UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________to __________________
Commission File Number:000-49746
VISCOUNT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 88-0498181 |
(State or other jurisdiction of | (I.R.S. Employer I.D. No.) |
incorporation or organization) |
4585 Tillicum Street, Burnaby, British Columbia, Canada V5J 5K9
(Address of principal executive offices)
(604) 327-9446
Registrant’s telephone number
_____________________
Former name, former address, and former fiscal year, if changed since last report
Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No[ ]
Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filed [ ] Smaller reporting company [X]
Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No[X]
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
As of September 30, 2010 the registrant’s outstanding common stock consisted of 17,841,250 shares.
PART I. FINANCIAL INFORMATION
Safe Harbor Statement
Certain statements in this filing that relate to financial results, projections, future plans, events, or performance are forward-looking statements and involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Terms such as “we believe”, “we expect” or “we project”, and similar terms, are examples of forward looking statements that we may use in this report. Such statements also relate to the sales trends of our Enterphone 2000, EPX, previously named Enterphone 3000, and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our product, and in general the market for our products. Any projections herein are based solely on management’s views, and were not prepared in accordance with any accounting guidelines applicable to projections. Accordingly, these forward looking statements are intended to provide the reader with insight into management’s proposals, expectations, strategies and general outlook for our business and products, but because of the risks associated with those statements, including those described herein and in our annual report, readers should not rely upon those statements in making an investment decision. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements.
The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein. Unless otherwise noted as USD or U.S. dollars, all dollar references herein are in Canadian dollars. As at September 30, 2010, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0290 for USD$1.0000 or CAD$1.0000 for USD$0.9718.
Item 1. Financial Statements
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
September 30, 2010
VISCOUNT SYSTEMS, INC. |
Interim Consolidated Balance Sheets |
(Expressed in Canadian dollars) |
September 30, | December 31, | |||||
2010 | 2009 | |||||
(Unaudited) | (Audited) | |||||
Assets | ||||||
Current assets | ||||||
Cash | $ | 461,656 | $ | 124,378 | ||
Trade accounts receivable, less allowance for doubtful accounts of $204,807 (2009 - $337,475) | 573,276 | 1,182,434 | ||||
Inventory (note 3) | 617,138 | 626,566 | ||||
Total current assets | 1,652,071 | 1,933,378 | ||||
Deposits | 5,891 | 5,891 | ||||
Equipment (note 4) | 36,841 | 42,358 | ||||
Intangible assets (note 5) | 94,015 | 109,684 | ||||
Total assets | $ | 1,788,817 | $ | 2,091,311 | ||
Liablilities and stockholders' equity | ||||||
Current liabilities | ||||||
Bank indebtedness (note 6) | $ | - | $ | 218,702 | ||
Accounts payable | 185,614 | 155,840 | ||||
Accrued liabilities | 445,208 | 447,878 | ||||
Deferred revenue | 31,444 | 39,678 | ||||
Due to stockholders (note 7) | 292,402 | 292,402 | ||||
Total current liabilities | 954,668 | 1,154,500 | ||||
Commitments (note 10) | ||||||
Stockholders' equity Capital stock (note 8) Authorized: 100,000,000 common shares with a par value of US$0.001 per share 20,000,000 preferred shares with a par value of US$0.001 per share Issued and outstanding: 17,841,250 common shares (2009 - 17,841,250) | 25,434 | 25,434 | ||||
Additional paid-in capital | 2,372,228 | 2,372,228 | ||||
Accumulated deficit | (1,563,512 | ) | (1,460,851 | ) | ||
Total stockholders' equity | 834,150 | 936,811 | ||||
Total liabilities and stockholders' equity | $ | 1,788,817 | $ | 2,091,311 |
See accompanying notes to interim consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Consolidated Statements of Operations |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended | Nine months ended | |||||||||||
September 30 | September 30 | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Sales | $ | 1,052,658 | $ | 1,478,348 | $ | 2,957,718 | $ | 3,838,918 | ||||
Cost of sales | 499,191 | 607,703 | 1,264,077 | 1,651,046 | ||||||||
Gross profit | 553,467 | 870,645 | 1,693,641 | 2,187,872 | ||||||||
Expenses | ||||||||||||
Selling, general and administrative | 451,795 | 650,826 | 1,538,323 | 1,771,724 | ||||||||
Research and development | 133,757 | 71,854 | 234,461 | 177,719 | ||||||||
Depreciation and amortization | 6,965 | 7,448 | 21,184 | 31,703 | ||||||||
592,517 | 730,128 | 1,793,968 | 1,981,146 | |||||||||
Income (loss) before other items | (39,050 | ) | 140,517 | (100,327 | ) | 206,726 | ||||||
Other items | ||||||||||||
Interest income | 9 | 4 | 10 | 94 | ||||||||
Interest expense | (338 | ) | (4,839 | ) | (2,344 | ) | (12,314 | ) | ||||
(329 | ) | (4,835 | ) | (2,334 | ) | (12,220 | ) | |||||
Income (loss) before income taxes | (39,379 | ) | 135,682 | (102,661 | ) | 194,506 | ||||||
Provision for income taxes | - | - | - | - | ||||||||
Net income (loss) | $ | (39,379 | ) | $ | 135,682 | $ | (102,661 | ) | $ | 194,506 | ||
Basic and diluted income (loss) per common share | $ | (0.00 | ) | $ | 0.01 | $ | (0.01 | ) | $ | 0.01 | ||
Weighted average number of common shares outstanding, Basic and diluted | 17,841,250 | 17,841,250 | 17,841,250 | 17,841,250 |
See accompanying notes to interim consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Consolidated Statements of Cash Flows |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30 |
2010 | 2009 | |||||
Operating activities: | ||||||
Net income (loss) | $ | (102,661 | ) | $ | 194,506 | |
Items not involving cash: | ||||||
Depreciation and amortization | 21,186 | 31,703 | ||||
Changes in non-cash working capital balances (note 9) | 637,455 | (208,521 | ) | |||
Net cash provided by operating activities | 555,980 | 17,688 | ||||
Financing activities: | ||||||
Proceeds from (repayment of) bank indebtedness | (218,702 | ) | 96,554 | |||
Repayment of stockholder loan | - | (73,000 | ) | |||
Repayment of notes payable | - | (50,000 | ) | |||
Net cash used in financing activities | (218,702 | ) | (26,446 | ) | ||
Increase (decrease) in cash | 337,278 | (8,758 | ) | |||
Cash, beginning of period | 124,378 | 255,172 | ||||
Cash, end of period | $ | 461,656 | $ | 246,414 | ||
Supplementary information: | ||||||
Interest paid | $ | 2,344 | $ | 7,475 | ||
Income taxes paid | $ | - | $ | - |
See accompanying notes to interim consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Consolidated Statement of Stockholders' Equity |
(Unaudited) |
(Expressed in Canadian dollars) |
Additional | |||||||||||||||
Common Stock | paid-in | ||||||||||||||
Shares | Amount | capital | Accumulated deficit | Total | |||||||||||
Balance, December 31, 2009 | 17,841,250 | $ | 25,434 | $ | 2,372,228 | $ | (1,460,851 | ) | $ | 936,811 | |||||
Net loss | - | - | - | (102,661 | ) | (102,661 | ) | ||||||||
Balance, September 30, 2010 | 17,841,250 | $ | 25,434 | $ | 2,372,228 | $ | (1,563,512 | ) | $ | 834,150 |
See accompanying notes to interim consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Notes to Interim Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
1. | Basis of presentation |
These unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and by Article 8-03 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of annual financial statements. Readers of these statements should read the audited annual consolidated financial statements of the Company filed on Form 10-K for the year ended December 31, 2009 in conjunction therewith. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2010 or for any other interim period.
The financial information as at September 30, 2010 and for the three month and nine month periods ended September 30, 2010 and 2009 is unaudited; however, such financial information includes all adjustments, consisting solely of normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of the financial information in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated balance sheet as of that date included in the Form 10-K.
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
2. | New accounting pronouncements |
In October 2009, the FASB issued authoritative guidance on revenue recognition which was effective beginning July 1, 2010. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. Adoption of this new guidance has not had a material impact on the financial statements.
In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which was effective beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. Adoption of this new guidance has not had a material impact on the financial statements.
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
3. | Inventory |
September 30, | December 31, | ||||||
2010 | 2009 | ||||||
Raw materials | $ | 328,104 | $ | 237,463 | |||
Work in process | 28,144 | 106,457 | |||||
Finished goods | 260,890 | 282,646 | |||||
$ | 617,138 | $ | 626,566 |
4. | Equipment |
Accumulated | Net book | |||||||||
September 30, 2010 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 95,473 | $ | 15,365 | ||||
Office furniture and equipment | 77,269 | 57,593 | 19,676 | |||||||
Leasehold improvements | 46,814 | 45,014 | 1,800 | |||||||
$ | 234,921 | $ | 198,080 | $ | 36,841 | |||||
Accumulated | Net book | |||||||||
December 31, 2009 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 93,318 | $ | 17,520 | ||||
Office furniture and equipment | 77,269 | 55,034 | 22,235 | |||||||
Leasehold improvements | 46,814 | 44,211 | 2,603 | |||||||
$ | 234,921 | $ | 192,563 | $ | 42,358 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
5. | Intangible assets |
On May 16, 2003, the Company consummated an agreement for the purchase of certain assets of Telus Corporation (“Telus”) comprised primarily of service agreements for a product sold by Telus known as “Enterphone 2000”. At December 31, 2003, the Company had acquired 2,215 service agreements for which it paid a total of $208,921. At September 30, 2010, the Company held 1,512 service agreements (December 31, 2009 – 1,577) at a cost, net of accumulated amortization of $114,906 (December 31, 2009 - $99,237), of $94,015 (December 31, 2009 - $109,684). The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: |
Year ending December 31: | ||||
2010 | $ | 20,892 | ||
2011 | 20,892 | |||
2012 | 20,892 | |||
2013 | 20,892 | |||
2014 | 20,892 |
6. | Bank indebtedness |
Bank indebtedness represents cheques written in excess of funds on deposit of $Nil (December 31, 2009 - $18,703) and amounts drawn under a bank credit facility of $Nil (December 31, 2009 - $200,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the bank’s prime lending rate plus 1.75% and are repayable on demand. The facility is secured by substantially all of our assets under a general security agreement and a pledge of personal property of a significant shareholder. The Company is required to maintain a current ratio greater than 1.5:1, measured quarterly, and a debt to tangible net worth ratio less than 1.5:1, measured annually, under the terms of the demand facility agreement. For purposes of debt covenant calculations, amounts due to stockholders are considered a component of equity and not a liability. The Company is also allowed to draw on the credit facility up to 75% of accounts receivable less than 90 days. At September 30, 2010, the Company was in compliance with debt covenants. | |
7. | Due to stockholders |
Amounts due to stockholders in the amount of $292,402 (2009, $292,402) are non-interest bearing, unsecured and have no fixed terms of repayment. Amounts due to stockholders are subordinated to amounts due on the company’s credit facility. |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
7. | Due to stockholders (cont’d…) |
During the 2008 fiscal year, the President loaned the Company $100,000. The loan carried interest at 9.5% per annum, was unsecured and had no fixed terms of repayment. The loan was repaid during the fourth quarter of 2009. |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
8. | Capital stock |
Stock Options | |
A summary of the stock option activity is as follows: |
Number of options | Weighted average | |||||
Exercise price | ||||||
Outstanding at December 31, 2009 | 3,363,800 | US$0.30 | ||||
Granted | - | - | ||||
Exercised | - | - | ||||
Expired/cancelled | - | - | ||||
Outstanding at September 30, 2010 | 3,363,800 | $0.30 |
A summary of the stock options outstanding and exercisable at September 30, 2010 is as follows:
Weighted | |||||
Average | Weighted | ||||
Remaining | Average | Aggregate | |||
Exercise Price | Number | Contractual | Exercise | Intrinsic | |
Life | Price | Value | |||
US$0.12 | 2,068,750 | 3.36 years | US$0.12 | US $- | |
$0.18 | 11,250 | 5.23 years | $0.18 | $ - | |
$0.40 | 327,500 | 1.84 years | $0.40 | $ - | |
$0.45 | 7,500 | 5.23 years | $0.45 | $ - | |
$0.55 | 5,000 | 5.23 years | $0.55 | $ - | |
$0.60 | 10,000 | 5.23 years | $0.60 | $ - | |
$0.65 | 933,800 | 1.22 years | $0.65 | $ - | |
3,363,800 | 2.63 years | $0.30 | $- |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
8. | Capital stock (cont’d…) |
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.10 per share as of September 30, 2010 (December 31, 2009 – US$0.19), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of September 30, 2010 was nil (September 30, 2009 – nil). | |
Warrants | |
A summary of warrant activity is as follows: |
Number of warrants | Weighted average | ||||||
Exercise price | |||||||
Outstanding at December 31, 2009 | 1,677,550 | US$ 0.25 | |||||
Granted | - | - | |||||
Exercised | - | - | |||||
Expired | - | - | |||||
Outstanding at September 30, 2010 | 1,677,550 | 0.25 |
A summary of the warrants outstanding and exercisable at September 30, 2010 is as follows:
Weighted | ||||
Average | Weighted | |||
Remaining | Average | |||
Exercise Price | Number | Contractual | Exercise | |
Life | Price | |||
US$0.25 | 1,677,550 | 1.55 years | US$0.25 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
9. | Changes in non-cash working capital balances |
Nine months ended | |||||||
September 30, | |||||||
2010 | 2009 | ||||||
Trade accounts receivable | $ | 609,158 | $ | (480,089 | ) | ||
Inventory | 9,428 | 260,550 | |||||
Prepaid expenses | - | 4,637 | |||||
Lease receivable | - | 857 | |||||
Accounts payable | 29,773 | 97,086 | |||||
Accrued Liabilities | (2,670 | ) | (88,369 | ) | |||
Deferred revenue | (8,234 | ) | (3,193 | ) | |||
$ | 637,455 | $ | (208,521 | ) |
10. | Commitments |
The Company is committed to make minimum annual payments on its premises, automobiles and office equipment operating leases that expire in 2014 as follows: |
Year or period ending December 31: | ||||
2010 | $ | 44,848 | ||
2011 | 160,482 | |||
2012 | 147,341 | |||
2013 | 65,025 | |||
2014 | 6,381 |
Rent expense included in the statements of operations for the three months ended September 30, 2010 is $34,133 (2009 - $33,668) and for the nine months ended September 30, 2010 is $101,624 (2009 - $99,499).
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
11. | Segment information | |
(a) | Operating segments: | |
The Company organizes its business into two reportable segments: manufacturing and servicing. The manufacturing segment designs, produces and sells intercom and door access control systems that utilize telecommunications wiring to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and other door access control systems. | ||
The segments’ accounting policies are the same as those described in Note 2 in the financial statements in the most recent Form 10-K. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales. |
For the three months ended September 30, 2010 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 726,922 | $ | 325,736 | $ | 1,052,658 | |||
Depreciation and amortization | 1,742 | 5,223 | 6,965 | ||||||
Interest expense, net | 338 | - | 338 | ||||||
Segment income before income taxes | (180,918 | ) | 141,538 | (39,380 | ) | ||||
Total assets | 1,694,802 | 94,015 | 1,788,817 |
For the three months ended September 30, 2009 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 949,818 | $ | 528,530 | $ | 1,478,348 | |||
Depreciation and amortization | 2,225 | 5,223 | 7,448 | ||||||
Interest expense, net | 4,839 | - | 4,839 | ||||||
Segment loss before income taxes | 28,952 | 106,730 | 135,682 | ||||||
Total assets | 1,657,504 | 114,907 | 1,772,411 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
12. | Segment information (cont’d…) |
For the nine months ended September 30, 2010 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 2,012,210 | $ | 945,509 | $ | 2,957,719 | |||
Depreciation and amortization | 5,515 | 15,669 | 21,184 | ||||||
Interest expense, net | 2,344 | - | 2,344 | ||||||
Segment income (loss) before income taxes | (377,589 | ) | 274,929 | (102,661 | ) | ||||
Total assets | 1,694,802 | 94,015 | 1,788,817 |
For the nine months ended September 30, 2009 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 2,606,193 | $ | 1,232,725 | $ | 3,838,918 | |||
Depreciation and amortization | 16,034 | 15,669 | 31,703 | ||||||
Interest expense, net | 11,514 | 800 | 12,314 | ||||||
Segment loss before income taxes | (53,283 | ) | 247,789 | 194,506 | |||||
Total assets | 1,657,504 | 114,907 | 1,772,411 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Nine months ended September 30, 2010 and 2009 |
12. | Segment information (cont’d…) | |
(b) | Of the total revenues for the nine months ended September 30, 2010, $448,833 (2009 - $693,560) was derived from U.S.-based customers and $2,508,886 (2009 - $3,145,358) from Canadian-based customers. | |
Substantially all of the Company's operations, assets and employees are located in Canada. | ||
(c) | Major customers: | |
No customer represented more than 10% of total revenues in either of the nine months ended September 30, 2010 and 2009. | ||
(d) | Products and services: | |
Enterphone 2000 sales represented 7.7% of total revenue during the nine months ended September 30, 2010 (2009 – 8.3%). MESH sales represented 56.4% of total revenue during the nine months ended September 30, 2010 (2009 – 63.2%). The balance of the Company’s revenues are derived from other products such as access tracking and control, closed circuit monitors, infrared and radio frequency remotes and servicing of intercom equipment. |
Item 2. Management Discussion and Analysis or Plan of Operation
Results of Operations
Sales for the three months ended September 30, 2010 and 2009 were $1,052,658 and $1,478,348, respectively, a decrease of $425,690 or 28.8% . Sales for the nine months ended September 30, 2010 and 2009 were $2,957,719 and $3,838,918, respectively, a decrease of $881,199 or 23.0% . This decrease was due to a slower U.S. and Canadian economy, resulting in decreased sales of our MESH and Enterphone units. MESH sales for the three months ended September 30, 2010 and 2009 were $576,610 and 1,024,743, respectively, a decrease of $448,133 or 43.7% . MESH sales for the nine months ended September 30, 2010 and 2009 was $1,667,123 and $2,427,684, respectively, a decrease of $760,561 or 31.3% . MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management. Enterphone 2000 sales for the three months ended September 30, 2010 and 2009 were $66,245 and $80,156, respectively, a decrease of $13,911 or 17.4% .. Enterphone 2000 sales for the nine months ended September 30, 2010 and 2009 were $229,180 and $318,610, respectively, a decrease of $89,430 or 28.1% . As an older technology, Enterphone sales have been dropping for several years. MESH EPX is the replacement for our old Enterphone system. MESH EPX is the next generation of Enterphone systems but with features that are compatible with high speed internet and other newer technologies.
Management believes that sales of the MESH product will continue to represent a significant proportion of total sales relative to sales of our Enterphone products. For the nine months ended September 30, 2010 and 2009, MESH sales were 56.4% and 63.2%, respectively, of total sales.
We also provide Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,512 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 per month, inclusive of parts and labor. Typical customers include strata management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems. During the nine months ended September 30, 2010 and 2009, customer service contracts and new equipment sales generated aggregate sales revenues of $945,509 and $1,232,725, respectively, a decrease of $287,216 or 23.3% . These sales included MESH sales by the service division. Sales decreased due to a slower Canadian economy.
The intangible assets held by the Company are comprised primarily of service contracts for our Enterphone 2000 product line. The number of service agreements held by the Company was 1,512 at September 30, 2010, as compared to 1,577 and 1,587 at December 31, 2009 and September 30, 2009, respectively. During the first two quarters of 2010, the Company performed a test for impairment and evaluated the status of service agreements. Management determined that no charge for impairment was required but the continuing reduction in the number of service contracts held, indicated that the intangible asset should be deemed to have a definitive life. Accordingly, the Company continued to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At September 30, 2010, the cost of the service agreements, net of accumulated amortization, was $94,015.
Cost of sales and services as a percentage of sales was 47.4% and 41.1% for the three months ended September 30, 2010 and 2009, respectively. Cost of sales and services as a percentage of sales was 42.7% and 43.0% for the nine months ended September 30, 2010 and 2009, respectively. Cost of sales has changed during these two comparative periods due to a combination of increases and decreases in the overall costs for many MESH component parts and management’s continued focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.
Gross profit for the three months ended September 30, 2010 and 2009 was $553,467 and $870,645, respectively, a decrease of $317,178 or 36.4% . For the nine months ended September 30, 2010 and 2009, gross profit was $1,693,641 and $2,187,872, respectively, a decrease of $494,231 or 22.6% . This decrease in gross profit corresponds with decreased sales and changes in product mix for the three and nine months ended September 30, 2010.
Selling, general and administrative expenses for the three months ended September 30, 2010 and 2009 were $451,795 and $650,826, respectively, a decrease of $199,031 or 30.6% . Selling, general and administrative expenses for the nine months ended September 30, 2010 and 2009 were $1,538,323 and $1,771,724, respectively, a decrease of $233,401 or 13.2% . The Company was focused on reducing various selling, general and administrative expenses to improve our net loss position. For the nine months ended September 30, 2010 and 2009, selling, general and administrative expenses, as a percentage of sales, were 52.0% and 46.1%, respectively.
Research and development costs for the three months ended September 30, 2010 and 2009 were $133,757 and $71,854, respectively, an increase of $61,903 or 86.2% . Research and development costs for the nine months ended September 30, 2010 and 2009 were $234,461 and $177,719, respectively, an increase of $56,742 or 31.9% . Research and development costs increased due to additional costs incurred to develop a new MESH related product.
Loss before income tax for the quarter ended September 30, 2010 was $(39,379), as compared to income before income tax of $135,682 for the quarter ended September 30, 2009. This equates to a decrease in quarter over quarter income of $175,061. Loss before income tax for the nine months ended September 30, 2010 was $(102,661), as compared to income before income tax of $194,506 for the nine months ended September 30, 2009. This equates to a decrease in nine month period over nine month period income of $297,167. The decrease in profitability was the result of fewer sales due to the poor U.S. and Canadian economy, offset by reductions in staffing costs, advertising, travel, tradeshow, various office expenses and the aforementioned reductions in input prices.
Liquidity and Capital Resources
Cash as of September 30, 2010, as compared to December 31, 2009 was $461,656 and $124,378, respectively. Cash as of September 30, 2009 was $246,414. The Company has a bank credit facility available for an operating loan of up to a maximum of $500,000 at the prime lending rate plus 1.75% . Amounts drawn are repayable on demand. At September 30, 2010, $nil was drawn on this facility. The facility is secured by substantially all of our assets under a general security agreement.
At September 30, 2010, working capital was $697,403, as compared to a working capital of $778,878 at December 31, 2009. Working capital has decreased by $81,475. The current ratio at September 30, 2010 was 1.73 to 1.0, as compared with 1.67 to 1.0 at December 31, 2009.
The accounts receivable turnover ratio at September 30, 2010 was 78 days, as compared 61 days at December 31, 2009 and 51 days at September 30, 2009. The increase at September 30, 2010, as compared to December 31, 2009 and September 30, 2009 was due to less proportionate sales to outstanding receivables at September 30, 2010, resulting in a greater time period where receivables remain outstanding. Management continues to follow up and monitor slower paying accounts on a monthly basis. The accounts receivable reserve was $204,807 at September 30, 2010, as compared to $337,475 at December 31, 2009, a decrease of $132,668. This reduction was the result of collecting some significant outstanding debt from some older accounts. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.
For the nine months ended September 30, 2010, there were no capital expenditures.
To date, we have not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. We expect that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.
We may require additional funds to support the development and marketing of our new MESH product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be unable to develop or enhance our products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.
There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.
We do not have any material commitments for capital expenditures as of September 30, 2010.
There are no known trends or uncertainties that will have a material impact on revenues.
Related Party Transactions
None.
Recently Issued Accounting Standards
There were no new accounting standards issued during the period ended September 30, 2010 that are expected to have a material impact on the Company.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2010. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of September 30, 2010, we have maintained effective disclosure controls and procedures in all material respects, including those necessary to ensure that information required to be disclosed in reports filed or submitted with the SEC (i) is recorded, processed, and reported within the time periods specified by the SEC, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decision regarding required disclosure.
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
31.1 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934 |
32.1 | Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 4, 2010 | VISCOUNT SYSTEMS, INC. | |
(Registrant) | ||
By: | /s/ Stephen Pineau | |
Stephen Pineau, President | ||
Principal Executive Officer | ||
and Principal Financial Officer |