
| |
|
|
|
|
| |
|
|
|
|
| By: |
/s/
Robert Liscouski |
|
Director |
March 26, 2015 |
| |
Robert Liscouski |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| By: |
/s/
Paul Goldenberg |
|
Director |
March 26, 2015 |
| |
Paul Goldenberg |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| By: |
/s/
Ned L. Siegel |
|
Director and Non-Executive |
March 26, 2015 |
| |
Ned L. Siegel |
|
Chairman of the Board |
|
| |
|
|
|
|
| |
|
|
|
|
| By: |
/s/
Alexander Buehler |
|
Director |
March 26, 2015 |
| |
Alexander Buehler |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| By: |
/s/
Geoffrey Arens |
|
Director |
March 26, 2015 |
| |
Geoffrey Arens |
|
|
|
29
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by
Registrants Which Have Not
Registered Securities Pursuant to Section 12 of the Act
Viscount Systems, Inc. has not registered securities pursuant
to Section 12 of the Securities Act and files reports pursuant to Section 15(d)
of the Securities Act. As of the date of filing of this Annual Report on Form
10-K, no annual report or proxy material has been sent to the holders of the
securities of Viscount Systems, Inc., however, a copy of this Annual Report will
be furnished to the holders of the securities of Viscount Systems, Inc.
subsequent to the date of filing of this Annual Report.
30
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
DECEMBER 31, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Viscount Systems
Inc:
We have audited the accompanying consolidated balance sheets of
Viscount Systems Inc. (the “Company”) as of December 31, 2014 and 2013 and the
related consolidated statements of operations and comprehensive loss,
stockholders’ deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position the Company as at
December 31, 2014 and 2013 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has incurred losses
in developing its business, and further losses are anticipated in the future.
The Company requires additional funds to meet its obligations and the costs of
its operations and there is no assurance that additional financing can be raised
when needed. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans in this regard are described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DALE MATHESON CARR-HILTON LABONTE LLP
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED ACCOUNTANTS
Vancouver, Canada
March 20, 2015
VISCOUNT SYSTEMS,
INC.
Consolidated Balance Sheets
(Expressed in Canadian
dollars)
As at December 31, 2014 and 2013
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Current assets |
|
|
|
|
|
|
| Cash and cash equivalents |
$ |
190,308 |
|
$ |
172,684 |
|
| Trade accounts receivable, less allowance
for doubtful accounts of $181,529 (2013 - $250,458) |
|
661,629 |
|
|
585,153 |
|
| Inventory
(note 3) |
|
533,217 |
|
|
532,798 |
|
| Total current assets |
|
1,385,154 |
|
|
1,290,635 |
|
| |
|
|
|
|
|
|
| Deposits |
|
1,391 |
|
|
1,391 |
|
| Equipment (note 4) |
|
206,004 |
|
|
22,229 |
|
| Intangible assets (note 5) |
|
5,224 |
|
|
26,116 |
|
| |
|
|
|
|
|
|
| Total assets |
$ |
1,597,773 |
|
$ |
1,340,371 |
|
| |
|
. |
|
|
|
|
| Liabilities and stockholders' deficit
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
| Accounts payable |
$ |
362,595 |
|
$ |
254,682 |
|
| Accrued liabilities |
|
564,466 |
|
|
601,270 |
|
| Lease obligation - current |
|
10,285 |
|
|
- |
|
| Deferred revenue |
|
37,318 |
|
|
37,543 |
|
| Due to related parties (note 6) |
|
5,003 |
|
|
33,727 |
|
| Loans payable (note 7) |
|
114,536 |
|
|
114,536 |
|
| Total current liabilities |
|
1,094,203 |
|
|
1,041,758 |
|
| |
|
|
|
|
|
|
| Lease obligation - long term |
|
17,182 |
|
|
- |
|
| Derivative financial liabilities (notes 8 and 9) |
|
2,858,618 |
|
|
5,118,454 |
|
| |
|
3,970,003 |
|
|
6,160,212 |
|
| |
|
|
|
|
|
|
| Stockholders' deficit |
|
|
|
|
|
|
| Capital stock (note 10) |
|
|
|
|
|
|
Authorized:
300,000,000
common shares with a par value of US$0.001 per
share
20,000,000
preferred shares with a par value of US$0.001 per
share
Issued and
outstanding:
126,009,581
common shares (2013 - 97,075,003) (note 10) |
|
148,787 |
|
|
119,853 |
|
| 1,072
preferred shares (2013 - 1,115) (note 8) |
|
- |
|
|
- |
|
| Additional paid-in capital |
|
10,140,519 |
|
|
6,731,161 |
|
| Accumulated deficit |
|
(12,661,536 |
) |
|
(11,670,855 |
) |
| Total
stockholders' deficit |
|
(2,372,230 |
) |
|
(4,819,841 |
) |
| |
|
|
|
|
|
|
| Total
liabilities and stockholders' deficit |
$ |
1,597,773 |
|
$ |
1,340,371 |
|
| |
|
|
|
|
|
|
| Commitments (note 13) |
|
|
|
|
|
|
| Subsequent event (note 16) |
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS,
INC.
Consolidated Statements of Operations and Comprehensive
Loss
(Expressed in Canadian dollars)
Years Ended December 31, 2014 and
2013
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Sales |
$ |
4,769,298 |
|
$ |
4,134,886 |
|
| Cost of sales |
|
2,461,377 |
|
|
1,742,277 |
|
| Gross profit |
|
2,307,921 |
|
|
2,392,609 |
|
| |
|
|
|
|
|
|
| Expenses |
|
|
|
|
|
|
| Selling, general and administrative |
|
5,624,312 |
|
|
3,064,786 |
|
| Research and development |
|
703,288 |
|
|
278,514 |
|
|
Depreciation and amortization |
|
50,298 |
|
|
23,825 |
|
| |
|
6,377,898 |
|
|
3,367,125 |
|
| |
|
|
|
|
|
|
| Loss before other items |
|
(4,069,977 |
) |
|
(974,516 |
) |
| |
|
|
|
|
|
|
| Other items |
|
|
|
|
|
|
| Interest income |
|
3,786 |
|
|
322 |
|
| Preferred share dividends |
|
(84,762 |
) |
|
(113,647 |
) |
| Fair
value adjustment of derivative liabilities (Note 9) |
|
3,160,272 |
|
|
(1,992,659 |
) |
| |
|
3,079,296 |
|
|
(2,105,984 |
) |
| |
|
|
|
|
|
|
| Net loss and comprehensive loss |
$ |
(990,681 |
) |
$ |
(3,080,500 |
) |
| |
|
|
|
|
|
|
| Basic and diluted loss per common share |
$ |
(0.01 |
) |
$ |
(0.03 |
) |
| |
|
|
|
|
|
|
| Weighted average number of common shares outstanding,
Basic and diluted |
|
119,454,239 |
|
|
91,969,573 |
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS, INC.
Consolidated Statement of Stockholders'
Deficit
(Expressed in Canadian dollars)
Years Ended December 31, 2014 and
2013
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Common Stock |
|
|
Preferred Stock |
|
|
paid-in |
|
|
Accumulated |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2012 |
|
86,733,750 |
|
$ |
109,512 |
|
|
1,149 |
|
$ |
- |
|
$ |
5,979,271 |
|
$ |
(8,590,355.00 |
) |
$ |
(2,501,572 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A dividends issued or to be issued |
|
- |
|
|
- |
|
|
91 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
| Conversion of Series A shares |
|
3,071,253 |
|
|
3,071 |
|
|
(125 |
) |
|
- |
|
|
192,404 |
|
|
- |
|
|
195,475 |
|
| Units issued for cash from equity
securities, net of costs |
|
6,750,000 |
|
|
6,750 |
|
|
- |
|
|
- |
|
|
487,025 |
|
|
- |
|
|
493,775 |
|
| Stock-based compensation - shares for consulting services |
|
520,000 |
|
|
520 |
|
|
- |
|
|
- |
|
|
52,374 |
|
|
- |
|
|
52,894 |
|
| Stock-based compensation - warrants |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
20,087 |
|
|
- |
|
|
20,087 |
|
| Net loss |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(3,080,500 |
) |
|
(3,080,500 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2013 |
|
97,075,003 |
|
|
119,853 |
|
|
1,115 |
|
|
- |
|
|
6,731,161 |
|
|
(11,670,855 |
) |
|
(4,819,841 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A dividends issued |
|
- |
|
|
- |
|
|
82 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
| Conversion of Series A shares |
|
3,071,253 |
|
|
3,071 |
|
|
(125 |
) |
|
|
|
|
312,525 |
|
|
|
|
|
315,596 |
|
| Units issued for cash from equity securities, net of costs |
|
25,113,327 |
|
|
25,113 |
|
|
- |
|
|
- |
|
|
1,502,633 |
|
|
- |
|
|
1,527,746 |
|
| Stock-based compensation - rachet shares
issued |
|
749,998 |
|
|
750 |
|
|
|
|
|
|
|
|
74,250 |
|
|
|
|
|
75,000 |
|
| Stock-based compensation - options and warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519,950 |
|
|
- |
|
|
1,519,950 |
|
| Net loss |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(990,681 |
) |
|
(990,681 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2014 |
|
126,009,581 |
|
$ |
148,787 |
|
|
1,072 |
|
$ |
- |
|
$ |
10,140,519 |
|
$ |
(12,661,536 |
) |
$ |
(2,372,230 |
) |
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS,
INC.
Consolidated Statements of Cash Flows
(Expressed in
Canadian dollars)
Years Ended December 31, 2014 and 2013
| |
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
| Operating activities: |
|
|
|
|
|
|
| Net loss |
$ |
(990,681 |
) |
$ |
(3,080,500 |
) |
| Items not involving
cash: |
|
|
|
|
|
|
| Depreciation and
amortization |
|
50,298 |
|
|
23,825 |
|
| Preferred
share dividends |
|
84,762 |
|
|
113,647 |
|
| Fair value adjustment of
derivative liability |
|
(3,160,272 |
) |
|
1,992,659 |
|
|
Stock-based compensation |
|
1,519,950 |
|
|
72,981 |
|
| Non-cash financing fees
|
|
371,221 |
|
|
- |
|
| Changes in non-cash working capital balances (note 12)
|
|
915 |
|
|
2,670 |
|
| Net cash used in
operating activities |
|
(2,123,807 |
) |
|
(874,719 |
) |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Investing activities: |
|
|
|
|
|
|
| Purchase of equipment |
|
(185,714 |
) |
|
- |
|
| Net cash used in
investing activities |
|
(185,714 |
) |
|
- |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Financing activities: |
|
|
|
|
|
|
| Proceeds from private
placement, net |
|
2,327,145 |
|
|
681,262 |
|
| Repayment of short term loans payable |
|
- |
|
|
(40,366 |
) |
| Net cash provided
by financing activities |
|
2,327,145 |
|
|
640,896 |
|
| |
|
|
|
|
|
|
| Increase (decrease) in cash
|
|
17,624 |
|
|
(233,823 |
) |
| |
|
|
|
|
|
|
| Cash, beginning of period |
|
172,684 |
|
|
406,507 |
|
| |
|
|
|
|
|
|
| Cash, end of period |
$ |
190,308 |
|
$ |
172,684 |
|
|
|
|
|
|
|
|
| Supplementary information:
|
|
|
|
|
|
|
| Interest paid |
$ |
- |
|
$ |
- |
|
| Income taxes paid |
$ |
- |
|
$ |
- |
|
See accompanying notes to interim financial statements.
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 1. |
Nature and continuance of operations |
| |
|
|
Viscount Systems, Inc. (the “Company”) was incorporated
on May 24, 2001 in the State of Nevada. The Company manufactures,
distributes, and provides services for electronic premises access and
security equipment primarily through its wholly owned Canadian subsidiary,
Viscount Communication and Control Systems Inc. |
| |
|
|
These financial statements have been prepared on a going
concern basis, which assumes the Company will be able to realize its
assets and discharge its liabilities in the normal course of business for
the foreseeable future. The Company has an accumulated deficit of
$12,661,536, reported a loss of $905,919 (2013 - $3,080,501). Although
management is confident that the company can access sufficient working
capital to maintain operations and ultimately generate positive cash flows
from operations, the ability to sustain the current level of operations is
dependent upon growing sales and achieving sustainable profits. Management
has estimated that the Company will need to raise a minimum of $1,500,000
by way of new debt or equity financing to continue normal operations for
the next twelve months. These factors raise substantial doubt about the
ability of the Company to continue operations as a going concern. The
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should the Company be
unable to continue as a going concern. |
| |
|
| 2. |
Significant accounting policies |
| |
|
|
These consolidated financial statements have been
prepared in conformity with US Generally Accepted Accounting Principles
(“GAAP”). |
| |
|
|
The significant accounting policies adopted by the
Company are as follows: |
| |
(a) |
Principles of consolidation |
| |
|
The consolidated financial statements include accounts
and results of the Company and its wholly-owned subsidiary, Viscount
Communication and Control Systems Inc. (“VCCS”). Intercompany transactions
and balances have been eliminated on consolidation. |
| |
|
|
| |
(b) |
Use of estimates |
| |
|
Management has made a number of estimates and judgments
relating to the reporting of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities in order to
prepare these consolidated financial statements in conformity with GAAP.
Significant areas involving estimate include the allowance for doubtful
accounts, inventory obsolescence, the provision for future warranty costs,
the estimated useful lives of equipment and intangible assets, the
deferred tax valuation allowance, and assumptions used to determine the
fair value of stock-based compensation and derivative liabilities. Actual
results could differ materially from those estimates. |
| |
|
|
| |
(c) |
Foreign currency translation |
| |
|
The functional and reporting currency of the Company and
its wholly-owned subsidiary is the Canadian dollar. Accordingly, the
financial statements are presented in Canadian dollars unless otherwise
specified. Monetary assets and liabilities denominated in a foreign
currency are translated at the exchange rate in effect at the balance
sheet date while non-monetary assets and liabilities denominated in a
foreign currency are translated at historical rates. Revenue and expense
items denominated in a foreign currency are translated at exchange rates
prevailing when such items are recognized in the statement of operations
and comprehensive loss. Exchange gains or losses arising on translation of
foreign currency items are included in the statement of operations and
comprehensive loss. |
| |
|
|
| |
(d) |
Inventory |
| |
|
Raw materials, work in process and finished goods are
stated at the lower of average cost and net realizable value. Cost
includes direct labor utilized in assembly and an allocation of plant
overhead. |
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 2. |
Significant accounting policies
(cont’d…) |
| |
|
|
|
(e) |
Equipment |
|
|
Equipment is stated at cost and depreciated over the
estimated useful lives of the assets: |
| |
Asset |
Basis |
Rate |
| |
|
|
|
| |
Automobile |
declining balance |
20% |
| |
Computer equipment |
declining balance |
30% |
| |
Leasehold improvements |
declining balance |
20% |
| |
Office furniture
and equipment |
declining balance |
20%
|
| |
(f) |
Intangible assets |
| |
|
Intangible assets consist of intercom service agreements
that are considered to have a finite useful life. They are recorded at
cost and are reviewed annually for impairment. On April 1, 2005, the
Company began amortizing the cost on a straight-line basis over an
estimated useful life of 10 years. |
| |
|
|
| |
(g) |
Impairment of long-lived assets |
| |
|
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability is measured by a comparison
of the carrying amount of an asset, or group of assets, to future net cash
flows expected to be generated by the asset or group of assets. If such
assets are considered to be impaired, an impairment provision is recorded
for the amount by which the carrying amount of the assets exceeds fair
value. |
| |
|
|
| |
(h) |
Revenue recognition |
| |
|
Product revenue is recognized when there is persuasive
evidence of a sale arrangement, delivery to the customer has occurred, the
fee is fixed and determinable, and collectability is considered probable.
Sales or transfers to customers prior to these criteria being met are
recorded as deferred revenue. Revenue from the installation of equipment
is recognized when the installation has been completed, the fee has been
fixed and collectability is considered probable. |
| |
|
|
| |
|
Service revenue is recognized on a straight-line basis
over the period covered by the service agreement only after there is a
signed agreement to provide service, the service fee is fixed or
determinable and collectability is probable. Cash received from customers,
in advance of the service period, is recorded as deferred
revenue. |
| |
|
|
| |
(i) |
Research and development costs |
| |
|
Research and development costs have been expensed as
incurred. |
| |
|
|
| |
(j) |
Derivative financial instruments |
| |
|
Derivative financial instruments that are not classified
as equity and are not used in hedging relationships are measured at fair
value. These include derivative warrant liabilities and derivative
conversion options liabilities. Subsequent changes to the estimated fair
values are recorded in the statement of operations and comprehensive
loss. |
| |
|
|
| |
(k) |
Net loss per share |
| |
|
Net loss per common share is computed by dividing the net
loss by the weighted average number of common shares outstanding for the
period. Diluted net loss per common share reflects the potential dilution
that could occur if stock options were exercised. |
| |
|
|
| |
|
For the year ended December 31, 2014 and 2013, shares
attributable to the assumed exercise of outstanding options and shares
attributable to the assumed exercise of outstanding warrants and
convertible preferred shares were excluded from the calculation of diluted
loss per share because the effect was antidilutive. |
| |
|
|
| |
(l) |
Stock-based compensation |
| |
|
The Company has adopted the fair value method of
accounting for all stock-based compensation expense. Stock-based
compensation expense is recognized in the consoldiated financial
statements for granted, modified, or settled stock options and
compensation warrants issued to employees for
services. |
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 2. |
Significant accounting policies
(cont’d…) |
| |
|
|
|
(m) |
Comprehensive loss |
|
|
The Company has no items of other comprehensive loss in
any year presented. Therefore, net loss equals comprehensive
loss. |
| |
|
|
|
(n) |
Reclassfications |
|
|
Certain amounts have been reclassifed in the comparative
consolidated balance sheet to conform to the current year’s
presentation. |
| |
|
|
|
(o) |
Cash and Cash Equivalents |
|
|
Cash equivalents consist of cash on deposit and term
deposits with original maturities of one year or less at the time of
issuance. |
| |
|
|
|
(p) |
Recently issued accounting pronouncements |
|
|
The Company has reviewed recently issued accounting
pronouncements and plans to adopt those that are applicable to it. It does
not expect the adoption of these pronouncements to have a material impact
on its financial position, results of operations or cash flows. |
| |
|
|
| 3. |
Inventory |
| |
|
|
December
31, |
|
|
December
31, |
|
| |
|
|
2014 |
|
|
2013 |
|
| |
|
|
|
|
|
|
|
| |
Raw materials |
$ |
289,100 |
|
$ |
347,641 |
|
| |
Work in process |
|
25,683 |
|
|
43,177 |
|
| |
Finished goods |
|
218,434 |
|
|
141,980 |
|
| |
|
|
|
|
|
|
|
| |
|
$ |
533,217 |
|
$ |
532,798 |
|
| |
|
|
|
|
|
Accumulated |
|
|
Net book |
|
| |
December 31, 2014 |
|
Cost |
|
|
depreciation |
|
|
value |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Automobile |
$ |
25,209 |
|
$ |
2,521 |
|
$ |
22,688 |
|
| |
Computer equipment |
|
171,635 |
|
|
112,941 |
|
|
58,694 |
|
| |
Leasehold improvements |
|
69,037 |
|
|
5,867 |
|
|
63,170 |
|
| |
Office furniture and equipment |
|
134,660 |
|
|
73,208 |
|
|
61,452 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
400,541 |
|
$ |
194,538 |
|
$ |
206,004 |
|
| |
|
|
|
|
|
Accumulated |
|
|
Net book |
|
| |
December 31, 2013 |
|
Cost |
|
|
depreciation |
|
|
value |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Computer equipment |
$ |
110,838 |
|
$ |
100,758 |
|
$ |
10,080 |
|
| |
Office furniture and equipment |
|
77,269 |
|
|
65,119 |
|
|
12,149 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
188,107 |
|
$ |
165,877 |
|
$ |
22,229 |
|
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
On May 16, 2003, the Company entered
into an agreement for the purchase of certain assets of Telus Corporation
(“Telus”). The assets comprised primarily of service agreements for a product
sold by Telus known as “Enterphone 2000”. At December 31, 2003, the Company had
acquired 2,215 service agreements for which it paid a total of $208,921. At
December 31, 2014, the Company held 1,186 service agreements (2013 – 1,254) at a
carrying cost, of $5,224 (2013 - $26,116), net of accumulated amortization of
$203,697 (2013 - $182,913).
The expected amortization expense for
the next fiscal year is as follows:
| |
Year ending December 31, 2015 |
$ |
5,224 |
|
| 6. |
Due to related parties |
| |
|
|
Amounts due to a director for consulting fees and travel
expenses totaled $5,003 at December 31, 2014 (2013 - $33,727). These
amounts are unsecured, non-interest bearing and have no fixed terms of
repayment. |
| |
|
| 7 |
Short term loans payable |
| |
|
|
Amounts due to third parties totaled $114,536 for
outstanding loans and advances (2013 - $114,536). These are non- interest
bearing, unsecured and have no fixed terms of repayment. |
| |
|
| 8. |
Series A convertible redeemable preferred
stock |
| |
|
|
In 2012, the Company completed the sale of 1,100 shares
of Series A Convertible Redeemable Preferred Stock (“Series A Shares”),
par value US$0.001 per share and stated value of US$1,000 per share, for
gross proceeeds of US$1,100,000. The Series A Shares contain certain
rights and preferences as follows: |
|
• |
convertible into shares of common stock of the Company at
the rate of US$0.0407 per common share or 85% of the previous twenty day
volume weighted average pricing. |
| |
• |
dividends of 8% per annum, payable in cash or Series A
Shares quarterly. |
|
• |
voting and conversion rights of up to 4.99% of the
outstanding common stock of the Company at the time of conversion per
holder; registration rights to the holders of the Series A Shares that may
be exercised in certain circumstances. |
|
• |
holders of Series A Shares are entitled to be paid 125%
of the stated value of the Series A Shares, plus all accrued, but unpaid
dividends on Series A Shares, upon liquidation or dissolution of the
Company, including forms of mergers and acquisitions, in priority to any
payments to the holders of shares of common stock. |
|
• |
the Series A Shares may be redeemed by the holders for
150% of their stated value, plus all accrued, but unpaid dividends on
Series A Shares, upon the occurrence of a default, which includes
performance conditions, delisting or late filing with the US Securities
and Exchange Commission (“SEC”). |
In connection with the Series A Shares
issuance, the Company also issued 13,285,012 warrants, each exercisable into one
common shares at US$0.08 per share for a period of 5 years. The Company paid a
cash comission of US$110,000 and issued 2,657,002 agents warrants. Each agent
warrant is exercisable into one common share of the Company at US$0.05 per share
for a period of 5 years. The warrants may be exercised on a cashless basis.
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 9. |
Derivative liabilities |
| |
Balance, December 31, 2013 |
$ |
3,023,161 |
|
| |
Fair value change of derivative liabilities |
|
1,992,659 |
|
| |
Fair value of preferred shares issued as
dividends |
|
113,647 |
|
| |
Fair value of warrants issued |
|
184,462 |
|
| |
Conversion of preferred shares |
|
(195,475 |
) |
| |
Balance, December 31, 2013 |
|
5,118,454 |
|
| |
Fair value change of derivative liabilities
|
|
(3,160,272 |
) |
| |
Fair value of preferred shares issued as dividends |
|
84,762 |
|
| |
Fair value of warrants issued and extended
|
|
1,095,294 |
|
| |
Other reclassification to derivative liability |
|
35,977 |
|
| |
Conversion of preferred shares |
|
(315,596 |
) |
| |
Balance, December
31, 2014 |
$ |
2,858,618 |
|
The derivative liability consists of
the fair value of share purchase warrants that were issued in unit private
placements and warrants whose life was extended that have an exercise price in a
currency other than the functional currency of the Company, as well as
conversion options and dividends on Series A Shares where the conversion price
is not fixed.
The fair value of the warrants and
dividends were determined using the Black-Scholes option pricing model and the
conversion options were valued using the Binomial Lattice model using the
following current market assumptions:
| |
|
|
December 31, |
|
|
December 31, |
|
| |
|
|
2014 |
|
|
2013 |
|
| |
Volatility |
|
79% - 109% |
|
|
92% - 186% |
|
| |
Risk-free interest rate |
|
0.25% - 1.10% |
|
|
0.63% - 1.39% |
|
| |
Expected life |
|
0.94 – 5.00 yrs |
|
|
2.19 – 4.75 yrs |
|
|
The significant assumptions used during the year to
estimate the fair value included an expected term (based on the history of
exercises and forfeitures) and volatility (based on the historical
volatility with a look-back period equivalent to the expected
term). |
| |
|
|
Certain derivative liabilities contain other provisions
such as rachet rights on conversion option prices and warrant exercise
prices. Under US GAAP, if the terms of a contingent option do not permit
an issuer to compute the number of shares that the holder would receive if
the contingent event occurs and the conversion option is adjusted, an
issuer shall wait until the contingent event occurs and then compute the
resulting liability. |
| |
|
| 10. |
Capital stock |
| |
|
|
On May 21, 2013, the Company completed a private
placement of 6,750,000 units at a price of US$0.10 per unit, for gross
proceeds of US$675,000. Each unit consisted of one common share and
one-half share purchase warrant of the Company, with each warrant
exercisable to acquire an additional share of the Company at a price of
US$0.20 for a period of 3 years, expiring May 17 and 21, 2016. In
connection with the offering, the Company paid cash costs of $15,000 and
issued share purchase warrants to acquire 675,000 shares of common stock
of the Company at a price of US$0.20 per share for a period of 3 years
from the closing date. The warrants may be exercised on a cashless
basis. |
| |
|
|
Upon issuance of the units, $184,462 were allocated to
the warrants and recorded as a derivative liability and the balance, net
of share issuance costs, was allocated to common stock and additional
paid-in capital. The fair value of the warrants was determined using the
Black-Scholes option pricing model using the following assumptions;
volatility of 155%; a dividend yield rate of 0%; a risk-free interest rate
of 0.40% and an expected life of three years and allocated on a relative
basis. |
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 10. |
Capital stock (cont’d) |
| |
|
|
On May 15, 2013, the Company issued 520,000 common shares
in consideration for consulting services with a fair value of
$52,894. |
| |
|
|
On March 11, 2014, the Company completed a private
placement of 8,333,329 shares of common stock at a price of US$0.09 per
share for total proceeds of US$750,000. The Company also issued a total of
4,166,659 warrants, each warrant exercisable to acquire an additional
share of the Company at an exercise price of US$0.20 per share for a
period of five years from the closing date. |
| |
|
|
On March 27, 2014, the Company completed a private
placement of 16,502,220 shares of common stock at a price of US$0.09 per
share for total proceeds of US$1,485,200. The Company also issued a total
of 8,251,107 warrants, each warrant exercisable to acquire an additional
share of the Company at an exercise price of US$0.20 per share for a
period of five years from the closing date. |
| |
|
|
On March 31, 2014, the Company issued an additional
277,778 shares of common stock at a price of US$0.09 per share for total
proceeds of US$25,000. The Company also issued 138,888 warrants, each
warrant exercisable to acquire an additional share of the Company at an
exercise price of US$0.20 per share for a period of five years from the
closing date. |
| |
|
|
In connection with the offerings, the Company paid to a
registered broker-dealer a commission of US$106,604 in cash and share
purchase warrants to acquire 1,184,487 shares of common stock of the
Company at a price of US$0.09 per share for a period of five years from
the closing date. The warrants may be exercised on a cashless
basis. |
| |
|
|
Upon issuance of the March 2014 units, $799,399 were
allocated to the warrants and recorded as a derivative liability and the
balance, net of share issuance costs, was allocated to common stock and
additional paid-in capital. The fair value of the warrants was determined
using the Black-Scholes option pricing model using the following
assumptions; volatility of 176%; a dividend yield rate of 0%; a risk-free
interest rate of 0.90% and an expected life of five years and allocated on
a relative basis. |
| |
|
|
Stock Options: |
| |
|
|
On July 8, 2014, the board amended the Company’s 2003
Share Option Plan by amending the termination provision and to increase
the number of common shares reserved for the issuance under the plan from
2,935,510 to 8,806,530. All other terms of the plan remain unchanged. All
stock options granted are exercisable in US$. A summary of the stock
option activity is as follows: |
| |
|
|
|
|
|
Weighted
average |
|
| |
|
|
Number of options |
|
|
exercise price |
|
| |
Outstanding at December 31,
2012 |
|
8,206,875 |
|
|
US$0.05 |
|
| |
Expired/cancelled |
|
(6,577,500 |
) |
|
US$0.05 |
|
| |
Outstanding at December 31,
2013 |
|
1,629,375 |
|
|
US$0.08 |
|
| |
Granted |
|
10,561,450 |
|
|
US$0.10 |
|
| |
Cancelled |
|
(438,750 |
) |
|
US$0.10 |
|
| |
Outstanding at December 31, 2014 |
|
11,752,075 |
|
|
US$0.09 |
|
The fair value of the options granted
during the year ended December 31, 2014 were determined using the Black-Scholes
option pricing model using the following current market assumptions:
| |
Volatility |
79.5% - 140% |
| |
Risk-free interest rate |
0.97% - 1.55% |
| |
Expected life |
2 yrs – 3.5 yrs |
The significant assumptions used during
the year to estimate the fair value included an expected term (based on the
history of exercises and forfeitures) and volatility (based on the historical
volatility with a look-back period equivalent to the expected term).
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 10. |
Capital stock (cont’d) |
| |
|
|
The weighted average grant date fair value of the options
granted during the year ended December 31, 2014 was $0.0789 per option
(2013 - $nil). |
| |
|
|
A summary of the stock options outstanding and
exercisable at December 31, 2014 is as
follows: |
| |
|
|
|
|
|
|
Weighted
average |
|
|
Weighted
average |
|
|
Aggregate |
|
| |
|
Exercise Price |
|
Number |
|
|
remaining contractual life |
|
|
exercise price |
|
|
intrinsic value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
US$ |
0.04 |
|
54,375 |
|
|
|
|
|
|
|
$ |
1,631 |
|
| |
|
0.08 |
|
1,500,000 |
|
|
|
|
|
|
|
|
- |
|
| |
|
0.09 |
|
10,016,450 |
|
|
|
|
|
|
|
|
- |
|
| |
|
0.10 |
|
125,000 |
|
|
|
|
|
|
|
|
- |
|
| |
|
0.15 |
|
56,250 |
|
|
|
|
|
|
|
|
- |
|
| |
|
|
|
11,752,075 |
|
|
4.06
years |
|
US$ |
0.09
|
|
$ |
1,631 |
|
The aggregate intrinsic value in the
preceding table represents the total intrinsic value, based on the Company’s
closing stock price of US$0.07 per share as of December 31, 2014, which would
have been received from the option holders had all option holders exercised
their options as of that date. The total number of in-the-money options vested
and exercisable as of December 31, 2014 was 54,375.
Warrants:
On May 30, 2013, the Company issued
230,000 warrants to a consultant in connection with a advisory services
agreement. These warrants have an exercise price of US$0.20 and expire on May
30, 2016. The grant date fair value of these warrants was $20,087 using the
Black-Scholes option pricing model with the following assumptions: expected life
of 3 years; volatility of 157%; risk-free interest rate of 0.49%; and a dividend
rate of 0%.
On April 4, 2014, the Company issued a
board member 250,000 compensation warrants, each warrant is exercisable to
acquire one common share of the Company at an exercise price of US$0.09 per
share for a period of three years expiring April 4, 2017.
On April 14, 2014, the Company issued
board members 2,690,000 compensation warrants, each warrant exercisable to
acquire an additional share of the Company at an exercise price of US$0.10 per
share for a period of five years expiring April 14, 2019. The Company also
issued to a board member 250,000 warrants, each warrant exercisable to acquire
an additional share of the Company at an exercise price of US$0.09 per share for
a period of five years expiring April 14, 2019.
On April 16, 2014, the Company extended
the term of 4,162,650 warrants issued as part of a private placement that closed
on April 16, 2007 and expired on April 16, 2012, for a period of three years
expiring April 16, 2017. Each warrant is exercisable to acquire an additional
share of the Company at an exercise price of US$0.09 per share. The grant date
fair value of these warrants was $366,120 using the Black-Scholes option pricing
model with the following assumptions: expected life of 2 years; volatility of
88%; risk-free interest rate of 0.89%; and a dividend rate of 0%.
The Company issued common shares at a
price of US$0.10 per share and share purchase warrants of the Company
exercisable at an exercise price of US$0.20 per share pursuant to securities
purchase agreements entered into between the Company and certain investors in
May 2013. These May 2013 shares and and May 2013 warrants were subject to
adjustment due to the issuance of common shares at a price of US$0.09 per share
in the Company’s private placement that closed on March 11, 2014. On May 20,
2014, pursuant to the adjustment, the Company issued to investors of the 2013
Offering a total of 749,998 shares of common stock with a fair value of $75,000
and 374,996 warrants, each warrant exercisable to acquire an additional share of
the Company at an exercise price of US$0.18 per share for a term of two years
expiring May 17, 2016. The grant date fair value of these warrants was $24,605
using the Black-Scholes option pricing model with the following assumptions:
expected life of 2 years; volatility of 81%; risk-free interest rate of 0.8%;
and a dividend rate of 0%.
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 10. |
Capital stock (cont’d) |
| |
|
|
On July 4, 2014, the Company extended the term of
2,500,000 warrants issued as part of a professional service agreement in
2011 and expired on June 22, 2014 for a period of a further two years
expiring June 22, 2016. Each warrant is exercisable to acquire an
additional share of the Company at an exercise price of US$0.065 per
share. The fair value of these warrants is $181,877 using the
Black-Scholes option pricing model with the following assumptions:
expected life of 1.4 years; volatility of 131%; risk-free interest rate of
0.52%; and a dividend rate of 0%. |
| |
|
|
On July 8, 2014, the Company issued a board member
250,000 compensation warrants, each warrant exercisable to acquire an
additional share of the Company at an exercise price of US$0.095 per share
for a period of five years expiring July 8, 2019. |
| |
|
|
On September 4, 2014, the Company issued a consultant
250,000 compensation warrants, each warrant exercisable to acquire an
additional share of the Company at an exercise price of US$0.09 per share
for a period of three years expiring September 4, 2017. |
| |
|
|
On December 19, 2014, the Company issued a board member
250,000 compensation warrants, each warrant exercisable to acquire an
additional share of the Company at an exercise price of US$0.095 per share
for a period of five years expiring December 19, 2019. |
| |
|
|
On December 30, 2014, 250,000 compensation warrants were
granted to each of four board members, totalling 1,000,000 warrants, each
warrant exercisable to acquire an additional share of the Company at an
exercise price of US$0.09 per share for period of three years expiring
December 30, 2017. These warrants were issued to replace the 1,000,000
warrants granted to the same board members on December 5, 2011 which had
expired on December 5, 2014. These warrants granted on December 5, 2011
had an exercisable price of CDN$0.10 per share for a period of three
years. |
| |
|
|
The fair values of the compensation warrants granted in
the year ended December 31, 2014 were determined using the Black-Scholes
option pricing model using the following current market
assumptions: |
| |
Volatility |
86% - 163% |
| |
Risk-free interest rate |
0.52% - 1.7% |
| |
Expected life |
1.4 yrs – 3.5 yrs |
The significant assumptions used during
the year to estimate the fair value of compensation warrants included an
expected term (based on the history of exercises) and volatility (based on the
historical volatility with a look-back period equivalent to the expected term).
The weighted average grant date fair
value of the compensation warrants granted during the year ended December 31,
2014 was $0.12 per warrant (2013 - $0.087).
A summary of warrant activity during
the twelve months ended December 31, 2014 is as follows:
| |
|
|
|
|
|
Weighted
average |
|
| |
|
|
Number of warrants |
|
|
exercise price |
|
| |
Outstanding at December 31,
2012 |
|
54,392,014 |
|
$ |
0.08 |
|
| |
Issued as part of private placement |
|
4,050,000 |
|
|
0.20 |
|
| |
Issued as compensation to consultant |
|
230,000 |
|
|
0.20 |
|
| |
Outstanding at December 31, 2013 |
|
58,672,014 |
|
|
0.09 |
|
| |
Issued as part of private
placements |
|
18,278,787 |
|
|
0.20 |
|
| |
Expired |
|
(1,000,000 |
) |
|
0.10 |
|
| |
Issued as compensation warrants |
|
4,940,000 |
|
|
0.09 |
|
| |
Outstanding at December 31, 2014 |
|
80,890,801 |
|
$ |
0.11 |
|
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 10. |
Capital stock (cont’d) |
| |
|
|
The value of the private placement warrants have not been
separately valued as the value would remain in additional paid in capital,
with the exception of warrants classified as derivatives (note
9). |
| |
|
|
A summary of the warrants outstanding and exercisable at
December 31, 2014 is as follows: |
| |
|
|
Weighted Average |
| Weighted Average |
Exercise Price |
Number |
Remaining Contractual Life |
|
US$ |
0.080 |
2,499,999 |
0.93 years
|
| $ |
0.080 |
9,500,001 |
0.93 years |
|
US$ |
0.080 |
3,000,000 |
0.98 years
|
| $ |
0.080 |
3,000,000 |
0.98 years |
|
US$ |
0.080 |
3,600,000 |
1.17 years
|
| $ |
0.080 |
7,350,000 |
1.17 years |
| $
|
0.150 |
2,500,000 |
1.48 years
|
| US$ |
0.065 |
12,285,012 |
2.43 years |
|
US$ |
0.050 |
2,457,002 |
2.43 years
|
| US$ |
0.065 |
1,000,000 |
2.80 years |
|
US$ |
0.050 |
200,000 |
2.80 years
|
| US$ |
0.100 |
5,000,000 |
2.90 years |
|
US$ |
0.050 |
1,000,000 |
2.90 years
|
| US$ |
0.200 |
2,375,000 |
1.38 years |
|
US$ |
0.200 |
675,000 |
1.39 years
|
| US$ |
0.200 |
1,000,000 |
1.39 years |
|
US$ |
0.200 |
230,000 |
1.41 years
|
| US$ |
0.200 |
4,955,547 |
4.20 years |
|
US$ |
0.200 |
8,641,151 |
4.24 years
|
| US$ |
0.200 |
144,443 |
4.25 years |
|
US$ |
0.090 |
250,000 |
2.26 years
|
| US$ |
0.090 |
250,000 |
4.29 years |
|
US$ |
0.090 |
250,000 |
2.68 years
|
| US$ |
0.095 |
250,000 |
4.52 years |
|
US$ |
0.100 |
1,540,000 |
4.29 years
|
| US$ |
0.100 |
1,150,000 |
4.29 years |
|
US$ |
0.080 |
4,162,650 |
2.29 years
|
| US$ |
0.180 |
263,886 |
1.38 years |
|
US$ |
0.180 |
111,110 |
1.38 years
|
| US$ |
0.095 |
250,000 |
1.24 years |
|
US$ |
0.10 |
250,000 |
4.96 years
|
|
US$ |
0.090
|
1,000,000 |
3.00 years |
| $ |
0.105 |
80,890,801 |
2.27 years |
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 11. |
Income taxes |
| |
|
|
The provision for income taxes differs from the amount
that would have resulted in applying the combined Canadian and United
States statutory income tax rates as follows: |
| |
|
|
Year
ended |
|
|
Year
ended |
|
| |
|
|
December 31, |
|
|
December 31, |
|
| |
|
|
2014 |
|
|
2013 |
|
| |
Net loss before income tax
|
$ |
(990,682 |
) |
$ |
(3,080,500 |
) |
| |
Statutory income tax rate |
|
26%
|
|
|
25.75% |
|
| |
Expected income tax recovery
at statutory income tax rate |
|
(257,577 |
) |
|
(793,229 |
) |
| |
Non-deductible expenses and other items |
|
(542,844 |
) |
|
493,400 |
|
| |
Change in valuation allowance |
|
800,421 |
|
|
299,829 |
|
| |
Income tax expense |
$ |
- |
|
$ |
- |
|
Temporary differences that give rise to
the following deferred income tax assets are as follows:
| |
|
|
December 31, 2014 |
|
|
December
31, 2013 |
|
| |
Equipment |
$ |
30,496 |
|
$ |
22,850 |
|
| |
Intangible assets |
|
25,679 |
|
|
24,470 |
|
| |
Investment tax credits
(non-refundable) |
|
1,371,512 |
|
|
1,051,751 |
|
| |
Losses |
|
1,385,279 |
|
|
616,264 |
|
| |
Research and development
costs |
|
872,644 |
|
|
791,797 |
|
| |
Warranty provision |
|
(323,162 |
) |
|
54,712 |
|
| |
|
|
3,362,447 |
|
|
2,562,026 |
|
| |
Valuation allowance |
|
(3,362,447 |
) |
|
(2,562,026 |
) |
| |
Net deferred income tax assets |
$ |
- |
|
$ |
- |
|
The Company has loss carry-forwards of
approximately $5,328,000 which will expire over a period up to 2034.
The Company has non-refundable federal
investment tax credits of approximately $872,000 which will expire over a period
up to 2034 and provincial investment tax credits of approximately $499,000,
which will expire over a period up to 2024.
The Company has unutilized scientific
research and development costs of approximately $3,356,000 which may be
available to reduce taxable income and income taxes payable in future years.
Management has determined that the
realization of the potential deferred tax assets resulting from these tax pools
and other temporary differences is uncertain at this time, and cannot be viewed
as more likely than not. Accordingly, the Company has recorded a full valuation
allowance for the potential deferred tax asset.
The Company files income tax returns in
Canada and the United States of America. The Company’s Canadian income tax
returns for 2007 through 2013 are open tax years. The Company’s United States
tax returns are open from 2008 through 2013. The Company has reviewed its tax
filings for these years to identify the existence of any uncertain tax positions
that would require recognition in the Company’s financial statements. The
Company may from time to time be assesed interest or penalties by tax filing
jurisdictions, although any such assessments historically have been minimal and
immaterial to the Company’s financial results.
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 12. |
Changes in non-cash working capital
balances |
| |
|
|
Years
ended December 31, |
|
| |
|
|
2014 |
|
|
2013 |
|
| |
Trade accounts receivable |
$ |
(76,476 |
) |
$ |
26,134 |
|
| |
Inventory |
|
(419 |
) |
|
(184,820 |
) |
| |
Accounts payable |
|
143,563 |
|
|
103,825 |
|
| |
Accrued liabilities |
|
(36,804 |
) |
|
31,985 |
|
| |
Deferred revenue |
|
(225 |
) |
|
(713 |
) |
| |
Due
to related parties |
|
(28,724 |
) |
|
26,259 |
|
| |
|
$ |
915 |
|
$ |
2,670 |
|
| 13. |
Commitments and contingencies |
| |
|
|
The Company is committed to minimum annual payments for
leases on its premises, automobiles, and office equipment as follows in
each of the next three years: |
| Year ending December 31, 2015 |
$ |
162,786
|
|
| Year ending December 31, 2016 |
$ |
73,029 |
|
| Year ending December 31, 2017 |
$ |
8,254 |
|
Rent expense included in the statements
of operations is $142,151 (2013 - $140,744).
The Company has an agreement with its
CEO for services. As consideration, the Company is obligated to a yearly salary
of US$175,000 plus a housing allowance of US$5,000 per month. The agreement is
for a three year term commencing March 1, 2014.
The Company has an agreement with a
consultant for business development, investor relations and strategic and
financial services. As consideration, the Company compensates the consultant at
$2,250 per month (subject to increase if funding is raised), and must pay
commissions of 10% on funds raised. The agreement may be terminated by 30 days
written notice. The commission arrangement shall extend for 12 months beyond
termination.
The Company has retained U.S. legal
representation for all general corporate and U.S. securities work. As
consideration, the Company will remit a monthly retainer at $5,000 per month for
work within the scope of the agreement for 6 months from January to June 2015,
after which, the monthly retainer is subject to adjustment.
The Company has an agreement with a
consultant for public and investor relations. As consideration, the Company will
remit a monthly fee at $12,500, of which $7,500 per month in cash and $5,000 per
month in restricted stock. The agreement will be for an initial period of 6
months from January to June 2015. The agreement may be terminated by 30 days
written notice.
In response to a Civil Claim filed by
the Company against its former President and CEO, the former President and CEO
has filed a counterclaim on January 2, 2015, alleging that he is owed
compensation for various reasons. The Company denies that he is entitled to any
of these amounts, and takes the position that his termination was for cause. The
outcome of the claims cannot be determined at this time and as a result no
contingent liability has been recorded.
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 14. |
Segment information |
| |
|
|
|
(a) |
Operating segments: |
|
|
The Company organizes its business into two reportable
segments: manufacturing and servicing. The manufacturing segment designs,
produces and sells intercom and door access control systems that utilize
telecommunications to control access to buildings and other facilities for
security purposes. The servicing segment provides maintenance to these
intercom and door access control systems. |
| |
|
|
|
|
Management evaluates performance based on profit or loss
from operations before income taxes and nonrecurring gains and losses, if
any. Retail prices are used to report intersegment
sales. |
| |
2014 |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
| |
Sales to external customers
|
$ |
3,631,777 |
|
$ |
1,137,521 |
|
$ |
4,769,298 |
|
| |
Depreciation and amortization |
|
29,406 |
|
|
20,892 |
|
|
50,298 |
|
| |
Segment income (loss) before
other items |
|
(4,306,758 |
) |
|
236,781 |
|
|
(4,069,977 |
) |
| |
Total assets |
$ |
1,592,549 |
|
$ |
5,224 |
|
$ |
1,597,773 |
|
| |
2013 |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
| |
Sales to external customers
|
$ |
3,051,405 |
|
$ |
1,083,481 |
|
$ |
4,134,886 |
|
| |
Depreciation and amortization |
|
2,933 |
|
|
20,892 |
|
|
23,825 |
|
| |
Segment income (loss) before
other items |
|
(1,306,229 |
) |
|
331,713 |
|
|
(974,516 |
) |
| |
Total assets |
$ |
1,314,255 |
|
$ |
26,116 |
|
$ |
1,340,371 |
|
| |
(b) |
Of the total sales for the twelve months ended December
31, 2014, $1,194,401 (2013 - $502,155) was derived from U.S.-based
customers and $3,574,897 (2013 - $3,632,731) from Canadian-based
customers. Substantially all of the Company's operations, assets and
employees are located in Canada. |
| |
|
|
| |
(c) |
Major customers: |
| |
|
No customer represented more than 10% of total sales in
either of the years presented. |
| |
|
|
| |
(d) |
Products: |
| |
|
MESH sales represented 38.7% of total revenue during the
twelve months ended December 31, 2014 (2013 – 47.8%). FREEDOM sales
represented 33.7% of total revenue during the twelve months ended December
31, 2014 (2013 – 24.0%). The balance of the Company’s revenues are derived
from other products such as access tracking and control, closed circuit
monitors, infrared and radio frequency remotes and servicing of intercom
equipment. |
| 15. |
Financial instruments |
| |
|
|
The Company’s financial instruments include cash, trade
accounts receivable, accounts payable, loans payable, and amounts due to
related parties. It is management’s opinion that the Company is not
exposed to significant interest, currency, or business concentration
arising from these financial instruments. The Company’s financial
instruments also include derivative liabilities which are measured at fair
value and are impacted by changes in interest rates, foreign exchange
rates and the price of the Company’s shares. |
| |
|
|
The fair values of all other financial instruments
approximate their carrying values based on their liquidity and short- term
nature. |
Viscount Systems, Inc.
Notes to Consolidated
Financial Statements
(Expressed in Canadian dollars)
December 31,
2014
| 15. |
Financial instruments (cont’d) |
| |
|
|
The Company is subject to significant liquidity risk. At
December 31, 2014, the Company’s current assets consist principally of
trade accounts receivables and inventory. The Company must liquidate
inventories and rapidly increase collection periods on its receivables to
ensure that sufficient cash is available to settle payables and operating
costs as they come due. |
| |
|
|
Fair value |
|
Financial instruments measured at fair value are classified
into one of three levels in the fair value hierarchy according to the
relative reliability of the inputs used to estimate the fair values. The
three levels of the fair value hierarchy are: |
|
Level 1 – Unadjusted quoted prices in active
markets for identical assets or liabilities; |
|
Level 2 – Inputs other than quoted prices
that are observable for the asset or liability either directly or
indirectly; and |
|
Level 3 – Inputs that are not based on
observable market data. |
| |
|
|
The Company recognizes its derivative liabilities at fair
value determined using Level 3 inputs. |
| |
|
| 16. |
Subsequent Event |
| |
|
|
On January 20, 2015, the Company completed a private
placement of 200 Series A Convertible Redeemable Preferred Stock with a
stated value of US$1,000 per share for total proceeds of
CAD$234,000. |
| |
|
|
Commending March, 2014, the Company entered into a one
year agreement with a financing company to factor its trade accounts
receivables. The financing company offered a CDN$1,000,000 credit facility
by the purchase of eligible accounts receivable at a discount rate of
3.65% of the face value of the purchased receivable plus 1/10% per day on
any receivable outstanding after 35 days from the date of invoice
purchase. Any amounts that remain unpaid 90 days after the initial invoice
date, or any dispute raised by the customer will be repurchased by the
Company or replaced by eligible receivables. |
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a)
OR 15d-14(a)
OF THE U.S. SECURITIES EXCHANGE ACT OF
1934
I, Dennis Raefield, certify that:
| 1. |
I have reviewed this report on Form 10-K for the fiscal
year ended December 31, 2014 of Viscount Systems, Inc. |
| |
|
|
| 2. |
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| |
|
|
| 3. |
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; |
| |
|
|
| 4. |
The registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| |
|
|
|
a) |
designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which
the annual report is being prepared; |
| |
|
|
|
b) |
designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles; |
| |
|
|
|
c) |
evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and |
| |
|
|
|
d) |
disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect the registrant’s internal
control over financial reporting; |
| |
|
|
| 5. |
The registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee
of registrant’s board of directors (or persons performing the equivalent
function): |
| |
|
|
|
a) |
all significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and |
| |
|
|
|
b) |
any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant’s control over financial reporting. |
| Date: March 26, 2015 |
By: |
/s/ Dennis Raefield |
| |
|
Dennis Raefield |
| |
|
Principal Executive Officer
|
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION
1350
AND RULE 13a-14(b) OR RULE 15d-14(b)
OF THE U.S.
SECURITIES EXCHANGE ACT OF 1934
In connection with the annual report of Viscount Systems, Inc.
(the "Company") on Form 10-K for the fiscal year ended December 31, 2014 as
filed with the Securities and Exchange Commission on March 26, 2015 (the
"Report"), each of the undersigned, in the capacities and on the dates indicated
below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
| |
1. |
The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and |
| |
|
|
| |
2. |
The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company. |
| Dated: March 26, 2015 |
/s/ Dennis Raefield |
| |
Dennis Raefield |
| |
Principal Executive Officer
|
Viscount Systems (CE) (USOTC:VSYS)
Historical Stock Chart
From Oct 2024 to Nov 2024
Viscount Systems (CE) (USOTC:VSYS)
Historical Stock Chart
From Nov 2023 to Nov 2024
