UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended September 30, 2015

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

For the transition period from _______________ to _______________

Commission File Number: 000-49746

VISCOUNT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

4585 Tillicum Street, Burnaby, British Columbia, Canada V5J 5K9
(Address of principal executive offices)

(604) 327-9446
Registrant’s telephone number

N/A
Former name, former address, and former fiscal year, if changed since last report

Check whether the registrant (1) filed all reports required to be filed by sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [   ]        No [X]

Check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [   ]        No [X]

Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer [   ]        Accelerated filer [   ]        Non-accelerated filed [   ]        Smaller reporting company [X]

Check whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes [   ]        No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of November 19, 2015 the registrant’s outstanding common stock consisted of 130,547,236 shares.

EXPLANATORY NOTE

            This quarterly report contains the revised condensed consolidated statement of operations for the three months ended September 30, 2014. Refer to Note 9 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further detail.

            During the preparation of the Form 10-Q for the three and nine months ended September 30, 2015, the Company identified an issue with the condensed consolidated statement of operations for the three months ended September 30, 2014, because the amounts included in those results didn’t represent the difference between the results for the nine months ended September 30, 2014 and the six months ended June 30, 2014. There was no error in the accounting for the nine months ended September 30, 2014.

VISCOUNT SYSTEMS, INC
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Safe Harbor Statement

Certain statements in this filing that relate to financial results, projections, future plans, events, or performance are forward-looking statements and involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Terms such as “we believe”, “we expect” or “we project”, and similar terms, are examples of forward looking statements that we may use in this report. Such statements also relate to the sales trends of our Enterphone 2000, EPX (previously named Enterphone 3000), Freedom, Liberty, and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our products, and in general the market for our products. Any projections herein are based solely on our management’s views, and were not prepared in accordance with any accounting guidelines applicable to projections. Accordingly, these forward looking statements are intended to provide the reader with insight into our management’s proposals, expectations, strategies and general outlook for our business and products, but because of the risks associated with those statements, including those described herein and in our annual report, readers should not rely upon those statements in making an investment decision. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward- looking statements. As used herein, the “Company”, “Viscount”, “we”, “us”, “our” and words of similar meaning refer to Viscount Systems, Inc.

The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein. Unless otherwise noted as USD or U.S. dollars, all dollar references herein are in Canadian dollars. As at September 30, 2015, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.339086 for USD$1.0000 or CAD$1.0000 for USD$0.746778.

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Item 1. Financial Statements

VISCOUNT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(Expressed in Canadian dollars)

See Notes to the Condensed Consolidated Financial Statements
2

VISCOUNT SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(Expressed in Canadian dollars)
For the three and nine months ended September 30, 2015 and 2014
(Unaudited)

See Notes to the Condensed Consolidated Financial Statements
3

VISCOUNT SYSTEMS, INC.
Condensed Consolidated Statement of Stockholders' Deficit
(Expressed in Canadian dollars)
For the Nine Months Ended September 30, 2015
(Unaudited)

See Notes to the Condensed Consolidated Financial Statements
4

VISCOUNT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
For the Nine Months Ended September 30, 2015 and 2014
(Unaudited)

See Notes to the Condensed Consolidated Financial Statements
5

VISCOUNT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows, continued
(Expressed in Canadian dollars)
For the Nine Months Ended September 30, 2015 and 2014
(Unaudited)

See Notes to the Condensed Consolidated Financial Statements
6

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

7

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

8

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

9

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

10

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

11

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

12

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

Since the Series A Shares are redeemable in certain circumstances which are considered to be outside the control of the Company, such shares have been classified as temporary equity. The Series A Shares were assessed under ASC 480 and the Company determined that the contingent redemption provisions associated with the financial instruments made them more akin to debt than equity. The Series A Shares are deemed to be a debt host contract because the embedded conversion option is not clearly and closely related to the host contract and, accordingly, the embedded conversion option is subject to bifurcation and separate evaluation. The conversion option has been bifurcated and the Company recorded their issuance date fair value of $184,835 (valued using the Binomial Lattice model) with the change in fair value recorded in the condensed consolidated statement of operations at each reporting period.

In conjunction with this issuance of Series A Shares, the Company also issued 1,462,500 warrants, each exercisable into one share of common stock at CAD$0.16 per share for a period of five years, which are exercisable on a cashless basis. The Company determined that these warrants should be classified as equity and, accordingly, they were valued using the Black-Scholes model and the relative fair value of such warrants of $32,472 was allocated to additional paid-in capital and the residual proceeds associated with the Series A Shares were allocated to temporary equity because the preferred stock is contingently redeemable.

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The assessed level that a financial asset or liability will carry is determined by the Company’s Chief Executive Officer.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the assignment of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

The derivative liabilities consist of the fair value of certain share purchase warrants that were issued in unit private placements that have an exercise price in a currency other than the functional currency of the Company, as well as embedded conversion options in Series A Shares. As of September 30, 2015, the Company’s derivative liabilities consisted of conversion options of $273,299 and warrant liabilities of $154,700, respectively.

The fair value of the warrants and embedded conversion options were determined using the Black-Scholes option pricing model and the Binomial Lattice model depending on their characteristics, using the following current market assumptions for the nine months ended:

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

On May 19, 2015, the Company granted ten-year options to two employees, one to purchase an aggregate of 150,000 shares of common stock at an exercise price of US$0.02 vested upon grant date and the other to purchase an aggregate of 250,000 shares of common stock at an exercise price of US$0.04, vesting six months from the grant date. The options had an aggregate grant date fair value of $8,000 which will be recognized proportionate to the vesting period.

The Company computed the fair value of options granted using the Black Scholes option pricing model, with the following assumptions:

The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2015 was $0.00 and $0.02 per share, respectively. The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2014 was $0.07 and $0.09 per share, respectively.

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

During the three and nine months ended September 30, 2015, the Company recorded stock based compensation expense of $6,750 and $6,750, respectively, related to the amortization of stock options. During the three and nine months ended September 30, 2014, the Company recorded stock based compensation expense of $11,684 and $919,632, respectively, related to the amortization of stock options. As of September 30, 2015, there was $1,250 of unrecognized stock based compensation expense related to the May 19, 2015 stock option grants which will be amortized over the remaining amortization period of 1.5 months.

Warrants

A summary of warrant activity during the nine months ended September 30, 2015 is as follows:

[1] US$ denominated warrants are reflected in their CAD$ equivalents.

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

The weighted average grant date fair value of warrants granted during the nine months ended September 30, 2015 $0.05 per share. There were no warrants granted during the three months ended September 30, 2015. The weighted average grant date fair value of warrants granted during the three and nine months ended September 30, 2014 was $0.08 and $0.08, respectively.

A summary of the warrants outstanding and exercisable at September 30, 2015 is as follows:

The warrants outstanding have no aggregate intrinsic value as of September 30, 2015.

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VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

20

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

21

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

22

VISCOUNT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Expressed in Canadian dollars)
(unaudited)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We maintain our books of account in Canadian dollars ("CAD") and references to dollar amounts herein are to the lawful currency of Canada unless otherwise indicated.

Overview

We are a manufacturer of access control and telephone entry products, which protect buildings from unauthorized access. The business consists of four divisions.

The newest and fastest growing division, started in 2011, is our Freedom Access Control software solution (“Freedom”). This enterprise-wide access control system controls entry doors throughout a business, hospital, school, or other buildings, and prevents entry by persons unknown or staff attempting to enter at the wrong time or day. Our Freedom IT platform can turn any access control card reader into an IP device by connecting the Freedom IP device with built-in input/output to a POE switch and then every card usage is processed on a redundant Freedom server either in the building or any remote site. The software component of Freedom is a web browser security operating platform. Unlike our competitors, who generally use control panels, the user database and the door control software is processed in IT language located on a server(s), thereby future-proofing systems from the traditional issue of proprietary hardware version obsolescence and improving scalability by eliminating the need for additional costly hardware every time a reader is added to the system. This segment has experienced significant growth since inception and we expect to see continued growth from our Freedom Federal partners relating to increased frequency of orders being released for US Citizenship and Immigration Services (“USCIS”) site projects. Additionally Freedom Commercial is beginning to see a steady ramp up of business activity generated by a strong pipeline and preliminary indications of project awards derived from that pipeline.

On the legacy business side, MESH sales have rebounded from their slow decline due to an increased focus on this legacy business, and the introduction of a mid-range product for the marketplace. MESH is a convergent technology developed by Viscount for the hi-rise marketplace that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management.

We also provide legacy Enterphone support and maintenance services pursuant to long term service contracts. Sales from the 1,151 existing service contracts continue to decline slowly as older equipment is removed from service. On average, each service contract represents ongoing revenues of approximately $43 per month, inclusive of parts and labor. Monthly fees include equipment sales to those contracts as well. Typical customers include strata management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems.

The last division is a service division that covers the Province of British Columbia (the “Service Division”). The primary revenue source for the Service Division is derived from maintenance agreements on Enterphone, EPX and other systems that are billed on a monthly basis, as well as time and material billings and installation projects.

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Condensed Consolidated Results of Operations

Three months ended September 30, 2015 compared to the three months ended September 30, 2014

Overview

We reported a net loss of $387,264 for the three months ended September 30, 2015 as compared to net income of $779,069 for the three months ended September 30, 2014. The decline in net income of $1,166,333 is primarily due to a decrease in other income, net of expense, of $1,471,685, partially offset by an increase in gross profit of $85,962 and a decrease in operating expenses of $219,390.

Revenues

Sales for the three months ended September 30, 2015 and 2014 were $1,177,211 and $1,419,204, respectively, reflecting a decrease of $241,993 or 17%. Freedom sales for the three months ended September 30, 2015 and 2014 were $318,073 and $491,512, respectively, reflecting a decrease of $173,439 or 35%, which was mostly due to lower freedom equipment and software sales during the three months ended September 30, 2015. The decreases in Freedom sales and customer service contracts were partially offset by an increase of $41,348 or 7% in Enterphone (including MESH) sales for the three months ended September 30, 2015 and 2014. Enterphone (including MESH) sales for the three months ended September 30 2015 and 2014 were, $594,062 and $552,714, respectively.

Gross profit

Gross profit for the three months ended September 30, 2015 and 2014 were $700,977 and $615,015, respectively, an increase of $85,962 or 14%. For the three months ended September 30, 2015 and 2014 cost of sales and services were $476,234 and $804,189 or as a percentage of sales was 40% and 57%, respectively. We have continued to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products. The cost of labor and travel incurred to generate our service division sales has also been reduced. We also increased software sales which have zero to minimal cost of sales.

Selling, general and administrative expenses

For the three months ended September 30, 2015 and 2014, selling, general and administrative expenses were $890,521 and $1,153,566, respectively, reflecting a decrease of $263,045 or 23%. For the three months ended September 30, 2015 and 2014, selling, general and administrative expenses as a percentage of sales, were 76% and 81%, respectively. Such decreases in expenses as compared to the third quarter of 2014 are mainly due to lower marketing cost and sales commissions associated to decreased sales revenue.

Research and development

For the three months ended September 30, 2015 and 2014, research and development costs were $233,211 and $189,556, respectively, reflecting an increase of $43,655 or 23%. Research and development costs have increased during 2015 as compared to 2014 due to the hiring of newly created technical support personnel.

Operating loss

Operating loss for the three months ended September 30 2015 was $422,755 as compared to operating loss of $728,107 for the three months ended September 30 2014, reflecting an increase in operating losses of $305,532 or 42%. The increase in operating loss is the result of increases in expenses, partially offset by the increase in gross profit, as described above.

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Other income (expense)

Other income was $35,491 for the three months ended September 30, 2015, compared to $1,507,176 for the nine months ended September 30, 2014, reflecting a decrease of $1,471,685 primarily due to a decrease in the gain realized from the change in the fair value of derivative liabilities.

Dividends

During the three months ended September 30, 2015, we recorded contractual dividends in the amount of $37,765, which represented the value of the embedded conversion options associated with Series A Shares issued as quarterly dividends. During the three months ended September 30, 2015, we recorded a deemed dividend in the amount of $2,010,330 in order to accrete the Series A Shares up to their redemption value.

Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014

Overview

We reported a net income of $2,050,566 for the nine months ended September 30, 2015 as compared to the net loss of $2,281,287 for the nine months ended September 30, 2014. The improvement in net income of $4,331,853 is due to an increase in gross profit of $1,090,237, a decrease in operating expenses by $1,812,660 as well as an increase in other income, net of expenses, of $1,428,956.

Revenues

Sales for the nine months ended September 30, 2015 and 2014 were $4,582,017 and $3,712,240 respectively, reflecting an increase of $869,777 or 23%. Freedom sales increased by $704,097 or 56% from $1,261,915 to $1,966,012 for the nine months ended September 30, 2014 and 2015, respectively, primarily due to a contract with the United States Government. Enterphone (including MESH) sales for the nine months ended September 30, 2015 and 2014 of $1,834,529 and $1,580,307 respectively, reflecting an increase of $254,222 or 16%. Services revenues decreased by $88,542 or 10%, from $870,018 to $781,476 during the nine months ended September 30, 2014 and 2015, respectively.

Gross profit

Gross profit for the nine months ended September 30, 2015 and 2014 were $2,791,646 and $1,701,409, respectively, reflecting an increase of $1,090,237 or 64%. For the nine months ended September 30, 2015 and 2014, the cost of sales and services were $1,790,371 and $2,010,831 or 39% and 54% of sales, respectively. We have continued to focus on controlling the input costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products. The cost of labor and travel incurred to generate our service division sales has also been reduced. Increased software sales with zero to minimal cost of sales also increase our gross margin.

Selling, general and administrative expenses

Selling, general and administrative expenses for the nine months ended September 30, 2015 and 2014 were $2,744,427 and $4,708,123 respectively, reflecting a decrease of $1,963,696 or 42%, primarily due to a decrease in stock based compensation expenses.

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Research and development

Research and development costs for the nine months ended September 30, 2015 and 2014 were $632,614 and $481,578, respectively, reflecting an increase of $151,036 and 31%. Research and development costs have increased during 2015 as compared to 2014 due to the hiring of newly created technical support personnel.

Operating loss

Operating loss for the nine months ended September 30, 2015 was $585,395 as compared to $3,488,292 for the nine months ended September 30, 2014, an improvement of $2,902,897 or 83%, primarily due to the increase in gross profit and decrease in stock-based compensation described above.

Other income (expense)

Other income was $2,635,961 for the nine months ended September 30, 2015, compared to $1,207,005 for the nine months ended September 30, 2014, reflecting an increase of $1,428,956 primarily due to an increase in the gain realized from the change in the fair value of derivative liabilities.

Dividends

During the nine months ended September 30, 2015, we recorded contractual dividends in the amount of $82,414, which represented the value of the embedded conversion options associated with Series A Shares issued as quarterly dividends. During the nine months ended September 30, 2015, we recorded a deemed dividend in the amount of $2,010,330 in order to accrete the Series A Shares up to their redemption value.

The effect of inflation and changing prices has had a negligible effect on revenues and net income (loss) for the preceding three quarters.

Liquidity and Capital Resources

We had cash of $173,713 as of September 30, 2015 and negative working capital of $2,485,826. We had an accumulated deficit of $10,610,970 as of September 30, 2015 and reported an operating loss for the nine months ended September 30, 2015 of $585,395. Cash flows used in operating activities for the nine months ended September 30, 2015 were $166,785. We are subject to significant liquidity risk. These factors raise substantial doubt about our ability to continue operations as a going concern. At September 30, 2015, our current assets consist principally of cash, trade accounts receivables and inventory.

Based on our current financial position, including the potential issuance of a substantial amount of demand notes, we could be required to fund our operations on a month-to-month basis. While we believe that we can access sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to continue operations is dependent upon raising addition capital and/or growing sales and achieving profits. Also, we will likely require additional funds to support the development and marketing of our new Freedom products. While we continue to actively seek new investors and customer relationships, there can be no assurance that we will be successful in obtaining sufficient working capital on terms that are acceptable or that actual results will not materially differ from expectations. If working capital becomes insufficient, we will have to reduce spending in several key areas including research and development and marketing. This would have a negative impact on our growth prospects, would render us unable to take advantage of future opportunities or respond to competitive pressures, and could result in our having to curtail operations. The management team will be working diligently to improve collection of accounts receivable and to reduce costs during the next several months.

Our financial statements have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future and the financial statements do not include any adjustment that might result from the outcome of this uncertainty.

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During the nine months ended September 30, 2015 and 2014, our sources and uses of cash were as follows:

Net Cash Used in Operating Activities

During the nine months ended September 30, 2015 and 2014, we experienced negative cash flows from operating activities in the amounts of $166,785 and $1,707,676, respectively. The net cash used in operating activities for the nine months ended September 30, 2015 was primarily due to net income of $2,050,566 reduced by net non-cash expenses of $2,636,438 plus $419,087 of net cash generated from changes in the levels of operating assets and liabilities, primarily from an increase in the level of accounts payable. The net cash used in operating activities for the nine months ended September 30, 2014, was primarily due to cash used to fund the net loss of $2,281,287 and non- cash income of $1,203,575 (the change in the fair value of derivative liabilities), partially offset by non-cash expenses of $2,166,811, plus $389,625 of net cash used to fund changes in the levels of operating assets and liabilities, primarily from an increase in the level of accounts receivable.

Net Cash Used in Investing Activities

During the nine months ended September 30, 2015 and 2014, $5,480 and $150,091, respectively, of cash was used to purchase property and equipment.

Net Cash Provided by Financing Activities

During the nine months ended September 30, 2015 and 2014, $210,670 and $2,366,570, respectively, of cash was provided by financing activities. The net cash provided by financing activities for the nine months ended September 30, 2015, resulted from $234,000, $197,500 and $3,050 of proceeds from the issuance of preferred stock, convertible notes and common stock and warrants, respectively, partially offset by payment of $7,630 and $5,000 for capital leases and deferred financing costs, respectively. The net cash provided by financing activities for the nine months ended September 30, 2014, resulted from $2,366,570 of proceeds from the issuance of common stock and warrants.

OFF-BALANCE SHEET ARRANGEMENTS

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

CRITICAL ACCOUNTING POLICIES

There are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2015, except as disclosed below. Please refer to that document for disclosures regarding the critical accounting policies related to our business.

Preferred Stock

We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classify our preferred shares in stockholders’ equity. As of September 30, 2015 and December 31, 2014, in accordance with ASC 480-10-S99, since certain of our preferred shares contain redemption rights which are not solely within our control, these issuances of preferred stock have been presented as temporary equity.

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Recent accounting pronouncements

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). Under ASU 2015-11 entities should measure inventory that is not measured using last-in, first-out (LIFO) or the retail inventory method, including inventory that is measured using first-in, first-out (FIFO) or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. We are currently evaluating the impact the adoption of ASU 2015-11 will have on our condensed consolidated financial position, results of operations and cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We have not yet determined the effect of the adoption of this standard and its impact on our condensed consolidated financial position and results of operations.

There are other various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our condensed consolidated financial position, results of operations or cash flows.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act of 1934, as amended (the “Exchange Act”), and is not required to provide the information under this item.

Item 4. Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. These rules refer to the controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. It is management’s responsibility to establish and maintain adequate internal control over financial reporting for the Company.

Our management, including our principal executive, financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2015. Based on that evaluation, our principal executive, financial and accounting officer has concluded that as of September 30, 2015, our disclosure controls and procedures were not effective. The management team has decided to reassess and redesign our internal control system during the next several months.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Under the supervision of our chief executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued in 1992. In 2013, COSO released an updated framework that becomes effective for year-ends beginning on or after December 15, 2014. Management is working to be compliant with the new framework in time for its annual assessment for the year ended December 31, 2015.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2014, management concluded that the Company’s internal control over financial reporting was not effective. The following are deficiencies and weakness that management is aware of:

Notwithstanding the existence of the deficiencies described above, our management has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. Management is addressing the deficiencies as resources permit.

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During the quarter ended September 30, 2015, the Company’s Controller and Principal Accounting Officer, Shavi Morsara resigned. In the interim, we are supplementing our financial reporting staff with experienced consultants, including consultants with SEC, U.S. GAAP and complex transaction expertise. Other than this change, there have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such matters that are deemed material to the condensed consolidated financial statements as of September 30, 2015 and December 31, 2014.

Item 1A. Risk Factors.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and is not required to provide the information under this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On September 30, 2015, the Company issued an aggregate 27.075 of Series A Shares to current holders of Series A Shares, representing quarterly dividends, convertible into 1,920,213 shares of common stock at a conversion rate of US$0.0141 per share, representing an aggregate value of US$27,075.

The issuance of the Series A Shares, as disclosed in this Item 2, were made in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(a)(2) of the Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act, as applicable, as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts related to compensation as provided under Rule 701.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

During the three months ended September 30, 2015, Scott Sieracki, the Company’s Interim Chief Executive Officer, was appointed the Company’s Principal Financial Officer and Principal Accounting Officer.

This quarterly report contains the revised condensed consolidated statement of operations for the three months ended September 30, 2014.  Refer to Note 9 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further detail.

On November 20, 2015, after consultation with the Company’s former independent registered public accounting firm, Dale Matheson Carr-Hilton Labonte LLP, the Board’s Audit Committee determined that the comparative financial statements for the three month period ended September 30, 2014 in the Company’s Form 10-Q for the quarter ended September 30, 2014 cannot be relied upon.  During the preparation of the Form 10-Q for the three and nine months ended September 30, 2015, the Company identified an issue with the condensed consolidated statement of operations for the three months ended September 30, 2014, because the amounts included in those results didn’t represent the difference between the results for the nine months ended September 30, 2014 and the six months ended June 30, 2014. There was no error in the accounting for the nine months ended September 30, 2014.

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Item 6. Exhibits.

* Filed herewith

** Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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