NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2016 and 2015
NOTE 1. Summary of Significant Accounting Policies
Nature of Business
The Company designs, assembles and markets video management systems and system components for use in security, surveillance, safety and control purposes by end users. The Company markets its products worldwide primarily to installing dealers, systems integrators, government entities and distributors.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries: IQinVision, Inc., Vicon Industries Limited and subsidiary (Vicon Deutschland GmbH) and TeleSite U.S.A., Inc. and subsidiary (Vicon Systems Ltd.), after elimination of intercompany accounts and transactions.
Revenue Recognition
Revenue is generally recognized when products are sold and title is passed to the customer. Advance service billings are deferred and recognized as revenues on a pro rata basis over the term of the service agreement. Pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25-05, the Company evaluates multiple-element revenue arrangements for separate units of accounting, and follows appropriate revenue recognition policies for each separate unit. Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective and reliable evidence of the fair value of the 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and amounts invested in highly liquid money market funds.
Marketable Securities
At
September 30, 2016
, marketable securities consisted of mutual fund investments principally in federal, state and local government debt securities of
$13,545
. Such mutual fund investments are stated at market value based on quoted market prices (Level 1 inputs) and are classified as available-for-sale under ASC 320, with cumulative unrealized gains and losses reported in accumulated other comprehensive loss as a component of shareholders’ equity. The cost of such securities was
$13,680
and
$13,355
at
September 30, 2016
and
2015
, respectively, with
$(135)
and
$(308)
of cumulative unrealized losses, net of tax where applicable, included in the carrying amounts at
September 30, 2016
and
2015
, respectively.
Allowances for Doubtful Accounts
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.
Inventories
Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values.
Assets Held for Sale
At September 30, 2015, the Company had classified its United Kingdom based operating facility as assets held for sale at a carrying value of approximately $800,902. The Company sold this facility in January 2016.
Long-Lived and Intangible Assets
Long-lived assets include reported property, plant, and equipment and intangible assets. The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Since the Company's merger with IQinVision, it has essentially redesigned its assumed 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 (see Note 2). There was no impairment of long-lived assets for the year ended September 30, 2015.
Property, plant, and equipment are recorded at cost and are being depreciated over periods ranging from 2 to 10 years. Intangible assets are being amortized over periods ranging from 7 to 15 years. Depreciation and amortization expense was $850,697 and $725,365 for the years ended
September 30, 2016 and 2015
.
Goodwill
The Company’s goodwill at September 30, 2015 represented the excess of the purchase price over the fair value of net identifiable assets acquired in the 2014 business combination with IQinVision. The Company conducted an impairment test at March 31, 2016 using the income approach and determined that its goodwill carrying value was fully impaired. As a result, the Company recorded an impairment charge of $6.0 million in the quarter ended March 31, 2016 (see Note 2).
Engineering and Development
Product engineering and development costs are charged to expense as incurred, and amounted to $
5,193,085
and $
5,063,010
in fiscal
2016
and
2015
, respectively. The Company evaluates the establishment of technological feasibility of its software in accordance with ASC 985 ("Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"). The Company has determined that technological feasibility for its new products is reached shortly before products are released for field testing. Costs incurred after technological feasibility has been established have not been material and are expensed as incurred.
Earnings Per Share
Basic EPS is computed based on the weighted average number of common shares outstanding. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options, warrants and incremental shares issuable under a deferred compensation agreement (see Note 7). In periods when losses are incurred, the effects of these securities are antidilutive and, therefore, are excluded from the computation of diluted EPS.
Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries by applying the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting cumulative translation adjustment of
$(528,716)
and
$(276,998)
at
September 30, 2016
and
2015
, respectively, is recorded as a component of shareholders' equity in accumulated other comprehensive loss.
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740 ("Accounting for Income Taxes"), which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred U.S. income taxes are not provided on undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company. The Company provides for a valuation allowance against its entire net deferred tax asset balance due to the uncertainty of future realization (see Note 3 for further discussion).
The Company accrues liabilities for identified tax contingencies that result from positions that are being challenged or could be challenged by tax authorities. The Company believes that its accrual for tax liabilities is adequate for all open years, based on Management’s assessment of many factors, including its interpretations of the tax law and judgments about potential actions by tax authorities. However, it is possible that the ultimate resolution of any tax audit may be materially greater or lower than the amount accrued.
Product Warranties
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the estimated warranty liability may be required.
Changes in the Company's warranty liability (included in accrued expenses)
for the fiscal years ended September 30, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
|
$
|
650,000
|
|
|
$
|
849,000
|
|
Provision for warranties
|
|
423,000
|
|
|
171,000
|
|
Expenses incurred
|
|
(392,000
|
)
|
|
(370,000
|
)
|
Balance at end of year
|
|
$
|
681,000
|
|
|
$
|
650,000
|
|
Fair Value of Financial Instruments
The majority of the Company’s non-financial assets and liabilities are not required to be carried at fair value on a recurring basis, but the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates to long-lived assets. The carrying amounts for trade accounts, other receivables, accounts payable and revolving credit borrowings approximate fair value due to either the short-term maturity of these instruments or the fact that the interest rate of the revolving credit borrowings is based upon current market rates.
Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Accounting for Stock-Based Compensation
The Company follows ASC 718 (“Share-Based Payment”), which requires that all share based payments to employees, including stock options, stock appreciation rights (SARs) and common stock share awards, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the years ended
September 30, 2016
and
2015
, the Company recorded non-cash compensation expense of
$81,593
(
$.01
per basic and diluted share) and
$625,061
(
$.07
per basic and diluted share), respectively, relating to stock-based compensation.
The fair value for options granted during the fiscal years ended
September 30, 2016
and
2015
was determined at the date of grant using a Black-Scholes valuation model and the straight-line attribution approach using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Risk-free interest rate
|
|
1.6
|
%
|
|
2.1
|
%
|
Dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
Volatility factor
|
|
72.5
|
%
|
|
63.7
|
%
|
Weighted average expected life
|
|
7.0 years
|
|
|
7.0 years
|
|
The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. Other than a one-time special dividend paid in connection with the IQinVision Merger, the Company never declared or paid any cash dividends and does not currently expect to do so in the future. Expected volatility is based on the annualized daily historical volatility of the Company’s stock over a representative period. The weighted-average expected life represents the period over which stock-based awards are expected to be outstanding and was determined based on a number of factors, including historical weighted average and projected holding periods for the remaining unexercised shares, the contractual terms of the Company’s stock-based awards, vesting schedules and expectations of future employee behavior.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options and SARs have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs.
Restructuring
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, provisions for doubtful accounts receivable, net realizable value of inventory, warranty obligations, income tax accruals, deferred tax valuation and assessments of the recoverability of the Company’s long-lived and intangible assets. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.
NOTE 2. Goodwill and Intangible Assets
The Company’s goodwill at September 30, 2015 represented the excess of the purchase price over the fair value of net identifiable assets acquired in the August 29, 2014 IQinVision business combination. The Company conducted an impairment test at March 31, 2016 using the income approach and determined that its goodwill carrying value was fully impaired. As a result, the Company recorded an impairment charge of $6.0 million in the quarter ended March 31, 2016. This noncash charge was principally based upon an updated assessment of the Company's continuing depressed market valuation and operating losses.
The components and estimated useful lives of intangible assets as of
September 30, 2016 and 2015
are stated below. Since the Company's merger with IQinVision in 2014, it has essentially redesigned its acquired 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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Estimated Useful Life
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
Technology
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,500,000
|
|
|
$
|
270,833
|
|
|
10 years
|
Customer relationships
|
910,000
|
|
|
371,833
|
|
|
910,000
|
|
|
148,833
|
|
|
7 years
|
Tradenames
|
660,000
|
|
|
91,667
|
|
|
660,000
|
|
|
47,667
|
|
|
15 years
|
|
$
|
1,570,000
|
|
|
$
|
463,500
|
|
|
$
|
4,070,000
|
|
|
$
|
467,333
|
|
|
|
The activity in the goodwill balance consists of the following:
|
|
|
|
|
Balance at October 1, 2014
|
6,016,469
|
|
Changes in Goodwill
|
—
|
|
Balance at September 30, 2015
|
6,016,469
|
|
Goodwill Impairment
|
(6,016,469
|
)
|
Balance at September 30, 2016
|
$
|
—
|
|
Amortization expense related to intangible assets for the year ended
September 30, 2016 and 2015
was
$517,000
and
$432,000
, respectively. Annual amortization expense for intangible assets over the next five years ending September 30 and thereafter is summarized as follows:
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2017
|
$
|
268,000
|
|
2018
|
177,000
|
|
2019
|
123,000
|
|
2020
|
91,000
|
|
2021
|
72,000
|
|
Thereafter
|
375,500
|
|
NOTE 3. Income Taxes
No income tax benefit was recognized on losses reported for the years presented due to uncertainty of realization. In fiscal 2011, the Company provided a valuation allowance against its deferred tax assets due to the uncertainty of future realization and, thus, no tax benefit has been recognized on subsequent reported pretax losses.
A reconciliation of the U.S. statutory tax rate to the Company’s effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
U.S. statutory tax
|
|
$
|
(4,343,000
|
)
|
|
(34.0
|
)%
|
|
$
|
(1,774,000
|
)
|
|
(34.0
|
)%
|
Increase in valuation allowance
|
|
2,318,000
|
|
|
18.1
|
|
|
1,420,000
|
|
|
27.2
|
|
Goodwill writedown
|
|
2,046,000
|
|
|
16.0
|
|
|
—
|
|
|
—
|
|
Foreign tax rate differences
|
|
—
|
|
|
—
|
|
|
281,000
|
|
|
5.4
|
|
Permanent differences
|
|
45,000
|
|
|
0.4
|
|
|
53,000
|
|
|
1.0
|
|
State tax, net of federal benefit
|
|
(119,000
|
)
|
|
(0.9
|
)
|
|
(105,000
|
)
|
|
(2.0
|
)
|
Other, net
|
|
53,000
|
|
|
0.4
|
|
|
125,000
|
|
|
2.4
|
|
Effective tax rate
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at
September 30, 2016 and 2015
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Inventories
|
|
$
|
1,558,000
|
|
|
$
|
1,627,000
|
|
Accrued compensation
|
|
528,000
|
|
|
753,000
|
|
Warranty accrual
|
|
244,000
|
|
|
244,000
|
|
Depreciation
|
|
98,000
|
|
|
115,000
|
|
Allowance for doubtful accounts receivable
|
|
337,000
|
|
|
342,000
|
|
Unearned revenue
|
|
205,000
|
|
|
346,000
|
|
U.S. net operating loss carryforwards
|
|
7,223,000
|
|
|
5,383,000
|
|
Foreign net operating loss carryforwards
|
|
1,575,000
|
|
|
1,575,000
|
|
Tax credits
|
|
989,000
|
|
|
989,000
|
|
Other
|
|
724,000
|
|
|
590,000
|
|
Gross deferred tax assets
|
|
13,481,000
|
|
|
11,964,000
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangibles
|
|
—
|
|
|
798,000
|
|
Other
|
|
56,000
|
|
|
59,000
|
|
Gross deferred tax liabilities
|
|
56,000
|
|
|
857,000
|
|
Total deferred tax assets and liabilities
|
|
13,425,000
|
|
|
11,107,000
|
|
Less valuation allowance
|
|
(13,425,000
|
)
|
|
(11,107,000
|
)
|
Net deferred tax assets and liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. As of September 30, 2016, there were no undistributed earnings of foreign subsidiaries.
The Company provides for 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.
Pretax domestic loss amounted to approximately
$(12,441,000)
and
($3,947,000)
in fiscal years 2016 and 2015, respectively. Pretax foreign loss amounted to approximately
($333,000)
and
($1,271,000)
in fiscal years 2016 and 2015, respectively. The Company has U.S. and foreign net operating loss carryforwards (NOLs) of approximately
$19.5 million
and
$6.9 million
, respectively, available to offset future taxable income. Such NOLs can be carried forward over periods through September 30, 2036 in the U.S. and indefinitely in foreign jurisdictions. On August 29, 2014, the Company merged with IQinVision, Inc. In connection with this merger, the Company's ability to utilize pre-merger net operating losses and tax credit carryforwards in the future is subject to certain limitations pursuant to Section 382 of the Internal Revenue Code. The annual limitation on utilization of the Company's U.S. net operating loss carryforwards is presently estimated at $500,000.
The Company follows the provisions of ASC 740 as it relates to uncertain tax positions. Unrecognized tax benefits activity for the years ended
September 30, 2016 and 2015
is summarized below:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
45,000
|
|
|
$
|
45,000
|
|
Additions (reductions) based on tax
positions related to prior years
|
|
|
|
—
|
|
|
—
|
|
Additions (reductions) based on tax
positions related to the current year
|
|
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
45,000
|
|
|
$
|
45,000
|
|
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At
September 30, 2016 and 2015
, there was no accrued net interest and penalties related to tax positions taken or to be taken on the Company’s tax returns and recorded as part of the reserves for uncertain tax positions. The Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax examinations for fiscal years prior to 2013 in the U.S. and 2010 in the U.K., Germany and Israel.
NOTE 4. Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss balances at
September 30, 2016 and 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Foreign currency translation adjustment
|
|
$
|
(528,716
|
)
|
|
$
|
(276,998
|
)
|
Unrealized loss on marketable securities
|
|
(135
|
)
|
|
(308
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(528,851
|
)
|
|
$
|
(277,306
|
)
|
NOTE 5. Segment and Geographic Information
The Company operates in one business segment which encompasses the design, assembly and marketing of video management systems and system components for the electronic protection segment of the security industry. Its U.S. based operations consist of Vicon Industries, Inc., the Company’s corporate headquarters and principal operating entity and its IQinVision, Inc. subsidiary. Its Europe-based operation consists of Vicon Industries Limited, which markets and distributes the Company’s products principally within Europe and the Middle East.
Net sales and long-lived assets related to operations in the United States and other foreign countries
for the fiscal years ended September 30, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
U.S.
|
|
$
|
27,534,522
|
|
|
$
|
35,696,491
|
|
Foreign
|
|
8,225,129
|
|
|
9,187,524
|
|
Total
|
|
$
|
35,759,651
|
|
|
$
|
44,884,015
|
|
Long-lived assets
|
|
|
|
|
U.S.
|
|
$
|
1,466,822
|
|
|
$
|
10,201,358
|
|
Foreign
|
|
159,861
|
|
|
112,725
|
|
Total
|
|
$
|
1,626,683
|
|
|
$
|
10,314,083
|
|
U.S. sales include
$4,062,421
and
$3,426,346
for export in
fiscal years 2016 and 2015
, respectively. Foreign sales principally represent sales from the Company’s Europe based subsidiaries.
NOTE 6. Long-Term Equity Incentive Plans
The Company maintains stock incentive plans that provide for the grant of incentive and non-qualified options, stock appreciation rights ("SARs") and common stock awards covering a total of
859,741
shares of common stock reserved for issuance to key employees, including officers and directors, as of
September 30, 2016
. All options and SARs are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. SARs provide the holder the right to receive, upon exercise, the excess of the exercise date fair market value over the grant date fair market value of a share of the Company's common stock in the form of equivalent shares of common stock at market value, cash or a combination of both. The plans allow for the payment of option exercises through the surrender of previously owned mature shares based on the fair market value of such shares at the date of surrender. Such surrendering of mature shares by holders results in an increase to treasury stock based on the stock price on date of surrender. There were
166,579
options and SARs available for grant under these plans at
September 30, 2016
.
Changes in outstanding stock options for the two years ended
September 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Options
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at September 30, 2014
|
|
763,834
|
|
|
|
$4.31
|
|
|
|
|
|
Options granted
|
|
123,000
|
|
|
|
$1.49
|
|
|
|
|
|
Options exercised
|
|
(110,127
|
)
|
|
|
$0.44
|
|
|
|
|
|
Options forfeited
|
|
(236,939
|
)
|
|
|
$3.56
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
539,768
|
|
|
|
$3.36
|
|
|
|
|
|
Options granted
|
|
40,000
|
|
|
|
$1.33
|
|
|
|
|
|
Options exercised
|
|
(11,782
|
)
|
|
|
$0.44
|
|
|
|
|
|
Options forfeited
|
|
(31,756
|
)
|
|
|
$2.83
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
536,230
|
|
|
|
$3.31
|
|
|
4.3
|
|
$—
|
Exercisable at September 30, 2016
|
|
393,704
|
|
|
|
$3.92
|
|
|
3.2
|
|
$—
|
The weighted-average grant date fair value of options granted during the years ended
September 30, 2016 and 2015
was
$0.88
and
$0.94
, respectively. As of
September 30, 2016
, there was
$93,174
of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a weighted-average period of
1.3 years
.
Changes in outstanding SARs for the two years ended
September 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of SARs
|
|
Weighted
Average
Base
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at September 30, 2014
|
|
262,586
|
|
|
3.11
|
|
|
|
|
|
SARs granted
|
|
—
|
|
|
—
|
|
|
|
|
|
SARs exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
SARs forfeited
|
|
(161,592
|
)
|
|
3.15
|
|
|
|
|
|
Outstanding at September 30, 2015
|
|
100,994
|
|
|
|
$3.05
|
|
|
|
|
|
SARs granted
|
|
—
|
|
|
—
|
|
|
|
|
|
SARs exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
SARs forfeited
|
|
(20,198
|
)
|
|
|
$2.93
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
80,796
|
|
|
|
$3.08
|
|
|
1.3
|
|
—
|
Exercisable at September 30, 2016
|
|
80,796
|
|
|
|
$3.08
|
|
|
1.3
|
|
—
|
As of
September 30, 2016
, there was no unrecognized compensation cost related to nonvested SARs.
NOTE 7. Loss Per Share
The following table provides the components of the basic and diluted loss per share (EPS) computations:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Basic EPS Computation
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,773,984
|
)
|
|
$
|
(5,218,302
|
)
|
Weighted average shares outstanding
|
|
9,341,030
|
|
|
9,152,509
|
|
Basic loss per share
|
|
$
|
(1.37
|
)
|
|
$
|
(.57
|
)
|
|
|
|
|
|
Diluted EPS Computation
|
|
|
|
|
Net loss
|
|
$
|
(12,773,984
|
)
|
|
$
|
(5,218,302
|
)
|
Weighted average shares outstanding
|
|
9,341,030
|
|
|
9,152,509
|
|
Stock options
|
|
—
|
|
|
—
|
|
Stock compensation arrangements
|
|
—
|
|
|
—
|
|
Diluted shares outstanding
|
|
9,341,030
|
|
|
9,152,509
|
|
Diluted loss per share
|
|
$
|
(1.37
|
)
|
|
$
|
(.57
|
)
|
For fiscal years 2016 and 2015, all outstanding stock options and shares issuable under stock compensation arrangements totaling
623,587
and
657,082
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 8. Commitments and Contingencies
The Company leases vehicles and occupies certain facilities under operating leases that expire at various dates through 2020. The leases, which cover periods from three to eight years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at September 30, 2016 was
$2,049,000
with minimum rentals for the fiscal years shown as follows: 2017 -
$843,000
; 2018 -
$620,000
; 2019 -
$428,000
; and 2020 -
$158,000
. Rent expense for fiscal 2016 and 2015 was approximately
$690,020
and
$585,776
, respectively.
The Company is a party to employment agreements with certain of its officers that provide for, among other things, the payment of compensation if there is a change in control without Board of Director approval (as defined in the agreements). The contingent
liability under such change in control provisions at September 30, 2016 would have been approximately
$1.6 million
. Certain of the Company’s employment agreements with its officers provide for a severance/retirement benefit upon certain occurrences or at a specified date of retirement, absent a change in control, aggregating
$1.0 million
at September 30, 2016. The Company is amortizing such obligation to expense on the straight-line method through the specified dates of retirement. Such expense amounted to approximately
$38,000
and
$50,000
in fiscal 2016 and 2015, respectively. In addition, at September 30, 2016, the Company was obligated to pay
$40,000
of severance liabilities to a former officer pursuant to a separation of services agreement.
The Company has an agreement with an officer to provide a deferred compensation benefit in the form of
6,561
shares of common stock. Such shares vest upon retirement or earlier under certain occurrences including death, involuntary termination or a change in control of the Company. The market value of such shares approximated
$20,000
at the date of grant, which is being amortized on the straight-line method through the specified date of retirement.
NOTE 9. Operating Facilities Sales
In March 2015, the Company closed on the sale of its former headquarters facility in Edgewood (Brentwood), New York, receiving net proceeds of approximately $3.3 million. In January 2016, the Company sold its United Kingdom based operating facility at a gross sales price of $1.5 million. The facility was classified as an asset held for sale in the accompanying consolidated balance sheets as of September 30, 2015. A gain of approximately $785,000 was recognized on the sale in the March 31, 2016 quarter after factoring in selling and transaction costs.
NOTE 10. 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 initial commitment fee of $37,500, which was paid at closing, as well as 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 September 30, 2016, the Company was in compliance with this covenant. As of September 30, 2016, outstanding borrowings under the Amended Agreement were $1,750,000.
NOTE 11. Restructuring Charges
Pursuant to the August 29, 2014 IQinVision merger, the Company initiated certain integration and restructuring activities pursuant to an approved plan (the "Plan"). The Company recognized
$572,913
of severance charges in fiscal 2015 in connection with the Plan pursuant to notification of termination benefits.
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.
Such restructuring amounts were reported in the Company's consolidated statement of operations for fiscal 2015 as follows:
|
|
|
|
|
|
2015
|
Cost of goods sold
|
—
|
|
Operating expense
|
572,913
|
|
Total restructuring charges
|
$
|
572,913
|
|
NOTE 12. Related Party Transactions
Shezhen Infinova Limited (Infinova), a Chinese corporation which owns shares of the Company as of September 30, 2016, began serving as a contract manufacturer to the Company for certain of its products in fiscal 2016. In fiscal 2016, the Company procured approximately $2.0 million of products from Infinova. Sales of Vicon products to Infinova were $496,000 in 2016. At September 30, 2016, the Company owed $427,000 to Infinova and Infinova owed $14,000 to the Company resulting from purchases and sales of products.
The Company has entered into a Credit Agreement with NIL Funding Corporation, which is an affiliate of The InterTech Group. The Chairman of the Company’s Board of Directors, Julian A. Tiedemann, serves as the Executive Vice President and Chief Operating Officer of The InterTech Group (see Note 10. Credit Agreement for further information).
NOTE 13: 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 August 2014, the FASB issued guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and related footnote disclosures. Management will be required to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. This guidance is effective prospectively for annual and interim reporting period beginning in 2017.
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 has not yet evaluated the impact of this guidance on the Company's financial condition, results of operations and related disclosures.
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.
NOTE 14. 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 six months. Although these issues have been substantially resolved, their market impact may linger 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 during the upcoming year. However, the Company intends to continue funding the development of its new VMS platform and rebuild its market channels.
At September 30, 2016, the Company had $2.0 million of cash reserves and $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 10 - Credit Agreement). The Company presently 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.