PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
Executive Officers and Directors of the Company are as follows:
|
Name
|
|
Age
|
|
Position
|
|
Saagar
Govil
|
|
32
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
John
M. Badke
|
|
59
|
|
Chief
Operating Officer and Chief Financial Officer
|
|
Bret
M. McGowan
|
|
53
|
|
Senior
Vice President, Sales and Marketing (Americas)
|
|
Peter
A. Horn
|
|
63
|
|
Vice
President, Operations
|
|
Mark
S. Provinsal
|
|
52
|
|
Senior
Vice President of International Sales
|
|
Aron
Govil
|
|
62
|
|
Director
|
|
Steven
E. Walin
|
|
63
|
|
Director
|
|
Warren
J. White
|
|
67
|
|
Director
|
The
business experience, principal occupations and employment, as well as period of service, of each of the officers and directors
of the Company during at least the last five years are set forth below.
Saagar
Govil - Chairman of the Board of Directors and Chief Executive Officer.
Mr. Saagar Govil was appointed as Chairman of the
Board and Chief Executive Officer in March 2018 pursuant to a letter agreement between the Company and Cemtrex entered into in
connection with Cemtrex’s purchase of 7,284,824 shares of the Company’s common stock, along with a warrant to purchase
an additional 1,500,000 shares, from NIL Funding Corporation. He also currently serves as the Chairman of the Board of Cemtrex,
a position he has held since June 2014, and as its Chief Executive Officer and President, positions he has held since December
2011. Mr. Govil holds a B.E. in Materials Engineering from Stony Brook University, N.Y. Saagar Govil is the son of Aron Govil.
He brings extensive experience in operations, technology and public company oversight. His current term on the Board will end
at the 2021 Annual Meeting of Shareholders.
John
M. Badke - Chief Executive Officer and Chief Financial Officer.
Mr. Badke was appointed Chief Operating Officer of the Company
in March 2018. He previously served as Chief Executive Officer from August 2016 to March 2018. He also serves as the Company’s
Chief Financial Officer, a position he has held since 1999. Mr. Badke originally joined the Company in 1992 as its Controller.
Prior to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an audit manager with the international accounting
firms of Arthur Andersen & Co. and Peat Marwick Main & Co.
Bret
M. McGowan - Senior Vice President, Sales and Marketing (Americas).
Mr. McGowan has been Senior Vice President, Sales and
Marketing (Americas) since June 2012. Previously, he served in varying Sales and Marketing vice president capacities since 2001.
Previously, he served as Director of Marketing since 1998 and as Marketing Manager since 1994. He joined the Company in 1993 as
a Marketing Specialist.
Peter
A. Horn - Vice President, Operations.
Mr. Horn has been Vice President, Operations since June 1999. From 1995 to 1999, he
was Vice President, Compliance and Quality Assurance. Prior to that time, he served as Vice President in various capacities since
his promotion in May 1990.
Mark
S. Provinsal - Senior Vice President, International Sales.
Mr. Provinsal was appointed Senior Vice President, International
Sales in October 2018. Previously, he served as the Managing Director of the Company’s U.K. based subsidiary since June
2014 and as its Director of Sales and Marketing from January 2012. He joined the Company in January 2010 as its Vice President,
Marketing and Product Management. Prior to joining the Company, Mr. Provinsal served as Executive Vice President of Dedicated
Micros Inc. (U.S.) from 2008 and prior as its Vice President Marketing and Product Strategy since 2006. From 2000 to 2006, he
served as the Director of Marketing and Product Development of IPIX Corporation.
Aron
Govil - Director.
Mr. Aron Govil was appointed to the Board in March 2018 pursuant to the letter agreement between the Company
and Cemtrex entered into in connection with Cemtrex’s purchase of 7,284,824 shares of the Company’s common stock,
along with a warrant to purchase an additional 1,500,000 shares, from NIL Funding Corporation. He also serves as Cemtrex’s
Executive Director and previously served as its Chairman of the Board of Cemtrex until June 2014. Since 1996, he has also been
the President of Ducon Technologies Inc., a privately-held company engaged in energy and environmental control systems. Prior,
he worked at various management and technical positions in the environmental industry. Mr. Govil holds a B.E. degree in chemical
engineering, an M.B.A. in Finance and is also a Professional Engineer licensed in New York and New Jersey. He brings extensive
experience in operations, finance, technology and public company oversight. His current term on the Board will end at the 2021
Annual Meeting of Shareholders.
Steven
E. Walin - Director.
Mr. Walin has been a director of the Company since June 2016. He served as the Chief Executive Officer
of GVI Security Solutions, Inc., a developer and distributor of video surveillance solutions, from March 2006 until his retirement
in 2011 to manage personal investments in both the security and consumer finance industries. Mr. Walin previously served as the
President of General Electric’s Security Enterprise Solutions Group from 2003 to 2006 and as the Senior Vice President of
North American Security for the Security Systems Division of Siemens Building Technologies since 2001. Prior to that, Mr. Walin
served in various senior level capacities for companies serving the broad security market. Mr. Walin brings extensive knowledge
of video and broader security markets having spent his entire career in the industry. He also brings general senior level operational
experience to the Board. His current term on the Board ends at the 2019 Annual Meeting of Shareholders.
Warren
J. White - Director
. Mr. White has been a director of the Company since June 2016. He served as the Senior Vice President
of Global Business Engineering for CGI Group Inc., a publicly listed international IT services provider, from which he retired
in 2012. He previously served as the Vice President of Information Technology and Global Procurement at Alcan Aluminum until 2003.
Mr. White presently works as an independent consultant in Information Technology and teaches related subjects at the John Molson
School of Business. He also serves on the Board of Directors of a number of companies, including Supremex Inc., Circa Enterprises
Inc. and Titan Logix Corp. Mr. White brings extensive experience in information technology, international operations, strategic
planning, public company oversight and finance, having started his career as a licensed accountant. His current term on the Board
ends at the 2019 Annual Meeting of Shareholders.
There
are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director
or officer except that Saagar Govil is the son of Aron Govil..
Audit
Committee Financial Expert
Due
to a recent director resignation and the Company’s limited resources to replace that director, the Company does not have
an “audit committee financial expert,” under the rules of the SEC, serving on the Audit Committee. The Company does
not have an independent audit committee as Mr. Aron Govil serves on this committee.
Code
of Ethics
The
Company has adopted a Code of Ethics and Business Conduct that applies to all its employees, including its chief executive officer,
chief financial and accounting officer, controller, and any persons performing similar functions. Such Code of Ethics and Business
Conduct is published on the Company’s internet website (www.vicon-security.com).
Compliance
with Section 16(a) of the Exchange Act
Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 2018
and certain written representations that no Form 5 is required, no person who, at any time during the year ended September 30,
2018 was a director, officer or beneficial owner of more than 10 percent of any class of equity securities of the Company registered
pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed in the above forms, reports required
by Section 16(a) of the Exchange Act during the year ended September 30, 2018.
ITEM
11 - EXECUTIVE COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Compensation
Philosophy and Objectives of Our Compensation Program
The
Company’s compensation programs are intended to enable it to attract, motivate, reward and retain the management talent
required to achieve corporate objectives, and thereby increase stockholder value. It is the Company’s policy to provide
incentives to senior management to achieve both short-term and long-term objectives and to reward exceptional performance and
contributions to the development of the business. To attain these objectives, the executive compensation program includes four
key components:
Base
Salary
.
Base salary for the Company’s executives is intended to provide competitive remuneration for services
provided to the Company over a one-year period. Base salaries are set at levels designed to attract and retain the most appropriately
qualified individuals for each of the key management level positions within the Company.
Cash
Incentive Bonuses
.
The Company’s bonus programs are intended to reward executive officers for the achievement
of various annual performance goals approved by the Company’s Board of Directors.
For
fiscal 2018 and 2017, there were no bonus plans established and no bonuses were paid to the Company’s executive officers.
Equity-based
Compensation
.
Equity-based compensation is designed to provide incentives to the Company’s executive officers
to build shareholder value over the long term by aligning their interests with the interest of shareholders. The Compensation
Committee of the Board of Directors believes that equity-based compensation provides an incentive that focuses the executive’s
attention on managing the company from the perspective of an owner with an equity stake in the business. Among our executive officers,
the number of shares of stock awarded or common stock subject to options granted to each individual generally depends upon the
level of that officer’s responsibility. The largest grants are generally awarded to the most senior officers who, in the
view of the Compensation Committee, have the greatest potential impact on the Company’s profitability and growth. Previous
grants of stock options or stock grants are reviewed in determining the size of any executive’s award in a particular year.
Retirement,
Health and Welfare Benefits and Other Perquisites
.
The Company’s executive officers are entitled to a specified
retirement/severance benefit pursuant to employment agreements as detailed below.
In
addition, the executive officers are entitled to participate in all of the Company’s employee benefit plans, including medical,
dental, group life, disability, accidental death and dismemberment insurance and the Company’s sponsored 401(k). The Company’s
named executive officers are also provided with either a leased car or automobile allowance.
Employment
Agreements
The
Company has entered into employment agreements with certain of its named executive officers that provide certain benefits upon
termination of employment or change in control of the Company without Board of Directors approval. All such agreements provide
the named executive officer with a payment of three times their average annual compensation for the previous five year period
if there is a change in control of the Company without Board of Director approval, as defined. Such payment can be taken in a
present value lump sum or equal installments over a three-year period. The agreements also provide the named executive officers
with certain severance/retirement benefits upon certain occurrences including termination of employment without cause as defined,
termination of employment due to the Company’s breach of specified employment conditions (good reason termination), death,
disability or retirement at a specified age. Such severance/retirement benefit provisions survive the expiration of the agreement
and include a fixed stated benefit of $350,000 for Mr. Badke and an additional deferred compensation benefit upon termination
of employment in certain circumstances in the form of 6,561 shares of the Company’s common stock.
2018
Summary Compensation Table
The
following table sets forth all compensation for the fiscal years ended September 30, 2018 and 2017 awarded to or earned by (i)
the person serving as the Company’s Chief Executive Officer and Chief Financial Officer during its fiscal year ended September
30, 2018, and (ii) by each of the Company’s other executive officers whose total compensation exceeded $100,000 during such
periods (collectively, our “named executive officers”).
|
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
All
Other Compensation ($)(1)
|
|
|
Total
($)
|
|
|
Saagar
Govil
Chief
Executive Officer
|
|
2018
|
|
|
|
78,462
|
(2)
|
|
|
—
|
|
|
|
78,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
M. Badke
|
|
2018
|
|
|
|
225,000
|
|
|
|
8,045
|
|
|
|
233,045
|
|
|
Chief Operating Officer and Chief Financial
Officer
|
|
2017
|
|
|
|
225,000
|
|
|
|
7,974
|
|
|
|
232,974
|
|
|
|
(1)
|
Represents
automobile expense paid by the Company.
|
|
|
|
|
|
|
(2)
|
Mr.
Govil was appointed as Chief Executive Officer on March 23, 2018.
|
Outstanding
Equity Awards at Fiscal 2018 Year-End
The
following table sets forth information with respect to the outstanding equity awards of the named executive officers as of September
30, 2018.
|
Name
|
|
Number
of securities underlying unexercised options (#) exercisable
|
|
|
Number
of securities underlying unexercised options (#) unexercisable
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
|
John
M. Badke
|
|
|
8,000
|
(1)
|
|
|
—
|
(1)
|
|
$
|
5.00
|
|
|
11/5/2018
|
|
Chief
Operating Officer and Chief Financial
|
|
|
7,000
|
(1)
|
|
|
—
|
(1)
|
|
$
|
4.06
|
|
|
10/15/2020
|
|
Officer
|
|
|
6,500
|
(1)
|
|
|
—
|
(1)
|
|
$
|
3.31
|
|
|
10/25/2021
|
|
|
|
|
10,000
|
(1)
|
|
|
—
|
(1)
|
|
$
|
2.62
|
|
|
12/4/2022
|
|
|
|
|
10,500
|
(2)
|
|
|
3,500
|
(2)
|
|
$
|
1.48
|
|
|
6/9/2025
|
|
|
(1)
|
Options
vest over a five year period in five equal annual installments beginning on the first anniversary of the grant date. Options
expire after the tenth anniversary of the grant date.
|
|
|
|
|
|
|
(2)
|
Options
vest over a four year period in four equal annual installments beginning on the first anniversary of the grant date. Options
expire after the tenth anniversary of the grant date.
|
Fiscal
2018 Directors’ Compensation
The
table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended September 30,
2018. On March 23, 2018, Julian A. Tiedemann resigned as a director of the Company and was replaced by Aron Govil. On August 24,
2018, Arthur D. Roche retired from the Company’s Board of Directors.
|
Name
|
|
Fees
Earned or
Paid
in Cash ($)
|
|
|
Total
($)
|
|
|
Aron
Govil
|
|
|
26,250
|
|
|
|
26,250
|
|
|
Arthur D. Roche
|
|
|
47,000
|
|
|
|
47,000
|
|
|
Julian A. Tiedemann
|
|
|
29,000
|
|
|
|
29,000
|
|
|
Steven E. Walin
|
|
|
45,000
|
|
|
|
45,000
|
|
|
Warren J. White
|
|
|
45,000
|
|
|
|
45,000
|
|
Directors’
Compensation and Term
During
fiscal 2018, non-employee directors were compensated at the rate of $35,000 per year retainer and $1,000 per committee meeting
attended in person or by teleconference, with the non-executive Chairman of the Board receiving an additional annual retainer
of $15,000. Also, the Chairman of the Audit Committee received an additional annual retainer of $8,000 and the Chairperson of
each of the Compensation and Nominating and Governance Committees received an additional annual retainer of $6,000. Employee directors
are not compensated for Board or committee meetings. Effective September 2018, non-employee directors are compensated at the rate
of $24,000 per year retainer with no additional fees paid for attendance at meetings or chairing of committees. Directors may
not stand for reelection after age 70, except that any director may serve additional three-year terms after age 70 with the unanimous
consent of the Board of Directors.
EQUITY
COMPENSATION PLAN INFORMATION
at
September 30, 2018
|
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
|
|
|
284,942
|
|
|
$
|
3.36
|
|
|
|
330,848
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
29,061
|
(1)
|
|
$
|
1.06
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
314,003
|
|
|
$
|
3.15
|
|
|
|
330,848
|
|
(1)
Consists of: (i) 22,500 shares subject to stock options and stock appreciation rights assumed by the Company in connection with
the IQinVision merger; and (ii) 6,561 shares of common stock issuable to a certain officer under a deferred compensation benefit
arrangement upon retirement and other termination of employment events.
(2)
Represents awards available for issuance under the Company’s Stock Incentive Plans.
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth information, as of January 7, 2019, based on information furnished by the persons named below, obtained
by the Company from its transfer agent or obtained from filings made by the persons named below with the SEC, with respect to
the beneficial ownership of shares of common stock by (i) each person known by the Company to be the beneficial owner of more
than 5% of its outstanding shares of common stock, (ii) each director and named executive officer of the Company and (iii) all
directors and executive officers of the Company as a group.
|
Name
and Address
Of
Beneficial Owner
|
|
Number
of Shares Beneficially Owned (1)
|
|
|
%
of Class
|
|
|
|
|
|
|
|
|
|
Cemtrex, Inc. and Aron Govil
19 Engineers Lane
Farmingdale, NY 11735
|
|
|
8,784,824
|
(2)
|
|
|
46.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Gordian, Inc. and Gregory A. Bone
424
Peachtree Lane
Paso Robles, CA 93446
|
|
|
1,382,111
|
(3)
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
John M. Badke
|
|
|
78,846
|
(4)
|
|
|
|
*
|
|
Steven E. Walin
|
|
|
7,500
|
(5)
|
|
|
|
*
|
|
Warren J. White
|
|
|
7,500
|
(5)
|
|
|
|
*
|
|
Total all Executive Officers and Directors
as a Group (8 persons)
|
|
|
259,776
|
(6)
|
|
|
1.5
|
%
|
*
Less than 1%
|
|
|
|
(1)
|
All
information was determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and based on 17,552,623
shares of common stock outstanding on January 7, 2019. Unless otherwise indicated, the Company believes that all persons named
in the table have sole voting and investment power over the shares of stock owned.
|
|
|
|
|
(2)
|
Includes
1,500,000 shares issuable upon exercise of warrants. All shares and warrants are owned directly by Cemtrex, Inc. As the controlling
stockholder and Executive Director of Cemtrex, Aron Govil may be deemed to beneficially own such shares and warrants.
|
|
|
|
|
(3)
|
Includes
1,306,350 shares held by Gordian, Inc. and 75,761 shares held by Gregory A. Bone. Mr. Bone is the President, a director and
the principal shareholder of Gordian, Inc. and therefore may be deemed to beneficially own the securities held by Gordian,
Inc.
|
|
|
|
|
(4)
|
Includes
currently exercisable options to purchase 34,000 shares.
|
|
|
|
|
(5)
|
Includes
currently exercisable options to purchase 7,500 shares.
|
|
|
|
|
(6)
|
Includes
currently exercisable options to purchase 133,500 shares.
|
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
On
August 8, 2018, the Company entered into a Research and Development Services Agreement (the “Agreement”) with Cemtrex,
Inc. (“Cemtrex”) to provide the Company with outsourced software development services. The Company is transitioning
its principal Israeli based software development activities to Cemtrex’s India based services group, which has now assumed
principal software coding and test responsibilities for the Company. The outsourcing of these activities is expected to materially
reduce the Company’s software development costs and provide development efficiencies, which should help expedite its software
roadmap. The terms of the Agreement, among other things, set forth the scope of services, consideration, developed technology
ownership, non-disclosure and safeguard of the Company’s software code. During fiscal 2018, Cemtrex billed the Company a
total of $356,066 in connection with software development activities. Cemtrex beneficially owns 46% of the Company’s common
stock. In addition, the Chief Executive Officer of Cemtrex serves as the Chief Executive Officer of the Company, and the principal
shareholder of Cemtrex, who serves as a director of Cemtrex, also serves as a director of the Company.
To
date, the Company has not adopted a formal written policy with respect to related party transactions. However, an informal unwritten
policy has been in place whereby all such related-party transactions are reported to, and approved by, the full Board of Directors
(other than any interested director).
ITEM
14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
In
September 2018, the Company appointed Wei, Wei & Co., LLP to replace BDO USA, LLP as the Company’s principal independent
registered public accounting firm to perform the audit of its fiscal year ended September 30, 2018 financial statements. The following
table details: the aggregate fees billed by Wei, Wei & Co., LLP and BDO USA, LLP for professional services rendered for the
audit of the Company’s consolidated annual financial statements and review of the financial statements included in the Company’s
quarterly reports on Form 10-Q; the aggregate fees billed by BDO USA, LLP for audit related matters and; the aggregate fees billed
by BDO USA, LLP for tax compliance, tax advice and tax planning during fiscal years ended September 30, 2018 and 2017:
|
|
|
2018
|
|
|
2017
|
|
|
Audit fees
|
|
$
|
252,000
|
|
|
$
|
295,000
|
|
|
Audit related fees
|
|
|
—
|
|
|
|
—
|
|
|
Tax fees
|
|
|
25,000
|
|
|
|
49,000
|
|
|
Totals
|
|
$
|
277,000
|
|
|
$
|
344,000
|
|
Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The
Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services
may include audit services, audit related services, tax services and other services. The Audit Committee has adopted a policy
for the pre-approval of services provided by the independent auditors. Under the policy, pre-approval generally is provided for
an annual period and any pre-approval is detailed as to the particular service or category of services and is subject to a specific
limit. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis, which must be accompanied
by a detailed explanation for each proposed service. The Audit Committee may delegate pre-approval authority to one or more of
its members. Such member must report any decisions to the Audit Committee at the next scheduled meeting.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2018 and 2017
NOTE
1. Summary of Significant Accounting Policies
Nature
of Business
The
Company designs, assembles and markets video management and access control systems and system components for use in security,
surveillance, safety and control purposes by end users. The Company markets its products worldwide primarily to installing dealers,
systems integrators, government entities and distributors.
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned
subsidiaries: IQinVision, Inc., Vicon Industries Limited and subsidiary (Vicon Deutschland GmbH) and TeleSite U.S.A., Inc. and
subsidiary (Vicon Systems Ltd.). All significant intercompany accounts and transactions have been eliminated in consolidation.
See Note 11.
Revenue
Recognition
Revenue
is generally recognized when products are sold and title is passed to the customer. Advance service billings are deferred and
recognized as revenues on a pro rata basis over the term of the service agreement. Pursuant to Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 605-25-05, the Company evaluates multiple-element revenue arrangements for
separate units of accounting, and follows appropriate revenue recognition policies for each separate unit. Elements are considered
separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective
and reliable evidence of the fair value of the delivered and undelivered items, and (iii) if a general right of return exists
relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within
the control of the Company. As applied to the Company, under arrangements involving the sale of product and the provision of services,
product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue is
recognized as services are performed.
For
products that include software and for separate licenses of the Company’s software products, the Company recognizes revenue
in accordance with the provisions of FASB Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). ASU 2009-13 provides revenue recognition guidance for establishing
separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each
deliverable in the arrangement based on the fair value of the elements. The fair value for each deliverable is based on vendor-specific
objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or best
estimate of selling price (“BESP”) if neither VSOE nor TPE is available. BESP must be determined in a manner that
is consistent with that used to determine the price to sell the specific elements on a standalone basis.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on deposit and amounts invested in highly liquid money market funds.
Marketable
Securities
At
September 30, 2018, marketable securities consisted of mutual fund investments principally in federal, state and local government
debt securities of $13,440. Such mutual fund investments are stated at market value based on quoted market prices (Level 1 inputs)
and are classified as available-for-sale under ASC 320, with cumulative unrealized gains and losses reported in accumulated other
comprehensive loss as a component of shareholders’ equity. The cost of such securities was $14,507 and $14,114 at September
30, 2018 and 2017, respectively, with $(1,067) and $(559) of cumulative unrealized losses, net of tax where applicable, included
in the carrying amounts at September 30, 2018 and 2017, respectively.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability
to make payments, an additional allowance may be required.
Inventories
Inventories
are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or net realizable
value. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are
written down to their estimated net realizable values.
Long-Lived
Assets and Intangible Assets
Long-lived
assets include reported property, plant, and equipment. The Company reviews its long-lived assets for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount
by which the carrying amount of the asset exceeds its fair value.
Property,
plant, and equipment are recorded at cost and are being depreciated over periods ranging from 2 to 10 years. Depreciation and
amortization expense of property, plant and equipment was $196,075 and $259,116 for the years ended September 30, 2018 and 2017.
In
fiscal 2017, the Company recorded an $838,500 writeoff of remaining IQinVision merger intangible assets.
Engineering
and Development
Product
engineering and development costs are charged to expense as incurred, and amounted to $4,145,318 and $4,811,465 in fiscal 2018
and 2017, respectively. The Company evaluates the establishment of technological feasibility of its software in accordance with
ASC 985 (“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”). The Company has
determined that technological feasibility for its new products is reached shortly before products are released for field testing.
Costs incurred after technological feasibility has been established have not been material and are expensed as incurred.
Earnings
Per Share
Basic
EPS is computed based on the weighted average number of common shares outstanding. Diluted EPS reflects the maximum dilution that
would have resulted from the exercise of stock options, warrants and incremental shares issuable under a deferred compensation
agreement (see Note 6). In periods when losses are incurred, the effects of these securities are antidilutive and, therefore,
are excluded from the computation of diluted EPS.
Foreign
Currency Translation
The
Company translates the financial statements of its foreign subsidiaries by applying the current rate method under which assets
and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated
at the average exchange rate for the reporting period. The resulting cumulative translation adjustment of $(222,685) and $(155,491)
at September 30, 2018 and 2017, respectively, is recorded as a component of shareholders’ equity in accumulated other comprehensive
loss.
Income
Taxes
The
Company accounts for income taxes under the provisions of ASC 740 (“Accounting for Income Taxes”), which requires
recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred U.S. income taxes are not provided on undistributed earnings of foreign
subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings
in the future is not expected to result in a material incremental tax liability to the Company. The Company provides for a valuation
allowance against its entire net deferred tax asset balance due to the uncertainty of future realization (see Note 2 for further
discussion).
On
December 22, 2017, new tax legislation came into effect. The provisions are generally effective for years beginning on or after
January 1, 2018. The most impactful item to the Company in the new law is the change in tax rate from 34% to 21%. This reduced
the gross US deferred tax assets prior to existing full valuation allowance from an effective rate of 38% to an effective rate
of 25.75%. Given the full valuation allowance, the change did not have a significant impact on the financial statements. In addition,
the new legislation requires the payment of transition tax regarding prior earnings of foreign subsidiaries. Due to losses of
the Company’s foreign subsidiaries, there is no transition tax due.
The
Company accrues liabilities for identified tax contingencies that result from positions that are being challenged or could be
challenged by tax authorities. The Company believes that its accrual for tax liabilities is adequate for all open years, based
on Management’s assessment of many factors, including its interpretations of the tax law and judgments about potential actions
by tax authorities. However, it is possible that the ultimate resolution of any tax audit may be materially greater or lower than
the amount accrued.
Product
Warranties
The
Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in
product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the estimated
warranty liability may be required.
Changes
in the Company’s warranty liability (included in accrued expenses) for the fiscal years ended September 30, 2018 and 2017
were as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Balance at beginning of
year
|
|
$
|
431,000
|
|
|
$
|
681,000
|
|
|
Provision for warranties
|
|
|
139,000
|
|
|
|
124,000
|
|
|
Expenses incurred
|
|
|
(216,000
|
)
|
|
|
(374,000
|
)
|
|
Balance at end
of year
|
|
$
|
354,000
|
|
|
$
|
431,000
|
|
Fair
Value of Financial Instruments
The
majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring
basis, but the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as
it relates to long-lived assets. The carrying amounts for trade accounts receivable, other receivables, accounts payable and revolving
credit borrowings approximate fair value due to either the short-term maturity of these instruments or the fact that the interest
rate of the revolving credit borrowings is based upon current market rates.
Fair
value estimates are made at a specific point in time based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
Accounting
for Stock-Based Compensation
The
Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees, including
stock options, stock appreciation rights (SARs) and common stock share awards, be recognized as compensation expense in the consolidated
financial statements based on their fair values and over the requisite service period. For the years ended September 30, 2018
and 2017, the Company recorded non-cash compensation expense of $23,053 ($.00 per basic and diluted share) and $42,071 ($.00 per
basic and diluted share), respectively, relating to stock-based compensation.
No
options were granted during the fiscal years ended September 30, 2018 and 2017. The fair value for options granted was determined
at the date of grant using a Black-Scholes valuation model and the straight-line attribution approach using the following weighted
average assumptions:
The
risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury
securities at maturity with an equivalent term. Other than a one-time special dividend paid in connection with the IQinVision
merger, the Company never declared or paid any cash dividends and does not currently expect to do so in the future. Expected volatility
is based on the annualized daily historical volatility of the Company’s stock over a representative period. The weighted-average
expected life represents the period over which stock-based awards are expected to be outstanding and was determined based on a
number of factors, including historical weighted average and projected holding periods for the remaining unexercised shares, the
contractual terms of the Company’s stock-based awards, vesting schedules and expectations of future employee behavior.
The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company’s employee stock options and SARs have characteristics
significantly different from traded options, and because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options and SARs.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates
include, but are not limited to, provisions for doubtful accounts receivable, net realizable value of inventory, warranty obligations,
income tax accruals, deferred tax valuation and assessments of the recoverability of the Company’s long-lived assets. Actual
results could differ from those estimates.
NOTE
2. Income Taxes
No
income tax benefit was recognized on losses reported for the years presented due to uncertainty of realization. In fiscal 2011,
the Company began providing a full valuation allowance against its net deferred tax assets due to the uncertainty of future realization
and, thus, no tax benefit has been recognized on subsequent reported pretax losses.
A
reconciliation of the U.S. statutory tax rate to the Company’s effective tax rate follows:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
U.S. statutory tax
|
|
$
|
(1,325,000
|
)
|
|
|
(24.5
|
)%
|
|
$
|
(2,384,000
|
)
|
|
|
(34.0
|
)%
|
|
(Decrease) increase in valuation allowance
|
|
|
(3,030,000
|
)
|
|
|
(56.0
|
)
|
|
|
2,280,000
|
|
|
|
32.5
|
|
|
Impact of federal rate change on deferred
tax balances
|
|
|
4,410,000
|
|
|
|
81.5
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign tax rate differences
|
|
|
72,000
|
|
|
|
1.3
|
|
|
|
238,000
|
|
|
|
3.4
|
|
|
Permanent differences
|
|
|
16,000
|
|
|
|
0.3
|
|
|
|
18,000
|
|
|
|
0.3
|
|
|
State tax, net of federal benefit
|
|
|
(110,000
|
)
|
|
|
(2.0
|
)
|
|
|
(126,000
|
)
|
|
|
(1.8
|
)
|
|
Other, net
|
|
|
(33,000
|
)
|
|
|
(0.6
|
)
|
|
|
(26,000
|
)
|
|
|
(0.4
|
)
|
|
Effective
tax rate
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
The
tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2018 and 2017 are
presented below:
|
|
|
2018
|
|
|
2017
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,029,000
|
|
|
$
|
1,543,000
|
|
|
Accrued compensation
|
|
|
348,000
|
|
|
|
539,000
|
|
|
Warranty accrual
|
|
|
79,000
|
|
|
|
150,000
|
|
|
Depreciation
|
|
|
61,000
|
|
|
|
100,000
|
|
|
Allowance for doubtful
accounts receivable
|
|
|
149,000
|
|
|
|
320,000
|
|
|
Unearned revenue
|
|
|
183,000
|
|
|
|
237,000
|
|
|
U.S. net operating
loss carryforwards
|
|
|
7,349,000
|
|
|
|
8,794,000
|
|
|
Foreign net operating
loss carryforwards
|
|
|
2,277,000
|
|
|
|
1,916,000
|
|
|
Tax credits
|
|
|
989,000
|
|
|
|
989,000
|
|
|
Other
|
|
|
1,011,000
|
|
|
|
1,181,000
|
|
|
Gross deferred tax
assets
|
|
|
13,475,000
|
|
|
|
15,769,000
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
38,000
|
|
|
|
64,000
|
|
|
Gross
deferred tax liabilities
|
|
|
38,000
|
|
|
|
64,000
|
|
|
Total deferred tax
assets and liabilities
|
|
|
13,437,000
|
|
|
|
15,705,000
|
|
|
Less
valuation allowance
|
|
|
(13,437,000
|
)
|
|
|
(15,705,000
|
)
|
|
Net
deferred tax assets and liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns
for which a tax benefit has been recorded in the income statement. As of September 30, 2018, there were no undistributed earnings
of foreign subsidiaries.
The
Company provides for a valuation allowance against its net deferred tax assets due to the uncertainty of future realization. The
full valuation allowance is determined to be appropriate due to the Company’s continuing operating losses since fiscal year
2010 and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become
deductible.
Pretax
domestic loss amounted to approximately $(3,604,000) and ($5,309,000) in fiscal years 2018 and 2017, respectively. Pretax foreign
loss amounted to approximately ($1,805,000) and ($1,703,000) in fiscal years 2018 and 2017, respectively. The Company has U.S.
and foreign net operating loss carryforwards (NOLs) of approximately $28.7 million and $10.5 million, respectively, available
to offset future taxable income. Such NOLs can be carried forward over periods through September 30, 2038 in the U.S. and indefinitely
in foreign jurisdictions. On August 29, 2014, the Company merged with IQinVision, Inc. In connection with this merger, the Company’s
ability to utilize pre-merger net operating losses and tax credit carryforwards in the future is subject to certain limitations
pursuant to Section 382 of the Internal Revenue Code. On November 7, 2017 the Company completed a rights offering that could further
limit its ability to utilize prior net operating losses and tax credit carryforwards in the future pursuant to Section 382 of
the Internal Revenue Code. This did not materially impact the balance sheet or statement of operations as the net deferred tax
asset has a full valuation allowance.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act
(the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code and established new tax laws that
affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 34% to 21%. In addition, net operating
losses generated subsequent to the Tax Act can only be used to offset 80% of taxable income with an indefinite carryforward period
for unused carryforwards.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from
the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a
company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional estimate in the financial statements. This guidance did not have
a material impact on the Company’s operating results or financial condition.
The
Company follows the provisions of ASC 740 as it relates to uncertain tax positions. Unrecognized tax benefits activity for the
years ended September 30, 2018 and 2017 is summarized below:
|
|
|
2018
|
|
|
2017
|
|
|
Beginning balance
|
|
$
|
45,000
|
|
|
$
|
45,000
|
|
|
Additions (reductions) based on tax
positions related to prior years
|
|
|
—
|
|
|
|
—
|
|
|
Additions (reductions)
based on tax positions related to the current year
|
|
|
—
|
|
|
|
—
|
|
|
Ending balance
|
|
$
|
45,000
|
|
|
$
|
45,000
|
|
The
Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September
30, 2018 and 2017, there was no accrued net interest and penalties related to tax positions taken or to be taken on the Company’s
tax returns and recorded as part of the reserves for uncertain tax positions. The Company files U.S. Federal and State income
tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax
examinations for fiscal years prior to 2015 in the U.S. and 2012 in the U.K., Germany and Israel.
NOTE
3. Accumulated Other Comprehensive Loss
The
accumulated other comprehensive loss balances at September 30, 2018 and 2017 consisted of the following:
|
|
|
2018
|
|
|
2017
|
|
|
Foreign currency translation
adjustment
|
|
$
|
(222,685
|
)
|
|
$
|
(155,491
|
)
|
|
Unrealized loss
on marketable securities
|
|
|
(1,067
|
)
|
|
|
(559
|
)
|
|
Accumulated other
comprehensive loss
|
|
$
|
(223,752
|
)
|
|
$
|
(156,050
|
)
|
NOTE
4. Segment and Geographic Information
The
Company operates in one business segment which encompasses the design, assembly and marketing of video management and access control
systems and system components for the electronic protection segment of the security industry. Its U.S. based operations consist
of Vicon Industries, Inc., the Company’s corporate headquarters and principal operating entity. Its Europe-based operation
consists of Vicon Industries Limited, which markets and distributes the Company’s products principally within Europe and
the Middle East.
Net
sales and long-lived assets related to operations in the United States and other foreign countries for the fiscal years ended
September 30, 2018 and 2017 are as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
23,048,392
|
|
|
$
|
21,698,526
|
|
|
Foreign
|
|
|
4,684,975
|
|
|
|
4,953,105
|
|
|
Total
|
|
$
|
27,733,367
|
|
|
$
|
26,651,631
|
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
154,218
|
|
|
$
|
271,258
|
|
|
Foreign
|
|
|
101,513
|
|
|
|
130,440
|
|
|
Total
|
|
$
|
255,731
|
|
|
$
|
401,698
|
|
U.S.
sales include $3,384,619 and $3,333,429 for export in fiscal years 2018 and 2017, respectively. Foreign sales principally represent
sales from the Company’s Europe based subsidiaries.
NOTE
5. Long-Term Equity Incentive Plans
The
Company maintains stock incentive plans that provide for the grant of incentive and non-qualified options, stock appreciation
rights (“SARs”) and common stock awards covering a total of 644,851 shares of common stock reserved for issuance to
key employees, including officers and directors, as of September 30, 2018. All options and SARs are issued at fair market value
at the grant date and are exercisable in varying installments according to the plans. SARs provide the holder the right to receive,
upon exercise, the excess of the exercise date fair market value over the grant date fair market value of a share of the Company’s
common stock in the form of equivalent shares of common stock at market value, cash or a combination of both. The plans allow
for the payment of option exercises through the surrender of previously owned mature shares based on the fair market value of
such shares at the date of surrender. Such surrendering of mature shares by holders results in an increase to treasury stock based
on the stock price on date of surrender. There were 330,848 options and SARs available for grant under these plans at September
30, 2018.
Changes
in outstanding stock options for the two years ended September 30, 2018 are as follows:
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at September 30, 2016
|
|
|
536,230
|
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(80,497
|
)
|
|
|
2.86
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
455,733
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(148,291
|
)
|
|
|
3.76
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
307,442
|
|
|
$
|
3.19
|
|
|
|
3.2
|
|
|
$
|
—
|
|
|
Exercisable at September 30, 2018
|
|
|
295,192
|
|
|
$
|
3.26
|
|
|
|
3.0
|
|
|
$
|
—
|
|
As
of September 30, 2018, there was $13,404 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested
stock options, which is expected to be recognized over a weighted-average period of 0.5 years.
Changes
in outstanding SARs for the two years ended September 30, 2018 are as follows:
|
|
|
Number
of SARs
|
|
|
Weighted
Average
Base
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at September 30, 2016
|
|
|
80,796
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
SARs granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SARs exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SARs forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
80,796
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
SARs granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SARs exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SARs forfeited
|
|
|
(80,796
|
)
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0
|
|
|
|
—
|
|
|
Exercisable at September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0
|
|
|
|
—
|
|
As
of September 30, 2018, there were no SARs outstanding and no unrecognized compensation cost related to nonvested SARs.
NOTE
6. Loss Per Share
The
following table provides the components of the basic and diluted loss per share (EPS) computations:
|
|
|
2018
|
|
|
2017
|
|
|
Basic
EPS Computation
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,409,147
|
)
|
|
$
|
(7,011,580
|
)
|
|
Weighted average shares outstanding
|
|
|
16,700,413
|
|
|
|
9,348,388
|
|
|
Basic loss per share
|
|
$
|
(.32
|
)
|
|
$
|
(.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Computation
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,409,147
|
)
|
|
$
|
(7,011,580
|
)
|
|
Weighted average shares outstanding
|
|
|
16,700,413
|
|
|
|
9,348,388
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
Stock compensation
arrangements
|
|
|
—
|
|
|
|
—
|
|
|
Diluted shares outstanding
|
|
|
16,700,413
|
|
|
|
9,348,388
|
|
|
Diluted loss per share
|
|
$
|
(.32
|
)
|
|
$
|
(.75
|
)
|
For
fiscal years 2018 and 2017, all outstanding stock options, warrants and shares issuable under stock compensation arrangements
totaling 1,814,003 and 2,043,090 shares, respectively, have been omitted from the calculation of diluted EPS as their effect would
have been antidilutive. The actual effect of these stock options and shares, if any, on the diluted earnings per share calculation
will vary significantly depending on fluctuations in the market price of the Company’s stock.
NOTE
7. Commitments and Contingencies
The
Company leases vehicles and occupies certain facilities under operating leases that expire at various dates through 2021. The
leases, which cover periods from three to eight years, generally provide for renewal options at specified rental amounts. The
aggregate operating lease commitment at September 30, 2018 was $893,000 with minimum rentals for the fiscal years shown as follows:
2019 - $655,000; 2020 - $181,000; and 2021 - $57,000. Rent expense for fiscal 2018 and 2017 was approximately $626,183 and $696,114,
respectively.
The
Company is a party to employment agreements with certain of its officers that provide for, among other things, the payment of
compensation if there is a change in control without Board of Director approval (as defined in the agreements). The contingent
liability under such change in control provisions at September 30, 2018 would have been approximately $1.7 million. Certain of
the Company’s employment agreements with its officers provide for a severance/retirement benefit upon certain occurrences
or at a specified date of retirement, absent a change in control, aggregating $1.0 million at September 30, 2018. The Company
is amortizing such obligation to expense on the straight-line method through the specified dates of retirement. Such expense amounted
to approximately $38,000 and $38,000 in fiscal 2018 and 2017, respectively.
The
Company has an agreement with an officer to provide a deferred compensation benefit in the form of 6,561 shares of common stock.
Such shares vest upon retirement or earlier under certain occurrences including death, involuntary termination or a change in
control of the Company. The market value of such shares approximated $20,000 at the date of grant, which is being amortized on
the straight-line method through the specified date of retirement. The unamortized expense of approximately $1,000 will be recognized
during fiscal 2019.
NOTE
8. Credit and Term Loan Agreements
On
March 4, 2016, the Company entered into a Credit Agreement (the “Agreement”) with NIL Funding Corporation to provide
a $3 million revolving line of credit for working capital purposes, which was subsequently amended and restated on two occasions
as described below. The Agreement provided for a borrowing formula based upon eligible accounts receivable and was secured by
a first priority security interest in substantially all of the Company’s assets. Borrowings under the Agreement bore interest
at a rate of 6.75% per annum. The Agreement also provided for an unused commitment fee equal to .5% per annum. The Agreement included
provisions that are customarily found in similar financing agreements.
On
August 18, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Amended Agreement”) with
NIL Funding Corporation which increased the $3 million revolving line of credit to $6 million. Under the Amended Agreement, the
facility was to mature on October 2, 2018 and consisted of two credit lines of $4 million and $2 million which bore interest at
rates of 6.95% per annum and 8.25% per annum, respectively. The $4 million line of credit was subject to a borrowing formula based
upon eligible accounts receivable. The Amended Agreement also provided for an initial commitment fee of $60,000, which was paid
at closing, as well as an unused commitment fee equal to .5% per annum. The Amended Agreement included a financial covenant that
required the Company to maintain a specified minimum tangible net worth, as defined, and was otherwise substantially similar to
the original Agreement with NIL Funding Corporation.
On
April 20, 2017, the Company entered into the Second Amended and Restated Credit Agreement (the “Second Amended Agreement”)
with NIL Funding Corporation, under which only $2 million of the $6 million facility was subject to a borrowing formula, effectively
providing the Company with $2 million of additional borrowing availability. The Second Amended Agreement also extended the maturity
date of the credit facility to April 2, 2019, and reduced the Company’s minimum tangible net worth requirement, but was
otherwise substantially similar to the Amended Agreement.
In
connection with the Second Amended Agreement, NIL Funding was issued a three-year warrant to purchase 1.5 million shares of the
Company’s common stock at a price of $.40 per share. The fair value of the warrant at the date of issuance was $438,000,
which is being amortized over the two-year remaining credit facility term from the date of issuance. At September 30, 2018 and
2017, there was approximately $108,000 and $339,000, respectively, of deferred warrant issuance costs included in other assets
in the accompanying balance sheets.
The
fair value for the warrants was determined at the date of issuance using the Black-Scholes valuation model and the straight-line
attribution approach using the following weighted average assumptions (see Note 1 for further discussion of Black Scholes valuation
method):
|
|
|
2017
|
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
Volatility factor
|
|
|
125.6
|
%
|
|
Weighted average expected life
|
|
|
3.0
years
|
|
Changes
in outstanding warrants for the two years ended September 30, 2018 are as follows:
|
Warrants
|
|
Number
of Warrants
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding at September 30, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
1,500,000
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,500,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,500,000
|
|
|
$
|
0.40
|
|
|
|
1.6
|
|
|
$
|
—
|
|
|
Exercisable at September 30, 2018
|
|
|
1,500,000
|
|
|
$
|
0.40
|
|
|
|
1.6
|
|
|
$
|
—
|
|
At
June 30, 2018, the Company was in violation of the minimum tangible net worth covenant under Section 4.9 of the Second Amended
Agreement. On July 27, 2018, the Company entered into an amendment (the “Amendment”) to the Second Amended Agreement
with NIL Funding Corporation, which Amendment provided that, among other things, (a) from June 12, 2018 until September 1, 2018,
the minimum tangible net worth covenant contained in Section 4.9 of the Second Amended Agreement was of no force or effect, (b)
from June 12, 2018 until September 2, 2018, the Company was not permitted to borrow any additional funds under the Second Amended
Agreement, and (c) NIL Funding Corporation waived any Event of Default (as defined in the Credit Agreement) with respect to Section
4.9 of the Second Amended Agreement that may have occurred prior to June 12, 2018. The Company paid NIL Funding Corporation a
fee of $29,000 in connection with the Amendment, which has been included in interest expense.
On
September 21, 2018, the Company entered into a $5.6 million Term Loan Agreement (the “Term Loan Agreement”) with NIL
Funding Corporation (“NIL”) to replace the $5.8 million outstanding balance on its existing revolving line of credit
agreement with a term loan. Upon closing, $5.6 million of outstanding borrowings under its revolving credit agreement were converted
to a term loan while the remaining $200,000 of outstanding borrowings were repaid to NIL. The Term Loan Agreement requires monthly
payments of accrued interest beginning on October 1, 2018. In addition, the Term Loan Agreement requires equal monthly principal
payments of $25,000, plus accrued interest, beginning on April 1, 2019 until the loan maturity date of March 30, 2020, at which
point the full outstanding balance of the loan and accrued interest are due. As of September 30, 2018, outstanding borrowings
under the Term Loan Agreement of $5.6 million are due in the fiscal years shown as follows: 2019 - $150,000; and 2020 - $5,450,000.
The
Term Loan Agreement provides for a formula that limits outstanding indebtedness based upon eligible accounts receivable and is
secured by a first priority security interest in substantially all of the Company’s assets. Borrowings under the Term Loan
Agreement bear interest at a rate of 8.85% per annum. The Term Loan Agreement required additional fees and expenses of approximately
$81,000, which was paid at closing, and includes provisions that are customarily found in similar financing agreements, including
a financial covenant which requires the Company to maintain a minimum level of inventory and liquid assets as defined therein.
NOTE
9. Related Party Transactions
On
August 8, 2018, the Company entered into a Research and Development Services Agreement (the “Agreement”) with Cemtrex,
Inc. (“Cemtrex”) to provide the Company with outsourced software development services. The Company is transitioning
its principal Israeli based software development activities to Cemtrex’s India based services group, which has now assumed
principal software coding and test responsibilities for the Company. The outsourcing of these activities is expected to materially
reduce the Company’s software development costs and provide development efficiencies, which should help expedite its software
roadmap. The terms of the Agreement, among other things, set forth the scope of services, consideration, developed technology
ownership, non-disclosure and safeguard of the Company’s software code. During fiscal 2018, Cemtrex billed the Company a
total of $356,066 in connection with software development activities. Cemtrex beneficially owns 46% of the Company’s common
stock. In addition, the Chief Executive Officer of Cemtrex serves as the Chief Executive Officer of the Company, and the principal
shareholder of Cemtrex, who serves as a director of Cemtrex, also serves as a director of the Company.
Shezhen
Infinova Limited (Infinova), a Chinese corporation which beneficially owned 5.8% of the outstanding shares of the Company’s
common stock as of September 30, 2017, began serving as a contract manufacturer to the Company for certain of its products in
fiscal 2016. The Company procured approximately $3.1 million of products from Infinova in fiscal 2017. Sales of Vicon products
to Infinova were $18,000 in 2017. At September 30, 2017, the Company owed $690,000 to Infinova and Infinova owed $14,000 to the
Company resulting from purchases and sales of products.
NOTE
10: Recent Accounting Pronouncements
In
May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will recognize
revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange
for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized.
Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction
price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in certain circumstances.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. This guidance permits the use of either the retrospective or cumulative
effect transition method and is effective for the Company beginning in fiscal 2019. The adoption of this guidance will not have
a material effect on the Company’s operating results or financial position.
In
February 2016, the FASB issued guidance on lease accounting requiring lessees to recognize a right-of-use asset and a lease liability
for long-term leases. The liability will be equal to the present value of lease payments. The standard requires the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This
guidance must be applied using a modified retrospective transition approach to all annual and interim periods presented and is
effective for the Company beginning on October 1, 2019. The Company is currently evaluating the effect of implementing this guidance.
In
March 2016, the FASB issued guidance on simplifying several aspects of accounting for share-based payment award transactions,
including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. This guidance requires a mix of prospective, modified retrospective, and retrospective transition to all annual
and interim periods presented and was effective for the Company beginning in fiscal 2018. The adoption of this guidance did not
have a material effect on the Company’s operating results or financial position.
In
January 2017, the FASB issued guidance that clarifies the definition of a business, which will impact many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The new standard is intended to help companies and other organizations
evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is
effective for the Company beginning in fiscal 2019 and will be considered for any future acquisitions.
NOTE
11. Going Concern and Liquidity
The
accompanying financial statements have been prepared on a going concern basis which assumes the Company will be able to realize
its assets and discharge its liabilities in the normal course of business for the foreseeable future and, thus, do not include
any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary if the Company
is unable to continue as a going concern. However, the Company’s ability to continue as a going concern is dependent upon
generating profitable operations in the future and obtaining the necessary financing to meet its obligations and repay its liabilities
arising from normal business operations when they come due.
The
Company has incurred operating losses due to depressed revenue levels and ongoing strategic investments. Since 2012, the Company
has made a significant investment in the development of a completely new, and strategically critical, video management system
(VMS). The initial release of this product offering was launched in January 2017, and was followed up by important system enhancements
released in July 2017, March 2018 and August 2018. The funding of this major development effort has contributed to the ongoing
operating losses and depletion of cash reserves. Cash losses over the past several years have been financed by credit facility
borrowings, the sale of the Company’s two principal operating facilities, ongoing management of working capital levels and,
more recently, the Company’s rights offering and related backstop funding discussed in Note 12 to the financial statements.
During the quarter ended September 30, 2018, the Company launched a series of restructuring initiatives, which management expects
will substantially reduce operating expenses and help improve operating efficiencies. The full impact of these initiatives are
not expected to be reflected in the Company’s financial statements until the onset of the quarter ending December 31, 2018.
At
September 30, 2018, the Company had approximately $2.0 million of cash and it currently expects to draw on these cash reserves
to finance its near term working capital needs while it implements its operating cost restructuring initiatives.
Notwithstanding
the above ongoing restructuring plans, the Company will likely require additional financing over the next twelve months to implement
its planned business objectives and strategies. Accordingly, and in light of the Company’s historic and continuing losses,
there is substantial doubt about the Company’s ability to continue as a going concern.
NOTE
12. Rights Offering and Investment Agreement
On
November 7, 2017, the Company completed a rights offering of common stock to its existing shareholders, whereby it raised approximately
$282,000 of gross proceeds for the issuance of 704,235 shares of its common stock pursuant to subscription commitments. On November
8, 2017, following the closing of the rights offering, the Company issued 7,500,000 shares of its common stock to NIL Funding
Corporation, the Company’s secured lender, for an aggregate purchase price of $3.0 million pursuant to an Investment Agreement
between the Company and NIL Funding Corporation dated as of July 27, 2017. The net proceeds from the rights offering and Investment
Agreement were used by the Company to pay down interest bearing borrowings under its Credit Agreement. In March 2018, Cemtrex,
Inc. acquired NIL Funding’s remaining equity holdings in the Company of 7,284,824 shares of common stock along with 1,500,000
warrants held.