UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
2015
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from _______________ to
_______________
Commission File Number: 000-49746
VISCOUNT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada |
88-0498181 |
(State or other jurisdiction of |
(I.R.S. Employer I.D. No.) |
incorporation or organization) |
|
4585 Tillicum Street, Burnaby, British Columbia, Canada
V5J 5K9
(Address of principal executive offices)
(604) 327-9446
Registrants telephone number
N/A
Former name, former address, and former
fiscal year, if changed since last report
Check whether the registrant (1) filed all reports required to
be filed by sections 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ ] No [X]
Check whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes
[ ] No [X]
Check whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [
] Accelerated filer
[ ] Non-accelerated filed
[ ] Smaller reporting
company [X]
Check whether the registrant is a shell company, as defined in
Rule 12b-2 of the Exchange Act.
Yes [
] No [X]
State the number of shares outstanding of each of the issuers
classes of common equity, as of the latest practicable date:
As of November 19, 2015 the registrants outstanding common
stock consisted of 130,547,236 shares.
EXPLANATORY NOTE
This quarterly report contains the revised
condensed consolidated statement of operations for the three months ended
September 30, 2014. Refer to Note 9 of the Notes to Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q for further detail.
During the preparation of the Form 10-Q for the
three and nine months ended September 30, 2015, the Company identified an issue
with the condensed consolidated statement of operations for the three months
ended September 30, 2014, because the amounts included in those results didnt
represent the difference between the results for the nine months ended September
30, 2014 and the six months ended June 30, 2014. There was no error in the
accounting for the nine months ended September 30, 2014.
VISCOUNT SYSTEMS, INC
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Safe Harbor Statement
Certain statements in this filing that relate to financial
results, projections, future plans, events, or performance are forward-looking
statements and involve significant risks and uncertainties, including, but not
limited to, the following: competition, promotional costs, and risk of declining
revenues. Terms such as we believe, we expect or we project, and similar
terms, are examples of forward looking statements that we may use in this
report. Such statements also relate to the sales trends of our Enterphone 2000,
EPX (previously named Enterphone 3000), Freedom, Liberty, and MESH product
lines, general revenues, income, the number of new construction projects or
building upgrades that may generate sales of our products, and in general the
market for our products. Any projections herein are based solely on our
managements views, and were not prepared in accordance with any accounting
guidelines applicable to projections. Accordingly, these forward looking
statements are intended to provide the reader with insight into our managements
proposals, expectations, strategies and general outlook for our business and
products, but because of the risks associated with those statements, including
those described herein and in our annual report, readers should not rely upon
those statements in making an investment decision. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements as a result of a number of factors. These forward-looking statements
are made as of the date of this filing, and the Company assumes no obligation to
update such forward- looking statements. As used herein, the Company,
Viscount, we, us, our and words of similar meaning refer to Viscount
Systems, Inc.
The following discusses our financial condition and results of
operations based upon our consolidated financial statements which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. It should be read in conjunction with our financial
statements and the notes thereto included elsewhere herein. Unless otherwise
noted as USD or U.S. dollars, all dollar references herein are in Canadian
dollars. As at September 30, 2015, the foreign exchange rate certified by the
Federal Reserve Bank of New York was CAD$1.339086 for USD$1.0000 or CAD$1.0000
for USD$0.746778.
1
Item 1. Financial Statements
VISCOUNT SYSTEMS, INC.
Condensed Consolidated
Balance Sheets
(Expressed in Canadian dollars)
|
|
September 30, |
|
|
December 31, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(unaudited) |
|
|
(revised - see Note 9) |
|
Assets |
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
Cash |
$ |
173,713
|
|
$ |
135,308
|
|
Short term investments |
|
55,000 |
|
|
55,000 |
|
Trade accounts receivable, net |
|
907,870 |
|
|
661,629 |
|
Prepaid expenses |
|
4,387 |
|
|
- |
|
Inventory |
|
560,508 |
|
|
533,217 |
|
Total Current Assets |
|
1,701,478 |
|
|
1,385,154 |
|
Equipment |
|
175,959 |
|
|
206,004 |
|
Deposits |
|
8,391 |
|
|
1,391 |
|
Intangible assets |
|
- |
|
|
5,224 |
|
Total
Assets |
$ |
1,885,828 |
|
$ |
1,597,773 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit |
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
Accounts payable |
$ |
970,696 |
|
$ |
362,595 |
|
Accrued liabilities |
|
550,845 |
|
|
564,466 |
|
Capital lease obligation - current portion |
|
10,964 |
|
|
10,285 |
|
Deferred revenue |
|
72,625 |
|
|
37,318 |
|
Due to related parties |
|
12,613 |
|
|
5,003 |
|
Loans payable |
|
114,536 |
|
|
114,536 |
|
Derivative liabilities |
|
427,999 |
|
|
2,858,618 |
|
Convertible redeemable preferred stock - see below
|
|
2,027,026 |
|
|
- |
|
Total Current Liabilities |
|
4,187,304 |
|
|
3,952,821 |
|
Capital lease obligation - non-current |
|
8,873 |
|
|
17,182 |
|
Total
Liabilities |
|
4,196,177 |
|
|
3,970,003 |
|
Commitments and contingencies |
|
|
|
|
|
|
Convertible redeemable preferred stock - US$0.001 par
value; 20,000,000 shares authorized: Series A
convertible redeemable preferred stock, stated value $1,000, 1,351 and
1,072 shares
issued and outstanding at
September 30, 2015 and December 31, 2014, respectively;
aggregate liquidation preference of
$1,351,000 and $1,072,000 as of September 30, 2015
and December 31, 2014, respectively |
|
- |
|
|
1 |
|
Stockholders' Deficit |
|
|
|
|
|
|
Common stock, par value US$0.001
per share, 300,000,000 shares authorized: 130,547,236 and
126,047,236 shares issued and outstanding at
September 30, 2015, respectively, and 126,009,581
shares issued and outstanding at December 31,
2014 |
|
130,547 |
|
|
126,009 |
|
Additional paid-in
capital |
|
8,170,074 |
|
|
10,163,296 |
|
Accumulated deficit |
|
(10,610,970 |
) |
|
(12,661,536 |
) |
Total Stockholders' Deficit |
|
(2,310,349 |
) |
|
(2,372,231 |
) |
Total
Liabilities and Stockholders' Deficit |
$ |
1,885,828 |
|
$ |
1,597,773 |
|
See Notes to the Condensed Consolidated Financial Statements
2
VISCOUNT SYSTEMS, INC.
Condensed Consolidated
Statements of Operations
(Expressed in Canadian dollars)
For the three
and nine months ended September 30, 2015 and 2014
(Unaudited)
|
|
Three months ended |
|
|
Nine
months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
(revised - see Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
$ |
1,177,211 |
|
$ |
1,419,204 |
|
$ |
4,582,017 |
|
$ |
3,712,240 |
|
Cost of sales |
|
476,234 |
|
|
804,189 |
|
|
1,790,371 |
|
|
2,010,831 |
|
Gross profit |
|
700,977 |
|
|
615,015 |
|
|
2,791,646 |
|
|
1,701,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
890,521 |
|
|
1,153,566 |
|
|
2,744,427 |
|
|
4,708,123 |
|
Research and development |
|
233,211 |
|
|
189,556 |
|
|
632,614 |
|
|
481,578 |
|
Total operating
expenses |
|
1,123,732 |
|
|
1,343,122 |
|
|
3,377,041 |
|
|
5,189,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
(422,755 |
) |
|
(728,107 |
) |
|
(585,395 |
) |
|
(3,488,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
6 |
|
|
2,110 |
|
|
24 |
|
|
3,430 |
|
Interest expense |
|
(6,049 |
) |
|
- |
|
|
(61,933 |
) |
|
- |
|
Loss on settlement of
convertible note |
|
- |
|
|
- |
|
|
(63,324 |
) |
|
- |
|
Amortization of debt discount |
|
- |
|
|
- |
|
|
(47,087 |
) |
|
- |
|
Change in fair value of derivative liabilities |
|
41,534 |
|
|
1,505,066 |
|
|
2,808,281 |
|
|
1,203,575 |
|
|
|
35,491 |
|
|
1,507,176 |
|
|
2,635,961 |
|
|
1,207,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
(387,264 |
) |
|
779,069 |
|
|
2,050,566 |
|
|
(2,281,287 |
) |
Preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible -
contractual dividends |
|
(37,765 |
) |
|
- |
|
|
(82,414 |
) |
|
- |
|
Series A convertible - deemed
dividends |
|
(2,010,330 |
) |
|
- |
|
|
(2,010,330 |
) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders |
$ |
(2,435,359 |
) |
$ |
779,069 |
|
$ |
(42,178 |
) |
$ |
(2,281,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income - basic |
$ |
(0.02 |
) |
$ |
0.01 |
|
$ |
(0.00 |
) |
$ |
(0.02 |
) |
Net (loss) income - diluted |
$ |
(0.02 |
) |
$ |
0.01 |
|
$ |
(0.00 |
) |
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of common
stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
126,047,236 |
|
|
126,009,581 |
|
|
126,040,891 |
|
|
117,236,991 |
|
Diluted |
|
126,047,236 |
|
|
126,009,581 |
|
|
175,403,366 |
|
|
117,236,991 |
|
See Notes to the Condensed Consolidated Financial Statements
3
VISCOUNT SYSTEMS, INC.
Condensed Consolidated
Statement of Stockholders' Deficit
(Expressed in Canadian dollars)
For the
Nine Months Ended September 30, 2015
(Unaudited)
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
(revised see Note 9) |
|
126,009,581 |
|
$ |
126,009 |
|
$ |
10,163,296 |
|
$ |
(12,661,536 |
) |
$ |
(2,372,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A dividend issued |
|
- |
|
|
- |
|
|
(82,414 |
) |
|
- |
|
|
(82,414 |
) |
Proceeds from sale of common stock &
warrants |
|
37,655 |
|
|
38 |
|
|
3,012 |
|
|
- |
|
|
3,050 |
|
Common stock issued to
directors for services |
|
4,500,000 |
|
|
4,500 |
|
|
(4,500 |
) |
|
- |
|
|
- |
|
Stock-based compensation |
|
- |
|
|
- |
|
|
68,538 |
|
|
- |
|
|
68,538 |
|
Warrants issued in connection
with Series A convertible redeemable preferred stock issuance |
|
- |
|
|
- |
|
|
32,472 |
|
|
- |
|
|
32,472 |
|
Deemed dividend in connection with Series A
convertible preferred stock redemption event |
|
- |
|
|
- |
|
|
(2,010,330 |
) |
|
- |
|
|
(2,010,330 |
) |
Net income |
|
- |
|
|
- |
|
|
- |
|
|
2,050,566 |
|
|
2,050,566 |
|
Balance, September 30, 2015 |
|
130,547,236 |
|
$ |
130,547 |
|
$ |
8,170,074 |
|
$ |
(10,610,970 |
) |
$ |
(2,310,349 |
) |
See Notes to the Condensed Consolidated Financial Statements
4
VISCOUNT SYSTEMS, INC.
Condensed Consolidated
Statements of Cash Flows
(Expressed in Canadian dollars)
For the Nine
Months Ended September 30, 2015 and 2014
(Unaudited)
|
|
For the nine months ended: |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
Operating Activities |
|
|
|
|
|
|
Net income (loss) |
$ |
2,050,566 |
|
$ |
(2,281,287 |
) |
Adjustments to reconcile net income (loss)
to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
40,750 |
|
|
36,337 |
|
Provision for
uncollectible receivables |
|
(66,606 |
) |
|
- |
|
Provision for inventory obsolescence |
|
- |
|
|
150,000 |
|
Change in fair value of
derivative liabilities |
|
(2,808,281 |
) |
|
(1,203,575 |
) |
Stock based compensation |
|
68,538 |
|
|
1,609,579 |
|
Original issue discount
on convertible debt |
|
18,750 |
|
|
- |
|
Loss on settlement of convertible debt |
|
63,324 |
|
|
- |
|
Amortization of debt
discount |
|
47,087 |
|
|
- |
|
Non-cash financing fees |
|
- |
|
|
370,895 |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(179,635 |
) |
|
(344,197 |
) |
Inventory |
|
(27,291 |
) |
|
37,774 |
|
Prepaid expenses |
|
(4,387 |
) |
|
- |
|
Deposits |
|
(7,000 |
) |
|
- |
|
Accounts payable |
|
608,104 |
|
|
8,275 |
|
Accrued liabilites |
|
(13,621 |
) |
|
(62,059 |
) |
Deferred revenue |
|
35,307 |
|
|
306 |
|
Due to related parties |
|
7,610 |
|
|
(29,724 |
) |
Net Cash Used in
Operating Activities |
|
(166,785 |
) |
|
(1,707,676 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
Purchase of property and equipment |
|
(5,480 |
) |
|
(150,091 |
) |
Net cash used in
investing activities |
|
(5,480 |
) |
|
(150,091 |
) |
|
|
|
|
|
|
|
Net Cash used in Financing Activities |
|
|
|
|
|
|
Capital lease payments |
|
(7,630 |
) |
|
- |
|
Proceeds from convertible note |
|
197,500 |
|
|
- |
|
Payment of deferred
financing costs |
|
(5,000 |
) |
|
- |
|
Repayment of convertible note |
|
(211,250 |
) |
|
- |
|
Proceeds from sale of common stock and
warrants |
|
3,050 |
|
|
2,366,570 |
|
Proceeds from sale
of preferred stock |
|
234,000 |
|
|
- |
|
Net cash provide by financing activities |
|
210,670 |
|
|
2,366,570 |
|
|
|
|
|
|
|
|
Increase in cash |
|
38,405 |
|
|
508,803 |
|
Cash, beginning of
period |
|
135,308 |
|
|
172,684 |
|
Cash, end of period |
|
173,713 |
|
|
681,487 |
|
See Notes to the Condensed Consolidated Financial Statements
5
VISCOUNT SYSTEMS, INC.
Condensed Consolidated
Statements of Cash Flows, continued
(Expressed in Canadian dollars)
For
the Nine Months Ended September 30, 2015 and 2014
(Unaudited)
|
|
For the nine months ended: |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Supplementary Information: |
|
|
|
|
|
|
Interest paid |
$ |
43,183 |
|
$ |
- |
|
Income taxes paid |
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities: |
|
|
|
|
|
|
Fair value of preferred shares issued
as dividends |
$ |
82,414 |
|
$ |
- |
|
Unvested common stock
issued to board members |
$ |
4,500 |
|
$ |
- |
|
Fair value of conversion options issued |
$ |
373,184 |
|
$ |
- |
|
Accretion of Series A
convertible preferred stock to redemption value |
$ |
2,010,330 |
|
$ |
- |
|
See Notes to the Condensed Consolidated Financial Statements
6
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
1. |
Organization |
|
|
|
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. |
|
|
|
The Companys legacy business, existing since 1969,
consists of products and services for high rise residential and office
buildings, generally described as telephone access. These products allow
visitors to contact tenants or offices via a lobby device to gain entry.
The Company has various brands in this marketplace, with high end products
called MESH, and lower cost products called Enterphone, selling through
dealers for Canada and the United States. |
|
|
|
The Companys Freedom Access Control software solution
(Freedom) controls entry doors throughout a business, hospital, school,
or other buildings, and prevents entry by persons unknown or staff
attempting to enter at the wrong time of day. |
|
|
2. |
Basis of Presentation |
|
|
|
These unaudited condensed consolidated financial
statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP) for
interim financial information and with the instructions for Form 10-Q and
from Article 8-03 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by U.S. GAAP for a complete set
of annual financial statements. These financial statements should be read
in conjunction with the audited annual consolidated financial statements
of the Company filed on Form 10-K for the year ended December 31, 2014.
The operating results for the periods presented are not necessarily
indicative of the results that will occur for the year ending December 31,
2015 or for any other period. |
|
|
|
The financial information as of September 30, 2015 and
for the three and nine months ended September 30, 2015 and 2014 is
unaudited; however, such financial information includes all adjustments,
consisting solely of normal recurring adjustments, which, are necessary
for the fair presentation of the financial information in conformity with
U.S. GAAP. |
7
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
3. |
Going Concern and Liquidity |
|
|
|
These condensed consolidated financial statements have
been prepared on a going concern basis, which assumes the Company will be
able to realize its assets and discharge its liabilities in the normal
course of business for the foreseeable future. The Company has an
accumulated deficit of $10,610,970 and an operating loss for the three and
nine months ended September 30, 2015 of $422,755 and $585,395,
respectively. The ability to sustain the current level of operations is
dependent on raising additional capital and/or growing sales and achieving
profits. These factors raise substantial doubt about the ability of the
Company to continue operations as a going concern. The condensed
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or
amounts of liabilities that might be necessary should the Company be
unable to continue in existence. |
|
|
|
Based on its current financial position, including the
potential issuance of a substantial amount of demand notes (see Note 8),
the Company could be required to fund its operations on a month-to-month
basis. The Company recognizes it will need to raise additional capital in
order to fund operations, meet its payment obligations and execute its
business plan. The Company is currently in negotiations regarding a
financing. There is no assurance that additional financing will be
available when needed or that management will be able to obtain financing
on terms acceptable to the Company and whether the Company will become
profitable and generate positive operating cash flow. If the Company is
unable to raise sufficient additional funds, it will have to develop and
implement a plan to further extend payables and reduce overhead until
sufficient additional capital is raised to support further operations.
There can be no assurance that such a plan will be successful. If the
Company is unable to obtain financing on a timely basis, the Company could
be forced to sell its assets and discontinue its operation. |
|
|
|
Accordingly, the accompanying condensed consolidated
financial statements have been prepared in conformity with U.S. GAAP,
which contemplates continuation of the Company as a going concern and the
realization of assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities
presented in the condensed consolidated financial statements do not
necessarily represent realizable or settlement values. The condensed
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. |
|
|
4. |
Significant Accounting Policies |
|
|
|
Use of Estimates |
|
|
|
The preparation of condensed consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Companys significant
estimates include reserves related to accounts receivable and inventory,
the recoverability and useful lives of long-lived assets, the valuation
allowance related to deferred tax assets and the valuation of equity
instruments and derivative liabilities. |
8
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
4. |
Significant Accounting Policies,
continued |
|
|
|
Concentration of Credit Risk |
|
|
|
The Company maintains deposits in financial institutions
which are insured by the Federal Deposit Insurance Corporation (FDIC).
At various times, the Company has deposits in these financial institutions
in excess of the amount insured by the FDIC. |
|
|
|
Allowance for Doubtful Accounts
Receivable |
|
|
|
Accounts receivable are shown net of an allowance for
doubtful accounts of $114,923 and $181,529 as of September 30, 2015 and
December 31, 2014, respectively. The Companys management has established
an allowance for doubtful accounts sufficient to cover probable and
reasonably estimable losses. The nature of the business is that the
majority of the payments are made before the product is delivered. If the
financial conditions of customers were to materially deteriorate, an
increase in the allowance amount could be required. The allowance for
doubtful accounts considers a number of factors, including collection
experience, current economic trends, estimates of forecasted write-offs,
aging of the accounts receivable, and other factors. |
|
|
|
Accounts Receivable Factoring |
|
|
|
On March 24, 2015, the Company entered into a one year
agreement with a financing company to factor its trade accounts
receivables. The financing company offered a credit facility not to exceed
$1,000,000 through the purchase of eligible accounts receivable at a
discount rate of 3.65% of the face value of the purchased receivable plus
1/10% per day on any receivable outstanding after 35 days from the date of
invoice purchase. Any amounts that remain unpaid 90 days after the initial
invoice date, or any dispute raised by the customer will be repurchased by
the Company or replaced by eligible receivables. As of September 30, 2015,
invoices totaling, in the aggregate, $82,627 had been factored. The
Companys accounts receivable are purchased by the financing company on a
recourse basis. Accordingly, the accounts receivable are retained on the
Companys balance sheet while advances from the financing company are
recorded as accrued liabilities. Discounts provided and interest charged
related to factoring of the accounts receivable have been expensed on the
accompanying condensed consolidated statements of operations as interest
expense. |
|
|
|
Stock-Based Compensation |
|
|
|
Stock-based compensation expense for all stock-based
payment awards is based on the estimated fair value of the award. For
employees and directors, the award is measured on the grant date. For
non-employees, the award is measured on the grant date and is then
remeasured at each vesting date and financial reporting date. The Company
generally issues new shares of the Companys common stock, par value
US$0.001 per share (the common stock) to satisfy option and warrant
exercises. |
9
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
4. |
Significant Accounting Policies,
continued |
|
|
|
Preferred Stock |
|
|
|
The Company applies the guidance enumerated in Accounting
Standards Codification 480 Distinguishing Liabilities from Equity (ASC
480) when determining the classification and measurement of preferred
stock. Preferred shares subject to mandatory redemption (if any) are
classified as liability instruments and are measured at fair value. The
Company classifies conditionally redeemable preferred shares, which
includes preferred shares that feature redemption rights that are either
within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within the Companys control, as
temporary equity. At all other times, the Company classifies its preferred
shares in stockholders equity. As of September 30, 2015 and December 31,
2014, in accordance with ASC 480-10-S99, since certain of the Companys
preferred shares contain redemption rights which are not solely within the
Companys control, these issuances of preferred stock have been presented
as temporary equity. |
|
|
|
Common Stock Warrants and Other Derivative Financial
Instruments |
|
|
|
The Company classifies as equity any contracts that (i)
require physical settlement or net-share settlement or (ii) provide the
Company with a choice of net-cash settlement or settlement in its own
shares (physical settlement or net-share settlement) providing that such
contracts are indexed to the Companys own stock. The Company classifies
as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net cash settle the contract if an
event occurs and if that event is outside the Companys control) or (ii)
gives the counterparty a choice of net-cash settlement or settlement in
shares (physical settlement or net-share settlement). |
|
|
|
The Company assesses classification of its common stock
warrants and other free standing derivatives at each reporting date to
determine whether a change in classification between assets, liabilities
and equity is required. The Company evaluated its free standing warrants
to purchase common stock to assess their proper classification in the
balance sheets as of September 30, 2015 and December 31, 2014 using the
applicable classification criteria enumerated under U.S. GAAP and
determined that the common stock purchase warrants should be classified as
a derivative liability, as these warrants were denominated in U.S.
dollars, while the functional currency of the Company is Canadian dollars.
Therefore, each period, these U.S. denominated warrants must be
re-valued. |
|
|
|
Sequencing Policy |
|
|
|
Under ASC 815-40-35, the Company has adopted a sequencing
policy that reclassifies contracts from equity to assets or liabilities
for those with the earliest inception date first. Future issuances of
securities will be evaluated as to reclassification as a liability under
our sequencing policy of earliest inception date first until either all of
the shares underlying the Companys Series A Convertible Redeemable
Preferred Stock, par value US$0.001 per share (the Series A Shares), are
settled or expire. |
10
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
4. |
Significant Accounting Policies,
continued |
|
|
|
Reclassifications |
|
|
|
Certain accounts in the prior period condensed
consolidated financial statements have been reclassified for comparison
purposes to conform to the presentation of the current period condensed
consolidated financial statements. These reclassifications had no effect
on the previously reported net loss. |
|
|
|
Recent Accounting Pronouncements |
|
|
|
In July 2015, the Financing Accounting Standards Board
(FASB) issued Accounting Standards Update No. 2015-11, Simplifying the
Measurement of Inventory (ASU 2015-11). Under ASU 2015-11 entities
should measure inventory that is not measured using last-in, first-out
(LIFO) or the retail inventory method, including inventory that is
measured using first-in, first-out (FIFO) or average cost, at the lower of
cost or net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. ASU 2015-11
is effective for reporting periods beginning after December 15, 2016 and
is to be applied prospectively. The Company is currently evaluating the
impact the adoption of ASU 2015-11 will have on its condensed consolidated
financial position, results of operations and cash flows. |
|
|
|
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from Contracts with Customers. This ASU supersedes the revenue recognition
requirements in Accounting Standards Codification 605 - Revenue
Recognition and most industry-specific guidance throughout the
Codification. The standard requires that an entity recognizes revenue to
depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. This ASU is effective on
January 1, 2017 and should be applied retrospectively to each prior
reporting period presented or retrospectively with the cumulative effect
of initially applying the ASU recognized at the date of initial
application. The Company has not yet determined the effect of the adoption
of this standard and its impact on the Company's condensed consolidated
financial position and results of operations. |
|
|
|
There are other various updates recently issued, most of
which represented technical corrections to the accounting literature or
application to specific industries and are not expected to a have a
material impact on the Company's condensed consolidated financial
position, results of operations or cash flows. |
|
|
|
Concentrations |
|
|
|
During the three months ended September 30, 2015, one
customer comprised approximately $121,000 or 10% of the Company's sales.
During the nine months ended September 30, 2015, another customer
comprised approximately $726,000 or 16% of the Company's sales. We had no
such concentrations during the three and nine months ended September 30,
2014. As of September 30, 2015, there were no accounts receivable due from
these customers. |
11
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
5. |
Inventory |
|
|
|
Inventory consists of the
following: |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Raw materials |
$ |
651,348 |
|
$ |
606,547 |
|
|
Work in process |
|
73,720 |
|
|
25,683 |
|
|
Finished goods |
|
152,887 |
|
|
218,434 |
|
|
Sub total |
|
877,955 |
|
|
850,664 |
|
|
Reserve for obsolescence and shrinkage |
|
(317,447 |
) |
|
(317,447 |
) |
|
Total |
$ |
560,508 |
|
$ |
533,217 |
|
6. |
Due to Related Parties |
|
|
|
Amounts due to directors for director fees and travel
expenses totaled $12,613 at September 30, 2015 (December 31, 2014 -
$5,003). These amounts are unsecured, non-interest bearing and have no
specified terms of repayment. |
|
|
7. |
Repayment of Convertible Debt |
|
|
|
On April 2, 2015, the Company received proceeds from the
issuance of an 8% Convertible Promissory Note (the Note) aggregating
approximately US $154,000 (CAD $192,500) after payment of deferred
financing costs of US $4,000 (CAD $5,000). The Note matures in one year
and had a principal amount of US $169,000 (CAD $211,250) and was
convertible 180 days from the date of the Note at a conversion price equal
to a 35% discount rate to the market price, subject to certain
adjustments, including dilutive issuances. The Note was recorded net of an
original issue discount of US $15,000 (CAD $18,750). The Note also
contained certain early payment penalties, based on the date of
prepayment. The Company determined that (a) the conversion option of the
Note contained an anti-dilution provision whereby the exercise price can
be adjusted based on certain new issuances; and (b) the Note is
denominated in a currency other than the functional currency of the
Company, and accordingly, the Company bifurcated the conversion option and
recorded a derivative liability of US $150,800 (CAD $188,349) with a
corresponding debt discount which is amortized through the term of the
Note to interest expense over the term of the Note, using the effective
interest method. The conversion option was valued using a binomial model
and marked-to-market through June 30, 2015 with a change in fair value of
CAD $110,411. The Company recorded amortization of the debt discount of US
$37,699 (CAD $47,087) for the three months ended June 30, 2015. On June
30, 2015, the Company repaid the Note, accrued interest and a 20%
prepayment penalty on the Note, with the total repayment aggregating US
$206,133 (CAD $248,384). On the date of the repayment, the remaining debt
discount and conversion option liability were charged to earnings,
resulting in a loss on settlement of the Note of US $53,101 (CAD
$66,324). |
12
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
8. |
Series A Shares |
|
|
|
On January 20, 2015, the Company erroneously issued
2,925,000 shares of common stock to an entity whose general partner is
managed by a member of the Companys Board of Directors (the Board) and
the shares were then cancelled in February 2015 and replaced with 200
Series A Shares in exchange for cash proceeds of US$200,000 (CAD$234,000).
The Series A Shares contain certain rights and preferences as
follows: |
|
|
convertible into shares of common stock at the lower of
US$0.07 per share, 85% of the previous twenty day volume weighted average
pricing or 85% of the previous ten day volume weighted average pricing.
|
|
|
dividends of 8% per annum, payable quarterly, in cash or
Series A Shares. |
|
|
a holder of Series A Shares may not convert such Series A
Shares into common stock exceeding either (i) 4.99% or (ii) 9.99% of the
common stock outstanding unless such holder provides the Company with 61
days' notice that this limitation shall be waived. |
|
|
no holder of Series A Shares shall be entitled to
exercise more than 4.99% of the voting power of all of the Company's
outstanding common stock. |
|
|
registration rights to the holders of the Series A Shares
that may be exercised in certain circumstances. |
|
|
holders of Series A Shares are entitled to be paid 125%
of the stated value of the Series A Shares, plus all accrued, but unpaid
dividends on Series A Shares, upon liquidation or dissolution of the
Company, including forms of mergers and acquisitions, in priority to any
payments to the holders of shares of common stock. |
|
|
holders of the Series A Shares may cause the Company to
redeem the Series A Shares for 150% of their stated value, plus all
accrued, but unpaid dividends on Series A Shares, upon the occurrence of a
default, which includes being in default on any material contracts,
securities, indebtedness, Articles of Incorporation and/or By-laws,
delisting or late filing with the U.S. Securities and Exchange Commission
(the SEC). |
Since the Series A Shares are
redeemable in certain circumstances which are considered to be outside the
control of the Company, such shares have been classified as temporary equity.
The Series A Shares were assessed under ASC 480 and the Company determined that
the contingent redemption provisions associated with the financial instruments
made them more akin to debt than equity. The Series A Shares are deemed to be a
debt host contract because the embedded conversion option is not clearly and
closely related to the host contract and, accordingly, the embedded conversion
option is subject to bifurcation and separate evaluation. The conversion option
has been bifurcated and the Company recorded their issuance date fair value of
$184,835 (valued using the Binomial Lattice model) with the change in fair value
recorded in the condensed consolidated statement of operations at each reporting
period.
In conjunction with this issuance of
Series A Shares, the Company also issued 1,462,500 warrants, each exercisable
into one share of common stock at CAD$0.16 per share for a period of five years,
which are exercisable on a cashless basis. The Company determined that these
warrants should be classified as equity and, accordingly, they were valued using
the Black-Scholes model and the relative fair value of such warrants of $32,472
was allocated to additional paid-in capital and the residual proceeds associated
with the Series A Shares were allocated to temporary equity because the
preferred stock is contingently redeemable.
13
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
8. |
Series A Shares, continued |
|
|
|
During the nine months ended September 30, 2015, the
Company issued 79 Series A Shares representing Series A quarterly
dividends. The embedded conversion options associated with the Series A
Shares were valued using the Binomial Lattice model as they were
denominated in USD currency and not in the Companys reporting currency.
The embedded conversion options associated with the Series A Shares were
valued at $82,414 was recorded as a derivative liability. |
|
|
|
As the Companys Quarterly Report on Form 10-Q (the Form
10-Q) for the quarter ended June 30, 2015 was not timely filed with the
SEC (a Redemption Event), the Company is required to redeem the Series A
Shares for 150% of their value if holders of 10% of the Stated Value (as
defined in the Companys Certificate of Designation, Preferences and
Rights of the Series A Shares, as amended (the Certificate)) of the
Series A Shares provide the Company with a written notice of redemption
within sixty days after the Redemption Event becomes known to such holders
(a Redemption Request). As of the date of this Form 10-Q, the Company
has not received a Redemption Request or a waiver from holders of Series A
Shares waiving their redemption rights in connection with the Redemption
Event. |
|
|
|
Subsequent to September 30, 2015, the Company is in
negotiations to issue Senior Secured Convertible
Demand Promissory A Notes (the Series A Demand Notes) to certain holders of Series A Shares in the aggregate principal amount equal to 150% of the stated value of their Series A Shares in exchange for their outstanding Series A Shares. Interest on the Series A Demand Notes accrues at 14% per annum if all or any portion of the interest payable on the Series A Demand Notes is paid in cash (increasing to the lesser of 21% per annum and the highest amount permitted by applicable law in case of an event of default) and it accrues at 5% for each 30 days if all or any portion of the interest payable on the Series A Demand Notes is paid in Series A Demand Notes (increasing to 8% for each 30 days in case of an event of default). |
|
Accordingly, as of September 30, 2015, the Company
recorded a $2,010,330 deemed dividend in order to accrete the Series A
Shares up to its redemption value (150% of the stated value). In addition,
the balance of the Series A Shares was reclassified from the mezzanine
presentation to a current liability. |
|
|
9. |
Revised Consolidated Financial
Statements |
|
|
|
Balance Sheet |
|
|
|
During the preparation of the Form 10-Q for the three
months ended March 31, 2015, the Company identified an issue with the
presentation of the Series A Shares as of December 31, 2014. The Series A
Shares should be presented on the consolidated balance sheet outside of
permanent equity since they are contingently redeemable for cash. There
was no error in the accounting for the Series A Shares, other than the
classification, and we believe this change in presentation has no material
effect on the Company's financial statements. |
|
|
|
In accordance with SEC Staff Accounting Bulletin No 108
(SAB 108), the Company has evaluated this error, based on an analysis of
quantitative and qualitative factors, as to whether it was material to the
consolidated balance sheet as of December 31, 2014 and if amendments of
previously filed financial statements with the SEC are required. The
Company has determined that quantitatively and qualitatively, the
classification error has no material impact to the consolidated balance
sheet as of December 31, 2014, or prior periods. |
|
|
|
Income Statement |
|
|
|
During the preparation of the Form 10-Q for the three and
nine months ended September 30, 2015, the Company identified an issue with
the condensed consolidated statement of operations for the three months
ended September 30, 2014, because the amounts included in those results
didnt represent the difference between the results for the nine months
ended September 30, 2014 and the six months ended June 30, 2014. There was
no error in the accounting for the nine months ended September 30,
2014. |
14
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
10. |
Fair Value of Financial Instruments |
|
|
|
The Companys financial instruments consist of cash,
short-term investments, trade accounts receivable, accounts payable,
accrued liabilities, capital lease obligations, due to related parties and
loans payable. The carrying amount of these financial instruments
approximates fair value due either to length of maturity or interest rates
that approximate prevailing market rates unless otherwise disclosed in
these financial statements. |
|
|
|
Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. These fair value measurements
apply to all financial instruments that are measured and reported on a
fair value basis. |
|
|
|
Based on the observability of the inputs used in the
valuation techniques, financial instruments are categorized according to
the fair value hierarchy, which ranks the quality and reliability of the
information used to determine fair values. Financial assets and
liabilities carried at fair value are classified and disclosed in one of
the following three categories: |
|
Level 1 |
Observable inputs such as quoted prices in active
markets. |
|
|
|
|
Level 2 |
Inputs, other than the quoted prices in active markets,
that are observable either directly or indirectly. |
|
|
|
|
Level 3 |
Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own assumptions.
|
Financial assets are considered Level 3
when their fair values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant model
assumption or input is unobservable.
The assessed level that a financial
asset or liability will carry is determined by the Companys Chief Executive
Officer.
In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy.
In such cases, the assignment of an asset or liability within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The Companys assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
15
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
10. |
Fair Value of Financial Instruments,
continued |
|
|
|
The Company uses Level 3 of the fair value hierarchy to
measure the fair value of the derivative liabilities and revalues its
derivative liabilities at every reporting period and recognizes gains or
losses in the condensed consolidated statements of operations that are
attributable to the change in the fair value of the derivative
liabilities. |
|
|
|
A summary of the Company's Level 3 derivative liabilities
for the nine months ended September 30, 2015 is as
follows: |
|
Balance, December 31, 2014 |
$ |
2,858,618 |
|
|
Fair value change of derivative
liabilities |
|
(2,808,281 |
) |
|
Fair value of
embedded conversion options issued |
|
373,184 |
|
|
Fair value of embedded conversion
options in preferred shares issued as dividends |
|
82,414 |
|
|
Transfers out due to extinguishment
of financial instruments |
|
(77,936 |
) |
|
Balance, September
30, 2015 |
$ |
427,999 |
|
The derivative liabilities consist of
the fair value of certain share purchase warrants that were issued in unit
private placements that have an exercise price in a currency other than the
functional currency of the Company, as well as embedded conversion options in
Series A Shares. As of September 30, 2015, the Companys derivative liabilities
consisted of conversion options of $273,299 and warrant liabilities of $154,700,
respectively.
The fair value of the warrants and
embedded conversion options were determined using the Black-Scholes option
pricing model and the Binomial Lattice model depending on their characteristics,
using the following current market assumptions for the nine months ended:
|
|
September 30, |
|
|
2015 |
2014 |
|
Volatility |
94.9% - 117% |
92% - 176% |
|
Risk-free interest rate |
0.33% - 1.37% |
0.44% - 1.73% |
|
Contractual term |
0.33 - 5.00 yrs |
1.84 - 5.00 yrs |
16
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
11. |
Capital Stock |
|
|
|
Common Stock |
|
|
|
Members of the Board are awarded shares of common stock
(the Restricted Common Stock) as compensation for performing Board
activities. On May 19, 2015, members of the Board received an aggregate of
4,500,000 shares of restricted common stock valued at $168,615, which will
vest one year from the issuance date. These shares are expensed over the
vesting period. During the three and nine months ended September 30, 2015,
the Company recorded $29,502 and $61,826 of stock based compensation,
respectively, related to the Restricted Common Stock. As of September 30,
2015 the unamortized value of the Restricted Common Stock is $106,789,
which will be expensed over the remaining amortization period of 7.6
months. As of September 30, 2015, 4,500,000 shares of restricted common
stock are unvested. |
|
|
|
Stock Options |
|
|
|
All stock options granted are exercisable in US$. A
summary of the stock option activity for the nine months ended September
30, 2015 is as follows: |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
Number of |
|
|
Average |
|
|
Remaining Life |
|
|
Intrinsic |
|
|
|
|
Options |
|
|
Exercise Price |
|
|
In Years |
|
|
Value |
|
|
Outstanding at January 1, 2015 |
|
12,022,075 |
|
|
US$0.09 |
|
|
|
|
|
|
|
|
Employee Options Granted |
|
400,000 |
|
|
US$0.06 |
|
|
|
|
|
|
|
|
Forfeited |
|
(330,000 |
) |
|
US$0.09 |
|
|
|
|
|
|
|
|
Expired |
|
(20,000 |
) |
|
US$0.10 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015 |
|
12,072,075 |
|
|
US$0.09 |
|
|
3.42 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2015 |
|
11,822,075 |
|
|
US$0.09 |
|
|
3.22 |
|
$ |
- |
|
On May 19, 2015, the Company granted
ten-year options to two employees, one to purchase an aggregate of 150,000
shares of common stock at an exercise price of US$0.02 vested upon grant date
and the other to purchase an aggregate of 250,000 shares of common stock at an
exercise price of US$0.04, vesting six months from the grant date. The options
had an aggregate grant date fair value of $8,000 which will be recognized
proportionate to the vesting period.
The Company computed the fair value of
options granted using the Black Scholes option pricing model, with the following
assumptions:
|
For
the Nine months Ended |
For
the Three months Ended |
For
the Nine months Ended |
|
September 30, 2015 |
September 30, 2014 |
September 30, 2014 |
Risk free interest rate |
0.28% - 0.98% |
0.97% |
0.97% - 1.55% |
Expected term |
3 years |
3 years |
3 - 5 years |
Expected volatility |
80% - 140% |
140% |
113% - 140% |
Expected dividends |
0% |
0% |
0% |
The weighted average grant date fair
value of options granted during the three and nine months ended September 30,
2015 was $0.00 and $0.02 per share, respectively. The weighted average grant
date fair value of options granted during the three and nine months ended
September 30, 2014 was $0.07 and $0.09 per share, respectively.
17
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
11. |
Capital Stock, continued |
|
|
|
Stock Options, continued |
|
|
|
A summary of the stock options outstanding and
exercisable at September 30, 2015 is as
follows: |
|
|
|
Exercisable Options |
|
Outstanding |
Exercisable |
Remaining |
|
|
Number of |
Number of |
Contractual Life |
Aggregate |
Exercise
Price |
Options |
Options |
in years |
Intrinsic Value |
US$ $0.02 |
150,000 |
150,000 |
9.6 |
$
- |
US$ $0.04 |
304,375 |
54,375 |
0.2 |
- |
US$ $0.08 |
1,500,000 |
1,500,000 |
0.7 |
- |
US$ $0.09 |
10,016,450 |
10,016,450 |
3.6 |
- |
US$ $0.10 |
45,000 |
45,000 |
1.8 |
- |
US$ $0.15 |
56,250 |
56,250 |
0.2 |
- |
|
12,072,075 |
11,822,075 |
3.2 |
$ - |
During the three and nine months ended
September 30, 2015, the Company recorded stock based compensation expense of
$6,750 and $6,750, respectively, related to the amortization of stock options.
During the three and nine months ended September 30, 2014, the Company recorded
stock based compensation expense of $11,684 and $919,632, respectively, related
to the amortization of stock options. As of September 30, 2015, there was $1,250
of unrecognized stock based compensation expense related to the May 19, 2015
stock option grants which will be amortized over the remaining amortization
period of 1.5 months.
Warrants
A summary of warrant activity during
the nine months ended September 30, 2015 is as follows:
|
|
|
|
|
|
[1] |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
Number of |
|
|
Average |
|
|
Remaining Life |
|
|
Intrinsic |
|
|
|
|
Warrants |
|
|
Exercise Price |
|
|
In Years |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2015 |
|
80,890,801 |
|
|
CAD$0.12 |
|
|
|
|
|
|
|
|
Issued in private placement transactions |
|
1,462,500 |
|
|
CAD$0.16 |
|
|
|
|
|
|
|
|
Issued as compensation warrants |
|
348,827 |
|
|
CAD$0.14 |
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2015 |
|
82,702,128 |
|
|
CAD$0.13 |
|
|
1.55
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2015 |
|
82,702,128 |
|
|
CAD$0.13 |
|
|
1.55 |
|
$ |
- |
|
[1] US$ denominated warrants are
reflected in their CAD$ equivalents.
18
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
11. |
Capital Stock, continued |
|
|
|
Warrants, continued |
|
|
|
On February 18, 2015, the Company also issued a total of
18,827 warrants of which 10,852 warrants were issued to an investor in
connection with the common stock and 7,975 warrants to a Board member, to
acquire Company stock at an exercise price of CAD$0.16 per share for a
period of five years from the closing date. The warrants may be exercised
on a cashless basis. These warrants were valued using a Binomial Model
resulting in a compensation expense of $909. |
|
|
|
On May 1, 2015, the Company entered into a six month
engagement agreement with a service provider pursuant to which the Company
issued an immediately vested, five year warrant to purchase 330,000 shares
of common stock at an exercise price of US $0.05 per share. The fair value
of the warrants was US $4,401 on the grant date which amount is being
amortized over the engagement term. |
|
|
|
The Company computed the fair value of compensation
warrants granted using the Binomial Model, with the following
assumptions: |
|
For the Nine Months
Ended |
|
September 30, 2015 |
Risk free interest rate |
1.37% - 1.50%
|
Expected term |
5.00 |
Expected volatility |
104% - 107%
|
Expected dividends |
0.00% |
The weighted average grant date fair
value of warrants granted during the nine months ended September 30, 2015 $0.05
per share. There were no warrants granted during the three months ended
September 30, 2015. The weighted average grant date fair value of warrants
granted during the three and nine months ended September 30, 2014 was $0.08 and
$0.08, respectively.
A summary of the warrants outstanding
and exercisable at September 30, 2015 is as follows:
|
|
|
|
Weighted Average |
|
|
|
|
Remaining |
|
Weighted Average |
|
Contractual Life |
|
Exercise
Price |
Warrants |
in years |
|
CAD$ |
0.065 |
2,500,000 |
0.73 |
|
CAD$ |
0.080 |
19,100,001 |
0.24 |
|
CAD$ |
0.090 |
975,000 |
3.82 |
|
CAD$ |
0.160 |
1,481,327 |
4.26 |
|
US$ |
0.050 |
17,272,014 |
1.79 |
|
US$ |
0.080 |
9,849,999 |
0.36 |
|
US$ |
0.090 |
4,937,650 |
1.80 |
|
US$ |
0.095 |
500,000 |
3.99 |
|
US$ |
0.100 |
7,690,000 |
2.63 |
|
US$ |
0.180 |
3,749,996 |
0.63 |
|
US$ |
0.200 |
14,646,141 |
3.13 |
|
CAD$ |
0.130 |
82,702,128 |
1.55 |
The warrants outstanding have no
aggregate intrinsic value as of September 30, 2015.
19
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
12. |
Commitments and Contingencies |
|
|
|
Litigation |
|
|
|
In the normal course of business, the Company may be
involved in legal proceedings, claims and assessments arising in the
ordinary course of business. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. There are
no such matters that are deemed material to the condensed consolidated
financial statements as of September 30, 2015 and December 31,
2014. |
|
|
|
Operating Leases |
|
|
|
Rent expense included in the condensed consolidated
statements of operations for the nine months ended September 30, 2015 and
2014 is $108,167 and $106,362, respectively and $36,389 and $35,990 for
the three months ended September 30, 2015 and 2014,
respectively. |
|
|
|
Consulting Agreement |
|
|
|
The Company had an agreement with a consultant for public
and investor relations. As consideration, the Company remitted a monthly
fee of $12,500, of which $7,500 per month was paid in cash and $5,000 per
month was paid in restricted stock. The agreement was for an initial
period of six months from January to June 2015. On June 30, 2015, the
agreement was terminated effective September 30, 2015. |
|
|
13. |
Segment Information |
|
|
|
The Company organizes its business into two reportable
segments: manufacturing and servicing. The manufacturing segment designs,
produces and sells intercom and door access control systems that utilize
telecommunications to control access to buildings and other facilities for
security purposes. The servicing segment provides maintenance to these
intercom and door access control systems. |
|
|
|
Management evaluates performance based on profit or loss
from operations before income taxes and nonrecurring gains and losses, if
any. Retail prices are used to report intersegment
sales. |
20
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
13. |
Segment Information, continued |
|
|
|
The following table summarizes financial information
about the Companys business segments as of and for the three and nine
months ended September 30, 2015 and 2014. |
|
As
of and for the three months ended |
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
|
Sales to external customers
|
$ |
912,135 |
|
$ |
265,076 |
|
$ |
1,177,211 |
|
|
Depreciation and amortization |
$ |
11,887 |
|
$ |
- |
|
$ |
11,887 |
|
|
Segment operating (loss)
income |
$ |
(623,647 |
) |
$ |
200,892 |
|
$ |
(422,755 |
) |
|
Total assets |
$ |
1,885,828 |
|
$ |
- |
|
$ |
1,885,828 |
|
|
As of and for the three months ended |
|
|
|
|
|
|
|
|
|
|
September 30, 2014 (revised - see Note 9) |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
|
Sales to
external customers |
$ |
1,044,226 |
|
$ |
374,978 |
|
$ |
1,419,204 |
|
|
Depreciation and amortization
|
$ |
15,913 |
|
$ |
5,223 |
|
$ |
21,136 |
|
|
Segment
operating (loss) income |
$ |
(808,355 |
) |
$ |
80,248 |
|
$ |
(728,107 |
) |
|
Total assets |
$ |
2,138,807 |
|
$ |
10,447 |
|
$ |
2,149,254 |
|
|
As
of and for the nine months ended |
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
|
Sales to external customers
|
$ |
3,800,541 |
|
$ |
781,476 |
|
$ |
4,582,017 |
|
|
Depreciation and amortization |
$ |
35,527 |
|
$ |
5,223 |
|
$ |
40,750 |
|
|
Segment operating (loss)
income |
$ |
(1,030,523 |
) |
$ |
445,128 |
|
$ |
(585,395 |
) |
|
Total assets |
$ |
1,885,828 |
|
$ |
- |
|
$ |
1,885,828 |
|
|
As
of and for the nine months ended |
|
|
|
|
|
|
|
|
|
|
September 30, 2014 |
|
Manufacturing |
|
|
Servicing |
|
|
Total |
|
|
Sales to external customers
|
$ |
2,842,222 |
|
$ |
870,018 |
|
$ |
3,712,240 |
|
|
Depreciation and amortization |
$ |
20,668 |
|
$ |
15,669 |
|
$ |
36,337 |
|
|
Segment operating loss |
$ |
(3,278,132 |
) |
$ |
(210,160 |
) |
$ |
(3,488,292 |
) |
|
Total assets |
$ |
2,138,807 |
|
$ |
10,447 |
|
$ |
2,149,254 |
|
21
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
13. |
Segment Information, continued |
|
|
|
Of the total sales for the nine months ended September
30, 2015 and 2014, $2,125,467 and $947,821, respectively, was derived from
U.S.- based customers and $2,456,550 and $2,764,419, respectively was
derived from Canadian-based customers. Substantially all of the Company's
operations, assets and employees are located in Canada. |
|
|
|
MESH sales represented 40% and 38.5% of total revenue
during the nine months ended September 30, 2015 and 2014, respectively.
Freedom sales represented 43% and 34% of total revenue during the nine
months ended September 30, 2015 and 2014, respectively. The balance of the
Companys revenues are derived from other products such as access tracking
and control, closed circuit monitors, infrared and radio frequency remotes
and servicing of intercom equipment. |
|
|
14. |
Net (Loss) Income per Share of Common
Stock |
|
|
|
Basic net (loss) income per share is computed by dividing
net (loss) income by the weighted-average number of common shares
outstanding. Diluted net (loss) income per share is computed by dividing
net (loss) income by the weighted-average number of common shares
outstanding, adjusted for the effect of dilutive securities using the
treasury stock method. The following table sets forth the computation of
basic and diluted (loss) income per common
share. |
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
$ |
(387,264 |
) |
$ |
779,069 |
|
$ |
2,050,566 |
|
$ |
(2,281,287 |
) |
|
Preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
convertible - contractual dividends |
|
(37,765 |
) |
|
|
|
|
(82,414 |
) |
|
|
|
|
Series A
convertible - deemed dividends |
|
(2,010,330 |
) |
|
- |
|
|
(2,010,330 |
) |
|
- |
|
|
Net (loss) income attributable to
common stockholders |
$ |
(2,435,359 |
) |
$ |
779,069 |
|
$ |
(42,178 |
) |
$ |
(2,281,287 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares
outstanding - basic |
|
126,047,236 |
|
|
126,009,581 |
|
|
126,040,891 |
|
|
117,236,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities : |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities
realizable from the vesting of
restricted stock |
|
- |
|
|
- |
|
|
4,500,000 |
|
|
- |
|
|
Convertible preferred stock, Series A |
|
- |
|
|
- |
|
|
44,862,475 |
|
|
- |
|
|
Total dilutive
shares |
|
- |
|
|
- |
|
|
49,362,475 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding - diluted |
|
126,047,236 |
|
|
126,009,581 |
|
|
175,403,366 |
|
|
117,236,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
(0.02 |
) |
$ |
0.01 |
|
$ |
(0.00 |
) |
$ |
(0.02 |
) |
|
Diluted |
$ |
(0.02 |
) |
$ |
0.01 |
|
$ |
(0.00 |
) |
$ |
(0.02 |
) |
22
VISCOUNT SYSTEMS, INC.
Notes to Condensed
Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)
14. |
Net (Loss) Income per Share of Common Stock,
continued |
|
|
|
The following potentially dilutive securities have been
excluded from the calculation of weighted average diluted common shares
because their inclusion would have been
anti-dilutive: |
|
|
|
September 30, |
|
|
|
|
2015 |
|
|
2014 |
|
|
Warrants |
|
82,702,128 |
|
|
80,890,801 |
|
|
Options |
|
12,072,075 |
|
|
11,752,075 |
|
|
Series A preferred stock |
|
- |
|
|
4,260,435 |
|
|
Total
potentially dilutive shares |
|
94,774,203 |
|
|
96,903,311 |
|
15. |
Subsequent Events |
|
|
|
Management has evaluated subsequent events or
transactions occurring through the date on which the financial statements
were issued. Based upon that evaluation, the Company did not identify any
recognized or non- recognized subsequent events that would have required
adjustment or disclosure in the condensed consolidated financial
statements. |
23
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
We maintain our books of account in Canadian dollars ("CAD")
and references to dollar amounts herein are to the lawful currency of Canada
unless otherwise indicated.
Overview
We are a manufacturer of access control and telephone entry
products, which protect buildings from unauthorized access. The business
consists of four divisions.
The newest and fastest growing division, started in 2011, is
our Freedom Access Control software solution (Freedom). This enterprise-wide
access control system controls entry doors throughout a business, hospital,
school, or other buildings, and prevents entry by persons unknown or staff
attempting to enter at the wrong time or day. Our Freedom IT platform can turn
any access control card reader into an IP device by connecting the Freedom IP
device with built-in input/output to a POE switch and then every card usage is
processed on a redundant Freedom server either in the building or any remote
site. The software component of Freedom is a web browser security operating
platform. Unlike our competitors, who generally use control panels, the user
database and the door control software is processed in IT language located on a
server(s), thereby future-proofing systems from the traditional issue of
proprietary hardware version obsolescence and improving scalability by
eliminating the need for additional costly hardware every time a reader is added
to the system. This segment has experienced significant growth since inception
and we expect to see continued growth from our Freedom Federal partners relating
to increased frequency of orders being released for US Citizenship and
Immigration Services (USCIS) site projects. Additionally Freedom Commercial is
beginning to see a steady ramp up of business activity generated by a strong
pipeline and preliminary indications of project awards derived from that
pipeline.
On the legacy business side, MESH sales have rebounded from
their slow decline due to an increased focus on this legacy business, and the
introduction of a mid-range product for the marketplace. MESH is a convergent
technology developed by Viscount for the hi-rise marketplace that increases
security at a reduced cost of hardware, cabling and installation, and with
simplified database management.
We also provide legacy Enterphone support and maintenance
services pursuant to long term service contracts. Sales from the 1,151 existing
service contracts continue to decline slowly as older equipment is removed from
service. On average, each service contract represents ongoing revenues of
approximately $43 per month, inclusive of parts and labor. Monthly fees include
equipment sales to those contracts as well. Typical customers include strata
management and building owners as well as various residential, business and
industrial users of Enterphone access control and security systems.
The last division is a service division that covers the
Province of British Columbia (the Service Division). The primary revenue
source for the Service Division is derived from maintenance agreements on
Enterphone, EPX and other systems that are billed on a monthly basis, as well as
time and material billings and installation projects.
24
Condensed Consolidated Results of Operations
Three months ended September 30, 2015 compared to the three
months ended September 30, 2014
Overview
We reported a net loss of $387,264 for the three months ended
September 30, 2015 as compared to net income of $779,069 for the three months
ended September 30, 2014. The decline in net income of $1,166,333 is primarily
due to a decrease in other income, net of expense, of $1,471,685, partially
offset by an increase in gross profit of $85,962 and a decrease in operating
expenses of $219,390.
Revenues
Sales for the three months ended September 30, 2015 and 2014
were $1,177,211 and $1,419,204, respectively, reflecting a decrease of $241,993
or 17%. Freedom sales for the three months ended September 30, 2015 and 2014
were $318,073 and $491,512, respectively, reflecting a decrease of $173,439 or
35%, which was mostly due to lower freedom equipment and software sales during
the three months ended September 30, 2015. The decreases in Freedom sales and
customer service contracts were partially offset by an increase of $41,348 or 7%
in Enterphone (including MESH) sales for the three months ended September 30,
2015 and 2014. Enterphone (including MESH) sales for the three months ended
September 30 2015 and 2014 were, $594,062 and $552,714, respectively.
Gross profit
Gross profit for the three months ended September 30, 2015 and
2014 were $700,977 and $615,015, respectively, an increase of $85,962 or 14%.
For the three months ended September 30, 2015 and 2014 cost of sales and
services were $476,234 and $804,189 or as a percentage of sales was 40% and 57%,
respectively. We have continued to focus on controlling the input costs by using
multiple suppliers to ensure that the best and most cost effective raw materials
are used in all of our products. The cost of labor and travel incurred to
generate our service division sales has also been reduced. We also increased
software sales which have zero to minimal cost of sales.
Selling, general and administrative expenses
For the three months ended September 30, 2015 and 2014,
selling, general and administrative expenses were $890,521 and $1,153,566,
respectively, reflecting a decrease of $263,045 or 23%. For the three months
ended September 30, 2015 and 2014, selling, general and administrative expenses
as a percentage of sales, were 76% and 81%, respectively. Such decreases in
expenses as compared to the third quarter of 2014 are mainly due to lower
marketing cost and sales commissions associated to decreased sales revenue.
Research and development
For the three months ended September 30, 2015 and 2014,
research and development costs were $233,211 and $189,556, respectively,
reflecting an increase of $43,655 or 23%. Research and development costs have
increased during 2015 as compared to 2014 due to the hiring of newly created
technical support personnel.
Operating loss
Operating loss for the three months ended September 30 2015 was
$422,755 as compared to operating loss of $728,107 for the three months ended
September 30 2014, reflecting an increase in operating losses of $305,532 or
42%. The increase in operating loss is the result of increases in expenses,
partially offset by the increase in gross profit, as described above.
25
Other income (expense)
Other income was $35,491 for the three months ended September
30, 2015, compared to $1,507,176 for the nine months ended September 30, 2014,
reflecting a decrease of $1,471,685 primarily due to a decrease in the gain
realized from the change in the fair value of derivative liabilities.
Dividends
During the three months ended September 30, 2015, we recorded
contractual dividends in the amount of $37,765, which represented the value of
the embedded conversion options associated with Series A Shares issued as
quarterly dividends. During the three months ended September 30, 2015, we
recorded a deemed dividend in the amount of $2,010,330 in order to accrete the
Series A Shares up to their redemption value.
Nine months ended September 30, 2015 compared to the nine
months ended September 30, 2014
Overview
We reported a net income of $2,050,566 for the nine months
ended September 30, 2015 as compared to the net loss of $2,281,287 for the nine
months ended September 30, 2014. The improvement in net income of $4,331,853 is
due to an increase in gross profit of $1,090,237, a decrease in operating
expenses by $1,812,660 as well as an increase in other income, net of expenses,
of $1,428,956.
Revenues
Sales for the nine months ended September 30, 2015 and 2014
were $4,582,017 and $3,712,240 respectively, reflecting an increase of $869,777
or 23%. Freedom sales increased by $704,097 or 56% from $1,261,915 to $1,966,012
for the nine months ended September 30, 2014 and 2015, respectively, primarily
due to a contract with the United States Government. Enterphone (including MESH)
sales for the nine months ended September 30, 2015 and 2014 of $1,834,529 and
$1,580,307 respectively, reflecting an increase of $254,222 or 16%. Services
revenues decreased by $88,542 or 10%, from $870,018 to $781,476 during the nine
months ended September 30, 2014 and 2015, respectively.
Gross profit
Gross profit for the nine months ended September 30, 2015 and
2014 were $2,791,646 and $1,701,409, respectively, reflecting an increase of
$1,090,237 or 64%. For the nine months ended September 30, 2015 and 2014, the
cost of sales and services were $1,790,371 and $2,010,831 or 39% and 54% of
sales, respectively. We have continued to focus on controlling the input costs
by using multiple suppliers to ensure that the best and most cost effective raw
materials are used in all of our products. The cost of labor and travel incurred
to generate our service division sales has also been reduced. Increased software
sales with zero to minimal cost of sales also increase our gross margin.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine
months ended September 30, 2015 and 2014 were $2,744,427 and $4,708,123
respectively, reflecting a decrease of $1,963,696 or 42%, primarily due to a
decrease in stock based compensation expenses.
26
Research and development
Research and development costs for the nine months ended
September 30, 2015 and 2014 were $632,614 and $481,578, respectively, reflecting
an increase of $151,036 and 31%. Research and development costs have increased
during 2015 as compared to 2014 due to the hiring of newly created technical
support personnel.
Operating loss
Operating loss for the nine months ended September 30, 2015 was
$585,395 as compared to $3,488,292 for the nine months ended September 30, 2014,
an improvement of $2,902,897 or 83%, primarily due to the increase in gross
profit and decrease in stock-based compensation described above.
Other income (expense)
Other income was $2,635,961 for the nine months ended September
30, 2015, compared to $1,207,005 for the nine months ended September 30, 2014,
reflecting an increase of $1,428,956 primarily due to an increase in the gain
realized from the change in the fair value of derivative liabilities.
Dividends
During the nine months ended September 30, 2015, we recorded
contractual dividends in the amount of $82,414, which represented the value of
the embedded conversion options associated with Series A Shares issued as
quarterly dividends. During the nine months ended September 30, 2015, we
recorded a deemed dividend in the amount of $2,010,330 in order to accrete the
Series A Shares up to their redemption value.
The effect of inflation and changing prices has had a
negligible effect on revenues and net income (loss) for the preceding three
quarters.
Liquidity and Capital Resources
We had cash of $173,713 as of September 30, 2015 and negative
working capital of $2,485,826. We had an accumulated deficit of $10,610,970 as
of September 30, 2015 and reported an operating loss for the nine months ended
September 30, 2015 of $585,395. Cash flows used in operating activities for the
nine months ended September 30, 2015 were $166,785. We are subject to
significant liquidity risk. These factors raise substantial doubt about our
ability to continue operations as a going concern. At September 30, 2015, our
current assets consist principally of cash, trade accounts receivables and
inventory.
Based on our current financial position, including the
potential issuance of a substantial amount of demand notes, we could be required
to fund our operations on a month-to-month basis. While we believe that we can
access sufficient working capital to maintain operations and ultimately generate
positive cash flow from operations, the ability to continue operations is
dependent upon raising addition capital and/or growing sales and achieving
profits. Also, we will likely require additional funds to support the
development and marketing of our new Freedom products. While we continue to
actively seek new investors and customer relationships, there can be no
assurance that we will be successful in obtaining sufficient working capital on
terms that are acceptable or that actual results will not materially differ from
expectations. If working capital becomes insufficient, we will have to reduce
spending in several key areas including research and development and marketing.
This would have a negative impact on our growth prospects, would render us
unable to take advantage of future opportunities or respond to competitive
pressures, and could result in our having to curtail operations. The management
team will be working diligently to improve collection of accounts receivable and
to reduce costs during the next several months.
Our financial statements have been prepared on a going concern
basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course
of business for the foreseeable future and the financial statements do not
include any adjustment that might result from the outcome of this uncertainty.
27
During the nine months ended September 30, 2015 and 2014, our
sources and uses of cash were as follows:
Net Cash Used in Operating Activities
During the nine months ended September 30, 2015 and 2014, we
experienced negative cash flows from operating activities in the amounts of
$166,785 and $1,707,676, respectively. The net cash used in operating activities
for the nine months ended September 30, 2015 was primarily due to net income of
$2,050,566 reduced by net non-cash expenses of $2,636,438 plus $419,087 of net
cash generated from changes in the levels of operating assets and liabilities,
primarily from an increase in the level of accounts payable. The net cash used
in operating activities for the nine months ended September 30, 2014, was
primarily due to cash used to fund the net loss of $2,281,287 and non- cash
income of $1,203,575 (the change in the fair value of derivative liabilities),
partially offset by non-cash expenses of $2,166,811, plus $389,625 of net cash
used to fund changes in the levels of operating assets and liabilities,
primarily from an increase in the level of accounts receivable.
Net Cash Used in Investing Activities
During the nine months ended September 30, 2015 and 2014,
$5,480 and $150,091, respectively, of cash was used to purchase property and
equipment.
Net Cash Provided by Financing Activities
During the nine months ended September 30, 2015 and 2014,
$210,670 and $2,366,570, respectively, of cash was provided by financing
activities. The net cash provided by financing activities for the nine months
ended September 30, 2015, resulted from $234,000, $197,500 and $3,050 of
proceeds from the issuance of preferred stock, convertible notes and common
stock and warrants, respectively, partially offset by payment of $7,630 and
$5,000 for capital leases and deferred financing costs, respectively. The net
cash provided by financing activities for the nine months ended September 30,
2014, resulted from $2,366,570 of proceeds from the issuance of common stock and
warrants.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Companys financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
CRITICAL ACCOUNTING POLICIES
There are no material changes from the critical accounting
policies set forth in Managements Discussion and Analysis of Financial
Condition and Results of Operations of our Annual Report on Form 10-K for the
year ended December 31, 2014 filed with the Securities and Exchange Commission
(the SEC) on March 31, 2015, except as disclosed below. Please refer to that
document for disclosures regarding the critical accounting policies related to
our business.
Preferred Stock
We apply the guidance enumerated in ASC 480 Distinguishing
Liabilities from Equity when determining the classification and measurement of
preferred stock. Preferred shares subject to mandatory redemption (if any) are
classified as liability instruments and are measured at fair value. We classify
conditionally redeemable preferred shares, which includes preferred shares that
feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within
our control, as temporary equity. At all other times, we classify our preferred
shares in stockholders equity. As of September 30, 2015 and December 31, 2014, in accordance with ASC 480-10-S99, since certain of
our preferred shares contain redemption rights which are not solely within our
control, these issuances of preferred stock have been presented as temporary
equity.
28
Recent accounting pronouncements
In July 2015, the FASB issued Accounting Standards Update No.
2015-11, Simplifying the Measurement of Inventory (ASU 2015-11). Under ASU
2015-11 entities should measure inventory that is not measured using last-in,
first-out (LIFO) or the retail inventory method, including inventory that is
measured using first-in, first-out (FIFO) or average cost, at the lower of cost
or net realizable value. Net realizable value is the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of
completion, disposal and transportation. ASU 2015-11 is effective for reporting
periods beginning after December 15, 2016 and is to be applied prospectively. We
are currently evaluating the impact the adoption of ASU 2015-11 will have on our
condensed consolidated financial position, results of operations and cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers. This ASU supersedes the revenue recognition
requirements in Accounting Standards Codification 605 - Revenue Recognition and
most industry-specific guidance throughout the Codification. The standard
requires that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or
services. This ASU is effective on January 1, 2017 and should be applied
retrospectively to each prior reporting period presented or retrospectively with
the cumulative effect of initially applying the ASU recognized at the date of
initial application. We have not yet determined the effect of the adoption of
this standard and its impact on our condensed consolidated financial position
and results of operations.
There are other various updates recently issued, most of which
represented technical corrections to the accounting literature or application to
specific industries and are not expected to a have a material impact on our
condensed consolidated financial position, results of operations or cash
flows.
29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.
The Company is a smaller reporting company as defined by Rule
12b-2 of the Exchange Act of 1934, as amended (the Exchange Act), and is not
required to provide the information under this item.
Item 4. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term disclosure controls and procedures is defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. These rules refer to the
controls and other procedures of a company that are designed to ensure that the
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is accumulated
and communicated to management, including our chief executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure. It is managements responsibility to establish and maintain
adequate internal control over financial reporting for the Company.
Our management, including our principal executive, financial
and accounting officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30,
2015. Based on that evaluation, our principal executive, financial and
accounting officer has concluded that as of September 30, 2015, our disclosure
controls and procedures were not effective. The management team has decided to
reassess and redesign our internal control system during the next several
months.
Our management is responsible for establishing and maintaining
effective internal control over financial reporting. Under the supervision of
our chief executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2014 using the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) issued in 1992. In 2013, COSO
released an updated framework that becomes effective for year-ends beginning on
or after December 15, 2014. Management is working to be compliant with the new
framework in time for its annual assessment for the year ended December 31,
2015.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Companys annual or
interim financial statements will not be prevented or detected on a timely
basis. In its assessment of the effectiveness of internal control over financial
reporting as of December 31, 2014, management concluded that the Companys
internal control over financial reporting was not effective. The following are
deficiencies and weakness that management is aware of:
|
a. |
All employees have full access to inventories.
Inventories are not adequately secured from employees who do not need
access; however, cameras are on site to mitigate any risk of
theft. |
|
b. |
The accounting department has unrestricted access to all
modules of the general ledger, however, the Controller reviews the ledgers
regularly. |
|
c. |
There is a material weakness for the accounting and
disclosure for complex transactions and financial
reporting. |
Notwithstanding the existence of the deficiencies described
above, our management has concluded that the financial statements included in
this Quarterly Report on Form 10-Q present fairly, in all material respects, our
financial position, results of operations and cash flows for the periods
presented in conformity with U.S. generally accepted accounting principles.
Management is addressing the deficiencies as resources permit.
30
During the quarter ended September 30, 2015, the Companys
Controller and Principal Accounting Officer, Shavi Morsara resigned. In the
interim, we are supplementing our financial reporting staff with experienced
consultants, including consultants with SEC, U.S. GAAP and complex transaction
expertise. Other than this change, there have been no changes in our internal
control over financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
31
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, the Company may be involved
in legal proceedings, claims and assessments arising in the ordinary course of
business. Such matters are subject to many uncertainties, and outcomes are not
predictable with assurance. There are no such matters that are deemed material
to the condensed consolidated financial statements as of September 30, 2015 and
December 31, 2014.
Item 1A. Risk Factors.
The Company is a smaller reporting company as defined by Rule
12b-2 of the Exchange Act, and is not required to provide the information under
this item.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On September 30, 2015, the Company issued an aggregate 27.075
of Series A Shares to current holders of Series A Shares, representing quarterly
dividends, convertible into 1,920,213 shares of common stock at a conversion
rate of US$0.0141 per share, representing an aggregate value of US$27,075.
The issuance of the Series A Shares, as disclosed in this Item
2, were made in reliance on the exemption from the registration requirements of
the Securities Act of 1933, as amended (the Securities Act), as set forth in
Section 4(a)(2) of the Securities Act or Rule 701 promulgated under Section 3(b)
of the Securities Act, as applicable, as transactions by an issuer not involving
any public offering or pursuant to benefit plans and contracts related to
compensation as provided under Rule 701.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the three months ended September 30, 2015, Scott
Sieracki, the Companys Interim Chief Executive Officer, was appointed the
Companys Principal Financial Officer and Principal Accounting Officer.
This quarterly report contains the revised condensed consolidated statement of operations for the three months ended September 30, 2014. Refer to Note 9 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further detail.
On November 20, 2015, after consultation with the Company’s former independent registered public accounting firm, Dale Matheson Carr-Hilton Labonte LLP, the Board’s Audit Committee determined that the comparative financial statements for the three month period ended September 30, 2014 in the Company’s Form 10-Q for the quarter ended September 30, 2014 cannot be relied upon. During the preparation of the Form 10-Q for the three and nine months ended September 30, 2015, the Company identified an issue with the condensed consolidated statement of operations for the three months ended September 30, 2014, because the amounts included in those results didn’t represent the difference between the results for the nine months ended September 30, 2014 and the six months ended June 30, 2014. There was no error in the accounting for the nine months ended September 30, 2014.
32
Item 6. Exhibits.
* Filed herewith
** Furnished herewith
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 23, 2015 |
VISCOUNT SYSTEMS, INC. |
|
(Registrant) |
|
By: |
/s/
Scott Sieracki |
|
|
Scott Sieracki |
|
|
Interim Chief Executive Officer |
|
|
Principal Executive, Financial and Accounting
Officer |
34
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14(a)
OR 15d-14(a)
OF THE U.S. SECURITIES EXCHANGE ACT OF
1934
I, Scott Sieracki, certify that:
1. |
I have reviewed this report on Form 10-Q for the fiscal
quarter ended September 30, 2015 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
this 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: November 23, 2015 |
By: |
/s/ Scott Sieracki |
|
|
Scott Sieracki |
|
|
Interim Chief Executive Officer
|
|
|
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 quarterly report of Viscount Systems,
Inc. (the Company) on Form 10 -Q for the fiscal quarter ended September 30,
2015 (the Report), the undersigned, in the capacity and on the date 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: November 23, 2015 |
/s/
Scott Sieracki |
|
Scott Sieracki |
|
Interim Chief Executive Officer |
|
Principal Executive Officer and Principal
Financial Officer |
Viscount Systems (CE) (USOTC:VSYS)
過去 株価チャート
から 8 2024 まで 9 2024
Viscount Systems (CE) (USOTC:VSYS)
過去 株価チャート
から 9 2023 まで 9 2024