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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number:  000-54635

STEALTH TECHNOLOGIES, INC.

(formerly, Excelsis Investments, Inc.)

(Exact name of registrant as specified in its charter)

NEVADA

(State or other jurisdiction of incorporation or organization)

27-2758155

(I.R.S. Employer Identification No.)

801 West Bay Drive, Suite 470

Largo, Florida 33770

(Address of principal executive offices, including zip code.)

727-330-2731

(Registrant's telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 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 last 90 days.  YES [X]     NO [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS 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 [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark 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:

91,943,278 as of August 18, 2016.

 

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TABLE OF CONTENTS

			Page
	PART I.		3
Item 1.	Consolidated Financial Statements.		3
	Consolidated Financial Statements:
		Consolidated Balance Sheets (unaudited)	F-1
		Consolidated Statements of Operations (unaudited)	F-2
		Consolidated Statements of Cash Flows (unaudited)	F-3
		Consolidated Notes to the Financial Statements (unaudited)	F-4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.		4 – 7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		8
Item 4.	Controls and Procedures.		8
	PART II.		8
Item 1.	Legal Proceedings.		8
Item 1A.	Risk Factors.		8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		8
Item 3.	Defaults Upon Senior Securities.		9
Item 4.	Mine Safety Disclosures.		9
Item 5.	Other Information.		9
Item 6.	Exhibits.		10
Signatures			11
Exhibit Index			12

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

STEALTH TECHNOLOGIES, INC.

(formerly Excelsis Investments, Inc.)

Consolidated Financial Statements

For the periods ended June 30, 2016 and December 31, 2015

Consolidated Financial Statement Index

Consolidated Balance Sheets (unaudited)	F–1
Consolidated Statements of Operations (unaudited)	F–2
Consolidated Statements of Cash Flows (unaudited)	F–3
Notes to the Consolidated Financial Statements (unaudited)	F–4

STEALTH TECHNOLGIES, INC.

(formerly Excelsis Investments, Inc.)

Consolidated Balance Sheets

STEALTH TECHNOLGIES, INC.

(formerly Excelsis Investments, Inc.)

Consolidated Statements of Operations

(unaudited)

STEALTH TECHNOLGIES, INC.

(formerly Excelsis Investments, Inc.)

Consolidated Statements of Cashflows

(unaudited)

Stealth Technologies, Inc. (formerly Excelsis Investments, Inc.) (the "Company") was incorporated in the state of Nevada on May 27, 2010 under the name "Pub Crawl Holdings, Inc". On June 14, 2010, the Company entered into an Assignment Agreement (the "Acquisition") with PB PubCrawl.com LLC ("PubCrawl"), a California limited liability company, whereby the Company acquired a 100% interest in the member shares of PubCrawl in exchange for 500,000 common shares of the Company. The Acquisition was accounted for in accordance with ASC 805-50, Related Issues, as the companies were under common control prior to acquisition. On September 3, 2012, the Company sold their rights to PubCrawl to the former President and Director of the Company.

On November 28, 2012, the Company acquired 100% of the members shares of Stealth Card Inc. (formerly Mobile Dynamic Marketing, Inc.) ("Stealth Card"), a company incorporated in the state of Florida on November 6, 2012, in exchange for the issuance of 1,000,000 common shares.  As part of the acquisition, the Company cancelled 15,000,000 issued and outstanding common shares held by the former President and Director of the Company and the management and directors of Stealth Card acquired 7,500,000 common shares of the Company in a private transaction with the former President and Director of the Company. Effectively, Stealth Card held 73% of the issued and outstanding common shares of the Company and the transaction has been accounted for as a reverse merger, where Stealth Card is deemed to be the acquirer for accounting purposes.

On July 13, 2013, the Company entered into a share exchange agreement with Career Start, Inc. ("Career"), a private corporation formed under the state of Florida on February 4, 2013.  Under the terms of the agreement, the Company acquired the net assets of Career in exchange for 4,714,286 common shares of the Company. The acquisition was between two related parties and has been accounted on a cost basis. On October 24, 2013, the Company effected a corporation name change to Excelsis Investments Inc.

On March 11, 2014, the Company announces its name change from Pub Crawl Holdings to Excelsis Investments, Inc.

On September 1, 2014, the Company entered into a purchase agreement with a non-related party to purchase intangible assets by issuing 30% of the outstanding common shares of the Company as determined on an as-converted, fully-diluted basis, which shall not be subject to dilution by any future issuances for the purchase of 3,000 customer accounts The Company is recognizing the revenue generated from the intangible asset on a net basis.

On November 5, 2014, the Company entered into share exchange agreement with a former officer of the Company in regards to common shares in the Company's wholly-owned subsidiaries, Career Start, Inc ("CSI") and Career Start Management ("CSM"), private corporations incorporated in the state of Florida and New York, respectively. Under the terms of the agreement, the Company received 3,111,429 shares of the Company held by the former officer in exchange for 100% of the issued and outstanding common shares of CSI and CSM. Subsequent to the disposal of the subsidiaries, the Company has turned its focus on the development and retail of stealth cards, a product meant to block RFID (Radio Frequency Identifier Signal) chipped cards from being read when placed in the correct orientation to help users secure their personal information.

On March 14, 2016, the Company incorporated a new wholly owned subsidiary, Safety Technologies Inc., a Nevada company. The Company's intention is to sell products other than the stealth cards, through the subsidiary. As at June 30, 2016, there has been no activity within the subsidiary.

On May 19, 2016, the Company's wholly-owned subsidiary, Mobile Dynamic Marking, Inc. changes its name to Stealth Card Inc.

On May 26, 2016, the Company changed its name from Excelsis Investments Inc. to Stealth Technologies, Inc.

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As at June 30, 2016, the Company has a working capital deficit of $1,346,258 and an accumulated deficit of $3,686,520. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the Company's future operations. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

2.	Summary of Significant Accounting Policies

a)

Basis of Presentation and Principles of Consolidation

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") and are expressed in U.S. dollars. These consolidated financial statements comprise the accounts of the Company and its wholly-owned subsidiary, Safety Technologies Inc., a Nevada company. All intercompany transactions have been eliminated on consolidation.  The Company's fiscal year end is December 31.

These interim unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's consolidated financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. These unaudited condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Accounts receivable represents amounts owed from customers for contracting employees and from consulting services. Amounts are presented net of the allowance for doubtful accounts, which represents the Company's best estimate of the amount of probable credit losses in the existing accounts receivable balance. The Company determines allowance for doubtful accounts based upon historical experience and current economic conditions.  The Company reviews the adequacy of its allowance for doubtful accounts on a regular basis.  As of June 30, 2016 and December 31, 2015, the Company had no allowances for doubtful accounts.

Inventory is comprised of stealth cards purchased for resell, and is recorded at the lower of cost or net realizable value on a first-in first-out basis.  The Company establishes inventory reserves for estimated obsolete or unsaleable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future and market conditions.

Intangible assets are stated at cost less accumulated amortization and are comprised of customer accounts acquired with an useful life of three years and amortized straight line over three years and patent and trademark development costs, which are currently being developed and has not been placed in use.

During the quarter ended June 30, 2016, the Company incurred $73,379 (2015 - $72,975) in amortization expense.

The Company computes net loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As at June 30, 2016, the Company had 16,836,916 (December 31, 2015 – 28,280,185) potentially dilutive common shares. The calculation of diluted earnings per share for the three months ended June 30, 2016, includes 16,836,916 shares of common stock underlying the convertible debentures.

The Company recognizes and accounts for revenue in accordance with ASC 605 as a principal on the sale of goods. Pursuant to ASC 605, Revenue Recognition, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the amount is fixed and determinable, risk of ownership has passed to the customer and collection is reasonably assured. The Company considered ASC 605-45, Principal Agent Considerations, and determined that the Company acts as a principal in its revenue-earnings activities as they are responsible for the production of goods purchased by the customer, can determine the pricing costs, goods purchased are paid directly by the Company, and has a credit risk with respect to collection of amounts owed by its customers.

For the Company's product sales, cost of revenue consists of inventory sold in each transaction. For the Company's service sales, cost of revenue consists of engineering services provided by a related party.

The following table represents assets and liabilities that are measured and recognized in fair value as of June 30, 2016, on a recurring basis:

The following table represents assets and liabilities that are measured and recognized in fair value as of December 31, 2015, on a recurring basis:

As of June 30, 2016, the Company had a derivative liability amount of $91,784 (December 31, 2015 – $491,249) which was classified as a Level 3 financial instrument, and a gain on change in fair value of derivative liabilities of $399,465 (December 31, 2015 – loss of $341,192).

3.	Convertible Debenture

a)

On June 20, 2014, the Company entered into a consulting agreement for consulting services. Pursuant to the agreement, the Company is to pay the consultant a commencement fee of $250,000. On June 23, 2014, the Company issued a $250,000 convertible note which is unsecured, non-bearing interest and due on June 22, 2015. The note is convertible into shares of common stock 180 days after the date of issuance (December 17, 2014) at a conversion rate of 90% of the lowest closing bid prices of the Company's common stock for the ten trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $70,159 (December 31, 2015 - $36,416) has been recorded in accounts payable and accrued liabilities.

 

On December 17, 2014, the note became convertible resulting in the Company recording a derivative liability of $94,188 with a corresponding adjustment to loss on change in fair value of derivative liabilities of $1,050 as accretion expense. Pursuant to the agreement, the convertible note matured on June 22, 2015 and 150% of the remaining balance in principal and interest is payable. During the year ended December 31, 2015, the Company included a penalty of $125,000 in interest expense for the additional amount payable due to defaulting on the loan. On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $20,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $88,357) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $120,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As June 30, 2016, the carrying value of the debenture was $255,000 (December 31, 2015 - $375,000) and the fair value of the derivative liability was $75,903 (December 31, 2015 - $304,860).

b)

On June 23, 2014, the Company issued a $50,000 convertible note which is unsecured, bears interest at 8% per annum and due on June 22, 2015. The Company received $49,400, net of issuance fee of $600. The note is convertible into shares of common stock 180 days after the date of issuance (December 20, 2014) at a conversion rate of 60% of the lowest closing bid prices of the Company's common stock for the five trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $13,661 (December 31, 2015 - $10,267) has been recorded in accounts payable and accrued liabilities.

On December 20, 2014, the note became convertible resulting in the Company recording a derivative liability of $49,618 with a corresponding adjustment to loss on change in fair value of derivative liabilities. Pursuant to the agreement, the convertible note matured on June 22, 2015 and 150% of the remaining balance in principal and interest is payable. During year ended December 31, 2015, the Company included a penalty of $12,753 in interest expense for the additional amount payable due to defaulting on the loan. During the year ended December 31, 2015, the Company issued 2,001,225 common shares for the conversion of $24,495. On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $5,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $46,652) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $30,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As at June 30, 2016, the carrying value of the debenture was $8,258 (December 31, 2015 - $38,258) and the fair value of the derivative liability was $3,142 (December 31, 2015 - $65,853). During the period ended June 30, 2016, the Company amortized $nil (December 31, 2015 - $285) in financing costs.

c)

On June 25, 2014, the Company issued a $50,000 convertible note which is unsecured, bears interest at 8% per annum and due on June 24, 2015. The Company received $49,400, net of issuance fee of $600. The note is convertible into shares of common stock 180 days after the date of issuance (December 22, 2014) at a conversion rate of 60% of the lowest closing bid prices of the Company's common stock for the five trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $20,985 (December 31, 2015 - $13,854) has been recorded in accounts payable and accrued liabilities.

 

On December 22, 2014, the note became convertible resulting in the Company recording a derivative liability of $49,464 with a corresponding adjustment to loss on change in fair value of derivative liabilities. Pursuant to the agreement, the convertible note matured on June 24, 2015 and 150% of the remaining balance in principal and interest is payable. During the year ended December 31, 2015, the Company included a penalty of $25,000 in interest expense for the additional amount payable due to defaulting on the loan.  On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $5,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $47,044) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $30,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As at June 30, 2016, the carrying value of the debenture was $45,000 (December 31, 2015 - $75,000) and the fair value of the derivative liability was $12,739 (December 31, 2015 - $120,536). During the period ended June 30, 2016, the Company amortized $nil (December 31, 2015 - $288) in financing costs.

4.	Derivative Liabilities

The Company records the fair value of the of the conversion price of the convertible debentures disclosed in Note 3 in accordance with ASC 815, Derivatives and Hedging. The fair value of the derivative was calculated using a multi-nominal lattice model performed by an independent qualified business valuator. The fair value of the derivative liability is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations. During the period June 30, 2016, the Company recorded a gain on the change in fair value of derivative liability of $399,465 (December 31, 2015 – loss of $341,192). As at June 30, 2016, the Company recorded a derivative liability of $91,784 (December 31, 2015 - $491,249).

The following inputs and assumptions were used to value the convertible debentures outstanding during the period ended June 30, 2016:

 

·	The range of stock prices for the valuation of the derivative instruments at June 30, 2016 ranged from $0.0221 to $0.0285 per share of common stock.

·	The debtholder would redeem (with penalties of 0% to 50% depending on the date and full-partial redemption) based on availability of alternative financing of 70%, 80%, and 90%.

·	The debtholder would automatically convert note at maturity if the registration was effective and the Company is not in default.

·	The projected annual volatility for each valuation period based on the historic volatility of the Company 410% - 469%

·	Capital raising events of $100,000 would occur in each quarter at 75% of market generating dilutive reset events at prices below $0.014 (rounded) for the convertible debentures.

A summary of the activity of the derivative liability is shown below:

a)	As at June 30, 2016, the Company was owed $199,444 (December 31, 2015 - $5,000) from sales revenue from a significant shareholder which is non-interest bearing, unsecured, and due on demand. This amount has been included in accounts receivable – related party.

b)	As at June 30, 2016, the Company owed $58,237 (December 31, 2015 - $25,150) to the President of the Company, which is non-interest bearing, unsecured, and due on demand.

c)	As at June 30, 2016, the Company owed $56,021 (December 31, 2015 - $22,998) to the Chief Financial Officer of the Company, which is non-interest bearing, unsecured, and due on demand.

d)

As at June 30, 2016, the Company recorded a liability for shares issuable of $845,259 (December 31, 2015 - $831,233) relating to 38,247,015 common shares to be issued to a significant shareholder pursuant to the acquisition agreement for the intangible assets. During the period ended June 30, 2016, the Company recorded $14,026 (December 31, 2015 – loss of $318,132) as a gain in the fair value of the shares issuable to the significant shareholder.

e)	As at June 30, 2016, the Company owed $75,000 (December 31, 2015 - $75,000) to a significant shareholder for a loan payable. The loan is unsecured, non-interest bearing, and due on July 25, 2017.

f)	During the period ended June 30, 2016, the Company generated revenues of $236,944 (December 31, 2015 - $837,100) from a significant shareholder.

g)	During the period ended June 30, 2016, the Company incurred payroll expense of $256,485 (December 31, 2015 - $267,495) to management and officers of the Company.

h)

During the period ended June 30, 2016, the Company incurred bonuses on sales of stealth cards of $144,513 (December 31, 2015 - $nil) to management and officers of the Company which has been included in cost of sales. Bonuses accrue on total gross sales at a rate of 5% each to the Chief Executive Officer and the Chief Financial Officer of the Company.

 

i)	During the period ended June 30, 2016, the Company issued 23,166,555 (December 31, 2015 - nil) common shares with a fair value of $671,830 (December 31, 2015 - $nil) to management and officers of the Company which has been included in consulting expenses.

 

j)

During the period ended June 30, 2016, the Company incurred engineering expense of $nil (December 31, 2015 - $132,550) to company owned by the mother of the President of the Company, which was included in cost of goods sold. As at June 30, 2016, the Company owed $15,201 (December 31, 2015 - $245,270) to the company owned by the mother of the President of the Company, which is non-interest bearing, unsecured, and due on demand. The amount owing has been recorded as accounts payable – related party.

a)

On July 25, 2014, the Company entered into a loan agreement with a related party for a loan of $175,000. Under the terms of the note, the amount is unsecured, non-interest bearing, and due on July 25, 2017. The unpaid principal is to be repaid in installments defined as the collected sum of 10% of the unadjusted gross sales revenue (net of returns and chargebacks) with the installments to begin once the Company has received the gross proceeds of $175,000. As at June 30, 2016, the Company had received loan proceeds of $75,000 (December 31, 2015 - $75,000). During the period ended June 30, 2016, the Company recorded imputed interest of $2,991 (December 31, 2015 - $6,000).

b)

At June 30, 2016, the Company owes $nil (December 31, 2015 - $19,491) pursuant to a future receivable sales agreement with a non-related party. Under the terms of the agreement, the amount is secured by $73,639 of the Company's accounts receivable, bears interest at 30%, and due in installments of $792 payable on each business day.

c)	At June 30, 2016, the Company owes $120,000 (December 31, 2015 - $120,000) in a note payable to a non-related party. Under the terms of the note, the amount is unsecured, bears interest at 10% per annum, and due on demand.

a)	On January 1, 2016, the Company issued 500,000 common shares with a fair value of $14,250 to unrelated parties for consulting services.

 

b)	On January 8, 2016, the Company issued 3,000,000 common shares with a fair value of $87,000 to unrelated parties for consulting services.

 

c)	On March 26, 2016, the Company issued 13,166,555 common shares with a fair value of $381,830 to the President of the Company for employee bonuses.

 

d)	On March 26, 2016, the Company issued 10,000,000 common shares with a fair value of $290,000 to the Chief Financial Officer of the Company for employee bonuses.

 

e)	On March 26, 2016, the Company issued 3,000,000 common shares with a fair value of $87,000 to a non-related party for consulting services.

 

f)	On at June 16, 2016, the Company issued 2,965,558 common shares with a fair value of $59,311 to unrelated parties for consulting services.

a)

On February 16, 2015, the Company entered into a lease agreement for a six month term commencing on March 1, 2015. The Company will have three consecutive options to renew the lease for an additional six months each. Pursuant to the agreement the Company has agreed to pay monthly amounts of $1,092 plus applicable sales taxes and pay a deposit of $2,668 consisting of the first month's rent and a $1,500 security deposit.

On August 13, 2015, the Company entered into an amendment agreement to renew the lease agreement. Pursuant to the amendment, the expiry date is extended to February 28, 2016.  On January 29, 2016, the lease was further amended to have an expiry date of August 31, 2016, and the Company has agreed to pay monthly amounts of $1,135 plus applicable sales taxes

b)

On December 22, 2015, the Company was served notice by an individual claiming that he had received electronic emails recommending the purchase of the Company's common stock. The plantiff claims that during the period of December 3, 2012 to December 7, 2012, he had received eighteen unsolicited electronic mails in regards to the purchase of the Company's common stock and is seeking damages of $1,000 for each electronic mail he has received, plus $1,700 in attorney fees for a total claim of $19,700. Per the plaintiff's claim, he has served notice to the Company since 2013. However, the Company asserts that they have not received any notices in regards to these claims until December of 2015. The plaintiff presented his case in court on February 19, 2016 and the court ruled in favor of the plaintiff for the full amount of $19,700. As at June 30, 2016, the Company accrued the expense as other loss and has included the liability in accounts payables and accrued liabilities.

c)	On February 2, 2016, the Company and three debt holders entered into a settlement agreement, where the Company agrees to pay $30,000 to the debt holders on or before the third day of each subsequent month until the entire balance is repaid by the Company. Refer to Note 3(a), (b), and (c).

d)

On February 1, 2016, the Company received notice that a third party was seeking compensation for damages as a result of false advertisements made by the Company in regards to the Company's stealth cards. The plaintiff is a manufacturer and distributor of radio frequency identification (RFID) chip protection cards which are in competition with the Company's stealth cards. The Company has filed an answer to the plaintiff's complaint, with denials and affirmative defenses, and is unable to estimate the likelihood of any outcome as at June 30, 2016.

e)

On February 22, 2016, the Company received notice that a consultant was seeking compensation for breach of agreement. Pursuant to the agreement, the parties agreed to equally split any net profits generated from the sale of Stealth cards made by the consultant. The Company asserts that historical sales generated from the sale of the Stealth Cards were not as a result of the consultant's services, and therefore the Company should not be liable for any compensation due to the consultant. The Company has filed a motion to dismiss, and is awaiting the hearing.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements.  You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms.  These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements.  Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

RESULTS OF OPERATIONS

Working Capital

Cash Flows

Operating Revenues

 

   During the three months ended June 30, 2016, the Company earned revenues from operations of $567,584 compared with revenue of $182,904 during the three months ended June 30, 2015. The increase in revenue and gross profit margin is due to the fact that the Company earned increased revenue from the sale of Stealth cards, and also earned revenue from a new product introduced in the prior quarter, which in an emergency two way voice system that connects the user to 911. The increase in total revenue is net of a decrease in revenue from services of $22,150 during the three month period ended June 30, 2016 compared to the same period in 2015. For the three month period ended June 30, 2016, the Company recorded a gross margin of $260,303 or 45.86% compared to $152,543 or 83.40% during the period ended June 30, 2015. During the three month period ended June 30, 2016, the Company incurred less cost of services relating to engineering costs in comparison to the prior year.

 

   During the six months ended June 30, 2016, the Company earned revenues from operations of $1,990,368 compared with revenues of $509,452 during the six months ended June 30, 2015.  The increase in revenues and gross profit margin is due to the fact that the Company earned increased revenues from the sale of Stealth cards, and also earned revenue from a new product introduced in the prior quarter, which is an emergency two way voice system that connects the user to 911. The increase in total revenue is net of a decrease in revenue from services of $211,518 during the six month period ended June 30, 2016 compared to the same period in 2015. For the six month period ended June 30, 2016, the Company recorded a gross margin of $1,191,138 or 59.85% compared to $374,358 or 73.48% during the period ended June 30, 2015. During the six month period ended June 30, 2016, the Company incurred less cost of services relating to engineering costs in comparison to prior year.

Operating Expenses and Net Loss

During the three months ended June 30, 2016, the Company incurred operating expenses from operations of $505,170 compared with $238,769 during the three months ended June 30, 2015.  The increase is due to an increase of $55,236 in consulting fees incurred to new consultants for business and financial consulting services as per new consulting agreements which were not incurred in the prior year, $2,899 in payroll costs as the Company increased salaries and benefits incurred to the President and Chief Financial Officer of the Company in comparison to prior year, and $33,850 in professional fees for legal services relating to legal disputes which only arose during the prior and current quarters, $2,600 in research and development costs relating to the development of new products, and $171,815 of general and administrative fees due to increased overall office costs as compared to prior year.

During the six months ended June 30, 2016, the Company incurred operating expenses from operations of $2,255,501 compared with $515,512 during the six months ended June 30, 2015.  The increase is due to an increase of $987,437 in consulting fees incurred to new consultants for business and financial consulting services as per new consulting agreements, as well as share-based compensation to the President and Chief Financial Officer of the Company for business consulting services which were not incurred in the prior year, $122,986 in payroll costs as the Company increased salaries and benefits incurred to the President and Chief Financial Officer of the Company in comparison to prior year, and $42,996 in professional fees for legal services relating to legal disputes which only arose during the prior and current quarters, $2,600 in research and development costs relating to the development of new products and $583,566 of general and administrative fees due to increased overall office costs as compared to prior year.

Liquidity and Capital Resources

As at June 30, 2016, the Company had cash of $138,411 and total current assets of $832,493 compared with cash of $388,183 and total current assets of $1,193,612 at December 31, 2015. The decrease in cash is attributed to increase in cost of goods sold and operating expenses. The overall decrease in total current assets is due to decrease of $249,772 in cash, $281,462 in receivables from revenue generated by the Company, and $297,305 in prepaid inventory, net of an increase of $194,444 in accounts receivables – related party, $155,761 in prepaid expense, and $117,215 in inventory.

The overall working capital deficit decreased from $1,607,626 at December 31, 2015 to $1,346,258 at June 30, 2016 due in part to decreases in accounts payable and accrued liabilities, accounts payable – related party, loans payable, convertible debentures, and derivative liability relating to the fair value of the floating conversion price of the convertible debenture. These decreases were offset by an increase in deferred revenue, amounts due to related parties, and liability for shares issuable – related party.

Cashflow from Operating Activities

During the six months ended June 30, 2016, the Company used $48,034 of cash for operating activities, which is reflective of the cash earned from operating activities, net of cash used for day-to-day business operations.   Comparatively, the Company used cash of $135,528 during the six months ended June 30, 2015. The decrease of cash used by operating activities is largely due to the Company earning higher revenue from the sale of its Stealth products in comparison to its prior period.

Cashflow from Investing Activities

During the six months ended June 30, 2016 the Company used $2,247 for investing activities to acquire intangible assets compared to the Company using $nil for investing activities during the six months ended June 30, 2015,

Cashflow from Financing Activities

During the six months ended June 30, 2016, the Company used $199,491 of cash for financing activities, compared with $nil used during the six months ended June 30, 2015. The increase in cash used for financing activities relate to repayments made towards loans payable and convertible debentures outstanding.

Convertible Promissory Note

On June 20, 2014, the Company entered into a consulting agreement for consulting services. Pursuant to the agreement, the Company is to pay the consultant a commencement fee of $250,000. On June 23, 2014, the Company issued a $250,000 convertible note which is unsecured, non-bearing interest and due on June 22, 2015. The note is convertible into shares of common stock 180 days after the date of issuance (December 17, 2014) at a conversion rate of 90% of the lowest closing bid prices of the Company's common stock for the ten trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $70,159 (December 31, 2015 - $36,416) has been recorded in accounts payable and accrued liabilities.

On December 17, 2014, the note became convertible resulting in the Company recording a derivative liability of $94,188 with a corresponding adjustment to loss on change in fair value of derivative liabilities of $1,050 as accretion expense. Pursuant to the agreement, the convertible note matured on June 22, 2015 and 150% of the remaining balance in principal and interest is payable. During the year ended December 31, 2015, the Company included a penalty of $125,000 in interest expense for the additional amount payable due to defaulting on the loan. On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $20,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $88,357) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $120,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As June 30, 2016, the carrying value of the debenture was $255,000 (December 31, 2015 - $375,000) and the fair value of the derivative liability was $75,903 (December 31, 2015 - $304,860).

On June 23, 2014, the Company issued a $50,000 convertible note which is unsecured, bears interest at 8% per annum and due on June 22, 2015. The Company received $49,400, net of issuance fee of $600. The note is convertible into shares of common stock 180 days after the date of issuance (December 20, 2014) at a conversion rate of 60% of the lowest closing bid prices of the Company's common stock for the five trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $13,661 (December 31, 2015 - $10,267) has been recorded in accounts payable and accrued liabilities.

On December 20, 2014, the note became convertible resulting in the Company recording a derivative liability of $49,618 with a corresponding adjustment to loss on change in fair value of derivative liabilities. Pursuant to the agreement, the convertible note matured on June 22, 2015 and 150% of the remaining balance in principal and interest is payable. During year ended December 31, 2015, the Company included a penalty of $12,753 in interest expense for the additional amount payable due to defaulting on the loan. During the year ended December 31, 2015, the Company issued 2,001,225 common shares for the conversion of $24,495. On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $5,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $46,652) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $30,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As at June 30, 2016, the carrying value of the debenture was $8,258 (December 31, 2015 - $38,258) and the fair value of the derivative liability was $3,142 (December 31, 2015 - $65,853). During the period ended June 30, 2016, the Company amortized $nil (December 31, 2015 - $285) in financing costs.

On June 25, 2014, the Company issued a $50,000 convertible note which is unsecured, bears interest at 8% per annum and due on June 24, 2015. The Company received $49,400, net of issuance fee of $600. The note is convertible into shares of common stock 180 days after the date of issuance (December 22, 2014) at a conversion rate of 60% of the lowest closing bid prices of the Company's common stock for the five trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at June 30, 2016, accrued interest of $20,985 (December 31, 2015 - $13,854) has been recorded in accounts payable and accrued liabilities.

On December 22, 2014, the note became convertible resulting in the Company recording a derivative liability of $49,464 with a corresponding adjustment to loss on change in fair value of derivative liabilities. Pursuant to the agreement, the convertible note matured on June 24, 2015 and 150% of the remaining balance in principal and interest is payable. During the year ended December 31, 2015, the Company included a penalty of $25,000 in interest expense for the additional amount payable due to defaulting on the loan.  On February 2, 2016, the Company entered into a settlement agreement whereby the Company would pay $5,000 on or before the third day of each subsequent month until the entire balance is repaid. During the period ended June 30, 2016, the Company had amortized $nil (December 31, 2015 - $47,044) of the debt discount to interest expense. During the period ended June 30, 2016, the Company repaid $30,000 (December 31, 2015 - $nil) of the outstanding loan pursuant to a settlement agreement. As at June 30, 2016, the carrying value of the debenture was $45,000 (December 31, 2015 - $75,000) and the fair value of the derivative liability was $12,739 (December 31, 2015 - $120,536). During the period ended June 30, 2016, the Company amortized $nil (December 31, 2015 - $288) in financing costs.

We prepared our financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. We identified certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection, and disclosure of each of the critical accounting policies. The following is a discussion of our most critical accounting policies:

The preparation of financial statements in conformity with US GAAP 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. The Company regularly evaluates estimates and assumptions related to the deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company's financial instruments consist principally of cash, accounts receivable, accounts receivable – related party, accounts payable and accrued liabilities, accounts payable – related party, loans payable, amount due to related parties, convertible debenture, and loan payable – related party. Pursuant to ASC 820, the fair value of our cash is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.