ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE" AND SIMILAR EXPRESSIONS OR FUTURE OR
CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY
FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING
STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS
IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE
FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES. THESE
FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING
"RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE
DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K,
UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2012. AS USED HEREIN, THE
"COMPANY," "VISCOUNT," "WE," "US," "OUR" AND WORDS OF SIMILAR MEANING REFER TO
VISCOUNT SYSTEMS, INC.
The Company maintains its books of account in Canadian dollars
and references to dollar amounts herein are to the lawful currency of Canada
unless otherwise indicated.
The following table sets forth, for the periods indicated,
certain exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of Canadian dollars per
one (1) U.S. dollar and are the inverse of rates quoted by the Federal Reserve
Bank of New York for U.S. dollars per CDN$1.00. The high and low exchange rates
for each month during the previous six months were as follows:
The following table sets out the exchange rate information as
at each of the years ended December 31, 2012 and 2011.
Item 1. BUSINESS
GENERAL
Viscount Systems Inc. is a manufacturer, developer and service
provider of access control security products. The company’s primary products are
Freedom, MESH, EPX and Axess. EPX and Axess are the latest models of the
Enterphone line of telephone entry systems, first introduced in 1966. Until 2012
MESH referred to Viscount’s line of computerized touch screen intercom systems
and accessories that included card access systems. With the expansion of
Viscount’s capabilities to provide leading edge building access solutions
independently of intercom systems the company has now split the MESH product
line into MESH Intercom solutions and Freedom access control solutions. Freedom
is being deployed in a large array of industrial and government sites and is
expected to be the growth engine for Viscount in the coming years.
In addition to its manufacturing division Viscount has a
service division that covers the Province of British Columbia. The primary
revenue source for the service division are 1,344 maintenance agreements on
Enterphone, EPX and other systems that are billed on a monthly basis.
The Company’s website address is
www.viscount.com
. All
periodic and current reports are available, free of charge, on the Company’s
website as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the U.S. Securities and Exchange Commission.
Electronic or paper copies of the Company’s filings are also available, free of
charge, upon request.
BUSINESS OVERVIEW
The Company has been designing, manufacturing and servicing
access control and security products, including intercom and door access control
systems and emergency communications systems since 1969. With the release of
MESH in 2003 and then Freedom in 2011 the company has been migrating away from
telecommunications based systems to large IP based building access systems.
Through this transition the company is migrating from a hardware based business
model to software based. To this end the company is investing heavily in mobile
and Cloud software applications for the Freedom platform. To support its
investments the Company has filed numerous patents since 2010 with a total of
approximately 60 patent claims currently pending.
Freedom is a new building security technology that represents a
departure from traditional access control and security systems. Traditional
systems use controllers that have a capacity to control from 1 to 8 door access
points per controller. Each controller has embedded software to create door open
commands that are programmed through a PC system user software interface.
Freedom does not include an embedded decision-making software platform. Instead,
with Freedom building security decisions are done in the same PC software,
thereby dramatically simplifying the architecture of systems. The hardware piece
of Freedom is the Freedom IP encryption bridge. Each bridge includes circuitry
to trigger locks and monitor alarms and is connected to networks using
switches.
The company has recognized for several years that the sales of
its traditional Enterphone/EPX products would continue to be stagnant or would
fall and accounted for only 9.5% of total sales for the year ended December 31,
2012. Enterphone is a building access control system that uses a building’s
internal phone wiring thereby avoiding use of telephone utility services. The
reason for the diminished sales of the product mainly relate to new digital
telecommunications alternatives. The Enterphone technology requires access to a
dedicated set of inside wires and is difficult to install and service with the existence of phone
over cable or TV over phone systems. Therefore, the popularity of the technology
has begun to wane.
6
The Company has a number of additional technologies in
development. This includes Facility Friend visitor management and photo-id
software and ABC business continuity software.
COMPANY HISTORY
The Company’s current business is operated primarily through
its wholly owned subsidiary Viscount Communication and Control Systems Inc. The
business of the Company’s subsidiary began operations in 1969 as a manufacturer
of video switching equipment. In 1970, the business was acquired by B.C. Telecom
Inc. (BC Tel), which was acquired by Telus Corporation in 1999. BC Tel was the
telephone utility for British Columbia, Canada controlled by GTE Corporation
(now Verizon Communications Inc.). Under BC Tel, the business operated as an
electronics research laboratory and manufacturing facility. Among the products
manufactured were central office telephone test equipment, telephone demarcation
blocks, and a satellite based kiosk system used to provide information at
airports and other public facilities. Responsibility for the manufacture of the
Enterphone system was transferred into the business in 1984 from BC Tel. BC Tel
contracted to sell the business in 1997 to Blue Mountain Technologies Inc., a
company that purchases and installs the Company’s products. Blue Mountain
Technologies Inc. simultaneously assigned its contractual rights to acquire all
of the business assets, except for certain leasehold interests, to the Company’s
subsidiary, Viscount Communication. BC Tel consented to the assignment and
accordingly the business was acquired by the Company’s subsidiary, Viscount
Communication and Control Systems Inc.
The Company was incorporated on May 24, 2001 under the laws of
the State of Nevada under the name OMW4 Corp. The Company’s subsidiary, Viscount
Communication was incorporated in 1997 under the laws of British Columbia,
Canada, for the purposes of carrying on the present access control business. The
Company acquired all of the issued and outstanding shares in the capital of
Viscount Communication on July 27, 2001, in exchange for 10,000,000 shares of
the Company’s common stock, thereby making it our wholly owned subsidiary. As a
result of the acquisition, the former shareholders of Viscount Communication
obtained a controlling interest in OMW4 Corp. In connection with the
acquisition, the Company changed its name to Viscount Systems Inc. effective
August 27, 2001.
In 2003, the Company acquired certain inventory and 2,165
service agreements from Telus Corporation. The service agreements related to the
maintenance Enterphone installations throughout Western Canada. The inventory
was comprised of various products and components for installation and repair of
these Enterphone installations. Enterphone is a specialized telephone switch
used to provide intercom and access control functions in buildings. It was
originally developed by BC Tel in 1965.
The company now focuses on several key products and markets.
EPX is the latest generation of Enterphone and was released in 2009. MESH,
released in 2003, is a digital platform for providing touch screen intercom and
signage solutions. Freedom was released in 2011 and represents the primary focus
for the future, IP based building security systems. Viscount has also expanded
the capabilities of Freedom to focus on US Federal Government opportunities by
making Freedom FIPS 201 compliant and is now upgrading Freedom further to expand
into mobile applications and the Cloud.
INDUSTRY OVERVIEW
The Company competes in the building intercom and access
control systems industry. The intercom and access control industry is sometimes
referred to as a segment of the low voltage systems industry. The Company’s
intercom and access control systems are designed to automate the control of
access to buildings or other restricted access areas. Intercom systems and
access control systems are complementary; however they can also be used
independently depending on user requirements. For example, most modern
residential apartment or condominium buildings have an intercom system for
visitors wishing to communicate with residents. Residents, on the other hand,
are issued access cards that can be used in conjunction with card readers
installed beside gates, parking garages, doors or elevators in order to gain
access.
7
Access control systems provide two functions for a building.
Building tenants use access cards and readers that control access through doors,
gates or elevators, while visitors use telephone intercoms to be granted
admission by a building occupant or manager. The systems also provide
sophisticated alarm functions such as identifying doors left open or forced
entry. The sophistication of systems ranges from controlling a single door where
records are kept manually, to large enterprise systems covering hundreds of
buildings from a dedicated security facility.
Freedom and MESH mark a very different business model from the
traditional approach. The building control and security industry has
traditionally been highly segmented based on specific functions designed into
proprietary electronic hardware. This has meant that makers of
heating/ventilation and air-conditioning systems and security card access
systems essentially manufacture input/output systems, while intercom makers
manufacture voice systems, and security camera makers manufacture closed circuit
video systems. Stated otherwise, audio, video, environment and access control
systems are traditionally all separate building control systems that are
independently controlled, installed, and maintained. There has been strong
convergence of technologies in the computer and telephone related industries
based on digital standards; however the building control industry has not as yet
undergone a similar convergence of technologies. Traditionally, where systems
need to be compatible, the industry has relied on integration. Integration is
the use of a host computer and custom software to tie separate and distinct
systems, typically from different manufacturers, together on a common software
platform. However because Freedom and MESH are based on a single software
platform and database architecture, different systems such as intercom and
building security can be run as a single platform. Furthermore, with Viscount’s
new Active Directory platform, logical and physical security can run as a
unified platform and creates much more secure and flexible systems that provided
with the integration model.
Along with certain other industry participants, the Company has
turned to current high-technology solutions in order to reduce costs of
ownership of security systems, while improving functionality. The Company has
developed new system platforms that will permit convergence of the control of
various building functions, such as access control, intercom, closed circuit
television, and heating/ventilation and air-conditioning. These systems can be
operated on a single commercially available host server and can operate using
standard communications techniques. As a result of using a single full service
system to replace the three or more separate dedicated systems, each requiring
its own host server, the overall cost of ownership of a security and control
system has been reduced.
Access Control Systems Technology
The enterprise access control industry has traditionally used a
communication technology known as Wiegand. Most of the worlds installed access
systems are based on Wiegand technology. This also includes most Smart Card and
biometric systems since these devices typically must be converted to some form
of Wiegand to be process on control panels. Today, these systems are commonly
found in residential, commercial and industrial buildings in the form of access
control cards and card readers. Wiegand was initially developed in 1970 by
Sensor Engineering as an access card technology. The card technology used a
special patented process whereby wires are imbedded in a plastic access card to
encode its data. This data format became a standard for other readers including
RFID. Most access control readers are connected to control panels. Each panel
holds a card databases and software that creates door unlock and alarm
decisions. Panels are typically networked using RS 485, CANBUS or a similar
technology. A host controller is programmed to receive information from the card
reader in order to permit access to a building.
Each host controller can operate between 1 to 8 doors.
Accordingly, a building with a large number of controlled access points could
require a large number of host controllers, resulting in greater hardware costs.
Host controllers can in turn be connected to a central server that monitors the
host controllers and collects information on access point usage. The host server
also holds the card holder database to store information and issue cards to
users.
The underlying technology that operates these traditional
access control systems is approximately 30 years old. The readers are considered
“dumb” readers as they simply receive information from the access card and
transmit it to a host controller. The host controller processes the information
in order to determine whether to grant or deny access. If access is granted, the
host controller then transmits a signal to activate a switch to open the access
point where the reader is located. This is a simple input/output type relay
system which requires a separate host controller for approximately every eight
access points.
8
There are numerous limitations with the older technology.
Systems are proprietary and expensive. In many ways physical and logic access
control are identical but the existence of control hardware has precluded proper
unification and convergence. New concerns about the vulnerabilities of control
panels to cyber-attack are prompting some end users to look at alternatives.
Compliance driven change
The Company is participating in this advance in the access
control industry with its proprietary MESH and Freedom intelligent access
control and communication technology systems. Viscount believes the answer to
the issues with the traditional access control model is the Freedom software
application based approach. After 9-11 the US Department of Homeland Security
was created. An evaluation concluded that control panels, cards were not secure.
With it came FIPS 201, an expansion of processes and regulations designed to
update security. An expanded standard, “FIPS-201-2,” is now in active drafting
for future implementation. These regulations state that the vast majority of the
existing access control infrastructure needs to be replaced or upgraded. This
presents an enormous opportunity for new lower cost and more conformant
technologies such as Freedom.
PRODUCTS
The Company is a manufacturer, developer, reseller and service
provider of intercom and access control systems. The Company’s intercom and
access control systems are installed throughout North America for various
applications including: condominium/apartment building access and intercom;
residential intercom; gated home/community access and intercom;
seniors/government housing access, tracking and intercom; elevator access and
tracking; garage or perimeter gate control, and emergency communications.
Enterphone Access Control Products
Historically, the Company’s principal product was the
Enterphone intercom and access control system. The model of the current
generation of Enterphone is EPX. Enterphone is the Company’s patented building
entry control system that uses a building’s internal phone wiring to allow
access control for tenants and intercom and access control between visitors and
tenants. The use of a building’s internal phone wiring by the Company’s
Enterphone system provides an option to using telephone company wiring, thereby
bypassing monthly telephone charges. It also does not require tenants to pay for
an individual phone line to operate their intercom and door access system and is
not affected by interruptions in telephone company service. This makes the
Company’s Enterphone system distinct from other “dial-up” telephone entry
systems that use telephone company lines.
The Enterphone system is sold as a central control panel which
is installed in a building’s telephone control room. The control panel connects
an intercom panel located at an entrance to the building with the telephone of
building tenants. A visitor wishing to gain access to the building dials a 1 to
4 digit number at the entrance panel. The call is directed from the entrance
panel, through the common control equipment and up to the tenant’s telephone.
The tenant hears a unique ring and can unlock the entrance door by pressing a
number on the telephone’s numeric keypad. The tenant does not need to rent a
telephone line from the telephone company. Each control panel can process
connections to as many as 840 suites.
The Company also manufactures electronic entry access panels
that can operate using either the Enterphone system, or dial-up telephone
company lines. The Company’s panels are manufactured in various sizes and with
various features in order to accommodate varying purposes and building types.
For example, the Company manufactures panels that provide intercom and access
control from 1 suite to up to 1000 suites; or panels that provide on-screen name
search capabilities; or panels that are streamlined in shape or small in size.
All panels that the Company manufactures incorporate the Enterphone technology,
however most panels can also be installed to use telephone company lines.
Enterphone panels can also be combined with other technologies
such as access tracking and control, closed circuit monitors, infrared and radio
frequency remotes, and Wiegand cards and card readers. The Company purchases
these technologies from other manufacturers and resells them under the Company’s
brand names. Most of the products that the Company resells can be integrated
into our Enterphone access control system.
9
We have no material principal suppliers with regards to the
Enterphone system..
Enterphone X
The next generation of Enterphone systems, called Enterphone X,
“EPX”, was released during the second quarter of 2008. The EPX product line has
replaced the EP2000 product line. EPX, also a no phone line system like EP2000,
is the next generation of Enterphone. EPX is more cost effective because it
requires less assembly and material input costs. EPX improves compatibility with
MESH and other newer telephony technologies. EPX sales are classified as a
source of MESH revenue.
The Enterphone 2000 design dates back to 1990 and the
architecture has created complications for both manufacturing and installation.
The new universal controller eliminates the need for Viscount to manufacture and
carry inventory for 10 different circuit boards. Overall, EPX reduces cost,
produces higher margins, and improves the Company’s ability to market MESH.
Our principal suppliers for EPX and MESH are Arrow Electronics
Canada Inc., Digi-Key Corporation, Electro Sonic Inc., and Metalcraft Technology
Inc.
MESH and Freedom Access Control Systems
Overview
MESH is a software-based building management system designed to
replace traditional systems that are more hardware intensive. The Company
continues to develop technology that was initially conceptualized in 1998. MESH
was commercially released in late 2003. MESH applications include touch screen
intercoms, building directories and physical card access and alarms. The first
MESH product releases were touch screen intercoms designed as an accessory for
the Enterphone/EPX product line. Viscount subsequently enhanced MESH to include
physical card access. For traditional markets such as high-rise condominiums
MESH intercom systems as well as access control systems have proven to be
complementary. However, in 2012 Viscount split MESH into two components; the
intercom component will continue to be branded as MESH and the access control
component will be branded as Freedom. The purpose of this was to eliminate
market confusion whereby end users looking for a highly secure physical access
system were presented with MESH, which appeared to be primarily an intercom
system.
MESH intercoms use a regular computer motherboard and off the
shelf computer accessories such as touch screens to create computerized building
intercom systems and building directories. MESH Touch Panels are intercom
accessories for the MESH access control and facility management system. MESH
panels can be surface or flush mounted. MESH allows building tenants to
communicate with visitors and grant or deny entry. Units can display residential
or commercial building directory listings with a building specific screen saver.
Options include built-in cameras, card access, and elevator control. Multiple
panels can be connected on a shared database or to central MESH Servers for
complete card access and facility management. MESH panels come with 15, 19 or
32” touch screens and can come for wall mounting or as floor mounted kiosks.
MESH panels, located at entrance doors for visitor access, can
operate independently or as slaves off the MESH server. The basic MESH panel
that the Company has commercially released is a full color screen industrial
computer. Panels may be located at entrance doors for visitor access or can be
on-site managed by security guards as they manage the MESH network. The
slave/master architecture of MESH panels reduces cost, simplifies programming,
and improves data base management.
In designing MESH, much consideration has been made of the many
dissimilar applications requiring a MESH network. In cases where building
control is accomplished with on-site security and concierge staff, limited MESH
hardware or possibly only software may be needed to perform the required
functions. For example, MESH software may be sold as a simple visitor tracking
system for commercial or gated residential sites.
10
In general, MESH has been designed to allow simple
installations to be performed by small independent alarm contractors. However,
provision has also been made for direct involvement by the Company’s staff in
large campus wide and enterprise wide installations.
MESH has many additional benefits, both in terms of building
security and particularly relative to the legacy Wiegand protocol. It is the
Company’s belief that addressable networks pose a serious threat to the
continued use of the Wiegand format.
MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. The Company has developed
various modules for our MESH technology, and intends to develop further modules
which will be released in a series of phases. Some of these product enhancement
modules are described below:
-
The MESH server provides new opportunities to host video on the unified
platform with voice and data. This product enhancement would represent an
entirely new concept in the security industry.
-
The nature of the MESH server makes MESH telephony products inherently
Internet enabled. Future MESH appliances may include the MESH television line,
which allows residents to view visitors at the door. MESH panels will be able
to connect to web enabled set top boxes being promoted as part of the web TV
market. MESH may be able to connect to videoconferencing telephones that would
compete in the large offshore video intercom business but at a fraction of the
cost by saving on conduit and cable.
-
The distributed intelligence of MESH makes the product suited to the
growing emergency call/nurse call industry.
-
MESH networks are built on a proprietary architecture platform which is
functional to integrate with any existing automation network.
Freedom
Freedom is the new IT platform developed and released during
the last quarter of 2010. This IT platform can turn any card reader into an IP
device by connecting the Freedom IP device with built-in I/O to a POE switch and
then every card usage is processed on a redundant MESH server either in your
building or anywhere in the world.
The software component of MESH Freedom is the MESH web browser
security operating platform. Unlike control panels, the user database and the
door control software is written in IT language located on a server(s), thereby
future proofing systems from the traditional issue of proprietary hardware
version obsolescence and improving scalability by eliminating the need for
additional hardware every time a reader is added to the system.
Viscount has upgraded Freedom to include unified
physical/logical access control using Microsoft Active Directory, both public
and private Cloud hosted solutions as well as mobile solutions.
Other products
Facility Friend:
Facility Friend is a web based Enterprise class software
platform for managing visitors, creating visitor and employee badges and
assisting security personnel in tracking packages, vehicles, and incidents. This
product was released during the second quarter of 2012. The system allows users
to manage an unlimited number of global sites within a single web tool. Each
site can assign multiple entry points. For commercial multi-tenant users,
visitors can be assigned to unlimited numbers of corporate clients within the
site.
Facility Friend is designed for a large array of applications
including: security stations, residential concierge and gated communities,
hospital reception, commercial enterprises, and government facilities. The
system will create logs of current visitors, scheduled visitors, overdue
visitors and a history of all visitors who have visited a facility. Visitors can
also be assigned temporary access cards for secure doors. Visitors who have been
identified as unwelcome can be tagged as banned across the Enterprise.
11
Scanners:
Facility Friend can improve enrollment of visitors, the
issuance of employee badges and security by using passport, driver license, and
signature capture scanning technology.
Photo ID:
Facility Friend has the ability to create full color ID cards
for both employees and visitors. The system supports all major brands of card
printers to print either onto RFID cards or onto adhesive labels to attach to
existing cards. For visitors, the system can print inexpensive visitor
labels.
Special Functions
Facility Friend has a number of predefined special applications
to assist in building management as well as the ability to create user defined
fields.
Package Tracking:
The Package Tracking function allows security to receive
packages at reception for staff/hosts with tracking numbers and email
notification.
For high security facilities the system also has fields to
track items brought into a facility by visitors and whether items being removed
are authorized.
Security Message Board:
Facility Friend has the capability to create custom messages
for security and reception personnel. Typical message types include Incident
Reports to define incident types and create security logs and Lost and Found to
track lost and found items or to track items left at security by visitors. Other
applications include tracking unregistered or improperly parked vehicles.
ABC – As Built Compiler
ABC is an online web program that allows uses to use
pre-configured templates to design the layout of facility security systems.
Users select a type of door or gate and add any type of door hardware to their
drawing. The system automatically populates the drawing with cable and conduit
requirements. The drawings can then be used to simplify bid specifications or to
simplify the installation process. All drawings are stored as archived “as
built” drawings in the event the security at a particular door needs to be
revisited in the future.
Other products also include RadioClick and InfraClik. These are
remote control access control products for doors and parking gates. They are
sold separately or as complementary to the Enterphone, Entercheck and MESH
systems. The Company also manufactures and sells EmerPhone, an intercom system
that is sold in elevator phone, emergency phone and entry phone
applications.
OTHER SERVICES
In addition to sales of the Enterphone, MESH and OEM products,
the Company also services approximately 1,344 existing Enterphone installations
within Western Canada.
PRODUCTION
Viscount has facilities for circuit board manufacture and
mechanical assembly. The Company uses a range of processes to produce its
products. Some products including Enterphone, InfraClik, and Axess are
completely manufactured in-house. The Company maintains full facilities to
assemble through-hole circuit boards and limited facilities for assembling
surface mount circuits. The Company has a policy of supporting old products as
long as parts are available for servicing and replacement. We have
designed EPX to be backwards compatible with the 2000 series to improve the
longevity and serviceability of both products. Freedom, MESH, EPX, MESH Freedom
and EmerPhone are manufactured using surface mount technology so are outsourced
with final assembly and software installed at Viscount. This includes all
Freedom IP Encryption bridges.
12
Some access control, card readers, Elektra panels, InfraClik
and various product accessories are purchased from other manufacturers and
resold under the Company’s brand-names.
Our principal suppliers of card readers are SecuraKey and HID
Global Corporation.
The MESH and Freedom software platform is loaded on standard
industrial computer chassis. The Company is not developing hardware internally
for MESH, since the required hardware controllers are commercially available at
quality and price levels that make internal development uneconomical. In
addition, by using commercial off-the-shelf (COTS) components, the Company
improves time to market, eliminate hardware debugging and increases the
Company’s ability to be technologically flexible in the future. The Company is
primarily executing final mechanical assembly of the MESH systems.
RESEARCH AND DEVELOPMENT
Research and development continues to be focused on enhancing
the Freedom/MESH product line. A number of these enhancements were identified in
the “MESH Structure”, Freedom and “Other products” section of this document.
Specific custom Freedom/MESH applications are being considered, evaluated and
implemented. An example of this process would be active directory integration.
Expenditures in connection with research and development for the years ended
December 31, 2012 and 2011 were $338,853 and $460,519, respectively.
MARKET AND MARKETING
The Market
MESH Market:
The Company’s traditional market for the Enterphone product was
apartment and condominium buildings. While the market for telephone entry type
systems amounts to about US$100 million, in the past 10 years there has been a
strong trend towards increased building security resulting in much more
sophisticated integrated installations. For example, in 1990, a typical
condominium building would be equipped with an intercom to admit visitors.
Today, a typical new building installation includes telephone entry, card
access, closed circuit cameras, individual burglar alarms and panic stations.
This puts pressure on manufacturers to provide a comprehensive package and
represents an opportunity for significant revenue growth per system. MESH is the
Company’s first in-house product that addresses these multiple requirements. The
modular nature of MESH also provides the Company with an excellent opportunity
to design additional products on the MESH platform to provide enhanced options
for a comprehensive building security package.
In addition to apartment entrances, MESH is also designed to
provide access control for the rapidly growing gated community market. Monitor
style directory panels are also used in thousands of commercial high-rises. The
MESH panel provides features previously unavailable for this market. The overall
effect of these system advances has enhanced the Company’s core business, while
allowing the Company to find applications where the new features expand the
traditional market for such systems.
The Company is targeting upgrades and retrofits to existing
apartments and various government agencies that use traditional telephone wire
intercom access control systems. New construction projects are also part of the
MESH installation market. The low hardware costs and increased functionality of
the MESH system continue to be marketed to building management companies, along
with its turnkey installation as a replacement to existing access control
systems for most modern buildings.
13
Freedom market:
Freedom moves Viscount into an entirely new market, door
security for enterprise clients. This market has been estimated from $5-10B and
includes a range of technologies for securing facilities including both RFID and
biometrics. The access control market can generally be described as the market
for any equipment used to control passage through a door, gate, parking garage,
or other portal. A portion of this market is comprised of mechanical and
electronic door locks that typically control access through single doors. Many
of the single door systems have been engineered for low security levels for
customers who do not desire a full access control host. The access control
market that the Company competes in involves computerized access control systems
that typically control access through multiple access points.
The physical access control industry was once highly fragmented
but through a process of consolidation has come to be generally dominated by a
number of multi-nationals. Physical access control typically involves two groups
– the electronic reader suppliers (RFID readers, Biometrics) and the control
suppliers. The control suppliers are typically the top of the food chain and
resell electronic reader devices as part of the control platform. This is the
core segment in which Viscount competes. The electronic reader part of this
industry grew out of old-fashioned door locks. It is not surprising that at this
level the most common companies are ASSA ABLOY and Stanley. ASSA ABLOY has been
the most aggressive over the years and is now fairly dominant in the area of
door control and “entrance systems.” Key acquisitions included HID (in 2000),
which is a leading provider of access control cards and electronic readers. ASSA
ABLOY has made over 20 acquisitions in the space and has almost 40,000 employees
worldwide.
Behind the door itself is access management and control. There
are specialized companies in this segment but most are now part of massive
conglomerates that provide a broad range of related industrial products. Major
players include Lenel, which is part of United Technologies Corporation (NYSE:
UTX), Software House, which is part of Ty-co International (NYSE: TYC),
Honeywell (NYSE: HON), Schneider Electric (SU:EN Paris), Johnson Controls (NYSE:
JCI) and Cisco (NASDAQ: CSCO).
Not only does a Freedom type unified system represent a viable
adjacent market opportunity that is large enough to be of interest, it may in
fact become critical that these companies move in the direction of Freedom. The
logic is simple; if Freedom can apply logical security rules to physical access
it can also apply physical security rules to logical access. If unified
platforms become the trend, any of the large identity management companies will
be at a severe disadvantage if they don’t enter the market.
The most obvious and clearly focused player so far is
Microsoft, which is now in a position to combine the most popular enterprise
user-management tool, Active Directory, with the Cloud (Azure in their
terminology) to provide a solution for both logical and physical access control
with one infrastructure using Freedom.
Distribution Plan
The Company currently has approximately 500 dealers for its
existing products throughout North America. When the existing business was
acquired from BC Tel, the Company relied primarily on exclusive and
semi-exclusive dealers in certain major metropolitan areas. The Company’s
distribution network is not static and the Company is constantly seeking
additional sales channels.
As previously noted MESH can serve several different markets
and the type of dealer serving each may vary. Simple installations may be
performed by small independent dealers, but as the overall scope of the project
increases, the technical ability of the dealer becomes increasingly important.
At the extreme, employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, personnel may
be involved on a co-op basis with large national security, building automation
and heating/ventilation and air-conditioning contractors.
These distribution deals, along with the existing dealer base,
gave the Company immediate access to the largest networks of dealers in the US,
Canada and Mexico.
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During the past year, the Company has been targeting its
existing markets as well as targeting US Federal Government and large corporate
end users for the sale of Freedom technology. The company is concentrating on
North America at this time.
Marketing Strategy
The Company has been using its established distribution
channels, as well as new distribution channels to access its target markets for
the MESH and Freedom technology. As a unique technology, however, end-users as
well as dealers must be educated about Freedom benefits. It is the Company’s
experience that a stronger initial emphasis on end-user decision-makers and
large national system integrators will be the most effective in developing the
Freedom market. The company sells through authorized dealers, integrators, VARS,
and distributors, and does not typically sell direct to End Users.
Webinars:
Viscount has been concentrating on webinars to educate the
industry about Freedom. The response has been excellent with audiences from
several hundred up to 800 registered attendees per webinar.
Advertising
Products are advertised on an ongoing basis in various print
publications, which the Company will continue to do. We have been testing new
publications on a regular basis to evaluate response, sales and readership. All
leads are followed up and magazines are rated based on a dollar sale per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given the Company a very accurate measure of the effectiveness
of various publications and individual ads.
Trade Shows
During 2012, the Company continued participating at tradeshows
to increase the awareness of MESH and Freedom. During 2013, we will continue to
attend tradeshows to keep up the exposure for MESH and MESH Freedom.
Direct Marketing
The Company continued educating customers about Freedom
technology by holding Freedom training seminars throughout the U.S. and at our
head office, via the internet.
Pricing Strategy
The Freedom technology is built on an architecture which can
reduce user costs significantly. The modular nature of the technology amplifies
this effect the larger the system becomes. The company has been actively
pursuing a pricing model based on substantive margins but at a price point that
can promote market disruption. Many traditional companies focus on recurring
revenue for software licenses. Viscount has chosen to forgo this in the short
term with a view to creating recurring revenue through Cloud sources. In 2013
the company is anticipating introducing a low cost version of Freedom to address
small and mid-size sites. The access control industry is fragmented with a wide
variation on pricing depending on the size of system and supplier. The new
product will be introduced to allow Viscount to compete for all system
sizes.
With a unique product and a position of product leadership, the
Company has devised a strategy of building market share. With the telephony
component, the Company has been targeting a price which provides MESH panels at
a price that is competitive with similar products, but with newer enhanced
features.
COMPETITION
Competitive Summary
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The security and building control industry is undergoing a
rapid period of consolidation. Large multi-national companies are integrating
vertically by acquiring equipment providers to build house brands. This began
with the purchase of Cardkey by Johnson Controls, Guardall by Chubb and
ADI/Northern Computers by Honeywell. More recent acquisitions include the
purchase of Kantech and Software House by Tyco and the purchase of Lenel and GE
Security by UTC. The access control industry is somewhat segmented with no
company having a dominant market position. Canada has approximately six access
control product manufacturers, while the U.S. has at least fifty. There is a
certain amount of vertical integration in the business and several large
multinational companies own their own house brands. Many branches of these
multinational companies often have their own brand preferences and buy outside
their internal distribution channels.
Almost all manufacturers build control hosts based on Wiegand
technology or Smart Card technology that converts to wiegand. Due to these
limitations, most research and development is focused on cost reducing hardware
and making the control hosts more network capable. In most cases, the
manufacturers using traditional Wiegand technology are limited from 1 to 8 doors
per host.
Competitive Threats
The Company has a strong dealer and distribution plan in place
and Freedom has positioned it in a market dominated by much larger players. The
higher security Freedom applications are also somewhat outside of the
traditional scope of business and therefore, the Company is rapidly trying to
develop a market for Freedom and in the process, educating users of Freedom
through training seminars. The Company believes that marketing strategies and
training seminars will provide benefits that will help it achieve market share
that will allow it to remain competitive. There is no guarantee that the Company
will be able to successfully compete against its larger competitors.
While Freedom is still a new product in an established growing
market, technological change can be met with resistance. Some buyers are nervous
about new products, and new protocols even more so. Most buyers are familiar
with the benefits of IP based cameras and the Company has marketed Freedom from
this point of view; that is to stress the inevitability of all access control
systems evolving this way.
A key concern is the ability of competitors to imitate the
product and the ability of large imitators to more easily commercialize their
product. We have estimated that the Company still has a three-year market lead.
Fortunately, the wide range of Freedom software applications should provide the
Company with an ongoing lead, as long as it is aggressive with research and
development.
INTELLECTUAL PROPERTY
Viscount actively protects its intellectual property. The
company has filed numerous patents since 2010, encompassing close to 60 patent
claims. The Viscount patent pending stable includes patents relating to Freedom,
unified identity management systems, cyber security, and the use of mobile
devices to perform security functions. These patents have not yet been awarded
but the company intends to vigorously defend each patent as they are
awarded.
The Company relies on a combination of non-disclosure and other
contractual agreements, and technical measures to protect the confidential
information, know-how, and proprietary rights relating to Enterphone, MESH and
other Viscount products. The Company has contractual rights with respect to
registered North American trademark and trade name for Enterphone (word alone).
The Company is still considering or in the process of registering North American
trade names for MESH and Freedom.
The Company has registered active Internet domain names for
www.viscount.com
,
www.enterphone.net
, and
www.enterphone.org
.
Standard employment agreements and license agreements contain
provisions that protect the confidentiality of proprietary technology. All our
employees and sales agents are required to sign these agreements prior to their
employment or engagement.
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To date the Company has not received notification that its
services or products infringe the proprietary rights of third parties. Third
parties could however make such claims of infringement in the future. The
Company cannot be certain that others will not develop substantially equivalent
or superseding proprietary technology, or that equivalent services will not be
marketed in competition with the Company’s services, thereby substantially
reducing the value of its proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements will provide meaningful protection for its
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.
GOVERNMENT REGULATIONS
There are a number of regulatory and related issues that affect
Viscount’s business. In order to comply with Sarbanes-Oxley and other rules and
regulations, every large public corporate entity is required to have adequate
security measures in place for the purpose of protecting IT data from tampering
by unauthorized personnel. A component of this includes properly securing
physical facilities as well as IT networks. Unfortunately, since control panels
typically use a separate security database from IT, it is very difficult to
relate usage of the systems for the purposes of audit and compliance. With the
Freedom unified platform using Microsoft Active Directory, audits and compliance
issues are simplified using a single set of IT logs.
For US Government facilities, Viscount must conform with
FIPS-201. A newer standard FIPS 201-2 is under final discussion and a release is
expected shortly. The new regulations positively impact Viscount through our
ability to perform control panel functions is software and may negatively impact
existing supplier since their existing technology and hardware is
non-conformant.
In addition, some of the Company’s Enterphone products are
still under government regulation. The Enterphone is an interposition technology
which in U.S. states can only be installed where the local public service
commission has designated the original point of entry of a building as the
demarcation point between the telephone company and building owner’s
responsibility. Conversely, it can also be installed where the telephone company
has given consent to allow Enterphone to share the telephone backbone.
The history of government deregulation for the Company mainly
relates to the demarcation point in a building. Until government deregulation
came to the access control industry, Enterphone type systems could only be
installed by telephone companies.
SOURCES OF REVENUES
The majority of the Company’s revenues were derived from the
MESH/Freedom and Enterphone product lines. In fiscal 2012, MESH/Freedom sales
represented 56% of total revenue, while Enterphone product sales represented 10%
of total revenue. The balance of the Company’s revenue was derived from service
agreements, and other products such as access tracking and control, closed
circuit video, infrared and radio frequency remotes.
EMPLOYEES
Viscount employs twenty four staff at its production facility
and head office located in Burnaby, British Columbia, Canada.
Board of Directors
Viscount has a current board of 5 members. Viscount’s board is
comprised of its CEO and individuals with senior security industry experience.
Stephen Pineau
Mr. Stephen Pineau, Steve has been the President, Chief
Executive Officer, Principal Accounting Officer and Secretary of Viscount
Systems Inc. since July 27, 2001 and serves as its Principal Financial Officer.
Mr. Pineau has been the President of Viscount Communication & Control
Systems Inc. since July 1997. He has served as Officer of Viscount since July
27, 2001. He served at Viscount Communication & Control Systems Inc., a
predecessor entity which, at the time, was a subsidiary of BC Tel, as Marketing
Director from 1992 to 1995. He left Viscount Communication to start Blue
Mountain Technologies Inc, where he held office as President from 1995 to 1997.
Since 1997, Mr. Pineau has held office as President of Viscount Communication.
He has been a Director of Viscount Systems Inc. since July 27, 2001 and Viscount
Communication & Control Systems Inc. since July 1997.
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Paul Brisgone
Paul Brisgone has had a long and distinguished career in the
security industry. Most recently, he served as Vice President of the Federal
Systems Division for ADT Security, responsible for selling and managing Federal
Government projects. Mr. Brisgone built the division from $20 million to over
$300 million in annual sales, eventually managing a staff of over 200 sales and
technical support personnel. While at ADT, he managed the security industry’s
largest GSA schedule, using it to generate over $50M in sales annually, built a
transportation security business from the ground up into a group that provides
services to over 60 airports nationally, and developed and built the Integrated
Systems Business unit within ADT’s Fed Systems group.
Paul Goldenberg
Paul Goldenberg has built a distinguished career as a highly
decorated criminal justice executive with extensive and broad-based experience
in a wide variety of politically sensitive government and NGO environments. In
February 2010, U.S. Department of Homeland Security (“DHS”) Secretary Janet
Napolitano appointed Mr. Goldenberg to the President¹s Homeland Security
Advisory Council¹s Countering Violent Extremism Working Group. He is the creator
of the Secure Community Network (SCN), which is a DHS funded organization that
advises churches, synagogues and mosques as to security risks and solutions. Mr.
Goldenberg is currently the Principal Counterterrorism and Homeland Security
Advisor to the American Hotel and Lodging Association, representing over 1,000
hotels in the U.S. and abroad. He is also the Senior Director of National
Security for the County Executives of America, representing over 700 county
mayors and executives.” Mr. Goldenberg is currently the Chairman and CEO of
Cardinal Point Strategies, a consulting firm that provides strategic solutions
on high profile and confidential matters for governments and businesses around
the world.
Robert Liscouski
Robert Liscouski was the first Assistant Secretary for
Infrastructure Protection for the Department of Homeland Security, serving from
March 2003 to February 2005, and reporting directly to then Secretary Tom Ridge.
He commanded over a $500 million budget and was responsible for coordinating
authority over the protection of all sectors of the nation’s critical
infrastructure, including agriculture, food, water, public health,
transportation, and hazardous materials, as well as key assets such as national
monuments, nuclear power plants, and dams. His private sector experience
includes Director of Information Assurance for The Coca-Cola Company and V.P.,
Law Enforcement Division, for ORION Scientific Systems. His government
experience includes 11 years with the Diplomatic Security Service of the U.S.
Department of State and five years criminal investigative experience as a
homicide and narcotics investigator in Bergen County, N.J. He is a Senior Fellow
at the Center of Strategic and International Studies in Washington, D.C. and is
an advisor to the U.S. Government on technology matters. Mr. Liscouski holds a
B.S. degree in Criminal Justice from John Jay College of Criminal Justice in New
York, and a Masters of Public Administration from the Kennedy School of
Government, Harvard University.
Dennis Raefield
Dennis Raefield has a long and distinguished career in the
access control and security industry. Most recently, Mr. Raefield was CEO and
President of Mace Security International, Inc. (OTC: MACE). Mr. Raefield was
President of
Honeywell
Access Systems, a $100M+ division of Honeywell
International, which manufactures enterprise level access control systems for
Fortune 100 client. Prior, Mr. Raefield was President of Pinkerton Systems
Integration (now Securitas), a $70M+ security system integration business
installing video, access control and alarms to Fortune 500 clients. During his
career, he was CEO or President of startups Reach Systems, an access control
manufacturer, and Ortega InfoSystems, an early PSIM manufacturer. He was also
Founder and CEO of Omega Corporate Security, a west coast premier systems
integrator based in the San Francisco Bay area. Mr. Raefield holds a BS degree in Mechanical Engineering from Santa Clara University,
and is a member of ASIS, SIA, ESA, ISIO, CAA, and CSAA.
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