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,
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
Registrants 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 issuers
classes of common equity, as of the latest practicable date:
As of
September 30, 2010 the registrants 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 managements 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 managements 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, 2010, the foreign exchange rate certified by the
Federal Reserve Bank of New York was CAD$1.0290 for USD$1.0000 or CAD$1.0000 for
USD$0.9718.
Item 1. Financial Statements
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian
Dollars)
September 30, 2010
VISCOUNT SYSTEMS, INC.
|
Interim Consolidated Balance Sheets
|
(Expressed in Canadian dollars)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
$
|
461,656
|
|
$
|
124,378
|
|
Trade accounts receivable, less allowance for doubtful
accounts of $204,807 (2009 - $337,475)
|
|
573,276
|
|
|
1,182,434
|
|
Inventory (note 3)
|
|
617,138
|
|
|
626,566
|
|
Total current assets
|
|
1,652,071
|
|
|
1,933,378
|
|
|
|
|
|
|
|
|
Deposits
|
|
5,891
|
|
|
5,891
|
|
Equipment (note 4)
|
|
36,841
|
|
|
42,358
|
|
Intangible assets
(note 5)
|
|
94,015
|
|
|
109,684
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
1,788,817
|
|
$
|
2,091,311
|
|
|
|
|
|
|
|
|
Liablilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Bank indebtedness (note 6)
|
$
|
-
|
|
$
|
218,702
|
|
Accounts payable
|
|
185,614
|
|
|
155,840
|
|
Accrued liabilities
|
|
445,208
|
|
|
447,878
|
|
Deferred revenue
|
|
31,444
|
|
|
39,678
|
|
Due to stockholders (note 7)
|
|
292,402
|
|
|
292,402
|
|
Total current
liabilities
|
|
954,668
|
|
|
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
|
|
(1,563,512
|
)
|
|
(1,460,851
|
)
|
Total
stockholders' equity
|
|
834,150
|
|
|
936,811
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$
|
1,788,817
|
|
$
|
2,091,311
|
|
See accompanying notes to interim consolidated financial
statements.
VISCOUNT SYSTEMS, INC.
|
Interim Consolidated Statements of Operations
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,052,658
|
|
$
|
1,478,348
|
|
$
|
2,957,718
|
|
$
|
3,838,918
|
|
Cost of sales
|
|
499,191
|
|
|
607,703
|
|
|
1,264,077
|
|
|
1,651,046
|
|
Gross profit
|
|
553,467
|
|
|
870,645
|
|
|
1,693,641
|
|
|
2,187,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
451,795
|
|
|
650,826
|
|
|
1,538,323
|
|
|
1,771,724
|
|
Research and development
|
|
133,757
|
|
|
71,854
|
|
|
234,461
|
|
|
177,719
|
|
Depreciation
and amortization
|
|
6,965
|
|
|
7,448
|
|
|
21,184
|
|
|
31,703
|
|
|
|
592,517
|
|
|
730,128
|
|
|
1,793,968
|
|
|
1,981,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other items
|
|
(39,050
|
)
|
|
140,517
|
|
|
(100,327
|
)
|
|
206,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
9
|
|
|
4
|
|
|
10
|
|
|
94
|
|
Interest expense
|
|
(338
|
)
|
|
(4,839
|
)
|
|
(2,344
|
)
|
|
(12,314
|
)
|
|
|
(329
|
)
|
|
(4,835
|
)
|
|
(2,334
|
)
|
|
(12,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(39,379
|
)
|
|
135,682
|
|
|
(102,661
|
)
|
|
194,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(39,379
|
)
|
$
|
135,682
|
|
$
|
(102,661
|
)
|
$
|
194,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
income (loss) per common share
|
$
|
(0.00
|
)
|
$
|
0.01
|
|
$
|
(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.
VISCOUNT SYSTEMS, INC.
|
Interim Consolidated Statements of Cash Flows
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
|
Nine months ended September 30
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(102,661
|
)
|
$
|
194,506
|
|
Items not involving cash:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
21,186
|
|
|
31,703
|
|
Changes in
non-cash working capital balances (note 9)
|
|
637,455
|
|
|
(208,521
|
)
|
Net cash provided by
operating activities
|
|
555,980
|
|
|
17,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from (repayment of) bank
indebtedness
|
|
(218,702
|
)
|
|
96,554
|
|
Repayment of stockholder loan
|
|
-
|
|
|
(73,000
|
)
|
Repayment of notes payable
|
|
-
|
|
|
(50,000
|
)
|
Net cash used in financing activities
|
|
(218,702
|
)
|
|
(26,446
|
)
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
337,278
|
|
|
(8,758
|
)
|
|
|
|
|
|
|
|
Cash, beginning of
period
|
|
124,378
|
|
|
255,172
|
|
|
|
|
|
|
|
|
Cash, end of
period
|
$
|
461,656
|
|
$
|
246,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information:
|
|
|
|
|
|
|
Interest paid
|
$
|
2,344
|
|
$
|
7,475
|
|
Income taxes paid
|
$
|
-
|
|
$
|
-
|
|
See accompanying notes to interim consolidated financial
statements.
VISCOUNT SYSTEMS, INC.
|
Interim 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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(102,661
|
)
|
|
(102,661
|
)
|
Balance, September 30, 2010
|
|
17,841,250
|
|
$
|
25,434
|
|
$
|
2,372,228
|
|
$
|
(1,563,512
|
)
|
$
|
834,150
|
|
See accompanying notes to interim consolidated financial
statements.
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Consolidated Financial Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 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
September 30, 2010 and for the three month and nine month periods ended
September 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.
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
2.
|
New accounting
pronouncements
|
In October 2009, the FASB issued
authoritative guidance on revenue recognition which was effective beginning July
1, 2010. 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. Adoption of this new guidance has not had a material impact on the
financial statements.
In June 2009, the FASB issued
authoritative guidance on the consolidation of variable interest entities, which
was 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. Adoption of this new guidance has not had a material impact
on the financial statements.
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
328,104
|
|
$
|
237,463
|
|
|
Work in process
|
|
28,144
|
|
|
106,457
|
|
|
Finished goods
|
|
260,890
|
|
|
282,646
|
|
|
|
|
|
|
|
|
|
|
|
$
|
617,138
|
|
$
|
626,566
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
September 30, 2010
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
$
|
110,838
|
|
$
|
95,473
|
|
$
|
15,365
|
|
|
Office furniture and equipment
|
|
77,269
|
|
|
57,593
|
|
|
19,676
|
|
|
Leasehold improvements
|
|
46,814
|
|
|
45,014
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,921
|
|
$
|
198,080
|
|
$
|
36,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 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 September 30,
2010, the Company held 1,512 service agreements (December 31, 2009
1,577) at a cost, net of accumulated amortization of $114,906 (December
31, 2009 - $99,237), of $94,015 (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 $Nil (December 31, 2009 - $18,703) and amounts drawn
under a bank credit facility of $Nil (December 31, 2009 - $200,000)
available to a maximum of $500,000. Amounts outstanding under the bank
credit facility bear interest at the banks prime lending rate plus 1.75%
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, 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 companys credit facility.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
7.
|
Due to stockholders (contd
)
|
|
|
|
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.
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 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 September 30, 2010
|
|
3,363,800
|
|
$0.30
|
|
A summary of the stock options
outstanding and exercisable at September 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
|
3.36 years
|
US$0.12
|
US $-
|
|
$0.18
|
11,250
|
5.23 years
|
$0.18
|
$ -
|
|
$0.40
|
327,500
|
1.84 years
|
$0.40
|
$ -
|
|
$0.45
|
7,500
|
5.23 years
|
$0.45
|
$ -
|
|
$0.55
|
5,000
|
5.23 years
|
$0.55
|
$ -
|
|
$0.60
|
10,000
|
5.23 years
|
$0.60
|
$ -
|
|
$0.65
|
933,800
|
1.22 years
|
$0.65
|
$ -
|
|
|
|
|
|
|
|
|
3,363,800
|
2.63 years
|
$0.30
|
$-
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
8.
|
Capital stock (contd
)
|
|
|
|
The aggregate intrinsic value in the preceding table
represents the total intrinsic value, based on the Companys closing stock
price of US$0.10 per share as of September 30, 2010 (December 31, 2009
US$0.19), which would have been received by the option holders had all
option holders exercised their options as of that date. The total number
of in-the-money options vested and exercisable as of September 30, 2010
was nil (September 30, 2009 nil).
|
|
|
|
Warrants
|
|
|
|
A summary of warrant activity is as
follows:
|
|
|
|
Number of warrants
|
|
|
Weighted average
|
|
|
|
|
|
|
|
Exercise price
|
|
|
Outstanding at December 31, 2009
|
|
1,677,550
|
|
|
US$ 0.25
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
Outstanding at September 30, 2010
|
|
1,677,550
|
|
|
0.25
|
|
A summary of the warrants outstanding
and exercisable at September 30, 2010 is as follows:
|
|
|
Weighted
|
|
|
|
|
Average
|
Weighted
|
|
|
|
Remaining
|
Average
|
|
Exercise Price
|
Number
|
Contractual
|
Exercise
|
|
|
|
Life
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
US$0.25
|
1,677,550
|
1.55 years
|
US$0.25
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
9.
|
Changes in non-cash working capital
balances
|
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
609,158
|
|
$
|
(480,089
|
)
|
|
Inventory
|
|
9,428
|
|
|
260,550
|
|
|
Prepaid expenses
|
|
-
|
|
|
4,637
|
|
|
Lease receivable
|
|
-
|
|
|
857
|
|
|
Accounts payable
|
|
29,773
|
|
|
97,086
|
|
|
Accrued Liabilities
|
|
(2,670
|
)
|
|
(88,369
|
)
|
|
Deferred revenue
|
|
(8,234
|
)
|
|
(3,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
637,455
|
|
$
|
(208,521
|
)
|
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
|
$
|
44,848
|
|
|
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 September 30, 2010 is $34,133 (2009 -
$33,668) and for the nine months ended September 30, 2010 is $101,624 (2009 -
$99,499).
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 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 September 30,
2010
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
726,922
|
|
$
|
325,736
|
|
$
|
1,052,658
|
|
Depreciation and amortization
|
|
1,742
|
|
|
5,223
|
|
|
6,965
|
|
Interest expense, net
|
|
338
|
|
|
-
|
|
|
338
|
|
Segment income before income taxes
|
|
(180,918
|
)
|
|
141,538
|
|
|
(39,380
|
)
|
Total assets
|
|
1,694,802
|
|
|
94,015
|
|
|
1,788,817
|
|
For the three months ended September 30,
2009
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
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 loss before income taxes
|
|
28,952
|
|
|
106,730
|
|
|
135,682
|
|
Total assets
|
|
1,657,504
|
|
|
114,907
|
|
|
1,772,411
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
12.
|
Segment information
(contd
)
|
For the nine months ended September 30,
2010
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
2,012,210
|
|
$
|
945,509
|
|
$
|
2,957,719
|
|
Depreciation and amortization
|
|
5,515
|
|
|
15,669
|
|
|
21,184
|
|
Interest expense, net
|
|
2,344
|
|
|
-
|
|
|
2,344
|
|
Segment income (loss) before income taxes
|
|
(377,589
|
)
|
|
274,929
|
|
|
(102,661
|
)
|
Total assets
|
|
1,694,802
|
|
|
94,015
|
|
|
1,788,817
|
|
For the nine months ended September 30,
2009
|
|
Manufacturing
|
|
|
Servicing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
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 loss before income taxes
|
|
(53,283
|
)
|
|
247,789
|
|
|
194,506
|
|
Total assets
|
|
1,657,504
|
|
|
114,907
|
|
|
1,772,411
|
|
VISCOUNT SYSTEMS, INC.
|
Notes to Interim Condensed Consolidated Financial
Statements
|
(Unaudited)
|
(Expressed in Canadian dollars)
|
Nine months ended September 30, 2010 and 2009
|
|
12.
|
Segment information (contd
)
|
|
|
|
|
(b)
|
Of the total revenues for the nine months ended September
30, 2010, $448,833 (2009 - $693,560) was derived from U.S.-based customers
and $2,508,886 (2009 - $3,145,358) 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, 2010 and 2009.
|
|
|
|
|
(d)
|
Products and services:
|
|
|
|
|
|
Enterphone 2000 sales represented 7.7% of total revenue
during the nine months ended September 30, 2010 (2009 8.3%). MESH sales
represented 56.4% of total revenue during the nine months ended September
30, 2010 (2009 63.2%). The balance of the Companys 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.
|
Item 2. Management Discussion and Analysis or Plan of
Operation
Results of Operations
Sales for the three months ended September 30, 2010 and 2009
were $1,052,658 and $1,478,348, respectively, a decrease of $425,690 or 28.8% .
Sales for the nine months ended September 30, 2010 and 2009 were $2,957,719 and
$3,838,918, respectively, a decrease of $881,199 or 23.0% . This decrease was
due to a slower U.S. and Canadian economy, resulting in decreased sales of our
MESH and Enterphone units. MESH sales for the three months ended September 30,
2010 and 2009 were $576,610 and 1,024,743, respectively, a decrease of $448,133
or 43.7% . MESH sales for the nine months ended September 30, 2010 and 2009 was
$1,667,123 and $2,427,684, respectively, a decrease of $760,561 or 31.3% . 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 September 30, 2010
and 2009 were $66,245 and $80,156, respectively, a decrease of $13,911 or 17.4%
. Enterphone 2000 sales for the nine months ended September 30, 2010 and 2009
were $229,180 and $318,610, respectively, a decrease of $89,430 or 28.1% . 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.
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 nine months ended September 30, 2010 and
2009, MESH sales were 56.4% and 63.2%, 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 1,512 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, 2010 and 2009, customer service contracts and
new equipment sales generated aggregate sales revenues of $945,509 and
$1,232,725, respectively, a decrease of $287,216 or 23.3% . These sales included
MESH sales by the service division. Sales decreased due to a slower Canadian
economy.
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 1,512 at September 30, 2010, as
compared to 1,577 and 1,587 at December 31, 2009 and September 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 September 30, 2010, the cost of the service agreements, net of
accumulated amortization, was $94,015.
Cost of sales and services as a percentage of sales was 47.4%
and 41.1% for the three months ended September 30, 2010 and 2009, respectively.
Cost of sales and services as a percentage of sales was 42.7% and 43.0% for the
nine months ended September 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
managements 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.
Gross profit for the three months ended September 30, 2010 and
2009 was $553,467 and $870,645, respectively, a decrease of $317,178 or 36.4% .
For the nine months ended September 30, 2010 and 2009, gross profit was
$1,693,641 and $2,187,872, respectively, a decrease of $494,231 or 22.6% . This
decrease in gross profit corresponds with decreased sales and changes in product
mix for the three and nine months ended September 30, 2010.
Selling, general and administrative expenses for the three
months ended September 30, 2010 and 2009 were $451,795 and $650,826,
respectively, a decrease of $199,031 or 30.6% . Selling, general and
administrative expenses for the nine months ended September 30, 2010 and 2009
were $1,538,323 and $1,771,724, respectively, a decrease of $233,401 or 13.2% .
The Company was focused on reducing various selling, general and administrative
expenses to improve our net loss position. For the nine months ended September
30, 2010 and 2009, selling, general and administrative expenses, as a percentage
of sales, were 52.0% and 46.1%, respectively.
Research and development costs for the three months ended
September 30, 2010 and 2009 were $133,757 and $71,854, respectively, an increase
of $61,903 or 86.2% . Research and development costs for the nine months ended
September 30, 2010 and 2009 were $234,461 and $177,719, respectively, an
increase of $56,742 or 31.9% . Research and development costs increased due to
additional costs incurred to develop a new MESH related product.
Loss before income tax for the quarter ended September 30, 2010
was $(39,379), as compared to income before income tax of $135,682 for the
quarter ended September 30, 2009. This equates to a decrease in quarter over
quarter income of $175,061. Loss before income tax for the nine months ended
September 30, 2010 was $(102,661), as compared to income before income tax of
$194,506 for the nine months ended September 30, 2009. This equates to a
decrease in nine month period over nine month period income of $297,167. The
decrease in profitability was the result of fewer sales due to the poor U.S. and
Canadian economy, 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 September 30, 2010, as compared to December 31, 2009
was $461,656 and $124,378, respectively. Cash as of September 30, 2009 was
$246,414. 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 September 30, 2010, $nil was drawn on this
facility. The facility is secured by substantially all of our assets under a
general security agreement.
At September 30, 2010, working capital was $697,403, as
compared to a working capital of $778,878 at December 31, 2009. Working capital
has decreased by $81,475. The current ratio at September 30, 2010 was 1.73 to
1.0, as compared with 1.67 to 1.0 at December 31, 2009.
The accounts receivable turnover ratio at September 30, 2010
was 78 days, as compared 61 days at December 31, 2009 and 51 days at September
30, 2009. The increase at September 30, 2010, as compared to December 31, 2009
and September 30, 2009 was due to less proportionate sales to outstanding
receivables at September 30, 2010, resulting in a greater time period where
receivables remain outstanding. Management continues to follow up and monitor
slower paying accounts on a monthly basis. The accounts receivable reserve was
$204,807 at September 30, 2010, as compared to $337,475 at December 31, 2009, a
decrease of $132,668. This reduction was the result of collecting some significant outstanding debt from some older accounts.
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, 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 September 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 September 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
September 30, 2010. Based on that evaluation, our principal executive officer
and principal financial officer have concluded that as of September 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.
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.
Date: November 4, 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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