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

~~FORM~~ 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~~March 3031, ~~2015~~ 2016

[ ] 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)

Nevada	~~88-0498181~~	88-0498181
(State or other jurisdiction of	~~(I.R.S. Employer I.D. No.)~~	(I.R.S. Employer
incorporation or organization)		I.D. No.)

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 [ X] No [X ]

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~~Yes ~~classes~~[ ] ofNo ~~common equity, as of the latest practicable date:~~ [X]

AsState the number of ~~November~~shares ~~19,~~outstanding ~~2015~~of each of the ~~registrant~~issuer’s ~~outstanding~~classes of common ~~stock~~ ~~consisted~~equity, as of the latest practicable date: 130,~~547~~297,236 shares of common stock as at May 20, 2016.

~~EXPLANATORY~~VISCOUNT SYSTEMS, ~~NOTE~~ INC

TABLE ~~This~~OF 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. CONTENTS

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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets for March 31, 2016 (Unaudited) and December 31, 2015	2

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	3

Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited)	4

Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	16

Item 3. Quantitative and Qualitative Disclosures about Market Risk	20

Item 4. Controls and Procedures	20

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	20

Item 1A. Risk Factors	20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3. Defaults Upon Senior Securities	20

Item 4. Mine Safety Disclosures	20

Item 5. Exhibits	21

SIGNATURES	22

VISCOUNT SYSTEMS, INC TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets for September 30, 2015 (Unaudited) and December 31, 2014 (Revised)	2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	3
Condensed Consolidated Statement of Stockholders ' Deficit for the Nine Months Ended September 30, 2015 (Unaudited)	4
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	5
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	30
Item 4. Controls and Procedures	30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	32
Item 4. Mine Safety Disclosures	32
Item 5. Other Information	32
Item 6. Exhibits	33
SIGNATURES	34

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~~ 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~~ 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~~March 3031, ~~2015~~2016, the foreign exchange rate certified by the Federal Reserve Bank of New York was CAD$1.~~339086~~3005 for USD$1.0000 or CAD$1.0000 for USD$0.~~746778~~7690.

~~Item 1~~Part I. Financial ~~Statements~~Information

~~VISCOUNT SYSTEMS, INC~~Item 1. ~~Condensed~~Financial ~~Consolidated Balance Sheets(Expressed in Canadian dollars)~~Statements

		September 30,			December 31,
		2015			2014
		(unaudited)			(revised - see Note 9)
Assets
Current Assets
Cash	$	173,713		$	135,308
Short term investments		55,000			55,000
Trade accounts receivable, net		907,870			661,629
Prepaid expenses		4,387			-
Inventory		560,508			533,217
Total Current Assets		1,701,478			1,385,154
Equipment		175,959			206,004
Deposits		8,391			1,391
Intangible assets		-			5,224
Total Assets	$	1,885,828		$	1,597,773
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable	$	970,696		$	362,595
Accrued liabilities		550,845			564,466
Capital lease obligation - current portion		10,964			10,285
Deferred revenue		72,625			37,318
Due to related parties		12,613			5,003
Loans payable		114,536			114,536
Derivative liabilities		427,999			2,858,618
Convertible redeemable preferred stock - see below		2,027,026			-
Total Current Liabilities		4,187,304			3,952,821
Capital lease obligation - non-current		8,873			17,182
Total Liabilities		4,196,177			3,970,003
Commitments and contingencies
Convertible redeemable preferred stock - US$0.001 par value; 20,000,000 shares authorized: Series A convertible redeemable preferred stock, stated value $1,000, 1,351 and 1,072 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively; aggregate liquidation preference of $1,351,000 and $1,072,000 as of September 30, 2015 and December 31, 2014, respectively		-			1
Stockholders' Deficit
Common stock, par value US$0.001 per share, 300,000,000 shares authorized: 130,547,236 and 126,047,236 shares issued and outstanding at September 30, 2015, respectively, and 126,009,581 shares issued and outstanding at December 31, 2014		130,547			126,009
Additional paid-in capital		8,170,074			10,163,296
Accumulated deficit		(10,610,970	)		(12,661,536	)
Total Stockholders' Deficit		(2,310,349	)		(2,372,231	)
Total Liabilities and Stockholders' Deficit	$	1,885,828		$	1,597,773

VISCOUNT SYSTEMS, INC.

~~See Notes to the~~ Condensed Consolidated ~~Financial~~Balance ~~Statements 2~~ Sheets

~~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)~~

		Three months ended						Nine months ended
		March 31, 2016				December 31, 2015
		September 30,						September 30,
		(Unaudited)
		2015			2014			2015			2014
Assets
					(revised - see Note 9)
Current Assets
Sales	$	1,177,211		$	1,419,204		$	4,582,017		$	3,712,240
Cash		$	51,796			$	250,270
Cost of sales		476,234			804,189			1,790,371			2,010,831
Short term investments			55,000				55,000
Gross profit		700,977			615,015			2,791,646			1,701,409
Trade accounts receivable, net			542,443				506,264
Operating expenses:
Prepaid expenses			40,724				31,791
Selling, general and administrative		890,521			1,153,566			2,744,427			4,708,123
Inventory			461,689				569,796
Research and development		233,211			189,556			632,614			481,578
Current assets held for sale			37,135				59,317
Total operating expenses		1,123,732			1,343,122			3,377,041			5,189,701
Total Current Assets			1,188,787				1,472,438
Operating loss		(422,755	)		(728,107	)		(585,395	)		(3,488,292	)
Equipment - net			162,256				162,332
Other income (expense):
Deposits			8,391				8,391
Interest income		6			2,110			24			3,430
Long-term assets held for sale			17,243				18,151
Interest expense		(6,049	)		-			(61,933	)		-
Total Assets		$	1,376,677			$	1,661,312
Loss on settlement of convertible note		-			-			(63,324	)		-
Liabilities and Stockholders’ Deficit
Amortization of debt discount		-			-			(47,087	)		-
Current Liabilities
Change in fair value of derivative liabilities		41,534			1,505,066			2,808,281			1,203,575
Accounts payable		$	974,431			$	900,211
		35,491			1,507,176			2,635,961			1,207,005
Accrued liabilities			592,947				532,003
Net (loss) income		(387,264	)		779,069			2,050,566			(2,281,287	)
Capital lease obligation - current portion			16,687				16,348
Preferred stock:
Deferred revenue			28,978				47,780
Series A convertible - contractual dividends		(37,765	)		-			(82,414	)		-
Due to related parties			134,583				91,683
Series A convertible - deemed dividends		(2,010,330	)		-			(2,010,330	)		-
Loans payable			114,536				114,536
Net (loss) income attributable to common stockholders	$	(2,435,359	)	$	779,069		$	(42,178	)	$	(2,281,287	)
Interest payable - Convertible Debt			982,039				373,841
Per share data:
Notes liability - Convertible Debt			3,279,871				3,491,802
Net (loss) income - basic	$	(0.02	)	$	0.01		$	(0.00	)	$	(0.02	)
Derivative liabilities			3,635,121				4,383,668
Net (loss) income - diluted	$	(0.02	)	$	0.01		$	(0.00	)	$	(0.02	)
Convertible redeemable preferred stock			269,880				269,880
Weighted average number of shares of common stock outstanding:
Total Current Liabilities			10,029,073				10,221,752
Basic		126,047,236			126,009,581			126,040,891			117,236,991
Capital lease obligation - non-current			5,346				9,647
Diluted		126,047,236			126,009,581			175,403,366			117,236,991
Total Liabilities			10,034,419				10,231,399
Commitments and contingencies
Convertible redeemable preferred stock - US$0.001 par value; 20,000,000 shares authorized:			-				-
Series A convertible redeemable preferred stock, stated value $1,000; 132 and 130 shares outstanding at March 31, 2016 and December 31, 2015, respectively; aggregate liquidation preference of $132,436 and $130,000 as of March 31, 2016 and December 31, 2015, respectively
Stockholders’ Deficit
Series B Preferred Stock, par value $0.001 per share. 50 shares issued and outstanding at March 31, 2016 and December 31, 2015.			1				1
Common stock, par value US$0.001 per share, 300,000,000 shares authorized, 130,297,236 shares issued, 126,047,236 shares outstanding at March 31, 2016 and December 31, 2015			130,297				130,297
Additional paid-in capital			7,610,096				7,558,416
Accumulated deficit			(16,398,136	)			(16,258,801	)
Total Stockholders’ Deficit			(8,657,742	)			(8,570,087	)
Total Liabilities and Stockholders’ Deficit		$	1,376,677			$	1,661,312

~~See~~The accompanying ~~Notes~~notes toare ~~the~~an ~~Condensed~~integral ~~Consolidated~~part ~~Financial~~of ~~Statements 3~~these condensed consolidated financial statements

~~VISCOUNT SYSTEMS, INC. Condensed Consolidated Statement of Stockholders' Deficit(Expressed in Canadian dollars)For the Nine Months Ended September 30, 2015 (Unaudited)~~ 2

	Common Stock				Additional
					paid-in			Accumulated
	Shares		Amount		capital			deficit			Total
Balance, December 31, 2014 (revised – see Note 9)	126,009,581	$	126,009	$	10,163,296		$	(12,661,536	)	$	(2,372,231	)
Series A dividend issued	-		-		(82,414	)		-			(82,414	)
Proceeds from sale of common stock & warrants	37,655		38		3,012			-			3,050
Common stock issued to directors for services	4,500,000		4,500		(4,500	)		-			-
Stock-based compensation	-		-		68,538			-			68,538
Warrants issued in connection with Series A convertible redeemable preferred stock issuance	-		-		32,472			-			32,472
Deemed dividend in connection with Series A convertible preferred stock redemption event	-		-		(2,010,330	)		-			(2,010,330	)
Net income	-		-		-			2,050,566			2,050,566
Balance, September 30, 2015	130,547,236	$	130,547	$	8,170,074		$	(10,610,970	)	$	(2,310,349	)

VISCOUNT SYSTEMS, INC.

~~See Notes to the~~ Condensed Consolidated ~~Financial~~ Statements 4 of Operations

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

		For the nine months ended:
		September 30,			September 30,
		2015			2014
Operating Activities
Net income (loss)	$	2,050,566		$	(2,281,287	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		40,750			36,337
Provision for uncollectible receivables		(66,606	)		-
Provision for inventory obsolescence		-			150,000
Change in fair value of derivative liabilities		(2,808,281	)		(1,203,575	)
Stock based compensation		68,538			1,609,579
Original issue discount on convertible debt		18,750			-
Loss on settlement of convertible debt		63,324			-
Amortization of debt discount		47,087			-
Non-cash financing fees		-			370,895
Changes in operating assets and liabilities:
Accounts receivable		(179,635	)		(344,197	)
Inventory		(27,291	)		37,774
Prepaid expenses		(4,387	)		-
Deposits		(7,000	)		-
Accounts payable		608,104			8,275
Accrued liabilites		(13,621	)		(62,059	)
Deferred revenue		35,307			306
Due to related parties		7,610			(29,724	)
Net Cash Used in Operating Activities		(166,785	)		(1,707,676	)
Cash Flows from Investing Activities
Purchase of property and equipment		(5,480	)		(150,091	)
Net cash used in investing activities		(5,480	)		(150,091	)
Net Cash used in Financing Activities
Capital lease payments		(7,630	)		-
Proceeds from convertible note		197,500			-
Payment of deferred financing costs		(5,000	)		-
Repayment of convertible note		(211,250	)		-
Proceeds from sale of common stock and warrants		3,050			2,366,570
Proceeds from sale of preferred stock		234,000			-
Net cash provide by financing activities		210,670			2,366,570
Increase in cash		38,405			508,803
Cash, beginning of period		135,308			172,684
Cash, end of period		173,713			681,487

For the three months ended March 31, 2016 and 2015

~~See Notes to the Condensed Consolidated Financial Statements 5~~ (Unaudited)

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)

	Three months ended
	March 31
	2016			2015

Sales	$	981,878		$	1,054,480
Cost of sales		451,799			563,663
Gross profit		530,079			490,817

Operating expenses:
Selling, general and administrative		849,554			879,860
Research and development		236,502			189,215
Total operating expenses		1,086,056			1,069,075

Operating loss		(555,977	)		(578,258	)

Other income (expense):
Interest income		3			10
Interest expense		(635,460	)		-
Foreign exchange gain on revaluation of notes liability		211,930			-
Change in fair value of derivative liabilities		757,176			621,373
		333,649			621,383

(Loss) income from continuing operations		(222,328	)		43,125
Income from discontinued operations of servicing business, net of tax		82,993			96,728
Net (loss) income		(139,335	)		139,853

Preferred stock:
Series A convertible - contractual dividends		(3,131	)		(18,696	)

Net (loss) income attributable to common stockholders	$	(142,466	)	$	121,157

Per share data:
Continuing operations	$	(0.00	)	$	0.00
Discontinued operations	$	0.00		$	0.00
Net (loss) income attributable to common stockholders – basic and diluted	$	0.00		$	0.00

Weighted average number of shares of common stock outstanding:
Basic and diluted		126,047,236			126,026,928

		For the nine months ended:
		September 30,		September 30,
		2015		2014
Supplementary Information:
Interest paid	$	43,183	$	-
Income taxes paid	$	-	$	-
Non-cash investing and financing activities:
Fair value of preferred shares issued as dividends	$	82,414	$	-
Unvested common stock issued to board members	$	4,500	$	-
Fair value of conversion options issued	$	373,184	$	-
Accretion of Series A convertible preferred stock to redemption value	$	2,010,330	$	-

The accompanying notes are an integral part of these condensed consolidated financial statements

~~See Notes to the Condensed Consolidated Financial Statements 6~~ 3

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

1.	Organization
	Viscount Systems, Inc. (the “Company”) was incorporated on May 24, 2001 in the State of Nevada. The Company manufactures, distributes, and provides services for electronic premises access and security equipment primarily through its wholly owned Canadian subsidiary, Viscount Communication and Control Systems Inc.
	The Company’s legacy business, existing since 1969, consists of products and services for high rise residential and office buildings, generally described as telephone access. These products allow visitors to contact tenants or offices via a lobby device to gain entry. The Company has various brands in this marketplace, with high end products called MESH, and lower cost products called Enterphone, selling through dealers for Canada and the United States.
	The Company’s Freedom Access Control software solution (“Freedom”) 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 of day.
2.	Basis of Presentation
	These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and from Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for a complete set of annual financial statements. These financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company filed on Form 10-K for the year ended December 31, 2014. The operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2015 or for any other period.
	The financial information as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 is unaudited; however, such financial information includes all adjustments, consisting solely of normal recurring adjustments, which, are necessary for the fair presentation of the financial information in conformity with U.S. GAAP.

Condensed Consolidated Statements of Cash Flows

7(Expressed in Canadian dollars)

~~VISCOUNT~~For the ~~SYSTEMS,~~Three ~~INC.~~Months ~~Notes~~Ended toMarch ~~Condensed Consolidated~~31, ~~Financial~~2016 ~~Statements(Expressed~~and ~~in Canadian dollars) (unaudited)~~ 2015

3.	Going Concern and Liquidity
	These condensed consolidated 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 $10,610,970 and an operating loss for the three and nine months ended September 30, 2015 of $422,755 and $585,395, respectively. The ability to sustain the current level of operations is dependent on raising additional capital and/or growing sales and achieving profits. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.
	Based on its current financial position, including the potential issuance of a substantial amount of demand notes (see Note 8), the Company could be required to fund its operations on a month-to-month basis. The Company recognizes it will need to raise additional capital in order to fund operations, meet its payment obligations and execute its business plan. The Company is currently in negotiations regarding a financing. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. If the Company is unable to obtain financing on a timely basis, the Company could be forced to sell its assets and discontinue its operation.
	Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
4.	Significant Accounting Policies
	Use of Estimates
	The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include reserves related to accounts receivable and inventory, the recoverability and useful lives of long-lived assets, the valuation allowance related to deferred tax assets and the valuation of equity instruments and derivative liabilities.

(Unaudited)

	For the three months ended
	March 31, 2016			March 31, 2015
Cash Flows from Operating Activities
Net (loss) income	$	(139,335	)	$	139,853
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Income from discontinued operations		(82,993	)		(96,728	)
Depreciation and amortization		9,678			10,685
Recovery of uncollectible receivables		(3,782	)		(66,607	)
Recovery of inventory obsolescence		(51,488	)		-
Change in fair value of derivative liabilities		(757,176	)		(621,373	)
Stock based compensation		54,811			908
Foreign exchange gain on revaluation of notes liability		(211,931	)
Fair value of warrants issued		5,498			-
Changes in operating assets and liabilities:
Accounts receivable		(32,397	)		(80,092	)
Inventory		159,595			(21,866	)
Prepaid expenses		(8,933	)		-
Accounts payable & accrued liabilities		135,164			361,296
Notes interest payable		608,198			-
Deferred revenue		(18,802	)		(7,723	)
Due to related parties		42,900			12,640
Net Cash used in operating activities from continuing operations		(290,993	)		(369,007	)
Net Cash provided by operating activities from discontinued operations		106,083			124,310
Net Cash used in Operating Activities		(184,910	)		(244,697	)

Cash Flows from Investing Activities
Purchases of property and equipment		(9,602	)		(1,371	)
Net cash used in investing activities		(9,602	)		(1,371	)

Cash Flows from Financing Activities
Capital lease payments		(3,962	)		(2,490	)
Proceeds from sale of common stock and warrants		-			3,050
Proceeds from sale of preferred stock		-			234,000
Net cash (used in) provided by financing activities		(3,962	)		234,560

Decrease in cash		(198,474	)		(11,508	)
Cash, beginning of period		250,270			135,308
Cash, end of period	$	51,796		$	123,800

Supplementary Information:
Interest paid	$	4,572		$	-

Non-cash investing and financing activities:
Fair value of preferred shares issued as dividends	$	3,131		$	18,696
Fair value of warrants issued	$	5,498		$	-
Fair value of embedded conversion option from Series A shares	$	-		$	184,835

~~VISCOUNT~~The accompanying ~~SYSTEMS,~~notes ~~INC.~~are ~~Notes~~an tointegral ~~Condensed Consolidated~~part ~~Financial~~of ~~Statements(Expressed~~these incondensed ~~Canadian~~consolidated ~~dollars) (unaudited)~~financial statements

4.	Significant Accounting Policies, continued
	Concentration of Credit Risk
	The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount insured by the FDIC.
	Allowance for Doubtful Accounts Receivable
	Accounts receivable are shown net of an allowance for doubtful accounts of $114,923 and $181,529 as of September 30, 2015 and December 31, 2014, 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 before 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.
	Accounts Receivable Factoring
	On March 24, 2015, the Company entered into a one year agreement with a financing company to factor its trade accounts receivables. The financing company offered a credit facility not to exceed $1,000,000 through the purchase of eligible accounts receivable at a discount rate of 3.65% of the face value of the purchased receivable plus 1/10% per day on any receivable outstanding after 35 days from the date of invoice purchase. Any amounts that remain unpaid 90 days after the initial invoice date, or any dispute raised by the customer will be repurchased by the Company or replaced by eligible receivables. As of September 30, 2015, invoices totaling, in the aggregate, $82,627 had been factored. The Company’s accounts receivable are purchased by the financing company on a recourse basis. Accordingly, the accounts receivable are retained on the Company’s balance sheet while advances from the financing company are recorded as accrued liabilities. Discounts provided and interest charged related to factoring of the accounts receivable have been expensed on the accompanying condensed consolidated statements of operations as interest expense.
	Stock-Based Compensation
	Stock-based compensation expense for all stock-based payment awards is based on the estimated fair value of the award. For employees and directors, the award is measured on the grant date. For non-employees, the award is measured on the grant date and is then remeasured at each vesting date and financial reporting date. The Company generally issues new shares of the Company’s common stock, par value US$0.001 per share (the “common stock”) to satisfy option and warrant exercises.

9VISCOUNT SYSTEMS, INC.

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

4.	Significant Accounting Policies, continued
	Preferred Stock
	The Company applies the guidance enumerated in Accounting Standards Codification 480 “Distinguishing Liabilities from Equity” (“ASC 480”) 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. The Company classifies 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 the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity. As of September 30, 2015 and December 31, 2014, in accordance with ASC 480-10-S99, since certain of the Company’s preferred shares contain redemption rights which are not solely within the Company’s control, these issuances of preferred stock have been presented as temporary equity.
	Common Stock Warrants and Other Derivative Financial Instruments
	The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
	The Company assesses classification of its common stock warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets, liabilities and equity is required. The Company evaluated its free standing warrants to purchase common stock to assess their proper classification in the balance sheets as of September 30, 2015 and December 31, 2014 using the applicable classification criteria enumerated under U.S. GAAP and determined that the common stock purchase warrants should be classified as a derivative liability, as these warrants were denominated in U.S. dollars, while the functional currency of the Company is Canadian dollars. Therefore, each period, these U.S. denominated warrants must be re-valued.
	Sequencing Policy
	Under ASC 815-40-35, the Company has adopted a sequencing policy that reclassifies contracts from equity to assets or liabilities for those with the earliest inception date first. Future issuances of securities will be evaluated as to reclassification as a liability under our sequencing policy of earliest inception date first until either all of the shares underlying the Company’s Series A Convertible Redeemable Preferred Stock, par value US$0.001 per share (the “Series A Shares”), are settled or expire.

(Expressed in Canadian dollars)

10(Unaudited)

~~VISCOUNT SYSTEMS, INC~~1. ~~Notes~~Basis toof ~~Condensed Consolidated Financial Statements(Expressed in Canadian dollars) (unaudited)~~ Presentation

4.	Significant Accounting Policies, continued
	Reclassifications
	Certain accounts in the prior period condensed consolidated financial statements have been reclassified for comparison purposes to conform to the presentation of the current period condensed consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
	Recent Accounting Pronouncements
	In July 2015, the Financing Accounting Standards Board (“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. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its 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. The Company has not yet determined the effect of the adoption of this standard and its impact on the Company's 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 the Company's condensed consolidated financial position, results of operations or cash flows.
	Concentrations
	During the three months ended September 30, 2015, one customer comprised approximately $121,000 or 10% of the Company's sales. During the nine months ended September 30, 2015, another customer comprised approximately $726,000 or 16% of the Company's sales. We had no such concentrations during the three and nine months ended September 30, 2014. As of September 30, 2015, there were no accounts receivable due from these customers.

These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and from Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for a complete set of annual financial statements. These financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company filed on Form 10-K for the year ended December 31, 2015. The operating results for the periods presented are not necessarily indicative of the results that will occur for the year ending December 31, 2016 or for any other period.

11The financial information as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 is unaudited; however, such financial information includes all adjustments, consisting solely of normal recurring adjustments, which, are necessary for the fair presentation of the financial information in conformity with U.S. GAAP.

~~VISCOUNT SYSTEMS, INC~~2. ~~Notes~~Nature toof ~~Condensed Consolidated~~operations ~~Financial~~and ~~Statements(Expressed~~going ~~in Canadian dollars) (unaudited)~~ concern

5Viscount Systems, Inc. ~~Inventory~~(the ~~Inventory~~“Company”) ~~consists~~was ofincorporated on May 24, 2001 in the ~~following:~~State of Nevada. The Company manufactures, distributes, and provides services for electronic premises access and security equipment primarily through its wholly owned Canadian subsidiary, Viscount Communication and Control Systems Inc.

		September 30,			December 31,
		2015			2014
Raw materials	$	651,348		$	606,547
Work in process		73,720			25,683
Finished goods		152,887			218,434
Sub total		877,955			850,664
Reserve for obsolescence and shrinkage		(317,447	)		(317,447	)
Total	$	560,508		$	533,217

The Company’s legacy business consists of products and services for high rise residential and office buildings, generally described as telephone access. These products allow visitors to contact tenants or offices via a lobby device to gain entry. The Company has various brands in this marketplace, with high end products called MESH, and lower cost products called Enterphone, selling through dealers in Canada and the United States.

6.	Due to Related Parties
	Amounts due to directors for director fees and travel expenses totaled $12,613 at September 30, 2015 (December 31, 2014 - $5,003). These amounts are unsecured, non-interest bearing and have no specified terms of repayment.
7.	Repayment of Convertible Debt
	On April 2, 2015, the Company received proceeds from the issuance of an 8% Convertible Promissory Note (the “Note”) aggregating approximately US $154,000 (CAD $192,500) after payment of deferred financing costs of US $4,000 (CAD $5,000). The Note matures in one year and had a principal amount of US $169,000 (CAD $211,250) and was convertible 180 days from the date of the Note at a conversion price equal to a 35% discount rate to the market price, subject to certain adjustments, including dilutive issuances. The Note was recorded net of an original issue discount of US $15,000 (CAD $18,750). The Note also contained certain early payment penalties, based on the date of prepayment. The Company determined that (a) the conversion option of the Note contained an anti-dilution provision whereby the exercise price can be adjusted based on certain new issuances; and (b) the Note is denominated in a currency other than the functional currency of the Company, and accordingly, the Company bifurcated the conversion option and recorded a derivative liability of US $150,800 (CAD $188,349) with a corresponding debt discount which is amortized through the term of the Note to interest expense over the term of the Note, using the effective interest method. The conversion option was valued using a binomial model and marked-to-market through June 30, 2015 with a change in fair value of CAD $110,411. The Company recorded amortization of the debt discount of US $37,699 (CAD $47,087) for the three months ended June 30, 2015. On June 30, 2015, the Company repaid the Note, accrued interest and a 20% prepayment penalty on the Note, with the total repayment aggregating US $206,133 (CAD $248,384). On the date of the repayment, the remaining debt discount and conversion option liability were charged to earnings, resulting in a loss on settlement of the Note of US $53,101 (CAD $66,324).

The Company’s Freedom Access Control software solution (“Freedom”) 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 of day.

12As of March 31, 2016, the Company has an accumulated deficit of $16,398,136, a working capital deficit of $8,840,286 and reported a loss of $139,335 for the three months ended March 31, 2016. These factors raise substantial doubt about the ability of the Company to continue operations as a going concern.

~~VISCOUNT~~Based on ~~SYSTEMS~~its current financial position, ~~INC.~~the ~~Notes~~Company could be required to ~~Condensed~~fund its operations on a month-to-month basis. The Company ~~Consolidated~~recognizes ~~Financial~~it ~~Statements(Expressed~~will need to raise additional capital in ~~Canadian~~order ~~dollars)~~to fund operations, meet its payment obligations and execute its ~~(unaudited)~~business plan. Although management is confident that the Company can access sufficient working capital to maintain operations and ultimately generate positive cash flows from operations, the ability to sustain the current level of operations is dependent upon growing sales and achieving sustainable profits. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. If the Company is unable to obtain financing on a timely basis, the Company could be forced to sell its assets and discontinue its operations.

8.Accordingly, the ~~Series~~accompanying Acondensed ~~Shares~~consolidated Onfinancial ~~January~~statements ~~20,~~have ~~2015,~~been ~~the~~prepared ~~Company~~in ~~erroneously~~conformity ~~issued~~with 2U.S. GAAP,~~925,000~~ ~~shares~~which contemplates continuation of ~~common~~the ~~stock~~Company toas ana ~~entity~~going ~~whose~~concern ~~general~~and ~~partner~~the isrealization ~~managed~~of byassets aand ~~member~~the satisfaction of ~~the~~liabilities ~~Company’s~~in ~~Board~~the normal course of ~~Directors~~business. ~~(the~~The ~~“Board”)~~carrying ~~and~~amounts ~~the~~of ~~shares~~assets ~~were~~and ~~then~~liabilities ~~cancelled~~presented in ~~February~~the ~~2015~~condensed ~~and~~consolidated ~~replaced~~financial ~~with~~statements do ~~200~~not ~~Series~~necessarily Arepresent ~~Shares~~realizable inor ~~exchange~~settlement ~~for~~values. ~~cash~~The ~~proceeds~~consolidated offinancial ~~US$200,000~~statements ~~(CAD$234,000).~~do ~~The~~not ~~Series~~include Aany ~~Shares~~adjustments that ~~contain~~might ~~certain~~result ~~rights~~from ~~and~~the ~~preferences~~outcome asof ~~follows:~~this uncertainty.

• convertible into shares of common stock at the lower of US$0.07 per share, 85% of the previous twenty day volume weighted average pricing or 85% of the previous ten day volume weighted average pricing. • dividends of 8% per annum, payable quarterly, in cash or Series A Shares. • a holder of Series A Shares may not convert such Series A Shares into common stock exceeding either (i) 4.99% or (ii) 9.99% of the common stock outstanding unless such holder provides the Company with 61 days' notice that this limitation shall be waived. • no holder of Series A Shares shall be entitled to exercise more than 4.99% of the voting power of all of the Company's outstanding common stock. • registration rights to the holders of the Series A Shares that may be exercised in certain circumstances. • holders of Series A Shares are entitled to be paid 125% of the stated value of the Series A Shares, plus all accrued, but unpaid dividends on Series A Shares, upon liquidation or dissolution of the Company, including forms of mergers and acquisitions, in priority to any payments to the holders of shares of common stock. • holders of the Series A Shares may cause the Company to redeem the Series A Shares for 150% of their stated value, plus all accrued, but unpaid dividends on Series A Shares, upon the occurrence of a default, which includes being in default on any material contracts, securities, indebtedness, Articles of Incorporation and/or By-laws, delisting or late filing with the U.S. Securities and Exchange Commission (the “SEC”).5

~~Since the Series A Shares are~~VISCOUNT ~~redeemable in certain circumstances which are considered to be outside the control of the Company~~ SYSTEMS, ~~such shares have been classified as temporary equity~~INC. 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~~Notes 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~~Condensed ~~paid-in~~Consolidated ~~capital~~Financial ~~and the residual proceeds associated with the Series A Shares were allocated to temporary equity because the preferred stock is contingently redeemable.~~Statements

13(Expressed in Canadian dollars)

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

8.	Series A Shares, continued
	During the nine months ended September 30, 2015, the Company issued 79 Series A Shares representing Series A quarterly dividends. The embedded conversion options associated with the Series A Shares were valued using the Binomial Lattice model as they were denominated in USD currency and not in the Company’s reporting currency. The embedded conversion options associated with the Series A Shares were valued at $82,414 was recorded as a derivative liability.
	As the Company’s Quarterly Report on Form 10-Q (the “Form 10-Q”) for the quarter ended June 30, 2015 was not timely filed with the SEC (a “Redemption Event”), the Company is required to redeem the Series A Shares for 150% of their value if holders of 10% of the Stated Value (as defined in the Company’s Certificate of Designation, Preferences and Rights of the Series A Shares, as amended (the “Certificate”)) of the Series A Shares provide the Company with a written notice of redemption within sixty days after the Redemption Event becomes known to such holders (a “Redemption Request”). As of the date of this Form 10-Q, the Company has not received a Redemption Request or a waiver from holders of Series A Shares waiving their redemption rights in connection with the Redemption Event.
	Subsequent to September 30, 2015, the Company is in negotiations to issue Senior Secured Convertible Demand Promissory A Notes (the “Series A Demand Notes”) to certain holders of Series A Shares in the aggregate principal amount equal to 150% of the stated value of their Series A Shares in exchange for their outstanding Series A Shares. Interest on the Series A Demand Notes accrues at 14% per annum if all or any portion of the interest payable on the Series A Demand Notes is paid in cash (increasing to the lesser of 21% per annum and the highest amount permitted by applicable law in case of an event of default) and it accrues at 5% for each 30 days if all or any portion of the interest payable on the Series A Demand Notes is paid in Series A Demand Notes (increasing to 8% for each 30 days in case of an event of default).

3.	Significant accounting policies

	Accordingly, as of September 30, 2015, the Company recorded a $2,010,330 deemed dividend in order to accrete the Series A Shares up to its redemption value (150% of the stated value). In addition, the balance of the Series A Shares was reclassified from the mezzanine presentation to a current liability.
9.	Revised Consolidated Financial Statements
	Balance Sheet
	During the preparation of the Form 10-Q for the three months ended March 31, 2015, the Company identified an issue with the presentation of the Series A Shares as of December 31, 2014. The Series A Shares should be presented on the consolidated balance sheet outside of permanent equity since they are contingently redeemable for cash. There was no error in the accounting for the Series A Shares, other than the classification, and we believe this change in presentation has no material effect on the Company's financial statements.
	In accordance with SEC Staff Accounting Bulletin No 108 (“SAB 108”), the Company has evaluated this error, based on an analysis of quantitative and qualitative factors, as to whether it was material to the consolidated balance sheet as of December 31, 2014 and if amendments of previously filed financial statements with the SEC are required. The Company has determined that quantitatively and qualitatively, the classification error has no material impact to the consolidated balance sheet as of December 31, 2014, or prior periods.
	Income Statement
	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.

The significant accounting policies adopted by the Company are as follows:

14(a) Principles of consolidation The condensed consolidated financial statements include accounts and results of the Company and its wholly-owned subsidiary, Viscount Communication and Control Systems Inc. (“VCCS”). Intercompany transactions and balances have been eliminated on consolidation. (b) Use of estimates Management has made a number of estimates and judgments relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in order to prepare these consolidated financial statements in conformity with U.S. GAAP. Significant areas involving estimates include 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 equity instruments, stock-based compensation and derivative liabilities. Actual results could differ materially from those estimates. (c) Reportable segment 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 will discontinue its servicing business and operate in one segment, the manufacturing business. During the three months ended March 31, 2016, the Company has reclassified its servicing business as a discontinued operation on the accompanying condensed consolidated financial statements (see Note 13). (d) Discontinued operations The Company accounted for its decision to sell its servicing business as discontinued operations in accordance with the guidance provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, “Accounting for Impairment or Disposal of Long-Lived Assets, and ASC 205, Presentation of Financial Statements,” 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. (e) Foreign currency translation The functional and reporting currency of the Company and its wholly-owned subsidiary is the Canadian dollar. Accordingly, the financial statements are presented in Canadian dollars unless otherwise specified. Monetary assets and liabilities denominated in a foreign currency are translated at the exchange rate in effect at the balance sheet date while non-monetary assets and liabilities denominated in a foreign currency are translated at historical rates. Revenue and expense items denominated in a foreign currency are translated at exchange rates prevailing when such items are recognized in the statement of operations and comprehensive loss. Exchange gains or losses arising on translation of foreign currency items are included in the statement of operations and comprehensive loss.

~~VISCOUNT SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements(Expressed in Canadian dollars) (unaudited)~~ 6

10.	Fair Value of Financial Instruments
	The Company’s financial instruments consist of cash, short-term investments, trade accounts receivable, accounts payable, accrued liabilities, capital lease obligations, due to related parties and loans payable. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.
	Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. These fair value measurements apply to all financial instruments that are measured and reported on a fair value basis.
	Based on the observability of the inputs used in the valuation techniques, financial instruments are categorized according to the fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

VISCOUNT SYSTEMS, INC.

	Level 1 —	Observable inputs such as quoted prices in active markets.
	Level 2 —	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
	Level 3 —	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Notes to Condensed Consolidated Financial Statements

~~Financial assets are considered Level 3~~(Expressed ~~when~~in ~~their~~Canadian ~~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.~~ dollars)

~~The assessed level that a financial~~(Unaudited) ~~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~~3. In ~~such~~Significant ~~cases,~~accounting ~~the~~policies 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.(continued)

	(f)	Allowance for doubtful accounts

		Accounts receivable are shown net of an allowance for doubtful accounts of $93,467 and $97,249 as of March 31, 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.

	(g)	Net loss per share of common stock

		Basic net earnings (loss) per share is computed by dividing net earnings (loss) attributable to holders of the Company Common Stock, par value $0.001(“Common Stock”) by the weighted average number of common shares outstanding during the period. Diluted net earnings per share reflects the potential dilution that could occur if securities or other instruments to issue Common Stock were exercised or converted into Common Stock. Potentially dilutive securities are excluded from the computation of diluted net earnings per share if their inclusion would be anti-dilutive and consist of the following:

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

	March 31
	2016		2015
Warrants		53,752,128		82,372,128
Options		12,991,450		11,692,075
Series A preferred stock		3,130,695		27,156,802
Series A Demand Notes and Series B Demand Notes and accrued interest		546,398,752		-
Total potentially dilutive shares		616,273,025		121,221,005

10.	Fair Value of Financial Instruments, continued
	(h)	Sequencing Policy
	The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liabilities at every reporting period and recognizes gains or losses in the condensed consolidated statements of operations that are attributable to the change in the fair value of the derivative liabilities.
		The Company has adopted a sequencing policy that reclassifies contracts from equity to assets or liabilities for those with the earliest inception date first. Future issuances of securities will be evaluated as to reclassification as a liability under the sequencing policy which will take the earliest date first until either all of the Common Stock underlying the Company’s Series A Convertible Redeemable Preferred Stock, (“Series A Shares”), are settled or expired.
	A summary of the Company's Level 3 derivative liabilities for the nine months ended September 30, 2015 is as follows:
	(i)	Recently issued accounting pronouncements
		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.

Balance, December 31, 2014	$	2,858,618
Fair value change of derivative liabilities		(2,808,281	)
Fair value of embedded conversion options issued		373,184
Fair value of embedded conversion options in preferred shares issued as dividends		82,414
Transfers out due to extinguishment of financial instruments		(77,936	)
Balance, September 30, 2015	$	427,999

		In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The update is effective for annual periods beginning after December 15, 2017 including interim reporting periods therein. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

		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 consolidated financial position, results of operations or cash flows.

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. 7

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

	September 30,
	2015	2014
Volatility	94.9% - 117%	92% - 176%
Risk-free interest rate	0.33% - 1.37%	0.44% - 1.73%
Contractual term	0.33 - 5.00 yrs	1.84 - 5.00 yrs

Notes to Condensed Consolidated Financial Statements

16(Expressed in Canadian dollars)

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

11.	Capital Stock
	Common Stock
	Members of the Board are awarded shares of common stock (the “Restricted Common Stock”) as compensation for performing Board activities. On May 19, 2015, members of the Board received an aggregate of 4,500,000 shares of restricted common stock valued at $168,615, which will vest one year from the issuance date. These shares are expensed over the vesting period. During the three and nine months ended September 30, 2015, the Company recorded $29,502 and $61,826 of stock based compensation, respectively, related to the Restricted Common Stock. As of September 30, 2015 the unamortized value of the Restricted Common Stock is $106,789, which will be expensed over the remaining amortization period of 7.6 months. As of September 30, 2015, 4,500,000 shares of restricted common stock are unvested.
	Stock Options
	All stock options granted are exercisable in US$. A summary of the stock option activity for the nine months ended September 30, 2015 is as follows:

4.	Accounts Receivable Factoring

Weighted

Average

Aggregate

Number of

Average

Remaining Life

Intrinsic

Options

Exercise Price

In Years

Value

Outstanding at January 1, 2015

12,022,075

US$0.09

Employee Options Granted

400,000

US$0.06

Forfeited

(330,000

)

US$0.09

Expired

(20,000

)

US$0.10

Outstanding at September 30, 2015

12,072,075

US$0.09

3.42

Exercisable at September 30, 2015

11,822,075

US$0.09

3.22

As of March 31, 2016, invoices totaling an aggregate of $244,874 had been factored. The Company’s accounts receivable are purchased by the financing company on a recourse basis. Accordingly, the accounts receivable are retained on the Company’s balance sheet while advances from the financing company are recorded as accrued liabilities. Discounts provided and interest charged related to factoring of the accounts receivable totaled $3,494 and have been expensed on the accompanying condensed consolidated statements of operations as interest expense.

~~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~~5.02 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. Inventory

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

	For the Nine months Ended	For the Three months Ended	For the Nine months Ended
		March 31, 2016			December 31, 2015
	September 30, 2015	September 30, 2014	September 30, 2014
Raw materials		$	654,941		$	806,659
Risk free interest rate	0.28% - 0.98%	0.97%	0.97% - 1.55%
Work in process			59,587			88,682
Expected term	3 years	3 years	3 - 5 years
Finished goods			282,237			261,018
Expected volatility	80% - 140%	140%	113% - 140%
Sub total			996,765			1,156,359
Expected dividends	0%	0%	0%
Reserve for obsolescence and shrinkage			(535,076	)		(586,563	)
Total		$	461,689		$	569,796

~~The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2015 was $0~~6.00 ~~and~~Due ~~$0.02~~to ~~per~~Related ~~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.~~Parties

17Amounts due to directors for consulting fees and travel expenses totaled $134,583 and $91,683 as of March 31, 2016 and December 31, 2015, respectively.

~~VISCOUNT SYSTEMS, INC~~7. ~~Notes~~Series toA ~~Condensed Consolidated~~convertible ~~Financial~~redeemable ~~Statements(Expressed~~preferred ~~in Canadian dollars) (unaudited)~~ stock

11.	Capital Stock, continued
	Stock Options, continued
	A summary of the stock options outstanding and exercisable at September 30, 2015 is as follows:

As the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 was not timely filed with the SEC (a “Redemption Event”), the Company is required to redeem its Series A convertible redeemable preferred stock (the “Series A Shares”) for 150% of their value if holders of 10% of the Stated Value (as defined in the Company’s Certificate of Designation, Preferences and Rights of the Series A Shares, as amended (the “Certificate”)) of the Series A Shares provide the Company with a written notice of redemption within sixty days after the Redemption Event becomes known to such holders (a “Redemption Request”). Accordingly, the Company has recorded the Series A Shares at its redemption value as of March 31, 2016 and December 31, 2015.

			Exercisable Options
	Outstanding	Exercisable	Remaining
	Number of	Number of	Contractual Life	Aggregate
Exercise Price	Options	Options	in years	Intrinsic Value
US$ $0.02	150,000	150,000	9.6	$ -
US$ $0.04	304,375	54,375	0.2	-
US$ $0.08	1,500,000	1,500,000	0.7	-
US$ $0.09	10,016,450	10,016,450	3.6	-
US$ $0.10	45,000	45,000	1.8	-
US$ $0.15	56,250	56,250	0.2	-
	12,072,075	11,822,075	3.2	$ -

~~During the three and nine months ended~~VISCOUNT ~~September 30~~ SYSTEMS, ~~2015, the Company recorded stock based compensation expense of $6,750 and $6,750, respectively, related to the amortization of stock options~~INC. 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~~Notes to Condensed Consolidated Financial Statements

~~A summary of warrant activity during~~(Expressed ~~the~~in ~~nine~~Canadian ~~months ended September 30, 2015 is as follows:~~ dollars)

[1]

Weighted

Average

Aggregate

Number of

Average

Remaining Life

Intrinsic

Warrants

Exercise Price

In Years

Value

Outstanding at January 1, 2015

80,890,801

CAD$0.12

Issued in private placement transactions

1,462,500

CAD$0.16

Issued as compensation warrants

348,827

CAD$0.14

Outstanding at September 30, 2015

82,702,128

CAD$0.13

1.55

Exercisable at September 30, 2015

82,702,128

CAD$0.13

1.55

(Unaudited)

~~[1]~~During the ~~US$~~three ~~denominated~~months ~~warrants~~ended ~~are~~March 31, 2016, the Company issued 2 Series A Shares representing Series A quarterly dividends. The embedded ~~reflected~~conversion options associated with the Series A Shares were valued using the Binomial Lattice model as they were denominated in USD ~~their~~currency ~~CAD~~and not in the Company’s reporting currency. The embedded conversion options associated with the Series A Shares were valued at $3,131 ~~equivalents~~and $18,696 as of March 31, 2016 and December 31, 2015, respectively, and recorded as a derivative liability in the accompanying condensed consolidated financial statement.

18As of March 31, 2016 and December 31, 2015, there were 132 and 130 Series A Shares outstanding. The convertible redeemable preferred stock balance total of $269,880 is recorded in the condensed consolidated balance sheet as a liability at March 31, 2016 and December 31, 2015, as they are subject to mandatory redemption.

~~VISCOUNT SYSTEMS, INC~~8. Notes toLiability ~~Condensed Consolidated~~– ~~Financial~~Convertible ~~Statements(Expressed in Canadian dollars) (unaudited)~~ Debt

11.	Capital Stock, continued
	Warrants, continued
	On February 18, 2015, the Company also issued a total of 18,827 warrants of which 10,852 warrants were issued to an investor in connection with the common stock and 7,975 warrants to a Board member, to acquire Company stock at an exercise price of CAD$0.16 per share for a period of five years from the closing date. The warrants may be exercised on a cashless basis. These warrants were valued using a Binomial Model resulting in a compensation expense of $909.
	On May 1, 2015, the Company entered into a six month engagement agreement with a service provider pursuant to which the Company issued an immediately vested, five year warrant to purchase 330,000 shares of common stock at an exercise price of US $0.05 per share. The fair value of the warrants was US $4,401 on the grant date which amount is being amortized over the engagement term.
	The Company computed the fair value of compensation warrants granted using the Binomial Model, with the following assumptions:

The Company’s notes liability consists of Senior Secured Convertible Demand Promissory A Notes and Senior Secured Convertible Demand Promissory B Notes for which the conversion features were bifurcated and are being classified as a derivative liability, which is marked-to-market each reporting period. (“Series A and B Demand Notes”).

	For the Nine Months Ended
	September 30, 2015
Risk free interest rate	1.37% - 1.50%
Expected term	5.00
Expected volatility	104% - 107%
Expected dividends	0.00%

Notes liability balance – Convertible Debt

~~The weighted average grant date fair~~At ~~value~~March of31, ~~warrants~~2016, ~~granted~~the ~~during~~Company revalued the ~~nine~~US ~~months~~currency ~~ended~~denominated ~~September~~notes ~~30,~~liability ~~2015~~of ~~$0.05 per~~the ~~share.~~Series ~~There~~A ~~were~~and noB ~~warrants~~Demand ~~granted~~Notes ~~during~~at the ~~three months ended~~March ~~September 30~~31, ~~2015.~~2016 ~~The~~exchange ~~weighted~~rate ~~average~~and ~~grant~~recorded ~~date~~a ~~fair~~foreign ~~value~~currency exchange gain of ~~warrants granted~~$211,930 ~~during~~on the ~~three~~accompanying ~~and~~condensed ~~nine~~consolidated ~~months ended September 30, 2014 was $0.08 and~~statement ~~$0.08,~~of ~~respectively~~operations.

AAs of ~~summary~~December of31 2015 and March 31, 2016, the ~~warrants~~Series ~~outstanding~~ A and ~~exercisable~~B atDemand ~~September~~Notes ~~30,~~liability ~~2015~~balance is as$3,491,802 ~~follows:~~and $3,279,871, respectively.

			Weighted Average
			Remaining
Weighted Average			Contractual Life
Exercise Price		Warrants	in years
CAD$	0.065	2,500,000	0.73
CAD$	0.080	19,100,001	0.24
CAD$	0.090	975,000	3.82
CAD$	0.160	1,481,327	4.26
US$	0.050	17,272,014	1.79
US$	0.080	9,849,999	0.36
US$	0.090	4,937,650	1.80
US$	0.095	500,000	3.99
US$	0.100	7,690,000	2.63
US$	0.180	3,749,996	0.63
US$	0.200	14,646,141	3.13
CAD$	0.130	82,702,128	1.55

Interest payable – Convertible Debt

The Company’s ~~warrants~~Interest ~~outstanding~~payable ~~have~~– noConvertible Debt includes Payment in Kind (“PIK”) interests accrued to the ~~aggregate~~Series ~~intrinsic~~A ~~value~~and B Demand Notes holders in the amount of US $384,539 (CAD $499,901) and US $100,759 (CAD $130,987), respectively, as of ~~September~~March 3031, ~~2015~~2016. These amounts have been recorded as interest expense in the accompanying condensed consolidated statement of operations during the three months ended March 31, 2016.

19At March 31, 2016, the Company revalued the US currency denominated interest payable balance at the March 31, 2016 exchange rate. Interest payable amounted to $982,039 and $373,841 at March 31, 2016 and December 31, 2015, respectively.

~~VISCOUNT SYSTEMS, INC~~9. ~~Notes~~Reservation toof ~~Condensed Consolidated~~Authorized ~~Financial Statements(Expressed in Canadian dollars) (unaudited)~~ Shares

12.	Commitments and Contingencies
	Litigation
	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.
	Operating Leases
	Rent expense included in the condensed consolidated statements of operations for the nine months ended September 30, 2015 and 2014 is $108,167 and $106,362, respectively and $36,389 and $35,990 for the three months ended September 30, 2015 and 2014, respectively.
	Consulting Agreement
	The Company had an agreement with a consultant for public and investor relations. As consideration, the Company remitted a monthly fee of $12,500, of which $7,500 per month was paid in cash and $5,000 per month was paid in restricted stock. The agreement was for an initial period of six months from January to June 2015. On June 30, 2015, the agreement was terminated effective September 30, 2015.
13.	Segment Information
	The Company organizes 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.
	Management evaluates performance based on profit or loss from operations before income taxes and nonrecurring gains and losses, if any. Retail prices are used to report intersegment sales.

The Series A Demand Note and Series B Demand Note also require the Company to reserve from its authorized shares of Common Stock a number of shares of Common Stock sufficient to convert all of the Series A Demand Note and Demand B Note into shares of Common Stock. In order to do so, the Company has covenanted to increase its authorized shares of Common Stock to 3,000,000,000 shares as soon as possible. If the Company is unable to satisfy this covenant, the Company will owe to the note holders an amount equal to 2% of the aggregate principal amount of the Series A Demand Note and Series B Demand Note plus all accrued but unpaid interest. The Company has not reserved such shares as of March 31, 2016.

20On March 30, 2016, the note holders agreed to waive any rights that they may have to declare a default, and to pursue any remedies or impose any penalties as applicable to Series A Demand Note and Series B Demand Note, effective December 3, 2015 and thereon, including the Company’s three months ended March 31, 2016.

~~VISCOUNT SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements(Expressed in Canadian dollars) (unaudited)~~ 9

~~13. Segment Information~~VISCOUNT SYSTEMS, ~~continued The following table summarizes financial information about the Company’s business segments as of and for the three and nine months ended September 30, 2015 and 2014~~INC.

As of and for the three months ended
September 30, 2015		Manufacturing			Servicing		Total
Sales to external customers	$	912,135		$	265,076	$	1,177,211
Depreciation and amortization	$	11,887		$	-	$	11,887
Segment operating (loss) income	$	(623,647	)	$	200,892	$	(422,755	)
Total assets	$	1,885,828		$	-	$	1,885,828

Notes to Condensed Consolidated Financial Statements

As of and for the three months ended
September 30, 2014 (revised - see Note 9)		Manufacturing			Servicing		Total
Sales to external customers	$	1,044,226		$	374,978	$	1,419,204
Depreciation and amortization	$	15,913		$	5,223	$	21,136
Segment operating (loss) income	$	(808,355	)	$	80,248	$	(728,107	)
Total assets	$	2,138,807		$	10,447	$	2,149,254

(Expressed in Canadian dollars)

As of and for the nine months ended
September 30, 2015		Manufacturing			Servicing		Total
Sales to external customers	$	3,800,541		$	781,476	$	4,582,017
Depreciation and amortization	$	35,527		$	5,223	$	40,750
Segment operating (loss) income	$	(1,030,523	)	$	445,128	$	(585,395	)
Total assets	$	1,885,828		$	-	$	1,885,828

(Unaudited)

As of and for the nine months ended
September 30, 2014		Manufacturing			Servicing			Total
Sales to external customers	$	2,842,222		$	870,018		$	3,712,240
Depreciation and amortization	$	20,668		$	15,669		$	36,337
Segment operating loss	$	(3,278,132	)	$	(210,160	)	$	(3,488,292	)
Total assets	$	2,138,807		$	10,447		$	2,149,254

In consideration of this waiver, the Company agreed to file an Information Statement on Form 14A or Form 14C, as applicable, with the U.S. Securities and Exchange Commission and take all and any such action to cure the Subsequent Reserve Deficiency and the Subsequent Authorized Deficiency for the Notes (i) on or prior to the close of business on May 31, 2016 in the case of an Information Statement Schedule 14C filing or (ii) on or prior to the close of business on July 29, 2016 in the case of an Information Statement Schedule 14A filing. The penalties would be retroactive to the initial default date contained in the Notes if the increase of authorized shares cannot be completed by June 15, 2016, if no SEC comments to the Schedule 14C are received and July 31, 2016, if SEC comments are received. There can be no assurance that the Company will be able to increase its authorized shares.

2110. Fair Value of Financial Instruments

~~VISCOUNT~~The Company’s ~~SYSTEMS~~financial instruments consist of cash, ~~INC.~~short-term ~~Notes~~investments, trade accounts receivable, accounts payable, accrued liabilities, capital lease obligations, due to ~~Condensed~~related parties and loans payable. The carrying amount of these financial instruments ~~Consolidated~~approximates ~~Financial~~fair ~~Statements(Expressed~~value indue ~~Canadian~~either ~~dollars)~~to length of maturity or interest rates that approximate prevailing market rates unless otherwise ~~(unaudited)~~disclosed in these financial statements.

13.	Segment Information, continued
	Of the total sales for the nine months ended September 30, 2015 and 2014, $2,125,467 and $947,821, respectively, was derived from U.S.- based customers and $2,456,550 and $2,764,419, respectively was derived from Canadian-based customers. Substantially all of the Company's operations, assets and employees are located in Canada.
	MESH sales represented 40% and 38.5% of total revenue during the nine months ended September 30, 2015 and 2014, respectively. Freedom sales represented 43% and 34% of total revenue during the nine months ended September 30, 2015 and 2014, respectively. The balance of the Company’s revenues are derived from other products such as access tracking and control, closed circuit monitors, infrared and radio frequency remotes and servicing of intercom equipment.
14.	Net (Loss) Income per Share of Common Stock
	Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive securities using the treasury stock method. The following table sets forth the computation of basic and diluted (loss) income per common share.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. These fair value measurements apply to all financial instruments that are measured and reported on a fair value basis.

		Three months ended					Nine months ended
		September 30,					September 30,
		2015			2014		2015			2014
Numerator:
Net (loss) income	$	(387,264	)	$	779,069	$	2,050,566		$	(2,281,287	)
Preferred stock:
Series A convertible - contractual dividends		(37,765	)				(82,414	)
Series A convertible - deemed dividends		(2,010,330	)		-		(2,010,330	)		-
Net (loss) income attributable to common stockholders	$	(2,435,359	)	$	779,069	$	(42,178	)	$	(2,281,287	)
Denominator:
Weighted average number of common shares outstanding - basic		126,047,236			126,009,581		126,040,891			117,236,991
Effect of dilutive securities :
Dilutive securities realizable from the vesting of restricted stock		-			-		4,500,000			-
Convertible preferred stock, Series A		-			-		44,862,475			-
Total dilutive shares		-			-		49,362,475			-
Weighted average number of common shares outstanding - diluted		126,047,236			126,009,581		175,403,366			117,236,991
Earnings per share:
Basic	$	(0.02	)	$	0.01	$	(0.00	)	$	(0.02	)
Diluted	$	(0.02	)	$	0.01	$	(0.00	)	$	(0.02	)

Based on the observability of the inputs used in the valuation techniques, financial instruments are categorized according to the fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

	Level 1 —	Observable inputs such as quoted prices in active markets.

	Level 2 —	Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

	Level 3 —	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

~~VISCOUNT~~Financial assets ~~SYSTEMS~~are considered Level 3 when their fair values are determined using pricing models, ~~INC.~~discounted ~~Notes~~cash toflow ~~Condensed~~methodologies or ~~Consolidated~~similar ~~Financial~~techniques ~~Statements(Expressed~~and inat ~~Canadian~~least ~~dollars) (unaudited)~~one significant model assumption or input is unobservable.

~~14.~~The assessed ~~Net~~level ~~(Loss)~~that ~~Income~~a ~~per~~financial ~~Share~~asset ofor ~~Common~~liability ~~Stock,~~will ~~continued~~carry ~~The~~is ~~following~~determined ~~potentially~~by ~~dilutive~~the ~~securities~~Company’s ~~have~~Principal ~~been~~Financial ~~excluded~~Officer under ~~from~~management ~~the calculation~~ of ~~weighted~~the ~~average~~Chief ~~diluted~~Executive ~~common shares because their inclusion would have been anti-dilutive:~~Officer.

	September 30,
	2015	2014
Warrants	82,702,128	80,890,801
Options	12,072,075	11,752,075
Series A preferred stock	-	4,260,435
Total potentially dilutive shares	94,774,203	96,903,311

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.

~~15.~~The Company ~~Subsequent~~uses ~~Events~~Level ~~Management~~3 ~~has~~of ~~evaluated~~the ~~subsequent~~fair ~~events~~value orhierarchy ~~transactions~~to ~~occurring~~measure ~~through~~ the ~~date~~fair onvalue ~~which~~of the ~~financial~~derivative ~~statements~~liabilities ~~were~~and ~~issued.~~revalues ~~Based~~its ~~upon~~derivative liabilities ~~that~~at ~~evaluation,~~every ~~the~~reporting ~~Company~~period ~~did~~and ~~not~~recognizes ~~identify~~gains ~~any~~or ~~recognized~~losses orin ~~non-~~the ~~recognized~~condensed ~~subsequent~~consolidated ~~events~~statements ~~that~~of ~~would~~operations ~~have~~that are ~~required~~attributable ~~adjustment~~to orthe ~~disclosure~~change in the ~~condensed~~fair ~~consolidated~~value ~~financial~~of ~~statements~~the derivative liabilities.

23A summary of the Company’s Level 3 derivative liabilities for the three months ended March 31, 2016 is as follows:

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

Balance, December 31, 2015	$	4,383,668
Fair value change of derivative liabilities		(757,176	)
Fair value of embedded conversion options in preferred shares issued as dividends		3,131
Fair value of Warrants issued		5,498
Balance, March 31, 2016	$	3,635,121

~~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.~~ 10

~~Overview~~VISCOUNT SYSTEMS, INC.

~~We are a manufacturer of access control and telephone entry~~Notes ~~products,~~to ~~which~~Condensed ~~protect~~Consolidated ~~buildings~~Financial ~~from unauthorized access. The business consists of four divisions.~~ Statements

~~The newest and fastest growing division, started in 2011, is our Freedom Access Control software solution~~ (~~“Freedom”). This enterprise-wide~~Expressed 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~~Canadian 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(sdollars), 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~~(Unaudited) 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~~10. ~~Sales~~Fair ~~from~~Value ~~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~~Financial ~~per~~Instruments 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. (continued)

~~The last division is a service division that covers the~~Fair ~~Province~~value change of ~~British~~derivative 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.liabilities

24The derivative liabilities consist of 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 the Series A and B Demand Notes and Series A Share dividends.

~~Condensed~~The fair ~~Consolidated~~value ~~Results~~ of ~~Operations~~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 three months ended March 31, 2016 and 2015:

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

	March 31
	2016	2015
Volatility	111.63% - 125.84%	81% - 104%
Risk-free interest rate	0.73% - 1.21%	0.26% - 1.37%
Contractual term	1.18 - 5.00 yrs	0.69 - 5.00 yrs

~~Overview~~11. Capital Stock

~~We reported a net loss of $387,264 for the three months ended~~Stock ~~September~~Options 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~~On January 18, 2016, the Company granted its Principal Financial Officer 200,000 stock options at an exercise price of US$0.01, fully vested at the issuance date and are exercisable for two years unless extended in writing. The options had an aggregate grant date fair value of $1,823, which was recorded as stock based compensation expense on the accompanying condensed consolidated statement of operations during the three months ended March 31, 2016.

~~Sales for the three months ended September 30, 2015 and 2014~~A ~~were~~summary ~~$1,177,211 and $1,419,204, respectively, reflecting a decrease~~ of ~~$241,993 or~~stock ~~17%.~~option ~~Freedom~~activity ~~sales~~ for the three months ended ~~September~~March 3031, ~~2015 and 2014 were $318~~2016,~~073~~ ~~and~~is ~~$491,512,~~as 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. follows:

Gross profit

Weighted

Average

Aggregate

Number of

Average

Remaining Life

Intrinsic

Options

Exercise Price

In Years

Value

Outstanding at January 1, 2016

12,791,450

US$0.08

Employee Options Granted

200,000

US$0.01

Outstanding at March 31, 2016

12,991,450

US$0.08

3.45

Exercisable at March 31, 2016

12,241,450

US$0.08

2.90

~~Gross~~The Company ~~profit~~has ~~for~~computed the ~~three~~fair ~~months~~value ~~ended~~of ~~September~~warrants ~~30,~~and ~~2015~~options ~~and~~granted using the Black-Scholes option pricing model. Option forfeitures ~~2014~~are ~~were~~estimated ~~$700,977~~at the time of valuation and ~~$615~~reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures differ,~~015,~~ ~~respectively~~or are expected to differ, anfrom ~~increase~~the ofprevious ~~$85~~estimate,~~962~~ orwhen ~~14%~~it is material. The Company estimated forfeitures related to option grants at annual rates ranging from 0% to 5% for options granted ~~For~~during the three months ended ~~September~~March 3031, ~~2015~~2016. ~~and~~The ~~2014~~expected ~~cost~~term ofused ~~sales~~for warrants and ~~services~~ ~~were~~options ~~$476,234~~issued to non-employees is the contractual life and ~~$804,189~~the orexpected asterm aused ~~percentage~~for options issued to employees is the estimated period of ~~sales~~time ~~was~~that ~~40%~~options ~~and~~granted ~~57%,~~are expected ~~respectively~~to be outstanding. WeThe ~~have~~Company ~~continued~~utilizes the “simplified” method to ~~focus~~develop onan ~~controlling~~estimate of the ~~input~~expected ~~costs~~term byof ~~using~~“plain ~~multiple~~vanilla” ~~suppliers~~employee tooption ~~ensure~~grants. ~~that~~The ~~the~~Company ~~best~~is ~~and~~utilizing ~~most~~an ~~cost~~expected ~~effective~~volatility ~~raw~~figure ~~materials are~~based ~~used~~on ina ~~all~~review of ~~our~~the ~~products.~~historical volatilities, ~~The~~over ~~cost~~a period of ~~labor~~time, ~~and~~equivalent ~~travel incurred~~ to ~~generate~~ ~~our~~the ~~service~~expected ~~division~~life ~~sales~~of ~~has~~the ~~also~~instrument ~~been~~being ~~reduced~~valued. WeThe ~~also~~risk-free ~~increased~~interest rate ~~software~~was ~~sales~~determined ~~which~~from ~~have~~the implied yields from U.S. Treasury zero-coupon tobonds ~~minimal~~with ~~cost~~a remaining term consistent with the expected term of ~~sales.~~the instrument being valued.

~~Selling, general and administrative expenses~~ 11

~~For the three months ended September 30, 2015 and 2014,~~VISCOUNT ~~selling~~SYSTEMS, ~~general and administrative expenses were $890,521 and $1,153,566, respectively, reflecting a decrease of $263,045 or 23%~~INC. 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~~Notes to ~~and~~Condensed ~~development~~Consolidated Financial Statements

~~For the three months ended September 30, 2015 and 2014,~~(Expressed ~~research~~in ~~and~~Canadian 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. dollars)

~~Operating loss~~ (Unaudited)

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%11. ~~The~~Capital ~~increase~~Stock ~~in operating loss is the result of increases in expenses, partially offset by the increase in gross profit, as described above.~~(continued)

25The fair value of the options granted during the three months ended March 31, 2016 were determined using the Black-Scholes option pricing model using the following current market assumptions:

Other income (expense)

Volatility		111.63% - 125.84%
Risk-free interest rate		0.73% - 1.21%
Contractual term		1.30 - 5.00 yrs

~~Other~~The significant ~~income~~assumptions ~~was~~used ~~$35,491~~during ~~for~~ the ~~three~~year ~~months~~to ~~ended~~estimate ~~September 30,~~the ~~2015,~~fair ~~compared~~value toincluded ~~$1,507,176~~an ~~for~~expected ~~the~~term ~~nine~~(based ~~months~~on ~~ended~~the ~~September~~history ~~30,~~of ~~2014,~~exercises ~~reflecting~~and aforfeitures) ~~decrease~~and ofvolatility ~~$1,471,685~~(based ~~primarily~~on ~~due~~the tohistorical avolatility ~~decrease~~with ina ~~the~~look-back ~~gain realized~~period ~~from~~equivalent ~~the~~to ~~change in~~ the ~~fair~~expected ~~value of derivative liabilities~~term).

~~Dividends~~The weighted average grant date fair value of the options granted during the three months ended March 31, 2016 and 2015 was US$0.01 and $0.00 per option, respectively.

~~During the three months ended September 30, 2015, we recorded~~A ~~contractual~~summary ~~dividends in the amount~~ of ~~$37,765, which represented~~ the ~~value~~stock ~~of the embedded conversion~~ options ~~associated~~outstanding ~~with~~and ~~Series~~exercisable Aat ~~Shares~~March ~~issued as quarterly dividends. During the three months ended September 30~~31, ~~2015,~~2016 ~~we recorded~~is aas ~~deemed dividend in the amount of $2,010,330 in order to accrete the Series A Shares up to their redemption value.~~ follows:

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

		Outstanding		Exercisable		Remaining
		Number of		Number of		Contractual Life
Exercise Price		Options		Options		in years
US$	0.01		200,000		200,000		1.8
US$	0.02		1,150,000		400,000		9.5
US$	0.04		250,000		250,000		5.1
US$	0.08		1,350,000		1,350,000		0.0
US$	0.09		10,016,450		10,016,450		3.1
US$	0.10		25,000		25,000		1.3
			12,991,450		12,241,450		3.45

~~Overview~~During the three months ended March 31, 2016 and 2015, the Company recorded stock based compensation expense related to the stock options granted to employees of $14,998, and $908, respectively.

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. Warrants

~~Revenues~~A summary of warrant activity during the three months ended March 31, 2016 is as follows:

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.

				[1]		Weighted
				Weighted		Average		Aggregate
	Number of			Average		Remaining Life		Intrinsic
	Warrants			Exercise Price		In Years		Value
Outstanding at January 1, 2016		64,702,128		CAD$	0.15
Expired		(10,950,000	)	CAD$	0.10
Outstanding at March 31, 2016		53,752,128		CAD$	0.15		1.73	$	-
Exercisable at March 31, 2016		53,752,128		CAD$	0.15		1.73	$	-

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

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. 12

~~Selling~~VISCOUNT SYSTEMS, ~~general and administrative expenses~~ INC.

~~Selling, general and administrative expenses for the nine~~Notes ~~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~~Condensed inConsolidated ~~stock~~Financial ~~based compensation expenses.~~Statements

26(Expressed in Canadian dollars)

~~Research and development~~ (Unaudited)

~~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%~~11. ~~Research~~Capital ~~and~~Stock ~~development costs have increased during 2015 as compared to 2014 due to the hiring of newly created technical support personnel.~~ (continued)

~~Operating~~A summary ~~loss~~of the warrants outstanding and exercisable at March 31, 2016 is as follows:

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.

				Weighted Average
				Remaining
Weighted Average				Contractual Life
Exercise Price		Warrants		in years
CAD$	0.065		2,500,000		0.23
CAD$	0.090		975,000		1.04
CAD$	0.160		1,481,327		3.76
US$	0.050		17,272,014		1.29
US$	0.090		4,937,650		1.30
US$	0.095		500,000		3.49
US$	0.100		7,690,000		2.13
US$	0.180		3,749,996		0.13
US$	0.200		14,646,141		2.63
CAD$	0.147		53,752,128		1.73

~~Other~~The warrants ~~income~~outstanding ~~(expense)~~have no aggregate intrinsic value as of March 31, 2016.

~~Other~~12. ~~income~~Commitments ~~was~~and $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. Contingencies

~~Dividends~~ Litigation

~~During~~ In the ~~nine~~normal ~~months~~course ~~ended~~of ~~September 30~~business, ~~2015,~~the weCompany ~~recorded contractual~~may ~~dividends~~be involved in ~~the~~legal ~~amount~~proceedings, ofclaims ~~$82,414,~~and ~~which~~assessments ~~represented~~arising in the ~~value~~ordinary course of ~~the~~ ~~embedded~~business. ~~conversion~~Such ~~options~~matters ~~associated~~are ~~with~~subject ~~Series~~to Amany ~~Shares~~uncertainties, ~~issued~~and ~~as quarterly~~outcomes ~~dividends.~~are ~~During~~not ~~the~~predictable ~~nine~~with ~~months~~assurance. ~~ended~~There ~~September~~are no ~~30,~~such ~~2015,~~matters ~~we recorded~~that aare deemed ~~dividend~~material into the ~~amount~~condensed ofconsolidated ~~$2,010,330~~financial instatements ~~order~~as toof ~~accrete~~March ~~the Series~~31, A2016 ~~Shares~~and ~~up to their redemption value~~2015.

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

~~Liquidity~~Viscount filed a Notice of Civil Claim in the Supreme Court of British Columbia against Stephen Pineau, its former President, CEO and ~~Capital~~director on ~~Resources~~November 19, 2014 alleging that during the term of his employment, Mr. Pineau had misappropriated certain company funds. The Company sought damages for breach of contract and fiduciary duty, equitable relief, including restitution and recovery of Company funds owed, special, aggravated and punitive damages, as well as interest and costs, including special costs. Mr. Pineau denied these allegations, and on January 2, 2015, filed a counterclaim alleging that the Company owed him compensation for wrongful termination, bad faith damages, compensation he claimed he is owed by the Company, unpaid director’s fees and expenses. Viscount denied these allegations and asserted that Mr. Pineau’s termination, while initially without cause, was changed for cause post-termination once the Company discovered evidence of Mr. Pineau’s alleged misappropriation.

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. 13

~~Based on our current financial position, including the~~VISCOUNT ~~potential issuance of a substantial amount of demand notes~~SYSTEMS, ~~we could be required to fund our operations on a month-to-month basis~~INC. 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~~Notes ~~basis, which assumes that we will be able~~ to ~~realize~~Condensed ~~our~~Consolidated ~~assets~~Financial 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.Statements

27(Expressed in Canadian dollars)

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

~~Net~~12. ~~Cash~~Commitments ~~Used~~and inContingencies ~~Operating Activities~~ (continued)

~~During~~As of ~~the~~March ~~nine months ended September 30~~31, ~~2015 and 2014~~2016, ~~we experienced negative cash flows from operating activities in~~ the ~~amounts~~Company ~~of $166,785~~ and ~~$1,707,676,~~its ~~respectively.~~former ~~The net cash used in operating activities for the nine months ended September 30~~CEO, ~~2015~~Stephen ~~was~~Pineau ~~primarily~~came ~~due~~ to ~~net~~general ~~income~~terms of ~~$2,050,566~~ ~~reduced~~an byagreement ~~net~~to ~~non-cash~~resolve ~~expenses~~their ~~of $2,636,438 plus $419,087 of net~~outstanding ~~cash~~claim. ~~generated~~The ~~from~~parties ~~changes~~fully inand ~~the~~finally ~~levels~~settle ofall ~~operating~~issues ~~assets~~between ~~and liabilities~~them, ~~primarily~~ ~~from~~including anbut ~~increase~~not inlimited ~~the~~to ~~level of accounts payable~~Mr. ~~The~~Pineau’s ~~net cash used~~employment inand ~~operating~~its ~~activities~~termination, ~~for~~directorship ~~the~~and ~~nine~~its ~~months~~termination, ~~ended~~options ~~September~~and 30shareholdings, ~~2014,~~as ~~was primarily~~well ~~due~~as ~~to cash used to fund~~ the ~~net~~facts ~~loss of $2,281,287~~ and ~~non-~~matters ~~cash income~~plead ~~of $1,203,575 (the change~~ in the ~~fair value of derivative liabilities),~~ ~~partially~~action ~~offset~~referenced ~~by non-cash expenses of $2~~above,~~166,811,~~ ~~plus~~on ~~$389,625~~a ofmutual ~~net cash used to fund changes in the levels of operating assets~~ and ~~liabilities, primarily~~without-costs ~~from an increase in the level of accounts receivable~~basis.

~~Net~~Both parties ~~Cash~~executed ~~Used~~the inconsent ~~Investing~~order ~~Activities~~dismissing the claim and counterclaim as if there had been a trial on the issues with no costs payable to either party and agreed to take all actions and steps necessary to have it filed with the Vancouver Registry.

~~During~~The Company agreed to re-issue 3,000,000 stock options to Mr. Pineau on the ~~nine~~same ~~months~~terms ~~ended~~and ~~September~~at 30the same exercise price as those that expired in December 2013, ~~2015~~being ~~and~~$0.04 ~~2014~~CAD, except with the expiry date extended by five years (expiring in December, 2018). Accordingly, $5the Company valued the 3,~~480~~000,000 ~~and~~stock options at $~~150~~24,~~091~~627, ~~respectively,~~using ofthe ~~cash~~Black-Scholes ~~was~~Model. ~~used~~As toof ~~purchase~~March ~~property~~31, ~~and~~2016, the stock options ~~equipment.~~related litigation liability was $24,627.

~~Net~~The Company ~~Cash~~agreed ~~Provided~~to byextend ~~Financing~~Mr. ~~Activities~~Pineau’s 3,000,000 warrants exercisable at $0.08 CAD per share, which expired December 23, 2015 until December 23, 2018. Accordingly, the Company valued the 3,000,000 extended warrants at $18,476, using the Black-Scholes Model. As of March 31, 2016, the warrants related to litigation liability was $18,476.

~~During the nine months ended September 30, 2015 and 2014,~~As ~~$210,670 and $2,366,570, respectively,~~ of ~~cash~~March ~~was provided by financing activities. The net cash provided by financing activities for the nine months ended September 30~~31, ~~2015~~2016, ~~resulted~~such ~~from~~options ~~$234,000, $197,500~~ and ~~$3,050 of proceeds from the issuance of preferred stock, convertible notes and common stock and~~ warrants, ~~respectively,~~have ~~partially~~not ~~offset~~been ~~by payment of $7,630 and $5,000 for capital leases and deferred financing costs, respectively~~issued. ~~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~~Subsequent to ~~SHEET~~the ~~ARRANGEMENTS~~first quarter of 2016, the Company and its former CEO, Stephen Pineau have executed the consent order and the law case has been dismissed. The Company issued Mr. Pineau 3,000,000 stock options and 3,000,000 warrants as disclosed above.

~~There are no off-balance sheet arrangements that have or are~~Operating 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. Leases

~~CRITICAL~~Rent expense, ~~ACCOUNTING~~including ~~POLICIES~~the insurance charge, included in the condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015 was $36,390 and $35,789, respectively. The Company has renewed the lease agreement from June 1, 2016 to May 31, 2017.

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. 14

~~Preferred~~VISCOUNT SYSTEMS, ~~Stock~~ INC.

~~We apply the guidance enumerated in ASC 480 “Distinguishing~~Notes ~~Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject~~ to ~~mandatory~~Condensed ~~redemption~~Consolidated ~~(if~~Financial 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. Statements

28(Expressed in Canadian dollars)

~~Recent accounting pronouncements~~ (Unaudited)

~~In July 2015, the FASB issued Accounting Standards Update No~~13. ~~2015-11,~~ ~~Simplifying~~Results ~~the Measurement~~ of ~~Inventory~~Discontinued (“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. Operations

InDiscontinued operations ~~May~~represent ~~2014,~~ the ~~FASB~~Company’s ~~issued~~servicing ~~ASU No. 2014-09~~business, ~~Revenue~~as ~~from Contracts~~a ~~with~~result 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~~Company’s ~~to which~~decision ~~the company expects~~ to besell ~~entitled~~this inline 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~~business. ~~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~~A summary ~~are~~of ~~other~~the ~~various~~Company’s ~~updates~~results ~~recently~~of ~~issued,~~discontinued ~~most~~operations of ~~which represented~~its ~~technical~~servicing ~~corrections~~business tofor the ~~accounting~~three ~~literature~~months orended ~~application~~March to31, ~~specific~~2016 ~~industries~~and 2015 and ~~are~~the ~~not~~Company’s ~~expected~~assets toand aliabilities ~~have~~from adiscontinued ~~material~~operations ~~impact~~of onits ~~our condensed~~servicing ~~consolidated~~business ~~financial~~as ~~position~~of March 31, ~~results~~2016 ofand ~~operations~~December or31, ~~cash flows.~~2015 is as follows:

29Results of discontinued servicing business operations:

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

	Three Months Ended March 31,
	2016		2015
Sales	$	222,965	$	270,416
Cost of sales		89,061		96,715
Operating expenses		50,911		76,973
Income from discontinued operations, net of tax	$	82,993	$	96,728

Income per share from discontinued operations, basic and diluted	$	0.00	$	0.00

Weighted average shares outstanding, basic and diluted		126,047,236		126,026,928

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

Item 4. Controls and Procedures.

	March 31, 2016		December 31, 2015

Accounts receivable	$	37,135	$	59,317
Equipment, net	$	17,243	$	18,151

~~EVALUATION~~14. OFSales ~~DISCLOSURE CONTROLS AND PROCEDURES~~ Concentration

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.

	(a)	Of the total sales for the three months ended March 31, 2016 and 2015, $368,632 and $487,979, respectively, were derived from U.S.-based customers. Total sales of $613,246 and $566,501, respectively, were derived from Canadian-based customers. Substantially all of the Company’s operations, assets and employees are located in Canada.

	(b)	Products:
		Enterphone/MESH sales represented 66% and 58% of total revenue during the three months ended March 31, 2016 and 2015, respectively. Freedom sales represented 34% and 42% of total revenue during the three months ended March 31, 2016 and 2015, respectively.

~~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~~Subsequent 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. Events

~~Our management is responsible for establishing and maintaining~~Management ~~effective~~has ~~internal~~evaluated ~~control~~subsequent ~~over~~events ~~financial~~or ~~reporting.~~transactions ~~Under~~occurring ~~the~~through ~~supervision of our chief executive officer and principal financial officer,~~ the ~~Company conducted~~date anon ~~evaluation~~which of the ~~effectiveness~~financial ofstatements ~~our~~were ~~internal~~issued. ~~control over~~Based ~~financial~~upon ~~reporting~~that ~~as of December 31~~evaluation, ~~2014 using~~ the ~~criteria~~Company ~~established~~did ~~in Internal~~not ~~Control—Integrated~~identify ~~Framework~~any ~~issued~~recognized byor ~~the~~non- ~~Committee~~recognized ofsubsequent ~~Sponsoring Organizations~~events ~~of the Treadway Commission (“COSO”) issued in 1992. In 2013, COSO released an updated framework~~ that ~~becomes~~would ~~effective~~have ~~for year-ends beginning on~~required adjustment or ~~after~~disclosure ~~December~~in ~~15, 2014. Management is working to be compliant with~~ the ~~new framework~~condensed inconsolidated ~~time~~financial ~~for~~statements, ~~its~~except ~~annual~~as ~~assessment for the year ended December 31, 2015~~disclosed.

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: 15

aItem 2. ~~All~~Management’s ~~employees~~Discussion ~~have~~and ~~full~~Analysis ~~access to inventories. Inventories are not adequately secured from employees who do not need access; however, cameras are on site to mitigate any risk~~ of ~~theft.~~Financial b.Condition ~~The~~and ~~accounting~~Results ~~department has unrestricted access to all modules~~ of ~~the general ledger, however, the Controller reviews the ledgers regularly. c. There is a material weakness for the accounting and disclosure for complex transactions and financial reporting.~~Operations

~~Notwithstanding the existence of the deficiencies described~~We ~~above,~~maintain our ~~management~~books ~~has~~of ~~concluded~~account ~~that the financial statements included~~ in ~~this~~ ~~Quarterly~~Canadian ~~Report~~dollars on(“CAD”) ~~Form~~and ~~10-Q~~references ~~present~~to ~~fairly,~~dollar inamounts ~~all~~herein ~~material~~are ~~respects,~~to ~~our financial position, results of operations and cash flows for~~ the ~~periods~~lawful ~~presented~~currency inof ~~conformity~~Canada ~~with~~unless ~~U.S.~~otherwise ~~generally accepted accounting principles~~indicated. ~~Management is addressing the deficiencies as resources permit.~~

30Overview

~~During the quarter ended September 30, 2015, the Company’s~~Viscount ~~Controller and Principal Accounting Officer~~Systems, ~~Shavi Morsara resigned~~Inc. Inis ~~the interim,~~a wemanufacturer ~~are~~of ~~supplementing~~physical ~~our~~access ~~financial~~control ~~reporting~~systems ~~staff~~(“PACS” ~~with~~or ~~experienced consultants,~~“Freedom ~~including~~PACS”) ~~consultants with SEC, U.S. GAAP~~ and ~~complex transaction~~telephone ~~expertise.~~entry ~~Other than this change~~products, ~~there~~which ~~have~~protect ~~been~~buildings nofrom ~~changes~~unauthorized inaccess. ~~our~~The ~~internal control~~business ~~over~~consists ~~financial~~of ~~reporting~~three ~~that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting~~segments.

31The newest and fastest growing segment, started in 2011, is our Freedom PACS solution (“Freedom”). This enterprise-wide access control system secures and controls ingress and egress points including doors, elevators, turnstiles, mantraps, vehicle barriers, gates and garage doors throughout an end user’s building, facility or campus and prevents the entry of persons unknown or staff attempting to gain access to ingress/egress points at the wrong time or day. This product segment has experienced significant growth since its inception with a high gross margin. It is the focus of the largest percentage of the Company’s spending and efforts.

~~PART~~The legacy IIbusiness, –existing ~~OTHER~~since ~~INFORMATION~~1969, focusing on products and services for high rise residential and office buildings, generally described as telephone entry, such as Enterphone. Enterphone is used to provide intercom and access control functions in buildings. These products allow visitors to contact tenants or offices via a lobby telephone entry device to request and be granted entry. The Company has various premier brands in this marketplace, the high end product is called MESH and enables a touchscreen user interface experience as well as lower cost products that are sold through dealers and distributors throughout Canada and the United States. The telephone entry business received some reinvestment in 2015 to develop new products helping to regain market share. The most recent addition to the family of telephone entry products was “Enterphone iQ” launched in mid-year 2015.

~~Item~~We operate 1our service division which provides coverage to the Province of British Columbia (the “Service Division”). The ~~Legal~~primary ~~Proceedings~~revenue source for the Service Division is derived from maintenance agreements supporting Enterphone, EPX and other systems. In January 2016, we decided to sell the Service Division and created a special committee to market our servicing division. As a result, the Service Division is classified as held for sale and is treated as discontinued operations and prior periods presented financial results have been reclassified to give effect to this change (see Note 13. Discontinued Operations).

~~In the normal course of business, the Company may be involved~~Condensed inConsolidated ~~legal~~Results ~~proceedings, claims and assessments arising in the ordinary course~~ of ~~business.~~ ~~Such~~Operations 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~~Three months ~~1A.~~ended ~~Risk~~March ~~Factors.~~31, 2016 compared to the three months ended March 31, 2015

~~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.~~ Overview

~~Item~~We reported 2a net loss of $139,335 for the three months ended March 31, 2016, compared to net income of $139,853 for the three months ended March 31, 2015. ~~Unregistered~~The ~~Sales~~decline in net income of ~~Equity~~$279,188 ~~Securities~~is primarily due to interest expense on notes liabilities of $630,888 incurred during the three months ended March 31, 2016, partially offset by a foreign exchange gain on the revaluation of USD denominated notes liability of $211,930, and ~~Use~~an increased gain on the fair value change of ~~Proceeds~~derivative liabilities of $135,803.

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. Revenues

~~The~~Sales for ~~issuance~~the ofthree ~~the~~months ~~Series~~ended AMarch ~~Shares~~31, as2016 ~~disclosed~~and in2015 ~~this~~were ~~Item 2~~$981,878 ~~were~~and ~~made~~$1,054,480, inrespectively, ~~reliance~~reflecting ona ~~the~~decrease ~~exemption~~of ~~from~~$72,602 or ~~the~~7%. ~~registration~~Freedom ~~requirements~~sales of for the ~~Securities~~three ~~Act~~months ofended ~~1933~~March 31, as2016 ~~amended~~and ~~(the~~2015 ~~“Securities~~were ~~Act”)~~$329,707 asand ~~set~~$441,105, ~~forth~~respectively, ~~in Section~~reflecting 4(a~~)(2)~~ decrease of ~~the~~$111,398 ~~Securities~~or ~~Act~~25%, orwhich ~~Rule~~was ~~701~~mostly ~~promulgated~~due ~~under~~to ~~Section~~lower ~~3(b) of~~freedom equipment sales during the ~~Securities~~three ~~Act,~~months asended ~~applicable~~March 31, as2016. The ~~transactions~~decrease in Freedom sales were partially offset by an ~~issuer~~increase ~~not~~of ~~involving~~$38,796 or 6% from Mesh/Enterphone sales for the three months ~~any~~ended ~~public~~March ~~offering~~31, or2016, ~~pursuant~~compared to ~~benefit~~2015. ~~plans~~Mesh/Enterphone ~~and~~sales ~~contracts~~for ~~related~~the ~~to compensation~~three asmonths ~~provided~~ended ~~under~~March ~~Rule~~31, ~~701.~~2016 and 2015 were, $652,171 and $613,375, respectively.

~~Item 3. Defaults Upon Senior Securities.~~16

~~None.~~ Gross profit

~~Item~~Gross profit 4for the three months ended March 31, 2016 and 2015 was $530,079 and $490,817, respectively, an increase of $39,262 or 8%. For ~~Mine~~the ~~Safety~~three ~~Disclosures~~months ended March 31, 2016 and 2015, cost of sales were $451,799 and $563,663 or, as a percentage of sales, was 46% and 53%, respectively. Included in cost of sales is a recovery of inventory obsolescence and shrinkage amounting to $51,278 and $0 for the three months ended March 31, 2016 and 2015, respectively.

~~Not~~Gross margin ~~applicable~~for the three months ended March 31, 2016 and 2015 was 54% and 47%, respectively. During the three months ended March 31, 2016, management has continued to focus on controlling costs by using multiple suppliers to ensure that the best and most cost effective raw materials are used in all of our products.

~~Item~~The gross 5margin percentage for three months ended March 31, 2016 of our product categories of Mesh/Enterphone and Freedom, were 47% and 67%, respectively. ~~Other~~The ~~Information~~gross margin percentage for the three months ended March 31, 2015 of product categories of MESH/Enterphone and Freedom were 28% and 73%, respectively.

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

~~This~~For the ~~quarterly~~three ~~report~~months ~~contains~~ended ~~the revised~~March ~~condensed~~31, ~~consolidated~~2016 ~~statement~~and of2015, ~~operations~~selling, ~~for~~general ~~the~~and ~~three~~administrative ~~months ended~~expenses ~~September~~were $849,554 and $879,860, respectively, reflecting a decrease of $30,306 ~~2014~~or 3. ~~Refer~~5%. Such decreases in expenses, compared to ~~Note~~the 9first quarter of ~~the~~2015, ~~Notes~~are mainly due to lower ~~Condensed Consolidated~~salary ~~Financial~~costs ~~Statements~~from insales ~~this~~and ~~Quarterly~~administration ~~Report~~departments, onand ~~Form~~lower ~~10-Q~~benefit ~~for further~~expenses, ~~detail~~lower marketing costs and general administration expenditures, as well as lower sales commissions associated to decreased sales revenue. For the three months ended March 31, 2016 and 2015, selling, general and administrative expenses as a percentage of sales, were 87% and 83%, respectively.

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 Research 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. development

32Research and development costs for the three months ended March 31, 2016 and 2015 were $236,502 and $189,215, respectively, reflecting an increase of $47,287 or 25%. Research and development costs have increased during the first quarter of 2016 as compared to 2015 due to the hiring of new R&D consultants for the Federal Information Processing Standards (“FIPS”) project and technical support personnel. The Company will decrease R&D expenditures during 2016 due to the shortage of cash flow.

~~Item 6. Exhibits.~~Operating loss

31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.*
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.**
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

Operating loss for the three months ended March 31, 2016 was $555,977, compared to an operating loss of $578,258 for the three months ended March 31, 2015, reflecting a decrease of $22,281 or 4%. The decrease in operating loss is mainly the result of decreased cost of sales, as described above.

*Other income ~~Filed herewith~~ (expense)

**Other income, ~~Furnished~~net ~~herewith~~was $333,649 for the three months ended March 31, 2016, compared to $621,383 for the three months ended March 31, 2015, reflecting a decrease of $287,734 or 46%, primarily due to interest expense on notes liability of $630,888 incurred during the first quarter of 2016, partially offset by the foreign exchange gain on revaluation of USD denominated notes liability of $211,930, and an increased gain on the fair value change of derivative liabilities of $135,803. The favorable USD exchange rate of $1.30 at March 31, 2016, compared to $1.38 at December 31, 2015, contributed to the foreign exchange gain on notes liability revaluation and gain on the fair value change of derivative liabilities.

33Income from Discontinued Operations

~~SIGNATURES~~Income from discontinued operations is attributable to the net income related to the Service Division as a result of our decision in January 2016 to sell the Service Division. Income from discontinued operations of $82,993 for the three months ended March 31, 2016 is comprised of sales revenues of $222,965, cost of sales of $89,061 and operating expenses of $50,911. Income from discontinued operations of $96,728 for the three months ended March 31, 2015 is comprised of sales revenues of $270,416, cost of sales of $96,715 and operating expenses of $76,973.

~~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.~~ 17

~~Date:~~Series A ~~November~~Shares ~~23, 2015 VISCOUNT SYSTEMS, INC. (Registrant)~~Dividends

~~By:~~During the ~~/s/~~three ~~Scott~~months ~~Sieracki~~ended ~~Scott~~March ~~Sieracki~~31, ~~Interim~~2016 ~~Chief~~and ~~Executive~~2015, ~~Officer~~contractual ~~Principal~~dividends ~~Executive~~were $3,131 ~~Financial~~and $18,696, respectively, which represented the fair value of the embedded conversion options associated with Series A Shares issued as quarterly dividends. We issued 2 and 25 ~~Accounting~~Series ~~Officer~~A Shares during the first quarter of 2016 and 2015, respectively.

34Liquidity and Capital Resources

We had cash of $51,796 as of March 31, 2016 and negative working capital of $8,840,286 as of March 31, 2016. The large amount of negative working capital is mainly due to the notes liability, the derivative notes liability and accrued PIK interest payable on the Series A and B Demand Notes liabilities. We had an accumulated deficit of $16,398,136 as of March 31, 2016 and reported an operating loss for the three months ended March 31, 2016 of $555,977. Net cash used in operating activities for the three months ended March 31, 2016 was $184,910. We are subject to significant liquidity risk. These factors raise substantial doubt about our ability to raise sufficient working capital and continue operations as a going concern. At March 31, 2016, our current assets consist principally of cash, trade accounts receivables and inventory.

Based on our current financial position, we could be required to fund our operations on a month-to-month basis to cover our monthly operations, including monthly payroll expense, research and development expense, selling, general and administration expense, the cash needed to purchase the manufactory raw material or the sale of part of our business. The ability to continue operations is dependent upon raising additional capital and/or growing sales and achieving profits. We will likely require additional funds to support the development and marketing of our new Freedom products. Management is also seeking to sell one of our business units – the Service Division, due to its non-core nature, as an asset sale to raise sufficient capital for business operations. 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 curtailing our operations or selling additional assets. The management team will be working diligently to reduce operating expenses during 2016.

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. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

During the three months ended March 31, 2016 and 2015, our sources and uses of cash were as follows:

Net Cash Used in Operating Activities

During the three months ended March 31, 2016 and 2015, we experienced negative cash flows in operating activities from continuing operations in the amount of $290,993 and $369,007, respectively.

The net cash used in operating activities during the first quarter of 2016 was primarily due to net loss of $139,335, increased by net income from discontinued operations of $82,993 and increased by non-cash income of $969,107 resulting from the change in the fair value of derivative liabilities and the foreign exchange gain on the revaluation of notes liabilities, partially offset by the adjustment of net non-cash expenses of $14,717. Net cash generated from changes in the levels of operating assets and liabilities was $885,725, primarily from an increase in the level of accounts payable, accrued liabilities and notes interest payable, a decrease of the level of the inventory and an increase in accounts receivable. The net cash used in operating activities for the three months ended March 31, 2015 was primarily due to cash generated from the net income of $139,853, increased by the net income from discontinued operations of $96,728, and decreased by the adjustment of non-cash income of $621,373 resulting from the change in the fair value of derivative liabilities, partially offset by the adjustment of non-cash expenses of $55,014, plus $264,255 of net cash generated from changes in the levels of operating assets and liabilities, primarily from an increase of accounts payable and an increase in inventory and accounts receivable.

During the three month ended March 31, 2016 and 2015, net cash provided by operating activities from discontinued operations was $106,083 and $124,310, respectively.

Net Cash Used in Investing Activities

During the three months ended March 31, 2016 and 2015, $9,602 and $1,371, respectively, of cash was used to purchase property and equipment, consisting of computers, office furniture and leasehold improvements.

Net Cash Provided by Financing Activities

During the three months ended March 31, 2016, $3,962 of cash was used by financing activities. During the three month ended March 31, 2015, $234,560 of cash was provided by the financing activities. The net cash provided by financing activities during the first quarter of 2015, mainly resulted from $234,000 of proceeds from the issuance of preferred stock.

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

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements.

We base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on April 14, 2016, which we believe are the most critical to our business and the understanding of our results of operations and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Recent accounting pronouncements

See Note 3, Significant accounting policies, to the condensed consolidated financial statement for the three months ended March 31, 2016, included elsewhere in the document.

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.

Disclosure Controls and Procedures. Our management, under the supervision and with the participation of the Company’s Principal Financial Officer and Chief Executive Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 promulgated under the Exchange Act as of the end of the period covered by this Quarterly Report. Based on such evaluation, management has concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were not effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Principal Financial Officer and Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During the first quarter of 2016, we continued to undertake certain initiatives, including implementing policies, procedures and controls, to improve and remediate material weaknesses related to our internal control over financial reporting that were identified for the fiscal year ended December 31, 2015. There have been no other changes in our internal control over financial reporting during the first quarter of 2016, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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 March 31, 2016.

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.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Exhibits.

31.1	Certification by the Interim Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934	*

31.2	Certification by the Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the U.S. Securities Exchange Act of 1934	*

32.1	Section 1350 Certification of the Interim Chief Executive Officer	**

32.2	Section 1350 Certification of the Principal Financial Officer	**

101.INS XBRL Instance Document*

101.SCH XBRL Taxonomy Extension Schema Document*

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB XBRL Taxonomy Extension Label Linkbase Document*

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

** Furnished herewith

SIGNATURES

Pursuant to the requirements of Section13 or 51(d) 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.

Date: May 23, 2016	VISCOUNT SYSTEMS, INC.

	By:	/s/ Scott Sieracki
		Scott Sieracki
		Interim Chief Executive Officer

	By:	/s/ Zhi Yuan Zheng
		Zhi Yuan Zheng
		Principal Financial Officer

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