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 ended June 30, 2013
[ ] 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
N/A
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 June 30, 2013 the registrant’s outstanding common stock consisted of 94,003,750 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, Freedom and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our product, and in general the market for our products. Any projections herein are based solely on management’s views, and were not prepared in accordance with any accounting guidelines applicable to projections. Accordingly, these forward looking statements are intended to provide the reader with insight into management’s proposals, expectations, strategies and general outlook for our business and products, but because of the risks associated with those statements, including those described herein and in our annual report, readers should not rely upon those statements in making an investment decision. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements.
The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein. Unless otherwise noted as USD or U.S. dollars, all dollar references herein are in Canadian dollars. As at June 30, 2013, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0518 for USD$1.0000 or CAD$1.0000 for USD$0.9508.
Item 1. Financial Statements
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
JUNE 30, 2013
VISCOUNT SYSTEMS, INC. |
Interim Condensed Consolidated Balance Sheets |
(Expressed in Canadian dollars) |
June 30, | December 31, | |||||
2013 | 2012 | |||||
(Unaudited) | (Audited) | |||||
Assets | ||||||
Current assets | ||||||
Cash | $ | 505,662 | $ | 406,506 | ||
Trade accounts receivable, less allowance for doubtful accounts of $159,983 (2012 - $105,185) | 713,211 | 611,288 | ||||
Inventory (note 2) | 396,279 | 347,978 | ||||
Total current assets | 1,615,152 | 1,365,772 | ||||
Deposits | 1,391 | 1,391 | ||||
Equipment (note 3) | 23,606 | 25,161 | ||||
Intangible assets | 36,562 | 47,008 | ||||
Total assets | $ | 1,676,711 | $ | 1,439,332 | ||
. | ||||||
Liablilities and stockholders' deficit | ||||||
Current liabilities | ||||||
Accounts payable | $ | 219,067 | $ | 150,857 | ||
Accrued liabilities | 533,952 | 566,260 | ||||
Deferred revenue | 39,588 | 38,256 | ||||
Due to related parties (note 4) | 24,113 | 7,468 | ||||
Short term loans payable (note 5) | 133,902 | 154,902 | ||||
Total current liabilities | 950,622 | 917,743 | ||||
Derivative financial liabilities (notes 6 and 7) | 5,266,392 | 3,023,161 | ||||
6,217,014 | 3,940,904 | |||||
Stockholders' deficit | ||||||
Capital stock (note 8) | ||||||
Authorized: 300,000,000 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: 94,003,750 common shares (2012 - 86,733,750) | 116,782 | 109,512 | ||||
1,195 preferred shares (2012 - 1,149) | - | - | ||||
Additional paid-in capital | 6,538,757 | 5,979,271 | ||||
Accumulated deficit | (11,195,842 | ) | (8,590,355 | ) | ||
Total stockholders' deficit | (4,540,303 | ) | (2,501,572 | ) | ||
Total liabilities and stockholders' deficit | $ | 1,676,711 | $ | 1,439,332 |
Commitments (note 10)
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended | Six months ended | |||||||||||
June 30 | June 30 | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Sales | $ | 1,041,088 | $ | 901,088 | $ | 1,869,408 | $ | 1,768,089 | ||||
Cost of sales | 418,185 | 355,140 | $ | 757,076 | 703,551 | |||||||
Gross profit | 622,903 | 545,948 | 1,112,332 | 1,064,538 | ||||||||
Expenses | ||||||||||||
Selling, general and administrative | 869,354 | 988,818 | 1,576,169 | 1,708,319 | ||||||||
Research and development | 40,765 | 69,601 | 73,929 | 142,600 | ||||||||
Depreciation and amortization | 5,980 | 6,354 | 12,001 | 12,768 | ||||||||
916,099 | 1,064,773 | 1,662,099 | 1,863,687 | |||||||||
Loss before other items | (293,196 | ) | (518,825 | ) | (549,767 | ) | (799,149 | ) | ||||
Other items | ||||||||||||
Interest income | 15 | 7 | 23 | 12 | ||||||||
Interest expense | - | (700 | ) | - | (760 | ) | ||||||
Fair value adjustment of derivative liability (note 5) | (414,157 | ) | (855,374 | ) | (2,003,910 | ) | (743,286 | ) | ||||
(414,142 | ) | (856,067 | ) | (2,003,887 | ) | (744,034 | ) | |||||
Net loss and comprehensive loss | (707,338 | ) | (1,374,892 | ) | (2,553,654 | ) | (1,543,183 | ) | ||||
Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.02 | ) |
Weighted average number of common shares outstanding, Basic and diluted | 90,172,431 | 76,733,750 | 88,462,590 | 76,473,750 |
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Consolidated Statement of Stockholders' Deficit |
(Expressed in Canadian dollars) |
Periods Ended June 30, 2013 and December 31, 2012 |
Additional | |||||||||||||||||||||||||||
Common Stock | Preferred Stock | paid-in | Obligation to | Deferred | Accumulated | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | issue shares | Compensation | deficit | Total | |||||||||||||||||||
Balance, December 31, 2011 | 76,473,750 | $ | 99,252 | - | $ | - | $ | 5,767,369 | $ | 20,800 | $ | (126,855 | ) | $ | (5,845,262 | ) | $ | (84,696 | ) | ||||||||
Units issued for cash from equity securities | - | - | 1,100 | - | - | - | - | - | - | ||||||||||||||||||
Units issued for consulting services | 260,000 | 260 | - | - | 20,540 | (20,800 | ) | - | - | - | |||||||||||||||||
Units issued for cash from private placement | 10,000,000 | 10,000 | - | - | 191,362 | - | - | - | 201,362 | ||||||||||||||||||
Stock-based compensation - warrants | - | - | - | - | - | - | 126,855 | - | 126,855 | ||||||||||||||||||
Series A dividends issued | - | - | 26 | - | - | - | - | (32,956 | ) | (32,956 | ) | ||||||||||||||||
Series A dividends to be issued | - | - | 23 | - | - | - | - | (32,951 | ) | (32,951 | ) | ||||||||||||||||
Net loss | - | - | - | - | - | - | - | (2,679,186 | ) | (2,679,186 | ) | ||||||||||||||||
Balance, December 31, 2012 | 86,733,750 | 109,512 | 1,149 | - | 5,979,271 | - | - | (8,590,355 | ) | (2,501,572 | ) | ||||||||||||||||
Series A dividends to be issued | - | - | - | - | - | - | - | (51,833 | ) | (51,833 | ) | ||||||||||||||||
Units issued for cash from equity securities | 6,750,000 | 6,750 | - | - | 502,015 | - | - | 508,765 | |||||||||||||||||||
Units issued for consulting services | 520,000 | 520 | - | - | 52,384 | - | - | 52,904 | |||||||||||||||||||
Cash issued for legal, commission and consulting services | - | - | - | - | (15,000 | ) | |||||||||||||||||||||
Stock-based compensation - warrants | - | - | - | - | 20,087 | - | - | ||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (2,553,654 | ) | (2,553,654 | ) | ||||||||||||||||
Balance, June 30, 2013 | 94,003,750 | $ | 116,782 | 1,149 | $ | - | $ | 6,538,757 | $ | - | $ | - | $ | (11,195,842 | ) | $ | (4,540,303 | ) |
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
(Expressed in Canadian dollars) |
For the six months ended | ||||||
June 30, | June 30, | |||||
2013 | 2012 | |||||
Operating activities: | ||||||
Net loss | $ | (2,553,654 | ) | $ | (1,543,183 | ) |
Items not involving cash: | ||||||
Depreciation and amortization | 12,001 | 12,768 | ||||
Fair value adjustment of derivative liability (note 7) | 2,003,910 | 743,286 | ||||
Selling, general and administrative expenses paid by stock options and warrants | 72,973 | 106,315 | ||||
Changes in non-cash working capital balances (note 9) | (96,336 | ) | 45,012 | |||
Net cash used in operating activities | (561,106 | ) | (635,802 | ) | ||
Financing activities: | ||||||
Proceeds from private placement | 681,262 | 1,053,740 | ||||
Repayment of short term loans payable | (21,000 | ) | (14,769 | ) | ||
Net cash provided by financing activities | 660,262 | 1,038,971 | ||||
Increase (decrease) in cash | 99,156 | 403,169 | ||||
Cash, beginning of period | 406,506 | 169,322 | ||||
Cash, end of period | $ | 505,662 | $ | 572,491 | ||
Supplementary information: | ||||||
Interest paid | $ | - | $ | 60 | ||
Income taxes paid | $ | - | $ | - |
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Six months ended June 30, 2013 |
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. These financial statements should be read in conjunction with the audited annual consolidated financial statements of Viscount Systems, Inc. (the “Company”) filed on Form 10-K for the year ended December 31, 2012. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2013 or for any other interim period.
The financial information as at June 30, 2013 and for the three months and six month periods ended June 30, 2013 and 2012 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.
These financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $11,195,842, reported a loss for the six month period ended June 30, 2013 of $2,553,662, and has working capital of $669,095 at June 30, 2013. Cash flows used in operating activities for the six months ended June 30, 2013 were $669,094. Although management is confident that the company can access sufficient working capital to maintain operations and ultimately generate positive cash flows from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving sustainable profits. Management has raised US$675,000 by way of equity financing to continue normal operations for the next twelve months. Management has been actively seeking new investors and developing new customer relationships, however additional financing arrangements have not yet completed. Short-term loan financing is anticipated from related parties, however there is no certainty that loans or equity financing will be available when required. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.
2. | Inventory |
June 30, | December 31, | ||||||
2013 | 2012 | ||||||
Raw materials | $ | 58,649 | $ | 147,083 | |||
Work in process | 35,653 | 15,100 | |||||
Finished goods | 301,977 | 185,795 | |||||
$ | 396,279 | $ | 347,978 |
3. | Equipment |
Accumulated | Net book | |||||||||
June 30, 2013 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 100,243 | $ | 10,595 | ||||
Office furniture and equipment | 77,269 | 64,258 | 13,011 | |||||||
$ | 188,107 | $ | 164,501 | $ | 23,606 |
Accumulated | Net book | |||||||||
December 31, 2012 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 99,642 | $ | 11,196 | ||||
Office furniture and equipment | 77,269 | 63,304 | 13,965 | |||||||
$ | 188,107 | $ | 162,946 | $ | 25,161 |
4. | Due to related parties | |
Amounts due to Directors for director fees and travel expenses totaled $24,113 at June 30, 2013 (December 31, 2012 - $7,468). These amounts are unsecured, non-interest bearing and have no specified terms of repayment. | ||
5. | Short term loans payable | |
Amounts due to third parties totaled $133,902 for outstanding loans and advances (December 31, 2012 - $154,902). These are non-interest bearing, unsecured and have no fixed terms of repayment. | ||
6. | Series A Convertible Redeemable Preferred Stock | |
On June 7, 2012, the Company completed the sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share and stated value of US$1,000 per share, for gross proceeeds of US$1,000,000. The Series A shares contain certain rights and preferences as follows: | ||
The Series A Shares are convertible into shares of common stock of the Company at the rate of US$0.0407 per common share or 85% of the previous twenty day volume weighted average pricing. | ||
dividends of 8% per annum, payable in cash or Series A Shares quarerly. | ||
voting and conversion rights of up to 4.99% of the outstanding common stock of the Company at the time of conversion per holder; registration rights to the holders of the Series A Shares that may be exercised in certain circumstances. | ||
holders of Series A Shares are entitled to be paid 125% of the stated value of the Series A Shares, plus all accrued, but unpaid dividends on Series A Shares, upon liquidation or dissolution of the Company, including forms of mergers and acquisitions, in priority to any payments to the holders of shares of common stock. | ||
the Series A Shares may be redeemed by the holders for 150% of their stated value, plus all accrued, but unpaid dividends on Series A Shares, upon the occurrence of a default, which includes performance conditions, delisting or late filing with the US Securities and Exchange Commission (“SEC”). | ||
In connection with the Series A share issuance, the Company also issued to the investors 12,285,012 shares purchase warrants, each exercisable into one common shares at US$0.08 per share for a period of 5 years. The Company paid a cash comission of US$100,000 and issued 2,457,002 Agents warrants. Each Agent warrant exercisable into one common share of the Company at US$0.05 per share for a period of 5 years. The warrants may be exercised on a cashless basis. |
6. | Series A Convertible Redeemable Preferred Stock (cont’d…) | |
Series A 5% Convertible Preferred Stock: | ||
On October 19, 2012, Viscount Systems, Inc. completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share and stated value of $1,000 per share for gross proceeds of $100,000. The Series A shares contain certain rights and preferences as follows: | ||
The Series A Shares are convertible into shares of common stock of the Company at the rate of US$0.05 per common share or 85% of the previous twenty day volume weighted average pricing. | ||
| ||
dividends of 8% per annum, payable in cash or Series A Shares quarterly. | ||
| ||
voting and conversion rights of up to 4.99% of the outstanding common stock of the Company at the time of conversion per holder. | ||
| ||
registration rights to the holders of the Series A Shares that may be exercised in certain circumstances. | ||
| ||
holders of Series A Shares are entitled to be paid 125% of the stated value of the Series A Shares, plus all accrued, but unpaid dividends on Series A Shares, upon liquidation or dissolution of the Company, including forms of mergers and acquisitions, in priority to any payments to the holders of shares of common stock. | ||
| ||
the Series A Shares may be redeemed by the holders for 150% of their stated value, plus all accrued, but unpaid dividends on Series A Shares, upon the occurrence of a default, which includes performance conditions, delisting or late filing with the SEC. |
In connection with the Series A share issuance, the Company also issued to the investors 1,000,000 share purchase warrants, each exercisable into one common share at US$0.08 per share for a period of 5 years. The company paid a cash commission of US$10,000 and issued 200,000 Agents warrants. Each Agent warrant is exercisable into one common share of the Company at $0.05 per share for a period of 5 years. The warrants may be exercised on a cashless basis. | |
7. | Derivative liabilities |
Derivative financial liabilities consist of warrants and the conversion option associated with the Series A Preferred Shares (Note 5). The warrants were originally issued in private placements, or as compensation to non employees, and have exercise prices denominated in United States dollars, which differs from the Company’s functional currency. | |
During the year ended December 31, 2012, the Company issued 1,100 Series A redeemable convertible preferred shares and a total of 15,942,014 share purchase warrants in connection with a financing. The preferred shares were determined to be a debt host contract and the warrants are derivative liabilities as they are not indexed to the Company’s own equity in accordance with ASC 815. |
7. | Derivative liabilities (cont’d…) |
The table below provides a summary of the changes in fair value, including net transfers, in and/or out, of financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2013: |
Fair Value Measurements Using Level 3 Inputs | |||||||||||||
Derivative | Derivative | ||||||||||||
Derivative | liability – | liability – | |||||||||||
liability – | conversion | Series A | |||||||||||
warrants | option | dividends | Total | ||||||||||
Balance, December 31, 2011 | $ | 317,003 | $ | - | $ | - | $ | 317,003 | |||||
Preferred share conversion option | - | 1,293,769 | - | 1,293,769 | |||||||||
Preferred share dividends | - | - | 32,956 | 32,956 | |||||||||
Share purchase warrants issued | 1,006,162 | - | - | 1,006,162 | |||||||||
Total fair value adjustment | 146,123 | 227,106 | 42 | 373,271 | |||||||||
Balance, December 31, 2012 | 1,469,288 | 1,520,875 | 32,998 | 3,023,161 | |||||||||
Preferred share dividends | - | - | 56,398 | 56,398 | |||||||||
Allocation to APIC | - | - | - | 187,487 | |||||||||
Total fair value adjustment | 821,271 | 1,141,713 | 40,926 | 2,003,910 | |||||||||
Balance, June 30, 2013 | $ | 2,290,559 | $ | 2,662,588 | $ | 130,322 | $ | 5,270,956 |
During the six months ended June 30, 2013, the Company recognized a charge to operations of $2,003,910 (June 30, 2012 - $743,286) being the change in the fair value of the derivative liability warrants, conversion option and dividends during the period.
During the six months ended June 30, 2013, the Company issued 22.77 (June 30- 2012 – nil) Series A dividends with a value of $56,398 (June 30, 2012 - $nil). At June 30, 2013, there were 22.21 (December 31, 2012 – 22.77) Series A dividends declared and to be issued with a value of $23,447 (December 31, 2012 - $32,951)
The fair value of the warrants were determined using the Black-Scholes option pricing model and the conversion options were valued using the Binomial Lattice model using the following current market assumptions:
June 30, | December 31, | ||||||
2013 | 2012 | ||||||
Volatility | 158% - 188% | 157% - 181% | |||||
Dividend yield | - | - | |||||
Risk-free interest rate | 0.36% - 0.77% | �� | 0.36% - 0.77% | ||||
Expected life | 2.68 – 5.00 yrs | 2.93 – 5.00 yrs |
8. | Capital stock |
Effective April 18, 2011, the Company completed a three for one forward-stock-split of its common stock with a corresponding increase in its authorized common stock from 100,000,000 shares of common stock to 300,000,000 shares of common stock.
On November 26, 2012, the Company completed a private placement of 10,000,000 units at a price of US$0.05 per unit, for gross proceeds of $496,350 (US$500,000). Each unit consisted of one common share and one share purchase warrant of the Company, with each warrant exercisable to acquire an additional share of the Company at a price of US$0.08 for a period of 5 years, expiring November 26, 2017. The Company issued 1,000,000 Agents warrants. Each Agent warrant is exercisable into one common share of the Company at $0.05 per share for a period of 5 years. Upon issuance of the units, $240,989 were allocated to the warrants and recorded as a derivative liability and the balance of $201,361, which is net of share issuance costs of $54,000, was allocated to common stock and additional paid-in capital. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions; volatility of 178%; a dividend yield rate of 0%; a risk-free interest rate of 0.70% and an expected life of five years, adjusted for market liquidity and allocated on a relative basis.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $50,000 and issued share purchase warrants to acquire 1,000,000 shares of common stock of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On May 21, 2013, the Company completed a private placement of 6,750,000 units at a price of US$0.10 per unit, for gross proceeds of US$675,000. Each unit consisted of one common share and one share purchase warrant of the Company, with each warrant exercisable to acquire an additional share of the Company at a price of US$0.20 for a period of 3 years, expiring May 17 and 21, 2016. Upon issuance of the units, $187,487 were allocated to the warrants and recorded as a derivative liability and the balance of $508,775, which is net of share issuance costs, was allocated to common stock and additional paid-in capital. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions; volatility of 155%; a dividend yield rate of 0%; a risk-free interest rate of 0.40% and an expected life of three years, adjusted for market liquidity and allocated on a relative basis.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $7,500 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of $0.20 per share for a period of 3 years from the closing date. The warrants may be exercised on a cashless basis.
8. | Capital Stock (cont’d…) |
Stock Options:
A summary of the stock option activity is as follows: | |||||||
Weighted average | |||||||
Number of options | Exercise price | ||||||
Outstanding at December 31, 2011 | 9,748,125 | US$0.06 | |||||
Granted | - | - | |||||
Expired/cancelled | (1,541,280 | ) | US$0.12 | ||||
Outstanding at December 31, 2012 | 8,206,875 | US$0.05 | |||||
Granted | - | - | |||||
Expired/cancelled | (3,465,000 | ) | US$0.04 | ||||
Outstanding at June 30, 2013 | 4,741,875 | US$0.06 |
Stock Options: | |
A summary of the stock options outstanding and exercisable at June 30, 2013 is as follows: |
Weighted | ||||||||||||
Average | Weighted | Aggregate | ||||||||||
Exercise | Remaining | Average | Intrinsic | |||||||||
Price | Number | Contractual Life | Exercise Price | Value | ||||||||
US$ 0.040 | 3,116,250 | 0.51 years | US$ 0.040 | US$ 186,975 | ||||||||
0.080 | 1,500,000 | 2.78 years | 0.080 | 30,000 | ||||||||
0.060 | 33,750 | 2.48 years | 0.060 | 1,350 | ||||||||
0.150 | 22,500 | 2.48 years | 0.150 | - | ||||||||
0.183 | 15,000 | 2.48 years | 0.183 | - | ||||||||
0.200 | 7,500 | 2.48 years | 0.200 | - | ||||||||
0.217 | 46,875 | 0.48 years | 0.217 | - | ||||||||
4,741,875 | 1.26 years | US$ 0.060 | US$ 218,325 |
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 June 30, 2013, which would have been received from 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 June 30, 2013 was 4,650,000 (December 31, 2012 – 6,206,250).
8. | Capital Stock (cont’d…) |
Warrants:
A summary of warrant activity during the six month ended June 30, 2013 is as follows: | |||||||
Weighted average | |||||||
Number of warrants | exercise price | ||||||
Outstanding at December 31, 2011 | 37,482,650 | $ | 0.09 | ||||
Issued as part of private placement | 18,285,012 | 0.07 | |||||
Issued as compensation to consultant | 3,657,002 | 0.05 | |||||
Expired | (5,032,650 | ) | 0.05 | ||||
Outstanding at December 31, 2012 | 54,392,014 | 0.08 | |||||
Issued as part of private placement | 4,050,000 | 0.20 | |||||
Issued as compensation to consultant | 230,000 | 0.20 | |||||
Expired | - | - | |||||
Outstanding at June 30, 2013 | 58,672,014 | $ | 0.09 |
On June 22, 2011, the Company issued 2,500,000 warrants to a consultant in connection with a professional services agreement. These warrants have an exercise price of $0.15 and expire on June 22, 2014. The agreement has a minimum term of twelve months in which the Company may terminate this agreement after eight months. The Company estimated the fair value of these warrants at grant to be $260,858 using the Black-Scholes option pricing model with the following assumptions: expected life of 3 years; volatility of 180%; risk-free interest rate of 2.24%; and a dividend rate of 0%. For the year period ended June 30, 2013, the Company recorded stock-based compensation expense of $72,981 (June 30, 2012 - $126,855). |
8. | Capital Stock (cont’d…) |
A summary of the warrants outstanding and exercisable at June 30, 2013 is as follows:
Weighted Average | |||
Weighted Average | Remaining Contractual | ||
Exercise Price | Number | Life | |
US$ 0.080 | 2,499,999 | 2.69 years | |
$ 0.080 | 9,500,001 | 2.69 years | |
US$ 0.080 | 3,000,000 | 2.73 years | |
$ 0.080 | 3,000,000 | 2.73 years | |
US$ 0.080 | 3,600,000 | 2.93 years | |
$ 0.080 | 7,350,000 | 2.93 years | |
$ 0.150 | 2,500,000 | 1.19 years | |
$ 0.010 | 1,000,000 | 1.68 years | |
US$ 0.065 | 12,285,012 | 4.18 years | |
US$ 0.050 | 2,457,002 | 4.18 years | |
US$ 0.065 | 1,000,000 | 4.55 years | |
US$ 0.050 | 200,000 | 4.55 years | |
US$ 0.010 | 5,000,000 | 4.65 years | |
US$ 0.050 | 1,000,000 | 4.65 years | |
US$ 0.200 | 2,375,000 | 2.90 years | |
US$ 0.200 | 675,000 | 2.89 years | |
US$ 0.200 | 1,000,000 | 2.89 years | |
US$ 0.200 | 230,000 | 2.92 years | |
$ 0.085 | 58,672,014 | 3.06 years |
9. | Changes in non-cash working capital balances |
Six months ended | |||||||
June 30, | |||||||
2013 | 2012 | ||||||
Trade accounts receivable | $ | (101,923 | ) | $ | (94,573 | ) | |
Inventory | (48,301 | ) | 99,175 | ||||
Accounts payable | 68,210 | 57,940 | |||||
Accrued Liabilities | (32,299 | ) | (19,545 | ) | |||
Deferred revenue | 1,332 | 2,015 | |||||
Due to related parties | 16,645 | - | |||||
$ | (96,336 | ) | $ | 45,012 |
10. | Commitments and contingencies |
The Company is committed to minimum annual payments for leases on its premises, automobiles, and office equipment as follows in each of the next three years:
Year or period ending June 30: | $ | |||
2013 | 358,109 | |||
2014 | 196,125 | |||
2015 | 152,921 | |||
2016 | 60,648 |
Rent expense included in the statements of operations is for the three months ended June 30, 2013 is $35,186 (2012 - $34,784) and for the six months ended June 30, 2013 is $70,372 (2012 - $69,367).
On June 22, 2011, the Company entered into a professional services agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant at $8,500 per month, pay commissions of 8% for new sales and issue warrants to acquire up to 2,500,000 shares (Note 8). Additionally for providing specific involvement in a M&A transaction or capital raise transaction, the consultant will be compensated at 7% or 10%, respectively, of the transaction value. The agreement may be terminated by 30 days written notice, after an initial term of 8 months. The commission arrangement shall extend for 12 months beyond termination.
On June 15, 2012, the Company entered into a six month consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant $12,500 per month. This contract was extended on a month by month basis at December 31, 2012.
On August 10, 2012, the Company entered into a one year consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant US$10,500 per month.
On May 1, 2013, the Company entered into a one year consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant $6,500 per month.
On May 11, 2013, the Company entered into a one year consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant $6,500 per month, including all travel expenses and commission payments.
On May 24, 2013, the Company entered into a one year consulting agreement with a consultant for business development and strategic initiatives. As consideration, the Company will compensate the consultant $3,000 per quarter, and was issued 230,000 warrants. These warrants have an exercise price of $ 0.20 and expire on May 30, 2016.
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 to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and door access control systems. | ||
Management evaluates performance based on profit or loss from operations before income taxes and nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales. |
For the three months ended June 30, 2013 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 621,247 | $ | 419,841 | $ | 1,041,088 | ||||
Depreciation and amortization | 755 | 5,223 | 5,978 | |||||||
Interest expense, net | - | - | - | |||||||
Segment income (loss) before income taxes | (437,743 | ) | 144,547 | (293,196 | ) | |||||
Total assets | 1,640,148 | 36,562 | 1,676,710 |
For the three months ended June 30, 2012 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 633,584 | $ | 267,504 | $ | 901,088 | ||||
Depreciation and amortization | 1,131 | 5,223 | 6,354 | |||||||
Interest expense, net | 700 | - | 700 | |||||||
Segment income (loss) before income taxes | (1,419,159 | ) | 44,267 | (1,374,892 | ) | |||||
Total assets | 1,518,281 | 57,454 | 1,575,735 |
11. | Segment information (cont’d…) |
For the six months ended June 30, 2013 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 1,238,035 | $ | 631,373 | $ | 1,869,408 | ||||
Depreciation and amortization | 1,555 | 10,446 | 12,001 | |||||||
Interest expense, net | - | - | - | |||||||
Segment income (loss) before income taxes | (761,015 | ) | 211,248 | (549,767 | ) | |||||
Total assets | 1,640,148 | 36,562 | 1,676,710 |
For the six months ended June 30, 2012 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 1,245,091 | $ | 522,998 | $ | 1,768,089 | ||||
Depreciation and amortization | 2,322 | 10,446 | 12,768 | |||||||
Interest expense, net | 760 | - | 760 | |||||||
Segment income (loss) before income taxes | (1,658,811 | ) | 115,628 | (1,543,183 | ) | |||||
Total assets | 1,518,281 | 57,454 | 1,575,735 |
As at December 31, 2012 | Manufacturing | Servicing | Total | |||||||
Total assets | $ | 1,392,324 | $ | 47,008 | $ | 1,439,332 |
(b) | Of the total revenues for the six months ended June 30, 2013, $230,525 (2012 - $208,714) was derived from U.S.-based customers and $1,638,882 (2012 - $1,559,375) 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 six months ended June 30, 2013 or 2012. | ||
(d) | Products and services: | |
MESH sales represented 48.7% of total revenue during the six months ended June 30, 2013 (2012 – 55.1%). FREEDOM sales represented 18.5% of total revenue during the six months ended June 30, 2013 (2012 – 7.0%). 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’s Discussion and Analysis of Financial Condition and Results of Operation
Results of Operations
Sales for the three months ended June 30, 2013 and 2012 were $1,041,088 and $901,088, respectively, an increase of $140,000 or 15.5%. Sales for the quarter ended March 31, 2013 was $828,320. This quarter ended June 30, 2013 has increased by $212,768, or 25.7%, as compared to the first quarter ended March 31, 2013. Sales for the six months ended June 30, 2013 and 2012 were $1,869,408 and $1,768,089, respectively, an increase of $101,319 or 5.7%. Freedom sales for the three months ended June 30, 2013 and 2012 were $203,882 and $nil, respectively. Freedom sales for the six months ended June 30, 2013 and 2012 were $345,128 and $124,107, respectively, an increase of $221,021 or 178.1% .. MESH sales for the three months ended June 30, 2013 and 2012 were $483,878 and $518,795, respectively, a decrease of $79,917 or 15.4%. MESH sales for the six months ended June 30, 2013 and 2012 were $911,145 and $850,661, respectively, an increase of $60,484 or 7.1%. MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management. The Freedom IT platform can turn any card reader into an IP device by connecting the Freedom IP device with built-in I/O to a POE switch and then every card usage is processed on a redundant MESH server either in the building or anywhere in the world. The software component of Freedom is the MESH web browser security operating platform. Unlike control panels, the user database and the door control software is written in IT language located on a server(s), thereby future proofing systems from the traditional issue of proprietary hardware version obsolescence and improving scalability by eliminating the need for additional hardware every time a reader is added to the system.
For the six months ended June 30, 2013 and 2012, Freedom sales were 18.5% and 7.0%, respectively, of total sales. For the six months ended June 30, 2013 and 2012, MESH sales were 48.7 % and 48.1%, respectively, of total sales.
The Company also provides Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,286 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 six months ended June 30, 2013 and 2012, customer service contracts and new equipment sales generated aggregate sales revenues of $627,573 and $522,998, respectively, an increase of $104,575 or 20.0%. This increase was due to increased Freedom and MESH equipment sales.
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 1,286 at June 30, 2013, as compared to 1,344 at December 31, 2012 and 1,386 at June 30, 2012. During the first two quarters of 2013, the Company performed a test for impairment and evaluated the status of service agreements. Management determined that no charge for impairment was required but the continuing reduction in the number of service contracts held, indicated that the intangible asset should be deemed to have a definitive life. Accordingly, the Company continued to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At June 30, 2013, the cost of the service agreements, net of accumulated amortization, was $36,562.
Cost of sales and services as a percentage of sales was 40.2% and 39.4% for the three months ended June 30, 2013 and 2012, respectively. Cost of sales and services as a percentage of sales was 40.5% and 39.8% for the six months ended June 30, 2013 and 2012, respectively. Cost of sales has remained consistent as we are in the early stages of our Freedom Bridge product line release. We expect cost of sales to remain constant until Freedom Bridge sales increase substantially. Management has continued to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.
Gross profit for the three months ended June 30, 2013 and 2012 was $622,903 and $545,948, respectively, an increase of $76,955 or 14.1%. Gross profit for the six months ended June 30, 2013 and 2012 was $1,112,332 and $1,064,538, respectively, an increase of $47,794 or 4.5%. This corresponds with increased sales and the marginally increased cost of sales for the three and six months ended June 30, 2013, as compared to three and six months ended June 30, 2012.
Selling, general and administrative expenses for the three months ended June 30, 2013 and 2012 were $869,354 and $988,818, respectively, a decrease of $119,464 or 12.1%. Selling, general and administrative expenses for the six months ended June 30, 2013 and 2012 were $1,576,169 and $1,708,319, respectively, a decrease of $132,150 or 7.8%. For the six months ended June 30, 2013 and 2012, selling, general and administrative expenses, as a percentage of sales, were 84.3% and 96.6%, respectively. Consulting fees for the six months ended June 30, 2013 and 2012 were $468,250 and $342,557, respectively, an increase of $125,693 or 36.7%. Consulting fees, in part, increased due to paying additional consultants $52,413 to provide strategic advice and alliances for key markets including the US Federal Government for Freedom projects. Other increases were related to Board of Directors fees which were $63,219.
Research and development costs for the three months ended June 30, 2013 were gross $113,690. Government grants for the three months ended June 30, 2013 totaled $72,925, resulting in net research and development costs of $40,766. Research and development costs for the six months ended June 30, 2013 were gross $218,356. Government grants for the six months ended June 30, 2013 totaled $144,426, resulting in net research and development costs of $73,930. Research and development costs for the quarter ended June 30, 2012 were gross $69,601. Government grants for the quarter ended June 30, 2012 was $nil. Research and development costs for the six months ended June 30, 2012 were gross $142,600. Government grants for the six months ended June 30, 2012 was $nil. Research and development costs have increased during the six months ended June 30, 2013, as compared to the six months ended June 30, 2012, due to hiring an engineer to improve the Freedom design.
Net loss for the three month period ended June 30, 2013 was $707,338, as compared to a net loss of $1,374,892 for the three month period ended June 30, 2012, a decreased loss of $667,554. Net loss for the six month period ended June 30, 2013 was $2,553,654, as compared to a net loss of $1,543,183 for the six month period ended June 30, 2012, an increased loss of $1,010,471. During the six months ended June 30, 2013, expenses were controlled to maintain cash flow and to minimize the net loss. The loss in 2012 was decreased by $112,088 as a result of fair value adjustments of certain outstanding warrants that are accounted for as a derivative financial instruments. The loss in 2013 was increased by $2,003,910 as a result of fair value adjustments of certain outstanding warrants that are accounted for as a derivative financial instrument. The fair value adjustment has no cash flow impact.
Liquidity and Capital Resources
Cash as of June 30, 2013, as compared to December 31, 2012 was $505,662 and $406,506, respectively, an increase of $99,156.
On June 7, 2012, Viscount Systems, Inc. completed a sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share, at a purchase price of US$1,000 and a stated value of US$1,000 per A Share, and for no additional consideration, an issuance of 12,285,012 share purchase warrants of the Company for gross proceeds of US$1,000,000. Each Warrant is exercisable to acquire a common share of the Company at a price of US$0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 24,570,024 shares of common stock of the Company at a conversion price of US$0.0407 per share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of US$100,000 and issued share purchase warrants to acquire 2,457,002 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of US$0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On October 19, 2012, Viscount Systems, Inc. completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share, at a purchase price of $1,000 and a stated value of $1,000 per A Share, and for no additional consideration, an issuance of 1,000,000 share purchase warrants of the Company for gross proceeds of $100,000. Each Warrant is exercisable to acquire a common share of the Company at a price of $0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 2,000,000 shares of common stock of the Company at a conversion price of $0.05 per share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $10,000 and issued share purchase warrants to acquire 200,000 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On November 26, 2012, Viscount Systems, Inc. completed a private placement of 10,000,000 units at a price of $0.05 per unit for total proceeds of $500,000. Each unit consists of one common share and one-half of one share purchase warrant of Viscount, with each whole warrant exercisable to acquire an additional share of Viscount at a price of $0.10 for a period of 5 years from the closing date.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $50,000 and issued share purchase warrants to acquire 1,000,000 shares of common stock of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On May 17, 2013, Viscount Systems, Inc. (the “Company”) completed a private placement of 4,750,000 units at a price of $0.10 per unit for total proceeds of $475,000. On May 21, 2013, the Company completed an additional private placement of 2,000,000 units at a price of $0.10 per unit for total proceeds of $200,000. Each unit consists of one common share and one-half of one share purchase warrant of the Company, with each whole warrant exercisable to acquire an additional share of the Company at a price of $0.20 for a period of three years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a cash commission of $7,500 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of $0.20 per share for a period of three years from the closing date. The warrants may be exercised on a cashless basis.
At June 30, 2013, the Company had a working capital of $669,094, as compared to working capital of $448,029 at December 31, 2012. Working capital had increased by $221,065. The current ratio at June 30, 2013 was 1.71, as compared with 1.49 at December 31, 2012.
The Company has the ability to finance operations and future growth through a stock-based equity injection of up to $1.5 million. However, the state of the global financial markets and recession fears present significant uncertainties for the timing and successful completion of an equity investment.
The Company’s financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $11,195,842, reported a loss for the six months ended June 30, 2013 of $2,553,654 and has working capital of $669,094 at June 30, 2013. Cash flows used in operating activities for the six months ended June 30, 2013 were $561,106. Although management is confident that the company can access sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving profits. Management has determined that the Company will need to raise up to $500,000 before the end of the fourth quarter of fiscal 2013 if sales do not improve, by way of debt or equity financing, to continue normal operations for the next twelve months. If this funding is not available the Company will have to reduce spending in several key areas including research and development and marketing. This would have a negative impact on the growth prospects of the Company. In the event the Company completes the required $500,000 financing and hits its sales targets, the Company does not anticipate requiring any additional financing for 2013. Management has been actively seeking new investors and developing customer relationships; however, a financing arrangement has not yet completed. Short-term loan financing is anticipated from related parties; however, there is no certainty that loans will be available when required. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.
The accounts receivable turnover ratio was 62 days at June 30, 2013, 52 days at December 31, 2012 and 50 days at June 30, 2012. The outstanding term for our receivables has been increasing due to a few slower paying customers. The accounts receivable reserve was $159,983 at June 30, 2013, as compared o $105,185 at December 31, 2012. The accounts receivable reserve has increased by $54,798 or 52.1%, since the year ended December 31, 2012. Additional bad debt was recognized for a particular slower paying customer. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.
The Company is subject to significant liquidity risk. At June 30, 2013, the Company’s current assets consist principally of trade accounts receivables and inventory. The Company must liquidate inventories and rapidly increase collection periods on its receivables to ensure that sufficient cash is available to settle payables and operating costs as they come due.
As the Company’s liquidity increases, we will be purchasing more inventory and hiring more sales and technical staff to accommodate the expected increased future sales.
There are no material unused sources of liquid assets.
For the six months ended June 30, 2013, there were no capital expenditures.
To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. The Company expects that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.
The Company will likely require additional funds to support the development and marketing of its new Freedom product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be unable to develop or enhance its products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.
There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.
The Company does not have any material commitments for capital expenditures as of June 30, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Related Party Transactions
None.
Critical Accounting estimates and judgments:
Critical Accounting Policies:
The Company’s discussion and analysis of its financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the allowance for doubtful accounts, inventory obsolescence, the provision for future warranty costs, the estimated useful lives of equipment and intangible assets, the deferred tax valuation allowance, and assumptions used to determine the fair value of stock-based compensation. Details are provided for critical estimates are as follows:
The Company follows the cost reduction method of accounting for investment tax credits and recognizes the estimated net recoverable amount when reasonable assurance exists as to their collectability. Investment tax credits claimed are ultimately subject to finalization of a review by Canada Customs and Revenue Agency. No assurances can be provided that the Company’s investment tax credit claims will be accepted as filed.
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectability of the Company’s trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made.
The Company reviews its intangible assets on an annual basis for impairment. The intangible assets are comprised of Enterphone service contracts. Management specifically reviews the number of contracts on hand and if there will be significant future cash flows to be generated from these contracts. If the Company determines that there is impairment, then a write-down will be made.
The Company maintains an allowance for inventory obsolescence. Management reviews the inventory on a quarterly basis by directly testing for obsolete inventory. The Company increased its provision for obsolete inventory by approximately $117,042 during the fourth quarter of 2012, as a result of a revised estimate by management.
Income taxes are accounted for under the asset and liability method. Under this method, to the extent that it is not more likely than not that a deferred tax asset will be recovered, a valuation allowance is provided. In making this determination, the Company considers estimated future taxable income and taxable timing differences expected to reverse in the future. Actual results may differ from those estimates.
Derivative financial instruments that are not classified as equity and are not used in hedging relationships are measured at fair value. These include derivative warrant liabilities and derivative conversion option liabilities. Susequent changes to the estimated fair value are recorded in the statement of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recent accounting pronouncements
In July 2012, the FASB issued an update related to annual impairment testing for indefinite-lived intangible assets which provides companies with the option to perform a qualitative impairment assessment for their indefinite-lived intangible assets that may allow them to skip the annual fair value calculation. The qualitative assessment is similar to the screen companies can use to determine whether they must perform the two-step goodwill impairment test. Companies must identify and evaluate changes in economic, industry and company-specific events and circumstances that could affect the significant inputs used in determining the fair value of these assets. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
In June, 2011, the FASB issued ASU No. 2011-05, which amends ASC Topic 220, Comprehensive Income. Under the amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively.
Additionally, the FASB issued a second amendment to ASC Topic 220 in December 2011, ASU No. 2011-12, which allows companies the ability to defer certain aspects of ASU 2011-05. For public entities, these amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures.
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.
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 June 30, 2013. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2013, 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 IFORMATION |
Item 6. Exhibits
31.1 | |
32.1 | Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2013 | VISCOUNT SYSTEMS, INC. | |
(Registrant) | ||
By: | /s/ Stephen Pineau | |
Stephen Pineau, President | ||
Principal Executive Officer | ||
and Principal Financial Officer |