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 June 30, 2014

[   ] 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 [X]      No [   ]

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 [X]      No [   ]

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 June 30, 2014 the registrant’s outstanding common stock consisted of 126,009,581 shares.

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 and MESH product lines, general revenues, income, the number of new construction projects or building upgrades that may generate sales of our product, and in general the market for our products. Any projections herein are based solely on 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 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.

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 June 30, 2014, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.0670 for USD$1.0000 or CAD$1.0000 for USD$0.9372.

Item 1.     Financial Statements

VISCOUNT SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)

JUNE 30, 2014

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

Commitments (note 10)
See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Expressed in Canadian dollars)
For the six months ended June 30, 2014

See accompanying notes to interim condensed consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Consolidated Statement of Stockholders' Deficit
(Expressed in Canadian dollars)
(Unaudited)

See accompanying notes to consolidated financial statements.

VISCOUNT SYSTEMS, INC.
Interim Condensed Statements of Cash Flows
(Unaudited)
(Expressed in Canadian dollars)

See accompanying notes to interim condensed consolidated financial statements.

In connection with the Series A share issuance, the Company also issued to the investors 12,285,012 shares purchase warrants, each exercisable into one common shares at US$0.08 per share for a period of 5 years. The Company paid a cash comission of US$100,000 and issued 2,457,002 Agents warrants. Each Agent warrant exercisable into one common share of the Company at US$0.05 per share for a period of 5 years. The warrants may be exercised on a cashless basis.

On October 19, 2012, the Company completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share and stated value of $1,000 per share for gross proceeds of $100,000. The Series A shares contain certain rights and preferences as follows:

The derivative liability consists of the fair value of 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. The derivative liability is a non-cash liability and the Company is not required to expend any cash to settle this liability.

The fair value of the warrants and dividends were determined using the Black-Scholes option pricing model and the conversion options were valued using the Binomial Lattice model using the following current market assumptions:

In connection with the offering, the Company paid to a registered broker-dealer a commission of US$71,000 in cash and share purchase warrants to acquire 788,888 shares of common stock of the Company at a price of US$0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.

On March 27, 2014, the Company completed a private placement of 16,502,220 shares of common stock at a price of US$0.09 per share for total proceeds of US$1,485,200. The Company also issued a total of 8,251,107 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.20 per share for a period of five years from the closing date.

On March 31, 2014, the Company issued an additional 277,778 shares of common stock at a price of US$0.09 per share for total proceeds of US$25,000. The Company also issued 138,888 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.20 per share for a period of five years from the closing date.

In connection with the offerings, the Company paid to a registered broker-dealer a commission of US$35,604 in cash and share purchase warrants to acquire 395,599 shares of common stock of the Company at a price of US$0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.

Stock Options:

All stock options granted are exercisable in US$. A summary of the stock option activity is as follows:

A summary of the stock options outstanding and exercisable at December 31, 2013 and June 30, 2014 is as follows:

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of US$0.11 per share as of June 30, 2014, which would have been received from the option holders had all option holders exercised their options as of that date. The total number of in-the-money options vested and exercisable as of June 30, 2014 was 256,610 (December 31, 2013 – 1,599,375).

Warrants:

On May 30, 2013, the Company issued 230,000 warrants to a consultant in connection with a advisory services agreement. These warrants have an exercise price of US$0.20 and expire on May 30, 2016. The Company estimated the fair value of these warrants at grant to be $20,087 using the Black-Scholes option pricing model with the following assumptions: expected life of 3 years; volatility of 157%; risk-free interest rate of 0.49%; and a dividend rate of 0%.

On April 4, 2014, the Company issued a board member 250,000 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.09 per share for a period of three years expiring April 4, 2017.

On April 14, 2014, the Company issued board members 2,690,000 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.10 per share for a period of five years expiring April 14, 2019. The Company also issued to a board member 250,000 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.09 per share for a period of five years expiring April 14, 2019.

On April 16, 2014, the Company extended the term of 4,162,650 warrants issued as part of a private placement that closed on April 16, 2007 and expired on April 16, 2012, for a period of three years expiring April 16, 2017. Each warrant is exercisable to acquire an additional share of the Company at an exercise price of US$0.25 per share.

The Company issued common shares at a price of US$0.10 per share and share purchase warrants of the Company exercisable at an exercise price of US$0.20 per share pursuant to securities purchase agreements entered into between the Company and certain investors in May 2013. These May 2013 shares and and May 2013 warrants are subject to adjustment due to the issuance of common shares at a price of US$0.09 per share in the Company’s private placement that closed on March 11, 2014. On May 20, 2014, pursuant to the adjustment, the Company issued to investors of the 2013 Offering a total of 749,998 shares of common stock at a price of US$0.09 per share as fully paid and non-assessable and 374,996 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of US$0.18 per share for a term of two years expiring May 17, 2016.

A summary of warrant activity during the six months ended June 30, 2014 is as follows:

A summary of the warrants outstanding and exercisable at June 30, 2014 is as follows:

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

Results of Operations

Sales for the three months ended June 30, 2014 and 2013 were $1,356,163 and $1,041,088, respectively, an increase of $315,075 or 30.3%. Sales for the quarter ended March 31, 2014 were $936,873. This quarter ended June 30, 2014 has increased to $1,356,163, an increase of $419,290, or 44.8%, as compared to the first quarter ended March 31, 2014. Sales for the six months ended June 30, 2014 and 2013 were $2,293,036 and $1,869,408, respectively, an increase of $423,628 or 22.7%. Freedom sales for the three months ended June 30, 2014 and 2013 were $547,654 and $203,882, respectively, an increase of $343,772 or 268.6 %. Freedom sales for the six months ended June 30, 2014 and 2013 were $765,077 and $345,128, respectively, an increase of $419,949 or 221.7% . The bulk of this increase was the rapid growth of Freedom and Liberty sales which were just starting in 2013. MESH sales for the three months ended June 30, 2014 and 2013 were $480,313 and $483,878, respectively, a slight decrease of $3,565 or 0.7%. MESH sales for the six months ended June 30, 2014 and 2013 were $883,653 and $911,145, respectively, a decrease of $27,492 or 3.0%. For the six months ended June 30, 2014 and 2013, Freedom sales were 33.4% and 18.5%, respectively, of total sales. For the six months ended June 30, 2014 and 2013, MESH sales were 38.5% and 48.7%, respectively, of total sales.

On the legacy business side, MESH sales have continued their slow decline due to the age of our low end product, and a lack of a mid-range product for the marketplace. Only our high-end MESH touch screen product is continuing to grow. MESH is a convergent technology developed by Viscount that increases security at a reduced cost of hardware, cabling and installation, and with simplified database management.

On the new product lines, our Freedom IT platform can turn any card reader into an IP device by connecting the Freedom IP device with built-in I/O to a POE switch and then every card usage is processed on a redundant Freedom server either in the building or anywhere in the world. The software component of Freedom is a web browser security operating platform. Unlike 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.

The Company also provides legacy Enterphone support and maintenance services pursuant to service contracts that were assigned to us from Telus Corporation in 2003. Sales from the 1,219 existing service contracts continue to be steady. On average, each service contract represents ongoing revenues of approximately $38 per month, inclusive of parts and labor. Typical customers include strata property management and building owners as well as various residential, business and industrial users of Enterphone access control and security systems. During the six months ended June 30, 2014 and 2013, customer service contracts and new equipment sales generated aggregate sales revenues of $495,040 and $627,573, respectively, a decrease of $132,533 or 21.1% . This decrease was due to a $30,000 decrease in service contract expirations and the balance was due to decreased installation projects.

The intangible assets held by the Company are comprised primarily of service contracts for our Enterphone 2000 product line. The number of service agreements held by the Company was 1,219 at June 30, 2014, as compared to 1,286 at June 30, 2013. Service contracts continue to decrease at approximately 1% per quarter due to contract expirations, as customers switch from the older Enterphone units, under contract, to new products under warranty. The Company continues to amortize the cost of the service agreements on a straight-line basis over an estimated useful life of 10 years, which became effective as of April 1, 2005. At June 30, 2014, the cost of the service agreements, net of accumulated amortization, was $15,670.

Cost of sales and services as a percentage of sales was 50.0% and 40.2% for the three months ended June 30, 2014 and 2013, respectively. Cost of sales and services as a percentage of sales was 52.6% and 40.5% for the six months ended June 30, 2014 and 2013, respectively. Cost of sales increased due the inclusion of our Service Division cost, which was previously included in selling, general and administration expenses in quarter ended March 31, 2014. Management has 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.

Gross profit for the three months ended June 30, 2014 and 2013 was $677,816 and $622,903, respectively, an increase of $54,913 or 8.8%. Gross profit for the six months ended June 30, 2014 and 2013 was $1,086,394 and $1,112,332, respectively, a decrease of $25,938 or 2.3%. This corresponds with increased sales and a reclassification of cost of sales for the three and six months ended June 30, 2014, as compared to three and six months ended June 30, 2013.

Selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 were $2,729,210 and $869,354, respectively, an increase of $1,859,856 or 313.9%. Selling, general and administrative expenses for the six months ended June 30, 2014 and 2013 were $3,539,356 and $1,576,169, respectively, an increase of $1,963,187 or 224.6%. Included in the selling, general and administrative expenses for the three and six months ended June 30, 2014 is $1,730,770 of non-cash stock compensation expense for the issuance of warrants and stock options to, management, and staff. Excluding this compensation expense from selling, general and administrative expenses the three and six months periods ending June 30, 2014 would result in totals of $998,440 and $1,808,586, respectively, a significant reduction in true SG&A expenses, excluding the non-cash charges. This non-cash compensation expense inclusion skews the percentages for the six months ended June 30, 2014 selling, general and administrative expenses, as a percentage of sales, to be 154.4%, as compared to the six months ended June 30, 2013 being 84.3%. Excluding the compensation expense from the selling, general and administrative expenses for the six months ended June 30, 2014 would result in selling, general and administrative expense as a percentage of total sales to be 78.9%. Consulting fees for the six months ended June 30, 2014 and 2013 were $325,724 and $468,250, respectively, a decrease of $142,526 or 30.4%. This decrease was due to some consultants becoming employees of the Company.

Research and development costs for the three and six months ended June 30, 2014 were gross $170,780 and $292,023, respectively. Research and development costs for the three months ended June 30, 2013 were gross $113,690. The quarter ended June 30, 2014 increased $57,090 over the quarter of June 30, 2013 due to the hiring of three newly created technical support positions. Government grants for the three months ended June 30, 2013 totaled $72,925, resulting in net research and development costs of $40,765. Research and development costs for the six months ended June 30, 2013 were gross $218,356. Government grants for the six months ended June 30, 2013 totaled $144,426, resulting in net research and development costs of $73,929.

Loss before other items for the three month period ended June 30, 2014 was $2,231,523, as compared to a loss before other items of $293,196 for the three month period ended June 30, 2013, an increased loss of $1,938,327. Included in the net loss for the three month period ended June 30, 2014 was a non-cash compensation expense of $1,730,770 for the issuance of warrants and stock options to management and staff. Otherwise, excluding this compensation expense would result in a loss before other items for the three months ended June 30, 2014 of $500,753. This adjusted loss before other items of $500,753 is an increased loss of $207,557, as compared to the loss before other items of $293,196 for the three months ended June 30, 2013. Loss before other items for the six month period ended June 30, 2014 was $2,760,185, as compared to a loss before other items of $549,767 for the six month period ended June 30, 2013, an increased loss of $2,210,418. Included in the loss for the six months ended June 30, 2014 was a non-cash compensation expense of $1,730,770 for the issuance of warrants and stock options to management and staff. Otherwise, excluding this compensation expense would result in a loss before other items $1,029,415 for the six months ended June 30, 2014. This adjusted loss before other items of $1,029,415 shows an increased loss of $479,648 for the six months ended June 30, 2014, as compared to the loss before other items of $549,767 for the six months ended June 30, 2013.

Liquidity and Capital Resources

Cash as of June 30, 2014, as compared to December 31, 2013 was $1,324,116 and $172,684, respectively, an increase of $1,151,432. The Increase was mainly due to completing three private placements in March 2014, raising a gross aggregate of US$2,260,200. Net proceeds after placement fees, legal costs, and operational costs resulted in a net cash raise of approximately $1,986,952.

On June 7, 2012, Viscount Systems, Inc. completed a sale of 1,000 shares of Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share, at a purchase price of US$1,000 and a stated value of US$1,000 per A Share, and for no additional consideration, an issuance of 12,285,012 share purchase warrants of the Company for gross proceeds of US$1,000,000. Each Warrant is exercisable to acquire a common share of the Company at a price of US$0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 24,570,024 shares of common stock of the Company at a conversion price of US$0.0407 per share, subject to adjustment provisions.

In connection with the offering, the Company paid to a registered broker-dealer a cash commission of US$100,000 and issued share purchase warrants to acquire 2,457,002 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of US$0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.

On October 19, 2012, Viscount Systems, Inc. completed a sale of 100 shares of Series A Convertible Redeemable Preferred Stock, par value $0.001 per share, at a purchase price of $1,000 and a stated value of $1,000 per A Share, and for no additional consideration, an issuance of 1,000,000 share purchase warrants of the Company for gross proceeds of $100,000. Each Warrant is exercisable to acquire a common share of the Company at a price of $0.08 per share for a period of 5 years from the closing date. The Warrants may be exercised on a cashless basis. The A Shares are convertible, at the option of the holders, into 2,000,000 shares of common stock of the Company at a conversion price of $0.05 per share, subject to adjustment provisions.

In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $10,000 and issued share purchase warrants to acquire 200,000 shares of common stock of the Company. Each Agent Warrant is exercisable to acquire one common share of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.

On November 26, 2012, Viscount Systems, Inc. completed a private placement of 10,000,000 units at a price of $0.05 per unit for total proceeds of $500,000. Each unit consists of one common share and one-half of one share purchase warrant of Viscount, with each whole warrant exercisable to acquire an additional share of Viscount at a price of $0.10 for a period of 5 years from the closing date.

In connection with the offering, the Company paid to a registered broker-dealer a cash commission of $50,000 and issued share purchase warrants to acquire 1,000,000 shares of common stock of the Company at a price of $0.05 per share for a period of 5 years from the closing date. The warrants may be exercised on a cashless basis.

On May 17, 2013, Viscount Systems, Inc. completed a private placement of 4,750,000 units at a price of $0.10 per unit for total proceeds of $475,000. On May 21, 2013, the Company completed an additional private placement of 2,000,000 units at a price of $0.10 per unit for total proceeds of $200,000. Each unit consists of one common share and one-half of one share purchase warrant of the Company, with each whole warrant exercisable to acquire an additional share of the Company at a price of $0.20 for a period of three years from the closing date.

In connection with the offerings, the Company paid to a registered broker-dealer a cash commission of $7,500 and issued share purchase warrants to acquire 675,000 shares of common stock of the Company at a price of $0.20 per share for a period of three years from the closing date. The warrants may be exercised on a cashless basis.

On March 11, 2014, Viscount Systems, Inc. completed a private placement of 8,333,329 shares of common stock at a price of $0.09 per share for total proceeds of $750,000. The Company also issued a total of 4,166,659 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.

In connection with the offering, the Company paid to a registered broker-dealer a commission of $71,000 in cash and share purchase warrants to acquire 788,888 shares of common stock of the Company at a price of $0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.

On March 27, 2014, Viscount Systems, Inc. completed a private placement of 16,502,220 shares of common stock at a price of $0.09 per share for total proceeds of $1,485,200. The Company also issued a total of 8,251,107 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.

On March 31, 2014, the Company issued an additional 277,778 shares of common stock at a price of $0.09 per share for total proceeds of $25,000. The Company also issued 138,888 warrants, each warrant exercisable to acquire an additional share of the Company at an exercise price of $0.20 per share for a period of five years from the closing date.

In connection with the offerings, the Company paid to a registered broker-dealer a commission of $35,604 in cash and share purchase warrants to acquire 395,599 shares of common stock of the Company at a price of $0.09 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis.

At June 30, 2014, the Company had a working capital of $1,572,812, as compared to working capital of $248,877 at December 31, 2013. Working capital had increased by $1,323,935. This increase was due to completing three private placements in March 2014, raising a gross aggregate of US$2,260,200. The current ratio at June 30, 2014 was 2.57, as compared with 1.24 at December 31, 2013.

The Company’s financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $14,773,800, reported a loss for the six months ended June 30, 2014 of $3,060,356 and has working capital of $1,578,812 at June 30, 2014. Cash flows used in operating activities for the six months ended June 30, 2014 were $1,149,419. Although management is confident that the company can access sufficient working capital to maintain operations and ultimately generate positive cash flow from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving profits. Management has determined that the Company will not need to raise anymore capital to continue normal operations for the next twelve months. If working capital becomes insufficient, the Company will have to reduce spending in several key areas including research and development and marketing. This would have a negative impact on the growth prospects of the Company. In the event the Company hits its sales targets, the Company will have sufficient working capital for 2014. Management continues actively seeking new investors and developing customer relationships. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.

The accounts receivable turnover ratio was 44 days at June 30, 2014, 61 days at December 31, 2013 and 62 days at June 30, 2013. The outstanding term for our receivables has been decreasing due to more aggressive collection efforts from a few slower paying customers. The accounts receivable reserve was $234,637 at June 30, 2014, as compared to $250,458 at December 31, 2013. The accounts receivable reserve has decreased by $15,821 or 6.3% since the year ended December 31, 2013. Management continues to follow-up on customer accounts to improve cash flow and to minimize bad debts. There had been no significant or material business conditions that would warrant further increases to the reserve at this time.

The Company is subject to significant liquidity risk. At June 30, 2014, the Company’s current assets consist principally of cash, trade accounts receivables, and inventory.

As the Company’s liquidity increases, we will be purchasing more inventory and hiring more sales and technical staff to accommodate the expected increased future sales.

There are no material unused sources of liquid assets.

For the three months ended June 30, 2014, capital expenditures included the acquisition of $19,052 of new furniture & fixtures, $35,249 for leasehold improvements and $20,582 for a new office telephone system.

To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. The Company expects that in the future, any excess cash will continue to be invested in high credit quality, interest-bearing securities.

The Company will likely require additional funds to support the development and marketing of its new Freedom product. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be unable to develop or enhance its products, take advantage of future opportunities, respond to competitive pressures, and may have to curtail operations.

There are no legal or practical restrictions on the ability to transfer funds between parent and subsidiary companies.

The Company does not have any material commitments for capital expenditures as of June 30, 2014.

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.

Related Party Transactions

During the period ended June 30, 2014 a total of CDN $26,087 was paid to related parties for director fees. An additional CDN $58,134 was paid to related parties as consulting fees during the period.

Critical Accounting estimates and judgments:

The Company’s discussion and analysis of its financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the allowance for doubtful accounts, inventory obsolescence, the provision for future warranty costs, the estimated useful lives of equipment and intangible assets, the deferred tax valuation allowance, and assumptions used to determine the fair value of stock-based compensation. Details are provided for critical estimates are as follows:

The Company follows the cost reduction method of accounting for investment tax credits and recognizes the estimated net recoverable amount when reasonable assurance exists as to their collectability. Investment tax credits claimed are ultimately subject to finalization of a review by Canada Customs and Revenue Agency. No assurances can be provided that the Company’s investment tax credit claims will be accepted as filed.

The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectability of the Company’s trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made.

The Company reviews its intangible assets on an annual basis for impairment. The intangible assets are comprised of Enterphone service contracts. Management specifically reviews the number of contracts on hand and if there will be significant future cash flows to be generated from these contracts. If the Company determines that there is impairment, then a write-down will be made.

The Company maintains an allowance for inventory obsolescence. Management reviews the inventory on a quarterly basis by directly testing for obsolete inventory. The Company increased its provision for obsolete inventory by approximately $100,000 during the first quarter of 2014, as a result of a revised estimate by management. There was no adjustment to the provision for obsolete inventory during the second quarter of 2014.

Income taxes are accounted for under the asset and liability method. Under this method, to the extent that it is not more likely than not that a deferred tax asset will be recovered, a valuation allowance is provided. In making this determination, the Company considers estimated future taxable income and taxable timing differences expected to reverse in the future. Actual results may differ from those estimates.

Derivative financial instruments that are not classified as equity and are not used in hedging relationships are measured at fair value. These include derivative warrant liabilities and derivative conversion option liabilities. Susequent changes to the estimated fair value are recorded in the statement of operations.

Recent accounting pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Item 4.    Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2014. Based on that evaluation, our principal executive officer and principal financial officer have concluded that as of June 30, 2014, we have maintained effective disclosure controls and procedures in all material respects, including those necessary to ensure that information required to be disclosed in reports filed or submitted with the SEC (i) is recorded, processed, and reported within the time periods specified by the SEC, and (ii) is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decision regarding required disclosure.

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.

PART II – OTHER INFORMATION

Item 6.      Exhibits

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.