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 endedMarch 31, 2014
[ ] 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 March 31, 2014 the registrant’s outstanding common stock consisted of 122,188,330 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 March 31, 2014, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.1055 for USD$1.0000 or CAD$1.0000 for USD$0.9046
Item 1. Financial Statements
VISCOUNT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
MARCH 31, 2014
VISCOUNT SYSTEMS, INC.
Interim Consolidated Balance Sheets
(Expressed in Canadian dollars)
For the three months ended March 31, 2014
March 31, | December 31, | |||||
2014 | 2013 | |||||
(Unaudited) | (Audited) | |||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 1,986,952 | $ | 172,684 | ||
Trade accounts receivable, less allowance for doubtful accounts of $272,906 (2013 - $250,458) | 559,067 | 585,153 | ||||
Inventory (note 2) | 491,849 | 532,798 | ||||
Total current assets | 3,037,868 | 1,290,635 | ||||
Deposits | 1,391 | 1,391 | ||||
Equipment (note 3) | 21,600 | 22,229 | ||||
Intangible assets | 20,893 | 26,116 | ||||
Total assets | $ | 3,081,752 | $ | 1,340,371 | ||
. | ||||||
Liablilities and stockholders' deficit | ||||||
Current liabilities | ||||||
Accounts payable | $ | 136,020 | $ | 254,682 | ||
Accrued liabilities | 629,021 | 601,270 | ||||
Deferred revenue | 33,272 | 37,543 | ||||
Due to related parties (note 4) | 18,798 | 33,727 | ||||
Loans payable (note 5) | 114,536 | 114,536 | ||||
Total current liabilities | 931,647 | 1,041,758 | ||||
Derivative financial liabilities (notes 6 and 7) | 7,238,956 | 5,118,454 | ||||
8,170,603 | 6,160,212 | |||||
Stockholders' deficit | ||||||
Capital stock | ||||||
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: 122,188,360 common shares (2013 - 97,075,003) (note 8) | 144,966 | 119,853 | ||||
1,115 preferred shares (2013 - 1,115) (note 8) | - | - | ||||
Additional paid-in capital | 8,273,219 | 6,731,161 | ||||
Accumulated deficit | (13,507,036 | ) | (11,670,855 | ) | ||
Total stockholders' deficit | (5,088,851 | ) | (4,819,841 | ) | ||
Total liabilities and stockholders' deficit | $ | 3,081,752 | $ | 1,340,371 | ||
Commitments (note 10) | ||||||
Subsequent event (note 12) |
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Interim Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended March 31, 2014
March 31, | March 31, | |||||
2014 | 2013 | |||||
Sales | $ | 936,873 | $ | 828,320 | ||
Cost of sales | 528,295 | 338,891 | ||||
Gross profit | 408,578 | 489,429 | ||||
Expenses | ||||||
Selling, general and administrative | 810,146 | 706,813 | ||||
Research and development | 121,243 | 33,164 | ||||
Depreciation and amortization | 5,852 | 6,023 | ||||
937,241 | 746,000 | |||||
Loss before other items | (528,663 | ) | (256,571 | ) | ||
Other items | ||||||
Interest income | 11 | 8 | ||||
Fair value adjustment of derivative liabilities (note 7) | (1,285,127 | ) | (1,589,753 | ) | ||
(1,285,116 | ) | (1,589,745 | ) | |||
Net loss and comprehensive loss | $ | (1,813,779 | ) | $ | (1,846,316 | ) |
Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.02 | ) |
Weighted average number of common shares outstanding, Basic and diluted | 122,188,330 | 86,733,750 |
See accompanying notes to interim condensed consolidated financial statements.
VISCOUNT SYSTEMS, INC.
Interim Consolidated Statement of Stockholders' Deficit
(Expressed in Canadian dollars)
(Unaudited)
Additional | |||||||||||||||||||||
Common Stock | Preferred Stock | paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Shares | Amount | capital | deficit | Total | |||||||||||||||
Balance, December 31, 2012 | 86,733,750 | $ | 109,512.00 | 1,149 | $ | - | $ | 5,979,271.00 | $ | (8,590,355.00 | ) | $ | (2,501,572.00 | ) | |||||||
Series A dividends issued or to be issued | - | - | 91 | - | - | - | - | ||||||||||||||
Conversion of Series A shares | 3,071,253 | 3,071 | (125 | ) | - | 192,404 | - | 195,475.00 | |||||||||||||
Units issued for cash from equity securities, net of costs | 6,750,000 | 6,750 | - | - | 487,025 | - | 493,775 | ||||||||||||||
Stock-based compensation - shares for consulting services | 520,000 | 520 | - | - | 52,374 | - | 52,894 | ||||||||||||||
Stock-based compensation - warrants | - | - | - | - | 20,087 | - | 20,087 | ||||||||||||||
Net loss | - | - | - | - | - | (3,080,500 | ) | (3,080,500 | ) | ||||||||||||
Balance, December 31, 2013 | 97,075,003 | 119,853 | 1,115 | - | 6,731,161 | (11,670,855 | ) | (4,819,841 | ) | ||||||||||||
Series A dividends issued or to be issued | - | - | 20 | - | - | (22,402 | ) | (22,402 | ) | ||||||||||||
Units issued for cash from equity securities, net of costs | 25,113,327 | 25,113 | - | - | 2,341,457 | - | 2,366,570 | ||||||||||||||
Value of warrant derivative liability | - | - | - | - | (799,399 | ) | - | (799,399 | ) | ||||||||||||
Net loss | - | - | - | - | - | (1,813,779 | ) | (1,813,779 | ) | ||||||||||||
Balance, March 31, 2014 | 122,188,330 | $ | 144,966 | 1,135 | $ | - | $ | 8,273,219 | $ | (13,507,036 | ) | $ | (5,088,851 | ) |
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Interim Consolidated Statements of Cash Flows |
(Unaudited) |
(Expressed in Canadian dollars) |
For the three months ended |
March 31, | March 31, | |||||
2014 | 2013 | |||||
Operating activities: | ||||||
Net loss | $ | (1,813,779 | ) | $ | (1,846,316 | ) |
Items not involving cash: | ||||||
Depreciation and amortization | 5,852 | 6,023 | ||||
Fair value adjustment of derivative liability | 1,285,127 | 1,589,753 | ||||
Changes in non-cash working capital balances (note 9) | (29,502 | ) | (62,981 | ) | ||
Net cash used in operating activities | (552,302 | ) | (313,521 | ) | ||
Financing activities: | ||||||
Proceeds from private placement | 2,366,570 | - | ||||
Repayment of short term loans payable | - | (9,000 | ) | |||
Net cash provided by (used in) financing activities | 2,366,570 | (9,000 | ) | |||
Increase (decrease) in cash | 1,814,268 | (322,521 | ) | |||
Cash and cash equivalents, beginning of year | 172,684 | 406,506 | ||||
Cash and cash equivalents, end of year | $ | 1,986,952 | $ | 83,985 | ||
Supplementary information: | ||||||
Interest paid | $ | - | $ | - | ||
Income taxes paid | $ | - | $ | - |
See accompanying notes to consolidated financial statements.
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
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, 2013. Operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2014 or for any other interim period. | |
The financial information as at March 31, 2014 and for the three months ended March 31, 2014 and 2013 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 $13,507,036, reported a loss for the three month period ended March 31, 2014 of $1,813,779, and has working capital of $2,106,221 at March 31, 2014. Cash flows used in operating activities for the three months ended March 31, 2014 were $552,302. The ability to sustain the current level of operations is dependant on growing sales and achieving profits. 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 |
March 31, | December 31, | ||||||
2014 | 2013 | ||||||
Raw materials | $ | 271,480 | $ | 347,641 | |||
Work in process | 40,664 | 43,177 | |||||
Finished goods | 179,705 | 141,980 | |||||
$ | 491,849 | $ | 532,798 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
3. | Equipment |
Accumulated | Net book | |||||||||
March 31, 2014 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 100,987 | $ | 9,851 | ||||
Office furniture and equipment | 77,269 | 65,520 | 11,749 | |||||||
$ | 188,107 | $ | 166,507 | $ | 21,600 |
Accumulated | Net book | |||||||||
December 31, 2013 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 100,758 | $ | 10,080 | ||||
Office furniture and equipment | 77,269 | 65,119 | 12,149 | |||||||
$ | 188,107 | $ | 165,877 | $ | 22,229 |
4. | Due to related parties |
Amounts due to directors for director fees and travel expenses totaled $18,798 at March 31, 2014 (December 31, 2013 - $33,727). 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 $114,536 for outstanding loans and advances (December 31, 2013 - $114,536). 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 (“Series A shares”), 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: |
• | 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 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 US Securities and Exchange Commission (“SEC”). |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
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.
On October 19, 2012, the Company 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:
• | 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 Shares (Note 6). These warrants together with other warrants issued in private placements, or as compensation to non employees, have exercise prices denominated in United States dollars which differs from the Company’s functional currency which is the Canadian dollar. | |
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 Preferred Stock and other private placement financings. 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. | |
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 three months ended March 31, 2014: |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
Fair Value Measurements Using Level 3 Inputs | |||||||||||||
Derivative | Derivative | Derivative | |||||||||||
liability | liability | liability – series | |||||||||||
– warrants | – conversion option | A dividends | Total | ||||||||||
Balance, December 31, 2012 | $ | 1,469,288 | $ | 1,520,875 | $ | 32,998 | $ | 3,023,161 | |||||
Preferred share dividends | - | - | 112,079 | 112,079 | |||||||||
Allocation to APIC | 186,030 | - | - | 186,030 | |||||||||
Conversion to common shares | - | (195,475 | ) | - | (195,475 | ) | |||||||
Total fair value adjustment | 793,462 | 1,131,059 | 68,138 | 1,992,659 | |||||||||
Balance, December 31, 2013 | 2,448,780 | 2,456,459 | 213,215 | 5,118,454 | |||||||||
Preferred share dividends | - | - | 35,976 | 35,976 | |||||||||
Allocation to APIC | 799,399 | - | - | 799,399 | |||||||||
Total fair value adjustment | 1,257,681 | (7,235 | ) | 34,680 | 1,285,127 | ||||||||
Balance, September 30, 2013 | $ | 4,505,860 | $ | 2,449,224 | $ | 283,872 | $ | 7,238,956 |
During the three months ended March 31, 2014, the Company recognized a charge to operations of $1,285,127 (March 31, 2013 – $1,589,753) being the change in the fair value of the derivative liability warrants, conversion option and dividends during the period.
During the three months ended March 31, 2014, the Company issued 22 Series A Shares in settlement of dividends with a value of $35,977. At March 31, 2014, there were 19.80 Series A Shares issuable in settlement of dividends which were subsequently issued with a value of $22,402.
The fair value of the warrants and dividends 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:
March 31, 2014 | December 31, 2013 | ||
Volatility | 92% - 176% | 92% - 186% | |
Risk-free interest rate | 0.44% - 1.73% | 0.63% - 1.39% | |
Expected life | 1.84 – 5.00 yrs | 2.19 – 4.75 yrs |
8. | Capital stock |
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-half 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. In connection with the offering, the Company paid cash costs of $15,000 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of US$0.20 per share for a period of 3 years from the closing date. The warrants may be exercised on a cashless basis. | |
Upon issuance of the units, $187,487 were allocated to the warrants and recorded as a derivative liability and the balance of $493,775, 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 and allocated on a relative basis. | |
On May 15, 2013, the Company issued 520,000 common shares in consideration for consulting services with a fair value of $52,894. | |
On March 11, 2014, the Company completed a private placement of 8,333,329 shares of common stock at a price of US$0.09 per share for total proceeds of US$750,000. The Company also issued a total of 4,166,659 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.20 per share for a period of five years from the closing date. |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
In connection with the offering, the Company paid to a registered broker-dealer a commission of US$71,000 in cash and share purchase warrants to acquire 788,888 shares of common stock of the Company at a price of US$0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.
On March 27, 2014, the Company completed a private placement of 16,502,220 shares of common stock at a price of US$0.09 per share for total proceeds of US$1,485,200. The Company also issued a total of 8,251,107 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.20 per share for a period of five years from the closing date.
On March 31, 2014, the Company issued an additional 277,778 shares of common stock at a price of US$0.09 per share for total proceeds of US$25,000. The Company also issued 138,888 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.20 per share for a period of five years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a commission of US$35,604 in cash and share purchase warrants to acquire 395,599 shares of common stock of the Company at a price of US$0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.
Stock Options:
All stock options granted are exercisable in US$. A smmary of the stock option activity is as follows:
Weighted average | |||||||
Number of options | exercise price | ||||||
Outstanding at December 31, 2013 and March 31, 2014 | 1,629,375 | US$0.08 |
A summary of the stock options outstanding and exercisable at December 31, 2013 and March 31, 2014 is as follows:
Weighted average | Weighted average | Aggregate | |||||
Exercise Price | Number | remaining contractual life | exercise price | intrinsic value | |||
US$ | 0.04 | 65,625 | 1.73 years | US$ | 0.04 | $ 5,250 | |
0.06 | 33,750 | 1.73 years | 0.06 | 2,025 | |||
0.08 | 1,500,000 | 2.03 years | 0.08 | 60,000 | |||
0.15 | 22,500 | 1.73 years | 0.15 | - | |||
0.20 | 7,500 | 1.73 years | 0.20 | - | |||
1,629,375 | 2.01 years | US$ | 0.08 | $ 67,275 |
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.12 per share as of March 31, 2014, 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 March 31, 2014 was 1,599,375 (December 31, 2013 – 1,599,375).
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
Warrants:
On May 30, 2013, the Company issued 230,000 warrants to a consultant in connection with a advisory services agreement. These warrants have an exercise price of US$0.20 and expire on May 30, 2016. The Company estimated the fair value of these warrants at grant to be $20,087 using the Black-Scholes option pricing model with the following assumptions: expected life of 3 years; volatility of 157%; risk-free interest rate of 0.49%; and a dividend rate of 0%.
A summary of warrant activity during the three months ended March 31, 2014 is as follows:
Weighted average | |||||||
Number of warrants | exercise price | ||||||
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 | |||||
Outstanding at December 31, 2013 | 58,672,014 | 0.09 | |||||
Issued as part of private placements | 13,741,141 | 0.20 | |||||
Outstanding at March 31, 2014 | 72,413,155 | $ | 0.11 |
A summary of the warrants outstanding and exercisable at March 31, 2014 is as follows:
Weighted Average | ||||
Weighted Average | Exercise Price | Number | Remaining Contractual Life | |
US$ | 0.080 | 2,499,999 | 1.93 years | |
$ | 0.080 | 9,500,001 | 1.93 years | |
US$ | 0.080 | 3,000,000 | 1.98 years | |
$ | 0.080 | 3,000,000 | 1.98 years | |
US$ | 0.080 | 3,600,000 | 2.17 years | |
$ | 0.080 | 7,350,000 | 2.17 years | |
$ | 0.150 | 2,500,000 | 0.47 years | |
$ | 0.010 | 1,000,000 | 0.93 years | |
US$ | 0.065 | 12,285,012 | 3.43 years | |
US$ | 0.050 | 2,457,002 | 3.43 years | |
US$ | 0.065 | 1,000,000 | 3.80 years | |
US$ | 0.050 | 200,000 | 3.80 years | |
US$ | 0.010 | 5,000,000 | 3.90 years | |
US$ | 0.050 | 1,000,000 | 3.90 years | |
US$ | 0.200 | 2,375,000 | 2.38 years | |
US$ | 0.200 | 675,000 | 2.39 years | |
US$ | 0.200 | 1,000,000 | 2.39 years | |
US$ | 0.200 | 230,000 | 2.41 years | |
US$ | 0.200 | 4,955,547 | 4.95 years | |
US$ | 0.200 | 8,641,151 | 4.99 years | |
US$ | 0.200 | 144,443 | 5.00 years | |
$ | 0.09 | 72,413,155 | 2.81 years |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
9. | Changes in non-cash working capital balances |
Three months ended March 31, | |||||||
2014 | 2013 | ||||||
Trade accounts receivable | $ | 26,086 | $ | (70,354 | ) | ||
Inventory | 40,949 | 28,555 | |||||
Accounts payable | (118,662 | ) | 26,400 | ||||
Accrued liabilities | 41,325 | (36,828 | ) | ||||
Deferred revenue | (4,271 | ) | (10,811 | ) | |||
Due to related parties | (14,929 | ) | 57 | ||||
$ | (29,502 | ) | $ | (62,981 | ) |
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 four years: |
Balance of year ending December 31, 2014 | $ | 339,966 | ||
Year ending December 31, 2015 | $ | 217,006 | ||
Year ending December 31, 2016 | $ | 127,248 | ||
Year ending December 31, 2017 | $ | 11,100 |
Rent expense included in the statements of operations for the three months ended March 31, 2014 is $35,186 (2013 - $35,186). | ||
The Company has an agreement with a consultant for business development, investor relations and strategic and financial services. As consideration, the Company compensates the consultant at $5,000 per month (subject to increase if funding is raised), and must pay commissions of 10% on funds raised. The agreement may be terminated by 30 days written notice. The commission arrangement shall extend for 12 months beyond termination. | ||
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 month ended March 31, 2014 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 743,981 | $ | 192,892 | $ | 936,873 | ||||
Depreciation and amortization | 629 | 5,223 | 5,852 | |||||||
Segment income (loss) before other items | (605,024 | ) | 76,361 | (528,663 | ) | |||||
Total assets | $ | 3,060,859 | $ | 20,893 | $ | 3,081,752 |
For the three months ended March 31, 2013 | Manufacturing | Servicing | Total | |||||||
Sales to external customers | $ | 616,788 | $ | 211,532 | $ | 828,320 | ||||
Depreciation and amortization | 800 | 5,223 | 6,023 | |||||||
Segment income (loss) before other items | (323,272 | ) | 66,701 | (256,571 | ) | |||||
Total assets | $ | 1,110,802 | $ | 41,785 | $ | 1,152,587 |
VISCOUNT SYSTEMS, INC. |
Notes to Interim Condensed Consolidated Financial Statements |
(Unaudited) |
(Expressed in Canadian dollars) |
Three months ended March 31, 2014 |
(b) | Of the total sales for the three months ended March 31, 2014, $178,840 (2013 - $134,758) was derived from U.S.-based customers and $758,033 (2013 - $693,562) 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 sales in either of the years presented. | ||
(d) | Products: | |
MESH sales represented 43.4% of total revenue during the three months ended March 31, 2014 (2013 – 51.6%). FREEDOM sales represented 23.2% of total revenue during the three months ended March 31, 2014 (2014 – 17.1%). 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. | ||
12. | Subsequent Event | |
On April 2, 2014, holders of 125 Series A shares elected to convert into 3,071,253 common shares at a conversion price of $0.0407. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Sales for the three months ended March 31, 2014 and 2013 were $936,873 and $828,320, respectively, an increase of $108,553 or 13.1% . Freedom sales for the three months ended March 31, 2014 and 2013 were $217,423 and $141,246, respectively, an increase of $76,177 or 53.9% . The bulk of this increase was the rapid growth of Freedom and Liberty sales which were just starting in 2013. MESH sales for the three months ended March 31, 2014 and 2013 were $403,340 and $427,267, respectively, a decrease of $23,927 or 5.6% . MESH sales have continued a slow decline due to the age of our low end product, and a lack of a mid-range product for the marketplace. Only our high end Mesh product is continuing to grow. MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management. 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 three months ended March 31, 2014 and 2013, Freedom sales were 23.2% and 17.1%, respectively, of total sales. For the three months ended March 31, 2014 and 2013, MESH sales were 43.4% and 51.6%, 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 1,242 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 per month, inclusive of parts and labor. Typical customers include strata management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems. During the three months ended March 31, 2014 and 2013, customer service contracts and new equipment sales generated aggregate sales revenues of $258,988 and $260,293, respectively, a decrease of $1,305 or 0.50% . These two periods comparative periods were consistent.
The intangible assets held by the Company are comprised primarily of service contracts for our Enterphone 2000 product line. The number of service agreements held by the Company was 1,242 at March 31, 2014, as compared to 1,330 at March 31, 2013. The Company continues to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At March 31, 2014, the cost of the service agreements, net of accumulated amortization, was $20,893.
Cost of sales and services as a percentage of sales was 56.4% and 40.9% for the three months ended March 31, 2014 and 2013, respectively. Cost of sales increased due the inclusion of our Service Division cost, which was included in selling general and administration expenses in quarter ended March 31, 2013.Management has continued to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.
Gross profit for the three months ended March 31, 2014 and 2013 was $408,578 and $489,429, respectively, a decrease of $80,851 or 16.52% . This corresponds with increased sales and a reclassification of cost of sales for the three months ended March 31, 2014 as compared to three months ended March 31, 2013.
Selling, general and administrative expenses for the three months ended March 31, 2014 and 2013 were $810,146 and $706,813, respectively, an increase of $103,333 or 14.6% . For the three months ended March 31, 2014 and 2013, selling, general and administrative expenses, as a percentage of sales, were 86.5% and 85.3%, respectively. These percentages are consistent with the total selling, general and administrative expenses for the three months ended March 31, 2014 and 2013, respectively. Consulting fees for the three months ended March 31, 2014 and 2013 were $178,142 and $183,709, respectively, a decrease of $5,567 or 3.03% . Consulting fees remained consistent.
Research and development costs for the three months ended March 31, 2014 were $121,243. Government grants for the three months ended March 31, 2013 was $nil. The Company did not apply for a research grant during the first quarter ended March 31, 2014.Research and development costs for the three months ended March 31, 2013 were $104,666. Government grants for the three months ended March 31, 2013 totaled $71,502, resulting in net research and development costs of $33,164. Research and development costs have remained consistent for these two comparative periods.
Net loss for the three month period ended March 31, 2014 was $1,813,779, as compared to a net loss of $1,846,316 for the three month period ended March 31, 2013, a decreased loss of $32,537. During the three months ended March 31, 2014, expenses were controlled to maintain cash flow and to minimize the net loss. This number will change as include the derivative calculations.
Liquidity and Capital Resources
Cash as of March 31, 2014, as compared to December 31, 2013 was $1,986,952 and $172,684, respectively, an increase of $1,814,268. The Increase was mainly due to completing three private placements in March 2014, raising an aggregate of US$2,260,200.
On June 7, 2012, Viscount Systems, Inc. completed a sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share, at a purchase price of US$1,000 and a stated value of US$1,000 per A Share, and for no additional consideration, an issuance of 12,285,012 share purchase warrants of the Company for gross proceeds of US$1,000,000. Each Warrant is exercisable to acquire a common share of the Company at a price of US$0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 24,570,024 shares of common stock of the Company at a conversion price of US$0.0407 per share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of US$100,000 and issued share purchase warrants to acquire 2,457,002 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of US$0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On October 19, 2012, Viscount Systems, Inc. completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share, at a purchase price of $1,000 and a stated value of $1,000 per A Share, and for no additional consideration, an issuance of 1,000,000 share purchase warrants of the Company for gross proceeds of $100,000. Each Warrant is exercisable to acquire a common share of the Company at a price of $0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 2,000,000 shares of common stock of the Company at a conversion price of $0.05 per share, subject to adjustment provisions.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $10,000 and issued share purchase warrants to acquire 200,000 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On November 26, 2012, Viscount Systems, Inc. completed a private placement of 10,000,000 units at a price of $0.05 per unit for total proceeds of $500,000. Each unit consists of one common share and one-half of one share purchase warrant of Viscount, with each whole warrant exercisable to acquire an additional share of Viscount at a price of $0.10 for a period of 5 years from the closing date.
In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $50,000 and issued share purchase warrants to acquire 1,000,000 shares of common stock of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.
On May 17, 2013, Viscount Systems, Inc. completed a private placement of 4,750,000 units at a price of $0.10 per unit for total proceeds of $475,000. On May 21, 2013, the Company completed an additional private placement of 2,000,000 units at a price of $0.10 per unit for total proceeds of $200,000. Each unit consists of one common share and one-half of one share purchase warrant of the Company, with each whole warrant exercisable to acquire an additional share of the Company at a price of $0.20 for a period of three years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a cash commission of $7,500 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of $0.20 per share for a period of three years from the closing date. The warrants may be exercised on a cashless basis.
On March 11, 2014, Viscount Systems, Inc. completed a private placement of 8,333,329 shares of common stock at a price of $0.09 per share for total proceeds of $750,000. The Company also issued a total of 4,166,659 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
In connection with the offering, the Company paid to a registered broker-dealer a commission of $71,000 in cash and share purchase warrants to acquire 788,888 shares of common stock of the Company at a price of $0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.
On March 27, 2014, Viscount Systems, Inc. completed a private placement of 16,502,220 shares of common stock at a price of $0.09 per share for total proceeds of $1,485,200. The Company also issued a total of 8,251,107 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
On March 31, 2014, the Company issued an additional 277,778 shares of common stock at a price of $0.09 per share for total proceeds of $25,000. The Company also issued 138,888 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.
In connection with the offerings, the Company paid to a registered broker-dealer a commission of $35,604 in cash and share purchase warrants to acquire 395,599 shares of common stock of the Company at a price of $0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.
At March 31, 2014, the Company had a working capital of $2,106,221, as compared to working capital of $248,877 at December 31, 2013. Working capital had increased by $1,857,344. This increase was due to completing three private placements in March 2014, raising an aggregate of US$2,260,200. The current ratio at March 31, 2014 was 3.26, as compared with 1.24 at December 31, 2013.
The Company’s financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $13,507,036, reported a loss for the three months ended March 31, 2014 of $1,813,779 and has working capital of $2,106,221 at March 31, 2014. Cash flows used in operating activities for the three months ended March 31, 2014 were $552,302. Although management is confident that the company can access sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving profits. Management has determined that the Company will not need to raise anymore capital to continue normal operations for the next twelve months. If working capital becomes insufficient, the Company will have to reduce spending in several key areas including research and development and marketing. This would have a negative impact on the growth prospects of the Company. In the event the Company hits its sales targets, the Company will have sufficient working capital for 2014. Management continues actively seeking new investors and developing customer relationships. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.
The accounts receivable turnover ratio was 46 days at March 31, 2014, 61 days at December 31, 2013 and 71 days at March 31, 2013. The outstanding term for our receivables has been decreasing due to more timely payments from a few slower paying customers. The accounts receivable reserve was $272,906 at March 31, 2014, as compared to $250,458 at December 31, 2013. The accounts receivable reserve has increased by $22,448 or 9.0%, since the year ended December 31, 2013. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.
The Company is subject to significant liquidity risk. At March 31, 2014, the Company’s current assets consist principally of cash, trade accounts receivables, and inventory.
As the Company’s liquidity increases, we will be purchasing more inventory and hiring more sales and technical staff to accommodate the expected increased future sales.
There are no material unused sources of liquid assets.
For the three months ended March 31, 2014, there were no capital expenditures.
To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. The Company expects that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.
The Company will likely require additional funds to support the development and marketing of its new Freedom product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be unable to develop or enhance its products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.
There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.
The Company does not have any material commitments for capital expenditures as of March 31, 2014.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Related Party Transactions
During the period ended March 31, 2014 a total of US $10,000 was paid to related parties for Director fees. An additional US $36,963 was paid to related parties as consulting fees during the period.
Critical Accounting estimates and judgments:
The Company’s discussion and analysis of its financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the allowance for doubtful accounts, inventory obsolescence, the provision for future warranty costs, the estimated useful lives of equipment and intangible assets, the deferred tax valuation allowance, and assumptions used to determine the fair value of stock-based compensation. Details are provided for critical estimates are as follows:
The Company follows the cost reduction method of accounting for investment tax credits and recognizes the estimated net recoverable amount when reasonable assurance exists as to their collectability. Investment tax credits claimed are ultimately subject to finalization of a review by Canada Customs and Revenue Agency. No assurances can be provided that the Company’s investment tax credit claims will be accepted as filed.
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectability of the Company’s trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made.
The Company reviews its intangible assets on an annual basis for impairment. The intangible assets are comprised of Enterphone service contracts. Management specifically reviews the number of contracts on hand and if there will be significant future cash flows to be generated from these contracts. If the Company determines that there is impairment, then a write-down will be made.
The Company maintains an allowance for inventory obsolescence. Management reviews the inventory on a quarterly basis by directly testing for obsolete inventory. The Company increased its provision for obsolete inventory by approximately $100,000 during the first quarter of 2014, as a result of a revised estimate by management.
Income taxes are accounted for under the asset and liability method. Under this method, to the extent that it is not more likely than not that a deferred tax asset will be recovered, a valuation allowance is provided. In making this determination, the Company considers estimated future taxable income and taxable timing differences expected to reverse in the future. Actual results may differ from those estimates.
Derivative financial instruments that are not classified as equity and are not used in hedging relationships are measured at fair value. These include derivative warrant liabilities and derivative conversion option liabilities. Susequent changes to the estimated fair value are recorded in the statement of operations.
Recent accounting pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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 March 31, 2014. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2014, 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
10.1 | Employment Agreement between the Company and Dennis Raefield dated February 17, 2014 |
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: May 14, 2014 | VISCOUNT SYSTEMS, INC. |
(Registrant) |
By: | /s/ Dennis Raefield | |
Dennis Raefield, President | ||
Principal Executive Officer | ||
and Principal Financial Officer |