Item 1. BUSINESS
GENERAL
We are a manufacturer, developer and service provider of access control security products. In 2008, commercial sales of our MESH product line continued to impact our total sales. MESH (Multimedia Embedded Security Hub) was a new technology developed by Viscount that converged voice (intercom, emergency communications), data (access control, elevator control, alarm) and some video to provide increased security at a reduced cost of hardware, cabling and installation and with simplified database management.
In addition to MESH, our current access control and security product lines include the following: Enterphone 2000, a building intercom; Entercheck, a card access system; RadioClik and InfraClik, radio frequency and infrared remote controls; Elektra, liquid crystal display intercom panels; EmerPhone, emergency telephone entry systems; and various accessories. We also have a service division that provides service for the Enterphone 2000. We currently have 1,630 service agreements in place.
Our website address is www.viscount.com. All periodic and current reports are available, free of charge, on our 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 our filings are also available, free of charge, upon request.
BUSINESS OVERVIEW
We design, manufacture and service access control and security products, including intercom and door access control systems and emergency communications systems. These systems use telecommunications wiring to control access to buildings and other facilities for security purposes. While much of our current revenues are derived from sales of the Enterphone technology and related security products, sales from our MESH product line continues to impact and provide a significant source of revenues. Service sales from our existing 1,630 service agreements also continue to provide a significant source of revenues.
MESH is now our leading sales product, accounting for 51.5% of total sales for the year ended December 31, 2008. MESH technology is based on a proprietary software platform that can be used for a variety of security and access control applications as well as communication functions. The technology represents a departure from traditional access control and security systems. Traditional systems use controllers that have a capacity to control from 1 to 8 access points per controller. A building access system using the MESH technology can control several hundred points of access from a single remote hardware and software platform. The technology also allows several previously independent building control systems to be hosted on a single hardware and software platform. Our proprietary MESH software is designed to be modular, permitting additional applications to be added as modules, each operating other building and area control systems and high technology requirements.
Enterphone continued to provide a consistent source of revenue, accounting for 17.7% of total sales for the year ended December 31, 2008. Enterphone is a building access control system that uses a building’s internal phone wiring thereby avoiding use of telephone utility services. Our products include access control panels that use the
Enterphone technology. Our control panels are typically installed at entrances to apartment buildings, government facilities, and other buildings and facilities where security concerns require access control systems. The control panels are sold in various formats and with varying features and capabilities. Our Enterphone technology control panels are sold through an established distribution network, and can be found installed in approximately 35,000 buildings throughout North America. We also package and sell access control and security products that are complementary to our Enterphone product, including card access systems, radio frequency remote controls, intercom monitors and closed circuit cameras.
COMPANY HISTORY
Our current business is operated primarily through our wholly owned subsidiary Viscount Communication and Control Systems Inc. The business of our 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 our products. Blue Mountain Technologies Inc. simultaneously assigned its contractual rights to acquire all of the business assets, except for certain leasehold interests, to our subsidiary, Viscount Communication. BC Tel consented to the assignment and accordingly the business was acquired by our subsidiary, Viscount Communication and Control Systems Inc.
We were incorporated on May 24, 2001 under the laws of the State of Nevada under the name OMW4 Corp. Our subsidiary, Viscount Communication was incorporated in 1997 under the laws of British Columbia, Canada, for the purposes of carrying on our present access control business. We 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 our 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, we changed our name to Viscount Systems Inc. effective August 27, 2001.
In 2003, we 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. Mirroring the increased security awareness in buildings over the past few years, we have been providing a more comprehensive package of complementary products. Products packaged, using third party technologies for this purpose, include card access systems, radio frequency remote controls, intercom display panels and closed circuit cameras.
The MESH product line, which has been under development since 1998, is an integrated platform for building access control and management. MESH continues to be the focus of our corporate development.
INDUSTRY OVERVIEW
We compete 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. Our 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 doors or elevators in order to gain access.
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.
The building control industry has traditionally been highly segmented based on function. 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. 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 instead of convergence. Integration is the use of a host computer to tie separate and distinct systems, typically from different manufacturers, together on a common software platform. Convergence, in the case of building control systems, is the provision of a new service that is designed to operate multiple systems using homogenous control parameters. Convergence is generally considered preferable to integration, as fewer distinct systems means lower operational and maintenance costs.
Along with certain other industry participants, we have turned to current high-technology solutions in order to reduce costs of ownership of security systems, while improving functionality. We have 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 access control industry has traditionally used a technology known as Wiegand. Approximately 90% of the world’s installed access systems are based on Wiegand technology. 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 Senso Engineering as an access card technology. The card technology uses a special patented process whereby wires are imbedded in a plastic access card to encode its data. When passed through a magnetic field generated by a card reader, the card generated a signal which is received and interpreted by the card reader. If the signal is recognized, the reader will transmit the information to a host controller to activate a switch, which for example purposes, may release a lock or open an elevator to permit building access to the cardholder. A host controller is essentially computer hardware that is programmed to receive information from the card reader in order to permit access to a building. Wiegand technology has established itself as the industry standard as it is viewed as being reliable and difficult to counterfeit the access cards.
Other products that use the Wiegand principals for access control are magnetic strip cards and radio frequency cards. These products function similarly by providing a card reader with a signal that the reader interprets and transmits to a host controller in order to grant or deny access.
Wiegand access control technology requires card readers that are connected to a host controller. 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 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.
As a result of the limitations and hardware requirements of the traditional access control systems, some security industry manufacturers are developing and marketing “intelligent” access control and communications systems. Intelligent systems allow several previously independent building control systems, such as intercom, access control, video, and climate control, to be controlled by a single server. These systems are based on software designed to control hundreds of readers from a single computer server, combined with “smart chips” installed in readers at each control point. Smart chips are programmable computer chips that permit access card readers to grant or deny access without the need to relay a signal to and from a central host controller. Smart chips can be programmed to perform tasks for a diverse range of building control systems, such as fire alarm systems, heating/ventilation and air conditioning, and building access and elevator controls. As the smart chip is programmed to make its own decisions on a given application, this reduces the load on the central host computer. The host computer accordingly performs primarily a monitoring and information collection function.
We are participating in this advance in the access control industry with our proprietary MESH intelligent access control and communication technology system. We believe that intelligent systems, including smart chip readers and cards will replace reliance on systems based on Wiegand technology.
PRODUCTS
We are a manufacturer, developer, reseller and service provider of intercom and access control systems based on telephone, new and traditional access card and reader technologies. Our 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.
For the year ended December 31, 2008, approximately 20% of total sales of our products and services were generated in the United States, and 80% in Canada. This represents a change from 2007, where sales to the United States and Canada were 23% and 77%, respectively. The change is in part due to increased sales of products and services in Canada as a result of our acquisition of service agreements and inventory from Telus Corporation. Information on our existing products can be viewed on our website at www.viscount.com.
Our Enterphone Access Control Products
Historically, our principal product was the Enterphone intercom and access control system. Enterphone is our 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 our 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 our Enterphone system distinct from other “dial-up” telephone entry systems that use telephone company lines. Sales of our products based on the Enterphone system account for approximately 18% of our total sales in fiscal 2008. This is down from approximately 30% in fiscal 2007, due in part to the development of other sources of sales, including Enterphone maintenance contracts, new product lines, and our OEM product lines.
Our 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.
We also manufacture electronic entry access panels that can operate using either our Enterphone system, or dial-up telephone company lines. Our panels are manufactured in various sizes and with various features in order to accommodate varying purposes and building types. For example, we manufacture 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 we manufacture incorporate the Enterphone technology, however most panels can also be installed to use telephone company lines.
Our 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. We purchase these technologies from other manufacturers and resell them under our brand names. Most of the products that we resell can be integrated into our Enterphone access control system.
Our MESH Access Control System
Overview
MESH is a software based building management system designed to replace traditional systems that are more hardware intensive. We continue to develop this technology that was started in 1998. MESH was pre-commercially released in late 2003.
MESH is a software platform that communicates with a network of “intelligent” input/output devices, such as card readers or building environment sensors. As such, the “intelligence” of the system can be said to be distributed among the input/output devices. This is contrasted with the traditional access control industry, which uses “dumb” readers that require information to be processed at a central host computer. An “intelligent” reader or input/output device uses a pre-programmed “smart chip” which allows it to process information on its own, and does not require the host computer to make action decisions, such as to grant or deny access to a door or to activate air-conditioning. The use of “intelligent” devices accordingly reduces the load on the host computer which allows the host computer to allocate its resources to a greater number and diversity of tasks. The networked distribution of “intelligent” devices also means reduced cost resulting from reduced hardware requirements, easier training of control system operators, and the use of commercially available host computer hardware and communication techniques. Initially, we will apply the MESH technology for access control system purposes.
The conceptual basis for MESH is simple. Virtually every low voltage building technology, except building access, has evolved using “intelligent” addressable network devices. This includes fire alarms and heating/ventilation and air-conditioning. An addressable network is one in which devices can constantly communicate with a host server controller or can be polled for information. For example, if a smoke detector on a non-addressable fire alarm system fails, a fire in that location may go undetected since there is no way to identify the failure without actually testing the device. In contrast, the “smart chip” in an addressable smoke detector may be able to notify the fire panel of a problem immediately and call for service. Access control systems, however, continue to be based on a 30-year-old standard called Wiegand. The limitations of this standard continue to plague the industry due to the slow data transmission speed (9600 baud) between the reader and the host controller, the high cost and quantity of specialized and dedicated hardware, and the inability of the host computer to process voice or video signals. For example, buildings requiring elevator access control have traditionally required a significant amount of expensive dedicated hardware. The MESH network with “intelligent” readers can accomplish these functions without dedicated hardware, resulting in cost reductions, both in terms of the actual hardware required and the labor, cable and conduit costs associated with installation.
The MESH system bypasses the need for specialized and dedicated hardware. Instead, MESH provides a software-based platform that operates on an industrial computer server connected to “intelligent” readers transmitting data at high speed rates of up to 156,000 baud, while simultaneously running voice and video applications. The benefits and functionality derived from this approach can be significant.
MESH Structure
The MESH network consists of a main control computer server communicating with a series of “intelligent” readers, panels, and input/output devices. The key to the technology is the “smart chip” we use, known as the MPNode computer chip, a programmable chip. We purchase the MPNode chips and program them to perform certain functions upon detecting certain data. For access control applications, the chip is installed into a card reader. When data from an access card is received by the card reader, the chip processes the data and makes a decision to grant or deny access. Information on the transaction is passed along to the host computer for data storage and analysis
purposes. Traditional Wiegand style card readers require an intermediate controller for every two or three reading devices. An intermediate controller is connected between the host computer and the group of readers controlled by it. In contrast, the MESH systems allows “intelligent” readers to be installed in series, or daisy-chain fashion, without the need for intermediate controllers. Small interface modules are used instead to maintain data flow. This reduces hardware costs as only one host computer is required.
MESH panels, located at entrance doors for visitor access, can operate independently or as slaves off the MESH server. The basic MESH panel that we have 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.
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 our 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 our 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. We have developed various modules for our MESH technology, and we intend to develop further modules which will be released in a series of phases. Some of these product enhancement modules are described below:
MESH Photo-badging software is being designed to allow digital photo-imaging of individuals accessing a building, which can be stored in a database. This module is currently in development.
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.
A new and emerging market segment tracks not just people, but equipment. A typical application is the embedding of anti-theft chips in computers, which integrate with card reader systems.
MESH to be a fully Internet Protocal enabled system.
Our other products
Our next generation of Enterphone systems, called Enterphone X, “EPX”, was released during the second quarter of 2008. EPX has replaced EP2000. 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.
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 our ability to market MESH.
Our other products include RadioClick and InfraClick. These are remote control access control products for doors and parking gates. They are sold separately or as complementary to our Enterphone, Entercheck and MESH systems. We also manufacture and sell EmerPhone, an intercom system that is sold in elevator phone, emergency phone and entry phone applications.
OTHER SERVICES
In addition to sales of our Enterphone, MESH and OEM products, we also service approximately 1,630 existing Enterphone installations within Western Canada.
PRODUCTION
Viscount has facilities for circuit board manufacture and mechanical assembly. We use a range of processes to produce our products. Some products including Enterphone, Infraclik, and Axess are completely manufactured in-house. MESH and Emerphone use outsourced circuit boards with final assembly and software installed at Viscount. Some access control, card readers, Elektra panels, Infraclik and various product accessories are purchased from other manufacturers and resold under our brand-names. We maintain full facilities to assemble through-hole circuit boards and limited facilities for assembling surface mount circuits. We have 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.
The MESH software platform is loaded on standard industrial computer chassis. We are 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 off-the-shelf components, we improve our time to market, eliminate hardware debugging and increase our ability to be technologically flexible in the future. We are primarily executing final mechanical assembly of the MESH systems.
RESEARCH AND DEVELOPMENT
Our research and development continues to be focused on enhancing MESH. A number of these enhancements were identified in the “MESH Structure” and “Our other products” section of this document. Specific custom MESH applications are being considered, evaluated and implemented. An example of this process would be considering built-in badging printers and a virtual concierge. We estimate that our expenditures in connection with research and development during the last two fiscal years totaled $644,565.
MARKET AND MARKETING
The Market
The intercom and access control market is serviced by a number of large and small competitors. Our traditional products compete in a mature market place that largely uses the 30 year old Wiegand technology. We believe that there currently exists an opportunity in the building and access control market for innovative products that use current technologies to reduce user costs. We have positioned our MESH technology to take advantage of this opportunity.
The access control market can generally be described as the market for any equipment used to control passage through a door, gate 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 we compete in involves computerized access control systems that typically control access through multiple access points, such as our Enterphone system. MESH was designed to present a new technology to this computerized market niche. In particular, in large high-rises with a full MESH system, individual tenants may use the MESH server to control access to one or two doors.
Our traditional market for our 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 our first in-house product that addresses these multiple requirements. The modular nature of MESH also provides us 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 our core business, while allowing us to find applications where the new features expand the traditional market for such systems.
We are 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 our 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.
While complete MESH networks will typically be installed, the modular nature of MESH allows additional segmentation based on product application and end-user need. The nature and scope of a MESH installation depends on the level of security required, the product alternatives, the number of buildings, and the level of system management required. The nature and scope of an installation can be described in terms of a user spectrum ranging from price sensitive users to users requiring enhanced services. At one end of this spectrum is price. For these applications MESH has been competing with traditional Wiegand systems. We believe the cost reduction aspects of MESH has provided us with a competitive advantage over traditional Wiegand systems. For example, a typical condominium developer does not manage a building after construction. Therefore, the developer is looking for a very affordable, reliable access control system. Unless a more sophisticated product will help sell suites, the developer tends to keep the system simple. At the middle of the spectrum are customers who will adopt MESH mainly due to system benefits. For a commercial high-rise this may be the flexibility derived from a new user profile approach MESH uses for programming. On the enhanced service end of the spectrum we find customers who need to develop a much closer relationship due to the level of sophistication of their needs. At this level, we anticipate additional revenue opportunities for custom programming, data mining and hosting, and direct installations for national accounts.
While the core function is controlling access/egress, through the planned development of various MESH technology modules, we have been actively targeting all of these segments. For example, a MESH add-on module can be developed to provide an asset tracking system to prevent computer theft. The inherent alarm functions of MESH allow it to be used as an integrated theft/burglar alarm system for large facilities. The MESH telephony video capture function will allow government agencies to track alcohol and drug problem tenants of controlled housing complexes or other regulatory monitoring functions. Finally, MESH, along with our EmerPhone, can function to combat vandalism and to secure parking lots.
We rank controlling access/egress and securing parking facilities as the primary concerns of our traditional core multi-residential business.
Distribution Plan
We currently have approximately 500 dealers for our existing products throughout North America. When our existing business was acquired from BC Tel, we relied primarily on exclusive and semi-exclusive dealers in certain major metropolitan areas. Our distribution network is not static and we are constantly seeking additional sales channels. In October and November of 2003, we signed a distributor deal with Tri Ed, the security distribution subsidiary of Tyco. The agreement placed our security products in 27 Canadian and U.S. Tyco branches, including Denver, Dallas, Phoenix, Seattle and six locations in California.
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, our employees may be directly involved with the customer in designing, installing and servicing the product. In other cases, our 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 our existing dealer base, gave us immediate access to the largest networks of dealers in the US, Canada and Mexico.
During the past year, we have been targeting our existing markets for the sale of our MESH technology, as well as targeting the international marketplace. Internationally, we have sold MESH in China, India, France, and New Zealand. MESH is designed to accommodate foreign languages with minimal modifications to the software. This is in contrast to other products of its type which require a heavy software investment to provide alternative language software. With MESH, the core software can be applied in all languages with only the on screen text displays needing to be translated. Translation can be accomplished using commercially available translation software.
MESH Marketing Strategy
We have been using our established distribution channels, as well as new distribution channels to access our target markets for the MESH technology. As a unique technology, however, end-users as well as dealers must be educated about MESH benefits. It is our experience that a stronger initial emphasis on end-user decision-makers and large national system integrators will be the most effective in developing the MESH market.
Advertising
Our products are advertised on an ongoing basis in various print publications, which we 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 sales per advertising dollar spent ratio. While the sales cycle is sometimes fairly long, this approach has given us a very accurate measure of the effectiveness of various publications and individual ads.
Trade Shows
During 2008, we reduced our participation at tradeshows to reduce costs. During 2009, we will consider attending certain tradeshows that will provide increased exposure for MESH.
Direct Marketing
We continued educating customers about our MESH technology by holding MESH training seminars throughout the U.S. and at hour head office.
Pricing Strategy
Our system provides features never before available in a building control security system. The MESH 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.
With a unique product and a position of product leadership, we have devised a strategy of building market share. This strategy involves selling MESH at reasonable 50-60% margins. With the telephony component, we have 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
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. Recent examples are the purchase of Cardkey by Johnson Controls, Guardall by Chubb and ADI/Northern Computers by Honeywell. The access control industry is very 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. Due to these limitations, most research and development is focused on cost reducing hardware and making the control hosts more network capable. In all cases, the manufacturer using traditional Wiegand technology are limited from 1 to 8 doors per host.
Competitive Threats
We have a strong dealer and distribution plan in place and MESH has positioned us in a market dominated by much larger players. The higher security MESH applications are also somewhat outside of our traditional scope of business and therefore, we are rapidly trying to develop a market for MESH and in the process, educating users of MESH through our training seminars. We believe that our marketing strategies and training seminars will provide benefits that will help us achieve market share that will allow us to be competitive. There is no guarantee that we will be able to successfully compete against our larger competitors.
While MESH 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 addressable fire alarms and we have marketed MESH 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 we still have a three-year market lead. Fortunately, the wide range of MESH software applications should provide us with an ongoing lead, as long as we are aggressive with research and development.
INTELLECTUAL PROPERTY
We will rely 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 our Enterphone, MESH and other Viscount products. We have contractual rights with respect to registered North American trademark and trade name for Enterphone (word alone). We are still considering registering North American tradenames for MESH.
We have registered active Internet domain names for www.viscount.com , www.enterphone.net, and www.enterphone.org.
Our standard employment agreements and license agreements contain provisions that protect the confidentiality of our proprietary property. All our employees and sales agents are required to sign these agreements prior to their employment or engagement.
To date we have not received notification that our services or products infringe the proprietary rights of third parties. Third parties could however make such claims of infringement in the future. We 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 our services, thereby substantially reducing the value of our proprietary rights. Furthermore, there can be no assurance that any confidentiality agreements between us and our employees or any license agreements will provide meaningful protection for our proprietary information in the event of any unauthorized use or disclosure of such proprietary information.
GOVERNMENT REGULATIONS
Some of our 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 us 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.
After the break-up each regional telephone company began to make its own decisions. As a result of this, Chicago, New York, and Boston became strong markets for the Enterphone. Another result of government deregulation was that many telephone companies withdrew from the access control systems industry, which resulted in our using direct dealers in those regions.
OUR SOURCES OF REVENUES
The majority of the Company’s revenues were derived from the MESH and Enterphone product lines. In fiscal 2008, MESH sales represented 52% of total revenue, while Enterphone product sales represented 18% of total revenue. The balance of the Company’s revenues were derived from service agreements, and other products such as access tracking and control, closed circuit monitors, infrared and radio frequency remotes.
EMPLOYEES
Viscount employs twenty five staff at its production facility and head office located in Burnaby, British Columbia, Canada.
Item 1A.
Item 1A. RISK FACTORS
You should carefully consider the following risk factors and other information in this annual report and in our filings with the Securities and Exchange Commission when you evaluate our business and the forward-looking statements that we make in this annual report.
We cannot be certain that the market will accept our new MESH™ technology as necessary to generate an economically viable level of sales. We may not be successful at achieving a profitable level of sales of our MESH technology.
Our ability to achieve significant growth is largely contingent upon the success of our MESH technology. The building access control industry is currently based upon well established and reliable technology that our MESH™ technology is designed to replace. Our technology has only recently been available commercially and as a consequence we have little data on which to establish a track record of market acceptance and sales. It is too soon to determine whether we will be able to gain a significant level of commercial acceptance of our MESH™ product. If we are unsuccessful at marketing and selling our MESH™ modules in sufficient quantities, we may not be able to achieve significant or sustained growth, and as a result the value of an investment in our common stock may decrease.
Other companies with greater resources than we have are currently developing or have commercially available products that use similar technology to our MESH™ product, and we may lose potential market share as a result.
Our MESH™ access control product is based on intelligent access modules, which use commercially available programmable microchip technology. Due to increasing availability and decreasing price of programmable microchips, the development and commercialization of “intelligent” access control systems is not unique to us. There are other companies that have developed or are developing similar products that use intelligent cards and card readers that will be competing with us in the access control industry. These competitors may have substantially greater financial, technical, marketing, and management resources than we have. Our ability to compete successfully will depend on several factors including timing of taking our MESH product to market and our ability to educate and use existing sales channels and develop new sales channels. To the extent that our requirement for additional financing may cause delays in the marketing of our MESH product, this may provide some of our better funded competitors with a competitive advantage in their ability to access the markets before us. To the extent that our competitors have more resources to market products based on similar technology, we may lose market share which would decrease the value of an investment in our common stock, or may cause the value of an investment in our common stock to decrease.
The loss or unavailability of Stephen Pineau, our President, Principal Executive Officer, and Principal Financial Officer for an extended period of time could adversely affect our business operations and prospects.
Our success depends, to a significant degree, upon the effort and skill of Stephen Pineau, our president and principal executive officer. We do not maintain key man insurance on Mr. Pineau. Due to his knowledge of our operations and products, the loss, incapacity, or unavailability of Mr. Pineau could have a material adverse effect on the business, financial condition or results of our operations, which would likely result in a decrease in the value of an investment in our common stock.
Because our common stock trades at prices below US$5.00 per share, and because we are not listed on a national exchange, there are additional regulations imposed on broker-dealers trading in our shares that may make it more difficult for you to resell our shares.
Because of rules that apply to shares with a market price of less than US$5.00 per share, known as the “penny stock rules”, investors in this offering will find it more difficult to sell their securities. The penny stock rules currently apply to trades in our shares. These rules in most cases require a broker-dealer to deliver a standardized risk disclosure document to a potential purchaser of the securities, along with additional information including current bid and offer quotations, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
Our directors and officers hold approximately 47% of our common stock and acting together may have the ability to control management and affairs of Viscount and to deter changes in control.
Our directors and officers collectively hold approximately 47% of our current issued and outstanding voting shares. As a result, such persons, acting together, may have the ability to control most matters submitted to our stockholders for approval, including the election and removal of directors, and to control the management and affairs of Viscount. In addition, our Articles of Incorporation include provisions that management can use to retain control over Viscount. Accordingly, such concentration of ownership, coupled with management friendly anti-takeover provisions, may have the effect of delaying, deferring or preventing a change in control of Viscount, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which limits the ability of our stockholders to participate in opportunities that may increase the value of their stock.
Item 2.
Item 2. DESCRIPTION OF PROPERTY
PROPERTY
Our executive office and central factory is located in Burnaby, British Columbia, where we currently lease 12,040 square feet. We lease this space under an industry standard operating lease with a term expiring May 31, 2010, renewable at the option of Viscount. Current monthly lease obligations are $10,921. We believe that our current facilities are adequate and are suitable for our current use, and that suitable additional facilities will be available, when needed, upon commercially reasonable terms. Our facilities are adequately insured against perils in a manner consistent with industry practice.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company was named as the sole defendant in litigation for wrongful dismissal that involves a former employee. The Company filed a defense to this claim and is actively defending its position. At this time, the likelihood of the outcome is not determinable and no provision has been made for the claim in the accounts.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
Item 5.
Item 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES
Trades in our common shares are quoted on the Over-the-Counter Bulletin Board (OTC Bulletin Board) which is a quotation service administered by the Financial Industry Regulatory Authority (FINRA). Our trading symbol on this service is “VSYS”.
The OTC Bulletin Board has a limited and sporadic trading market and does not constitute an established trading market. Our shares began trading on February 12, 2002. The following table sets forth the range of high and low price information of the common shares as reported on the OTC Bulletin Board for the last two fiscal years and the subsequent period ending February 12, 2009. The price information available reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
As of January 2, 2009 there were 39 holders of record of our common stock, holding a total of 17,841,250 shares, and an unknown number of beneficial holders.
We have not declared any dividends in the last two fiscal years.
The following table sets forth information respecting our compensation plans as at December 31, 2008, under which shares of our common stock are authorized to be issued.
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation plans approved by security holders 3,363,800 US$0.30
Equity compensation plans not approved by security holders
N/a N/a N/a
Total 3,363,800 US$0.30
Item 6.
Item 6. SELECTED FINANCIAL DATA
Not applicable.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. All dollar amounts are in Canadian dollars unless otherwise noted.
RESULTS OF OPERATIONS
Sales revenues for the years ended December 31, 2008 and 2007 were $5,102,434 and $4,970,967, respectively, an increase of $131,467 or 2.7% . The increase in sales for the year ended December 31, 2008 resulted from increased sales of our MESH system and continued steady sales of our legacy Enterphone 2000 system. MESH sales for the years ended December 31, 2008 and 2007 were $2,627,308 and $1,875,469, respectively, an increase of $751,839 or 40.1% . MESH sales for the year ended December 31, 2008 were 51.5% of total sales, as compared to 37.7% of total sales for the year ended December 31, 2007. MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management.
Enterphone 2000 sales for the years ended December 31, 2008 and 2007 were $902,663 and $1,469,011, respectively, a decrease of $566,348 or 38.6% . Enterphone 2000 sales for the year ended December 31, 2008 were 18% of total sales, as compared to 30% of total sales for the year ended December 31, 2007. As an old technology, Enterphone sales have been dropping for several years and negating much of our MESH growth. MESH EPX is the replacement for our old Enterphone system. MESH EPX is the next generation of Enterphone systems but with features that are compatible with high speed internet and other newer technologies. With MESH EPX, we can anticipate recovering our lost Enterphone revenue while continuing to increase our MESH business.
We also provide Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,630 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $33 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 twelve months ended December 31, 2008, customer service contracts and new equipment sales generated aggregate sales revenues of $1,638,913, as compared to $1,516,485 for the year ended December 31, 2007, an increase of $122,428 or 8.1% . These two comparative years are consistent. These sales included MESH sales by the service division.
The intangible assets held by the Company are comprised primarily of service agreements for our product known as “Enterphone 2000”. The number of service agreements held by the Company decreased from 1,664 at December 31, 2007 to 1,645, 1,634, 1,638, and 1,630 at March 31, June 30, September 30, and December 31, 2008, respectively. During the four quarters of 2008, the Company performed a test for impairment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) 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 based on the provisions of SFAS 142. 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 December 31, 2008, the cost of the service agreements, net of accumulated amortization, was $130,576.
The cost of sales as a percentage of sales was 40.6% for the year ended December 31, 2008, as compared with the cost of sales as a percentage of sales of 43.6% for the year ended December 31, 2007. Costs of sales as a percentage of sales had remained consistent due to management’s commitment of reviewing input costs regularly. Our policy of managing cost of sales remains the same. We are continuously focusing on controlling costs, by using multiple suppliers to ensure that the best and most inexpensive raw materials are used in our products.
Gross profit for the year ended December 31, 2008 was $3,032,238, as compared to $2,803,278 for the year ended December 31, 2007, an increase of $228,960 or 8.2% . This increase corresponds with the increased sales revenues and consistent cost of sales percentage for the year ended December 31, 2008.
Selling, general and administrative expenses were $2,722,946 and $3,059,721 for the years ended December 31, 2008 and 2007, respectively, a decrease of $336,755or 11.0% . This decrease was due to decreases in variable costs such as advertising, travel, tradeshow and various office expenses. As a percentage of sales, selling, general and administrative expenses were 53.4% and 61.6% for the years ended December 31, 2008 and 2007, respectively.
Research and development costs were $331,737 for the year ended December 31, 2008, as compared to $312,827 for the year ended December 31, 2007. Research and development costs increased by $18,910 or 6.1% . Research and development costs remained consistent.
Loss before income tax for the year ended December 31, 2008 was $(86,364), as compared to loss before income tax of $(623,570) for the year ended December 31, 2007. This was a decrease in loss of $537,206. The decrease in net loss during the year ended December 31, 2008 was the result of decreased variable costs such as advertising, tradeshow, traveling, and various office expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased as of December 31, 2008, as compared to December 31, 2007. At December 31, 2008, cash totaled $255,172, as compared with the cash of $111,173 at December 31, 2007. This represented an increase of $143,999.
We have a bank credit facility available for an operating loan of up to a maximum of $500,000 at the prime lending rate plus 1.0% . Amounts drawn are repayable on demand. At December 31, 2008, $57,775 was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.
On April 16, 2007, the Company completed a private placement of 1,677,550 units at a price of US$0.16 per unit for gross proceeds of US$268,408. Each unit consists of one common share and one warrant. Each warrant is exercisable at a price of US$0.25 per share until April 16, 2012 to acquire an additional share of common stock.
At December 31, 2008, working capital was $301,036, as compared to a working capital of $349,734 at December 31, 2007. Working capital has decreased by $48,698. The current ratio at December 31, 2008 was 1.28 to 1.0, as compared with 1.31 to 1.0 at December 31, 2007.
The accounts receivable turnover ratio for year ended December 31, 2008 was 61 days, as compared to 63 days for the year ended December 31, 2007, a decrease of 2 days. This decrease was due to better follow up and monitoring of slower paying accounts on a monthly basis by management. The accounts receivable reserve was $336,776 at December 31, 2008, as compared to $223,390 for the year ended December 31, 2007, an increase of $113,386. The reserve was increased to be conservative in recognizing some of the slower paying accounts. Management continues to recognize and remove older doubtful customer accounts from the accounts receivable sub-ledger, as well as more regular follow-up on certain customer accounts to improve the collection process. There had been no significant or material business conditions that would warrant additional increases to the reserve at this time.
For the year ended December 31, 2008, there were no capital expenditures other than the purchase of equipment.
To date, we have not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. We expect that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.
We will likely require additional funds to support the development and marketing of our new MESH product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be unable to develop or enhance our products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.
There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.
We do not have any material commitments for capital expenditures as of December 31, 2008.
There are no known trends or uncertainties that will have a material impact on revenues.
Related Party Transactions
In February of 2008, Stephen Pineau, president of Viscount, loaned the Company $100,000. The loan bears interest at 9.5% per annum, is unsecured and has no fixed terms of repayment.
In April of 2007 we sold 1,677,550 units at a price of $0.16 per unit, with each unit consisting of one share in the common stock of Viscount one share purchase warrant, for aggregate proceeds of $268,408. A total of 815,000 of the units were purchased by Stephen Pineau, president of Viscount.
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 estimated recoverable amounts of investment tax credits, trade accounts receivable, and deferred tax assets. The
Company believes the following critical accounting policies require its more significant judgment and estimates used in the preparation of the consolidated financial statements.
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 an 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. If management determines that obsolete inventory has increased, then an increase in the allowance will be made.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” which changes how business acquisitions are accounted. SFAS 141R, requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and all liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain, provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent considerations); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosure of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No. 51,” which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCI) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company is currently evaluating the future impacts and disclosure of this standard.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful life of Intangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP FAS 142-3 will not have an impact on its financial position and results of operations.
Other recently issued pronouncements are not expected to be applicable to the Company or have significant impact on the Company’s financial statements.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are attached to this report following the signature page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer who is also our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report, we have maintained effective disclosure controls and procedures in all material respects, including those necessary to ensure that information required to be disclosed in reports filed or submitted with the SEC (i) is recorded, processed, and reported within the time periods specified by the SEC, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decision regarding required disclosure.
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2008, the Company’s internal control over financial reporting was not effective based on those criteria. Based on the assessment, management has found the following material weaknesses in internal controls, as follows:
a.
We do not have independent directors. Our principal executive officer and chairman of the board are also the directors of The Company. We do not plan on changing our directors for 2009.
b.
Receivables: The Company’s internal accounting software allowed the same person to input and post receivable transactions.
c.
Payables: The Company’s controls allows for the same person to input and process payments.
d.
Inventory: The Company’s controls allows for the same person to invoice and pick inventory. The Company tightened internal control over its inventory counts and improved verification and valuation processes. Management also performs additional testing and monitoring of its inventory software system.
e.
Adjusting journal entries: The Company has an informal process for allowing clerks who perform other functions within the accounting cycle to perform adjusting journal entries.
f.
IT environment: The Company’s information technology control systems are informal in nature. This environment is lacking segregation of duties and formal security policies.
g.
Audit Committee: The audit committee is comprised of our principal executive officer and chairman of the board. We do not have an independent audit committee member. The audit committee members have some financial reporting expertise.
h.
Code of ethics: We do not have a formal code of ethics. Management is on site daily to deal with any deviations from sound integrity and ethical values. Departures from approved policies and procedures are assessed by management and dealt with appropriately.
The Company management has and continues to take action to correct the known deficiencies and it plans to remain vigilant and to add additional staff and system improvements, as needed, to ensure that its internal control over financial reporting is effective. These efforts include formalizing the assessment process by identifying and scheduling periodic internal testing of the various systems and process involved in its internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
Not applicable.
PART III.
Items 10 -14
Information with respect to Items 10 through 14 is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission on or before May 1, 2009 and is incorporated herein by reference. If the definitive Proxy Statement cannot be filed on or before May 1, 2009, the issuer will instead file an amendment to this Form 10 KSB disclosing the information with respect to Items 10 through 14.
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 2009.
VISCOUNT SYSTEMS, INC.
By: /s/ Stephen Pineau
Stephen Pineau
President and Principal Executive Officer
In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
Signature
Title Date
By: /s/ Stephen Pineau
President, Secretary, March 20, 2009
Stephen Pineau
Principal Executive Officer, Principal
Financial Officer and Director
By: /s/ Greg shen
Chairman of the Board and March 20, 2009
Greg Shen
Director
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
DECEMBER 31, 2008
DAVIDSON & COMPANY LLP
Chartered Accountants A Partnership of Incorporated Professionals
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Viscount Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Viscount Systems, Inc. and Subsidiary as at December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
"DAVIDSON & COMPANY LLP"
Vancouver, Canada Chartered Accountants
March 18, 2009
1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6
Telephone (604) 687-0947 Fax (604) 687-6172
VISCOUNT SYSTEMS, INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
As at December 31
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Operations
(Expressed in Canadian dollars)
Years ended December 31
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(Expressed in Canadian dollars)
Years Ended December 31, 2008 and 2007
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
Years ended December 31
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
1. Nature and continuance of operations
Viscount Systems Inc. (the “Company”) was incorporated on May 24, 2001. The Company manufactures, distributes, and provides services for electronic premises access and security equipment. The functional currency for the Company and its wholly-owned subsidiary is the Canadian dollar.
These financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. These financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern.
The Company has incurred losses and the ability of the Company to continue as a going- concern depends upon its ability to restore profitable operations and to continue to raise adequate financing. Management is actively targeting sources of additional financing which would assure continuation of the Company’s operations.
There can be no assurance that the Company will be able to restore profitable operations and continue to raise funds in which case the Company may be unable to meet its obligations. Should the Company be unable to realize on its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded on the balance sheets.
2. Significant accounting policies
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The significant accounting policies adopted by the Company are as follows:
(a) Principles of consolidation
The consolidated financial statements include accounts and results of the Company and its wholly-owned subsidiary, Viscount Communication and Control Systems Inc. (“VCCS”). All material intercompany transactions and balances have been eliminated in consolidation.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(b) Use of estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant areas of estimate are the amount of recoverable investment tax credits (notes 11 and 12(a)), the allowance for doubtful accounts, the estimated useful lives of equipment, the deferred tax valuation allowance, and stock-based compensation. Actual results could differ from those estimates.
(c) Foreign currency translation
The functional currency of the Company and its wholly-owned subsidiary is the Canadian dollar. Accordingly, monetary assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the balance sheet date while non-monetary assets and liabilities denominated in a foreign currency are translated at historical rates. Revenue and expense items denominated in a foreign currency are translated at exchange rates prevailing when such items are recognized in the statement of operations. Exchange gains or losses arising on translation of foreign currency items are included in the statement of operations.
(d) Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts on a specific account basis based on the credit risk of specific customers, historical trends and other information that management believes will adequately provide for credit losses.
(e) Inventory
Raw materials and supplies are stated at the lower of cost or market (replacement cost). Cost is generally determined on the first-in, first-out basis. Work in process and finished goods are stated at the lower of average cost or market (net realizable value). An inventory reserve is recorded based upon a physical count of all obsolete inventory.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(f) Equipment
Equipment is stated at cost. Depreciation is recorded based on the estimated useful lives of the assets as follows:
(g) Intangible assets
Intangible assets, consist of intercom service agreements, and have a definitive life based on provisions of SFAS 142. They are recorded at cost and are reviewed annually for impairment. Commencing on April 1, 2005, the Company is amortizing the cost on a straight-line basis over an estimated useful life of 10 years.
(h) Impairment of long-lived assets
Long-lived assets are continually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(i) Revenue recognition
Revenue is recognized when there is persuasive evidence of an arrangement and delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable. Cash received from customers prior to these criteria being met is recorded as deferred revenue. Amounts billed related to shipping and handling, which are not significant, are included in revenue. The related shipping and handling costs, which are also not significant, are included in cost of sales.
Revenue from the installation of equipment is recognized when the installation has been completed, the fee is fixed and determinable, and collectability is considered probable.
Service revenue is recognized on a straight-line basis over the period covered by the service agreement only after there is a signed agreement to provide service to the Enterphone 2000 system, the service fee is fixed or determinable, and collectibility is probable. Cash received from customers, in advance of the service period, is recorded as deferred revenue. The Enterphone 2000 system is a building access control system that uses a building’s internal phone wiring thereby avoiding the use of telephone utility services.
(j) Research and development costs
Research and development costs are expensed as incurred and are shown net of investment tax credits (note 11).
(k) Advertising costs
Advertising costs are expensed as incurred. Advertising costs amounted to $115,214 (2007 - $204,764).
(l) Government assistance and investment tax credits
The Company follows the cost reduction method of accounting for government assistance and investment tax credits, whereby, the estimated net recoverable amount of the benefit of the tax credits is recognized, when reasonable assurance exists as to their collectibility, as a reduction in the cost of the related capital asset or expenditure.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(o) Stock-based compensation
The Company records stock-based compensation based on the fair value recognition provisions of SFAS 123(R), “Share-Based Payment”, whereby stock-based compensation expense is recognized in the consolidated financial statements for granted, modified, or settled stock options. The provisions of SFAS 123(R) apply to new stock options and stock options outstanding, but not yet vested.
(p) Comprehensive income
The Company has no items of other comprehensive income in any year presented. Therefore, net income presented in the consolidated statements of operations equals comprehensive income.
(q) Certain comparative figures have been reclassified to conform with the current year’s presentation.
(r) Adoption of new accounting pronouncements
The Company adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008. SFAS No. 157 applies to all financial instruments being measured and reported on a fair value basis. In February 2008, the FASB issued a staff position that delays the effective date of SFAS 157 for all nonfinancial assets and liabilities except for those recognized or disclosed at least annually. Therefore, the Company has adopted the provision of FAS 157 with respect to its financial assets and liabilities only.
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices that are available in active markets for identical assets or liabilities. The types of financial instruments included in Level 1 are marketable equity available for sale securities that are traded in an active exchange market.
Level 2 - Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Instruments included in this category are warrants and derivative contracts whose value is determined using a pricing model with inputs that
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(r) Adoption of new accounting pronouncements (cont’d)
are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Effective January 1, 2008, the Company adopted FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company did not elect to adopt the fair value option under this statement.
The adoption of these pronouncements did not have a material effect on the Company’s consolidated financial position or results of operations.
(s) Recent accounting pronouncements
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” which changes how business acquisitions are accounted. SFAS 141R, requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and all liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain, provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent considerations); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosure of this standard.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No. 51,” which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCI) in partially owned consolidated subsidiaries and the loss of control of subsidiaries.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
2. Significant accounting policies (cont’d)
(s) Recent accounting pronouncements (cont’d)
Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company is currently evaluating the future impacts and disclosure of this standard.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful life of Intangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142) in order to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Management has determined that the adoption of FSP FAS 142-3 will not have an impact on its financial position and results of operations.
3. Inventory
4. Lease receivable
Lease receivable includes an amount due from a customer in monthly installments on a five- year leasing contract expiring in 2009. The contract bears an interest rate of 7% per annum and is secured by the equipment under lease.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
5. Equipment
6. Intangible assets
On May 16, 2003, the Company consummated an agreement for the purchase of certain assets of Telus Corporation (“Telus”) comprised primarily of service agreements for a product sold by Telus known as “Enterphone 2000”. At December 31, 2003, the Company had acquired 2,215 service agreements for which it paid a total of $208,921. At December 31, 2008, the Company held 1,630 service agreements (December 31, 2007 - 1,664) at a cost, net of accumulated amortization of $78,345 (December 31, 2007 - $57,453) of $130,576 (December 31, 2007 - $151,468).
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
7. Bank indebtedness
Bank indebtedness represents cheques written in excess of funds on deposit of $17,775 (2007 - $23,951) and amounts drawn under a bank credit facility of $40,000 (2007 - $240,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1% and are repayable on demand. The facility is secured by substantially all of our assets under a general security agreement. The Company is required to maintain a current ratio greater than 1.5:1, measured quarterly, and a debt to tangible net worth ratio less than 1.5:1, measured annually, under the terms of the demand facility agreement. For purposes of debt covenant calculations, amounts due to stockholders are considered a component of equity and not a liability. The Company is also allowed to draw on the credit facility up to 75% of accounts receivable less than 90 days. At December 31, 2008, the Company was in compliance with the ratio requirements.
During the year ended December 31, 2006, the bank required additional security for the credit facility consisting of a pledge of personal property of a significant shareholder.
8. Due to stockholders
Amounts due to stockholders totaling $292,402 are non-interest bearing, unsecured and have no fixed terms of repayment.
During the current fiscal year, the President loaned the Company $100,000. The loan bears interest at 9.5% per annum, is unsecured and has no fixed terms of repayment.
9. Notes payable
The notes payable to individuals bear interest at 8% per annum, are unsecured, and are due December 31, 2009. Principal prepayments are made at the discretion of the Board of Directors.
10. Capital stock
(a) Each share of common stock has the same rights, privileges and preferences. The holders of the outstanding common stock are entitled, in the event of liquidation, to a pro rata share of net assets, subject to any preferences that may be applicable on any preferred stock. The Board of Directors has the authority to determine and amend the
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
10. Capital stock (cont’d)
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
10. Capital stock (cont’d)
A summary of the stock option activity is as follows:
During the year ended December 31, 2008, the Company recorded $Nil (2007 - $128,274) relating to the fair value of stock options issued to employees and recorded $Nil (2007 - $Nil) relating to the fair value of stock options issued to non-employees as selling, general and administration expenses in the consolidated statement of operations.
The weighted average fair value of stock options granted during the year ended December 31, 2008 was $Nil (2007 - $0.26) per option. All options granted during the fiscal years presented vested upon granting.
The Company used the Black-Scholes option pricing model to compute estimated fair value of options granted during the year ended December 31, 2007 based on the following weighted average assumptions: average expected stock price volatility of 74%, expected dividend yield of 0%, risk-free interest rate of 3.89% and expected option life of 3 years.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
10. Capital stock (cont’d)
A summary of the stock options outstanding and exercisable at December 31, 2008 is as follows:
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.07 per share as of December 31, 2008 (2007 - US$0.40), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of December 31, 2008 was nil (2007 - 2,080,000). The total intrinsic value of options exercised during the year ended December 31, 2008 was $Nil (2007 - $20,475).
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
10. Capital stock (cont’d)
Warrants
A summary of warrant activity is as follows:
A summary of the warrants outstanding and exercisable at December 31, 2008 is as follows:
11. Research and development
Research and development expenditures are recorded net of investment tax credits, which totaled $nil for the years ended December 31, 2008 and 2007.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
12. Income taxes
(a) A reconciliation of income tax recovery at statutory rates with the reported income tax recovery is as follows:
(b) Temporary differences that give rise to the following deferred income tax assets and liabilities are as follows:
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
12. Income taxes (cont’d)
The Company has unutilized operating loss carryforwards of $Nil (2007 - $190,984).
The Company has non-refundable federal investment tax credits of $337,619 (2007 - $347,467) which will expire up to 2028 and provincial investment tax credits of $169,899 (2007 - $178,857) which will expire up to 2018.
The Company has unutilized scientific research and development costs of $2,153,651 (2007 - $1,827,018) which are available to reduce taxable income and income taxes payable in future years.
A valuation allowance is applied to the deferred tax asset because it is not more likely than not that the benefits of the future income tax asset will be available to the Company. The Company adopted the provisions of FIN 48 on January 1, 2007. No cumulative effect adjustment to the January 1, 2007 balance of the Company’s deficit was required upon the implementation of FIN 48. As of the date of adoption, there were no unrecognized tax benefits. Under current conditions and expectations, management does not foresee any significant changes in unrecognized tax benefits that would have a material impact on the Company’s financial statements.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. As of the date of adoption of FIN 48, there was no accrued interest or accrued penalties.
The Company files income tax returns in Canada and the United States of America. The Company’s Canadian income tax returns for 2003 through 2008 are open tax years. The Company’s United States tax returns are open from 2003 through 2008.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
13. Commitments and contingencies
The Company is committed to make minimum annual payments on its premises, automobiles, and office equipment operating leases that expire in 2012 as follows:
Rent expense included in the statements of operations is $129,555 (2007 - $124,886).
The Company was named as the sole defendant in litigation for wrongful dismissal that involves a former employee. The Company filed a defense to this claim and is actively defending its position. At this time, the likelihood of the outcome is not determinable and no provision has been made for the claim in the accounts.
14. Changes in non-cash working capital balances
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
15. Segment information
(a) Operating segments:
The Company organizes its business into two reportable segments: manufacturing and servicing. The manufacturing segment designs, produces and sells intercom and door access control systems that utilize telecommunications wiring to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and door access control systems.
The segments’ accounting policies are the same as those described in Note 2. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales.
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2008
16. Financial instruments
The Company’s financial instruments consist of cash, trade accounts receivable, lease receivable, bank indebtedness, accounts payable, accrued liabilities, due to stockholders and notes payable. It is management’s opinion that the Company is not exposed to significant interest, currency, business concentration or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values based on their liquidity and short-term nature.