VSYS Viscount Systems Inc (CE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

For the transition period from __________________ to __________________

Commission File Number: 000-49746

VISCOUNT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Nevada	88-0498181
(State or other jurisdiction of	(I.R.S. Employer I.D. No.)
incorporation or organization)

4585 Tillicum Street, Burnaby, British Columbia, Canada V5J 5K9
(Address of principal executive offices)

(604) 327-9446
Registrant’s telephone number

_________________________________________________________________
Former name, former address, and former fiscal year, if changed since last report

Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No [   ]

Check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes [X]    No [   ]

Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company.
Large accelerated filer [   ]      Accelerated filer [   ]      Non-accelerated filed [   ]      Smaller reporting company [X]

Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes [   ]   No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest
practicable date: As of September 30, 2009 the registrant’s outstanding common stock consisted of
17,841,250 shares.

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PART I.      FINANCIAL INFORMATION

Safe Harbor Statement

Certain statements in this filing that relate to financial results, projections, future plans, events, or performance are forward-looking statements and involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Terms such as “we believe”, “we expect” or “we project”, and similar terms, are examples of forward looking statements that we may use in this report. Such statements also relate to the sales trends of our Enterphone 2000, EPX, previously named Enterphone 3000, and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our product, and in general the market for our products. Any projections herein are based solely on management’s views, and were not prepared in accordance with any accounting guidelines applicable to projections. Accordingly, these forward looking statements are intended to provide the reader with insight into management’s proposals, expectations, strategies and general outlook for our business and products, but because of the risks associated with those statements, including those described herein and in our annual report, readers should not rely upon those statements in making an investment decision. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements.

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. Unless otherwise noted as USD or U.S. dollars, all dollar references herein are in Canadian dollars. As at September 30, 2009, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0707 for USD$1.0000 or CAD$1.0000 for USD$0.9339.

Item 1.      Financial Statements

2

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VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

SEPTEMBER 30, 2009

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VISCOUNT SYSTEMS, INC.
Interim Consolidated Balance Sheets
(Expressed in Canadian dollars)

		September 30,			December 31,
		2009			2008
		(Unaudited)			(Audited)
Assets
Current assets
Cash	$	246,414		$	255,172
Trade accounts receivable, less allowance for doubtful accounts
of $334,838 (2008 - $336,776)		1,064,607			584,517
Inventory (note 3)		296,022			556,572
Prepaid expenses		5,891			10,528
Lease receivable		104			961
Total current assets		1,613,037			1,407,750
Equipment (note 4)		44,467			60,501
Intangible assets (note 5)		114,907			130,576
Total assets	$	1,772,411		$	1,598,827
Liablilities and stockholders' equity
Current liabilities
Bank indebtedness (note 6)	$	154,329		$	57,775
Accounts payable		254,779			157,693
Accrued liabilities		329,195			417,564
Deferred revenue		28,087			31,280
Due to stockholders (note 7)		319,402			392,402
Note payable (note 8)		-			50,000
Total current liabilities		1,085,792			1,106,714
Commitments (note 11)
Stockholders' equity
Capital stock (note 9)
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 (2008 - 17,841,250)		25,434			25,434
Additional paid-in capital		2,353,030			2,353,030
Accumulated deficit		(1,691,845	)		(1,886,351	)
Total stockholders' equity		686,619			492,113
Total liabilities and stockholders' equity	$	1,772,411		$	1,598,827

See accompanying notes to interim consolidated financial statements.

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VISCOUNT SYSTEMS, INC.
Interim Consolidated Statements of Operations
(Unaudited)
(Expressed in Canadian dollars)

		Three months ended						Nine months ended
		September 30						September 30
		2009			2008			2009			2008
Sales	$	1,478,348		$	1,299,280		$	3,838,918		$	3,942,767
Cost of sales		607,703			597,637			1,651,046			1,686,780
Gross profit		870,645			701,643			2,187,873			2,255,987
Expenses
Selling, general and administrative		650,826			636,574			1,771,724			2,092,984
Research and development		71,854			78,994			177,719			251,811
Depreciation and amortization		7,448			7,925			31,703			24,219
		730,128			723,493			1,981,146			2,369,014
Income (loss) before other items		140,517			(21,850	)		206,726			(113,027	)
Other items
Interest income		4			99			94			892
Interest expense		(4,839	)		(7,557	)		(12,314	)		(19,951	)
		(4,835	)		(7,458	)		(12,220	)		(19,059	)
Income (loss) before income taxes		135,682			(29,308	)		194,506			(132,086	)
Provision for income taxes		-			-			-			-
Net income (loss)	$	135,682		$	(29,308	)	$	194,506		$	(132,086	)
Basic and diluted income (loss) per common share	$	0.01		$	(0.00	)	$	0.01		$	(0.01	)
Weighted average number of common shares outstanding,
Basic and diluted		17,841,250			17,841,250			17,841,250			17,841,250

See accompanying notes to interim consolidated financial statements.

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VISCOUNT SYSTEMS, INC.
Interim Consolidated Statement of Stockholders' Equity
(Unaudited)
(Expressed in Canadian dollars)

See accompanying notes to interim consolidated financial statements.

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VISCOUNT SYSTEMS, INC.
Interim Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in Canadian dollars)

Nine months ended September 30

		2009			2008
Operating activities:
Net income (loss)	$	194,506		$	(132,086	)
Items not involving cash:
Depreciation and amortization		31,703			24,219
Changes in non-cash working capital balances (note 10)		(208,521	)		(174	)
Net cash provided by (used in) operating activities		17,688			(108,041	)
Financing activities:
Proceeds from bank indebtedness		96,554			21,641
Proceeds from (repayment of) stockholder loan		(73,000	)		100,000
Repayment of notes payable		(50,000	)		-
Net cash provided by (used in) financing activities		(26,446	)		121,641
Increase (decrease) in cash		(8,758	)		13,600
Cash, beginning of period		255,172			111,173
Cash, end of period	$	246,414		$	124,773
Supplementary information:
Interest paid	$	7,475		$	19,951
Income taxes paid	$	-		$	-

See accompanying notes to interim consolidated financial statements.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

1.	Basis of presentation
	These unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and by Article 8-03 of Regulation S- X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of annual financial statements. Readers of these statements should read the audited annual consolidated financial statements of the Company filed on Form 10-K for the year ended December 31, 2008 in conjunction therewith. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2009 or for any other interim period.
	The financial information as at September 30, 2009 and for the three and nine month periods ended September 30, 2009 and 2008 is unaudited; however, such financial information includes all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of the financial information in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated balance sheet as of December 31, 2008 has been derived from the audited consolidated balance sheet as of that date included in the Form 10-K.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

2.	New 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, in–process research and development, indemnification assets and tax benefits. SFAS No. 141R was effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances beginning January 1, 2009. Management has determined that the adoption of SFAS No. 141R did not have an impact on its financial position and results of operations.
	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 parent’s 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. 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. SFAS No. 160 was effective beginning January 1, 2009. Management has determined that the adoption of SFAS No. 160 did not have an impact on its financial position and results of operations.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

2.	New accounting pronouncements (cont’d…)
	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 was effective beginning January 1, 2009. Management has determined that the adoption of FSP FAS 142-3 did not have an impact on its financial position and results of operations.
	In April 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for estimating the fair value of assets and liabilities when the volume and level of activity associated with those assets and liabilities has decreased significantly. The guidance also requires the disclosure of the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The adoption of this statement did not have a material impact on the Company’s results of operations and financial position.
	In June 2009, the FASB issued guidance on Subsequent Events. This requires companies to recognize in the financial statements the effects of subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. An entity shall disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued. Companies are not permitted to recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued. Some non recognized subsequent events must be disclosed to keep the financial statements from being misleading. For such events a company must disclose the nature of the event, an estimate of its financial effect, or a statement that such an estimate cannot be made. This Statement applies prospectively for interim or annual financial periods ending after June 15, 2009. The adoption of FAS 165 did not have a material impact on the Company’s results of operations and financial position. Please see note 13.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

2.	New accounting pronouncements (cont’d…)
	In June 2009, the FASB issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 168”. Upon its adoption, the FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. Following this, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. This will also modify the existing hierarchy of GAAP to include only two levels — authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and early adoption is not permitted. The adoption of this standard did not have a material impact on its financial position, results of operations or cash flows.
	Recent Accounting Guidance Not Yet Adopted
	In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software- enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe adoption of this new guidance will not have a material impact on our financial statements.
	In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for us beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial statements.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

3.

Inventory

			September 30,			December 31,
			2009			2008
	Raw materials	$	145,491		$	326,107
	Work in process		56,570			29,830
	Finished goods		93,961			200,635
		$	296,022		$	556,572

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

4.

Equipment

						Accumulated			Net book
	September 30, 2009		Cost			depreciation			value
	Computer equipment	$	110,838		$	92,485		$	18,353
	Office furniture and equipment		77,269			54,093			23,176
	Leasehold improvements		46,814			43,876			2,938
		$	234,921		$	190,454		$	44,467

						Accumulated			Net book
	December 31, 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

5.	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 September 30, 2009, the Company held 1,587 service agreements (December 31, 2008 – 1,630) at a cost, net of accumulated amortization of $94,014 (December 31, 2008 - $78,345), of $114,907 (December 31, 2008 - $130,576).

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

6.	Bank indebtedness
	Bank indebtedness represents cheques written in excess of funds on deposit of $4,329 (December 31, 2008 - $17,775) and amounts drawn under a bank credit facility of $150,000 (December 31, 2008 - $40,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1.75% and are repayable on demand. The facility is secured by substantially all of our assets under a general security agreement and a pledge of personal property of a significant shareholder. 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 September 30, 2009, the Company was in compliance with debt covenants.
7.	Due to stockholders
	Amounts due to stockholders in the amount of $319,402 (2008, $392,402) are non-interest bearing, unsecured and have no fixed terms of repayment.
	During the 2008 fiscal year, the President loaned the Company $100,000, of which $27,000 remains outstanding. The loan bears interest at 9.5% per annum, is unsecured and has no fixed terms of repayment.
8.	Note payable
	The note payable to an individual bore interest at 8% per annum, was unsecured, and was repaid during July 2009.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

9.	Capital stock
	Stock Options
	A summary of the stock option activity is as follows:

			Number of options			Weighted average
						Exercise price
	Outstanding at December 31, 2008		3,363,800			US$0.30
	Granted		-			-
	Exercised		-			-
	Expired/cancelled		-			-
	Outstanding at September 30, 2009		3,363,800			$0.30

A summary of the stock options outstanding and exercisable at September 30, 2009 is as follows:

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

9.	Capital stock (cont’d…)
	The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.10 per share as of September 30, 2009 (December 31, 2008 – US$0.07), 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 September 30, 2009 was nil (September 30, 2008 – 2,068,750). The total intrinsic value of options exercised during the quarter ended September 30, 2009 was $nil (September 30, 2008 - $nil).
	Warrants
	A summary of warrant activity is as follows:

			Number of warrants			Weighted average
						Exercise price
	Outstanding at December 31, 2008		1,677,550			US$	0.25
	Granted		-				-
	Exercised		-				-
	Expired		-				-
	Outstanding at September 30, 2009		1,677,550				0.25

A summary of the warrants outstanding and exercisable at September 30, 2009 is as follows:

Weighted

Average

Weighted

Remaining

Average

Exercise Price

Number

Contractual

Exercise

Life

Price

US$0.25

1,677,550

2.55 years

US$0.25

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

10.	Changes in non-cash working capital balances

			Nine months ended
			September 30,
			2009			2008
	Trade accounts receivable	$	(480,089	)	$	(275,563	)
	Inventory		260,550			268,323
	Prepaid expenses		4,637			-
	Lease receivable		857			771
	Accounts payable		97,086			57
	Accrued Liabilities		(88,369	)		11,134
	Deferred revenue		(3,193	)		(4,896	)
		$	(208,521	)	$	(174	)

11.	Commitments
	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 or period ending December 31:
	2009	$	49,104
	2010		105,673
	2011		16,519
	2012		1,221

Rent expense included in the statements of operations for the nine months ended September 30, 2009 is $99,499 (2008 - $96,790) and for the three month period ended September 30, 2009 is $33,668 (2008 - $32,765).

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

12.	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 other door access control systems.
		The segments’ accounting policies are the same as those described in Note 2 in the financial statements in the most recent Form 10-K. 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.
		Information as to these reportable segments for the three and nine months ended September 30, 2009 and 2008 are as follows:

	For the three months ended September 30,		Manufacturing			Servicing			Total
	2009
	Sales to external customers	$	949,818		$	528,530		$	1,478,348
	Depreciation and amortization		2,225			5,223			7,448
	Interest expense, net		4,839			-			4,839
	Segment income before income taxes		28,952			106,730			135,682
	Total assets		1,657,504			114,907			1,772,411

	For the three months ended September 30,		Manufacturing			Servicing			Total
	2008
	Sales to external customers	$	879,517		$	419,763		$	1,299,280
	Depreciation and amortization		2,702			5,223			7,925
	Interest expense, net		16,535			1,400			17,935
	Segment loss before income taxes		(71,202	)		41,894			(29,308	)
	Total assets		1,582,553			135,799			1,718,352

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

12.	Segment information (cont’d…)

	For the nine months ended September 30,		Manufacturing			Servicing			Total
	2009
	Sales to external customers	$	2,606,193		$	1,232,725		$	3,838,918
	Depreciation and amortization		16,034			15,669			31,703
	Interest expense, net		11,514			800			12,314
	Segment income (loss) before income taxes		(53,283	)		247,789			194,506
	Total assets		1,657,504			114,907			1,772,411

	For the nine months ended September 30,		Manufacturing			Servicing			Total
	2008
	Sales to external customers	$	2,651,722		$	1.291,045		$	3,942,767
	Depreciation and amortization		8,550			15,669			24,219
	Interest expense, net		40,938			4,200			45,138
	Segment loss before income taxes		(169,064	)		36,978			(132,086	)
	Total assets		1,582,553			135,799			1,718,352

	(b)	Of the total revenues for the nine months ended September 30, 2009, $693,560 (2008 - $760,294) was derived from U.S.-based customers and $3,145,358 (2008 - $3,182,473) 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 nine months ended September 30, 2009 and 2008.

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VISCOUNT SYSTEMS, INC.

Notes to Interim Consolidated Financial Statements

(Unaudited)

(Expressed in Canadian dollars)

Nine months ended September 30, 2009 and 2008

12.	Segment information (cont’d…)
	(d)	Products and services:
		Enterphone 2000 sales represented 8.3% of total revenue during the nine months ended September 30, 2009 (2008 –19%). MESH sales represented 63.2% of total revenue during the nine months ended September 30, 2009 (2008 – 51%). The balance of the Company’s revenues are derived from other products such as access tracking and control, closed circuit monitors, infrared and radio frequency remotes and servicing of intercom equipment.

13.	Subsequent Events
	We evaluated events occurring between the end of our fiscal quarter, September 30, 2009 and November 6, 2009 when the financial statements were issued. There were no subsequent events that provided additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.

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Item 2.      Management Discussion and Analysis or Plan of Operation

Results of Operations

Sales for the three months ended September 30, 2009 and 2008 were $1,478,348 and $1,299,280, respectively, an increase of $179,068 or 13.7% . Sales for the nine months ended September 30, 2009 and 2008 were $3,838,918 and $3,942,767, respectively, a decrease of $103,849 or 2.6% . MESH sales for the three months ended September 30, 2009 and 2008 were $1,024,743 and $632,822, respectively, an increase of $391,921 or 61.9% . Mesh sales for the nine months ended September 30, 2009 and 2008 were $2,427,684 and $2,011,597, respectively, an increase of $416,087 or 20.6% . 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. Enterphone 2000 sales for the three months ended September 30, 2009 and 2008 were $80,156 and $252,610, respectively, a decrease of $172,454 or 68.2% . Enterphone sales for the nine months ended September 30, 2009 and 2008 were $318,610 and $735,296, a decrease of $416,686 or 56.6% . 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 have been recovering our lost Enterphone revenue while continuing to increase our MESH business.

Management believes that sales of the MESH product will continue to represent an increasing proportion of total sales relative to sales of our Enterphone products. For the nine months ended September 30, 2009 and 2008, MESH sales were 63.2% and 51.0%, respectively, of total sales.

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 1,587 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 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 nine months ended September 30, 2009 and 2008, customer service contracts and new equipment sales generated aggregate sales revenues of $1,232,725 and $1,291,045, respectively, a decrease of $58,320 or 4.5% . These sales included MESH sales by the service division.

The intangible assets held by the Company are comprised primarily of service contracts for our Enterphone 2000 product line. The number of service agreements held by the Company was 1,587 at September 30, 2009, as compared to 1,630 and 1,638 at December 31, 2008 and September 30, 2008, respectively. During the three quarters of 2009, 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 September 30, 2009, the cost of the service agreements, net of accumulated amortization, was $114,907.

Cost of sales and services as a percentage of sales was 41.1% and 46.0% for the three months ended September 30, 2009 and 2008, respectively. Cost of sales and service for the nine months ended September 30, 2009 and 2008 was 43.0% and 42.8%, respectively. Cost of sales has increased slightly during the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, due to the increased cost of materials. Management continues to focus on controlling the input

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costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.

Gross profit for the three months ended September 30, 2009 and 2008 was $870,645 and $701,643, respectively, an increase of $169,002 or 24.0% . For the nine months ended September 30, 2009 and 2008, gross profit was $2,187,873 and $2,255,987, respectively, a decrease of $68,114 or 3.0% .

Selling, general and administrative expenses for the three months ended September 30, 2009 and 2008 were $650,826 and $636,574, respectively, an increase of $14,252 or 2.2% . Selling, general and administrative expenses for the nine months ended September 30, 2009 and 2008 were $1,771,724 and $2,092,984 respectively, a decrease of $321,260 or 15.3% . The decrease during these two comparative periods was due to decreases in variable costs such as advertising, tradeshow and various office expenses. For the nine months ended September 30, 2009 and 2008, selling, general and administrative expenses, as a percentage of sales, were 46.1% and 52.5%, respectively.

Research and development costs for the three months ended September 30, 2009 and 2008 were $71,854 and $78,994, respectively, a decrease of $7,140 or 9.0% . Research and development costs for the nine months ended September 30, 2009 and 2008 were $177,719 and $251,811, respectively, a decrease of $74,092 or 29.4% . Research and development costs have decreased during these two comparative periods, as more MESH project phases have been completed.

Net profit for the quarter ended September 30, 2009 was $135,682 and net loss for the quarter ended September 30, 2008 was $29,308, an increase in profitability of $164,990. Net profit for the nine months ended September 30, 2009 was $194,506 and net loss for the nine months ended September 30, 2008 was $132,086, an increase in profitability of $326,592. The increase in profitability during the three and nine months ended September 30, 2009 was the result of decreased variable costs such as tradeshow, traveling, and various office expenses.

Liquidity and Capital Resources

Cash as of September 30, 2009, as compared to December 31, 2008 was $246,414 and $255,172, respectively. Cash as of September 30, 2008 was $124,773. 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 1.75% . Amounts drawn are repayable on demand. At September 30, 2009, $154,329 was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.

At September 30, 2009, working capital was $527,245, as compared to a working capital of $301,036 at December 31, 2008. Working capital has increased by $226,209. The current ratio at September 30, 2009 was 1.49 to 1.0, as compared with 1.28 to 1.0 at December 31, 2008.

The accounts receivable turnover ratio at September 30, 2009 was 51 days, as compared 61 days at December 31, 2008 and September 30, 2008. The accounts receivable reserve was $334,838 at September 30, 2009, as compared to $336,776 at December 31, 2008. The accounts receivable reserve has decreased by $1,938 or 0.5%, since the year ended December 31, 2008. These two comparative periods were consistent. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.

For the nine months ended September 30, 2009, there were minimal capital expenditures.

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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 September 30, 2009.

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, of which $27,000 remains outstanding. The loan bears interest at 9.5% per annum, is unsecured and has no fixed terms of repayment.

Recently Issued Accounting Standards

There were no new accounting standards issued during this period ended September 30, 2009.

Item 4(T).  Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2009. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 30, 2009, 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.

PART II – OTHER INFORMATION

Item 6.      Exhibits

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31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934
32.1	Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 9, 2009		VISCOUNT SYSTEMS, INC.
		(Registrant)
	By:	/s/ Stephen Pineau
		Stephen Pineau, President
		Principal Executive Officer
		and Principal Financial Officer

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