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
June 30, 2010
[ ] 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 June 30,
2010 the registrant’s outstanding common stock consisted of 17,841,250
shares.
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 June 30, 2010, the foreign exchange rate certified by the Federal
Reserve Bank of New York was CAD$1.0646 for USD$1.0000 or CAD$1.0000 for
USD$0.9393.
Item 1. Financial Statements
2
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian
Dollars)
June 30, 2010
|
VISCOUNT SYSTEMS, INC.
|
|
Interim Condensed Consolidated Balance Sheets
|
|
(Expressed in Canadian dollars)
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash
|
$
|
125,111
|
|
$
|
124,378
|
|
|
Trade accounts receivable, less allowance for doubtful
accounts of $336,893 (2009 - $337,475)
|
|
784,476
|
|
|
1,182,434
|
|
|
Inventory (note 3)
|
|
712,107
|
|
|
626,566
|
|
|
Total current assets
|
|
1,621,694
|
|
|
1,933,378
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
5,891
|
|
|
5,891
|
|
|
Equipment (note 4)
|
|
38,583
|
|
|
42,358
|
|
|
Intangible assets
(note 5)
|
|
99,237
|
|
|
109,684
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
1,765,405
|
|
$
|
2,091,311
|
|
|
|
|
.
|
|
|
|
|
|
Liablilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Bank indebtedness (note 6)
|
$
|
54,505
|
|
$
|
218,702
|
|
|
Accounts payable
|
|
103,745
|
|
|
155,840
|
|
|
Accrued liabilities
|
|
400,749
|
|
|
447,878
|
|
|
Deferred revenue
|
|
40,473
|
|
|
39,678
|
|
|
Due to stockholders (note 7)
|
|
292,402
|
|
|
292,402
|
|
|
Total current
liabilities
|
|
891,874
|
|
|
1,154,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments (note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
Capital stock (note 8)
|
|
|
|
|
|
|
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 (2009 - 17,841,250)
|
|
25,434
|
|
|
25,434
|
|
|
Additional paid-in capital
|
|
2,372,228
|
|
|
2,372,228
|
|
|
Accumulated
deficit
|
|
(1,524,131
|
)
|
|
(1,460,851
|
)
|
|
Total stockholders' equity
|
|
873,531
|
|
|
936,811
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
1,765,405
|
|
$
|
2,091,311
|
|
See accompanying notes to interim condensed consolidated financial
statements.
F-1
|
VISCOUNT SYSTEMS, INC.
|
|
Interim Condensed Consolidated Statements of Operations
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
|
June
30
|
|
|
|
|
|
June
30
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
893,872
|
|
$
|
1,289,926
|
|
$
|
1,905,061
|
|
$
|
2,360,570
|
|
|
Cost of sales
|
|
405,509
|
|
|
539,135
|
|
|
764,886
|
|
|
1,043,343
|
|
|
Gross profit
|
|
488,363
|
|
|
750,791
|
|
|
1,140,175
|
|
|
1,317,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
552,465
|
|
|
597,913
|
|
|
1,086,527
|
|
|
1,120,898
|
|
|
Research and development
|
|
57,134
|
|
|
62,628
|
|
|
100,704
|
|
|
105,865
|
|
|
Depreciation
and amortization
|
|
7,059
|
|
|
7,571
|
|
|
14,219
|
|
|
24,255
|
|
|
|
|
616,658
|
|
|
668,112
|
|
|
1,201,450
|
|
|
1,251,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other items
|
|
(128,295
|
)
|
|
82,679
|
|
|
(61,275
|
)
|
|
66,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
1
|
|
|
10
|
|
|
1
|
|
|
90
|
|
|
Interest expense
|
|
(1,191
|
)
|
|
(3,712
|
)
|
|
(2,006
|
)
|
|
(7,475
|
)
|
|
|
|
(1,190
|
)
|
|
(3,702
|
)
|
|
(2,005
|
)
|
|
(7,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(129,485
|
)
|
|
78,977
|
|
|
(63,280
|
)
|
|
58,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(129,485
|
)
|
$
|
78,977
|
|
$
|
(63,280
|
)
|
$
|
58,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
income (loss) per common share
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
$
|
(0.00
|
)
|
$
|
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 condensed consolidated financial
statements.
F-2
|
VISCOUNT SYSTEMS, INC.
|
|
Interim Condensed Consolidated Statement of Stockholders'
Equity
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
paid-in
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Accumulated deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
17,841,250
|
|
$
|
25,434
|
|
$
|
2,372,228
|
|
$
|
(1,460,851
|
)
|
$
|
936,811
|
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(63,280
|
)
|
|
(63,280
|
)
|
|
Balance, June 30, 2010
|
|
17,841,250
|
|
$
|
25,434
|
|
$
|
2,372,228
|
|
$
|
(1,524,131
|
)
|
$
|
873,531
|
|
See accompanying notes to interim condensed consolidated
financial statements.
F-3
|
VISCOUNT SYSTEMS, INC.
|
|
Interim Condensed Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
|
|
Six months ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(63,280
|
)
|
$
|
58,824
|
|
|
Items not involving cash:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
14,219
|
|
|
24,255
|
|
|
Changes in
non-cash working capital balances (note 9)
|
|
213,988
|
|
|
(161,215
|
)
|
|
Net cash provided
by (used in) operating activities
|
|
164,927
|
|
|
(78,136
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
Purchase of
equipment
|
|
-
|
|
|
-
|
|
|
Net cash used in
investing activities
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
Proceeds from (repayment of) bank indebtedness
|
|
(164,194
|
)
|
|
149,862
|
|
|
Repayment of stockholder loan
|
|
-
|
|
|
(53,000
|
)
|
|
Repayment of
notes payable
|
|
-
|
|
|
(45,000
|
)
|
|
Net cash provided
by (used in) financing activities
|
|
(164,194
|
)
|
|
51,862
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
733
|
|
|
(26,274
|
)
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
124,378
|
|
|
255,172
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
$
|
125,111
|
|
$
|
228,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information:
|
|
|
|
|
|
|
|
Interest paid
|
$
|
2,006
|
|
$
|
7,475
|
|
|
Income taxes
paid
|
$
|
-
|
|
$
|
-
|
|
See accompanying notes to interim condensed consolidated
financial statements.
F-4
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Consolidated Financial Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
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, 2009 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, 2010 or for any other interim period.
The financial information as at June
30, 2010 and for the three month and six month periods ended June 30, 2010 and
2009 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, 2009
has been derived from the audited consolidated balance sheet as of that date
included in the Form 10-K.
F-5
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
2.
|
New accounting
pronouncements
|
In October 2009, the FASB issued
authoritative guidance on revenue recognition which is effective 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. The Company believes the adoption
of this new guidance will not have a material impact on the financial
statements.
In June 2009, the FASB issued
authoritative guidance on the consolidation of variable interest entities, which
is effective 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. The Company believes adoption of this new guidance will not
have a material impact on the financial statements.
F-6
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
|
|
|
June 30, December 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
393,478
|
|
$
|
237,463
|
|
|
|
Work in process
|
|
56,626
|
|
|
106,457
|
|
|
|
Finished goods
|
|
262,003
|
|
|
282,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
712,107
|
|
$
|
626,566
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
June 30, 2010
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
110,838
|
|
$
|
94,808
|
|
$
|
16,030
|
|
|
|
Office furniture and equipment
|
|
77,269
|
|
|
56,781
|
|
|
20,488
|
|
|
|
Leasehold improvements
|
|
46,814
|
|
|
44,749
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,921
|
|
$
|
196,335
|
|
$
|
38,583
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
December 31, 2009
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
110,838
|
|
$
|
93,318
|
|
$
|
17,520
|
|
|
|
Office furniture and equipment
|
|
77,269
|
|
|
55,034
|
|
|
22,235
|
|
|
|
Leasehold improvements
|
|
46,814
|
|
|
44,211
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,921
|
|
$
|
192,563
|
|
$
|
42,358
|
|
F-7
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
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 June 30,
2010, the Company held 1,539 service agreements (December 31, 2009 –
1,577) at a cost, net of accumulated amortization of $109,683 (December
31, 2009 - $99,237), of $99,237 (December 31, 2009 - $109,684). The
estimated aggregate amortization expense for each of the five succeeding
fiscal years is as follows:
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
$
|
20,892
|
|
|
|
2011
|
|
20,892
|
|
|
|
2012
|
|
20,892
|
|
|
|
2013
|
|
20,892
|
|
|
|
2014
|
|
20,892
|
|
|
6.
|
Bank indebtedness
|
|
|
|
|
|
Bank indebtedness represents cheques written in excess of
funds on deposit of $14,505 (December 31, 2009 - $18,703) and amounts
drawn under a bank credit facility of $40,000 (December 31, 2009 -
$200,000) 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 June 30, 2010, the Company was in compliance with
debt covenants.
|
|
|
|
|
7.
|
Due to stockholders
|
|
|
|
|
|
Amounts due to stockholders in the amount of $292,402
(2009, $292,402) are non-interest bearing, unsecured and have no fixed
terms of repayment. Amounts due to stockholders are subordinated to
amounts due on the company’s credit facility.
|
F-8
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
7.
|
Due to stockholders (cont’d…)
|
|
|
|
|
|
During the 2008 fiscal year, the President loaned the
Company $100,000. The loan carried interest at 9.5% per annum, was
unsecured and had no fixed terms of repayment. The loan was repaid during
the fourth quarter of 2009.
|
F-9
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
8.
|
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, 2009
|
|
3,363,800
|
|
|
US$0.30
|
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
Expired/cancelled
|
|
-
|
|
|
-
|
|
|
|
Outstanding at June 30, 2010
|
|
3,363,800
|
|
$
|
0.30
|
|
A summary of the stock options
outstanding and exercisable at June 30, 2010 is as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
Weighted
|
|
|
|
|
|
Remaining
|
Average
|
Aggregate
|
|
|
Exercise Price
|
Number
|
Contractual
|
Exercise
|
Intrinsic
|
|
|
|
|
Life
|
Price
|
Value
|
|
|
|
|
|
|
|
|
|
US$0.12
|
2,068,750
|
3.61 years
|
US$0.12
|
US $-
|
|
|
$0.18
|
11,250
|
5.48 years
|
$0.18
|
$ -
|
|
|
$0.40
|
327,500
|
2.09 years
|
$0.40
|
$ -
|
|
|
$0.45
|
7,500
|
5.48 years
|
$0.45
|
$ -
|
|
|
$0.55
|
5,000
|
5.48 years
|
$0.55
|
$ -
|
|
|
$0.60
|
10,000
|
5.48 years
|
$0.60
|
$ -
|
|
|
$0.65
|
933,800
|
1.48
years
|
$0.65
|
$ -
|
|
|
|
|
|
|
|
|
|
|
3,363,800
|
2.89
years
|
$0.30
|
$-
|
F-10
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
8.
|
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$0.12 per share as of June 30, 2010 (December 31, 2009
–US$0.19), which would have been received by the option holders had all option
holders exercised their options as of that date. The total number of
in-the-money options vested and exercisable as of June 30, 2010 was nil (June
30, 2009 – nil).
Warrants
A summary of warrant activity is as
follows:
|
|
|
|
Number of warrants
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
Exercise price
|
|
|
|
Outstanding at December 31, 2009
|
|
1,677,550
|
|
|
US$ 0.25
|
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
|
Outstanding at June 30, 2010
|
|
1,677,550
|
|
|
0.25
|
|
A summary of the warrants outstanding
and exercisable at June 30, 2010 is as follows:
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
Weighted
|
|
|
|
|
|
Remaining
|
Average
|
|
|
|
Exercise Price
|
Number
|
Contractual
|
Exercise
|
|
|
|
|
|
Life
|
Price
|
|
|
|
|
|
|
|
|
|
|
US$0.25
|
1,677,550
|
1.80 years
|
US$0.25
|
|
F-11
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
9.
|
Changes in non-cash working capital
balances
|
|
|
|
|
Six months ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
397,958
|
|
$
|
(281,617
|
)
|
|
|
Inventory
|
|
(85,541
|
)
|
|
146,018
|
|
|
|
Prepaid expenses
|
|
-
|
|
|
4,637
|
|
|
|
Lease receivable
|
|
-
|
|
|
577
|
|
|
|
Accounts payable
|
|
(52,095
|
)
|
|
54,569
|
|
|
|
Accrued Liabilities
|
|
(47,129
|
)
|
|
(91,579
|
)
|
|
|
Deferred revenue
|
|
795
|
|
|
6,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,988
|
|
$
|
(161,215
|
)
|
|
10.
|
Commitments
|
|
|
|
|
|
The Company is committed to make minimum annual payments
on its premises, automobiles and office equipment operating leases that
expire in 2014 as follows:
|
|
|
Year or period ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
$
|
102,309
|
|
|
|
2011
|
|
160,482
|
|
|
|
2012
|
|
147,341
|
|
|
|
2013
|
|
65,025
|
|
|
|
2014
|
|
6,381
|
|
Rent expense included in the statements
of operations for the three months ended June 30, 2010 is $33,668 (2009 -
$33,066) and for the six months ended June 30, 2010 is $67,491 (2009 - $65,831).
F-12
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
11.
|
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.
|
|
|
For the three months ended June 30, 2010
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
621,113
|
|
$
|
272,759
|
|
$
|
893,872
|
|
|
|
Depreciation and amortization
|
|
1,836
|
|
|
5,223
|
|
|
7,059
|
|
|
|
Interest expense, net
|
|
1,191
|
|
|
-
|
|
|
1,191
|
|
|
|
Segment income before income taxes
|
|
(158,671
|
)
|
|
29,186
|
|
|
(129,485
|
)
|
|
|
Total assets
|
|
1,666,168
|
|
|
99,238
|
|
|
1,765,406
|
|
|
|
For the three months ended June 30, 2009
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
960,457
|
|
$
|
329,469
|
|
$
|
1,289,926
|
|
|
|
Depreciation and amortization
|
|
2,348
|
|
|
5,223
|
|
|
7,571
|
|
|
|
Interest expense, net
|
|
3,512
|
|
|
200
|
|
|
3,712
|
|
|
|
Segment loss before income taxes
|
|
33,329
|
|
|
45,648
|
|
|
78,977
|
|
|
|
Total assets
|
|
1,558,553
|
|
|
120,130
|
|
|
1,678,683
|
|
F-13
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
12.
|
Segment information
(cont’d…)
|
|
|
For the six months ended June 30, 2010
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
1,285,288
|
|
$
|
619,773
|
|
$
|
1,905,061
|
|
|
|
Depreciation and amortization
|
|
3,773
|
|
|
10,446
|
|
|
14,219
|
|
|
|
Interest expense, net
|
|
2,006
|
|
|
-
|
|
|
2,006
|
|
|
|
Segment income (loss) before income taxes
|
|
(196,671
|
)
|
|
133,391
|
|
|
(63,280
|
)
|
|
|
Total assets
|
|
1,666,168
|
|
|
99,238
|
|
|
1,765,406
|
|
|
|
For the six months ended June 30, 2009
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
1,656,375
|
|
$
|
704,195
|
|
$
|
2,360,570
|
|
|
|
Depreciation and amortization
|
|
13,809
|
|
|
10,446
|
|
|
24,255
|
|
|
|
Interest expense, net
|
|
6,675
|
|
|
800
|
|
|
7,475
|
|
|
|
Segment loss before income taxes
|
|
(82,235
|
)
|
|
141,059
|
|
|
58,824
|
|
|
|
Total assets
|
|
1,558,553
|
|
|
120,130
|
|
|
1,678,683
|
|
F-14
|
VISCOUNT SYSTEMS, INC.
|
|
Notes to Interim Condensed Consolidated Financial
Statements
|
|
(Unaudited)
|
|
(Expressed in Canadian dollars)
|
|
Six months ended June 30, 2010 and 2009
|
|
|
|
12.
|
Segment information (cont’d…)
|
|
|
|
|
|
|
(b)
|
Of the total revenues for the six months ended June 30,
2010, $303,799 (2009 - $430,285) was derived from U.S.-based customers and
$1,601,262 (2009 - $1,930,285) 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 six months ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
(d)
|
Products and services:
|
|
|
|
|
|
|
|
Enterphone 2000 sales represented 8.6% of total revenue
during the six months ended June 30, 2010 (2009 – 10.1%). MESH sales
represented 57.2% of total revenue during the six months ended June 30,
2010 (2009 – 59%). 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.
|
F-15
Item 2. Management Discussion and Analysis or Plan of
Operation
Results of Operations
Sales for the three months ended June 30, 2010 and 2009 were
$893,872 and $1,289,926, respectively, a decrease of $396,054 or 30.7% . Sales
for the six months ended June 30, 2010 and 2009 were $1,905,061 and $2,360,570,
respectively, a decrease of $455,509 or 19.3% . This decrease was due partly to
a slower U.S. and Canadian economy, resulting in decreased sales of our MESH and
Enterphone units, and a shortage of certain inventory components to fill
significant orders. MESH sales for the three months ended June 30, 2010 and 2009
were $471,092 and 797,803, respectively, a decrease of $326,711 or 41.0% . MESH
sales for the six months ended June 30, 2010 and 2009 was $1,090,512 and
$1,402,941, respectively, a decrease of $312,429 or 22.3% . 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 June 30, 2010 and 2009 were
$97,296 and $134,476, respectively, a decrease of $37,180 or 27.6% . Enterphone
2000 sales for the six months ended June 30, 2010 and 2009 were $162,935 and
$238,454, respectively, a decrease of $75,519 or 31.7% . As an older technology,
Enterphone sales have been dropping for several years. 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.
Management believes that sales of the MESH product will
continue to represent a significant proportion of total sales relative to sales
of our Enterphone products. For the six months ended June 30, 2010 and 2009,
MESH sales were 57.2% and 59.4%, 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 1,539 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
six months ended June 30, 2010 and 2009, customer service contracts and new
equipment sales generated aggregate sales revenues of $619,773 and $704,195,
respectively, a decrease of $84,422 or 12.0% . 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 1,539 at June 30, 2010, as
compared to 1,577 and 1,598 at December 31, 2009 and June 30, 2009,
respectively. During the first two quarters of 2010, the Company performed a
test for impairment 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. 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 June 30, 2010, the cost of the service agreements, net of
accumulated amortization, was $99,238.
Cost of sales and services as a percentage of sales was 45.4%
and 41.8% for the three months ended June 30, 2010 and 2009, respectively. Cost
of sales and services as a percentage of sales was 40.2% and 44.2% for the six
months ended June 30, 2010 and 2009, respectively. Cost of sales has changed
during these two comparative periods due to a combination of increases and
decreases in the overall costs for many MESH component parts and management’s
continued focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost
effective raw materials are used in all of our products.
3
Gross profit for the three months ended June 30, 2010 and 2009
was $488,363 and $750,791, respectively, a decrease of $262,428 or 35.0% . For
the six months ended June 30, 2010 and 2009, gross profit was $1,140,175 and
$1,317,227, respectively, a decrease of $177,052 or 13.4% . This decrease in
gross profit corresponds with decreased sales and changes in product mix for the
three and six months ended June 30, 2010.
Selling, general and administrative expenses for the three
months ended June 30, 2010 and 2009 were $552,465 and $597,913, respectively, a
decrease of $45,448 or 7.6% . Selling, general and administrative expenses for
the six months ended June 30, 2010 and 2009 were $1,086,527 and $1,120,898,
respectively, a decrease of $34,371 or 3.1% . These two comparative periods were
consistent. For the six months ended June 30, 2010 and 2009, selling, general
and administrative expenses, as a percentage of sales, were 57.0% and 47.5%,
respectively.
Research and development costs for the three months ended June
30, 2010 and 2009 were $57,134 and $62,628, respectively, a decrease of $5,494
or 8.8% . Research and development costs for the six months ended June 30, 2010
and 2009 were $100,704 and $105,865, respectively, a decrease of $5,161 or 4.9%
. These two comparative periods were consistent.
Loss before income tax for the quarter ended June 30, 2010 was
$(129,485), as compared to income before income tax of $78,977 for the quarter
ended June 30, 2009. This equates to a decrease in quarter over quarter income
of $208,462. Loss before income tax for the six months ended June 30, 2010 was
$(63,280), as compared to income before income tax of $58,824 for the six months
ended June 30, 2009. This equates to a decrease in six month period over six
month period income of $122,104. The decrease in profitability was the result of
fewer sales due to the poor economy and delivery problems from our main
supplier, offset by reductions in staffing costs, advertising, travel,
tradeshow, various office expenses and the aforementioned reductions in input
prices.
Liquidity and Capital Resources
Cash as of June 30, 2010, as compared to December 31, 2009 was
$125,111 and $124,378, respectively. Cash as of June 30, 2009 was $228,898. The
Company has 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 June 30, 2010, $54,505 was drawn on this facility. The
facility is secured by substantially all of our assets under a general security
agreement.
At June 30, 2010, working capital was $729,820, as compared to
a working capital of $778,879 at December 31, 2009. Working capital has
decreased by $49,059. The current ratio at June 30, 2010 was 1.82 to 1.0, as
compared with 1.67 to 1.0 at December 31, 2009.
The accounts receivable turnover ratio at June 30, 2010 was 91
days, as compared 61 days at December 31, 2009 and 46 days at June 30, 2009. The
increase at June 30, 2010 and December 31, 2009 is caused in its entirety by one
large accounts receivable from a large customer. Ignoring this receivable, the
turnover ratio at June 30, 2010 would have been 48 days, which is more
consistent with the 46 days at June 30, 2009. This consistency was due to
consistent follow up and monitoring of slower paying accounts on a monthly basis
by management. The accounts receivable reserve was $336,893 at June 30, 2010, as
compared to $337,475 at December 31, 2009. The accounts receivable reserve has
remained consistent, since the year ended December 31, 2009. 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.
4
For the six months ended June 30, 2010, there were no capital
expenditures.
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 may 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 June 30, 2010.
There are no known trends or uncertainties that will have a
material impact on revenues.
Related Party Transactions
None.
Recently Issued Accounting Standards
There were no new accounting standards issued during the period
ended June 30, 2010 that are expected to have a material impact on the
Company.
Item 4. 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 June
30, 2010. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that as of June 30, 2010, 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.
5
PART II – OTHER INFORMATION
Item 6. Exhibits
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.
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Date: July 30, 2010
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VISCOUNT SYSTEMS, INC.
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(Registrant)
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By:
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/s/ Stephen Pineau
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Stephen Pineau, President
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Principal Executive Officer
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and Principal Financial Officer
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6
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