Item
1. BUSINESS
GENERAL
Viscount
Systems, Inc. is a manufacturer of physical access control systems (“PACS” or “Freedom PACS”) and telephone
entry products, which protect buildings from unauthorized access. The business consists of three segments.
The
newest and fastest growing segment, started in 2011, is our Freedom PACS solution (“Freedom”). This enterprise-wide
access control system secures and controls ingress and egress points including doors, elevators, turnstiles, mantraps, vehicle
barriers, gates and garage doors throughout an end user’s building, facility or campus and prevents the entry of persons
unknown or staff attempting to gain access to ingress/egress points at the wrong time or day. This product segment has experienced
significant growth since inception with the highest gross margin of all the Company’s segments. It is the focus of the largest
percentage of the Company’s spending and efforts.
The
legacy business, existing since 1969, focusing on products and services for high rise residential and office buildings, generally
described as telephone entry, such as Enterphone. Enterphone is used to provide intercom and access control functions in buildings.
These products allow visitors to contact tenants or offices via a lobby telephone entry device to request and be granted entry.
The Company has various premier brands in this marketplace, the high end product is called MESH and enables a touchscreen user
interface experience as well as lower cost products that are sold through dealers and distributors throughout Canada and the United
States. The telephone entry business received some reinvestment in 2015 to develop new products helping to regain market share.
The most recent addition to the family of telephone entry products was “Enterphone iQ” launched in mid-year 2015.
The
third segment of the Viscount business is a service division that provides coverage to the Province of British Columbia (the “Service
Division”). The primary revenue source for the Service Division is derived from 1,134 maintenance agreements supporting
Enterphone, EPX and other systems. These maintenance customers are billed on a monthly basis, as well as Time and Material (“T&M”)
billings for additional services and installation projects.
BUSINESS
OVERVIEW
The
Company has been designing, manufacturing and servicing access control and security products, including telephone entry, intercom
and physical access control systems and emergency communications systems since 1969. With the release of MESH in 2003 and then
the Freedom PACS in 2011 the Company has been migrating away from telecommunications-based systems to large enterprise IP based
building access systems. Through this transition, the Company is transitioning from a hardware centric business model to software
centric model. To this end, the Company is investing heavily in mobile, cloud and cyber secured software based applications for
the Freedom platform and developing a go to market strategy to further develop its share in U.S. federal government (“Federal”)
market space and the commercial marketplace for the Freedom PACS. To support its investments, the Company has filed several patents
since 2010, with a total of four patents granted and approximately 60 patent applications pending.
Freedom
is a new building security technology that does not include an embedded decision-making software and hardware platform. Traditional
systems use distributed controllers that have a capacity to control from 1 to 32 door access points per controller. Each controller
has embedded software to create door open commands and other access control decision which reside on the microchip inside the
controller. This poses several problems. One is security risk due to physical access to the controller and its installation location
throughout a facility that poses risk of compromising the information within the controller. These controllers are proprietary
in design and do not have enterprise level security, meaning they cannot be directly protected by the same cyber security programs
that an information technology team (“ITT”) department uses to secure and protect other conventional software based
applications. The second drawback of traditional control panel based systems is the need to upgrade them as they age and technology
advances. These control panels require firmware updates when there are changes made to the upstream software. Freedom represents
a departure from traditional physical access control systems. Instead, with Freedom, security decisions are performed in the software
which is located on the customer’s dedicated or virtualized servers or in their Internet cloud (the “cloud”),
thereby dramatically simplifying the architecture of systems. The hardware piece of Freedom is the Freedom IP encryption bridge,
which is considerably less expensive than traditional PACS hardware. Each bridge includes circuitry to control locks and monitor
alarms and is connected to the network similarly to any other network device such as voice over IP phone (“VoIP”)
system, printer or computer. Having access control software residing on the server allows ITT to manage door access as easily
as they would manage a printer on the network or a VoIP phone. Risk of compromising the access codes is reduced dramatically by
having access software behind server enterprise level firewall and protected by the end users cyber security best practices. Unlike
conventional systems, there is no need to upgrade the hardware or attend to the facility in order to make changes. All changes
and upgrades can be made in the Freedom software centrally located on the server and managed by ITT. This significantly reduces
the lifetime ownership cost of the system, improves the cyber security position of the end user and better future proofs the investment.
The
Company has recognized for several years that the sales of its traditional Enterphone/EPX products would continue to be stagnant
or would fall. Enterphone is a building access control system that uses a building’s internal phone wiring, thereby avoiding
use of telephone utility services. The reason for the diminished sales of the product mainly relates to new digital telecommunications
alternatives. The Enterphone technology requires access to a dedicated set of inside wires and is difficult to install and service
with the existence of phone over cable or TV over phone systems. Therefore, the popularity of the technology has begun to wane.
COMPANY
HISTORY
The
Company’s current business is operated primarily through its wholly owned subsidiary Viscount Communication and Control
Systems Inc. (“Viscount Communication”). The business of the Company’s subsidiary began operations in 1969 as
a manufacturer of video switching equipment. In 1970, the business was acquired by B.C. Telecom Inc. (“BC Tel”), which
was acquired by Telus Corporation in 1999. BC Tel was the telephone utility for British Columbia, Canada and was controlled by
GTE Corporation (now Verizon Communications Inc.). Under BC Tel, the business operated as an electronics research laboratory and
manufacturing facility. Among the products manufactured were central office telephone test equipment, telephone demarcation blocks,
and a satellite-based kiosk system used to provide information at airports and other public facilities.
The
Company was incorporated on May 24, 2001 under the laws of the State of Nevada under the name OMW4 Corp. The Company’s subsidiary,
Viscount Communication, was incorporated in 1997 under the laws of British Columbia, Canada, for the purposes of carrying on the
present access control business. The Company acquired all of the issued and outstanding shares in the capital of Viscount Communication
on July 27, 2001, in exchange for 10,000,000 shares of the Company’s common stock, thereby making it our wholly owned subsidiary.
As a result of the acquisition, the former shareholders of Viscount Communication obtained a controlling interest in OMW4 Corp.
In connection with the acquisition, the Company changed its name to Viscount Systems, Inc. effective August 27, 2001.
In
2003, the Company acquired certain inventory and 2,165 service agreements from Telus Corporation. The service agreements related
to the maintenance of Enterphone installations throughout Western Canada. The inventory was comprised of various products and
components for installation and repair of these Enterphone installations.
Freedom
was released in 2011 and represents the primary focus for the future, IP-based building security systems. Viscount has also expanded
the capabilities of Freedom to focus on Federal opportunities by making Freedom FIPS 201 compliant (as more fully described below)
and is now upgrading Freedom further to expand into mobile applications and the cloud.
INDUSTRY
OVERVIEW
The
Company competes in the building intercom and access control systems industry. The intercom and access control industry is sometimes
referred to as a segment of the low-voltage systems industry. The Company’s intercom and access control systems are designed
to automate the control of access to buildings or other restricted access areas. Intercom systems and access control systems are
complementary; however they can also be used independently depending on user requirements. For example, most modern residential
apartment or condominium buildings have an intercom system for visitors wishing to communicate with residents. Residents, on the
other hand, are issued access cards that can be used in conjunction with card readers installed beside gates, parking garages,
doors or elevators in order to gain access.
Access
control systems provide two functions for a building. Building tenants use access cards and readers that control access through
doors, gates or elevators, while visitors use telephone intercoms to be granted admission by a building occupant or manager. The
systems also provide sophisticated alarm functions such as identifying doors left open or forced entry. The sophistication of
systems ranges from controlling a single door where records are kept manually to large enterprise systems covering hundreds of
buildings from a dedicated security facility.
Freedom
and MESH mark a very different business model from the traditional approach. The building control and security industry has traditionally
been highly segmented based on specific functions designed into proprietary electronic hardware. This has meant that makers of
heating/ventilation and air-conditioning systems and security card access systems essentially manufacture input/output systems,
while intercom makers manufacture voice systems, and security camera makers manufacture closed-circuit video systems. Stated otherwise,
audio, video, environment and access control systems are traditionally all separate building control systems that are independently
controlled, installed, and maintained. There has been strong convergence of technologies in the computer and telephone-related
industries based on digital standards; however, the building control industry has not as yet undergone a similar convergence of
technologies. Traditionally, where systems need to be compatible, the industry has relied on integration. Integration is the use
of a host computer and custom software to tie separate and distinct systems, typically from different manufacturers, together
on a common software platform. However, because Freedom and MESH are based on a single software platform and database architecture,
different systems such as intercom and building security can be run as a single platform. Furthermore, with Viscount’s new
Active Directory platform (as described below), logical and physical security can run as a unified platform that creates much
more secure and flexible systems that comport with the integration model.
Along
with certain other industry participants, the Company has turned to current high-technology solutions in order to reduce costs
of ownership of security systems while improving functionality. The Company has developed new system platforms that will permit
convergence of the control of various building functions, such as access control, intercom, closed-circuit television, and heating/ventilation
and air-conditioning. These systems can be operated on a single commercially available host server and can operate using standard
communications techniques. As a result of using a single full-service system to replace the three or more separate dedicated systems,
each requiring its own host server, the overall cost of ownership of a security and control system has been reduced.
Access
Control Systems Technology
The
enterprise access control industry has traditionally used a communication technology known as Wiegand. Most of the world’s
installed access systems are based on Wiegand technology. This also includes most smart card and biometric systems since these
devices typically must be converted to some form of Wiegand to be processed on control panels. Today, these systems are commonly
found in residential, commercial and industrial buildings in the form of access control cards and card readers. Wiegand was initially
developed in 1970 by Sensor Engineering as an access card technology. The card technology used a special patented process whereby
wires are imbedded in a plastic access card to encode its data. This data format became a standard for other readers including
Radio Frequency Identification Devices (“RFID”). Most access control readers are connected to control panels. Each
panel holds a card database and software that creates door unlock and alarm decisions. Panels are typically networked using RS
485, CANBUS or a similar technology. A host controller is programmed to receive information from the card reader in order to permit
access to a building.
Each
host controller can operate between 1 to 8 doors. Accordingly, a building with a large number of controlled access points could
require a large number of host controllers, resulting in greater hardware costs. Host controllers can in turn be connected to
a central server that monitors the host controllers and collects information on access point usage. The host server also holds
the card holder database to store information and issue cards to users.
The
underlying technology that operates these traditional access control systems is approximately 30 years old. The readers are considered
“dumb” readers as they simply receive information from the access card and transmit it to a host controller. The host
controller processes the information in order to determine whether to grant or deny access. If access is granted, the host controller
then transmits a signal to activate a switch to open the access point where the reader is located. This is a simple input/output-type
relay system which requires a separate host controller for approximately every eight access points.
There
are numerous limitations with the older technology. Systems are proprietary and expensive. In many ways physical and logical access
control are identical, but the existence of control hardware has precluded proper unification and convergence for the physical
access control industry. New concerns about the vulnerabilities of control panels to cyber-attack are prompting some end users
to look at alternatives.
Compliance
driven change
The
Company is participating in this advance in the access control industry with its proprietary MESH and Freedom intelligent access
control and communication technology systems. Viscount believes the answer to the issues with the traditional access control model
is the Freedom software application-based approach. After September 11, 2001, the US Department of Homeland Security was created.
An evaluation under the Federal Information Processing Standards (“FIPS”) concluded that control panels and cards
were not secure. With it came FIPS 201, an expansion of processes and regulations designed to update security. An expanded standard,
“FIPS-201-2,” is now in active drafting by FIPS for future implementation. These regulations state that the vast majority
of the existing access control infrastructure needs to be replaced or upgraded. This presents an enormous opportunity for new
lower-cost and more conformant technologies such as Freedom.
PRODUCTS
The
Company is a manufacturer, developer, reseller and service provider of intercom and access control systems. The Company’s
intercom and access control systems are installed throughout North America for various applications including: condominium/apartment
building access and intercom; residential intercom; gated home/community access and intercom; seniors/government housing access,
tracking and intercom; elevator access and tracking; garage or perimeter gate control; and emergency communications.
Enterphone
Access Control Products
Historically,
the Company’s principal product was the Enterphone intercom and access control system. Enterphone is the Company’s
patented building entry control system that uses a building’s internal phone wiring to allow access control for tenants
and intercom and access control between visitors and tenants. The use of a building’s internal phone wiring by the Company’s
Enterphone system provides an option to using telephone company wiring, thereby bypassing monthly telephone charges. It also does
not require tenants to pay for an individual phone line to operate their intercom and door access system and is not affected by
interruptions in telephone company service. This makes the Company’s Enterphone system distinct from other “dial-up”
telephone entry systems that use telephone company lines.
The
Enterphone EPX system is sold as a central control unit which is installed in a building’s telephone control room. The EPX
connects an intercom panel located at an entrance to the building with the telephone of building tenants. A visitor wishing to
gain access to the building dials a one to four digit number at the entrance panel. The call is directed from the entrance panel,
through the EPX system and up to the tenant’s telephone. The tenant hears a unique ring and can unlock the entrance door
by pressing a number on the telephone’s numeric key-pad. EPX can process connections to as many as 840 suites.
The
Company also manufactures electronic entry access panels that can operate using either the EPX system or dial-up telephone company
lines. The Company’s panels are manufactured in various sizes and with various features in order to accommodate varying
purposes and building types. For example, the Company manufactures panels that provide intercom and access control from one suite
to unlimited number of suits; or panels that provide on-screen name search capabilities; or panels that are streamlined in shape
or small in size. All panels that the Company manufactures incorporate the Enterphone technology; however, most panels can also
be installed to use telephone company lines.
Enterphone
panels can also be combined with other technologies such as access tracking and control, closed-circuit monitors, infrared and
radio frequency remotes, and Wiegand cards and card readers. The Company purchases these technologies from other manufacturers
and resells them under the Company’s brand names. Most of the products that the Company resells can be integrated into our
Enterphone access control system.
Enterphone
iQ
In
early 2015, Viscount completed a new product line, offering a mid-ranged solution based on our MESH technology. This LCD color
video screen, housed in a smaller footprint at considerable cost savings, is intended to offer Viscount’s high-quality telephone
entry system at a price comparable to our competitors’ black and white, LCD, two to four line display. We expect considerable
sales growth with this product, capturing a price point for which Viscount had no offering previously. This introduction reflects
a re-commitment to the telephone entry market that had previously been allowed to age in its technology.
MESH
and Freedom Access Control Systems
Overview
MESH
is a software-based building management system designed to replace traditional systems that are more hardware intensive. The Company
continues to develop technology that was initially conceptualized in 1998. MESH was commercially released in late 2003. MESH applications
include touch-screen intercoms, building directories and physical card access and alarms. The first MESH product releases were
touch-screen intercoms designed as an accessory for the Enterphone/EPX product line. Viscount subsequently enhanced MESH to include
physical card access. For traditional markets such as high-rise condominiums, MESH intercom systems as well as access control
systems have proven to be complementary. However, in 2012, Viscount split MESH into two components: the intercom component will
continue to be branded as MESH and the access control component will be branded as Freedom. The purpose of this was to eliminate
market confusion whereby end users looking for a highly secure physical access system were presented with MESH, which appeared
to be primarily an intercom system.
MESH
intercoms use a regular computer motherboard and off-the-shelf computer accessories such as touch screens to create computerized
building intercom systems and building directories. MESH touch panels are intercom accessories for the MESH access control and
facility management system. MESH panels can be surface- or flush- mounted. MESH allows building tenants to communicate with visitors
and grant or deny entry. Units can display residential or commercial building directory listings with a building-specific screen
saver. Options include built-in cameras, card access, and elevator control, and internal heater for extremely cold climates. Multiple
panels can be connected on a shared database or to central MESH servers for complete card access and facility management. MESH
comes in 15, 19 or 32 inch screen sizes with or without touch screens, black powder coated or stainless steel, available as wall
mounted panels or floor mounted kiosks.
MESH
panels, located at entrance doors for visitor access, can operate independently or as a client of the MESH server. The basic MESH
panel that the Company has commercially released is a full color screen industrial computer. The MESH panels may be located at
entrance doors for visitor access or can be on-site managed by security guards as they manage the MESH network. The host/client
architecture of MESH panels reduces cost, simplifies programming, and improves data base management.
In
designing MESH, much consideration has been made of the many dissimilar applications requiring a MESH network. In cases where
building control is accomplished with on-site security and concierge staff, limited MESH hardware or possibly only software may
be needed to perform the required functions. For example, MESH software may be sold as a simple visitor tracking system for commercial
or gated residential sites.
In
general, MESH has been designed to allow simple installations to be performed by small independent alarm contractors. However,
provision has also been made for direct involvement by the Company’s staff in large campus- wide and enterprise-wide installations.
MESH
has many additional benefits, both in terms of building security and particularly relative to the legacy Wiegand technology.
MESH
is a modular product, meaning that the software can accommodate add-on features or upgraded features. The Company has developed
various modules for its MESH technology and intends to develop further modules which will be released in a series of phases. Some
of these product enhancement modules are described below:
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The
MESH server provides new opportunities to host video on the unified platform with voice and data.
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The
nature of the MESH server makes MESH telephony products inherently Internet-enabled. Future MESH appliances may include the
MESH television line, which allows residents to view visitors at the door. MESH panels may be able to connect to web-enabled
set-top boxes being promoted as part of the web TV market.
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The
distributed intelligence of MESH makes the product suited to the growing emergency call/nurse call industry.
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MESH
networks are built on a proprietary architecture platform which is functional to integrate with any existing automation network.
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Freedom
Freedom
is the new internet technology (“IT”) platform developed and released by the Company during the last quarter of 2010.
This IT platform can turn any card reader into an internet protocol (“IP”) device by connecting the Freedom IP device
with built-in input/output to a Power-Over-Ethernet (“POE”) switch and then every card usage is processed on a redundant
MESH server either in a customer’s building or any remote site. Freedom is designed as a highly secure, scalable software
solution to ensure that stringent access control is maintained in homeland security applications. The ability to unify physical/logical
operations, leverage existing IT infrastructure and ensure high levels of compliance with government regulations enables Freedom
to provide significant benefit to integration partners and end customers.
The
software component of Freedom is the web browser security operating platform. Unlike control panels, the user database and the
door control software is written in IT language located on a server(s), thereby future-proofing systems from the traditional issue
of proprietary hardware version obsolescence and improving scalability by eliminating the need for additional hardware every time
a reader is added to the system.
Viscount
has upgraded Freedom to include unified physical/logical access control using Microsoft Active Directory, both public and private
cloud-hosted solutions as well as mobile solutions. In 2014, Freedom was strengthened and hardened, including receiving a prestigious
certification called FICAM 1302 from the US Federal Government. The Freedom solution is so unique compared to competitors, FICAM
1302 (versus the existing 1301 category) was created just to display the unique offering from Viscount. Our solution eliminates
significant cost from existing solutions, while still offering the highest security available. In 2015, Viscount expects FICAM
1302 certification to drive penetration into other Federal agencies that was previously blocked until certification.
Freedom
Access Control has been selected as the Best Integrated System for HSPD-12/FIPS-201 in the Government Security News (“GSN”)
2015 Homeland Security Awards.
The
GSN Homeland Security Awards honor distinguished vendors of IT and physical security products and solutions, and recognizes federal,
state, county and municipal government and law enforcement agencies that implement unique solutions to help mitigate security
threats. Now in its seventh year, the awards program highlights innovative technologies, solutions and programs throughout the
homeland security market.
The
win marks Viscount’s second consecutive Homeland Security Award recognition from the publication, having received honors
for Best Platform for Physical/Logical Access in 2014. Viscount’s Freedom access control solution was selected as an award
winner based on its IT-centric architecture, which is designed to integrate physical and logical access control functions in government
installations. Freedom is currently being leveraged in a wide variety of government applications, including multiple United States
Citizenship and Immigration Service locations.
Liberty
Liberty
was a derivation of the Freedom PACS initially intended to address the smaller sized system access control market, and was to
be sold exclusively through security distribution channels. Liberty was initially launched in the fourth quarter of 2013 but has
since been discontinued as the resources required to effectively support the product through distribution was deemed no longer
financially and operationally feasible by senior leadership.
OTHER
SERVICES
In
addition to sales of the Enterphone, MESH, and Freedom, the Company also services approximately 1,134 existing Enterphone installations
within Western Canada.
PRODUCTION
Viscount
has facilities for circuit board manufacture and mechanical assembly. The Company uses a range of processes to produce its products.
The Company maintains full facilities to assemble through-hole circuit boards and limited facilities for assembling surface-mount
circuits. The Company has a policy of supporting old products as long as parts are available for servicing and replacement. We
have designed EPX to be backwards compatible with the Viscount Legacy products to improve the longevity and serviceability of
both products. Freedom, MESH and EPX are manufactured using surface-mount technology so are outsourced with final assembly and
software installed at Viscount. This includes all Freedom IP encryption bridges.
Our
principal suppliers of card readers are HID Global Corporation and Veridt, Inc.
The
MESH and Freedom software platforms are loaded on standard industrial computer chassis. The Company is not developing hardware
internally for MESH or Freedom since the required hardware controllers are commercially available at quality and price levels
that makes internal development uneconomical. In addition, by using commercially available off the shelf (“COTS”)
components, the Company improves time to market, eliminates hardware debugging and increases the Company’s ability to be
technologically flexible in the future. The Company is primarily executing final mechanical assembly of the MESH and Freedom systems.
RESEARCH
AND DEVELOPMENT
Research
and development continues to be focused on enhancing the Freedom/MESH product line. A number of these enhancements were identified
in the “MESH and Freedom Access Control Systems”, “Freedom” and “Other Services” section of
this document. Specific custom Freedom/MESH applications are being considered, evaluated and implemented. An example of this process
is the Freedom active directory (“AD”) integration which enables the Freedom PACS to use an end users AD environment
for authenticating a system user logon to Freedom. Freedom can also utilize an end user AD environment for automated physical
access control door assignments by referencing specific information assigned to an identity or person in the AD environment which
is then correlated by Freedom to make access control door privilege assignments. The end result is that an end user no longer
has to double enter data in to Freedom and is also insured that Freedom is making access control decisions based upon the most
current existence of a person in AD. Expenditures in connection with research and development for the years ended December 31,
2015 and 2014 were $885,592 and $703,288 respectively. The research and development (“R&D”) expenditures are eligible
for partial Canada Revenue Agency SR&ED tax incentive treatment.
MARKET
AND MARKETING
The
Market
MESH
Market:
The
Company’s traditional market for the Enterphone product was apartment and condominium buildings. While the market for telephone
entry-type systems amounts to approximately US$100 million based on internal market research conducted by the Company, in the
past 10 years there has been a strong trend towards increased building security resulting in much more sophisticated integrated
installations. For example, in 1990, a typical condominium building would be equipped with an intercom to admit visitors. Today,
a typical new building installation includes telephone entry, card access, closed-circuit cameras, individual burglar alarms and
panic stations. This puts pressure on manufacturers to provide a comprehensive package and represents an opportunity for significant
revenue growth per system. MESH is the Company’s first in-house product that addresses these multiple requirements. The
modular nature of MESH also provides the Company with an excellent opportunity to design additional products on the MESH platform
to provide enhanced options for a comprehensive building security package.
In
addition to apartment entrances, MESH is also designed to provide access control for the rapidly growing gated community market.
Monitor-style directory panels are also used in thousands of commercial high-rises. The MESH panel provides features previously
unavailable for this market, such as touch screens, multiple language options and color video displays. The overall effect of
these system advances has enhanced the Company’s core business, while allowing the Company to find applications where the
new features expand the traditional market for such systems.
The
Company is targeting upgrades and retrofits to existing apartments and various government agencies that use traditional telephone
wire intercom access control systems. New construction projects are also part of the MESH installation market. The low hardware
costs and increased functionality of the MESH system continue to be marketed to building management companies, along with its
turnkey installation as a replacement to existing access control systems for most modern buildings.
Freedom
market:
Freedom
moves Viscount into an entirely new market of door security for enterprise clients. This market has been estimated at $1.2 billion
for access control manufacturers (and approximately $5-10 billion for end users) according to the Freeman Report, and includes
a range of technologies for securing facilities, including both RFID and biometrics. The access control market can generally be
described as the market for any equipment used to control passage through a door, gate, parking garage, or other portal. A portion
of this market is comprised of mechanical and electronic door locks that typically control access through single doors. Many of
the single door systems have been engineered for low security levels for customers who do not desire a full access control host.
The access control market that the Company competes in involves computerized access control systems that typically control access
through multiple access points.
The
physical access control industry was once highly fragmented, but through a process of consolidation, has come to be generally
dominated by a number of multi-nationals, listed below. Physical access control typically involves two groups – the electronic
reader suppliers (RFID readers, biometrics) and the control panel suppliers. The control panel suppliers are typically the top
of the food chain and resell electronic reader devices as part of the control panel platform. This is the core segment in which
Viscount competes. The electronic reader part of this industry grew out of old-fashioned door locks. The most common companies
are ASSA ABLOY Group (“ASSA ABLOY”) and Stanley Industrial. ASSA ABLOY has been the most aggressive over the years
and is now fairly dominant in the area of door control and “entrance systems.” Key acquisitions by ASSA ABLOY included
HID Global Corporation (in 2000), which is a leading provider of access control cards and electronic readers. ASSA ABLOY has made
over 20 acquisitions in the space and has almost 40,000 employees worldwide.
Access
control doors require software and hardware to operate. There are specialized companies in this segment, but most are now part
of massive conglomerates that provide a broad range of related industrial products. Major players include Lenel, which is part
of United Technologies Corporation (NYSE: UTX), Software House, which is part of Tyco International (NYSE: TYC), Honeywell (NYSE:
HON), Schneider Electric (SU:EN Paris), Johnson Controls (NYSE: JCI), Cisco (NASDAQ: CSCO), Stanley Industrial and ASSA ABLOY.
Not
only does a Freedom like unified system represent a viable adjacent market opportunity that is large enough to be of interest,
it may in fact become critical that these companies move in the direction of Freedom. The logic is simple: if Freedom can apply
logical security rules to physical access, it can also apply physical security rules to logical access. As unified platforms become
the trend, any of the large identity management companies will be at a severe disadvantage if they don’t enter the market
to address the physical and door control side of security.
INTRUSION
DETECTION SYSTEM INTEGRATION
The
most clearly focused player so far in combining logical and physical access is Microsoft, which is now in a position to combine
the most popular enterprise user-management tool, Active Directory, with the cloud (referred to as “Azure” by Microsoft)
to provide a solution for both logical and physical access control with one infrastructure using Freedom.
Viscount
is actively pursuing solutions to integrate with intrusion detection systems such as DMP and DSC. The goal is to design a unified
Freedom interface that provides authentication, administration, configuration and monitoring functionalities that satisfy both
access control and intrusion detection industries. The ability to activate and monitor external alarms systems and to share Freedom
administrative roles and policies with IDS systems are the major themes of this endeavor.
Ongoing
research and development effort has been invested in Enterprise Video System integration. Due to the diversity of Video Systems
in the market, Viscount is closely working with industry experts to build a platform that can integrate with most IP based DVR
systems in a unified fashion. The goal is to be able to use any DVR systems of the customers’ choosing without investing
heavily in proprietary software interface. At the same time, Viscount is developing and improving its’ web based monitoring
system that combines Access Control, Video and of course intrusion detection into one integrated application. Viscount carefully
follows industry design guidelines in order to optimize user experience.
CYBER
SECURITY
Cyber
Security standards are becoming more rigorous and demanding each year and the guideline and requirements are continuously being
affected and adjusted by the number of cyber security breaches that are taking place throughout the world. In light of this, Viscount
is investing in a next generation cryptology hardware for the Freedom Bridge product as described below. This new design if developed,
will guarantee high assurance data encryption and efficient operation throughput of the entire architecture of the Freedom PACS.
OSDP
OSDP
(Open Supervised Device Protocol) is an emerging standard for Access Control Readers. With Viscount’s RS485 equipped FB-10
Freedom Bridge, Freedom server is able to manage OSDP readers on TCP/IP networks. This new generation of readers offer more high-end
hardware choices to users, especially in Federal space. Efforts have been made to evaluate OSDP readers from different manufacturers.
Software drivers are being developed to work with OSDP protocol. FIPS support is also within the scope of this development.
Freedom-Active
Directory development in Viscount has gone through a number of revisions in the last few years. Freedom is enhancing its Access
Control model to combine the best of both role based access control (“RBAC”) and attribute based access control (“ABAC”)
which are used to regulate an individual’s access to the network or to perform specific tasks such as view, create, modify
within applications. Freedom is leveraging these same logical access control models in order to map with Active Directory groups
and directories. Because of this very tight link to Active Directory’s architecture, Viscount’s strength in the Enterprise
IT space has gained considerable momentum and is peaking the interest of a few very large IT security and cyber security partners.
Distribution
Plan
The
Company currently has approximately 450 dealers for its existing products throughout North America and 70 certified integrators
for its Freedom product line. The Company’s distribution network is not static, and the Company is constantly seeking additional
go to market partners, resellers, distributors and alliances.
As
previously noted, MESH can serve several different markets and the type of dealer serving each may vary. Simple installations
may be performed by small independent dealers, but as the overall scope of the project increases, the technical ability of the
dealer becomes increasingly important. At the extreme, employees may be directly involved with the customer in designing, installing
and servicing the product. In other cases, personnel may be involved on a co-op basis with large national security, building automation
and heating/ventilation and air-conditioning contractors.
During
the past year, the Company has continued to target its existing markets as well as targeting the Federal and large corporate end
users for the sale of Freedom technology. The Company is concentrating on North America for the Freedom product at this time.
First-line installation and technical support are provided by our dealers and certified integrators to the end users.
Marketing
Strategy
The
Company has been using its established distribution channels, as well as new distribution channels, to access its target markets
for the MESH, Freedom, and Liberty technology. As a unique technology, however, end-users as well as dealers must be educated
about Freedom’s benefits and capabilities. It is the Company’s experience that a stronger initial emphasis on influencing
end-user decision-makers and large national system integrators will be the most effective in developing the Freedom market. The
Company sells through authorized dealers, integrators, value-added-resellers, and distributors and does not typically sell directly
to end users.
Webinars
Viscount
has continued to concentrate on webinars to educate the industry about Freedom. The response has been excellent with audiences
as large as several hundred registered attendees per webinar.
Advertising
Our
products are advertised on an ongoing basis in various print publications, which the Company will continue to do. We have been
testing new publications on a regular basis to evaluate response, sales and readership. All leads are followed up, and magazines
are rated based on a dollar sale per advertising dollar spent ratio. While the sales cycle is sometimes fairly long, this approach
has given the Company a very accurate measure of the effectiveness of various publications and individual ads.
Trade
Shows
During
2015, the Company continued participating in tradeshows to increase the awareness of MESH and Freedom. During 2016, we will continue
to attend tradeshows to enhance the exposure for MESH/Enterphone, and Freedom products.
Direct
Marketing
The
Company continued educating customers about Freedom technology by holding Freedom and Liberty training seminars throughout the
U.S. and at our head office via the internet.
Pricing
Strategy
The
Freedom technology is built on an architecture which can reduce user costs significantly. The modular nature of the technology
amplifies this effect the larger the system becomes. The Company has continued to actively pursue a pricing model based on substantive
margins, but at a price point that can promote market disruption. Viscount has a view to creating a recurring revenue model for
its software licensing through a subscription license approach as well as cloud sources. The access control industry is fragmented
with a wide variation on pricing depending on the size of system and supplier. Additionally in 2015 Viscount focused on a concerted
effort to promote and sell a Freedom CUBE concept which prepackages a reduced reader license version of the Freedom software on
to PC appliance. The Freedom CUBE has gained an increasing level of adoption as it enable Viscount’s Freedom dealers to
sell a very easy to install configure system at a very competitive price point. The Freedom CUBE also enables Viscount to compete
for all system sizes and has provided a very strategic replacement for the former Liberty access control system.
The
Company believes that it has a unique product and a position of product leadership that will support its strategy of building
market share. With the telephonic component, the Company has been targeting a price which provides MESH panels at a price that
is competitive with similar products, but with newer enhanced features.
COMPETITION
Competitive
Summary
The
security and building control industry is undergoing a rapid period of consolidation. Large multi-national companies are integrating
vertically by acquiring equipment providers to build house brands. This began with the purchase of Cardkey Systems Inc. by Johnson
Controls Inc., Guard-All Electronic Security Systems, Inc. by Chubb Fire and Security and ADI/Northern Computers by Honeywell
International, Inc. More recent acquisitions include the purchase of Kantech and Software House by Tyco Electronics and the purchase
of Lenel and GE Security by United Technologies. The access control industry is segmented with no company having a dominant market
position. Canada has approximately six access control product manufacturers, while the U.S. has at least fifty. There is a certain
amount of vertical integration in the business, and several large multinational companies possess their own house brands. Many
branches of these multinational companies often have their own brand preferences and buy outside their internal distribution channels.
Almost
all manufacturers build control hosts based on Wiegand technology or smart card technology that converts data to Wiegand. Due
to these limitations, most research and development is focused on reducing hardware costs and making the control hosts more network
capable. In most cases, the manufacturers using traditional Wiegand technology are limited from 1 to 8 doors per control host.
Competitive
Threats
The
Company has a strong dealer and distribution plan in place, and Freedom has positioned the Company in a market dominated by much
larger players. The higher security Freedom applications are also somewhat outside of the traditional scope of business, and therefore
the Company is rapidly trying to develop a market for Freedom, and in the process, educating users of Freedom through training
seminars. The Company believes that marketing strategies and training seminars will provide benefits that will help it achieve
market share that will allow it to remain competitive. There is no guarantee that the Company will be able to successfully compete
against its larger competitors.
While
Freedom is still a new product in an established growing market, technological change can be met with resistance. Some buyers
are nervous about new products and new protocols even more so. Most buyers are familiar with the benefits of IP-based cameras
and the Company has marketed Freedom from this point of view; that is, to stress the inevitability of all access control systems
evolving this way.
A
key concern is the ability of competitors to imitate the product and the ability of large imitators to more easily commercialize
their product. The Company’s senior management, having prior experience working for the Company’s larger competitors,
have estimated that the Company still has a three-year market lead based on the research and development schedules of such competitors.
The Company believes the wide range of Freedom software applications should provide the Company with an ongoing lead, as long
as it is aggressive with research and development.
INTELLECTUAL
PROPERTY
Viscount
actively protects its intellectual property. The Company has filed patents since 2010, encompassing close to 60 patent claims
under six (6) major patent filings. Viscount was awarded three US patents in 2014. Other patents have not yet been awarded, but
the Company intends to vigorously defend each patent as they are awarded.
The
Company relies on a combination of non-disclosure and other contractual agreements to protect the confidential information, know-how,
and proprietary rights relating to Enterphone, MESH and other Viscount products. The Company has contractual rights with respect
to registered North American trademark and trade name for Enterphone (word alone). The Company is still considering or in the
process of registering North American trade names for MESH and Freedom.
The
Company has registered active Internet domain names for www.viscount.com, www.libertyacess.net, www.enterphone.net, and www.enterphone.org.
Standard
employment agreements and license agreements contain provisions that protect the confidentiality of proprietary technology. All
of our employees and sales agents are required to sign these agreements prior to their employment or engagement.
To
date, the Company has not received notification that its services or products infringe the proprietary rights of third parties.
Third parties could, however, make such claims of infringement in the future. The Company cannot be certain that others will not
develop substantially equivalent or superior proprietary technology, or that equivalent services will not be marketed in competition
with the Company’s services, thereby substantially reducing the value of its proprietary rights. Furthermore, there can
be no assurance that any confidentiality agreements between the Company and its employees or any license agreements will provide
meaningful protection for its proprietary information in the event of any unauthorized use or disclosure of such proprietary information.
GOVERNMENT
REGULATIONS
There
are a number of regulatory and related issues that affect Viscount’s business. In order to comply with Sarbanes-Oxley Act
of 2002 (“SOX”) and other rules and regulations, every large public corporate entity is required to have adequate
security measures in place for the purpose of protecting IT data from tampering by unauthorized personnel. A component of this
includes properly securing physical facilities as well as IT networks. Unfortunately, since control panels typically use a separate
security database from IT, it is very difficult to relate usage of the systems for the purposes of audit and compliance. With
the Freedom unified platform using Active Directory, audits and compliance issues are simplified using a single set of IT logs.
For
Federal facilities, Viscount must conform to FIPS-201 and other federal requirements. A newer standard of FIPS 201-2 is under
final discussion, and a release is expected shortly. The new regulations positively impact Viscount through our ability to perform
traditional hardware functions with software and may negatively impact existing suppliers since their existing technology and
hardware is non-conformant.
The
Enterphone is an interposition technology which, in the U.S., can only be installed where the local public service commission
has designated the original point of entry of a building as the demarcation point between the telephone company and the building
owner’s responsibility.
SOURCES
OF REVENUES
The
majority of the Company’s revenues were derived from the MESH/Enterphone and Freedom product lines. In 2015, MESH/Enterphone
sales represented 38.6% of total revenue, while Freedom product sales represented 44.1% of total revenue. The balance of the Company’s
revenue was derived from service agreements and other products such as access tracking and control, closed-circuit video, infrared
and radio frequency remotes.
EMPLOYEES
Viscount
employs 36 staff members at its production facility and corporate headquarters located in Burnaby, British Columbia, Canada, as
well as sales and support personnel in the United States.
Members
of Management are as follows:
Scott
Sieracki, Interim
Chief Executive Officer
. Mr. Sieracki, was appointed the Company’s Interim Chief Executive
Officer on July 16, 2015. Previously, Mr. Sieracki had been the Company’s Vice President of Sales since December 1, 2014.
Prior to joining the Company, Mr. Sieracki worked as Vice President of Sales for IDV Solutions, Inc., an enterprise risk visualization
company, from October 2012 to October 2014 and Vice President of Sales for Quantum Secure, Inc. part of HID Global, a security
and identity technology company, from September 2006 to September 2012. From November 2001 to August 2006, Mr. Sieracki served
as Director of Sales North America for Software House, a Tyco International company, and from February 1997 to September 1999,
Mr. Sieracki served as President and co-founder of Open Options, a provider of open architecture based access control systems.
Zhi
Yuan (Yvonne) Zheng,
Principal Financial Officer
.
On January 18, 2016, the Company appointed Ms. Zheng, who has been
the Company’s Internal Controller since September 2015, its Principal Financial Officer pursuant to an employment agreement,
dated January 18, 2016, between Ms. Zheng and the Company.
The
Company’s website address is www.viscount.com. The Company’s periodic and current reports are available, free of charge,
on the Company’s website as soon as reasonably practicable after such material is electronically filed with, or furnished
to, the U.S. Securities and Exchange Commission (the “SEC”). Electronic or paper copies of the Company’s filings
are also available, free of charge, upon request.
The
public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of the websites referred to above
are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual
references only.