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, 2008
[ ] 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
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88-0498181
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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4585 Tillicum Street, Burnaby, British Columbia,
Canada
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V5J 5K9
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(Address of principal executive offices)
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(Zip Code)
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Issuers telephone number:
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(604) 327-9446
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Securities registered pursuant to Section 12(b) of the
Act:
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None
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Securities registered pursuant to Section 12(g) of the
Act:
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Common Stock, $.001 per share
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(Title of class)
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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 if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form,
and no disclosure will
be contained, to the best of the registrants 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 [ ]
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Accelerated
filer
[ ]
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Non-accelerated filer [ ]
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(Do not check if a smaller
reporting company)
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Smaller reporting company [
X
]
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Check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State issuers revenues for its most recent fiscal year:
$4,189,608 ($5,102,434 in Canadian dollars converted at an
exchange rate of
US$0.8211/CDN$ 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 registrants most recently
completed second fiscal quarter: $3,746,663 as at
June 30, 2008.
State the number of shares outstanding of each of the issuers
classes of common equity, as of the latest practicable
date: 17,841,250 shares of common stock as at March 20, 2009.
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 is to be filed within 120 days after the end of
the Registrant's fiscal
year ended December 31, 2008.
Transitional Small Business Disclosure Format (Check one): Yes
[ ] No [X]
3
Form 10-K
Table of Contents
1
FORM 10-K
VISCOUNT SYSTEMS, INC.
PART I.
FORWARD-LOOKING STATEMENTS
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS",
"PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR
EXPRESSIONS OR 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, 2007. 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
We maintain our 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 Canadian dollars per
one (1) U.S. dollar and are the inverse of rates quoted by the Federal Reserve
Bank of New York for U.S. dollars per CDN$1.00. On February 12, 2008, the
exchange rate was US$1.00 per CDN$1.2248. The high and low exchange rates for
each month during the previous six months were as follows:
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High
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Low
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February 2009
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1.2250
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1.2160
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January 2009
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1.2765
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1.1761
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December 2008
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1.3008
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1.1872
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November 2008
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1.2952
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1.1477
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October 2008
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1.2995
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1.0585
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September 2008
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1.0821
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1.0298
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2
The following table sets out the exchange rate information as
at each of the years ended December 31, 2008 and 2007.
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Year Ended December 31
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2008
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2007
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Rate at end of Period
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1.2180
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0.9913
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Average Rate during Period
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1.0660
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1.0748
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Low
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0.9711
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1.1030
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High
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1.3008
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0.8419
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Item 1. BUSINESS
GENERAL
We are a manufacturer, developer and service provider of access
control security products. In 2008, commercial sales of our MESH product line
continued to impact our total sales. MESH (Multimedia Embedded Security Hub) was
a new technology developed by Viscount that converged voice (intercom, emergency
communications), data (access control, elevator control, alarm) and some video
to provide increased security at a reduced cost of hardware, cabling and
installation and with simplified database management.
In addition to MESH, our current access control and security
product lines include the following: Enterphone 2000, a building intercom;
Entercheck, a card access system; RadioClik and InfraClik, radio frequency and
infrared remote controls; Elektra, liquid crystal display intercom panels;
EmerPhone, emergency telephone entry systems; and various accessories. We also
have a service division that provides service for the Enterphone 2000. We
currently have 1,630 service agreements in place.
Our website address is
www.viscount.com
. All periodic
and current reports are available, free of charge, on our website as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the U.S. Securities and Exchange Commission. Electronic or paper
copies of our filings are also available, free of charge, upon request.
BUSINESS OVERVIEW
We design, manufacture and service access control and security
products, including intercom and door access control systems and emergency
communications systems. These systems use telecommunications wiring to control
access to buildings and other facilities for security purposes. While much of
our current revenues are derived from sales of the Enterphone technology and
related security products, sales from our MESH product line continues to impact
and provide a significant source of revenues. Service sales from our existing
1,630 service agreements also continue to provide a significant source of
revenues.
MESH is now our leading sales product, accounting for 51.5% of
total sales for the year ended December 31, 2008. MESH technology is based on a
proprietary software platform that can be used for a variety of security and
access control applications as well as communication functions. The technology
represents a departure from traditional access control and security systems.
Traditional systems use controllers that have a capacity to control from 1 to 8
access points per controller. A building access system using the MESH technology
can control several hundred points of access from a single remote hardware and
software platform. The technology also allows several previously independent
building control systems to be hosted on a single hardware and software
platform. Our proprietary MESH software is designed to be modular, permitting
additional applications to be added as modules, each operating other building
and area control systems and high technology requirements.
Enterphone continued to provide a consistent source of revenue,
accounting for 17.7% of total sales for the year ended December 31, 2008.
Enterphone is a building access control system that uses a buildings internal
phone wiring thereby avoiding use of telephone utility services. Our products
include access control panels that use the
3
Enterphone technology. Our control panels are typically
installed at entrances to apartment buildings, government facilities, and other
buildings and facilities where security concerns require access control systems.
The control panels are sold in various formats and with varying features and
capabilities. Our Enterphone technology control panels are sold through an
established distribution network, and can be found installed in approximately
35,000 buildings throughout North America. We also package and sell access
control and security products that are complementary to our Enterphone product,
including card access systems, radio frequency remote controls, intercom
monitors and closed circuit cameras.
COMPANY HISTORY
Our current business is operated primarily through our wholly
owned subsidiary Viscount Communication and Control Systems Inc. The business of
our 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 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. Responsibility for the manufacture of the Enterphone system
was transferred into the business in 1984 from BC Tel. BC Tel contracted to sell
the business in 1997 to Blue Mountain Technologies Inc., a company that
purchases and installs our products. Blue Mountain Technologies Inc.
simultaneously assigned its contractual rights to acquire all of the business
assets, except for certain leasehold interests, to our subsidiary, Viscount
Communication. BC Tel consented to the assignment and accordingly the business
was acquired by our subsidiary, Viscount Communication and Control Systems
Inc.
We were incorporated on May 24, 2001 under the laws of the
State of Nevada under the name OMW4 Corp. Our subsidiary, Viscount Communication
was incorporated in 1997 under the laws of British Columbia, Canada, for the
purposes of carrying on our present access control business. We 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 our 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, we changed our name to Viscount
Systems Inc. effective August 27, 2001.
In 2003, we acquired certain inventory and 2,165 service
agreements from Telus Corporation. The service agreements related to the
maintenance Enterphone installations throughout Western Canada. The inventory
was comprised of various products and components for installation and repair of
these Enterphone installations. Enterphone is a specialized telephone switch
used to provide intercom and access control functions in buildings. It was
originally developed by BC Tel in 1965. Mirroring the increased security
awareness in buildings over the past few years, we have been providing a more
comprehensive package of complementary products. Products packaged, using third
party technologies for this purpose, include card access systems, radio
frequency remote controls, intercom display panels and closed circuit cameras.
The MESH product line, which has been under development since
1998, is an integrated platform for building access control and management. MESH
continues to be the focus of our corporate development.
INDUSTRY OVERVIEW
We compete 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. Our 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 doors or elevators in
order to gain access.
4
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.
The building control industry has traditionally been highly segmented
based on function. 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. 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 instead of convergence. Integration
is the use of a host computer to tie separate and distinct systems, typically
from different manufacturers, together on a common software platform. Convergence,
in the case of building control systems, is the provision of a new service that
is designed to operate multiple systems using homogenous control parameters.
Convergence is generally considered preferable to integration, as fewer distinct
systems means lower operational and maintenance costs.
Along with certain other industry participants, we have turned
to current high-technology solutions in order to reduce costs of ownership of
security systems, while improving functionality. We have 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 access control industry has traditionally used a technology
known as Wiegand. Approximately 90% of the worlds installed access systems are
based on Wiegand technology. 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 Senso
Engineering as an access card technology. The card technology uses a special
patented process whereby wires are imbedded in a plastic access card to encode
its data. When passed through a magnetic field generated by a card reader, the
card generated a signal which is received and interpreted by the card reader. If
the signal is recognized, the reader will transmit the information to a host
controller to activate a switch, which for example purposes, may release a lock
or open an elevator to permit building access to the cardholder. A host
controller is essentially computer hardware that is programmed to receive
information from the card reader in order to permit access to a building.
Wiegand technology has established itself as the industry standard as it is
viewed as being reliable and difficult to counterfeit the access cards.
Other products that use the Wiegand principals for access
control are magnetic strip cards and radio frequency cards. These products
function similarly by providing a card reader with a signal that the reader
interprets and transmits to a host controller in order to grant or deny
access.
Wiegand access control technology requires card readers that
are connected to a host controller. 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 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.
5
As a result of the limitations and hardware requirements of the
traditional access control systems, some security industry manufacturers are
developing and marketing intelligent access control and communications
systems. Intelligent systems allow several previously independent building
control systems, such as intercom, access control, video, and climate control,
to be controlled by a single server. These systems are based on software
designed to control hundreds of readers from a single computer server, combined
with smart chips installed in readers at each control point. Smart chips are
programmable computer chips that permit access card readers to grant or deny
access without the need to relay a signal to and from a central host controller.
Smart chips can be programmed to perform tasks for a diverse range of building
control systems, such as fire alarm systems, heating/ventilation and air
conditioning, and building access and elevator controls. As the smart chip is
programmed to make its own decisions on a given application, this reduces the
load on the central host computer. The host computer accordingly performs
primarily a monitoring and information collection function.
We are participating in this advance in the access control
industry with our proprietary MESH intelligent access control and communication
technology system. We believe that intelligent systems, including smart chip
readers and cards will replace reliance on systems based on Wiegand technology.
PRODUCTS
We are a manufacturer, developer, reseller and service provider
of intercom and access control systems based on telephone, new and traditional
access card and reader technologies. Our 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.
For the year ended December 31, 2008, approximately 20% of
total sales of our products and services were generated in the United States,
and 80% in Canada. This represents a change from 2007, where sales to the United
States and Canada were 23% and 77%, respectively. The change is in part due to
increased sales of products and services in Canada as a result of our
acquisition of service agreements and inventory from Telus Corporation.
Information on our existing products can be viewed on our website at
www.viscount.com
.
Our Enterphone Access Control Products
Historically, our principal product was the Enterphone intercom
and access control system. Enterphone is our patented building entry control
system that uses a buildings internal phone wiring to allow access control for
tenants and intercom and access control between visitors and tenants. The use of
a buildings internal phone wiring by our 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 our Enterphone system distinct from other
dial-up telephone entry systems that use telephone company lines. Sales of our
products based on the Enterphone system account for approximately 18% of our
total sales in fiscal 2008. This is down from approximately 30% in fiscal 2007,
due in part to the development of other sources of sales, including Enterphone
maintenance contracts, new product lines, and our OEM product lines.
Our Enterphone system is sold as a central control panel which
is installed in a buildings 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 1 to
4 digit number at the entrance panel. The call is directed from the entrance
panel, through the common control equipment and up to the tenants telephone.
The tenant hears a unique ring and can unlock the entrance door by pressing a
number on the telephones numeric keypad. The tenant does not need to rent a
telephone line from the telephone company. Each control panel can process
connections to as many as 840 suites.
We also manufacture electronic entry access panels that can
operate using either our Enterphone system, or dial-up telephone company lines.
Our panels are manufactured in various sizes and with various features in order
to accommodate varying purposes and building types. For example, we manufacture
panels that provide intercom and access control from 1 suite to up to 1000
suites; or panels that provide on-screen name search capabilities; or panels
6
that are streamlined in shape or small in size. All panels that
we manufacture incorporate the Enterphone technology, however most panels can
also be installed to use telephone company lines.
Our 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. We
purchase these technologies from other manufacturers and resell them under our
brand names. Most of the products that we resell can be integrated into our
Enterphone access control system.
Our MESH Access Control System
Overview
MESH is a software based building management system designed to
replace traditional systems that are more hardware intensive. We continue to
develop this technology that was started in 1998. MESH was pre-commercially
released in late 2003.
MESH is a software platform that communicates with a network of
intelligent input/output devices, such as card readers or building environment
sensors. As such, the intelligence of the system can be said to be distributed
among the input/output devices. This is contrasted with the traditional access
control industry, which uses dumb readers that require information to be
processed at a central host computer. An intelligent reader or input/output
device uses a pre-programmed smart chip which allows it to process information
on its own, and does not require the host computer to make action decisions,
such as to grant or deny access to a door or to activate air-conditioning. The
use of intelligent devices accordingly reduces the load on the host computer
which allows the host computer to allocate its resources to a greater number and
diversity of tasks. The networked distribution of intelligent devices also
means reduced cost resulting from reduced hardware requirements, easier training
of control system operators, and the use of commercially available host computer
hardware and communication techniques. Initially, we will apply the MESH
technology for access control system purposes.
The conceptual basis for MESH is simple. Virtually every low
voltage building technology, except building access, has evolved using
intelligent addressable network devices. This includes fire alarms and
heating/ventilation and air-conditioning. An addressable network is one in which
devices can constantly communicate with a host server controller or can be
polled for information. For example, if a smoke detector on a non-addressable
fire alarm system fails, a fire in that location may go undetected since there
is no way to identify the failure without actually testing the device. In
contrast, the smart chip in an addressable smoke detector may be able to
notify the fire panel of a problem immediately and call for service. Access
control systems, however, continue to be based on a 30-year-old standard called
Wiegand. The limitations of this standard continue to plague the industry due to
the slow data transmission speed (9600 baud) between the reader and the host
controller, the high cost and quantity of specialized and dedicated hardware,
and the inability of the host computer to process voice or video signals. For
example, buildings requiring elevator access control have traditionally required
a significant amount of expensive dedicated hardware. The MESH network with
intelligent readers can accomplish these functions without dedicated hardware,
resulting in cost reductions, both in terms of the actual hardware required and
the labor, cable and conduit costs associated with installation.
The MESH system bypasses the need for specialized and dedicated
hardware. Instead, MESH provides a software-based platform that operates on an
industrial computer server connected to intelligent readers transmitting data
at high speed rates of up to 156,000 baud, while simultaneously running voice
and video applications. The benefits and functionality derived from this
approach can be significant.
MESH Structure
The MESH network consists of a main control computer server
communicating with a series of intelligent readers, panels, and input/output
devices. The key to the technology is the smart chip we use, known as the
MPNode computer chip, a programmable chip. We purchase the MPNode chips and
program them to perform certain functions upon detecting certain data. For
access control applications, the chip is installed into a card reader. When data
from an access card is received by the card reader, the chip processes the data
and makes a decision to grant or deny access. Information on the transaction is
passed along to the host computer for data storage and analysis
7
purposes. Traditional Wiegand style card readers require an
intermediate controller for every two or three reading devices. An intermediate
controller is connected between the host computer and the group of readers
controlled by it. In contrast, the MESH systems allows intelligent readers to
be installed in series, or daisy-chain fashion, without the need for
intermediate controllers. Small interface modules are used instead to maintain
data flow. This reduces hardware costs as only one host computer is
required.
MESH panels, located at entrance doors for visitor access, can
operate independently or as slaves off the MESH server. The basic MESH panel
that we have commercially released is a full color screen industrial computer.
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 slave/master
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 our 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. It is our
belief that addressable networks pose a serious threat to the continued use of
the Wiegand format.
MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. We have developed various
modules for our MESH technology, and we intend to develop further modules which
will be released in a series of phases. Some of these product enhancement
modules are described below:
-
MESH Photo-badging software is being designed to allow digital
photo-imaging of individuals accessing a building, which can be stored in a
database. This module is currently in development.
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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.
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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 will 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.
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The distributed intelligence of MESH makes the product suited to the
growing emergency call/nurse call industry.
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MESH networks are built on a proprietary architecture platform which is
functional to integrate with any existing automation network.
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A new and emerging market segment tracks not just people, but equipment. A
typical application is the embedding of anti-theft chips in computers, which
integrate with card reader systems.
-
MESH to be a fully Internet Protocal enabled system.
8
Our other products
Our next generation of Enterphone systems, called Enterphone X,
EPX, was released during the second quarter of 2008. EPX has replaced EP2000.
EPX, also a no phone line system like EP2000, is the next generation of
Enterphone. EPX is more cost effective because it requires less assembly and
material input costs. EPX improves compatibility with MESH and other newer
telephony technologies.
The Enterphone 2000 design dates back to 1990 and the
architecture has created complications for both manufacturing and installation.
The new universal controller eliminates the need for Viscount to manufacture and
carry inventory for 10 different circuit boards. Overall, EPX reduces cost,
produces higher margins, and improves our ability to market MESH.
Our other products include RadioClick and InfraClick. These are
remote control access control products for doors and parking gates. They are
sold separately or as complementary to our Enterphone, Entercheck and MESH
systems. We also manufacture and sell EmerPhone, an intercom system that is sold
in elevator phone, emergency phone and entry phone applications.
OTHER SERVICES
In addition to sales of our Enterphone, MESH and OEM products,
we also service approximately 1,630 existing Enterphone installations within
Western Canada.
PRODUCTION
Viscount has facilities for circuit board manufacture and
mechanical assembly. We use a range of processes to produce our products. Some
products including Enterphone, Infraclik, and Axess are completely manufactured
in-house. MESH and Emerphone use outsourced circuit boards with final assembly
and software installed at Viscount. Some access control, card readers, Elektra
panels, Infraclik and various product accessories are purchased from other
manufacturers and resold under our brand-names. We maintain full facilities to
assemble through-hole circuit boards and limited facilities for assembling
surface mount circuits. We have 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.
The MESH software platform is loaded on standard industrial
computer chassis. We are not developing hardware internally for MESH, since the
required hardware controllers are commercially available at quality and price
levels that make internal development uneconomical. In addition, by using
off-the-shelf components, we improve our time to market, eliminate hardware
debugging and increase our ability to be technologically flexible in the future.
We are primarily executing final mechanical assembly of the MESH systems.
RESEARCH AND DEVELOPMENT
Our research and development continues to be focused on
enhancing MESH. A number of these enhancements were identified in the MESH
Structure and Our other products section of this document. Specific custom
MESH applications are being considered, evaluated and implemented. An example of
this process would be considering built-in badging printers and a virtual
concierge. We estimate that our expenditures in connection with research and
development during the last two fiscal years totaled $644,565.
MARKET AND MARKETING
The Market
The intercom and access control market is serviced by a number
of large and small competitors. Our traditional products compete in a mature
market place that largely uses the 30 year old Wiegand technology. We believe
that there currently exists an opportunity in the building and access control
market for innovative products that use current technologies to reduce user
costs. We have positioned our MESH technology to take advantage of this
opportunity.
9
The access control market can generally be described as the
market for any equipment used to control passage through a door, gate 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 we compete
in involves computerized access control systems that typically control access
through multiple access points, such as our Enterphone system. MESH was designed
to present a new technology to this computerized market niche. In particular, in
large high-rises with a full MESH system, individual tenants may use the MESH
server to control access to one or two doors.
Our traditional market for our Enterphone product was apartment
and condominium buildings. While the market for telephone entry type systems
amounts to about US$100 million, 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 our first in-house product
that addresses these multiple requirements. The modular nature of MESH also
provides us 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. The overall
effect of these system advances has enhanced our core business, while allowing
us to find applications where the new features expand the traditional market for
such systems.
We are 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 our 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.
While complete MESH networks will typically be installed, the
modular nature of MESH allows additional segmentation based on product
application and end-user need. The nature and scope of a MESH installation
depends on the level of security required, the product alternatives, the number
of buildings, and the level of system management required. The nature and scope
of an installation can be described in terms of a user spectrum ranging from
price sensitive users to users requiring enhanced services. At one end of this
spectrum is price. For these applications MESH has been competing with
traditional Wiegand systems. We believe the cost reduction aspects of MESH has
provided us with a competitive advantage over traditional Wiegand systems. For
example, a typical condominium developer does not manage a building after
construction. Therefore, the developer is looking for a very affordable,
reliable access control system. Unless a more sophisticated product will help
sell suites, the developer tends to keep the system simple. At the middle of the
spectrum are customers who will adopt MESH mainly due to system benefits. For a
commercial high-rise this may be the flexibility derived from a new user profile
approach MESH uses for programming. On the enhanced service end of the spectrum
we find customers who need to develop a much closer relationship due to the
level of sophistication of their needs. At this level, we anticipate additional
revenue opportunities for custom programming, data mining and hosting, and
direct installations for national accounts.
While the core function is controlling access/egress, through
the planned development of various MESH technology modules, we have been
actively targeting all of these segments. For example, a MESH add-on module can
be developed to provide an asset tracking system to prevent computer theft. The
inherent alarm functions of MESH allow it to be used as an integrated
theft/burglar alarm system for large facilities. The MESH telephony video
capture function will allow government agencies to track alcohol and drug
problem tenants of controlled housing complexes or other regulatory monitoring
functions. Finally, MESH, along with our EmerPhone, can function to combat
vandalism and to secure parking lots.
10
We rank controlling access/egress and securing parking
facilities as the primary concerns of our traditional core multi-residential
business.
Distribution Plan
We currently have approximately 500 dealers for our existing
products throughout North America. When our existing business was acquired from
BC Tel, we relied primarily on exclusive and semi-exclusive dealers in certain
major metropolitan areas. Our distribution network is not static and we are
constantly seeking additional sales channels. In October and November of 2003,
we signed a distributor deal with Tri Ed, the security distribution subsidiary
of Tyco. The agreement placed our security products in 27 Canadian and U.S. Tyco
branches, including Denver, Dallas, Phoenix, Seattle and six locations in
California.
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, our employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, our personnel
may be involved on a co-op basis with large national security, building
automation and heating/ventilation and air-conditioning contractors.
These distribution deals, along with our existing dealer base,
gave us immediate access to the largest networks of dealers in the US, Canada
and Mexico.
During the past year, we have been targeting our existing
markets for the sale of our MESH technology, as well as targeting the
international marketplace. Internationally, we have sold MESH in China, India,
France, and New Zealand. MESH is designed to accommodate foreign languages with
minimal modifications to the software. This is in contrast to other products of
its type which require a heavy software investment to provide alternative
language software. With MESH, the core software can be applied in all languages
with only the on screen text displays needing to be translated. Translation can
be accomplished using commercially available translation software.
MESH Marketing Strategy
We have been using our established distribution channels, as
well as new distribution channels to access our target markets for the MESH
technology. As a unique technology, however, end-users as well as dealers must
be educated about MESH benefits. It is our experience that a stronger initial
emphasis on end-user decision-makers and large national system integrators will
be the most effective in developing the MESH market.
Advertising
Our products are advertised on an ongoing basis in various
print publications, which we 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 sales per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given us a very accurate measure of the effectiveness of
various publications and individual ads.
Trade Shows
During 2008, we reduced our participation at tradeshows to
reduce costs. During 2009, we will consider attending certain tradeshows that
will provide increased exposure for MESH.
Direct Marketing
We continued educating customers about our MESH technology by
holding MESH training seminars throughout the U.S. and at hour head office.
11
Pricing Strategy
Our system provides features never before available in a
building control security system. The MESH 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.
With a unique product and a position of product leadership, we
have devised a strategy of building market share. This strategy involves selling
MESH at reasonable 50-60% margins. With the telephony component, we have 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
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. Recent
examples are the purchase of Cardkey by Johnson Controls, Guardall by Chubb and
ADI/Northern Computers by Honeywell. 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 own 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. Due to these limitations, most research and development is focused
on cost reducing hardware and making the control hosts more network capable. In
all cases, the manufacturer using traditional Wiegand technology are limited
from 1 to 8 doors per host.
Competitive Threats
We have a strong dealer and distribution plan in place and MESH
has positioned us in a market dominated by much larger players. The higher
security MESH applications are also somewhat outside of our traditional scope of
business and therefore, we are rapidly trying to develop a market for MESH and
in the process, educating users of MESH through our training seminars. We
believe that our marketing strategies and training seminars will provide
benefits that will help us achieve market share that will allow us to be
competitive. There is no guarantee that we will be able to successfully compete
against our larger competitors.
While MESH 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 addressable fire alarms and we have marketed MESH 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. We have estimated that we still have a three-year market lead.
Fortunately, the wide range of MESH software applications should provide us with
an ongoing lead, as long as we are aggressive with research and development.
INTELLECTUAL PROPERTY
We will rely on a combination of non-disclosure and other
contractual agreements, and technical measures to protect the confidential
information, know-how, and proprietary rights relating to our Enterphone, MESH
and other Viscount products. We have contractual rights with respect to
registered North American trademark and trade name for Enterphone (word alone).
We are still considering registering North American tradenames for MESH.
12
We have registered active Internet domain names for
www.viscount.com
,
www.enterphone.net
, and www.enterphone.org.
Our standard employment agreements and license agreements
contain provisions that protect the confidentiality of our proprietary property.
All our employees and sales agents are required to sign these agreements prior
to their employment or engagement.
To date we have not received notification that our services or
products infringe the proprietary rights of third parties. Third parties could
however make such claims of infringement in the future. We cannot be certain
that others will not develop substantially equivalent or superseding proprietary
technology, or that equivalent services will not be marketed in competition with
our services, thereby substantially reducing the value of our proprietary
rights. Furthermore, there can be no assurance that any confidentiality
agreements between us and our employees or any license agreements will provide
meaningful protection for our proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.
GOVERNMENT REGULATIONS
Some of our products are still under government regulation. The
Enterphone is an interposition technology which in U.S. states 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 building owners responsibility. Conversely, it can also be
installed where the telephone company has given consent to allow Enterphone
to share the telephone backbone.
The history of government deregulation for us mainly relates to
the demarcation point in a building. Until government deregulation came to the
access control industry, Enterphone type systems could only be installed by
telephone companies.
After the break-up each regional telephone company began to
make its own decisions. As a result of this, Chicago, New York, and Boston
became strong markets for the Enterphone. Another result of government
deregulation was that many telephone companies withdrew from the access control
systems industry, which resulted in our using direct dealers in those
regions.
OUR SOURCES OF REVENUES
The majority of the Companys revenues were derived from
the MESH and Enterphone product lines. In fiscal 2008, MESH sales represented
52% of total revenue, while Enterphone product sales represented 18% of total
revenue. The balance of the Companys revenues were derived from service
agreements, and other products such as access tracking and control, closed circuit
monitors, infrared and radio frequency remotes.
EMPLOYEES
Viscount employs twenty five staff at its production facility
and head office located in Burnaby, British Columbia, Canada.
Item 1A. RISK FACTORS
You should carefully consider the following risk factors and
other information in this annual report and in our filings with the Securities
and Exchange Commission when you evaluate our business and the forward-looking
statements that we make in this annual report.
13
We cannot be certain that the market will accept our new
MESH technology as necessary to generate an economically viable level of sales.
We may not be successful at achieving a profitable level of sales of our MESH
technology.
Our ability to achieve significant growth is largely contingent
upon the success of our MESH technology. The building access control industry is
currently based upon well established and reliable technology that our MESH
technology is designed to replace. Our technology has only recently been
available commercially and as a consequence we have little data on which to
establish a track record of market acceptance and sales. It is too soon to
determine whether we will be able to gain a significant level of commercial
acceptance of our MESH product. If we are unsuccessful at marketing and selling
our MESH modules in sufficient quantities, we may not be able to achieve
significant or sustained growth, and as a result the value of an investment in
our common stock may decrease.
Other companies with greater resources than we have are
currently developing or have commercially available products that use similar
technology to our MESH product, and we may lose potential market share as a
result.
Our MESH access control product is based on intelligent access
modules, which use commercially available programmable microchip technology. Due
to increasing availability and decreasing price of programmable microchips, the
development and commercialization of intelligent access control systems is not
unique to us. There are other companies that have developed or are developing
similar products that use intelligent cards and card readers that will be
competing with us in the access control industry. These competitors may have
substantially greater financial, technical, marketing, and management resources
than we have. Our ability to compete successfully will depend on several factors
including timing of taking our MESH product to market and our ability to educate
and use existing sales channels and develop new sales channels. To the extent
that our requirement for additional financing may cause delays in the marketing
of our MESH product, this may provide some of our better funded competitors with
a competitive advantage in their ability to access the markets before us. To the
extent that our competitors have more resources to market products based on
similar technology, we may lose market share which would decrease the value of
an investment in our common stock, or may cause the value of an investment in
our common stock to decrease.
The loss or unavailability of Stephen Pineau, our
President, Principal Executive Officer, and Principal Financial Officer for an
extended period of time could adversely affect our business operations and
prospects.
Our success depends, to a significant degree, upon the effort
and skill of Stephen Pineau, our president and principal executive officer. We
do not maintain key man insurance on Mr. Pineau. Due to his knowledge of our
operations and products, the loss, incapacity, or unavailability of Mr. Pineau
could have a material adverse effect on the business, financial condition or
results of our operations, which would likely result in a decrease in the value
of an investment in our common stock.
Because our common stock trades at prices below US$5.00
per share, and because we are not listed on a national exchange, there are
additional regulations imposed on broker-dealers trading in our shares that may
make it more difficult for you to resell our shares.
Because of rules that apply to shares with a market price of
less than US$5.00 per share, known as the penny stock rules, investors in this
offering will find it more difficult to sell their securities. The penny stock
rules currently apply to trades in our shares. These rules in most cases require
a broker-dealer to deliver a standardized risk disclosure document to a
potential purchaser of the securities, along with additional information
including current bid and offer quotations, the compensation of the
broker-dealer and its salesperson in the transaction, monthly account statements
showing the market value of each penny stock held in the customers account, and
to make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to
the transaction.
14
Our directors and officers hold approximately 47% of our
common stock and acting together may have the ability to control management and
affairs of Viscount and to deter changes in control.
Our directors and officers collectively hold approximately 47%
of our current issued and outstanding voting shares. As a result, such persons,
acting together, may have the ability to control most matters submitted to our
stockholders for approval, including the election and removal of directors, and
to control the management and affairs of Viscount. In addition, our Articles of
Incorporation include provisions that management can use to retain control over
Viscount. Accordingly, such concentration of ownership, coupled with management
friendly anti-takeover provisions, may have the effect of delaying, deferring or
preventing a change in control of Viscount, impeding a merger, consolidation,
takeover or other business combination or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, which
limits the ability of our stockholders to participate in opportunities that may
increase the value of their stock.
Item 2. DESCRIPTION OF PROPERTY
PROPERTY
Our executive office and central factory is located in Burnaby,
British Columbia, where we currently lease 12,040 square feet. We lease this
space under an industry standard operating lease with a term expiring May 31,
2010, renewable at the option of Viscount. Current monthly lease obligations are
$10,921. We believe that our current facilities are adequate and are suitable
for our current use, and that suitable additional facilities will be available,
when needed, upon commercially reasonable terms. Our facilities are adequately
insured against perils in a manner consistent with industry practice.
Item 3. LEGAL PROCEEDINGS
The Company was named as the sole defendant in litigation for
wrongful dismissal that involves a former employee. The Company filed a defense
to this claim and is actively defending its position. At this time, the
likelihood of the outcome is not determinable and no provision has been made for
the claim in the accounts.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
Item 5.
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER
MATTERS AND PURCHASES OF EQUITY SECURITIES
|
Trades in our common shares 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). Our 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. Our shares began
trading on February 12, 2002. The following table sets forth the range of high
and low price information of the common shares as reported on the OTC Bulletin
Board for the last two fiscal years and the subsequent period ending February
12, 2009. The price information available reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
15
|
|
High (U.S. $)
|
Low (U.S. $)
|
2009
|
First Quarter
(through February 12, 2009)
|
$0.08
|
$0.07
|
2008
|
Fourth Quarter
|
0.13
|
0.06
|
|
Third Quarter
|
0.22
|
0.12
|
|
Second Quarter
|
0.45
|
0.21
|
|
First Quarter
|
0.43
|
0.29
|
2007
|
Fourth Quarter
|
0.51
|
0.34
|
|
Third Quarter
|
0.49
|
0.38
|
|
Second Quarter
|
0.49
|
0.22
|
|
First Quarter
|
0.35
|
0.22
|
As of January 2, 2009 there were 39 holders of record of our
common stock, holding a total of 17,841,250 shares, and an unknown number of
beneficial holders.
We have not declared any dividends in the last two fiscal
years.
The following table sets forth information respecting our
compensation plans as at December 31, 2008, 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
|
3,363,800
|
US$0.30
|
0
|
Equity compensation plans not approved by security holders
|
N/a
|
N/a
|
N/a
|
Total
|
3,363,800
|
US$0.30
|
0
|
Item 6. SELECTED FINANCIAL DATA
Not applicable.
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The following discusses our financial condition and results of
operations based upon our 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 our financial
statements and the notes thereto included elsewhere herein. All dollar amounts
are in Canadian dollars unless otherwise noted.
RESULTS OF OPERATIONS
Sales revenues for the years ended December 31, 2008 and 2007
were $5,102,434 and $4,970,967, respectively, an increase of $131,467 or 2.7% .
The increase in sales for the year ended December 31, 2008 resulted from
increased sales of our MESH system and continued steady sales of our legacy
Enterphone 2000 system. MESH sales for the years ended December 31, 2008 and
2007 were $2,627,308 and $1,875,469, respectively, an increase of $751,839 or
40.1% . MESH sales for the year ended December 31, 2008 were 51.5% of total
sales, as compared to 37.7% of total sales for the year ended December 31, 2007.
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.
16
Enterphone 2000 sales for the years ended December 31, 2008 and
2007 were $902,663 and $1,469,011, respectively, a decrease of $566,348 or 38.6%
. Enterphone 2000 sales for the year ended December 31, 2008 were 18% of total
sales, as compared to 30% of total sales for the year ended December 31, 2007.
As an old technology, Enterphone sales have been dropping for several years and
negating much of our MESH growth. MESH EPX is the replacement for our old
Enterphone system. MESH EPX is the next generation of Enterphone systems but
with features that are compatible with high speed internet and other newer
technologies. With MESH EPX, we can anticipate recovering our lost Enterphone
revenue while continuing to increase our MESH business.
We also provide Enterphone support and maintenance services
pursuant to service contracts that were assigned to us from Telus Corporation in
2003. Sales from the 1,630 existing service contracts continue to be steady. On
average, each service contract represents ongoing revenues of approximately $33
per month, inclusive of parts and labor. 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, 2008, customer service contracts and new
equipment sales generated aggregate sales revenues of $1,638,913, as compared to
$1,516,485 for the year ended December 31, 2007, an increase of $122,428 or 8.1%
. These two comparative years are consistent. These sales included MESH sales by
the service division.
The intangible assets held by the Company are comprised
primarily of service agreements for our product known as Enterphone 2000. The
number of service agreements held by the Company decreased from 1,664 at
December 31, 2007 to 1,645, 1,634, 1,638, and 1,630 at March 31, June 30,
September 30, and December 31, 2008, respectively. During the four quarters of
2008, the Company performed a test for impairment in accordance with Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142) and evaluated the status of service agreements. Management
determined that no charge for impairment was required but the continuing
reduction in the number of service contracts held, indicated that the intangible
asset should be deemed to have a definitive life based on the provisions of SFAS
142. Accordingly, the Company continued 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, 2008, the cost of
the service agreements, net of accumulated amortization, was $130,576.
The cost of sales as a percentage of sales was 40.6% for the
year ended December 31, 2008, as compared with the cost of sales as a percentage
of sales of 43.6% for the year ended December 31, 2007. Costs of sales as a
percentage of sales had remained consistent due to managements commitment of
reviewing input costs regularly. Our policy of managing cost of sales remains
the same. We are continuously focusing on controlling costs, by using multiple
suppliers to ensure that the best and most inexpensive raw materials are used in
our products.
Gross profit for the year ended December 31, 2008 was
$3,032,238, as compared to $2,803,278 for the year ended December 31, 2007, an
increase of $228,960 or 8.2% . This increase corresponds with the increased
sales revenues and consistent cost of sales percentage for the year ended
December 31, 2008.
Selling, general and administrative expenses were $2,722,946
and $3,059,721 for the years ended December 31, 2008 and 2007, respectively, a
decrease of $336,755or 11.0% . This decrease was due to decreases in variable
costs such as advertising, travel, tradeshow and various office expenses. As a
percentage of sales, selling, general and administrative expenses were 53.4% and
61.6% for the years ended December 31, 2008 and 2007, respectively.
Research and development costs were $331,737 for the year ended
December 31, 2008, as compared to $312,827 for the year ended December 31, 2007.
Research and development costs increased by $18,910 or 6.1% . Research and
development costs remained consistent.
Loss before income tax for the year ended December 31, 2008 was
$(86,364), as compared to loss before income tax of $(623,570) for the year
ended December 31, 2007. This was a decrease in loss of $537,206. The decrease
in net loss during the year ended December 31, 2008 was the result of decreased
variable costs such as advertising, tradeshow, traveling, and various office
expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased as of December 31, 2008, as compared to December
31, 2007. At December 31, 2008, cash totaled $255,172, as compared with the cash
of $111,173 at December 31, 2007. This represented an increase of $143,999.
17
We have a bank credit facility available for an operating loan
of up to a maximum of $500,000 at the prime lending rate plus 1.0% . Amounts
drawn are repayable on demand. At December 31, 2008, $57,775 was drawn on this
facility. The facility is secured by substantially all of our assets under a
general security agreement.
On April 16, 2007, the Company completed a private placement of
1,677,550 units at a price of US$0.16 per unit for gross proceeds of US$268,408.
Each unit consists of one common share and one warrant. Each warrant is
exercisable at a price of US$0.25 per share until April 16, 2012 to acquire an
additional share of common stock.
At December 31, 2008, working capital was $301,036, as compared
to a working capital of $349,734 at December 31, 2007. Working capital has
decreased by $48,698. The current ratio at December 31, 2008 was 1.28 to 1.0, as
compared with 1.31 to 1.0 at December 31, 2007.
The accounts receivable turnover ratio for year ended December
31, 2008 was 61 days, as compared to 63 days for the year ended December 31,
2007, a decrease of 2 days. This decrease was due to better follow up and
monitoring of slower paying accounts on a monthly basis by management. The
accounts receivable reserve was $336,776 at December 31, 2008, as compared to
$223,390 for the year ended December 31, 2007, an increase of $113,386. The
reserve was increased to be conservative in recognizing some of the slower
paying accounts. Management continues to recognize and remove older doubtful
customer accounts from the accounts receivable sub-ledger, as well as more
regular follow-up on certain customer accounts to improve the collection
process. There had been no significant or material business conditions that
would warrant additional increases to the reserve at this time.
For the year ended December 31, 2008, there were no capital
expenditures other than the purchase of equipment.
To date, we have not invested in derivative securities or any
other financial instruments that involve a high level of complexity or risk. We
expect that in the future, any excess cash will continue to be invested in high
credit quality, interest-bearing securities.
We will likely require additional funds to support the
development and marketing of our new MESH product. There can be no assurance
that additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, we may be unable to develop or enhance our
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.
We do not have any material commitments for capital
expenditures as of December 31, 2008.
There are no known trends or uncertainties that will have a
material impact on revenues.
Related Party Transactions
In February of 2008, Stephen Pineau, president of Viscount,
loaned the Company $100,000. The loan bears interest at 9.5% per annum, is
unsecured and has no fixed terms of repayment.
In April of 2007 we sold 1,677,550 units at a price of $0.16
per unit, with each unit consisting of one share in the common stock of Viscount
one share purchase warrant, for aggregate proceeds of $268,408. A total of
815,000 of the units were purchased by Stephen Pineau, president of Viscount.
Critical Accounting Policies:
The Companys discussion and analysis of its financial
condition and results of operations, including the discussion on liquidity and
capital resources, are based upon the Companys 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
estimated recoverable amounts of investment tax credits, trade accounts
receivable, and deferred tax assets. The
18
Company believes the following critical accounting policies
require its more significant judgment and estimates used in the preparation of
the consolidated financial statements.
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 Companys investment tax
credit claims will be accepted as filed.
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 uncollectability
of the Companys trade accounts receivable balances. If the Company determines
that the financial conditions of any of its customers 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 an impairment, then a
write-down will be made.
The Company maintains an allowance for inventory obsolescence.
Management reviews the inventory on a quarterly basis by directly testing for
obsolete inventory. If management determines that obsolete inventory has
increased, then an increase in the allowance will be made.
Income taxes are accounted for under the asset and liability
method. Under this method, to the extent that it is not more likely than not
that a deferred tax asset will be recovered, a valuation allowance is provided.
In making this determination, the Company considers estimated future taxable
income and taxable timing differences expected to reverse in the future. Actual
results may differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141R, Business
Combinations which changes how business acquisitions are accounted. SFAS 141R,
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and all liabilities assumed in the transaction and
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination. Certain,
provisions of this standard will, among other things, impact the determination
of acquisition-date fair value of consideration paid in a business combination
(including contingent considerations); exclude transaction costs from
acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, inprocess research and
development, indemnification assets and tax benefits. SFAS No. 141R is effective
for business combinations and adjustments to an acquired entitys deferred tax
asset and liability balances occurring after December 31, 2008. The Company is
currently evaluating the future impacts and disclosure of this standard.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statement, an amendment of ARB No. 51,
which establishes new standards governing the accounting for and reporting of
noncontrolling interests (NCI) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability;
that increases and decreases in the parents ownership interest that leave
control intact be treated as equity transactions, rather than as step
acquisitions or dilution gains or losses; and that losses of a partially owned
consolidated subsidiary be allocated to the NCI even when such allocation might
result in a deficit balance. This standard also requires changes to certain
presentation and disclosure requirements. SFAS No. 160 is effective beginning
January 1, 2009. The provisions of the standard are to be applied to all NCIs
prospectively, except for the presentation and disclosure requirements, which
are to be applied retrospectively to all periods presented. The Company is
currently evaluating the future impacts and disclosure of this standard.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful life of Intangible Assets, (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or
extension
19
assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142) in order to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. Management has determined that the adoption of FSP FAS
142-3 will not have an impact on its financial position and results of
operations.
Other recently issued pronouncements are not expected to be
applicable to the Company or have significant impact on the Companys financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements 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
Managements Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer who
is also our principal financial officer, evaluated the effectiveness of our
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,
our principal executive officer and principal financial officer concluded that
as of the end of the period covered by this report, we have 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 our principal executive officer and principal financial
officer, as appropriate to allow for timely decision regarding required
disclosure.
There have been no changes in our internal control over
financial reporting that occurred during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Managements Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
effective internal control over financial reporting as defined in Rule 13a-15(f)
under the
Securities Exchange Act of 1934
. The Companys 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.
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.
20
Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2008 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, 2008, the Companys
internal control over financial reporting was not effective based on those
criteria. Based on the assessment, management has found the following material
weaknesses in internal controls, as follows:
|
a.
|
We do not have independent directors. Our principal
executive officer and chairman of the board are also the directors of The
Company. We do not plan on changing our directors for 2009.
|
|
b.
|
Receivables: The Companys internal accounting software
allowed the same person to input and post receivable transactions.
|
|
c.
|
Payables: The Companys controls allows for the same
person to input and process payments.
|
|
d.
|
Inventory: The Companys controls allows for the same
person to invoice and pick inventory. The Company tightened internal
control over its inventory counts and improved verification and valuation
processes. Management also performs additional testing and monitoring of
its inventory software system.
|
|
e.
|
Adjusting journal entries: The Company has an informal
process for allowing clerks who perform other functions within the
accounting cycle to perform adjusting journal entries.
|
|
f.
|
IT environment: The Companys information technology
control systems are informal in nature. This environment is lacking
segregation of duties and formal security policies.
|
|
g.
|
Audit Committee: The audit committee is comprised of our
principal executive officer and chairman of the board. We do not have an
independent audit committee member. The audit committee members have some
financial reporting expertise.
|
|
h.
|
Code of ethics: We do not have a formal code of ethics.
Management is on site daily to deal with any deviations from sound
integrity and ethical values. Departures from approved policies and
procedures are assessed by management and dealt with appropriately.
|
The Company management has and continues to take action to
correct the known deficiencies and it plans to remain vigilant and to add
additional staff and system improvements, as needed, to ensure that its internal
control over financial reporting is effective. These efforts include formalizing
the assessment process by identifying and scheduling periodic internal testing
of the various systems and process involved in its internal control over
financial reporting.
Item 9B. OTHER INFORMATION
Not applicable.
PART III.
Items 10 14
Information with respect to Items 10 through 14 is set forth in
the Proxy Statement to be filed with the Securities and Exchange Commission on
or before May 1, 2009 and is incorporated herein by reference. If the definitive
Proxy Statement cannot be filed on or before May 1, 2009, the issuer will
instead file an amendment to this Form 10 KSB disclosing the information with
respect to Items 10 through 14.
21
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
22
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 20, 2009.
|
VISCOUNT SYSTEMS, INC.
|
|
|
|
By:
/s/ Stephen Pineau
|
|
Stephen Pineau
|
|
President and Principal Executive Officer
|
In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the dates indicated.
|
Signature
|
|
Title
|
Date
|
|
|
|
|
|
By:
|
/s/
Stephen Pineau
|
|
President, Secretary,
|
March 20, 2009
|
|
Stephen Pineau
|
|
Principal Executive Officer, Principal
|
|
|
|
|
Financial Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Greg shen
|
|
Chairman of the Board and
|
March 20, 2009
|
|
Greg Shen
|
|
Director
|
|
23
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian
Dollars)
DECEMBER 31, 2008
D
AVIDSON
&
C
OMPANY
LLP
|
|
Chartered Accountants
|
A Partnership of Incorporated Professionals
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Viscount Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Viscount Systems,
Inc. and Subsidiary as at December 31, 2008 and 2007 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These consolidated 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 the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
the Company as at December 31, 2008 and 2007 and the results of its operations
and its cash flows for the years then ended in conformity with generally accepted
accounting principles 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 consolidated financial statements, the Company has suffered
recurring losses from operations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are discussed in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
|
"DAVIDSON
& COMPANY
LLP"
|
|
|
Vancouver, Canada
|
Chartered Accountants
|
March 18, 2009
|
|
1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC,
Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
VISCOUNT SYSTEMS,
INC.
Consolidated Balance Sheets
(Expressed in Canadian
dollars)
As at December 31
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
$
|
255,172
|
|
$
|
111,173
|
|
Trade accounts receivable, less
allowance for doubtful accounts
|
|
|
|
|
|
|
of $336,776 (2007 - $223,390)
|
|
584,517
|
|
|
619,287
|
|
Inventory (note 3)
|
|
556,572
|
|
|
756,234
|
|
Prepaid expenses
|
|
10,528
|
|
|
6,028
|
|
Lease receivable (note 4)
|
|
961
|
|
|
1,037
|
|
Total current assets
|
|
1,407,750
|
|
|
1,493,759
|
|
|
|
|
|
|
|
|
Lease receivable (note 4)
|
|
-
|
|
|
931
|
|
|
|
|
|
|
|
|
Equipment (note 5)
|
|
60,501
|
|
|
76,344
|
|
|
|
|
|
|
|
|
Intangible assets
(note 6)
|
|
130,576
|
|
|
151,468
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,598,827
|
|
$
|
1,722,502
|
|
|
|
|
|
|
|
|
Liablilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Bank indebtedness (note 7)
|
$
|
57,775
|
|
$
|
263,951
|
|
Accounts payable and accrued liabilities
|
|
575,257
|
|
|
490,585
|
|
Deferred revenue
|
|
31,280
|
|
|
27,087
|
|
Due to stockholders (note 8)
|
|
392,402
|
|
|
292,402
|
|
Notes payable (note 9)
|
|
50,000
|
|
|
70,000
|
|
Total current
liabilities
|
|
1,106,714
|
|
|
1,144,025
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
Capital stock (note 10)
|
|
|
|
|
|
|
Authorized:
|
|
|
|
|
|
|
100,000,000 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:
|
|
|
|
|
|
|
17,841,250 common shares (2007 -
17,841,250)
|
|
25,434
|
|
|
25,434
|
|
Additional paid-in capital (note 10)
|
|
2,353,030
|
|
|
2,353,030
|
|
Accumulated
deficit
|
|
(1,886,351
|
)
|
|
(1,799,987
|
)
|
Total stockholders' equity
|
|
492,113
|
|
|
578,477
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
1,598,827
|
|
$
|
1,722,502
|
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS,
INC.
Consolidated Statements of Operations
(Expressed in
Canadian dollars)
Years ended December 31
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
5,102,434
|
|
$
|
4,970,967
|
|
Cost of sales and
services
|
|
2,070,196
|
|
|
2,167,689
|
|
Gross profit
|
|
3,032,238
|
|
|
2,803,278
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Selling, general and administrative
|
|
2,722,946
|
|
|
3,059,721
|
|
Research and development (note 11)
|
|
331,737
|
|
|
312,827
|
|
Depreciation
and amortization
|
|
36,735
|
|
|
34,655
|
|
|
|
3,091,418
|
|
|
3,407,203
|
|
|
|
|
|
|
|
|
Loss before other items
|
|
(59,180
|
)
|
|
(603,925
|
)
|
|
|
|
|
|
|
|
Other items
|
|
|
|
|
|
|
Interest income
|
|
945
|
|
|
4,509
|
|
Interest expense
|
|
(28,129
|
)
|
|
(24,154
|
)
|
|
|
(27,184
|
)
|
|
(19,645
|
)
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(86,364
|
)
|
|
(623,570
|
)
|
|
|
|
|
|
|
|
Provision
for income taxes (note 12)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(86,364
|
)
|
$
|
(623,570
|
)
|
|
|
|
|
|
|
|
Basic and diluted
loss per common share
|
$
|
(0.00
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
|
|
|
|
|
|
|
Basic and diluted
|
|
17,841,250
|
|
|
17,293,653
|
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS,
INC.
Consolidated Statements of Stockholders' Equity
(Expressed
in Canadian dollars)
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
16,082,450
|
|
$
|
23,675
|
|
$
|
1,907,432
|
|
$
|
(1,176,417
|
)
|
$
|
754,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for cash upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of stock options
|
|
81,250
|
|
|
81
|
|
|
10,517
|
|
|
-
|
|
|
10,598
|
|
Units issued for cash from private placement
|
|
1,677,550
|
|
|
1,678
|
|
|
306,807
|
|
|
|
|
|
308,485
|
|
Stock-based compensation (note 10)
|
|
-
|
|
|
-
|
|
|
128,274
|
|
|
-
|
|
|
128,274
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(623,570
|
)
|
|
(623,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
17,841,250
|
|
|
25,434
|
|
|
2,353,030
|
|
|
(1,799,987
|
)
|
|
578,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(86,364
|
)
|
|
(86,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
17,841,250
|
|
$
|
25,434
|
|
$
|
2,353,030
|
|
$
|
(1,886,351
|
)
|
$
|
492,113
|
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS,
INC.
Consolidated Statements of Cash Flows
(Expressed in
Canadian dollars)
Years ended December 31
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(86,364
|
)
|
$
|
(623,570
|
)
|
Items not involving cash:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
36,735
|
|
|
34,655
|
|
Selling, general and
administrative expenses paid by stock options
|
|
-
|
|
|
128,274
|
|
Changes in
non-cash working capital balances (note 14)
|
|
319,804
|
|
|
338,915
|
|
Net cash provided
by (used in) operating activities
|
|
270,175
|
|
|
(121,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Repayment of bank indebtedness
|
|
(206,176
|
)
|
|
(55,736
|
)
|
Proceeds from exercise of stock options
|
|
-
|
|
|
10,598
|
|
Proceeds from private placement
|
|
-
|
|
|
308,485
|
|
Proceeds from stockholder loan
|
|
100,000
|
|
|
-
|
|
Repayment of notes payable
|
|
(20,000
|
)
|
|
(165,000
|
)
|
Net cash provided by (used in) financing
activities
|
|
(126,176
|
)
|
|
98,347
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
143,999
|
|
|
(23,379
|
)
|
|
|
|
|
|
|
|
Cash, beginning of
year
|
|
111,173
|
|
|
134,552
|
|
|
|
|
|
|
|
|
Cash, end of year
|
$
|
255,172
|
|
$
|
111,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information:
|
|
|
|
|
|
|
Interest paid
|
$
|
28,129
|
|
$
|
24,154
|
|
Income taxes recovered
|
|
-
|
|
|
-
|
|
See accompanying notes to consolidated financial
statements.
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
1.
|
Nature and continuance of operations
|
|
|
|
|
Viscount Systems Inc. (the Company) was incorporated on
May 24, 2001. The Company manufactures, distributes, and provides services
for electronic premises access and security equipment. The functional
currency for the Company and its wholly-owned subsidiary is the Canadian
dollar.
|
|
|
|
|
These financial statements have been prepared on a going
concern basis, which assumes the Company will be able to realize assets
and discharge liabilities in the normal course of business for the
foreseeable future. These financial statements do not include the
adjustments that would be necessary should the Company be unable to
continue as a going concern.
|
|
|
|
|
The Company has incurred losses and the ability of the
Company to continue as a going- concern depends upon its ability to
restore profitable operations and to continue to raise adequate financing.
Management is actively targeting sources of additional financing which
would assure continuation of the Companys operations.
|
|
|
|
|
There can be no assurance that the Company will be able
to restore profitable operations and continue to raise funds in which case
the Company may be unable to meet its obligations. Should the Company be
unable to realize on its assets and discharge its liabilities in the
normal course of business, the net realizable value of its assets may be
materially less than the amounts recorded on the balance sheets.
|
|
|
|
2.
|
Significant accounting policies
|
|
|
|
|
These consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America. 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). All material intercompany
transactions and balances have been eliminated in
consolidation.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies (contd
)
|
|
|
|
|
(b)
|
Use of estimates
|
|
|
|
|
|
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America. Significant areas of estimate are the amount of recoverable investment tax credits (notes 11 and 12(a)), the allowance for doubtful
accounts, the estimated useful lives of equipment, the deferred tax valuation allowance, and stock-based compensation. Actual results could differ from those estimates.
|
|
|
|
|
(c)
|
Foreign currency translation
|
|
|
|
|
|
The functional currency of the Company and its wholly-owned subsidiary is the Canadian dollar. Accordingly, 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. Exchange gains or losses arising on translation of foreign currency items are included in the statement of operations.
|
|
|
|
|
(d)
|
Allowance for doubtful accounts
|
|
|
|
|
|
The Company establishes an allowance for doubtful accounts on a specific account basis based on the credit risk of specific customers, historical trends and other information that management believes will adequately provide for
credit losses.
|
|
|
|
|
(e)
|
Inventory
|
|
|
|
|
|
Raw materials and supplies are stated at the lower of cost or market (replacement cost). Cost is generally determined on the first-in, first-out basis. Work in process and finished goods are stated at the lower of average cost or
market (net realizable value). An inventory reserve is recorded based upon a physical count of all obsolete inventory.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies
(contd
)
|
|
|
|
|
(f)
|
Equipment
|
|
|
|
|
|
Equipment is stated at cost. Depreciation is recorded
based on the estimated useful lives of the assets as
follows:
|
|
Asset
|
Basis
|
Rate
|
|
|
|
|
|
Computer equipment
|
declining balance
|
30%
|
|
Office furniture and equipment
|
declining balance
|
20%
|
|
Leasehold improvements
|
straight-line
|
20%
|
|
|
|
|
|
(g)
|
Intangible assets
|
|
|
|
|
|
Intangible assets, consist of intercom service
agreements, and have a definitive life based on provisions of SFAS 142.
They are recorded at cost and are reviewed annually for impairment.
Commencing on April 1, 2005, the Company is amortizing the cost on a
straight-line basis over an estimated useful life of 10 years.
|
|
|
|
|
(h)
|
Impairment of long-lived assets
|
|
|
|
|
|
Long-lived assets are continually reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies (contd
)
|
|
|
|
|
(i)
|
Revenue recognition
|
|
|
|
|
|
Revenue is recognized when there is persuasive evidence of an arrangement and delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable. Cash received from customers prior
to these criteria being met is recorded as deferred revenue. Amounts billed related to shipping and handling, which are not significant, are included in revenue. The related shipping and handling costs, which are also not significant, are included
in cost of sales.
|
|
|
|
|
|
Revenue from the installation of equipment is recognized when the installation has been completed, the fee is fixed and determinable, 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 to the Enterphone 2000 system, the service fee is fixed or determinable, and collectibility is probable. Cash received from customers,
in advance of the service period, is recorded as deferred revenue. The Enterphone 2000 system is a building access control system that uses a buildings internal phone wiring thereby avoiding the use of telephone utility services.
|
|
|
|
|
(j)
|
Research and development costs
|
|
|
|
|
|
Research and development costs are expensed as incurred and are shown net of investment tax credits (note 11).
|
|
|
|
|
(k)
|
Advertising costs
|
|
|
|
|
|
Advertising costs are expensed as incurred. Advertising costs amounted to $115,214 (2007 - $204,764).
|
|
|
|
|
(l)
|
Government assistance and investment tax credits
|
|
|
|
|
|
The Company follows the cost reduction method of accounting for government assistance and investment tax credits, whereby, the estimated net recoverable amount of the benefit of the tax credits is recognized, when reasonable
assurance exists as to their collectibility, as a reduction in the cost of the related capital asset or expenditure.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies (contd
)
|
|
|
|
|
(m)
|
Income taxes
|
|
|
|
|
|
The Company follows the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, future income
taxes are recognized for the future 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). Future income
tax assets and liabilities are measured using enacted income tax rates expected to be recovered or settled. The effect on future 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 future income tax assets recognized is limited to the amount that is more likely than not to be realized.
|
|
|
|
|
|
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109 (FIN 48). This interpretation clarifies the recognition
threshold and measurement of a tax position taken or expected to be taken on a tax return, and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and transition. The Company adopted the provisions of FIN 48 on January 1, 2007 (Note 12).
|
|
|
|
|
(n)
|
Net income (loss) per share
|
|
|
|
|
|
Net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential
dilution that could occur if stock options were exercised.
|
|
|
|
|
|
The weighted average number of common shares outstanding for computing basic net income (loss) per common share was 17,841,250 (2007 17,293,653). The weighted average number of common shares outstanding for computing
diluted net income (loss) per common share was 17,841,250 (2007 17,293,653). For the year ended December 31, 2008, 3,363,800 shares (2007 3,363,800) attributable to the assumed exercise of outstanding options and 1,677,550 shares (2007
1,677,550) attributable to the assumed exercise of outstanding warrants were excluded from the calculation of diluted loss per share because the effect was antidilutive.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies (contd
)
|
|
|
|
|
(o)
|
Stock-based compensation
|
|
|
|
|
|
The Company records stock-based compensation based on the fair value recognition provisions of SFAS 123(R), Share-Based Payment, whereby stock-based compensation expense is recognized in the consolidated financial
statements for granted, modified, or settled stock options. The provisions of SFAS 123(R) apply to new stock options and stock options outstanding, but not yet vested.
|
|
|
|
|
(p)
|
Comprehensive income
|
|
|
|
|
|
The Company has no items of other comprehensive income in any year presented. Therefore, net income presented in the consolidated statements of operations equals comprehensive income.
|
|
|
|
|
(q)
|
Certain comparative figures have been reclassified to conform with the current years presentation.
|
|
|
|
|
(r)
|
Adoption of new accounting pronouncements
|
|
|
|
|
|
The Company adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008. SFAS No. 157 applies to all financial instruments being measured and reported on a fair value basis. In February 2008, the FASB issued a staff position
that delays the effective date of SFAS 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Therefore, the Company has adopted the provision of FAS 157 with respect to its financial assets and
liabilities only.
|
|
|
|
|
|
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level
1 are marketable equity available for sale securities that are traded in an active exchange market.
|
|
|
|
|
|
Level 2 Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are warrants and derivative contracts whose value is determined using a pricing model with inputs that
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies
(contd
)
|
|
(r)
|
Adoption of new accounting pronouncements (contd
)
are observable in the market or can be derived
principally from or corroborated by observable market data.
|
|
|
|
|
|
Level 3 Unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of
the assets or liabilities. Level 3 includes assets and liabilities whose
values are determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or
estimation.
|
|
|
|
|
|
Effective January 1, 2008, the Company adopted FAS No.
159, The Fair Value Option for Financial Assets and Financial
Liabilities (FAS 159) which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The Company did not elect
to adopt the fair value option under this statement.
|
|
|
|
|
|
The adoption of these pronouncements did not have a
material effect on the Companys consolidated financial position or
results of operations.
|
|
|
|
|
(s)
|
Recent accounting pronouncements
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations which changes how business acquisitions are
accounted. SFAS 141R, requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and all
liabilities assumed in the transaction and establishes the
acquisition-date fair value as the measurement objective for all assets
acquired and liabilities assumed in a business combination. Certain,
provisions of this standard will, among other things, impact the
determination of acquisition-date fair value of consideration paid in a
business combination (including contingent considerations); exclude
transaction costs from acquisition accounting; and change accounting
practices for acquired contingencies, acquisition-related restructuring
costs, inprocess research and development, indemnification assets and tax
benefits. SFAS No. 141R is effective for business combinations and
adjustments to an acquired entitys deferred tax asset and liability
balances occurring after December 31, 2008. The Company is currently
evaluating the future impacts and disclosure of this standard.
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statement, an
amendment of ARB No. 51, which establishes new standards governing the
accounting for and reporting of noncontrolling interests (NCI) in
partially owned consolidated subsidiaries and the loss of control of
subsidiaries.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
2.
|
Significant accounting policies
(contd
)
|
|
(s)
|
Recent accounting pronouncements (contd
)
|
|
|
|
|
|
Certain provisions of this standard indicate, among other
things, that NCIs (previously referred to as minority interests) be
treated as a separate component of equity, not as a liability; that
increases and decreases in the parents ownership interest that leave
control intact be treated as equity transactions, rather than as step
acquisitions or dilution gains or losses; and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such
allocation might result in a deficit balance. This standard also requires
changes to certain presentation and disclosure requirements. SFAS No. 160
is effective beginning January 1, 2009. The provisions of the standard are
to be applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which are to be applied retrospectively to all
periods presented. The Company is currently evaluating the future impacts
and disclosure of this standard.
|
|
|
|
|
|
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful life of Intangible Assets, (FSP FAS 142-3).
FSP FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and
Other Intangible Assets, (SFAS No. 142) in order to improve the
consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008.
Management has determined that the adoption of FSP FAS 142-3 will not have
an impact on its financial position and results of
operations.
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
$
|
326,107
|
|
$
|
509,003
|
|
|
Work in process
|
|
29,830
|
|
|
27,578
|
|
|
Finished goods
|
|
200,635
|
|
|
219,653
|
|
|
|
|
|
|
|
|
|
|
|
$
|
556,572
|
|
$
|
756,234
|
|
4.
|
Lease receivable
|
|
|
|
Lease receivable includes an amount due from a customer
in monthly installments on a five- year leasing contract expiring in 2009.
The contract bears an interest rate of 7% per annum and is secured by the
equipment under lease.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
2008
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
110,838
|
|
$
|
89,566
|
|
$
|
21,272
|
|
|
Office furniture and equipment
|
|
77,269
|
|
|
41,999
|
|
|
35,270
|
|
|
Leasehold improvements
|
|
46,814
|
|
|
42,855
|
|
|
3,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,921
|
|
$
|
174,420
|
|
$
|
60,501
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
2007
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
110,838
|
|
$
|
84,478
|
|
$
|
26,360
|
|
|
Office furniture and equipment
|
|
77,269
|
|
|
33,173
|
|
|
44,096
|
|
|
Leasehold improvements
|
|
46,814
|
|
|
40,926
|
|
|
5,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,921
|
|
$
|
158,577
|
|
$
|
76,344
|
|
6.
|
Intangible assets
|
|
|
|
On May 16, 2003, the Company consummated an agreement for
the purchase of certain assets of Telus Corporation (Telus) 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,
2008, the Company held 1,630 service agreements (December 31, 2007 -
1,664) at a cost, net of accumulated amortization of $78,345 (December 31,
2007 - $57,453) of $130,576 (December 31, 2007 -
$151,468).
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
7.
|
Bank indebtedness
|
|
|
|
Bank indebtedness represents cheques written in excess of
funds on deposit of $17,775 (2007 - $23,951) and amounts drawn under a
bank credit facility of $40,000 (2007 - $240,000) available to a maximum
of $500,000. Amounts outstanding under the bank credit facility bear
interest at the banks prime lending rate plus 1% and are repayable on
demand. The facility is secured by substantially all of our assets under a
general security agreement. The Company is required to maintain a current
ratio greater than 1.5:1, measured quarterly, and a debt to tangible net
worth ratio less than 1.5:1, measured annually, under the terms of the
demand facility agreement. For purposes of debt covenant calculations,
amounts due to stockholders are considered a component of equity and not a
liability. The Company is also allowed to draw on the credit facility up
to 75% of accounts receivable less than 90 days. At December 31, 2008, the
Company was in compliance with the ratio requirements.
|
|
|
|
During the year ended December 31, 2006, the bank
required additional security for the credit facility consisting of a
pledge of personal property of a significant shareholder.
|
|
|
8.
|
Due to stockholders
|
|
|
|
Amounts due to stockholders totaling $292,402 are
non-interest bearing, unsecured and have no fixed terms of
repayment.
|
|
|
|
During the current fiscal year, the President loaned the
Company $100,000. The loan bears interest at 9.5% per annum, is unsecured
and has no fixed terms of repayment.
|
|
|
9.
|
Notes payable
|
|
|
|
The notes payable to individuals bear interest at 8% per
annum, are unsecured, and are due December 31, 2009. Principal prepayments
are made at the discretion of the Board of Directors.
|
|
|
10.
|
Capital stock
|
|
(a)
|
Each share of common stock has the same rights,
privileges and preferences. The holders of the outstanding common stock
are entitled, in the event of liquidation, to a pro rata share of net
assets, subject to any preferences that may be applicable on any preferred
stock. The Board of Directors has the authority to determine and amend
the
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
10.
|
Capital stock
(contd
)
|
|
|
designation, preferences, limitations and relative rights
of preferred stock. There was no preferred stock issued and outstanding at
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
(b)
|
On April 16, 2007, the Company completed a private
placement of 1,677,550 units at a price of US$0.16 per unit for gross
proceeds of US$268,408. Each unit consisted of one common share of the
Company and one share purchase warrant. Each share purchase warrant
entitles the holder to acquire one additional common share of the Company
for US$0.25 per share until April 16, 2012.
|
|
|
|
|
|
|
On August 2, 2007, the Company granted 327,500 stock
options with a five year term, exercisable at a price of US$0.40 per share
until August 1, 2012, and vesting immediately.
|
|
|
|
|
|
|
On December 12, 2007, the Company extended stock option
agreements for 168,125 stock options under its 2001 and 2003 Stock Option
Plans with an expiration date of December 21, 2007 to December 21,
2009.
|
|
|
|
|
|
|
During the year ended December 31, 2007, the Company
issued 81,250 shares of common stock on the exercise of stock options for
gross proceeds of $10,598.
|
|
|
|
|
|
(c)
|
The Company has the following stock option plans which
serve as equity incentive programs for management, qualified employees,
members of the Board of Directors and independent advisors or consultants
outstanding as at December 31, 2008:
|
|
|
|
|
|
|
(i)
|
The 2001 Stock Option Plan (the 2001 Plan), which
became effective on December 21, 2001, permits, at any one time, up to
1,500,000 shares of common stock to be reserved for issuance. The maximum
term during which a vested option may be exercised is ten years from the
date of grant. The vesting period and the option price are determined by
the compensation committee. The option price may be set at a discount to
the closing price on the date of grant unless it is an incentive stock
option. As at December 31, 2008, the total number of stock options
outstanding under the 2001 Plan is 1,001,925.
|
|
|
|
|
|
|
(ii)
|
The 2003 Stock Option Plan (the 2003 Plan), which
became effective on January 3, 2003 and amended on July 10, 2007 permits,
at any one time, up to 2,935,510 shares of common stock to be reserved for
issuance. The maximum term during which a vested option may be exercised
is ten years from the date of grant. The vesting period and the option
price are determined by the compensation committee. The option price may
be set at a discount to the closing price on the date of grant unless it
is an incentive stock option. As at December 31, 2008, the total number of
stock options outstanding under the 2003 Plan is
2,361,875.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
10.
|
Capital stock (contd
)
|
|
|
|
A summary of the stock option activity is as
follows:
|
|
|
|
Number
of options
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
Exercise price
|
|
|
Outstanding at December 31, 2006
|
|
3,117,550
|
|
|
US$0.28
|
|
|
Granted
|
|
495,625
|
|
|
0.33
|
|
|
Exercised
|
|
(81,250
|
)
|
|
0.13
|
|
|
Expired/cancelled
|
|
(168,125
|
)
|
|
0.18
|
|
|
Outstanding at December 31, 2007
|
|
3,363,800
|
|
|
0.30
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Expired/cancelled
|
|
-
|
|
|
-
|
|
|
Outstanding at December 31, 2008
|
|
3,363,800
|
|
|
0.30
|
|
During the year ended December 31,
2008, the Company recorded $Nil (2007 - $128,274) relating to the fair value of
stock options issued to employees and recorded $Nil (2007 - $Nil) relating to
the fair value of stock options issued to non-employees as selling, general and
administration expenses in the consolidated statement of operations.
The weighted average fair value of
stock options granted during the year ended December 31, 2008 was $Nil (2007 -
$0.26) per option. All options granted during the fiscal years presented vested
upon granting.
The Company used the Black-Scholes
option pricing model to compute estimated fair value of options granted during
the year ended December 31, 2007 based on the following weighted average
assumptions: average expected stock price volatility of 74%, expected dividend
yield of 0%, risk-free interest rate of 3.89% and expected option life of 3
years.
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
10.
|
Capital stock (contd
)
|
A summary of the stock options
outstanding and exercisable at December 31, 2008 is as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
Average
|
|
Aggregate
|
|
Exercise Price
|
|
Number
|
|
Contractual
|
Exercise
|
|
Intrinsic
|
|
|
|
|
|
Life
|
Price
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$0.12
|
|
2,068,750
|
|
4.72 years
|
US$0.12
|
|
US$ -
|
|
$0.18
|
|
11,250
|
|
0.97 years
|
$0.18
|
|
$ -
|
|
$0.40
|
|
327,500
|
|
3.59 years
|
$0.40
|
|
$ -
|
|
$0.45
|
|
7,500
|
|
0.97 years
|
$0.45
|
|
$ -
|
|
$0.55
|
|
5,000
|
|
0.97 years
|
$0.55
|
|
$ -
|
|
$0.60
|
|
10,000
|
|
0.97 years
|
$0.60
|
|
$ -
|
|
$0.65
|
|
933,800
|
|
2.97 years
|
$0.65
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,363,800
|
|
4.08
years
|
$0.30
|
|
$ -
|
|
The aggregate intrinsic value in the
preceding table represents the total intrinsic value, based on the Companys
closing stock price of US$0.07 per share as of December 31, 2008 (2007
US$0.40), which would have been received by 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, 2008 was nil
(2007 2,080,000). The total intrinsic value of options exercised during the
year ended December 31, 2008 was $Nil (2007 - $20,475).
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
10.
|
Capital stock (contd
)
|
|
|
|
Warrants
|
|
|
|
A summary of warrant activity is as
follows:
|
|
|
|
Number
of warrants
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
Exercise price
|
|
|
Outstanding at December 31,
2006
|
|
-
|
|
|
US$ -
|
|
|
Granted
|
|
1,677,550
|
|
|
0.25
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
Outstanding at December 31,
2007
|
|
1,677,550
|
|
|
0.25
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
Outstanding at December 31,
2008
|
|
1,677,550
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
A summary of the warrants outstanding
and exercisable at December 31, 2008 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$0.25
|
|
1,677,550
|
|
|
3.29 years
|
|
|
US$0.25
|
|
|
|
|
|
|
|
11.
|
Research and development
|
|
|
|
Research and development expenditures are recorded net of
investment tax credits, which totaled $nil for the years ended December
31, 2008 and 2007.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
12.
|
Income taxes
|
|
|
|
|
(a)
|
A reconciliation of income tax recovery at statutory
rates with the reported income tax recovery is as
follows:
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
$
|
(86,364
|
)
|
$
|
(623,570
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (recovery) at statutory
rates
|
$
|
(26,773
|
)
|
$
|
(212,762
|
)
|
|
Non deductible expenses and other items
|
|
484,336
|
|
|
224,645
|
|
|
Deductible expenses and other items
|
|
(268,384
|
)
|
|
(15,653
|
)
|
|
Recognized
investment tax credits
|
|
(189,179
|
)
|
|
3,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax recovery
|
$
|
-
|
|
$
|
-
|
|
|
(b)
|
Temporary differences that give rise to the following
deferred income tax assets and liabilities are as
follows:
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
Equipment
|
$
|
12,899
|
|
$
|
9,118
|
|
|
Intangible assets
|
|
21,769
|
|
|
16,965
|
|
|
Investment tax credits
(non-refundable)
|
|
507,518
|
|
|
526,324
|
|
|
Research
and development costs
|
|
559,949
|
|
|
493,295
|
|
|
Operating loss
carryforward
|
|
-
|
|
|
51,566
|
|
|
Warranty provision
|
|
91,000
|
|
|
19,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred income tax
assets
|
|
1,193,135
|
|
|
1,116,776
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(1,193,135
|
)
|
|
(1,116,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
12.
|
Income taxes (contd
)
|
The Company has unutilized operating
loss carryforwards of $Nil (2007 - $190,984).
The Company has non-refundable federal
investment tax credits of $337,619 (2007 - $347,467) which will expire up to
2028 and provincial investment tax credits of $169,899 (2007 - $178,857) which
will expire up to 2018.
The Company has unutilized scientific
research and development costs of $2,153,651 (2007 - $1,827,018) which are
available to reduce taxable income and income taxes payable in future years.
A valuation allowance is applied to
the deferred tax asset because it is not more likely than not that the benefits
of the future income tax asset will be available to the Company. The Company
adopted the provisions of FIN 48 on January 1, 2007. No cumulative effect
adjustment to the January 1, 2007 balance of the Companys deficit was required
upon the implementation of FIN 48. As of the date of adoption, there were no
unrecognized tax benefits. Under current conditions and expectations, management
does not foresee any significant changes in unrecognized tax benefits that would
have a material impact on the Companys financial statements.
The Company recognizes interest
accrued related to unrecognized tax benefits in interest expense and penalties
in operating expenses. As of the date of adoption of FIN 48, there was no
accrued interest or accrued penalties.
The Company files income tax returns
in Canada and the United States of America. The Companys Canadian income tax
returns for 2003 through 2008 are open tax years. The Companys United States
tax returns are open from 2003 through 2008.
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
13.
|
Commitments and contingencies
|
|
|
|
The Company is committed to make minimum annual payments
on its premises, automobiles, and office equipment operating leases that
expire in 2012 as follows:
|
|
Year ending December
31:
|
|
|
|
|
|
|
|
|
|
2009
|
$
|
187,623
|
|
|
2010
|
|
94,361
|
|
|
2011
|
|
15,576
|
|
|
2012
|
|
1,221
|
|
|
|
|
|
|
|
Rent expense included in the statements of operations is
$129,555 (2007 - $124,886).
|
|
|
|
The Company was named as the sole defendant in litigation
for wrongful dismissal that involves a former employee. The Company filed
a defense to this claim and is actively defending its position. At this
time, the likelihood of the outcome is not determinable and no provision
has been made for the claim in the accounts.
|
|
|
14.
|
Changes in non-cash working capital
balances
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
34,770
|
|
$
|
268,300
|
|
|
Inventory
|
|
199,662
|
|
|
36,317
|
|
|
Prepaid expenses
|
|
(4,500
|
)
|
|
-
|
|
|
Lease receivable
|
|
1,007
|
|
|
1,045
|
|
|
Accounts payable and accrued liabilities
|
|
84,672
|
|
|
34,657
|
|
|
Deferred
revenue
|
|
4,193
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
319,804
|
|
$
|
338,915
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
15.
|
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 wiring to control access to buildings and other
facilities for security purposes. The servicing segment provides
maintenance to these intercom and door access control systems.
|
|
|
|
|
|
The segments accounting policies are the same as those
described in Note 2. Management evaluates performance based on profit or
loss from operations before income taxes not including nonrecurring gains
and losses, if any. Retail prices are used to report intersegment
sales.
|
|
December 31, 2008
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
3,463,521
|
|
$
|
1,638,913
|
|
$
|
5,102,434
|
|
|
Depreciation and amortization
|
|
15,843
|
|
|
20,892
|
|
|
36,735
|
|
|
Interest expense
|
|
22,729
|
|
|
5,400
|
|
|
28,129
|
|
|
Segment income (loss) before income taxes
|
|
(252,243
|
)
|
|
165,879
|
|
|
(86,364
|
)
|
|
Total assets
|
|
1,468,251
|
|
|
130,576
|
|
|
1,598,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
3,454,482
|
|
$
|
1,516,485
|
|
$
|
4,970,967
|
|
|
Depreciation and amortization
|
|
13,763
|
|
|
20,892
|
|
|
34,655
|
|
|
Interest expense
|
|
10,087
|
|
|
14,067
|
|
|
24,154
|
|
|
Segment income (loss) before income taxes
|
|
(733,246
|
)
|
|
109,676
|
|
|
(623,570
|
)
|
|
Total assets
|
|
1,571,034
|
|
|
151,468
|
|
|
1,722,502
|
|
|
|
|
|
|
|
|
|
|
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Consolidated Financial Statements
|
(Expressed in Canadian dollars)
|
|
December 31, 2008
|
|
15.
|
Segment information (contd.)
|
|
|
|
|
(b)
|
Of the total revenues for the year ended December 31, 2008, $1,015,183 (2007 - $1,129,233) was derived from U.S.-based customers and $4,087,251 (2007 - $3,841,734) 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 revenues in either of the years ended December 31, 2008 and 2007.
|
|
|
|
|
(d)
|
Products:
|
|
|
|
|
|
Enterphone sales represented 18% of total revenue during the year ended December 31, 2008 (2007 30%). The balance of the Companys revenues are derived from service agreements and other products such as access tracking
and control, closed circuit monitors, infrared and radio frequency remotes.
|
16.
|
Financial instruments
|
|
|
|
The Companys financial instruments consist of cash, trade accounts receivable, lease receivable, bank indebtedness, accounts payable, accrued liabilities, due to stockholders and notes payable. It is managements
opinion that the Company is not exposed to significant interest, currency, business concentration or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values based on
their liquidity and short-term nature.
|
Viscount Systems (CE) (USOTC:VSYS)
Historical Stock Chart
From May 2024 to Jun 2024
Viscount Systems (CE) (USOTC:VSYS)
Historical Stock Chart
From Jun 2023 to Jun 2024