See accompanying notes to unaudited interim consolidated financial statements.
See accompanying notes to unaudited interim consolidated financial statements.
See accompanying notes to unaudited interim consolidated financial statements.
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
Validian Corporation (the Company) was incorporated in the State of Nevada on April 12, 1989 as CCC Funding Corp. The Company underwent several name changes before being renamed to Validian Corporation on January 28, 2003.
Since August 3, 1999, the efforts of the Company have been devoted primarily to the development of a high speed, highly secure method of transacting business using the Internet, and to the sale and marketing of the Companys products.
1. Basis of presentation
The accompanying consolidated financial statements include the accounts of Validian Corporation and its wholly owned subsidiaries (collectively, the "Company") after elimination of all significant intercompany balances and transactions. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While management has based its assumptions and estimates on the facts and circumstances currently known, final amounts may differ from such estimates.
The interim financial statements are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the financial position and results of operations of the Company for the periods presented. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full fiscal year ending December 31, 2016. These unaudited interim financial statements have been prepared following accounting principles consistent with those used in the annual audited financial statements and should be read in conjunction with the annual audited financial statements for the year ended December 31, 2015.
Going concern
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has no revenues, has negative working capital of $10,971,948, and stockholders deficiency of $10,971,948 as at March 31, 2016, and has incurred a loss of $843,113 and negative cash flow from operations of $382,404 for the three months then ended. Furthermore, the Company failed to settle certain 10% senior convertible notes and promissory notes plus accrued interest when they matured on various dates between October 2008 and December 2015. As a result of these non-payment defaults, all of the 10% senior convertible notes, as well as the promissory notes were in default at March 31, 2016, in accordance with the default provisions of the respective notes, and consequently are due and payable on demand. In addition, the Company expects to continue to incur operating losses for the foreseeable future, and has no lines of credit or other financing facilities in place.
The Company expects to incur operating expenses of approximately $1,360,000 for the year ending December 31, 2016, subject to the availability of adequate funding. In the event the Company cannot raise the additional funds necessary to finance its research and development and sales and marketing activities, it may have to cease operations.
All of the factors above raise substantial doubt about the Companys ability to continue as a going concern. Managements plan to address these issues includes raising capital through the private placement of equity, the exercise of previously-issued equity instruments and through the issuance of additional promissory notes. The Companys ability to continue as a going concern is subject to managements ability to successfully implement these plans. Failure to do so could have a material adverse effect on the Companys position and or results of operations and could also result in the Company ceasing operations. The consolidated financial statements do not include adjustments that would be required if the assets are not realized and the liabilities settled in the normal course of operations.
Even if successful in obtaining financing in the near term, the Company cannot be certain that cash generated from its future operations will be sufficient to satisfy its liquidity requirements in the longer term, and it may need to continue to raise capital by issuing additional equity or by obtaining credit facilities. The Companys future capital requirements will depend on many factors, including, but not limited to, the market acceptance of its products and the level of its promotional activities and advertising required to generate product sales. No assurance can be given that any such additional funding will be available or that, if available, it can be obtained on terms favorable to the Company.
5
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
2. Promissory notes payable
The following table sets forth the financial statement presentation of the promissory note proceeds on issuance, and the changes in the financial statement presentation of the balance allocated to the notes as at and for the periods ended March 31, 2016 and December 31, 2015:
|
|
|
|
Three months
|
Year ended
|
|
ended March 31, 2016
|
December 31, 2015
|
|
(unaudited)
|
|
Balance beginning of period
|
$ 36,250
|
$ 46,250
|
|
|
|
Principal repaid
|
--
|
(10,000)
|
|
|
|
Balance end of period
|
$ 36,250
|
$ 36,250
|
Included in interest and financing costs for the three months ended March 31, 2016 is $1,085 (2015: $1,368), of interest on the promissory notes. Interest on the promissory notes paid in cash during the three months ended March 31, 2016 is $nil (2015: $nil).
3. 10% Senior convertible notes
The following table sets forth the financial statement presentation of the note proceeds on issuance, and the changes in financial statement presentation of the balance allocated to the 10% senior convertible notes for the periods ended March 31, 2016 and December 31, 2015:
|
|
|
|
Three months
|
Year
|
|
Ended
|
Ended
|
|
March 31, 2016
|
December 31, 2015
|
|
(unaudited)
|
|
Balance beginning of period
|
$ 6,721,291
|
$ 6,805,886
|
|
|
|
Note proceeds on issuance
|
60,000
|
1,173,307
|
Allocated to common stock and additional paid-in capital for the relative
|
|
|
fair value of stock issued to holders of the notes:
|
|
|
Allocated to common stock par value
|
(180)
|
(2,595)
|
Allocated to additional paid-in capital
|
(5,100)
|
(97,472)
|
|
(5,280)
|
(100,067)
|
Allocated to additional paid-in capital for the intrinsic value of the
|
|
|
beneficial conversion feature
|
(9,614)
|
(654,456)
|
Proceeds allocated to 10% senior convertible notes on issuance
|
45,106
|
418,784
|
|
|
|
Accretion recorded as a charge to interest and financing costs
|
14,894
|
754,523
|
Principal repaid in cash
|
(38,453)
|
(298,415)
|
Principal converted in accordance with the terms of the notes
|
--
|
(702,597)
|
Principal repaid through the issuance of new 10% senior convertible
|
|
|
notes
|
--
|
(256,890)
|
|
|
|
|
6,742,838
|
6,721,291
|
Payable to related parties (note 8)
|
(558,053)
|
(566,507)
|
|
|
|
|
$ 6,184,785
|
$ 6,154,784
|
6
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
3. 10% Senior convertible notes (continued)
During the three months ended March 31, 2016, the Company issued an aggregate of $60,000 of its 10% senior convertible notes, for cash, and repaid an aggregate of $38,453 in principal.
Under the terms of the notes issued during the three months ended March 31, 2016, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest into common stock of the company, at a rate of one common share for each $0.03 of debt converted. The Company has the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, with the permission of the holders. Interest on the notes is accrued until the notes are either repaid by the Company or converted by the holder. At the Companys option, interest may be paid either in cash or in common shares of the Company. If interest is paid in common shares, the number of shares required for settlement will be calculated at the rate of conversion in effect for the conversion of the note principal. $50,000 of the notes are payable on demand; $10,000 of the notes mature on December 31, 2016.
Notwithstanding the stated maturity date, all of the notes issued during the three months ended March 31, 2016 are payable on demand, pursuant to the default provisions of the notes, as described below.
Holders of the notes issued during the three months ended March 31, 2016 were granted 180,000 common shares of the Company upon issuance of the notes; $5,280, representing the relative fair value of the common shares at the issuance date, was allocated to the common shares par value and additional paid in capital.
At the date of issuance, the conversion feature of the notes was in-the-money. $9,614, representing the relative fair value of the beneficial conversion feature, was allocated to additional paid in capital.
The Company failed to settle certain of its 10% senior convertible notes plus accrued interest thereon when they matured on various dates between October 1, 2008 and December 31, 2015. At March 31, 2016, a significant portion of these notes remained in default for non-payment. As a result of these non-payment defaults, all of the 10% senior convertible notes are in default at March 31, 2016, in accordance with the default provisions of the notes, and consequently are payable on demand. Interest is accrued at the coupon rate on all notes outstanding past the maturity date.
The following table summarizes information regarding the 10% senior convertible notes outstanding at March 31, 2016:
|
|
Note
|
Conversion
|
Principal
|
Rate
|
$ 5,731,331
|
$0.03
|
511,507
|
0.038
|
500,000
|
0.10
|
$ 6,742,838
|
|
At March 31, 2016, $2,835,025 of the 10% senior convertible notes were secured by a first position lien on all of the assets of the Company. The remaining $3,907,813 were unsecured. As a result of the event of default noted above, holders of secured notes have the right to exercise their lien on all of the assets of the Company.
Included in interest and financing costs for the three months ended March 31, 2016 is $172,911 (2015: $169,814) in coupon rate interest accrued on the 10% senior convertible notes, and $14,894 (2015: $501,344) in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.
At March 31, 2016, the fair value of the stock issuable to fully convert the 10% senior convertible note principal, was $6,075,647, which is $667,191 less than the principal outstanding on that date.
7
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
4. Convertible promissory notes
During the three months ended March 31, 2016, the Company issued $356,111 of its convertible promissory notes for cash. The notes bear interest at the rate of 8% until they mature, or until there is an event of default; thereafter, any portion of the principal or interest which has not been settled will be subject to interest at the rate of 22% per annum.
$55,000 of the notes issued during the three months ended March 31, 2016 mature on January 5, 2017, and may be prepaid during the period from issuance to July 3, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment. The holder has the option to convert any balance of principal and interest which is unpaid at July 3, 2016, or thereafter, into common stock of the Company. The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 40%.
$50,000 of the notes issued during the three months ended March 31, 2016 mature on November 8, 2016, and may be prepaid during the period from issuance to July 29, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment. The holder has the option to convert any balance of principal and interest which is unpaid at July 29, 2016 or thereafter, into common stock of the Company. The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the ten trading days immediately preceding such conversion, discounted by 49%.
$40,000 of the notes issued during the three months ended March 31, 2016 mature on February 22, 2017, and may be prepaid during the period from issuance to August 20, 2016, in part or in full, at various rates ranging from 120% to 145% of the principal balance plus accrued interest to the date of prepayment. The holder has the option to convert any balance of principal and interest which is unpaid at any time, into common stock of the Company. The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.
$111,111 of the notes issued during the three months ended March 31, 2016 mature on March 2, 2018. The holder has the option to convert any balance of principal and interest which is unpaid at August 29, 2016 or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as the average of the lowest two trading prices during the twenty-five trading days immediately preceding such conversion, discounted by 40%.
$100,000 of the notes issued during the three months ended March 31, 2016 mature on December 15, 2016, and may be prepaid during the period from issuance to September 11, 2016, in full, at various rates ranging from 135% to 150% of the principal balance plus accrued interest to the date of prepayment. The holder has the option to convert any balance of principal and interest which is unpaid at September 11, 2016 or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.
$316,938, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital; the notes are being accreted to their face value over the term of the notes, through periodic charges to interest expense using the effective interest rate method.
$7,025 in finance fees, and $20,111 in original issue discounts, were incurred in relation to the convertible promissory notes issued during the three months ended March 31, 2016, and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.
During the three months ended March 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $118,000 of note principal, plus $4,720 of accrued interest thereon, into 8,223,430 shares of the Companys common stock.
8
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
4. Convertible promissory notes (continued)
The convertible promissory notes contain penalty provisions relating to events of default, pursuant to which the Company could be required not only to pay interest at the rate of 22% following such an event, but also to pay immediately 150% of the principal outstanding plus accrued interest and penalty interest; alternatively, the Company could be required, at the discretion of the holder, to issue stock in satisfaction of the value determined under such penalty provisions, at the rate of conversion in effect at such time as the holder so elects. In addition to non-payment of the note principal and interest at maturity or failure to transfer stock on receipt of a notice of conversion from the holder, events of default include making an assignment or appointment of a receiver or trustee, ceasing operations, liquidating assets or entering into bankruptcy proceedings; certain money judgments filed against the Company; breach of covenants, representations or warranties under the note; delisting of the Companys stock or failure to comply with the exchange act; failure to maintain property or rights which are necessary to the Companys business; certain restatements of the Companys financial statements as filed with the SEC during the preceding two years; effectuating a reverse stock split without first providing the holder with 20 days notice of such occurrence; replacing the Companys transfer agent without first providing to the successor transfer agent, the necessary instructions to effect a transfer of stock to the holder pursuant to the terms of the note.
The discount to market conversion feature of the convertible promissory notes causes a theoretical possibility that the Company may be required to settle the notes by issuing more shares than are authorized. Furthermore, this feature causes the notes to fall within the FAS 133 definition of a derivative liability. Management has calculated that the maximum number of shares required to convert the principal plus accrued interest on the convertible notes at March 31, 2016 was 35,550,785, which represents approximately 11% of the authorized, unissued shares at that date, and has also estimated that the fair value of the notes at March 31, 2016 approximates face value, therefore no adjustment for fair value restatement has been made.
The convertible promissory notes are being accreted to their face value over the term of the notes through periodic charges to interest expense. During the three months ended March 31, 2016, accretion of $109,844 (2015: $144,420) was included in interest and financing costs.
Also included in interest and financing costs for the three months ended March 31, 2016 is $6,613 (2015: $47,811) relating to accrued coupon-rate and bonus interest on the convertible promissory notes; $7,851 (2015: $8,875) relating to the amortization of deferred finance fees incurred in connection with the placement of the convertible promissory notes; and $571(2015: $nil) relating to the amortization of deferred original issue discount on the convertible promissory notes.
At March 31, 2016, the fair value of the stock issuable to fully convert the convertible promissory note principal was $1,016,426, which exceeded the principal amount outstanding on that date by $532,815.
5. Stockholders deficiency
(a) Common stock transactions
During the three months ended March 31, 2016, the Company issued an aggregate of 9,000,000 shares of its common stock as remuneration for consulting services rendered and to be rendered. $279,800, representing the fair value of the stock at issuance, was allocated to shares and additional paid in capital, and will be allocated to expense over the term of the related contracts.
During the three months ended March 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes and converted an aggregate of $118,000 of note principal and $4,720 in accrued interest thereon, into 8,223,430 shares of the Companys common stock.
In connection with the issuance of the Companys 10% senior convertible notes during the three months ended March 31, 2016, the Company issued 180,000 shares of its common stock, with a relative fair value of $5,280, to the holders of the notes.
On February 8, 2016, the Company issued 100,000 shares of its common stock, valued at $3,090, in settlement of $3,000 in accounts payable. A loss of $90 has been recognized in connection with this transaction.
9
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
5. Stockholders deficiency (continued)
(b)
Stock-based compensation
The following table presents the total of stock-based compensation included in the expenses of the Company for the three months ended March 31, 2016 and 2015:
|
|
|
|
Three Months Ended
March 31,
|
|
2016
|
2015
|
|
|
|
Selling, general and administrative
|
$ 139,467
|
$ 38,967
|
Total stock-based compensation included in expenses
|
$ 139,467
|
$ 38,967
|
6. Interest and financing costs
Interest and financing costs include accrued and paid coupon rate interest and accretion and financing costs relating to the 10% senior convertible notes and convertible promissory notes.
7. Loss per share
As the Company incurred a net loss during the three months ended March 31, 2016, and during the three months ended March 31, 2015, the loss and diluted loss per common share are based on the weighted-average common shares outstanding during the period. The following outstanding instruments could have a dilutive effect in the future:
|
|
|
|
March 31, 2016
|
March 31, 2015
|
|
(unaudited)
|
(unaudited)
|
Shares issuable on conversion of 10% senior
|
|
|
convertible notes
|
209,505,075
|
216,826,310
|
Shares issuable on conversion of convertible promissory
notes and accrued interest thereon
|
35,550,785
|
12,742,329
|
Stock options
|
7,500,000
|
--
|
Total
|
252,555,860
|
229,568,639
|
8. Related party transactions
Included in 10% senior convertible notes payable (note 3) is $510,495 (December 31, 2015 $518,949) payable to a director and to a company controlled by a director, and $47,558 (December 31, 2015: $47,558) payable to an individual related to a director and a company controlled by an individual related to a director.
$381,175 (December 31, 2015: $367,051) in accrued interest charges relating to the 10% senior convertible notes is included in accrued liabilities at March 31, 2016. $14,124 (2015: $15,312) is included in interest and financing costs for the three months ended March 31, 2016.
10
VALIDIAN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Interim Consolidated, Condensed Financial Statements
March 31, 2016
(In United States dollars)
9. Supplementary cash flow information
The Company paid no income taxes during the three months ended March 31, 2016, nor during the three months ended March 31, 2015. Interest paid in cash during the three months ended March 31, 2016 was $nil (2015: $46,860).
Non-cash financing activities are excluded from the consolidated statements of cash flows. The following is a summary of such activities for the three months ended March 31, 2016 and 2015:
|
|
|
|
2016
|
2015
|
|
|
|
Issuance of the Companys common stock on conversion of convertible
|
|
|
promissory notes plus accrued interest thereon
|
$ 122,720
|
$ --
|
Issuance of the Companys common stock as compensation to consultants
|
279,800
|
224,500
|
Issuance of the Companys common stock in settlement of accounts payable
|
|
|
and accrued liabilities
|
3,000
|
--
|
Issuance of the Companys common stock on conversion of the 10% senior
|
|
|
convertible notes plus accrued interest thereon
|
--
|
350,000
|
Issuance of the Companys 10% senior convertible notes in settlement of
|
|
|
previously issued 10% senior convertible notes and accrued interest thereon
|
--
|
288,308
|
Issuance of the Companys common stock in settlement of accrued interest
|
|
|
on the 10% senior convertible notes
|
--
|
54,231
|
Total
|
$ 405,520
|
$ 972,159
|
10. Fair value measurements
The carrying value of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities approximates fair value due to the short term to maturity of these instruments. The carrying value of the 10% senior convertible notes, the convertible promissory notes, and the promissory notes approximate fair value, due to the issuance of certain of these debt instruments during the three months prior and/or subsequent to the period ended March 31, 2016, under conditions substantially identical to those existing at March 31, 2016.
11. Recent accounting pronouncements
Management does not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
12. Subsequent events
On April 12, 2016, the Company issued $10,000 of its 10% senior convertible notes, for cash. The notes are payable on December 31, 2016; the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest into common stock of the Company at a ratio of one common share for each $0.03 of debt converted; the Company may pre-pay all or any portion of the balance outstanding on the notes at any time without penalty or bonus, with permission from the holder; interest is payable on conversion of the notes, and may, at the Companys option, be paid in either cash or in common shares of the Company at the rate of one common share for each $0.03 of interest settled. The Company issued 30,000 shares of its common stock to the holders pursuant to the terms of the notes.
On April 25, 2016, the Company issued 100,000 shares of its common stock in settlement of $3,000 in accounts payable.
Except for the foregoing, we have evaluated subsequent events through the date the financial statements were issued. All material events have been disclosed.
11