VISCOUNT SYSTEMS INC

Prior to January 1, 2016, the Company organized its business into two reportable segments: manufacturing and servicing. The manufacturing segment designs, produces and sells intercom and door access control systems that utilize telecommunications to control access to buildings and other facilities for security purposes. The servicing segment provides maintenance to these intercom and door access control systems. As a result of the Company’s decision to sell its servicing business, the Company plans to discontinue its servicing business and operate in one segment, the manufacturing business. During the three and six months ended June 30, 2016, the Company has reclassified its servicing business as a discontinued operation on the accompanying condensed consolidated financial statements (see Note 13).

The Company accounted for its decision to sell its servicing business as discontinued operations which requires that only a component of an entity or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations that has been disposed of or is classified as held for sale and has operations and cash flows that can be clearly distinguished from the rest of the entity be reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items in the statements of operations. Assets and liabilities are also reclassified into separate line items on the related balance sheets for the periods presented. The statements of cash flows for the periods presented are also reclassified to reflect the results of discontinued operations as separate line items.

Accounts receivable are shown net of an allowance for doubtful accounts of $94,244 and $97,249 as of June 30, 2016 and December 31, 2015, respectively. The Company’s management has established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The nature of the business is that the majority of the payments are made net 30 days after the product is delivered. If the financial conditions of customers were to materially deteriorate, an increase in the allowance amount could be required. The allowance for doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted write-offs, aging of the accounts receivable, and other factors.

In March 2016, the FASB issued ASU, No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.

We reported a net loss of $709,117 for the three months ended June 30, 2016, compared to net income of $2,297,977 for the three months ended June 30, 2015, a decrease of $3,007,094, or 131%. The decrease is mainly attributable to a decrease in sales of $806,342, an increase in interest expense of $697,879 related to notes liabilities PIK interest accrual and Accounts Receivable factoring (the “AR factoring”), a decrease from the change in fair value of derivative liabilities of $1,920,942. The higher sales from the three months ended June 30, 2015 included sales of $726,000 (US $600,000) generated from Freedom software sales to the United States Citizenship and Immigration Service (the “USCIS”) locations. Additionally, net loss for the three months ended June 30, 2015 included a $63,324 loss on the settlement of convertible notes and $47,087 of amortization of debt discount.