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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 Commission file number: 000-49746 Issuers telephone number: (604) 327-9446 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 per
share Check whether the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Check whether the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Check whether the registrant (1) filed all reports required to
be filed by Section 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. 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 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 if there is no disclosure
of delinquent filers in response to Item 405 of Regulation S-K contained in this
form, and no disclosure will be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[X] Check whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. Check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such common
equity, as of the last business day of the registrants most recently completed
second fiscal quarter: $1,962,537 as at June 30, 2009. State the number of shares outstanding of each of the issuers
classes of common equity, as of the latest practicable date: 17,841,250 shares
of common stock as at February 26, 2010. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K, which Proxy Statement is to be filed within 120 days after the end of the
Registrant's fiscal year ended December 31, 2009. Transitional Small Business Disclosure Format (Check one): Yes
[ ] No [X] 3 Form 10-K 1 FORM 10-K VISCOUNT SYSTEMS, INC. PART I. FORWARD-LOOKING STATEMENTS ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
OTHERWISE INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS",
"PROJECTS", "ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR
EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND
"COULD" ARE GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K,
UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2007. AS USED HEREIN, THE
"COMPANY," "VISCOUNT," "WE," "US," "OUR" AND WORDS OF SIMILAR MEANING REFER TO
VISCOUNT SYSTEMS, INC. Currency of Financial Information and Exchange Rate
Table The Company maintains its books of account in Canadian dollars
and references to dollar amounts herein are to the lawful currency of Canada
unless otherwise indicated. The following table sets forth, for the periods indicated,
certain exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of Canadian dollars per
one (1) U.S. dollar and are the inverse of rates quoted by the Federal Reserve
Bank of New York for U.S. dollars per CDN$1.00. The high and low exchange rates
for each month during the previous six months were as follows: 2 The following table sets out the exchange rate information as
at each of the years ended December 31, 2009 and 2008. Item 1. BUSINESS GENERAL The Company is a manufacturer, developer and service provider
of access control security products. In 2009, commercial sales of its MESH
product line accounted for over 50% of its total sales. MESH (Multimedia
Embedded Security Hub) was a new technology developed by Viscount that converged
voice (intercom, emergency communications), data (access control, elevator
control, alarm) and some video to provide increased security at a reduced cost
of hardware, cabling and installation and with simplified database management.
In addition to MESH, the Companys current access control and
security product lines include the following: Enterphone 2000, a building
intercom; Entercheck, a card access system; RadioClik and InfraClik, radio
frequency and infrared remote controls; Elektra, liquid crystal display intercom
panels; EmerPhone, emergency telephone entry systems; and various accessories.
The Company also has a service division that provides service for the Enterphone
2000. We currently have 1,577 service agreements in place. The Companys website address is www.viscount.com. All
periodic and current reports are available, free of charge, on the Companys
website as soon as reasonably practicable after such material is electronically
filed with, or furnished to, the U.S. Securities and Exchange Commission.
Electronic or paper copies of the Companys filings are also available, free of
charge, upon request. BUSINESS OVERVIEW The Company designs, manufactures and services access control
and security products, including intercom and door access control systems and
emergency communications systems. These systems use telecommunications wiring to
control access to buildings and other facilities for security purposes. Much of
the Companys current revenues are now derived from sales of the MESH product
line. Service sales from the Companys existing 1,577 service agreements also
continue to provide a significant source of revenues. MESH is now the Companys leading sales product, accounting for
61.2% of total sales for the year ended December 31, 2009. MESH technology is
based on a proprietary software platform that can be used for a variety of
security and access control applications as well as communication functions. The
technology represents a departure from traditional access control and security
systems. Traditional systems use controllers that have a capacity to control
from 1 to 8 access points per controller. A building access system using the
MESH technology can control several hundred points of access from a single
remote hardware and software platform. The technology also allows several
previously independent building control systems to be hosted on a single
hardware and software platform. The Companys proprietary MESH software is
designed to be modular, permitting additional applications to be added as
modules, each operating other building and area control systems and high
technology requirements. Enterphone sales have decreased over the past few years, due to
the emergence of MESH, accounting for 9.5% of total sales for the year ended
December 31, 2009. Enterphone is a building access control system that uses a
buildings internal phone wiring thereby avoiding use of telephone utility
services. The Companys products include access control panels that use the
Enterphone technology. The Companys control panels are typically installed at entrances to apartment buildings, government
facilities, and other buildings and facilities where security concerns require
access control systems. The control panels are sold in various formats and with
varying features and capabilities. The Companys Enterphone technology control
panels are sold through an established distribution network, and can be found
installed in approximately 35,000 buildings throughout North America. The
Company also packages and sells access control and security products that are
complementary to its Enterphone product, including card access systems, radio
frequency remote controls, intercom monitors and closed circuit cameras. 3 COMPANY HISTORY The Companys current business is operated primarily through
its wholly owned subsidiary Viscount Communication and Control Systems Inc. The
business of The Companys subsidiary began operations in 1969 as a manufacturer
of video switching equipment. In 1970, the business was acquired by B.C. Telecom
Inc. (BC Tel), which was acquired by Telus Corporation in 1999. BC Tel was the
telephone utility for British Columbia, Canada controlled by GTE Corporation
(now Verizon Communications Inc.). Under BC Tel, the business operated as an
electronics research laboratory and manufacturing facility. Among the products
manufactured were central office telephone test equipment, telephone demarcation
blocks, and a satellite based kiosk system used to provide information at
airports and other public facilities. Responsibility for the manufacture of the
Enterphone system was transferred into the business in 1984 from BC Tel. BC Tel
contracted to sell the business in 1997 to Blue Mountain Technologies Inc., a
company that purchases and installs the Companys products. Blue Mountain
Technologies Inc. simultaneously assigned its contractual rights to acquire all
of the business assets, except for certain leasehold interests, to the Companys
subsidiary, Viscount Communication. BC Tel consented to the assignment and
accordingly the business was acquired by The Companys subsidiary, Viscount
Communication and Control Systems Inc. The Company was incorporated on May 24, 2001 under the laws of
the State of Nevada under the name OMW4 Corp. The Companys subsidiary, Viscount
Communication was incorporated in 1997 under the laws of British Columbia,
Canada, for the purposes of carrying on the present access control business. The
Company acquired all of the issued and outstanding shares in the capital of
Viscount Communication on July 27, 2001, in exchange for 10,000,000 shares of
the Companys common stock, thereby making it our wholly owned subsidiary. As a
result of the acquisition, the former shareholders of Viscount Communication
obtained a controlling interest in OMW4 Corp. In connection with the
acquisition, the Company changed its name to Viscount Systems Inc. effective
August 27, 2001. In 2003, the Company acquired certain inventory and 2,165
service agreements from Telus Corporation. The service agreements related to the
maintenance Enterphone installations throughout Western Canada. The inventory
was comprised of various products and components for installation and repair of
these Enterphone installations. Enterphone is a specialized telephone switch
used to provide intercom and access control functions in buildings. It was
originally developed by BC Tel in 1965. Mirroring the increased security
awareness in buildings over the past few years, The Company has been providing a
more comprehensive package of complementary products. Products packaged, using
third party technologies for this purpose, include card access systems, radio
frequency remote controls, intercom display panels and closed circuit
cameras. The MESH product line, which has been under development since
1998, is an integrated platform for building access control and management. MESH
continues to be the focus of the Companys corporate development. INDUSTRY OVERVIEW The Company competes in the building intercom and access
control systems industry. The intercom and access control industry is sometimes
referred to as a segment of the low voltage systems industry. The Companys
intercom and access control systems are designed to automate the control of
access to buildings or other restricted access areas. Intercom systems and
access control systems are complementary; however they can also be used
independently depending on user requirements. For example, most modern
residential apartment or condominium buildings have an intercom system for
visitors wishing to communicate with residents. Residents, on the other hand,
are issued access cards that can be used in conjunction with card readers
installed beside doors or elevators in order to gain access. 4 Access control systems provide two functions for a building.
Building tenants use access cards and readers that control access through doors,
gates or elevators, while visitors use telephone intercoms to be granted
admission by a building occupant or manager. The systems also provide
sophisticated alarm functions such as identifying doors left open or forced
entry. The sophistication of systems ranges from controlling a single door where
records are kept manually, to large enterprise systems covering hundreds of
buildings from a dedicated security facility. The building control industry has traditionally been highly
segmented based on function. This has meant that makers of heating/ventilation
and air-conditioning systems and security card access systems essentially
manufacture input/output systems, while intercom makers manufacture voice
systems, and security camera makers manufacture closed circuit video systems.
Stated otherwise, audio, video, environment and access control systems are
traditionally all separate building control systems that are independently
controlled. There has been strong convergence of technologies in the computer
and telephone related industries based on digital standards; however the
building control industry has not as yet undergone a similar convergence of
technologies. Traditionally, where systems need to be compatible, the industry
has relied on integration instead of convergence. Integration is the use of a
host computer to tie separate and distinct systems, typically from different
manufacturers, together on a common software platform. Convergence, in the case
of building control systems, is the provision of a new service that is designed
to operate multiple systems using homogenous control parameters. Convergence is
generally considered preferable to integration, as fewer distinct systems means
lower operational and maintenance costs. Along with certain other industry participants, the Company has
turned to current high-technology solutions in order to reduce costs of
ownership of security systems, while improving functionality. The Company has
developed new system platforms that will permit convergence of the control of
various building functions, such as access control, intercom, closed circuit
television, and heating/ventilation and air-conditioning. These systems can be
operated on a single commercially available host server and can operate using
standard communications techniques. As a result of using a single full service
system to replace the three or more separate dedicated systems, each requiring
its own host server, the overall cost of ownership of a security and control
system has been reduced. Access Control Systems Technology The access control industry has traditionally used a technology
known as Wiegand. Approximately 90% of the worlds installed access systems are
based on Wiegand technology. Today, these systems are commonly found in
residential, commercial and industrial buildings in the form of access control
cards and card readers. Wiegand was initially developed in 1970 by Senso
Engineering as an access card technology. The card technology uses a special
patented process whereby wires are imbedded in a plastic access card to encode
its data. When passed through a magnetic field generated by a card reader, the
card generated a signal which is received and interpreted by the card reader. If
the signal is recognized, the reader will transmit the information to a host
controller to activate a switch, which for example purposes, may release a lock
or open an elevator to permit building access to the cardholder. A host
controller is essentially computer hardware that is programmed to receive
information from the card reader in order to permit access to a building.
Wiegand technology has established itself as the industry standard as it is
viewed as being reliable and difficult to counterfeit the access cards. Other products that use the Wiegand principals for access
control are magnetic strip cards and radio frequency cards. These products
function similarly by providing a card reader with a signal that the reader
interprets and transmits to a host controller in order to grant or deny access.
Wiegand access control technology requires card readers that
are connected to a host controller. Each host controller can operate between 1
to 8 doors. Accordingly, a building with a large number of controlled access
points could require a large number of host controllers, resulting in greater
hardware costs. Host controllers can in turn be connected to a central server
that monitors the host controllers and collects information on access point
usage. The underlying technology that operates these traditional
access control systems is approximately 30 years old. The readers are considered
dumb readers as they simply receive information from the access card and
transmit it to a host controller. The host controller processes the information
in order to determine whether to grant or deny access. If access is granted, the
host controller then transmits a signal to activate a switch to open the access
point where the reader is located. This is a simple input/output type relay
system which requires a separate host controller for approximately every eight
access points. 5 As a result of the limitations and hardware requirements of the
traditional access control systems, some security industry manufacturers are
developing and marketing intelligent access control and communications
systems. Intelligent systems allow several previously independent building
control systems, such as intercom, access control, video, and climate control,
to be controlled by a single server. These systems are based on software
designed to control hundreds of readers from a single computer server, combined
with smart chips installed in readers at each control point. Smart chips are
programmable computer chips that permit access card readers to grant or deny
access without the need to relay a signal to and from a central host controller.
Smart chips can be programmed to perform tasks for a diverse range of building
control systems, such as fire alarm systems, heating/ventilation and air
conditioning, and building access and elevator controls. As the smart chip is
programmed to make its own decisions on a given application, this reduces the
load on the central host computer. The host computer accordingly performs
primarily a monitoring and information collection function. The Company is participating in this advance in the access
control industry with its proprietary MESH intelligent access control and
communication technology system. The Company believes that intelligent systems,
including smart chip readers and cards will replace reliance on systems based on
Wiegand technology. PRODUCTS The Company is a manufacturer, developer, reseller and service
provider of intercom and access control systems based on telephone, new and
traditional access card and reader technologies. The Companys intercom and
access control systems are installed throughout North America for various
applications including: condominium/apartment building access and intercom;
residential intercom; gated home/community access and intercom;
seniors/government housing access, tracking and intercom; elevator access and
tracking; garage or perimeter gate control, and emergency communications. For the year ended December 31, 2009, approximately 17% of
total sales of the Companys products and services were generated in the United
States and 83% in Canada. This represents a change from 2008, where sales to the
United States and Canada were 20% and 80%, respectively. Information on the
Companys existing products can be viewed on our website at
www.viscount.com. Enterphone Access Control Products Historically, the Companys principal product was the
Enterphone intercom and access control system. Enterphone is the Companys
patented building entry control system that uses a buildings internal phone
wiring to allow access control for tenants and intercom and access control
between visitors and tenants. The use of a buildings internal phone wiring by
the Companys Enterphone system provides an option to using telephone company
wiring, thereby bypassing monthly telephone charges. It also does not require
tenants to pay for an individual phone line to operate their intercom and door
access system and is not affected by interruptions in telephone company service.
This makes the Companys Enterphone system distinct from other dial-up
telephone entry systems that use telephone company lines. Sales of products
based on the Enterphone system account for approximately 18% of total sales in
fiscal 2008. This is down from approximately 30% in fiscal 2007, due in part to
the development of other sources of sales, including Enterphone maintenance
contracts, new product lines, and OEM product lines. The Enterphone system is sold as a central control panel which
is installed in a buildings telephone control room. The control panel connects
an intercom panel located at an entrance to the building with the telephone of
building tenants. A visitor wishing to gain access to the building dials a 1 to
4 digit number at the entrance panel. The call is directed from the entrance
panel, through the common control equipment and up to the tenants telephone.
The tenant hears a unique ring and can unlock the entrance door by pressing a
number on the telephones numeric keypad. The tenant does not need to rent a
telephone line from the telephone company. Each control panel can process
connections to as many as 840 suites. The Company also manufactures electronic entry access panels
that can operate using either the Enterphone system, or dial-up telephone
company lines. The Companys panels are manufactured in various sizes and with
various features in order to accommodate varying purposes and building types.
For example, the Company manufactures panels that provide intercom and access control from 1 suite to
up to 1000 suites; or panels that provide on-screen name search capabilities; or
panels that are streamlined in shape or small in size. All panels that the
Company manufactures incorporate the Enterphone technology, however most panels
can also be installed to use telephone company lines. 6 Enterphone panels can also be combined with other technologies
such as access tracking and control, closed circuit monitors, infrared and radio
frequency remotes, and Wiegand cards and card readers. The Company purchases
these technologies from other manufacturers and resells them under the Companys
brand names. Most of the products that the Company resells can be integrated
into our Enterphone access control system. Our MESH Access Control System Overview MESH is a software-based building management system designed to
replace traditional systems that are more hardware intensive. The Company
continues to develop technology that was initially conceptualized in 1998. MESH
was commercially released in late 2003. MESH is a software platform that communicates with a network of
intelligent input/output devices, such as card readers or building environment
sensors. As such, the intelligence of the system can be said to be distributed
among the input/output devices. This is contrasted with the traditional access
control industry, which uses dumb readers that require information to be
processed at a central host computer. An intelligent reader or input/output
device uses a pre-programmed smart chip which allows it to process information
on its own, and does not require the host computer to make action decisions,
such as to grant or deny access to a door or to activate air-conditioning. The
use of intelligent devices accordingly reduces the load on the host computer
which allows the host computer to allocate its resources to a greater number and
diversity of tasks. The networked distribution of intelligent devices also
means reduced cost resulting from reduced hardware requirements, easier training
of control system operators, and the use of commercially available host computer
hardware and communication techniques. The conceptual basis for MESH is simple. Virtually every low
voltage building technology, except building access, has evolved using
intelligent addressable network devices. This includes fire alarms and
heating/ventilation and air-conditioning. An addressable network is one in which
devices can constantly communicate with a host server controller or can be
polled for information. For example, if a smoke detector on a non-addressable
fire alarm system fails, a fire in that location may go undetected since there
is no way to identify the failure without actually testing the device. In
contrast, the smart chip in an addressable smoke detector may be able to
notify the fire panel of a problem immediately and call for service. Access
control systems, however, continue to be based on a 30-year-old standard called
Wiegand. The limitations of this standard continue to plague the industry due to
the slow data transmission speed (9600 baud) between the reader and the host
controller, the high cost and quantity of specialized and dedicated hardware,
and the inability of the host computer to process voice or video signals. For
example, buildings requiring elevator access control have traditionally required
a significant amount of expensive dedicated hardware. The MESH network with
intelligent readers can accomplish these functions without dedicated hardware,
resulting in cost reductions, both in terms of the actual hardware required and
the labor, cable and conduit costs associated with installation. The MESH system bypasses the need for specialized and dedicated
hardware. Instead, MESH provides a software-based platform that operates on an
industrial computer server connected to intelligent readers transmitting data
at high speed rates of up to 156,000 baud, while simultaneously running voice
and video applications. The benefits and functionality derived from this
approach can be significant. MESH Structure The MESH network consists of a main control computer server
communicating with a series of intelligent readers, panels, and input/output
devices. The key to the technology is the smart chip, known as the MPNode
computer chip, a programmable chip. The Company purchases the MPNode chips and
programs them to perform certain functions upon detecting certain data. For
access control applications, the chip is installed into a card reader. When data
from an access card is received by the card reader, the chip processes the data
and makes a decision to grant or deny access. Information on the transaction is passed along to
the host computer for data storage and analysis purposes. Traditional Wiegand
style card readers require an intermediate controller for every two or three
reading devices. An intermediate controller is connected between the host
computer and the group of readers controlled by it. In contrast, the MESH system
allows intelligent readers to be installed in series, or daisy-chain fashion,
without the need for intermediate controllers. Small interface modules are used
instead to maintain data flow. This reduces hardware costs as only one host
computer is required. 7 MESH panels, located at entrance doors for visitor access, can
operate independently or as slaves off the MESH server. The basic MESH panel
that the Company has commercially released is a full color screen industrial
computer. Panels may be located at entrance doors for visitor access or can be
on-site managed by security guards as they manage the MESH network. The
slave/master architecture of MESH panels reduces cost, simplifies programming,
and improves data base management. In designing MESH, much consideration has been made of the many
dissimilar applications requiring a MESH network. In cases where building
control is accomplished with on-site security and concierge staff, limited MESH
hardware or possibly only software may be needed to perform the required
functions. For example, MESH software may be sold as a simple visitor tracking
system for commercial or gated residential sites. In general, MESH has been designed to allow simple
installations to be performed by small independent alarm contractors. However,
provision has also been made for direct involvement by the Companys staff in
large campus wide and enterprise wide installations. MESH has many additional benefits, both in terms of building
security and particularly relative to the legacy Wiegand protocol. It is The
Companys belief that addressable networks pose a serious threat to the
continued use of the Wiegand format. MESH is a modular product, meaning that the software can
accommodate add-on features or upgraded features. The Company has developed
various modules for our MESH technology, and intends to develop further modules
which will be released in a series of phases. Some of these product enhancement
modules are described below: MESH Photo-badging software is being designed to allow digital
photo-imaging of individuals accessing a building, which can be stored in a
database. This module is currently in development. The MESH server provides new opportunities to host video on the unified
platform with voice and data. This product enhancement would represent an
entirely new concept in the security industry. The nature of the MESH server makes MESH telephony products inherently
Internet enabled. Future MESH appliances may include the MESH television line,
which allows residents to view visitors at the door. MESH panels will be able
to connect to web enabled set top boxes being promoted as part of the web TV
market. MESH may be able to connect to videoconferencing telephones that would
compete in the large offshore video intercom business but at a fraction of the
cost by saving on conduit and cable. The distributed intelligence of MESH makes the product suited to the
growing emergency call/nurse call industry. MESH networks are built on a proprietary architecture platform which is
functional to integrate with any existing automation network. A new and emerging market segment tracks not just people, but equipment. A
typical application is the embedding of anti-theft chips in computers, which
integrate with card reader systems. Enterphone X The next generation of Enterphone systems, called Enterphone X,
EPX, was released during the second quarter of 2008. The EPX product line has
replaced the EP2000 product line. EPX, also a no phone line system like
EP2000, is the next generation of Enterphone. EPX is more cost
effective because it requires less assembly and material input costs. EPX
improves compatibility with MESH and other newer telephony technologies. EPX
sales are classified as a source of MESH revenue. 8 The Enterphone 2000 design dates back to 1990 and the
architecture has created complications for both manufacturing and installation.
The new universal controller eliminates the need for Viscount to manufacture and
carry inventory for 10 different circuit boards. Overall, EPX reduces cost,
produces higher margins, and improves the Companys ability to market MESH. Other products Other products include RadioClick and InfraClick. These are
remote control access control products for doors and parking gates. They are
sold separately or as complementary to the Enterphone, Entercheck and MESH
systems. The Company also manufactures and sells EmerPhone, an intercom system
that is sold in elevator phone, emergency phone and entry phone
applications. OTHER SERVICES In addition to sales of the Enterphone, MESH and OEM products,
The Company also services approximately 1,577 existing Enterphone installations
within Western Canada. PRODUCTION Viscount has facilities for circuit board manufacture and
mechanical assembly. The Company uses a range of processes to produce its
products. Some products including Enterphone, Infraclik, and Axess are
completely manufactured in-house. MESH and Emerphone use outsourced circuit
boards with final assembly and software installed at Viscount. Some access
control, card readers, Elektra panels, Infraclik and various product accessories
are purchased from other manufacturers and resold under the Companys
brand-names. The Company maintains full facilities to assemble through-hole
circuit boards and limited facilities for assembling surface mount circuits. The
Company has a policy of supporting old products as long as parts are available
for servicing and replacement. We have designed EPX to be backwards compatible
with the 2000 series to improve the longevity and serviceability of both
products. The MESH software platform is loaded on standard industrial
computer chassis. The Company is not developing hardware internally for MESH,
since the required hardware controllers are commercially available at quality
and price levels that make internal development uneconomical. In addition, by
using off-the-shelf components, the Company improves time to market, eliminate
hardware debugging and increases the Companys ability to be technologically
flexible in the future. The Company is primarily executing final mechanical
assembly of the MESH systems. RESEARCH AND DEVELOPMENT Research and development continues to be focused on enhancing
MESH. A number of these enhancements were identified in the MESH Structure and
Other products section of this document. Specific custom MESH applications are
being considered, evaluated and implemented. An example of this process would be
considering built-in badging printers and a virtual concierge. Expenditures in
connection with research and development during the last two fiscal years
totaled $575,570. MARKET AND MARKETING The Market The intercom and access control market is serviced by a number
of large and small competitors. The Companys traditional products compete in a
mature market place that largely uses the 30 year old Wiegand technology. The
Company believes that there currently exists an opportunity in the building and
access control market for innovative products that use current technologies to reduce user costs.
The Company has positioned its MESH technology to take advantage of this
opportunity. 9 The access control market can generally be described as the
market for any equipment used to control passage through a door, gate or other
portal. A portion of this market is comprised of mechanical and electronic door
locks that typically control access through single doors. Many of the single
door systems have been engineered for low security levels for customers who do
not desire a full access control host. The access control market that the
Company competes in involves computerized access control systems that typically
control access through multiple access points, such as the Enterphone system.
MESH was designed to present a new technology to this computerized market niche.
In particular, in large high-rises with a full MESH system, individual tenants
may use the MESH server to control access to one or two doors. The Companys traditional market for the Enterphone product was
apartment and condominium buildings. While the market for telephone entry type
systems amounts to about US$100 million, in the past 10 years there has been a
strong trend towards increased building security resulting in much more
sophisticated integrated installations. For example, in 1990, a typical
condominium building would be equipped with an intercom to admit visitors.
Today, a typical new building installation includes telephone entry, card
access, closed circuit cameras, individual burglar alarms and panic stations.
This puts pressure on manufacturers to provide a comprehensive package and
represents an opportunity for significant revenue growth per system. MESH is the
Companys first in-house product that addresses these multiple requirements. The
modular nature of MESH also provides the Company with an excellent opportunity
to design additional products on the MESH platform to provide enhanced options
for a comprehensive building security package. In addition to apartment entrances, MESH is also designed to
provide access control for the rapidly growing gated community market. Monitor
style directory panels are also used in thousands of commercial high-rises. The
MESH panel provides features previously unavailable for this market. The overall
effect of these system advances has enhanced the Companys core business, while
allowing the Company to find applications where the new features expand the
traditional market for such systems. The Company is targeting upgrades and retrofits to existing
apartments and various government agencies that use traditional telephone wire
intercom access control systems. New construction projects are also part of the
MESH installation market. The low hardware costs and increased functionality of
the MESH system continue to be marketed to building management companies, along
with its turnkey installation as a replacement to existing access control
systems for most modern buildings. While complete MESH networks will typically be installed, the
modular nature of MESH allows additional segmentation based on product
application and end-user need. The nature and scope of a MESH installation
depends on the level of security required, the product alternatives, the number
of buildings, and the level of system management required. The nature and scope
of an installation can be described in terms of a user spectrum ranging from
price sensitive users to users requiring enhanced services. At one end of this
spectrum is price. For these applications MESH has been competing with
traditional Wiegand systems. The Company believes the cost reduction aspects of
MESH have provided it with a competitive advantage over traditional Wiegand
systems. For example, a typical condominium developer does not manage a building
after construction. Therefore, the developer is looking for a very affordable,
reliable access control system. Unless a more sophisticated product will help
sell suites, the developer tends to keep the system simple. At the middle of the
spectrum are customers who will adopt MESH mainly due to system benefits. For a
commercial high-rise this may be the flexibility derived from a new user profile
approach MESH uses for programming. On the enhanced service end of the spectrum
the Company finds customers who need to develop a much closer relationship due
to the level of sophistication of their needs. At this level, the Company
anticipates additional revenue opportunities for custom programming, data mining
and hosting, and direct installations for national accounts. While the core function is controlling access/egress, through
the planned development of various MESH technology modules, the Company has been
actively targeting all of these segments. For example, a MESH add-on module can
be developed to provide an asset tracking system to prevent computer theft. The
inherent alarm functions of MESH allow it to be used as an integrated
theft/burglar alarm system for large facilities. The MESH telephony video
capture function will allow government agencies to track alcohol and drug
problem tenants of controlled housing complexes or other regulatory monitoring functions. Finally,
MESH, along with the EmerPhone, can function to combat vandalism and to secure
parking lots. 10 The Company ranks controlling access/egress and securing
parking facilities as the primary concerns of its traditional core
multi-residential business. Distribution Plan The Company currently has approximately 500 dealers for its
existing products throughout North America. When the existing business was
acquired from BC Tel, the Company relied primarily on exclusive and
semi-exclusive dealers in certain major metropolitan areas. The Companys
distribution network is not static and the Company is constantly seeking
additional sales channels. In October and November of 2003, the Company signed a
distributor deal with Tri Ed, the security distribution subsidiary of Tyco. The
agreement placed The Companys security products in 27 Canadian and U.S. Tyco
branches, including Denver, Dallas, Phoenix, Seattle and six locations in
California. As previously noted MESH can serve several different markets
and the type of dealer serving each may vary. Simple installations may be
performed by small independent dealers, but as the overall scope of the project
increases, the technical ability of the dealer becomes increasingly important.
At the extreme, employees may be directly involved with the customer in
designing, installing and servicing the product. In other cases, personnel may
be involved on a co-op basis with large national security, building automation
and heating/ventilation and air-conditioning contractors. These distribution deals, along with the existing dealer base,
gave the Company immediate access to the largest networks of dealers in the US,
Canada and Mexico. During the past year, the Company has been targeting its
existing markets for the sale of MESH technology, as well as targeting the
international marketplace. Internationally, the Company has sold MESH in China,
India, France, and New Zealand. MESH is designed to accommodate foreign
languages with minimal modifications to the software. This is in contrast to
other products of its type which require a heavy software investment to provide
alternative language software. With MESH, the core software can be applied in
all languages with only the on screen text displays needing to be translated.
Translation can be accomplished using commercially available translation
software. MESH Marketing Strategy The Company has been using its established distribution
channels, as well as new distribution channels to access its target markets for
the MESH technology. As a unique technology, however, end-users as well as
dealers must be educated about MESH benefits. It is the Companys experience
that a stronger initial emphasis on end-user decision-makers and large national
system integrators will be the most effective in developing the MESH market. Advertising Products are advertised on an ongoing basis in various print
publications, which the Company will continue to do. We have been testing new
publications on a regular basis to evaluate response, sales and readership. All
leads are followed up and magazines are rated based on a dollar sale per
advertising dollar spent ratio. While the sales cycle is sometimes fairly long,
this approach has given the Company a very accurate measure of the effectiveness
of various publications and individual ads. Trade Shows During 2009, the Company reduced its participation at
tradeshows to reduce costs. During 2010, we will consider attending certain
tradeshows that will provide increased exposure for MESH. 11 Direct Marketing The Company continued educating customers about MESH technology
by holding MESH training seminars throughout the U.S. and at our head office,
via the internet. Pricing Strategy The MESH technology is built on an architecture which can
reduce user costs significantly. The modular nature of the technology amplifies
this effect the larger the system becomes. With a unique product and a position of product leadership, the
Company has devised a strategy of building market share. This strategy involves
selling MESH at reasonable 50-60% margins. With the telephony component, the
Company has been targeting a price which provides MESH panels at a price that is
competitive with similar products, but with newer enhanced features. COMPETITION The security and building control industry is undergoing a
rapid period of consolidation. Large multi-national companies are integrating
vertically by acquiring equipment providers to build house brands. Recent
examples are the purchase of Cardkey by Johnson Controls, Guardall by Chubb and
ADI/Northern Computers by Honeywell. The access control industry is very
segmented with no company having a dominant market position. Canada has
approximately six access control product manufacturers, while the U.S. has at
least fifty. There is a certain amount of vertical integration in the business
and several large multinational companies own their own house brands. Many
branches of these multinational companies often have their own brand preferences
and buy outside their internal distribution channels. Almost all manufacturers build control hosts based on Wiegand
technology. Due to these limitations, most research and development is focused
on cost reducing hardware and making the control hosts more network capable. In
all cases, the manufacturers using traditional Wiegand technology are limited
from 1 to 8 doors per host. Competitive Threats The Company has a strong dealer and distribution plan in place
and MESH has positioned it in a market dominated by much larger players. The
higher security MESH applications are also somewhat outside of the traditional
scope of business and therefore, the Company is rapidly trying to develop a
market for MESH and in the process, educating users of MESH through training
seminars. The Company believes that marketing strategies and training seminars
will provide benefits that will help it achieve market share that will allow it
to remain competitive. There is no guarantee that the Company will be able to
successfully compete against its larger competitors. While MESH is still a new product in an established growing
market, technological change can be met with resistance. Some buyers are nervous
about new products, and new protocols even more so. Most buyers are familiar
with the benefits of addressable fire alarms and the Company has marketed MESH
from this point of view; that is to stress the inevitability of all access
control systems evolving this way. A key concern is the ability of competitors to imitate the
product and the ability of large imitators to more easily commercialize their
product. We have estimated that The Company still has a three-year market lead.
Fortunately, the wide range of MESH software applications should provide the
Company with an ongoing lead, as long as it is aggressive with research and
development. 12 INTELLECTUAL PROPERTY The Company will rely on a combination of non-disclosure and
other contractual agreements, and technical measures to protect the confidential
information, know-how, and proprietary rights relating to Enterphone, MESH and
other Viscount products. The Company has contractual rights with respect to
registered North American trademark and trade name for Enterphone (word alone).
The Company is still considering registering North American trade names for
MESH. The Company has registered active Internet domain names for
www.viscount.com , www.enterphone.net, and www.enterphone.org. Standard employment agreements and license agreements contain
provisions that protect the confidentiality of proprietary technology. All our
employees and sales agents are required to sign these agreements prior to their
employment or engagement. To date the Company has not received notification that its
services or products infringe the proprietary rights of third parties. Third
parties could however make such claims of infringement in the future. The
Company cannot be certain that others will not develop substantially equivalent
or superseding proprietary technology, or that equivalent services will not be
marketed in competition with the Companys services, thereby substantially
reducing the value of its proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements will provide meaningful protection for its
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information. GOVERNMENT REGULATIONS Some of The Companys products are still under government
regulation. The Enterphone is an interposition technology which in U.S. states
can only be installed where the local public service commission has designated
the original point of entry of a building as the demarcation point between the
telephone company and building owners responsibility. Conversely, it can also
be installed where the telephone company has given consent to allow Enterphone
to share the telephone backbone. The history of government deregulation for the Company mainly
relates to the demarcation point in a building. Until government deregulation
came to the access control industry, Enterphone type systems could only be
installed by telephone companies. After the break-up each regional telephone company began to
make its own decisions. As a result of this, Chicago, New York, and Boston
became strong markets for the Enterphone. Another result of government
deregulation was that many telephone companies withdrew from the access control
systems industry, which resulted in the Company using direct dealers in those
regions. SOURCES OF REVENUES The majority of the Companys revenues were derived from the
MESH and Enterphone product lines. In fiscal 2009, MESH sales represented 61.2%
of total revenue, while Enterphone product sales represented 9.5% of total
revenue. The balance of the Companys revenues were derived from service
agreements, and other products such as access tracking and control, closed
circuit monitors, infrared and radio frequency remotes. EMPLOYEES Viscount employs twenty five staff at its production facility
and head office located in Burnaby, British Columbia, Canada. Item 1A. RISK FACTORS You should carefully consider the following risk factors and
other information in this annual report and in filings with the Securities and
Exchange Commission when you evaluate the Companys business and the
forward-looking statements that the Company makes in this annual report. Other companies with greater resources than we have are
currently developing or have commercially available products that use similar
technology to MESH product and the company may lose potential market share as a
result. The MESH access control product is based on intelligent access
modules, which use commercially available programmable microchip technology. Due
to increasing availability and decreasing price of programmable microchips, the
development and commercialization of intelligent access control systems is not
unique to the Company. There are other companies that have developed or are
developing similar products that use intelligent cards and card readers that
will be competing with the Company in the access control industry. These
competitors may have substantially greater financial, technical, marketing and
management resources than the Company has. The Companys ability to compete
successfully will depend on its ability to educate and use existing sales
channels and develop new sales channels. To the extent that competitors have
more resources to market products based on similar technology, the Company may
lose market share which would decrease the value of an investment in its common
stock, or may cause the value of an investment in the Companys common stock to
decrease. The loss or unavailability of Stephen Pineau, the
Companys President, Principal Executive Officer, and Principal Financial
Officer for an extended period of time could adversely affect business
operations and prospects. The Companys success depends, to a significant degree, upon
the effort and skill of Stephen Pineau, president and chief executive officer.
The Company does not maintain key man insurance on Mr. Pineau. Due to his
knowledge of operations and products, the loss, incapacity, or unavailability of
Mr. Pineau could have a material adverse effect on the business, financial
condition or results of operations, which would likely result in a decrease in
the value of an investment in our common stock. Because common stock trades at prices below US$5.00 per
share, and because the Company is not listed on a national exchange, there are
additional regulations imposed on broker-dealers trading in the Companys shares
that may make it more difficult for you to resell the Companys shares.
Because of rules that apply to shares with a market price of
less than US$5.00 per share, known as the penny stock rules, investors in this
offering will find it more difficult to sell their securities. The penny stock
rules currently apply to trades in the Companys shares. These rules in most
cases require a broker-dealer to deliver a standardized risk disclosure document
to a potential purchaser of the securities, along with additional information
including current bid and offer quotations, the compensation of the
broker-dealer and its salesperson in the transaction, monthly account statements
showing the market value of each penny stock held in the customers account, and
to make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchasers written agreement to
the transaction. Directors and officers hold approximately 47% of the
Companys common stock and acting together may have the ability to control
management and affairs of Viscount and to deter changes in control. The Companys directors and officers collectively hold
approximately 47% of our current issued and outstanding voting shares. As a
result, such persons, acting together, may have the ability to control most
matters submitted to our stockholders for approval, including the election and
removal of directors, and to control the management and affairs of Viscount. In
addition, Articles of Incorporation include provisions that management can use
to retain control over Viscount. Accordingly, such concentration of ownership,
coupled with management friendly anti-takeover provisions, may have the effect
of delaying, deferring or preventing a change in control of Viscount, impeding a
merger, consolidation, takeover or other business combination or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company, which limits the ability of stockholders to participate
in opportunities that may increase the value of their stock. Item 2. DESCRIPTION OF PROPERTY 14 PROPERTY The Companys executive office and central factory is located
in Burnaby, British Columbia, where the Company currently leases 12,040 square
feet. The Company leases this space under an industry standard operating lease
with a term expiring May 31, 2010, renewable at the option of Viscount. Current
monthly lease obligations are $11,223. The Company believes that its current
facilities are adequate and are suitable for its current use, and that suitable
additional facilities will be available, when needed, upon commercially
reasonable terms. The Companys facilities are adequately insured against perils
in a manner consistent with industry practice. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS None. PART II. Item 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES Trades in the Companys common shares are quoted on the
Over-the-Counter Bulletin Board (OTC Bulletin Board) which is a quotation
service administered by the Financial Industry Regulatory Authority (FINRA). The
Companys trading symbol on this service is VSYS. The OTC Bulletin Board has a limited and sporadic trading
market and does not constitute an established trading market. The Companys
shares began trading on February 12, 2002. The following table sets forth the
range of high and low price information of the common shares as reported on the
OTC Bulletin Board for the last three fiscal years and the subsequent period
ending March 12, 2010. The price information available reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions. As of January 4, 2010 there were 39 holders of record of the
Companys common stock, holding a total of 17,841,250 shares, and an unknown
number of beneficial holders. The Company has not declared any dividends in the last two
fiscal years. 15 The following table sets forth information detailing the
Companys compensation plans as at December 31, 2009, under which shares of our
common stock are authorized to be issued. Item 6. SELECTED FINANCIAL DATA Not applicable. Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION The following discusses the Companys financial condition and
results of operations based upon its 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 the
Companys financial statements and the notes thereto included elsewhere herein.
All dollar amounts are in Canadian dollars unless otherwise noted. RESULTS OF OPERATIONS Sales revenues for the years ended December 31, 2009 and 2008
were $4,892,440 and $5,102,434, respectively, a decrease of $209,994 or 4.1% .
This decrease in sales for the year ended December 31, 2009 resulted from a
greater decrease in sales of the legacy Enterphone 2000 system, as compared to
the increase in sales of MESH products. MESH sales for the years ended December
31, 2009 and 2008 were $2,993,897 and $2,627,308, respectively, an increase of
$366,589 or 14.0% . MESH sales for the year ended December 31, 2009 were 61.2%
of total sales, as compared to 51.5% of total sales for the year ended December
31, 2008. MESH is a convergent technology developed by Viscount that increases
security at a reduced cost of hardware, cabling and installation, and with
simplified database management. Enterphone 2000 sales for the years ended
December 31, 2009 and 2008 were $465,014 and $902,663, respectively, a decrease
of $437,649 or 48.5% . Enterphone 2000 sales for the year ended December 31,
2009 were 9.5% of total sales, as compared to 17.7% of total sales for the year
ended December 31, 2008. As an old technology, Enterphone sales have been
dropping for several years and negating much of the MESH growth. MESH EPX is the
replacement for the older Enterphone system. MESH EPX is the next generation of
Enterphone systems but with features that are compatible with high speed
internet and other newer technologies. With MESH EPX, the Company has been
recovering its lost Enterphone revenue while continuing to increase its MESH
business. Management believes that sales of the MESH product will continue to
represent an increasing proportion of total sales relative to sales of
Enterphone products. The Company also provides Enterphone support and maintenance
services pursuant to service contracts that were assigned to the Company from
Telus Corporation in 2003. Sales from the 1,577 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 twelve months ended December 31, 2009, customer
service contracts and new equipment sales generated aggregate sales revenues of $1,568,134, as compared to $1,638,913 for the year
ended December 31, 2008, an decrease of $70,779 or 4.3% . These two comparative
years are consistent. These sales included MESH sales by the service
division. 16 The intangible assets held by the Company are comprised
primarily of service agreements for the Enterphone 2000. The number of service
agreements held by the Company decreased from 1,630 at December 31, 2008 to
1,615, 1,598, 1,587, and 1,577 at March 31, June 30, September 30, and December
31, 2009, respectively. During the four quarters of 2009, 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 December 31, 2009, the cost of the service
agreements, net of accumulated amortization, was $109,684. The cost of sales as a percentage of sales was 39.3% for the
year ended December 31, 2009, as compared with the cost of sales as a percentage
of sales of 42.5% for the year ended December 31, 2008. Costs of sales as a
percentage of sales has remained consistent due to managements commitment of
reviewing input costs regularly. The Companys policy of managing cost of sales
remains the same. The Company is continuously focusing on controlling costs, by
using multiple suppliers to ensure that the best and most inexpensive raw
materials are used in its products. In addition, the Company reduced its
provision for obsolete inventory by approximately $150,000 during the fourth
quarter of 2009 as a result of a revised estimate by management. Gross profit for the year ended December 31, 2009 was
$2,971,829, as compared to $2,932,238 for the year ended December 31, 2008, an
increase of $39,591 or 1.35% . This increase corresponds with a consistent cost
of sales percentage for the year ended December 31, 2009 and the adjustment to
cost of sales resulting from the change in the estimate for inventory
obsolescence previously mentioned. Selling, general and administrative expenses were $2,249,315
and $2,622,946 for the years ended December 31, 2009 and 2008, respectively, a
decrease of $373,631 or 14.2% . This decrease was due to reductions in staffing
costs, in addition to reductions in advertising, travel, tradeshow and various
office expenses. As a percentage of sales, selling, general and administrative
expenses were 46.0% and 51.4% for the years ended December 31, 2009 and 2008,
respectively. Research and development costs were $243,833 for the year ended
December 31, 2009, as compared to $331,737 for the year ended December 31, 2008.
Research and development costs decreased by $87,904 or 26.5% . Research and
development have decreased during these two comparative periods, as more MESH
project phases have been completed. Income before income tax for the year ended December 31, 2009
was $425,500, as compared to loss before income tax of $(86,364) for the year
ended December 31, 2008. This equates to an increase in year over year income of
$511,864. The increase in profitability was the result of reductions in staffing
costs, in addition to reductions in advertising, travel, tradeshow and various
office expenses and the change in the estimate for inventory obsolescence
previously mentioned. LIQUIDITY AND CAPITAL RESOURCES Cash on hand was $124,378 and $255,172, for December 31, 2009,
and December 31, 2008 respectively. This represented a decrease of $130,794. In
addition to cash on hand, the company has a credit facility that can be drawn
upon to the lesser of $500,000 or 75% of accounts receivable less than 90 days
at the prime lending rate plus 1.75% . Amounts drawn are repayable on demand. At
December 31, 2009, $218,703 was drawn on this facility. The facility is secured
by substantially all of the Companys assets under a general security agreement.
At December 31, 2009, working capital was $778,879 as compared
to a working capital of $290,508 at December 31, 2008. Working capital has
increased by $488,371. The current ratio at December 31, 2009 was 1.67 to 1.0,
as compared with 1.26 to 1.0 at December 31, 2008. 17 Accounts receivable turnover for years ended December 31, 2009
and 2008 was 5.5 and 8.5 times, respectively. The decrease in year over year
turnover ratios is caused in its entirety by one large and irregular account
receivable from a large customer. Ignoring the large, irregular receivable, year
over year turnover for 2009 and 2008 are 8.04 and 8.48 respectively and are
relatively consistent. This consistency was due to consistent follow up and
monitoring of slower paying accounts on a monthly basis by management. The
accounts receivable reserve was $337,475 at December 31, 2009, as compared to
$336,776 for the year ended December 31, 2008, an increase of $699. Management
continues to conduct regular follow-up on certain customer accounts to improve
the collection process. Management is not aware of any significant or material
changes to business conditions that would warrant a change to the reserve at
this time. For the year ended December 31, 2009, 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 MESH product. There can be no assurance
that additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, 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 December 31, 2009. There are no known trends or uncertainties that will have a
material impact on revenues. Related Party Transactions During the 2008 fiscal year, the President loaned the Company
$100,000. The loan carried interest at 9.5% per annum, was unsecured and had no
fixed terms of repayment. The loan was repaid during the fourth quarter of
2009. Critical Accounting Policies: The Companys discussion and analysis of its financial
condition and results of operations, including the discussion on liquidity and
capital resources, are based upon the Companys 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 Companys 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 Companys 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. 18 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 reduced its provision for obsolete inventory by
approximately $150,000 during the fourth quarter of 2009 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. RECENTLY ISSUED ACCOUNTING STANDARDS In March 2008, the FASB issued guidance to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. The
guidance achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity's liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. The guidance
became effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, and was adopted by the Company
beginning in the first quarter of 2009. The adoption had no material impact on
the Company's financial position, results of operations or cash flows. In April 2008, the FASB issued guidance that amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset in order to improve
the consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset.
Guidance is effective for fiscal years beginning after December 15, 2008. The
adoption had no material impact on the Company's financial position, results of
operations or cash flows. In April 2009, the Financial Accounting Standards Board
(FASB) issued authoritative guidance for estimating the fair value of assets
and liabilities when the volume and level of activity associated with those
assets and liabilities has decreased significantly. The guidance also requires
the disclosure of the inputs and valuation technique(s) used to measure fair
value and a discussion of changes in valuation techniques and related inputs, if
any, during the period. The adoption had no material impact on the Company's
financial position, results of operations or cash flows. In May 2009, the FASB issued guidance that establishes general
standards of accounting for and disclosure of events that occur subsequent to
the balance sheet date but before financial statements are issued. The statement
defines two types of subsequent events (1) recognized subsequent events, which
provide additional evidence about conditions that existed at the balance sheet
date, and (2) non-recognized subsequent events, which provide evidence about
conditions that did not exist at the balance sheet date, but arose before the
financial statements were issued. Recognized subsequent events are required to
be recognized in the financial statements, and non-recognized subsequent events
are required to be disclosed. The guidance requires entities to disclose the
date through which subsequent events have been evaluated and the basis for the
date. The adoption had no material impact on the Company's financial position,
results of operations or cash flows. In June 2009, the FASB issued The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 168. Upon its adoption, the FASB Accounting
Standards Codification (the Codification) will become the source of
authoritative GAAP recognized by the FASB to be applied to nongovernmental
entities. On the effective date, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. Following this, the
FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions,
or Emerging Issues Task Force abstracts. This will also modify the existing
hierarchy of GAAP to include only two levels authoritative and
non-authoritative. This is effective for financial statements issued for interim
and annual periods ending after September 15, 2009, and early adoption is not
permitted. The adoption of this standard did not have a material impact on its
financial position, results of operations or cash flows. 19 Recent accounting pronouncements In October 2009, the FASB issued authoritative guidance on
revenue recognition that will become effective beginning July 1, 2010, with
earlier adoption permitted. Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition. The Company believes the adoption of this new guidance
will not have a material impact on its financial statements. In June 2009, the FASB issued authoritative guidance on the
consolidation of variable interest entities, which is effective beginning July
1, 2010. The new guidance requires revised evaluations of whether entities
represent variable interest entities, ongoing assessments of control over such
entities, and additional disclosures for variable interests. The Company
believes adoption of this new guidance will not have a material impact on its
financial statements. Other recently issued pronouncements are not expected to be
applicable to the Company or have significant impact on the Companys financial
statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are attached to this report following
the signature page. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. Item 9A. CONTROLS AND PROCEDURES Managements Evaluation of Disclosure Controls and
Procedures The Companys management, including its principal executive
officer who is also our principal financial officer, evaluated the effectiveness
of disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this report. Based on that
evaluation, the principal executive officer and principal financial officer
concluded that as of the end of the period covered by this report, the Company
has 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 the principal executive
officer and principal financial officer, as appropriate to allow for timely
decision regarding required disclosure. 20 There have been no changes in internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting. Managements Report on Internal Control over Financial
Reporting The Companys management is responsible for establishing and
maintaining effective internal control over financial reporting as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2009 using the criteria set
forth in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2009, the Companys
internal control over financial reporting was not effective based on those
criteria. Based on the assessment, management has found the following material
weaknesses and significant deficiencies in internal controls: Material Weaknesses: The Audit Committee and Board of Directors are both
wholly composed of members of management. As a result, the Board and the
Audit Committee are not independent. In addition, none of the members of
the Board or Audit Committee are professionally designated financial
experts. Job roles in the accounting department are not adequately
segregated to effectively reduce the risk of fraud. Complex financial information and journal entries created
during the financial closing process are not reviewed in sufficient detail
by senior management or the Board Significant Deficiencies: Management has not implemented a formalized risk
assessment process to address fraud risks as they relate to financial
reporting. . The compensation committee is wholly composed of members
of management. Roles and responsibilities for the financial reporting
process are not documented in a formalized manner. All employees have full access to inventories.
Inventories are not adequately secured from employees who do not need
access. The accounting department has unrestricted access to all
parts of the G/L and access to inventory. Management has not implemented a formalized IT
policy. Physical access to IT infrastructure is not adequately
restricted. Management does not have a data retention
policy. Management is in the preliminary stages of addressing known
material weaknesses and significant deficiencies. It plans to remain vigilant
and to add additional staff and system improvements as resources permit. Item 9B. OTHER INFORMATION Not applicable. PART III. 21 Information with respect to Items 10 through 14 is set forth in
the Proxy Statement to be filed with the Securities and Exchange Commission on
or before April 30, 2010 and is incorporated herein by reference. If the
definitive Proxy Statement cannot be filed on or before April 30, 2010, the
issuer will instead file an amendment to this Form 10K disclosing the
information with respect to Items 10 through 14. 22 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 23 Signatures In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 19, 2010. In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the dates indicated. 24 VISCOUNT SYSTEMS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM To the Stockholders and Board of Directors of Viscount Systems
Inc: We have audited the accompanying consolidated balance sheet of
Viscount Systems Inc. (the Company) as at December 31, 2009 and the related
consolidated statements of operations, stockholders equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
as at December 31, 2008 and the related consolidated statements of operations,
stockholders equity and cash flows for the year then ended were audited by
other auditors whose report dated March 18, 2009 expressed an unqualified
opinion on those financial statements. We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, based on our audit, these financial statements
present fairly, in all material respects, the financial position of the Company
as at December 31, 2009 and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America. DALE MATHESON CARR-HILTON LABONTE LLP Vancouver, Canada See accompanying notes to consolidated financial
statements. See accompanying notes to consolidated financial
statements. See accompanying notes to consolidated financial
statements. See accompanying notes to consolidated financial
statements. Nature and continuance of operations Viscount Systems Inc. (the Company) was incorporated on
May 24, 2001 in the State of Nevada. The Company manufactures,
distributes, and provides services for electronic premises access and
security equipment primarily through its wholly owned Canadian subsidiary
Viscount Communication and Control Systems Inc. These financial statements
have been prepared on a going concern basis, which assumes the Company
will be able to realize assets and discharge liabilities in the normal
course of business for the foreseeable future. The Company has an
accumulated deficit of $1,460,851 and has reported a profit in 2009 for
the first time in several years. Although management is confident that the
company has sufficient working capital to maintain operations for the
ensuing year, the ability to sustain normal operations is dependent upon
maintaining or growing sales and profits for the foreseeable future.
Additional capital may be required in the future depending on
profitability, sales and enterprise needs. Significant accounting policies These consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America. Certain prior year figures have been
reclassified to agree with current presentation. The significant accounting policies adopted by the
Company are as follows: Principles of consolidation The consolidated financial statements include accounts
and results of the Company and its wholly-owned subsidiary, Viscount
Communication and Control Systems Inc. (VCCS). All material intercompany
transactions and balances have been eliminated in
consolidation. Significant accounting policies
(contd
) Use of estimates Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
Significant areas of estimate are the 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. Actual results could differ from those
estimates. Foreign currency translation The functional and reporting currency of the Company and
its wholly-owned subsidiary is the Canadian dollar. Accordingly, the
financial statements are presented in Canadian dollars unless otherwise
specified. Monetary assets and liabilities denominated in a foreign
currency are translated at the exchange rate in effect at the balance
sheet date while non-monetary assets and liabilities denominated in a
foreign currency are translated at historical rates. Revenue and expense
items denominated in a foreign currency are translated at exchange rates
prevailing when such items are recognized in the statement of operations.
Exchange gains or losses arising on translation of foreign currency items
are included in the statement of operations. Allowance for doubtful accounts The Company establishes an allowance for doubtful
accounts on a specific account basis based on the credit risk of specific
customers, historical trends and other information that management
believes is indicative of future losses on accounts receivable. The
allowance for doubtful accounts amounted to $337,475 (2008 -
336,775) Inventory Raw materials and supplies are stated at the lower of
cost or market (replacement cost). Cost is determined on the first-in,
first-out basis. Work in process and finished goods are stated at the
lower of average cost or market (net realizable value) Cost includes
direct labor utilized in assembly and an allocation of plant overhead. A
provision for obsolesence is recorded based upon a physical count of
inventory. During the fourth quarter of 2009 the Company reduced its
provision for obsolete inventory by approximately
$150,000. Significant accounting policies
(contd
) Equipment Equipment is stated at cost. Depreciation is recorded
based on the estimated useful lives of the assets as
follows: Intangible assets Intangible assets consist of intercom service agreements
that are considered to have a definitive life. They are recorded at cost
and are reviewed annually for impairment. On April 1, 2005, the Company
began amortizing the cost on a straight-line basis over an estimated
useful life of 10 years. Impairment of long-lived assets Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability is measured by a comparison
of the carrying amount of an asset or group of assets to future net cash
flows expected to be generated by the asset or group of assets. If such
assets are considered to be impaired, an impairment provision is made
based amount by which the carrying amount of the assets exceeds the fair
value of the assets. F-7 Significant accounting policies
(contd
) Revenue recognition Revenue is recognized when there is persuasive evidence
of an arrangement and delivery to the customer has occurred, the fee is
fixed and determinable, and collectability is considered probable. Sales
or transfers to customers prior to these criteria being met are recorded
as deferred revenue. Revenue from the installation of equipment is
recognized when the installation has been completed, the fee is fixed and
determinable, and collectability is considered probable. Service revenue is recognized on a straight-line basis
over the period covered by the service agreement only after there is a
signed agreement to provide service, the service fee is fixed or
determinable, and collectibility is probable. Cash received from
customers, in advance of the service period, is recorded as deferred
revenue. Research and development costs Research and development costs have been expensed as
incurred and are shown net of investment tax credits. Advertising costs Advertising costs are expensed as incurred. Advertising
costs amounted to $149,541 (2008 - $115,214). Government assistance and investment tax
credits The Company follows the cost reduction method of
accounting for government assistance and investment tax credits, whereby,
the estimated net recoverable amount of the benefit of the tax credits is
recognized, when reasonable assurance exists as to their collectibility,
as a reduction in the cost of the related capital asset or
expenditure. F-8 Significant accounting policies
(contd
) Income taxes The Company follows the asset and liability method of
accounting for income taxes. Under this method, future income taxes are
recognized for the future income tax consequences attributable to
differences between the financial statement carrying values of existing
assets and liabilities and their respective income tax bases (temporary
differences). Future income tax assets and liabilities are measured using
enacted income tax rates expected to be recovered or settled. The effect
on future income tax assets and liabiliites of a change in tax rates is
included in income in the period in which the change occurs. The amount of
future income tax assets recognized is limited to the amount that is more
likely than not to be realized. In July 2006, the FASB issued guideance that clarifies
the recognition threshold and measurement of a tax position taken or
expected to be taken on a tax return, and requires expanded disclosure
with respect to the uncertainty in income taxes. This guidance also
provides for derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. The Company
adopted these provisions on January 1, 2007. Net income (loss) per share Net income (loss) per common share is computed by
dividing the net income (loss) by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per common
share reflects the potential dilution that could occur if stock options
were exercised. The weighted average number of common shares outstanding
for computing basic net income (loss) per common share was 17,841,250
(2008 17,841,250). The weighted average number of common shares
outstanding for computing diluted net income (loss) per common share was
17,841,250 (2008 17,841,250). For the year ended December 31, 2009,
3,363,800 shares (2008 3,363,800) attributable to the assumed exercise
of outstanding options and 1,677,550 shares (2008 1,677,550)
attributable to the assumed exercise of outstanding warrants were excluded
from the calculation of diluted loss per share because the effect was
antidilutive. F-9 Significant accounting policies
(contd
) Stock-based compensation The Company records stock-based compensation based on the
fair value recognition provisions whereby stock-based compensation expense
is recognized in the consolidated financial statements for granted,
modified, or settled stock options. The provisions apply to new stock
options and stock options outstanding, but not yet vested. Comprehensive income The Company has no items of other comprehensive income in
any year presented. Therefore, net income presented in the consolidated
statements of operations equals comprehensive income. Adoption of new accounting pronouncements In March 2008, the FASB issued guidance to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand
their effects on an entity's financial position, financial performance,
and cash flows. The guidance achieves these improvements by requiring
disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. It also provides more information about an
entity's liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within
footnotes to enable financial statement users to locate important
information about derivative instruments. The guidance became effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, and was adopted by the Company
beginning in the first quarter of 2009. The adoption had no material
impact on the Company's financial position, results of operations or cash
flows. In April 2008, the FASB issued guidance that amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible
asset in order to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. Guidance is effective for fiscal
years beginning after December 15, 2008. The adoption had no material
impact on the Company's financial position, results of operations or cash
flows. F-10
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
For the fiscal year ended December 31,
2009
For the transition period from ______to
______
VISCOUNT SYSTEMS, INC.
(Name of registrant as
specified in its charter)
NEVADA
88-0498181
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
4585 Tillicum Street, Burnaby, British Columbia,
Canada
V5J 5K9
(Address of principal executive offices)
(Zip Code)
(Title of class)
Yes [ ] No [X]
Yes [ ] No [X]
Yes [X] No [ ]
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [ X ]
YES [ ] NO [X]
State issuers
revenues for its most recent fiscal year: $4,284,310 ($4,892,440 in Canadian
dollars converted at an exchange rate of US$0.8757/CDN$ 1.000) .
Table of Contents
High
Low
February 2010
1.0772
1.0371
January 2010
1.0695
1.0225
December 2009
1.0748
1.0366
November 2009
1.0830
1.0427
October 2009
1.0961
1.0251
September 2009
1.1103
1.0591
Year Ended December 31
2009
2008
Rate at end of Period
1.0510
1.2180
Average Rate during Period
1.1420
1.0660
Low
1.0251
0.9711
High
1.3066
1.3008
Competitive Summary
High (U.S. $)
Low (U.S. $)
2010
First Quarter (through March
12, 2010)
$0.18
$0.14
2009
Fourth Quarter
0.22
0.10
Third Quarter
0.23
0.10
Second Quarter
0.22
0.05
First Quarter
0.08
0.05
2008
Fourth Quarter
0.13
0.06
Third Quarter
0.22
0.12
Second Quarter
0.45
0.21
First Quarter
0.43
0.29
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) Number of securities
remaining
available for
future issuance under
equity
compensation
plans (excluding
securities reflected
in
column (a))
(c)
Equity compensation plans approved by security
holders
3,363,800
US$0.30
0
Equity compensation plans not approved by security
holders
N/a
N/a
N/a
Total
3,363,800
US$0.30
0
Adoption of new
accounting pronouncements
a.
b.
c.
a.
b.
c.
d.
e.
f.
g.
h.
Items 10 14
Exhibit No.
Description of
Exhibit
Manner of Filing
3.1
Articles of Incorporation
Incorporated by reference to
Exhibit 3.1 to the Form SB-2 of the Company, SEC File No. 333- 68998 (the
Form SB-2)
3.2
Amendment to the Articles of Incorporation
Incorporated by reference to Exhibit 3.2 to the
Form SB-2
3.3
Bylaws
Incorporated by reference to
Exhibit 3.1 to the Form SB-2
10.1
Employment Agreement with Stephen Pineau
Incorporated by reference to Exhibit 10.2 to
the Form SB-2
10.2
Employment Agreement with Greg
Chen
Incorporated by reference to
Exhibit 10.3 to the Form SB-2
10.3
2001 Stock Option Plan
Incorporated by reference to Exhibit A to the
Proxy Statement on Schedule 14A filed with the SEC on April 30, 2002
10.4
2003 Stock Option Plan
Incorporated by reference to
Exhibit A to the Proxy Statement on Schedule 14A filed with the SEC on
April 30, 2003
21.1
Subsidiaries of the registrant
Incorporated by reference to Exhibit 21.1 to
the Form SB-2
31.1
Certification Pursuant to Rule
13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934
Filed herewith
32.1
Section 1350 Certification of the Principal
Executive Officer and Principal Financial Officer
Filed herewith
VISCOUNT SYSTEMS, INC.
By:
/s/ Stephen Pineau
Stephen Pineau
President and Principal Executive Officer
Signature
Title
Date
By:
/s/
Stephen Pineau
President, Secretary,
March 19, 2010
Stephen Pineau
Principal Executive Officer, Principal
Financial Officer and Director
By:
/s/
Greg Shen
Chairman of the Board and
March 19, 2010
Greg Shen
Director
CONSOLIDATED FINANCIAL
STATEMENTS
(Expressed in Canadian Dollars)
DECEMBER 31,
2009
CHARTERED
ACCOUNTANTS
March 12, 2010
VISCOUNT SYSTEMS, INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
As at December 31
2009
2008
Assets
Current assets
Cash
$
124,378
$
255,172
Trade accounts receivable, less allowance for
doubtful accounts
of $337,475 (2008 -
$336,776)
1,182,434
584,517
Inventory (note 3)
626,566
556,572
Lease
receivable
-
961
Total current assets
1,933,379
1,397,222
Deposits
5,891
10,528
Equipment (note 4)
42,358
60,501
Intangible assets (note 5)
109,684
130,576
Total assets
$
2,091,311
$
1,598,827
Liablilities and stockholders'
equity
Current liabilities
Bank indebtedness (note 6)
$
218,701
$
57,775
Accounts payable
155,840
157,693
Accrued liabilities
447,878
417,564
Deferred revenue
39,678
31,280
Due to stockholders (note 7)
292,402
392,402
Note payable (note 8)
-
50,000
Total current
liabilities
1,154,500
1,106,714
Commitments (note 12)
Stockholders' equity
Capital stock (note 9)
Authorized:
100,000,000 common
shares with a par value of US$0.001 per share
20,000,000 preferred shares with a par
value of US$0.001 per share
Issued and outstanding:
17,841,250 common shares (2008 -
17,841,250)
25,434
25,434
Additional paid-in capital (note 9)
2,372,228
2,353,030
Accumulated
deficit
(1,460,851
)
(1,886,351
)
Total stockholders' equity
936,811
492,113
Total liabilities and stockholders' equity
$
2,091,311
$
1,598,827
F-1
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Operations
(Expressed in Canadian dollars)
Years ended December 31
2009
2008
Sales
$
4,892,440
$
5,102,434
Cost of sales
1,920,611
2,170,196
Gross profit
2,971,829
2,932,238
Expenses
Selling, general and administrative
2,249,315
2,622,946
Research and development (note 10)
243,833
331,737
Depreciation
and amortization
39,037
36,735
2,532,185
2,991,418
Income (loss) before other items
439,644
(59,180
)
Other items
Interest income
95
945
Interest expense
(14,238
)
(28,129
)
(14,144
)
(27,184
)
Income (loss) before income taxes
425,500
(86,364
)
Provision
for income taxes (note 11)
-
Net income (loss)
$
425,500
$
(86,364
)
Basic and diluted
income (loss) per common share
$
0.02
$
(0.00
)
Weighted average number of common shares outstanding,
Basic and diluted
17,841,250
17,841,250
F-2
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(Expressed in Canadian dollars)
Years Ended
December 31, 2009 and 2008
Additional
Common Stock
paid-in
Shares
Amount
capital
Accumulated deficit
Total
Balance, December 31, 2007
17,841,250
$
25,434
$
2,353,030
$
(1,799,987
)
$
578,477
Net loss
-
-
-
(86,364
)
(86,364
)
Balance, December 31, 2008
17,841,250
25,434
2,353,030
(1,886,351
)
492,113
Stock-based compensation
-
-
19,198
-
19,198
Net income
-
-
-
425,500
425,500
Balance, December
31, 2009
17,841,250
$
25,434
$
2,372,228
$
(1,460,851
)
$
936,811
F-3
VISCOUNT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
Years ended
December 31
2009
2008
Operating activities:
Net income (loss)
$
425,500
$
(86,364
)
Items not involving cash:
Depreciation and
amortization
39,037
36,735
Selling, general and administrative
expenses paid by stock options
19,198
-
Changes in non-cash working capital balances (note
13)
(625,455
)
319,804
Net cash provided by (used in) operating
activities
(141,720
)
270,175
Financing activities:
Proceeds from (repayment of) bank indebtedness
160,926
(206,176
)
Proceeds from (repayment of) from
stockholder loan
(100,000
)
100,000
Repayment of
notes payable
(50,000
)
(20,000
)
Net cash provided
by (used in) financing activities
10,926
(126,176
)
Increase (decrease) in cash
(130,794
)
143,999
Cash, beginning of year
255,172
111,173
Cash, end of year
$
124,378
$
255,172
Supplementary information:
Interest paid
$
14,238
$
28,129
Income taxes
recovered
-
-
F-4
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
1.
2.
(a)
F-5
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2.
(b)
(c)
(d)
(e)
F-6
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2.
(f)
Asset
Basis
Rate
Computer equipment
declining balance
30%
Office furniture and equipment
declining balance
20%
Leasehold improvements
straight-line
20%
(g)
(h)
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2.
(i)
(j)
(k)
(l)
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2.
(m)
(n)
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2.
(o)
(p)
(q)
VISCOUNT SYSTEMS, INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
December 31, 2009
2. | Significant accounting policies (contd ) | |
(r) | Adoption of new accounting pronouncements |
|
In April 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance for estimating the fair value of assets and liabilities when the volume and level of activity associated with those assets and liabilities has decreased significantly. The guidance also requires the disclosure of the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The adoption had no material impact on the Company's financial position, results of operations or cash flows. |
||
In May 2009, the FASB issued guidance that establishes general standards of accounting for and disclosure of events that occur subsequent to the balance sheet date but before financial statements are issued. The statement defines two types of subsequent events (1) recognized subsequent events, which provide additional evidence about conditions that existed at the balance sheet date, and (2) non-recognized subsequent events, which provide evidence about conditions that did not exist at the balance sheet date, but arose before the financial statements were issued. Recognized subsequent events are required to be recognized in the financial statements, and non-recognized subsequent events are required to be disclosed. The guidance requires entities to disclose the date through which subsequent events have been evaluated and the basis for the date. The adoption had no material impact on the Company's financial position, results of operations or cash flows. |
||
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 168. Upon its adoption, the FASB Accounting Standards Codification (the Codification) will become the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. Following this, the FASB will not issue new accounting standards in the form of FASB Statements, FASB Staff Positions, or Emerging Issues Task Force abstracts. This will also modify the existing hierarchy of GAAP to include only two levels authoritative and non- authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and early adoption is not permitted. The adoption of this standard did not have a material impact on its financial position, results of operations or cash flows. |
F-11
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
2. | Significant accounting policies (contd ) |
|
(s) | Recent accounting pronouncements |
|
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software- enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Company believes the adoption of this new guidance will not have a material impact on the financial statements. |
||
In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The Company believes adoption of this new guidance will not have a material impact on the financial statements. |
||
3. | Inventory |
2009 | 2008 | ||||||
Raw materials | $ | 237,463 | $ | 326,107 | |||
Work in process | 106,457 | 29,830 | |||||
Finished goods | 282,646 | 200,635 | |||||
$ | 626,566 | $ | 556,572 |
F-12
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
4. | Equipment |
Accumulated | Net book | |||||||||
2009 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 93,318 | $ | 17,520 | ||||
Office furniture and equipment | 77,269 | 55,034 | 22,235 | |||||||
Leasehold improvements | 46,814 | 44,211 | 2,603 | |||||||
$ | 234,921 | $ | 192,563 | $ | 42,358 | |||||
Accumulated | Net book | |||||||||
2008 | Cost | depreciation | value | |||||||
Computer equipment | $ | 110,838 | $ | 89,566 | $ | 21,272 | ||||
Office furniture and equipment | 77,269 | 41,999 | 35,270 | |||||||
Leasehold improvements | 46,814 | 42,855 | 3,959 | |||||||
$ | 234,921 | $ | 174,420 | $ | 60,501 |
5. | Intangible assets |
On May 16, 2003, the Company consummated an agreement for the purchase of certain assets of Telus Corporation (Telus) comprised primarily of service agreements for a product sold by Telus known as Enterphone 2000. At December 31, 2003, the Company had acquired 2,215 service agreements for which it paid a total of $208,921. At December 31, 2009, the Company held 1,577 service agreements (December 31, 2008 1,630) at a carrying value, net of accumulated amortization of $99,237 (December 31, 2008 - $78,345) of $109,684 (December 31, 2008 - $130,576). The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: |
Year ending December 31: | ||||
2010 | $ | 20,892 | ||
2011 | 20,892 | |||
2012 | 20,892 | |||
2013 | 20,892 | |||
2014 | 20,892 |
F-13
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
6. | Bank indebtedness |
Bank indebtedness represents cheques written in excess of funds on deposit of $18,703 (December 31, 2008 - $17,775) and amounts drawn under a bank credit facility of $200,000 (December 31, 2008 - $40,000) available to a maximum of $500,000. Amounts outstanding under the bank credit facility bear interest at the banks prime lending rate plus 1.75% and are repayable on demand. The facility is secured by substantially all of the Companys assets under a general security agreement and the guarantee of two officers and directors supported by a pledge of personal property of one of the guarantors. The Company is required to maintain a current ratio greater than 1.5:1, measured quarterly and a debt to tangible net worth ratio less than 1.5:1, measured annually, under the terms of the demand facility agreement. For purposes of debt covenant calculations, amounts due to stockholders are considered a component of equity and not a liability. The Company is also allowed to draw on the credit facility up to 75% of accounts receivable less than 90 days. At December 31, 2009, the Company was in compliance with debt covenants. |
|
7. | Due to stockholders |
Amounts due to stockholders in the amount of $292,402 (2008, $392,402) are non-interest bearing, unsecured and have no fixed terms of repayment. Amounts due to stockholders are subordinated to amounts due on the companys credit facility. |
|
During the 2008 fiscal year, the President loaned the Company $100,000. The loan carried interest at 9.5% per annum, was unsecured and had no fixed terms of repayment. The loan was repaid during the fourth quarter of 2009. |
|
8. | Notes payable |
The notes bore interest at 8% per annum, were unsecured, and were fully repaid in July 2009. |
F-14
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
9. | Capital stock |
|
(a) | Each share of common stock has the same rights, privileges and preferences. The holders of the outstanding common stock are entitled, in the event of liquidation, to a pro rata share of net assets, subject to any preferences that may be applicable on any preferred stock. The Board of Directors has the authority to determine and amend the designation, preferences, limitations and relative rights of preferred stock. There was no preferred stock issued and outstanding at December 31, 2009 and 2008. |
(b) | On April 16, 2007, the Company completed a private placement of 1,677,550 units, at a price of US$0.16 per unit, for gross proceeds of US$268,408. Each unit consisted of one common share of the Company and one share purchase warrant. Each share purchase warrant entitles the holder to acquire one additional common share of the Company for US$0.25 per share until April 16, 2012. |
||
On August 2, 2007, the Company granted 327,500 stock options with a five year term, Exercisable, at a price of US$0.40 per share, until August 1, 2012. The options vested immediately. |
|||
On October 15, 2009, the Company extended stock option agreements for 168,125 stock options under its 2001 and 2003 Stock Option Plans. The options have expiration dates of December 21, 2009 to December 21, 2015. Extended stock options were valued and accounted for using the incremental value method. |
|||
(c) | The Company has the following stock option plans which serve as equity incentive programs for management, qualified employees, members of the Board of Directors and independent advisors or consultants outstanding as at December 31, 2009: |
||
(i) | The 2001 Stock Option Plan (the 2001 Plan), which became effective on December 21, 2001, permits, at any one time, up to 1,500,000 shares of common stock to be reserved for issuance. The maximum term during which a vested option may be exercised is ten years from the date of grant. The vesting period and the option price are determined by the compensation committee. The option price may be set at a discount to the closing price on the date of grant unless it is an incentive stock option. As at December 31, 2009, the total number of stock options outstanding under the 2001 Plan is 1,001,925. |
||
(ii) | The 2003 Stock Option Plan (the 2003 Plan), which became effective on January 3, 2003 and amended on July 10, 2007 permits, at any one time, up to 2,935,510 shares of common stock to be reserved for issuance. The maximum term during which a vested option may be exercised is ten years from the date of grant. |
F-15
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
9. | Capital stock (contd ) |
|
The vesting period and the option price are determined by the compensation committee. The option price may be set at a discount to the closing price on the date of grant unless it is an incentive stock option. As at December 31, 2009, the total number of stock options outstanding under the 2003 Plan is 2,361,875. |
||
A summary of the stock option activity is as follows: |
Number of options | Weighted average | ||||||
Exercise price | |||||||
Outstanding at December 31, 2007 | 3,363,800 | US$0.30 | |||||
Granted | - | - | |||||
Exercised | - | - | |||||
Expired/cancelled | - | - | |||||
Outstanding at December 31, 2008 | 3,363,800 | 0.30 | |||||
Granted | 168,125 | 0.17 | |||||
Exercised | - | - | |||||
Expired/cancelled | (168,125 | ) | 0.17 | ||||
Outstanding at December 31, 2009 | 3,363,800 | 0.30 |
During the year ended December 31, 2009, the Company recorded the stock-based compensation expense of $19,198 (2008 - $Nil) related to the extension of 168,125 stock options, under the 2001 and 2003 Stock Option Plans originally expiring December 21, 2009 and extending the expiry date to December 21, 2015.
The weighted average fair value of stock options granted during the year ended December 31, 2009 was $0.17 (2008 - $Nil) per option. All options granted during the fiscal years presented vested upon granting.
The Company used the Black-Scholes option pricing model to compute estimated fair value of options granted during the year ended December 31, 2009 based on the following weighted average assumptions: average expected stock price volatility of 109%, expected dividend yield of 0%, risk-free interest rate of 2.77% and expected option life of 3 years.
F-16
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
9. | Capital stock (contd ) |
A summary of the stock options outstanding and exercisable at December 31, 2009 is as follows:
Weighted | ||||||||||
Average | Weighted | |||||||||
Remaining | Average | Aggregate | ||||||||
Exercise Price | Number | Contractual | Exercise | Intrinsic | ||||||
Life | Price | Value | ||||||||
$ | $ | |||||||||
US$0.12 | 2,068,750 | 4.11 years | $ | 0.12 | 144,812 | |||||
$0.18 | 11,250 | 5.98 years | $ | 0.18 | 113 | |||||
$0.40 | 327,500 | 2.59 years | $ | 0.40 | - | |||||
$0.45 | 7,500 | 5.98 years | $ | 0.45 | - | |||||
$0.55 | 5,000 | 5.98 years | $ | 0.55 | - | |||||
$0.60 | 10,000 | 5.98 years | $ | 0.60 | - | |||||
$0.65 | 933,800 | 1.97 years | $ | 0.65 | - | |||||
3,363,800 | 3.38 years | $ | 0.30 | $ | 144,925 |
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Companys closing stock price of US$0.19 per share as of December 31, 2009 (2008 US$0.07), which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of December 31, 2009 was 2,080,000 (2008 nil).
F-17
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
9. | Capital stock (contd ) |
Warrants
A summary of warrant activity is as
follows:
Number of warrants | Weighted average | ||||||
Exercise price | |||||||
Outstanding at December 31, 2007 | - | US$ - | |||||
Granted | 1,677,550 | 0.25 | |||||
Exercised | - | - | |||||
Expired | - | - | |||||
Outstanding at December 31, 2008 | 1,677,550 | 0.25 | |||||
Granted | - | - | |||||
Exercised | - | - | |||||
Expired | - | - | |||||
Outstanding at December 31, 2009 | 1,677,550 | 0.25 |
A summary of the warrants outstanding and exercisable at December 31, 2009 is as follows:
Weighted | ||||
Average | Weighted | |||
Remaining | Average | |||
Exercise Price | Number | Contractual | Exercise | |
Life | Price | |||
US$0.25 | 1,677,550 | 2.29 years | US$0.25 |
10. | Research and development |
Research and development expenditures are recorded net of investment tax credits, which totaled $nil for the years ended December 31, 2009 and 2008.
F-18
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
11. | Income taxes |
(a) The provision for income taxes differs from the amount that would have resulted in applying the combined Canadian federal and statutory income tax rates as follows: |
2009 | 2008 | ||||||
Net income (loss) before income tax rates | $ | 425,500 | $ | (86,364 | ) | ||
Statutory income tax rate | 30% | 31% | |||||
Expected income tax expense (recovery) at statutory income tax rate | $ | 127,650 | $ | (26,773 | ) | ||
Non-deductible expenses and other items | 228,255 | 139,593 | |||||
Change in valuation allowance | (123,349 | ) | 76,359 | ||||
Recognized investment tax credit | (232,556 | ) | (189,179 | ) | |||
Income tax expense | $ | - | $ | - |
(b) | Temporary differences that give rise to the following deferred income tax assets as follows: |
2009 | 2008 | ||||||
Equipment | $ | 16,939 | $ | 12,899 | |||
Intangible assets | 26,154 | 21,769 | |||||
Investment tax credits (non-refundable) | 402,215 | 507,518 | |||||
Research and development costs | 550,248 | 559,949 | |||||
Warranty provision | 74,230 | 91,000 | |||||
1,069,786 | 1,193,135 | ||||||
Valuation allowance | (1069,786 | ) | (1,193,135 | ) | |||
Net future income tax assets | $ | - | $ | - |
The Company has non-refundable federal investment tax credits of $272,139 (2008 -$337,619) which will expire up to 2028 and provincial investment tax credits of $130,076 (2008 - $169,899) ,which will expire up to 2018.
F-19
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
The Company has unutilized scientific research and development costs of $2,200,992 (2008 - $2,153,651) which are available to reduce taxable income and income taxes payable in future years.
Management has determined that the realization of the deferred tax assets resulting from these tax pools and other temporary differences is uncertain at this time, and cannot be viewed as more likely than not. Accordingly, the Company has recorded a valuation allowance for the potential deferred tax asset.
The Company files income tax returns in Canada and the United States of America. The Companys Canadian income tax returns for 2004 through 2009 are open tax years. The Companys United States tax returns are open from 2004 through 2009. The Company has reviewed its tax filings for these years to identify the existence of any uncertain tax positions that would require recognition in the Companys financial statements. The Company may from time to time be assesed interest or penalties by major jurisdictions, although any such assessments historically have been minimal and immaterial to the Companys financial results. In the event the Company has received an assessment for interest and /or penalties, it has been classified in the financial statements as general and adminstrative expense.
12. | Commitments |
The Company is committed to make minimum annual payments on its premises, automobiles, and office equipment operating leases that expire in 2015 as follows:
Year ending December 31: | ||||
2010 | $ | 108,432 | ||
2011 | 22,900 | |||
2012 | 7,602 | |||
2013 | 6,381 | |||
2014 | 6,381 |
Rent expense included in the statements of operations is $133,167 (2008 - $129,555).
F-20
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
13. | Changes in non-cash working capital balances |
2009 | 2008 | ||||||
Trade accounts receivable | $ | (597,918 | ) | $ | 34,770 | ||
Inventory | (69,994 | ) | 199,662 | ||||
Prepaid expenses | 4,637 | (4,500 | ) | ||||
Lease receivable | 961 | 1,007 | |||||
Accounts payable | (1,853 | ) | (55,358 | ) | |||
Accrued liabilities | 30,314 | 140,030 | |||||
Deferred revenue | 8,398 | 4,193 | |||||
$ | (625,455 | ) | $ | 319,804 |
F-21
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
14. | Segment information |
|
(a) | Operating segments: |
|
The Company organizes its business into two reportable segments: manufacturing and servicing. The manufacturing segment designs, produces and sells intercom and door access control systems that utilize telecommunications wiring to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and door access control systems. |
||
The segments accounting policies are described in Note 2. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales. |
December 31, 2009 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 3,324,306 | $ | 1,568,134 | $ | 4,892,440 | |||
Depreciation and amortization | 18,145 | 20,892 | 39,037 | ||||||
Interest expense | 13,438 | 800 | 14,238 | ||||||
Segment income (loss) before income taxes | 243,823 | 181,677 | 425,500 | ||||||
Total assets | 1,981,627 | 109,684 | 2,091,311 | ||||||
December 31, 2008 | Manufacturing | Servicing | Total | ||||||
Sales to external customers | $ | 3,463,521 | $ | 1,638,913 | $ | 5,102,434 | |||
Depreciation and amortization | 15,843 | 20,892 | 36,735 | ||||||
Interest expense | 22,729 | 5,400 | 28,129 | ||||||
Segment income (loss) before income taxes | (252,243 | ) | 165,879 | (86,364 | ) | ||||
Total assets | 1,468,251 | 130,576 | 1,598,827 |
F-22
VISCOUNT SYSTEMS, INC. |
Notes to Consolidated Financial Statements |
(Expressed in Canadian dollars) |
December 31, 2009 |
14. | Segment information (contd.) |
|
(b) | Of the total revenues for the year ended December 31, 2009, $811,606 (2008 - $1,015,183) was derived from U.S.-based customers and $4,080,834 (2008 - $4,087,251) from Canadian-based customers. |
|
Substantially all of the Company's operations, assets and employees are located in Canada. |
||
(c) | Major customers: |
|
One of our customers represented 10.4% of total revenues in the year ended December 31, 2009. No customer represented more than 10% of total revenues in the year ended December 31, 2008. |
||
(d) | Products: |
|
Enterphone sales represented 10% of total revenue during the year ended December 31, 2009 (2008 18%). MESH sales represented 61% of total revenue during the year ended December 31, 2009 (2008 52%). The balance of the Companys revenues are derived from service agreements and other products such as access tracking and control, closed circuit monitors, infrared and radio frequency remotes. |
15. Financial instruments
The Companys financial instruments consist of cash, trade accounts receivable, lease receivable, bank indebtedness, accounts payable, accrued liabilities, due to stockholders and notes payable. It is managements opinion that the Company is not exposed to significant interest, currency, business concentration or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values based on their liquidity and short-term nature.
F-23
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULE
13a-14(a) OR 15d-14(a)
OF THE U.S. SECURITIES EXCHANGE
ACT OF 1934
I, Stephen Pineau, certify that:
1. |
I have reviewed this report on Form 10-K for the fiscal year ended December 31, 2009 of Viscount Systems, Inc. | |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report is being prepared; | |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c) |
evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) |
disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrants internal control over financial reporting; | |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function): | |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants control over financial reporting. |
Date: March 19, 2010 | By: | /s/ Stephen Pineau |
Stephen Pineau | ||
Principal Executive Officer and Principal Financial Officer |
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AND RULE 13a-14(b) OR RULE 15d-14(b)
OF THE U.S. SECURITIES
EXCHANGE ACT OF 1934
In connection with the annual report of Viscount Systems, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2009 as filed with the Securities and Exchange Commission on March 20, 2009 (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: March 19, 2010 | /s/ Stephen Pineau |
Stephen Pineau | |
Principal Executive Officer and Principal Financial Officer |
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