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 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 June 30, 2014, the foreign exchange rate certified by the Federal
Reserve Bank of New York was CAD$1.0670 for USD$1.0000 or CAD$1.0000 for
USD$0.9372.
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
Results of Operations
Sales for the three months ended June 30, 2014 and 2013 were
$1,356,163 and $1,041,088, respectively, an increase of $315,075 or 30.3%.
Sales for the quarter ended March 31, 2014 were $936,873. This quarter ended
June 30, 2014 has increased to $1,356,163, an increase of $419,290, or 44.8%, as
compared to the first quarter ended March 31, 2014. Sales for the six months
ended June 30, 2014 and 2013 were $2,293,036 and $1,869,408, respectively, an
increase of $423,628 or 22.7%. Freedom sales for the three months ended June
30, 2014 and 2013 were $547,654 and $203,882, respectively, an increase of
$343,772 or 268.6 %. Freedom sales for the six months ended June 30, 2014 and
2013 were $765,077 and $345,128, respectively, an increase of $419,949 or 221.7%
. The bulk of this increase was the rapid growth of Freedom and Liberty sales
which were just starting in 2013. MESH sales for the three months ended June 30,
2014 and 2013 were $480,313 and $483,878, respectively, a slight decrease of
$3,565 or 0.7%. MESH sales for the six months ended June 30, 2014 and 2013 were
$883,653 and $911,145, respectively, a decrease of $27,492 or 3.0%. For the six
months ended June 30, 2014 and 2013, Freedom sales were 33.4% and 18.5%,
respectively, of total sales. For the six months ended June 30, 2014 and 2013,
MESH sales were 38.5% and 48.7%, respectively, of total sales.
On the legacy business side, MESH sales have continued their
slow decline due to the age of our low end product, and a lack of a mid-range
product for the marketplace. Only our high-end MESH touch screen product is
continuing to grow. 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.
On the new product lines, our 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
Freedom server either in the building or anywhere in the world. The software
component of Freedom is a web browser security operating platform. Unlike
control panels, the user database and the door control software is processed 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 costly hardware every time a
reader is added to the system.
The Company also provides legacy Enterphone support and
maintenance services pursuant to service contracts that were assigned to us from
Telus Corporation in 2003. Sales from the 1,219 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 property management and building owners as well as
various residential, business and industrial users of Enterphone access control
and security systems. During the six months ended June 30, 2014 and 2013,
customer service contracts and new equipment sales generated aggregate sales
revenues of $495,040 and $627,573, respectively, a decrease of $132,533 or 21.1%
. This decrease was due to a $30,000 decrease in service contract expirations
and the balance was due to decreased installation projects.
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 1,219 at June 30, 2014, as
compared to 1,286 at June 30, 2013. Service contracts continue to decrease at
approximately 1% per quarter due to contract expirations, as customers switch
from the older Enterphone units, under contract, to new products under warranty.
The Company continues to amortize the cost of the service agreements on a
straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At June 30, 2014, the cost of the service agreements, net of accumulated amortization, was $15,670.
Cost of sales and services as a percentage of sales was 50.0% and 40.2% for the three months ended June 30, 2014 and 2013, respectively. Cost of sales and services as a percentage of sales was 52.6% and 40.5% for the six months ended June 30, 2014
and 2013, respectively. Cost of sales increased due the inclusion of our Service Division cost, which was previously included in selling, general and administration expenses in quarter ended March 31, 2014. 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 June 30, 2014 and 2013 was $677,816 and $622,903, respectively, an increase of $54,913 or 8.8%. Gross profit for the six months ended June 30, 2014 and 2013 was $1,086,394 and $1,112,332,
respectively, a decrease of $25,938 or 2.3%. This corresponds with increased sales and a reclassification of cost of sales for the three and six months ended June 30, 2014, as compared to three and six months ended June 30, 2013.
Selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 were $2,729,210 and $869,354, respectively, an increase of $1,859,856 or 313.9%. Selling, general and administrative expenses for the six
months ended June 30, 2014 and 2013 were $3,539,356 and $1,576,169, respectively, an increase of $1,963,187 or 224.6%. Included in the selling, general and administrative expenses for the three and six months ended June 30, 2014 is
$1,730,770 of non-cash stock compensation expense for the issuance of warrants and stock options to, management, and staff. Excluding this compensation expense from selling, general and administrative expenses the three and six months periods
ending June 30, 2014 would result in totals of $998,440 and $1,808,586, respectively, a significant reduction in true SG&A expenses, excluding the non-cash charges. This non-cash compensation expense inclusion skews the percentages for
the six months ended June 30, 2014 selling, general and administrative expenses, as a percentage of sales, to be 154.4%, as compared to the six months ended June 30, 2013 being 84.3%. Excluding the compensation expense from the selling, general and
administrative expenses for the six months ended June 30, 2014 would result in selling, general and administrative expense as a percentage of total sales to be 78.9%. Consulting fees for the six months ended June 30, 2014 and 2013 were $325,724
and $468,250, respectively, a decrease of $142,526 or 30.4%. This decrease was due to some consultants becoming employees of the Company.
Research and development costs for the three and six months ended June 30, 2014 were gross $170,780 and $292,023, respectively. Research and development costs for the three months ended June 30, 2013 were gross $113,690. The quarter
ended June 30, 2014 increased $57,090 over the quarter of June 30, 2013 due to the hiring of three newly created technical support positions. Government grants for the three months ended June 30, 2013 totaled $72,925, resulting in net
research and development costs of $40,765. Research and development costs for the six months ended June 30, 2013 were gross $218,356. Government grants for the six months ended June 30, 2013 totaled $144,426, resulting in net research
and development costs of $73,929.
Loss before other items for the three month period ended June 30, 2014 was $2,231,523, as compared to a loss before other items of $293,196 for the three month period ended June 30, 2013, an increased loss of $1,938,327. Included in the
net loss for the three month period ended June 30, 2014 was a non-cash compensation expense of $1,730,770 for the issuance of warrants and stock options to management and staff. Otherwise, excluding this compensation expense would result in a
loss before other items for the three months ended June 30, 2014 of $500,753. This adjusted loss before other items of $500,753 is an increased loss of $207,557, as compared to the loss before other items of $293,196 for the three
months ended June 30, 2013. Loss before other items for the six month period ended June 30, 2014 was $2,760,185, as compared to a loss before other items of $549,767 for the six month period ended June 30, 2013, an increased loss of $2,210,418. Included in the loss for the six months ended June 30, 2014 was a non-cash compensation
expense of $1,730,770 for the issuance of warrants and stock options to management and staff. Otherwise, excluding this compensation expense would result in a loss before other items $1,029,415 for the six months ended June 30, 2014. This
adjusted loss before other items of $1,029,415 shows an increased loss of $479,648 for the six months ended June 30, 2014, as compared to the loss before other items of $549,767 for the six months ended June 30, 2013.
Liquidity and Capital Resources
Cash as of June 30, 2014, as compared to December 31, 2013 was $1,324,116 and $172,684, respectively, an increase of $1,151,432. The Increase was mainly due to completing three private placements in March 2014, raising a gross aggregate
of US$2,260,200. Net proceeds after placement fees, legal costs, and operational costs resulted in a net cash raise of approximately $1,986,952.
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.
On May 17, 2013, Viscount Systems, Inc. completed a private placement of 4,750,000 units at a price of $0.10 per unit for total proceeds of $475,000. On May 21, 2013, the Company completed an additional private placement of 2,000,000 units
at a price of $0.10 per unit for total proceeds of $200,000. Each unit consists of one common share and one-half of one share purchase warrant of the Company, with each whole warrant exercisable to acquire an additional share of the Company
at a price of $0.20 for a period of three years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a cash commission of $7,500 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of $0.20 per share for a
period of three years from the closing date. The warrants may be exercised on a cashless basis.
On March 11, 2014, Viscount Systems, Inc. completed a private placement of 8,333,329 shares of common stock at a price of $0.09 per share for total proceeds of $750,000. The Company also issued a total of 4,166,659 warrants, each warrant
exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
In connection with the offering, the Company paid to a registered broker-dealer a commission of $71,000 in cash and share purchase warrants to acquire 788,888 shares of common stock of the Company at a price of $0.09 per share for a period
of five years from the closing date. The warrants may be exercised on a cashless basis.
On March 27, 2014, Viscount Systems, Inc. completed a private placement of 16,502,220 shares of common stock at a price of $0.09 per share for total proceeds of $1,485,200. The Company also issued a total of 8,251,107 warrants, each warrant
exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
On March 31, 2014, the Company issued an additional 277,778 shares of common stock at a price of $0.09 per share for total proceeds of $25,000. The Company also issued 138,888 warrants, each warrant exercisable to acquire an additional share
of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a commission of $35,604 in cash and share purchase warrants to acquire 395,599 shares of common stock of the Company at a price of $0.09 per share for a period
of five years from the closing date. The warrants may be exercised on a cashless basis.
At June 30, 2014, the Company had a working capital of $1,572,812, as compared to working capital of $248,877 at December 31, 2013. Working capital had increased by $1,323,935. This increase was due to completing three private placements
in March 2014, raising a gross aggregate of US$2,260,200. The current ratio at June 30, 2014 was 2.57, as compared with 1.24 at December 31, 2013.
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 $14,773,800, reported a loss for the six months ended June 30, 2014 of $3,060,356 and has working capital of $1,578,812 at June 30, 2014. Cash flows used in operating activities for the six months ended June
30, 2014 were $1,149,419. 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 not need to raise
anymore capital to continue normal operations for the next twelve months. If working capital becomes insufficient, 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 hits its sales targets, the Company will have sufficient working capital for 2014. Management continues actively seeking new investors and developing customer
relationships. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.
The accounts receivable turnover ratio was 44 days at June 30, 2014, 61 days at December 31, 2013 and 62 days at June 30, 2013. The outstanding term for our receivables has been decreasing due to more aggressive collection efforts from a few slower
paying customers. The accounts receivable reserve was $234,637 at June 30, 2014, as compared to $250,458 at December 31, 2013. The accounts receivable reserve has decreased by $15,821 or 6.3% since the year ended December 31, 2013.
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 June 30, 2014, the Company’s current assets consist principally of cash, trade accounts receivables, and inventory.
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 June 30, 2014, capital expenditures included the acquisition of $19,052 of new furniture & fixtures, $35,249 for leasehold improvements and $20,582 for a new office telephone system.
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 June 30, 2014.
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
During the period ended June 30, 2014 a total of CDN $26,087 was paid to related parties for director fees. An additional CDN $58,134 was paid to related parties as consulting fees during the period.
Critical Accounting estimates and judgments:
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
$100,000 during the first quarter of 2014, as a result of a revised estimate by management. There was no adjustment to the provision for obsolete inventory during the second quarter of 2014.
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.
Recent accounting pronouncements
The Company has implemented all new accounting pronouncements
that are in effect and that may impact its financial statements and does not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on its financial position or results of
operations.