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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File Number: 1-7939
VICON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
11-2160665
(I.R.S. Employer
Identification No.)
135 Fell Court, Hauppauge, New York
(Address of principal executive offices)
11788
(Zip Code)
(631) 952-2288
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
At February 14, 2017, the registrant had outstanding 9,348,388 shares of Common Stock, $.01 par value.
VICON INDUSTRIES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Page Number
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations
3
Condensed Consolidated Statements of Comprehensive Loss
4
Condensed Consolidated Balance Sheets
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
12
15
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
16
Item 3. Defaults Upon Senior Securities
16
Item 4. Mine Safety Disclosures
16
Item 5. Other Information
16
Item 6. Exhibits
16
Signatures
17
2
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICON INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
12/31/2016
12/31/2015
Net sales
Cost of sales
Gross profit
$
Operating expenses:
Selling, general and administrative expense
Engineering and development expense
6,604,978
4,032,819
2,572,159
$ 10,880,556
6,609,381
4,271,175
2,680,857
1,139,976
3,820,833
3,930,151
1,318,396
5,248,547
(1,248,674)
Operating loss
Other income (expense):
Interest income
Interest expense
233
(53,568)
(1,302,009)
Loss before income taxes
Income tax expense
—
Net loss
(977,372)
164
—
(977,208)
—
$ (1,302,009) $
(977,208)
Loss per share:
Basic
$
(.14) $
(.10)
Diluted
$
(.14) $
(.10)
Weighted average shares outstanding:
Basic
9,348,388
9,330,779
Diluted
9,348,388
9,330,779
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
VICON INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended
12/31/2016
12/31/2015
(977,208)
$ (1,302,009) $
Net loss
Other comprehensive income (loss):
Unrealized loss on securities
Foreign currency translation adjustment
Other comprehensive income
Comprehensive loss
(411)
135,238
134,827
$ (1,167,182) $
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
(85)
157,309
157,224
(819,984)
Table of Contents
VICON INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
12/31/2016
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories:
Parts, components, and materials
Work-in-process
Finished products
$
2,769,122
13,299
4,765,625
9/30/2016
$
1,230,357
1,144,823
4,855,177
7,230,357
500,357
15,278,760
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Property, plant and equipment
Less accumulated depreciation and amortization
1,954,422
13,545
6,158,504
1,432,135
812,455
4,745,660
6,990,250
572,440
15,689,161
5,861,178
5,865,969
(5,365,579)
(5,345,786)
495,599
520,183
1,039,500
1,106,500
736,338
761,865
$ 17,550,197 $ 18,077,709
Intangible assets, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued compensation and employee benefits
Accrued expenses
Unearned revenue
TOTAL CURRENT LIABILITIES
3,204,081
1,774,003
1,319,293
548,231
6,845,608
Revolving credit borrowings
Unearned revenue - non current
Other long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies
1,750,000
69,585
1,512,499
10,177,692
SHAREHOLDERS’ EQUITY
Common stock, par value $.01 per share
authorized - 25,000,000 shares
issued - 10,044,827 shares
Capital in excess of par value
Accumulated deficit
Treasury stock at cost, 696,439 shares
Accumulated other comprehensive loss
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,551,080
1,701,103
1,472,272
476,565
6,201,020
1,750,000
76,950
1,522,825
9,550,795
100,448
100,448
40,530,692
40,517,919
(29,426,968) (28,124,959)
(3,437,643)
(3,437,643)
(394,024)
(528,851)
7,372,505
8,526,914
$ 17,550,197 $ 18,077,709
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
VICON INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
12/31/2016
12/31/2015
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization
Amortization of deferred compensation
Stock compensation expense
Change in assets and liabilities:
Accounts receivable, net
Inventories, net
$ (1,302,009) $
(977,208)
128,322
373
12,399
215,409
373
153,198
1,296,548
(312,261)
578,020
864,267
269,717
(78,812)
(2,685)
(182,058)
(287,007)
(34,741)
(413,916)
(28,261)
(501,724)
Cash flows from investing activities:
Net increase in marketable securities
Capital expenditures
Net cash used in investing activities
(165)
(42,605)
(42,770)
(83)
(48,963)
(49,046)
Cash flows from financing activities:
Proceeds from exercise of stock options
Net cash provided by financing activities
Effect of exchange rate changes on cash
—
—
279,450
5,184
5,184
223,469
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued compensation and employee benefits
Accrued expenses
Unearned revenue
Other liabilities
Net cash provided by (used in) operating activities
62,766
25,526
676,549
78,803
(146,777)
64,301
(6,520)
Net increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
$
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
814,700
1,954,422
2,769,122
(322,117)
$
2,390,409
2,068,292
Table of Contents
VICON INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2016
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and the instructions to Form 10Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 2017. For further information, refer to the consolidated financial statements and footnotes thereto
included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2016.
Note 2: Marketable Securities
Marketable securities consist of mutual fund investments principally in federal, state and local government debt securities of
$13,299 as of December 31, 2016. Such mutual fund investments are stated at market value based on quoted market prices (Level
1 inputs) and are classified as available-for-sale under the provisions of Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 320, with unrealized gains and losses reported in accumulated other comprehensive loss as a
component of shareholders’ equity. The cost of such securities at December 31, 2016 was $13,845, with $546 of cumulative
unrealized losses reported at December 31, 2016.
Note 3: Accounts Receivable
Accounts receivable is stated net of an allowance for uncollectible accounts of $1,065,000 and $1,069,000 as of December 31,
2016 and September 30, 2016, respectively.
Note 4: Loss per Share
Basic loss per share (EPS) is computed based on the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock
options and under deferred compensation agreements.
The following tables provide the components of the basic and diluted EPS computations for the three month periods ended
December 31, 2016 and 2015:
Three Months Ended
December 31,
2016
2015
Basic EPS Computation
Net loss
Weighted average shares outstanding
Basic loss per share
7
$
(1,302,009)
$
9,348,388
(.14)
$
(977,208)
$
9,330,779
(.10)
Table of Contents
Three Months Ended
December 31,
2016
2015
Diluted EPS Computation
Net loss
$
Weighted average shares outstanding
Stock options
Stock compensation arrangements
Diluted shares outstanding
(1,302,009)
$
9,348,388
—
—
9,348,388
Diluted loss per share
$
(.14)
(977,208)
9,330,779
—
—
9,330,779
(.10)
$
For the for the three month periods ended December 31, 2016 and 2015, all outstanding stock options and shares issuable under
stock compensation arrangements totaling 623,587 and 670,300 shares, respectively, have been omitted from the calculation of
diluted EPS as their effect would have been antidilutive. The actual effect of these stock options and shares, if any, on the diluted
earnings per share calculation will vary significantly depending on fluctuations in the market price of the Company's stock.
Note 5: Accumulated Other Comprehensive Loss
The Company's accumulated other comprehensive loss balances at December 31, 2016 and September 30, 2016 consisted of the
following:
December 31,
2016
(393,478)
$
(546)
(394,024)
$
Foreign currency translation adjustment
Unrealized loss on marketable securities
Accumulated other comprehensive loss
September 30,
2016
(528,716)
$
(135)
(528,851)
$
Note 6: Intangible Assets
The components and estimated useful lives of intangible assets as of December 31, 2016 and September 30, 2016 are stated below.
Amortization is provided on a straight line method, or in the case of customer relationships, on an accelerated method, over the
following estimated useful lives:
December 31, 2016
Gross
Accumulated
Amount
Amortization
Definite-lived intangibles:
Customer relationships
Tradenames
$
910,000
660,000
1,570,000
$
427,833
102,667
530,500
September 30, 2016
Gross
Accumulated
Amount
Amortization
$
910,000
660,000
1,570,000
$
371,833
91,667
463,500
Estimated
Useful Life
7 years
15 years
Amortization expense was $67,000 and $129,250 for the three month periods ended December 31, 2016 and 2015, respectively.
8
Table of Contents
Future amortization expense for intangible assets over the next five years ending September 30 and thereafter is summarized as
follows:
Fiscal Year
Remainder of 2017
2018
2019
2020
2021
Thereafter
$
$
Amount
201,000
177,000
123,000
91,000
72,000
375,500
Note 7: Stock-Based Compensation
The Company maintains stock option plans that include both incentive and non-qualified options reserved for issuance to key
employees, including officers and directors. All options are issued at fair market value at the grant date and are exercisable in
varying installments according to the plans. The plans allow for the payment of option exercises through the surrender of previously
owned mature shares based on the fair market value of such shares at the date of surrender.
The Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees, including
stock options, be recognized as compensation expense in the consolidated financial statements based on their grant date fair values
and over the requisite service period. For the three month periods ended December 31, 2016 and 2015, the Company recorded
non-cash compensation expense of $12,399 and $153,198, respectively ($.00 and $.02 per basic and diluted share, respectively),
relating to stock compensation.
Note 8: Recent Accounting Pronouncements
In May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will
recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in
exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how
revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money
in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in
certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity's contracts with customers. This guidance permits the use of either the retrospective
or cumulative effect transition method and is effective for the Company beginning in 2019; early adoption is not permitted prior
to 2018. The Company is currently in the initial stages of evaluating the effect of implementing this guidance.
In February 2016, the FASB issued guidance on lease accounting requiring lessees to recognize a right-of-use asset and a lease
liability for long-term leases. The liability will be equal to the present value of lease payments. This guidance must be applied
using a modified retrospective transition approach to all annual and interim periods presented and is effective for the Company
beginning in fiscal 2019. The Company is currently in the initial stages of evaluating the effect of implementing this guidance.
In March 2016, the FASB issued guidance on simplifying several aspects of accounting for share-based payment award transactions,
including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of
cash flows. This guidance requires a mix of prospective, modified retrospective, and retrospective transition to all annual and
interim periods presented and is effective for the Company beginning in fiscal 2018. The Company is currently in the initial stages
of evaluating the effect of implementing this guidance.
9
Table of Contents
Note 9: Income Taxes
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns
for which a tax benefit has been recorded in the income statement. The Company has a valuation allowance against its deferred
tax assets due to the uncertainty of future realization. The full valuation allowance is determined to be appropriate due to the
Company's operating losses since fiscal year 2010 and the inherent uncertainties of predicting future operating results in periods
over which such net tax differences become deductible. At September 30, 2016, the Company had $13.4 million of unrecognized
net deferred tax assets available, which includes approximately $8.8 million of tax effected U.S. and foreign net operating loss
carryforwards. On August 29, 2014, the Company merged with IQinVision, Inc. In connection with this merger, the Company's
ability to utilize pre-merger net operating losses and tax credit carryforwards in the future is subject to certain limitations pursuant
to Section 382 of the Internal Revenue Code. The annual limitation on utilization of the Company's U.S. net operating loss
carryforwards is presently estimated at $500,000.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The
Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The
Company is generally no longer subject to tax examinations in such jurisdictions for fiscal years prior to 2013 in the U.S. and
2010 in the U.K., Germany and Israel.
Note 10: Fair Value
The majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring basis,
but the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates
to long-lived assets. The carrying amounts for trade accounts, other receivables, accounts payable and revolving credit borrowings
approximate fair value due to either the short-term maturity of these instruments or the fact that the interest rate of the revolving
credit borrowings is based upon current market rates.
Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
Note 11: Product Warranties
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages
in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the
estimated warranty liability may be required.
Changes in the Company's warranty liability (included in accrued expenses) for the three month periods ended December 31, 2016
and 2015 were as follows:
Three Months Ended
December 31,
2016
2015
$ 650,000
$ 650,000
114,000
108,000
(114,000)
(108,000)
Balance at beginning of period
Provision for warranties
Expenses incurred
Balance at end of period
$ 650,000
10
$ 650,000
Table of Contents
Note 12: Credit Agreement
On March 4, 2016, the Company entered into a Credit Agreement (the “Agreement”) with NIL Funding Corporation to provide
a $3 million revolving line of credit for working capital purposes. The Agreement provides for a borrowing formula based upon
eligible accounts receivable and is secured by a first priority security interest in substantially all of the Company’s assets. Borrowings
under the Agreement bear interest at a rate of 6.75% per annum. The Agreement also provides for an unused commitment fee
equal to .5% per annum. The Agreement includes provisions that are customarily found in similar financing agreements, but does
not include any financial covenants. NIL Funding Corporation is an affiliate of The InterTech Group, whose Executive Vice
President and Chief Operating Officer, Julian A. Tiedemann, serves as the Chairman of the Company’s Board of Directors.
On August 18, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Amended Agreement”) with
NIL Funding Corporation which increased the $3 million revolving line of credit to $6 million. This facility, as amended, matures
on October 2, 2018 and consists of two credit lines of $4 million and $2 million which bear interest at rates of 6.95% per annum
and 8.25% per annum, respectively. The $4 million line of credit is subject to a borrowing formula based upon eligible accounts
receivable. The Amended Agreement also provides for an initial commitment fee of $60,000, which was paid at closing, as well
as an unused commitment fee equal to .5% per annum. The Amended Agreement includes a financial covenant that requires the
Company to maintain a specified minimum tangible net worth, as defined, and is otherwise substantially similar to the original
Agreement with NIL Funding Corporation. At December 31, 2016, the Company was in compliance with this covenant. As of
December 31, 2016, outstanding borrowings under the Amended Agreement were $1,750,000.
NOTE 13. Going Concern and Liquidity
The accompanying financial statements have been prepared on a going concern basis which assumes the Company will be able
to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future and, thus, do not include
any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary if the Company is
unable to continue as a going concern. However, the Company's ability to continue as a going concern is dependent upon generating
profitable operations in the future and obtaining the necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due.
The Company continues to incur operating losses due to decreased revenue levels and ongoing strategic investments. Since 2012,
the Company has made a significant investment in the development of a completely new, and strategically critical, video
management system (VMS). The first release of this product offering was launched in January 2017 and is ultimately expected to
significantly enhance the Company’s market competitiveness. The funding of this major development effort has contributed to
the ongoing operating losses and depletion of cash reserves. The Company has also encountered issues with certain of its camera
offerings that have negatively impacted its revenues during the last nine months. Although these issues have been substantially
resolved, their market impact has lingered into fiscal 2017. In response, the Company phased in material operating expense
reductions over the course of the past several years and will consider further cost cutting measures throughout the remainder of
the fiscal year. However, the Company intends to continue funding the development of its new VMS platform and rebuilding its
market channels.
At December 31, 2016, the Company had $2.8 million of cash reserves and a maximum of $4.25 million of borrowings available
under the Credit Agreement described above, which is subject in part to a borrowing-base formula. Cash losses over the past
several years have been financed in part by the sale of the Company’s two principal operating facilities and ongoing management
of working capital levels. The Company expects to continue to draw on its credit facility to finance its near term working capital
needs. In addition, the Company is currently seeking additional funding sources and evaluating strategic alternatives to finance
its aggressive product development roadmap and growth initiatives over the upcoming twelve month period. Since there are no
guarantees that such plans will be successful and that the Company will have sufficient available cash to sustain its operations
through the next twelve month period, there is substantial doubt about the Company's ability to continue as a going concern.
11
Table of Contents
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated
financial statements for the periods indicated, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, product
warranties, inventories, long lived and intangible assets, income taxes and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors including general market conditions that are believed
to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Results for the periods reported herein are not necessarily indicative of results that may be expected in future periods.
Overview
The Company designs, assembles and markets video management systems and system components for use in security, surveillance,
safety and communication applications by a broad group of end users worldwide. The Company’s product line consists of various
elements of a video system, including DVR's, NVR's, video encoders, decoders, servers and related video management software,
data storage units, analog, digital and HD megapixel fixed and robotic cameras, virtual and analog matrix video switchers and
controls, and system peripherals.
The Company sells video surveillance system components in a highly competitive worldwide marketplace principally to authorized
security distributors, dealers and system integrators. Such dealers and integrators typically resell and install the Company’s
products directly to end users, among other services. The Company’s sales are principally project based and are largely dependent
upon winning projects, construction activities and the timing of funding. Sales will vary from period to period depending upon
many factors including seasonal and geographic trends in construction activities and the timing of deliveries due to changes in
project schedules and funding. The Company usually does not have a large backlog as its customer orders are typically deliverable
within three months or often upon receipt of order.
The Company competes in a market of rapid technology shifts which enhance the performance capability of security systems. As
a result, the Company spends a significant amount on new product development. In fiscal 2016 and 2015, the Company incurred
$5.2 million and $5.1 million of engineering and development expense or 15% and 11% of net sales, respectively. The Company’s
expenditures for product development are substantially less than its major competitors. The ongoing market shift to intelligent
software solutions will continue to burden the Company’s development resources and increase ongoing annual expense for product
development. Further, the Company’s sales effort requires a high level of customer service and technical support for its
products. The Company routinely considers various strategic options that may augment or supplement its present product offerings
and technology platforms.
The Company has a foreign sales and distribution subsidiary in Europe that conducts certain of its business in British pounds and
Euros that represented approximately 23% of the Company’s consolidated sales for fiscal 2016. It also has an Israel based
engineering and development subsidiary that incurs a majority of its operating expenses in Shekels that represented approximately
14% of the Company’s operating expenses for fiscal 2016. Changes in these local foreign currency exchange rates could have a
direct impact on the Company's reported financial position and results.
Results of Operations
Three Months Ended December 31, 2016 Compared with December 31, 2015
Net sales for the quarter ended December 31, 2016 decreased by $4.3 million (39%) to $6.6 million compared with $10.9 million
in the year ago period. Sales in the Americas decreased $3.0 million (35%) to $5.5 million compared with $8.5 million in the year
ago period, while Europe, Middle East and Africa (EMEA) sales decreased $1.3 million (56%) to $1.1 million compared with
$2.4 million in the year ago period. Order intake for the quarter ended December 31, 2016 decreased by $5.9 million (51%) to
$5.8 million compared with $11.7 million in the year ago period. Americas order intake decreased by $4.6 million (49%) to $4.8
million compared with $9.4 million in the year ago period, while EMEA order intake decreased $1.3 million (57%) to $1.0 million
compared with $2.3 million in the year ago period. The backlog of unfilled orders was $907,000 at December 31, 2016 compared
with $1.7 million at September 30, 2016. The Company's market share continued to be impacted by its reliance upon a legacy
12
Table of Contents
product offering as well as past camera line production issues that have since been resolved. Scheduled new core product launches
during the remainder of fiscal 2017 are expected to significantly improve the Company's market competitiveness.
Gross profit margins were 38.9% for the quarter ended December 31, 2016 compared with 39.3% in the year ago period. Excluding
the impacts of largely fixed production overhead costs relative to reduced sales, current quarter margins increased by 1.6% as
compared with the year ago period.
Operating expenses for the first quarter of fiscal 2017 decreased $1.4 million to $3.8 million compared with $5.2 million for the
year ago period. Selling, general and administrative (SG&A) expenses for the current quarter decreased $1.2 million to $2.7
million compared with $3.9 million in the year ago period. Such decreases included the effects of planned staff and other cost
reduction initiatives necessitated by lower revenue expectations. Engineering and development expenses decreased $178,000 to
$1.1 million for the current quarter compared with $1.3 million for the year ago period as the Company continued investing in its
new video management system platform.
The Company incurred an operating loss of $1.2 million for the first quarter of fiscal 2017 compared with an operating loss of
$977,000 in the year ago period.
The Company incurred interest expense of $54,000 for the first quarter of fiscal 2017 relating to borrowings under its revolving
credit agreement.
The Company provides for a valuation allowance against its deferred tax assets due to the uncertainty of future realization and,
thus, no tax benefit has been recognized on reported pretax losses for both periods (see Note 9: Income Taxes).
As a result of the foregoing, the Company reported a net loss of $1.3 million for the first quarter of fiscal 2017 compared with a
net loss of $977,000 in the year ago period.
Liquidity and Capital Resources
Net cash provided by operating activities was $578,000 for the first quarter of fiscal 2017. Cash generated by a $1.3 million
decrease in accounts receivable and a $609,0000 increase in trade and accrued liabilities were offset in part by a $1.2 million
reported net loss exclusive of non-cash charges. Net cash used in investing activities was $43,000 for the first quarter of fiscal
2017 consisting principally of capital expenditures. As a result of the foregoing, cash (exclusive of marketable securities) increased
by $815,000 for the first quarter of fiscal 2017 after the effect of exchange rate changes on the cash position of the Company.
The Company continues to incur operating losses due to decreased revenue levels and ongoing strategic investments. Since 2012,
the Company has made a significant investment in the development of a completely new, and strategically critical, video
management system (VMS). The first release of this product offering was launched in January 2017 and is ultimately expected to
significantly enhance the Company’s market competitiveness. The funding of this major development effort has contributed to
the ongoing operating losses and depletion of cash reserves. The Company has also encountered issues with certain of its camera
offerings that have negatively impacted its revenues during the last nine months. Although these issues have been substantially
resolved, their market impact has lingered into fiscal 2017. In response, the Company phased in material operating expense
reductions over the course of the past several years and will consider further cost cutting measures throughout the remainder of
the fiscal year. However, the Company intends to continue funding the development of its new VMS platform and rebuilding its
market channels.
At December 31, 2016, the Company had $2.8 million of cash reserves and a maximum of $4.25 million of borrowings available
under the Credit Agreement described below, which is subject in part to a borrowing-base formula. Cash losses over the past
several years have been financed in part by the sale of the Company’s two principal operating facilities and ongoing management
of working capital levels. During fiscal 2016, the Company entered into a Credit Agreement that was subsequently amended and
restated in August 2016. This Agreement currently consists of two credit lines totaling $6 million that mature in October 2018
(see Note 12 - Credit Agreement). The Company expects to continue to draw on its credit facility to finance its near term working
capital needs. In addition, the Company is currently seeking additional funding sources and evaluating strategic alternatives to
finance its aggressive product development roadmap and growth initiatives over the upcoming twelve month period. Since there
are no guarantees that such plans will be successful and that the Company will have sufficient available cash to sustain its operations
through the next twelve month period, there is substantial doubt about the Company's ability to continue as a going concern.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations)
that have, or are reasonably likely to have, a material effect on the Company’s financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Critical Accounting Policies
The Company's significant accounting policies are fully described in Note 1 to the Company's consolidated financial statements
included in its September 30, 2016 Annual Report on Form 10-K. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue is generally recognized when products are sold and title is passed to the customer. Advance service billings are deferred
and recognized as revenues on a pro rata basis over the term of the service agreement. Pursuant to Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 605-25-05, the Company evaluates multiple-element revenue
arrangements for separate units of accounting, and follows appropriate revenue recognition policies for each separate
unit. Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer,
(ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if a general right of return exists
relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within the
control of the Company. As applied to the Company, under arrangements involving the sale of product and the provision of
services, product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue
is recognized as services are performed.
For products that include software and for separate licenses of the Company’s software products, the Company recognizes revenue
in accordance with the provisions of FASB Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). ASU 2009-13 provides revenue recognition guidance
for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement
consideration to each deliverable in the arrangement based on the fair value of the elements. The fair value for each deliverable
is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or
best estimate of selling price ("BESP") if neither VSOE nor TPE is available. BESP must be determined in a manner that is
consistent with that used to determine the price to sell the specific elements on a standalone basis.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages
in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the
estimated warranty liability may be required.
The Company writes down its inventory for estimated obsolescence and slow moving inventory equal to the difference between
the carrying cost of inventory and the estimated net realizable market value based upon assumptions about future demand and
market conditions. Technology changes and market conditions may render some of the Company’s products obsolete and additional
inventory write-downs may be required. If actual future demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
The Company evaluates the establishment of technological feasibility of its software in accordance with ASC 985 ("Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"). The Company has determined that technological
feasibility for its new products is reached shortly before products are released for field testing. Costs incurred after technological
feasibility has been established have not been material and are expensed as incurred.
The Company assesses the recoverability of the carrying value of its long-lived and intangible assets whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability
of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future
undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between
the fair value and the carrying amount. Since the Company's merger with IQinVision, it has essentially redesigned its acquired
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camera line. Thus, the Company determined that its technology asset was fully impaired and, as a result, recorded an impairment
charge of $2.0 million at September 30, 2016.
The Company's ability to recover the reported amounts of deferred income tax assets is dependent upon its ability to generate
sufficient taxable income during the periods over which net temporary tax differences become deductible. The Company provides
for a valuation allowance against all deferred tax assets due to the uncertainty of future realization. The Company plans to provide
a full valuation allowance against its deferred tax assets until such time that it can achieve a sustained level of profitability or other
positive evidence arises that would demonstrate an ability to recover such assets.
The Company accrues liabilities for identified tax contingencies that result from positions that are being challenged or could be
challenged by tax authorities. The Company believes that its accrual for tax liabilities is adequate for all open years, based on
Management’s assessment of many factors, including its interpretations of the tax law and judgments about potential actions by
tax authorities. However, it is possible that the ultimate resolution of any tax audit may be materially greater or lower than the
amount accrued.
Accounting for restructuring activities, as compared to regular operating cost management activities, requires an evaluation of
formally committed and approved plans. Restructuring activities have comparatively greater strategic significance and materiality
and may involve exit activities, whereas regular cost containment activities are more tactical in nature and are rarely characterized
by formal and integrated action plans or exiting a particular product, facility or service.
The Company is subject to proceedings, lawsuits and other claims related to labor, product and other matters. The Company
assesses the likelihood of an adverse judgment or outcomes for these matters, as well as the range of potential losses. A
determination of the reserves required, if any, is made after careful analysis. The required reserves may change in the future due
to new developments.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this Report on Form 10-Q that are not strictly historical facts including, without limitation, statements included
under the “Management’s Discussion and Analysis” caption, are “forward-looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and
business environment. The forward-looking statements are based on current expectations and involve a number of known and
unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties
inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company
or any other person that the objectives or plans of the Company will be achieved. The Company assumes no obligation to publicly
update or revise its forward-looking statements or to advise of changes in the assumptions and factors on which they are based.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as required by
Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that,
as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and
forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding
required disclosures.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation
referred to above that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable
ITEM 5 - OTHER INFORMATION
None
ITEM 6 – EXHIBITS
Exhibit
Number Description
31
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on
Form 10-Q shall be deemed to be “furnished” and not “filed.”
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
VICON INDUSTRIES, INC.
February 21, 2017
/s/ John M. Badke
John M. Badke
Chief Executive Officer and
Chief Financial Officer
17
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