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, Freedom and MESH product lines, general
revenues, income, the number of new construction projects or building upgrades
that may generate sales of our product, and in general the market for our
products. Any projections herein are based solely on management’s views, and
were not prepared in accordance with any accounting guidelines applicable to
projections. Accordingly, these forward looking statements are intended to
provide the reader with insight into management’s proposals, expectations,
strategies and general outlook for our business and products, but because of the
risks associated with those statements, including those described herein and in
our annual report, readers should not rely upon those statements in making an
investment decision. The Company's actual results could differ materially from
those anticipated in such forward-looking statements as a result of a number of
factors. These forward-looking statements are made as of the date of this
filing, and the Company assumes no obligation to update such forward-looking
statements.
The following discusses our financial condition and results of
operations based upon our consolidated financial statements which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. It should be read in conjunction with our financial
statements and the notes thereto included elsewhere herein. Unless otherwise
noted as USD or U.S. dollars, all dollar references herein are in Canadian
dollars. As at March 31, 2013, the foreign exchange rate certified by the
Federal Reserve Bank of New York was CAD$1.0167 for USD$1.0000 or CAD$1.0000 for
USD$0.9836.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of Operation
Results of Operations
Sales for the three months ended March 31, 2013 and 2012 were
$828,320 and $867,001, respectively, a decrease of $38,681 or 4.5% . These two
comparative periods were consistent. Freedom sales for the three months ended
March 31, 2013 and 2012 were $141,246 and $67,610, respectively, an increase of
$73,636 or 108.9% . MESH sales for the three months ended March 31, 2013 and
2012 were $427,267 and $388,364, respectively, an increase of $38,903 or 10.0% .
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. The Freedom 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 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.
For the three months ended March 31, 2013 and 2012, Freedom
sales were 17.1% and 7.8%, respectively, of total sales. For the three months
ended March 31, 2013 and 2012, MESH sales were 51.6 % and 44.8%, respectively,
of total sales.
The Company also provides Enterphone support and maintenance
services pursuant to service contracts that were assigned to us from Telus
Corporation in 2003. Sales from the 1,330 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 three months ended March 31, 2013 and 2012, customer service
contracts and new equipment sales generated aggregate sales revenues of $260,293
and $255,494, respectively, an increase of $4,799 or 1.9% . These two
comparative periods were consistent.
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 1,330 at March 31, 2013, as
compared to 1,344 at December 31, 2012 and 1,407 at March 31, 2012. During the
first quarter of 2013, 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 March 31, 2013, the cost
of the service agreements, net of accumulated amortization, was $41,785.
Cost of sales and services as a percentage of sales was 40.9%
and 40.2% for the three months ended March 31, 2013 and 2012, respectively. Cost
of sales has remained consistent as we are in the early stages of our Freedom
Bridge product line release. We expect cost of sales to remain constant until
Freedom Bridge sales increase substantially. Management has continued to 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 March 31, 2013 and 2012
was $489,429 and $518,590, respectively, a decrease of $29,161 or 5.6% . This
corresponds with consistent sales and the marginally
increased cost of sales for the three months ended March 31, 2013, as compared to three months ended March 31, 2012.
Selling, general and administrative expenses for the three months ended March 31, 2013 and 2012 were $706,813 and $719,501, respectively, a decrease of $12,688 or 1.8% . For the three months ended March 31, 2013 and 2012, selling,
general and administrative expenses, as a percentage of sales, were 85.3% and 83.0%, respectively. Consulting fees for the three months ended March 31, 2013 and 2012 were $183,709 and $106,205, respectively, an increase of $77,504 or
73.0% . Consulting fees, in part, increased due to paying additional consultants US$62,794 to provide strategic advice and alliances for key markets including the US Federal Government for Freedom projects. Other increases were related to Board
of Directors fees which were $41,223 and $10,000 for the three months ended March 31, 2013 and 2012, respectively.
Research and development costs for the quarter ended March 31, 2013 were gross $104,666. Government grants for the quarter ended March 31, 2013 totaled $71,502, resulting in net research and development costs of $33,164. Research and
development costs for the quarter ended March 31, 2012 were gross $72,999. Government grants for the quarter ended March 31, 2012 was $nil. Research and development costs have increased during this first quarter of 2013, as compared to the
first quarter of 2012, due to hiring an engineer to improve the Freedom design.
Net loss for the three month period ended March 31, 2013 was $1,846,316, as compared to a net loss of $168,290 for the three month period ended March 31, 2012, an increased loss of $1,678,026. During the first quarter of 2013, expenses
were controlled to maintain cash flow and to minimize the net loss. The loss in 2012 was decreased by $112,088 as a result of fair value adjustments of certain outstanding warrants that are accounted for as a derivative financial instruments.
The loss in 2013 was increased by $1,589,753 as a result of fair value adjustments of certain outstanding warrants that are accounted for as a derivative financial instrument. The fair value adjustment has no cash flow impact.
Liquidity and Capital Resources
Cash as of March 31, 2013, as compared to December 31, 2012 was $83,985 and $406,506, respectively, a decrease of $322,521.
On June 7, 2012, Viscount Systems, Inc. completed a sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share, at a purchase price of US$1,000 and a stated value of US$1,000 per A Share, and
for no additional consideration, an issuance of 12,285,012 share purchase warrants of the Company for gross proceeds of US$1,000,000. Each Warrant is exercisable to acquire a common share of the Company at a price of US$0.08 per share for a
period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 24,570,024 shares of common stock of the Company at a conversion price of US$0.0407 per
share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of US$100,000 and issued share purchase warrants to acquire 2,457,002 shares of common stock of the Company. Each Agent Warrant is exercisable to
acquire one common share of the Company at a price of US$0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On October 19, 2012, Viscount Systems, Inc. completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share, at a purchase price of $1,000 and a stated value of $1,000 per A Share, and for no
additional consideration, an issuance of 1,000,000 share purchase
warrants of the Company for gross proceeds of $100,000. Each Warrant is exercisable to acquire a common share of the Company at a price of $0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a
cashless basis. The A Shares are convertible, at the option of the holders, into 2,000,000 shares of common stock of the Company at a conversion price of $0.05 per share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $10,000 and issued share purchase warrants to acquire 200,000 shares of common stock of the Company. Each Agent Warrant is exercisable to
acquire one common share of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On November 26, 2012, Viscount Systems, Inc. completed a private placement of 10,000,000 units at a price of $0.05 per unit for total proceeds of $500,000. Each unit consists of one common share and one-half of one share purchase warrant of
Viscount, with each whole warrant exercisable to acquire an additional share of Viscount at a price of $0.10 for a period of 5 years from the closing date.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $50,000 and issued share purchase warrants to acquire 1,000,000 shares of common stock of the Company at a price of $0.05 per share for a
period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
At March 31, 2013, the Company had a working capital of $206,993, as compared to working capital of $448,029 at December 31, 2012. Working capital had decreased by $241,036. The current ratio at March 31, 2013 was 1.24, as compared with
1.49 at December 31, 2012.
The Company has the ability to finance operations and future growth through a stock-based equity injection of up to $1.5 million. However, the state of the global financial markets and recession fears present significant uncertainties for the
timing and successful completion of an equity investment.
The Company’s financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company
has an accumulated deficit of $10,460,118, reported a loss for the three months ended March 31, 2013 of $1,846,316 and has working capital of $206,993 at March 31,2013. Cash flows used in operating activities for the three months ended
March 31, 2013 were $313,521. Although management is confident that the company can access, sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to sustain the current level of
operations is dependent upon growing sales and achieving profits. Management has determined that the Company will need to raise up to $1,000,000 before the end of the second quarter of fiscal 2013, if sales do not improve, by way of debt or
equity financing, to continue normal operations for the next twelve months. If this funding is not available the company will have to reduce spending in several key areas including research and development and marketing. This would have a negative
impact on the growth prospects of the company. In the event the company completes the required $1,000,000 financing and hits its sales targets, the company does not anticipate requiring any additional financing for 2013. Management has been
actively seeking new investors and developing customer relationships, however a financing arrangement has not yet completed. Short-term loan financing is anticipated from related parties, however there is no certainty that loans will be available
when required. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.
The accounts receivable turnover ratio was 71 days at March 31, 2013, 52 days at December 31, 2012 and 43 days at March 31, 2012. The outstanding term for our receivables has been increasing due to a few slower paying customers. The accounts
receivable reserve was $131,184 at March 31, 2013, as compared to $105,185 at December 31, 2012. The accounts receivable reserve has increased by $25,999 or 24.7%, since the year ended December 31, 2012. 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.
The Company is subject to significant liquidity risk. At March 31, 2013, the Company’s current assets consist principally of trade accounts receivables and inventory. The Company must liquidate inventories and rapidly increase collection
periods on its receivables to ensure that sufficient cash is available to settle payables and operating costs as they come due.
As the Company’s liquidity increases, we will be purchasing more inventory and hiring more sales and technical staff to accommodate the expected increased future sales There are no material unused sources of liquid assets.
For the three months ended March 31, 2013, there were no capital expenditures.
To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. The Company expects that in the future, any excess cash will continue to be invested in high credit
quality, interest-bearing securities.
The Company will likely require additional funds to support the development and marketing of its new Freedom product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be unable to develop or enhance its 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.
The Company does not have any material commitments for capital expenditures as of March 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Related Party Transactions
None.
Critical Accounting estimates and judgements:
Critical Accounting Policies:
The Company’s discussion and analysis of its financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon the Company’s financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the allowance for doubtful accounts, inventory
obsolescence, the provision for future warranty costs, the estimated useful lives of equipment and intangible assets, the deferred tax valuation allowance, and assumptions used to determine the fair value of stock-based compensation. Details are
provided for critical estimates are as follows:
The Company follows the cost reduction method of accounting for investment tax credits and recognizes the estimated net recoverable amount when reasonable assurance exists as to their collectability. Investment tax credits claimed are ultimately
subject to finalization of a review by Canada Customs and Revenue Agency. No assurances can be provided that the Company’s investment tax credit claims will be accepted as filed.
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience,
customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectability of the Company’s trade accounts receivable balances. If the Company determines that the financial conditions of any of its
customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made. The Company reviews its intangible assets on an annual basis for impairment. The intangible assets are comprised of
Enterphone service contracts. Management specifically reviews the number of contracts on hand and if there will be significant future cash flows to be generated from these contracts. If the Company determines that there is impairment, then a
write-down will be made.
The Company maintains an allowance for inventory obsolescence. Management reviews the inventory on a quarterly basis by directly testing for obsolete inventory. The Company increased its provision for obsolete inventory by approximately $117,042
during the fourth quarter of 2012, as a result of a revised estimate by management.
Income taxes are accounted for under the asset and liability method. Under this method, to the extent that it is not more likely than not that a deferred tax asset will be recovered, a valuation allowance is provided. In making this determination,
the Company considers estimated future taxable income and taxable timing differences expected to reverse in the future. Actual results may differ from those estimates. Derivative financial instruments that are not classified as equity and are not
used in hedging relationships are measured at fair value. These include derivative warrant liabilities and derivative conversion option liabilities. Susequent changes to the estimated fair value are recorded in the statement of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recent accounting pronouncements
In July 2012, the FASB issued an update related to annual impairment testing for indefinite-lived intangible assets which provides companies with the option to perform a qualitative impairment assessment for their indefinite-lived intangible assets
that may allow them to skip the annual fair value calculation. The qualitative assessment is similar to the screen companies can use to determine whether they must perform the two-step goodwill impairment test. Companies must identify and evaluate
changes in economic, industry and company-specific events and circumstances that could affect the significant inputs used in determining the fair value of these assets. This ASU is effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012.
In June, 2011, the FASB issued ASU No. 2011-05, which amends ASC Topic 220, Comprehensive Income. Under the amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each
component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement
of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU
should be applied retrospectively.
Additionally, the FASB issued a second amendment to ASC Topic 220 in December 2011, ASU No. 2011-12, which allows companies the ability to defer certain aspects of ASU 2011-05. For public entities, these amendments are effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures.
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations
or cash flows.