Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
In this section, we explain our consolidated financial condition and results of operations for the years ended December 31, 2017 and December 31, 2016. As you read this section, you may find it helpful to refer to our Consolidated Financial Statements in Item 8 of this annual report.
Until we acquired our former subsidiary, Graph-O-Logic, S.A. in August 1999, we had no material or substantive business operations. Since then, our business has been as more fully described in " Part I, Item 1: Description of Business". Accordingly, in this section we focus solely on the historical business operations of the subsidiary and our current business plan and operations.
Critical Accounting Policies
We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies and methods used in preparation of the financial statements are described in note 2 to our 2017 Consolidated Financial Statements included with this Annual Report on Form 10-K for the year ended December 31, 2017. We evaluate our estimates and assumptions on a regular basis, based on historical experience and other relevant factors. Actual results could differ materially from these estimates and assumptions. The following critical accounting policies are impacted by judgments, assumptions and estimates used in preparation of our December 31, 2017 Consolidated Financial Statements.
Research and development expenses
:
We expense all of our research and development expenses in the period in which they are incurred. At such time as our products are determined to be commercially available, we will capitalize those development expenditures that are related to the maintenance of the commercial products and amortize these capitalized expenditures over the estimated life of the commercial product. The estimated life of the commercial product will be based on managements estimates, including estimates of current and future industry conditions. A significant change to these assumptions could impact the estimated useful life of our commercial products resulting in a change to amortization expense and impairment charges.
Stock-based compensation
:
The Corporation accounts for stock-based compensation in accordance with the provisions of ASC Topic 718 Compensation stock compensation). ASC Topic 718 requires all share-based payments, including stock options granted by the Corporation to its employees, to be recognized as expenses, based on the fair value of the share-based payments at the date of grant. For purposes of estimating the grant date fair value of stock-based compensation, the Corporation uses the Black Scholes option-pricing model and has elected to treat awards with graded vesting as a single award. The fair value of awards granted is recognized as compensation expense on a straight-line basis over the requisite service period, which in the Corporations circumstances is the stated vesting period of the award.
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Financial instruments
:
We have issued convertible notes and convertible notes with common shares. The fair value of the convertible notes is required to be estimated as well as the fair value of the convertible notes issued with common shares. There are significant assumptions and management estimates used in determining these amounts. A significant change to these assumptions could result in a significant change to the fair value of the convertible notes.
Plan of Operations
We are a development stage enterprise. As such, our historical results of operations are unlikely to provide a meaningful understanding of the activities expected to take place during the period through December 31, 2018. Our major initiatives through December 31, 2018 are:
*
obtaining commercial sales of our products, and continuing our current marketing program;
*
developing and improving product agents to perform specialized functions common to many e-commerce sites and m-commerce; and
*
furthering the development of our products.
For more information, please see Part 1. Item 1: Description of Business Our Technology.
Sales and Marketing Plans:
We will continue our marketing process with our focus being potential customers located in North America, Latin America, Europe, the Middle East and Asia Pacific. The potential customers and our current marketing program are more fully described in Part 1. Item 1: Description of Business - Target Market.
We will continue to focus our marketing efforts on identifying potential customers by presenting technical seminars, participating in trade shows, using the services of social media, public relations firms, market research, the creation and dissemination of technical and commercial collateral materials, the maintenance and periodic re-design of our website, and the placement of advertisements in print and electronic publications. Subject to our ability to obtain adequate funding, we plan on spending $100,000 on our marketing efforts during the year ending December 31, 2018.
Our sales representatives, who are compensated on a base compensation plus commission basis, will follow up with potential customers identified through our marketing efforts, with the objective of more fully explaining the benefits of our products and negotiating the terms of the licensing of our products. Subject to our ability to obtain adequate funding, we expect to spend approximately $200,000 on our sales initiatives, including compensation and travel expenses, during the year ending December 31, 2018.
Subject to our ability to obtain adequate funding, our sales and marketing expenditures for the year ending December 31, 2018 are expected to total $300,000.
Cost of Sales and Services:
In the event that our sales efforts are successful, we will need to assist our customers in the implementation of our products. Depending on the success of our sales efforts, and subject to our ability to obtain adequate funding, we expect to spend $10,000 on training and related activities during the year ending December 31, 2018.
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Product Development:
We plan on continuing to fund third parties to develop our key technology and related products, under the direction and management of our product management group and our senior management. For more information please see Part 1. Item 1. Description of Business - Our Technology.
We will improve and further develop our products based on responses from potential customers. The costs associated with our product development activities are primarily those currently planned and thus are subject to a high degree of control. Subject to our ability to obtain adequate funding, we estimate that the cost of our product development program during the year ending December 31, 2018 will be $900,000.
General and Administrative Expenses:
Subject to our ability to obtain adequate funding, we expect to spend $262,000 on general and administrative activities during the year ending December 31, 2018.
In summary, provided we are able to obtain adequate funding, we expect to spend a total of $1,472,000 for all expenses during the year ending December 31, 2018, subject to our ability to generate revenues from the licensing of our products and our ability to raise additional capital.
Since entering the development stage, we have obtained financing through the private placement of preferred shares, debt, convertible debentures, common stock and warrants, and through the exercise of some of these warrants. Until such time as we generate sufficient revenues from the licensing of our software applications, we will continue to be dependent on raising substantial amounts of additional capital through any one or a combination of debt offerings or equity offerings, including but not limited to:
*
debt instruments, including demand notes and convertible notes similar to those discussed below in Liquidity and Capital Resources;
*
private placements of preferred shares and of common stock;
*
exercise of stock options at a weighted average exercise price of $0.04 per share; or
*
funding from potential clientele or future industry partners.
Results of Operations
In this section, we discuss our operations for the periods indicated and the factors affecting them that resulted in changes from one period to the other.
The fiscal year ended December 31, 2017 compared to the fiscal year ended December 31, 2016
Revenue:
On January 1, 2006 we entered into an agreement with a Value-Added Reseller (VAR), pursuant to which we granted the VAR a license to sell our software to the VARs customers for a period of three years. As a result of subsequent delays in completing certain of our software products to a market ready stage, and in consideration of the general market decline during 2009, we have agreed to extend the expiry of this agreement, with terms to be negotiated upon completion of our current development initiatives. Our fee for this license, excluding applicable sales taxes, was $155,000, of which $151,650 has been collected. We will recognize revenue in connection with this sale once all of the criteria required for us to do so as set out in our accounting policies, have been met.
During the year ended December 31, 2010, we entered into an agreement with a VAR, pursuant to which we granted the VAR a license to sell our software to the VARs customers for a period of one year. A nonrefundable deposit of $165,000 was received in connection with this contract; revenue will be recognized under this contract as the conditions for recognizing revenue as set out in our accounting policies have been met.
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During the year ended December 31, 2016, we entered into a Software License Agreement with a customer pursuant to which we granted a license to integrate and deploy our software in their application. An initial license fee of $400,000 was paid on signing for the license and integration, which integration was completed during 2016. A royalty per end point and/or end user is payable quarterly in arrears upon deployment of the application. We also entered into a Software License Agreement with another customer pursuant to which we granted a license to integrate and deploy our software in their application. An initial license fee of $75,000 was paid on signing for the license and another payment of $75,000 is due upon the integration, which is scheduled for completion during 2018, plus a royalty per end point and/or end user is payable quarterly in arrears upon deployment of the application.
We had no revenue during the year ended December 31, 2017 as a result of a shift in our selling focus to large companies for whom the sales cycle is much longer.
Since August 1999, we have directed all of our attention towards the completion, and sales and marketing of our software applications. We believe that if we are successful in our development and sales and marketing efforts, we will generate a source of revenue in the future from sales and/or licensing of our software applications.
Selling, general and administrative expenses:
Selling, general and administrative expenses consist primarily of personnel costs, professional fees, communication expenses, occupancy costs and other miscellaneous costs associated with supporting our research and development, sales and marketing and investor relations activities. During the year ended December 31, 2017 we incurred a total of $499,323, as compared to $897,497, during the year ended December 31, 2016. There was an overall decrease in selling, general and administrative expenses of $398,174 (44%).
The decrease in selling, general and administrative expenses occurred primarily as a result of a decrease in stock-based remuneration for administrative consultants.
We have made efforts to reduce these costs wherever possible, through measures such as reducing the number of personnel, reducing our occupancy costs, postponing our Annual General Meeting, reducing the number of trade shows in which we participate, reducing travel costs, and delaying production of new promotional material. We will continue to carefully monitor our selling, general and administrative expenses as we work within current budgetary limits leading up to the full commercial release of our products.
Research and development expenses:
Research and development expenses consist primarily of personnel costs, consulting fees and travel expenses directly associated with the development of our software applications. During the year ended December 31, 2017, we spent $497,924 developing our software applications, compared to $930,019 during the year ended December 31, 2016. There was an overall decrease in research and development expenses of $432,095 (47%).
The decrease in research and development expenses occurred primarily as a result of us engaging less personnel to assist in our research and development activities; below is a summary of these activities during the year.
Q1 2017
During Q1 2017, the primary focus of our development activity was developing the migration to the Red Hat Enterprise Linux operating system, including SDK's for C++ and Java and testing; developing the migration to the Apple iOS operating system including SDK's for Objective-C and Swift and testing; and supporting installation of Validian's core technology into a customer's environment for testing and evaluation.
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Q2 2017
During Q2 2017, the primary focus of our development activity was completing the development of the migration to the Red Hat Enterprise Linux operating system, including SDK's for C++ and Java and testing; completing the development of the migration to the Apple iOS operating system including SDK's for Objective-C and Swift and testing; and supporting the trial release of a customer's Validian-enabled application.
Q3 2017
During Q3 2017, primary focus of our development activity was product support during customer and prospect trials; completing version 3.3 of Validian's technology including feature and load testing.
Q4 2017
During Q4 2017, the primary focus of our development activity was product support during customer and prospect trials.
Interest and financing costs
: Interest and financing costs during the year ended December 31, 2017 and during the year ended December 31, 2016 consisted of interest and financing costs associated with our 10% senior convertible notes, our convertible promissory notes, and our promissory notes. During the year ended December 31, 2017, we incurred $968,866 in interest and financing costs, a decrease of $241,061 (20%) over the $1,209,927 in interest and financing costs incurred during the year ended December 31, 2016.
The $968,866 in interest and financing costs we incurred during the year ended December 31, 2017 is comprised of $188,311 of interest paid and payable to the holders of our debt; $716,356 of accretion on our 10% senior convertible notes, our promissory notes and our convertible promissory notes; $38,402 in amortization of original issue discount on our convertible promissory notes; and $25,797 of financing costs. The $1,209,927 in interest and financing costs we incurred during the year ended December 31, 2016 is comprised of $556,056 of interest paid and payable to the holders of our debt; $598,835 of accretion on our 10% senior convertible notes, our promissory notes and our convertible promissory notes; $28,266 in amortization of original issue discount on our convertible promissory notes; and $26,770 of financing costs.
Aggregate interest and financing costs decreased by $241,061 (20%) during the year ended December 31, 2017 as compared with the year ended December 31, 2016. There was a decrease of $367,745 (66%) in coupon rate interest charges, which occurred primarily as a result of a result of a net decrease of $5,334,053 in the principal balance of our interest-bearing notes during 2016, where for a portion of the year interest was accrued on the larger principal balance. In addition, $142,280 in prepayment bonus incurred in accordance with the prepayment provision on our convertible promissory notes during 2016, an increase of $103,383 (73%) over the $38,897 in prepayment bonus we incurred during 2017.
Charges to interest as a result of accretion increased by $117,521 (20%), as a result of the equity components of notes issued during 2017 having a higher relative fair value than those issued during 2016.
Financing costs relate to our convertible promissory notes and our promissory notes and are deferred at issuance and amortized over the life of the note. During the year ended December 31, 2017, we paid $16,000 in finance costs on new notes issued, as compared with $29,750 paid on new notes issued during the year ended December 31, 2016. Financing costs recognized as expense through periodic amortization
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charges decreased by $973 (4%) during the year ended December 31, 2017 as compared with the year ended December 31, 2016.
During the year ended December 31, 2017, we paid $18,000 in original issue discount in connection with the issuance of our convertible promissory notes, which was deferred at issuance and is being amortized over the life of the note. $38,402 in original issue discount was recognized as expense through periodic amortization charges during the year. During the year ended December 31, 2016, we paid $57,611 in original issue discount in connection with the issuance of our convertible promissory notes, which was deferred at issuance and is being amortized over the life of the note. $28,266 in original issue discount was recognized as expense through periodic amortization charges during the year ended December 31, 2016.
Loss on extinguishment of debt and accrued liabilities:
During the year ended December 31, 2017, there were no losses on extinguishment of debt and accrued liabilities.
During the year ended December 31, 2016, we recognized a net gain of $260 on the issuance of 200,000 shares of our common stock in settlement of $6,000 in accounts payable and accrued liabilities; a loss of $212,645 on the issuance of 1,005 shares of our Series A Convertible Preferred stock in settlement of $792,355 of accrued interest on our 10% senior convertible notes; a loss of $816,125 on the issuance of 3,900 shares of our Series B Convertible Preferred stock in settlement of $2,835,025 of our 10% senior convertible notes and $248,850 in accrued interest thereon; and a net loss of $616,784 on the issuance of 3,580 shares of our Series C Convertible Preferred stock in settlement of $2,792,233 of our 10% senior convertible notes and $170,983 in accrued interest thereon.
Other expense:
Other expense is comprised of realized and unrealized gains and losses on foreign currency translations, the majority of which relate to accounts payable and accrued liabilities denominated in Canadian dollars. During the year ended December 31, 2017, the Canadian dollar gained strength in relation to the United States dollar, resulting in a net loss of $133,299 on foreign currency translations. During the year ended December 31, 2016, the Canadian dollar gained strength in relation to the United States dollar, resulting in a net loss of $53,271 on foreign currency translations.
Net loss:
We incurred a loss of $2,099,412 ($0.00 per share) for the year ended December 31, 2017, compared to a loss of $4,261,008 ($0.01 per share) for the year ended December 31, 2016. Our revenues and future profitability and future rate of growth are substantially dependent on our ability to:
*
license the software applications to a sufficient number of clients;
*
be cash-flow positive on an ongoing basis;
*
modify the successful software applications, over time, to provide enhanced benefits to existing users; and
*
successfully develop related software applications.
Liquidity and Capital Resources
General:
Since inception, we have funded our operations from private placements of debt and equity securities. In addition, until September 1999, we derived revenues from consulting contracts with affiliated parties, the proceeds of which were used to fund operations. Until such time as we are able to generate adequate revenues from the licensing of our software applications, we cannot assure that we will be successful in raising additional capital, or that cash from the issuance of debt securities, the exercise of existing warrants and options, and the placements of additional equity securities, if any, will be sufficient to fund our long-term research and development and selling, general and administrative expenses.
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Our cash and cash equivalents decreased by $191,867 during the year ended December 31, 2017, from a balance of $191,764 at December 31, 2016, to a bank indebtedness of $103 at December 31, 2017, primarily as a result of our operating activities, which generated a net loss of $527,102. This decrease in cash was substantially offset by our financing activities which generated net proceeds of $335,338. Our cash and cash equivalents increased by $153,306 during the year ended December 31, 2016, from a balance of $38,458 at December 31, 2015, to $191,764 at December 31, 2016, primarily as a result of our financing activities, which generated net proceeds of $1,897,845 from the issuance of our Series A Convertible preferred shares, our 10% senior convertible notes and our promissory notes, net of repayments and debt issuance costs. This increase in cash was substantially offset by our net loss of $4,261,008 for the year, which resulted in net cash used in operations of $1,744,539.
As discussed elsewhere in this report, we have added an explanatory paragraph to our consolidated financial statements for the year ended December 31, 2017. It states that our economic viability is dependent on our ability to finalize the development of our principal products, generate sales and finance operational expenses, and that these factors, together with our lack of revenues to date, our negative working capital, our loss for the year, as well as negative cash flow from operating activities, and our accumulated deficit, raise substantial doubt regarding our ability to continue as a going concern. At December 31, 2017, we had negative working capital of $4,641,061 and an accumulated deficit of $54,759,828; we incurred a net loss of $2,099,412, and negative cash flow from operations of $527,102 for the year then ended; and note 2(a) to our consolidated financial statements for the year ended December 31, 2017 also discusses the continuing substantial doubt regarding our ability to continue as a going concern.
We had our first commercial sales during the year ended December 31, 2016; and no commercial sales during 2017. We anticipate further commercial sales during the second or third quarter of 2018, however we cannot be assured that this will be the case. During the year ended December 31, 2017, we engaged five new consultants to provide marketing and investor relations services; we did not hire any new employees. We do not expect to hire any additional personnel during the next six months unless we are successful in raising significant funds through commercial sales or the issuance of our debt or equity securities. We have not made, nor do we expect to make, any material commitments for capital equipment expenditures during the next twelve months.
We have an immediate requirement for additional working capital in order to proceed with our business plan. We review our cash needs and sources on a month-to-month basis and we are currently pursuing appropriate opportunities to raise additional capital to fund operations. Additional sources of capital could involve issuing equity or debt. However, additional funding may not be available to us on reasonable terms, if at all. The perceived risk associated with the possible sale of a large number of shares could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline. We may be unable to raise additional capital if our stock price is too low. A sustained inability to raise capital could force us to limit or curtail our operations.
We expect the level of our future operating expenses to be driven by the needs of our research and development and marketing programs offset by the availability of funds. In addition, we have since inception made an effort to keep our expenses relatively low and conserve available cash until we begin generating sufficient operating cash flow.
Sources of Capital:
Our principal sources of capital for funding our business activities have been the private placements of debt and equity securities. During the year ended December 31, 2017, we issued $146,235, net of repayments, of our 10% senior convertible notes and $246,000, net of finance fees, original issue discount and repayments, in convertible promissory notes, which generated cash for funding
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operations, and which were partially offset by net repayments of $57,000 of our promissory notes. We also issued 258 shares of our Series C convertible preferred shares in settlement of accounts payable, accrued liabilities and consulting fees; $60,000, of our 10% senior convertible notes in settlement of accounts payable; 147,654,844 shares of our common stock in settlement of our convertible promissory notes and accrued interest thereon; and $4,000 of our promissory notes in settlement of accounts payable, all of which reduced the cash which would otherwise have been required to settle these liabilities and expenses. We issued 10,499,001 shares of our common stock pursuant to the terms of 10% senior convertible notes issued during the year, and 75,000 shares of our common stock pursuant to the terms of promissory notes issued during the year, which reduced the rate of coupon interest which would otherwise have been reflected in these transactions.
During the period from January 1 to April 2, 2018, we issued $33,500 of our 12% promissory notes, the proceeds of which were used to fund operations. Additionally, we issued an aggregate of 34,057,552 shares of our common stock to holders of our convertible promissory notes on conversion of the notes and accrued interest thereon, which reduced the cash which would otherwise have been required to settle these liabilities.
The Corporation has not entered into any off-balance sheet arrangement which would have provided the Corporation with a source of capital.
Uses of Capital:
Over the past several years, we have scaled our development activities to the level of available cash resources. Research and development expenses for the year ended December 31, 2017 decreased by approximately 47% as compared to the year ended December 31, 2016. Selling, general and administrative expenses for the year ended December 31, 2017 decreased by approximately 44% as compared to the year ended December 31, 2016. The changes in these expenses occurred as a result of several factors, as explained under Results of Operation.
Our plans with respect to future staffing will be dependent upon our ability to raise additional capital. We have not entered into any off-balance sheet arrangements which would have resulted in our use of capital.
The cost to implement appropriate controls and procedures to ensure compliance with Section 404 of the Act is included in our budget for 2018.
Commitments:
We are not currently a party to any operating lease agreement, nor do we have any contingent liabilities.
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Item 8. Financial Statements.
Consolidated Financial Statements of
VALIDIAN CORPORATION
Years ended December 31, 2017 and 2016
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Validian Corp
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Validian Corp (the Company) as of December 31, 2017 and December 31, 2016 and the related statements of operations, stockholders equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has no revenues, has negative working capital at December 31, 2017, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ AMC Auditing
AMC Auditing
We have served as the Companys auditor since 2011
Las Vegas, Nevada
April 13, 2018
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|
|
|
VALIDIAN CORPORATION
Consolidated Balance Sheets
December 31, 2017 and 2016
(In U.S. dollars)
|
|
2017
|
2016
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
Cash and cash equivalents
|
$
|
$ 191,764
|
Value added taxes recoverable
|
5,995
|
34,020
|
Prepaid expenses
|
25,974
|
57,544
|
Total current assets
|
31,969
|
283,328
|
|
|
|
Total assets
|
$ 31,969
|
$ 283,328
|
|
|
|
Liabilities and Stockholders Deficiency
|
|
|
|
|
|
Current liabilities:
|
|
|
Bank indebtedness
|
$ 103
|
$
|
Accounts payable
|
697,438
|
443,910
|
Accrued liabilities
|
2,387,412
|
2,119,910
|
Accrued interest on 10% notes payable to related parties (note 11)
|
4,187
|
4,001
|
Deferred revenue
|
320,000
|
320,000
|
Promissory notes payable (note 4)
|
61,250
|
112,784
|
10% Senior convertible notes (note 5)
|
1,168,974
|
962,739
|
Promissory notes payable to a related party (note 4 and 11)
|
4,500
|
|
Convertible promissory notes (note 6)
|
29,166
|
32,777
|
Total current liabilities
|
4,673,030
|
3,996,121
|
|
|
|
Total liabilities
|
4,673,030
|
3,996,121
|
|
|
|
Stockholders deficiency:
|
|
|
Preferred stock ($0.001 par value. Authorized 50,000,000
|
|
|
shares; issued and outstanding Nil shares in 2017 and 2016)
|
|
|
Series A Convertible Preferred stock ($0.001 par value, $1,000 stated
|
|
|
value. Authorized 10,000 shares in 2017 and 2016; issued and
|
|
|
outstanding 2,230 shares in 2017 and 2,230 shares in 2016)
|
2
|
2
|
Series B Convertible Preferred stock ($0.001 par value, $1,000 stated
|
|
|
value. Authorized 5,000 shares in 2017 and 2016; issued and outstanding
|
|
|
3,900 shares in 2017 and 3,900 shares in 2016)
|
4
|
4
|
Series C Convertible Preferred stock ($0.001 par value, $1,000 stated
|
|
|
value. Authorized 5,000 shares in 2017 and 2016; issued and outstanding
|
|
|
3,409 shares in 2017 and 3,151 shares in 2016)
|
3
|
3
|
Common stock ($0.001 par value. Authorized 700,000,000 shares in 2017
|
|
|
and in 2016; Issued and outstanding 600,520,343 shares
|
|
|
in 2017 and 442,341,498 shares in 2016 (note 7(a))
|
600,520
|
442,342
|
Additional paid-in capital
|
49,567,976
|
48,555,010
|
Deficit
|
(54,759,828)
|
(52,660,416)
|
Treasury stock (7,000 shares in 2017 and 2016 at cost)
|
(49,738)
|
(49,738)
|
Net stockholders deficiency
|
(4,641,061)
|
(3,712,793)
|
Future operations (note 2(a))
|
|
|
Guarantees and commitments (note 12)
|
|
|
Subsequent events (note 17)
|
|
|
Total liabilities and stockholders deficiency
|
$ 31,969
|
$ 283,328
|
See accompanying notes to consolidated financial statements
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|
|
|
VALIDIAN CORPORATION
Consolidated Statements of Operations
Years ended December 31, 2017 and 2016
(In U.S. dollars)
|
|
|
|
|
2017
|
2016
|
|
|
|
Income:
|
|
|
Software licensing fees
|
$
|
$ 475,000
|
|
|
|
Total Income
|
|
475,000
|
|
|
|
Expenses:
|
|
|
Selling, general and administrative
|
499,323
|
897,497
|
Research and development
|
497,924
|
930,019
|
Depreciation of property and equipment
|
|
|
|
|
|
Total Expenses
|
997,247
|
1,827,516
|
|
|
|
|
|
|
Loss before the undernoted
|
(997,247)
|
(1,352,516)
|
|
|
|
Other expenses:
|
|
|
Loss on extinguishment of debt and accrued
|
|
|
liabilities (note 9)
|
|
(1,645,294)
|
Interest and financing costs (notes 9 and 11)
|
(968,866)
|
(1,209,927)
|
Other
|
(133,299)
|
(53,271)
|
|
|
|
Total other expenses
|
(1,102,165)
|
(2,908,492)
|
|
|
|
|
|
|
Net loss
|
$(2,099,412)
|
$(4,261,008)
|
|
|
|
Loss per common share basic
|
|
|
and diluted (note 10)
|
$(0.00)
|
$(0.01)
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
outstanding
|
501,784,788
|
415,187,703
|
See accompanying notes to consolidated financial statements.
33
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
VALIDIAN CORPORATION
Consolidated Statements of Changes in Stockholders Equity (Deficiency)
Years ended December 31, 2017 and 2016
(In U.S. dollars)
|
|
Number
|
Common
stock
amount
|
Ser. A
Conv. Pref
Stock
Number
|
Ser. A
Conv. Pref
Stock
Amount
|
Ser. B
Conv. Pref
Stock
Number
|
Ser. B
Conv. Pref
Stock
Amount
|
Ser. C
Conv. Pref
Stock
Number
|
Ser.C
Conv. Pref
Stock
Amount
|
Additional
paid-in
capital
|
Deficit
|
Treasury
stock
|
Total
|
Balances at December 31, 2015
|
387,538,066
|
$387,538
|
|
$
|
|
$
|
|
$
|
$37,024,381
|
$(48,228,458)
|
$(49,738)
|
$(10,866,277)
|
Ser. A Conv. Preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issued for cash (note 7(b))
|
|
|
1,225
|
1
|
|
|
|
|
1,224,999
|
|
|
1,225,000
|
Shares issued pursuant to the
|
|
|
|
|
|
|
|
|
|
|
|
|
terms of the 10% senior
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible notes at issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
(note 5)
|
210,000
|
210
|
|
|
|
|
|
|
5,996
|
|
|
6,206
|
Intrinsic value of the beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature of the
|
|
|
|
|
|
|
|
|
|
|
|
|
10% senior convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
at date of issuance (note 5)
|
|
|
|
|
|
|
|
|
11,873
|
|
|
11,873
|
Shares issued as partial
|
|
|
|
|
|
|
|
|
|
|
|
|
consideration for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
services rendered and to be
|
|
|
|
|
|
|
|
|
|
|
|
|
rendered (note 7(a))
|
9,100,000
|
9,100
|
|
|
|
|
|
|
274,230
|
|
|
283,330
|
Common shares issued in
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with the conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
of the 10% senior convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
notes and accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
thereon (note 7(a))
|
6,280,729
|
6,281
|
|
|
|
|
|
|
182,141
|
|
|
188,422
|
Ser. A Conv. Preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issued in connection with the
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of the 10% senior
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible notes and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
interest thereon (note 7(b))
|
|
|
1,005
|
1
|
|
|
|
|
1,004,999
|
|
|
1,005,000
|
Ser. B Conv. Preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issued in connection with the
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of the 10% senior
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible notes and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
interest thereon (note 7(b))
|
|
|
|
|
3,900
|
4
|
|
|
3,899,996
|
|
|
3,900,000
|
Ser. C Conv. Preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issued in connection with the
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion of the 10% senior
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible notes and accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
interest thereon (note 7(b))
|
|
|
|
|
|
|
3,580
|
4
|
3,579,996
|
|
|
3,580,000
|
Effective discount on the beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature of the Ser. C
|
|
|
|
|
|
|
|
|
|
|
|
|
Conv Preferred shares (note 7(d))
|
|
|
|
|
|
|
|
|
170,950
|
(170,950)
|
|
|
Conversion of Ser. C Conv
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares in exchange for
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (notes 7(a) and
|
|
|
|
|
|
|
|
|
|
|
|
|
7(b))
|
14,300,000
|
14,300
|
|
|
|
|
(429)
|
(1)
|
(14,299)
|
|
|
|
Shares issued in connection
|
|
|
|
|
|
|
|
|
|
|
|
|
with the conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
and accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
thereon (note 7(a))
|
23,962,703
|
23,963
|
|
|
|
|
|
|
304,680
|
|
|
328,643
|
Shares issued in settlement of
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (note 7(a))
|
200,000
|
200
|
|
|
|
|
|
|
5,540
|
|
|
5,740
|
Intrinsic value of the beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature of the
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
at date of issuance (note 6)
|
--
|
--
|
|
|
|
|
|
|
858,278
|
--
|
--
|
858,278
|
Shares issued pursuant to the
|
|
|
|
|
|
|
|
|
|
|
|
|
terms of the promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
at issuance (note 7(a))
|
750,000
|
750
|
|
|
|
|
|
|
21,250
|
--
|
--
|
22,000
|
Net loss
|
|
|
|
|
|
|
|
|
|
(4,261,008)
|
|
(4,261,008)
|
Balances at December 31, 2016
|
442,341,498
|
$442,342
|
2,230
|
$ 2
|
3,900
|
$ 4
|
3,151
|
$ 3
|
$48,555,010
|
$(52,660,416)
|
$(49,738)
|
$(3,712,793)
|
34
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
VALIDIAN CORPORATION
Consolidated Statements of Changes in Stockholders Equity (Deficiency)
Years ended December 31, 2017 and 2016
(In U.S. dollars)
|
|
Number
|
Common
stock
amount
|
Ser. A
Conv. Pref
Stock
Number
|
Ser. A
Conv. Pref
Stock
Amount
|
Ser. B
Conv. Pref
Stock
Number
|
Ser. B
Conv. Pref
Stock
Amount
|
Ser. C
Conv. Pref
Stock
Number
|
Ser.C
Conv. Pref
Stock
Amount
|
Additional
paid-in
capital
|
Deficit
|
Treasury
stock
|
Total
|
Balances at December 31, 2016
|
442,341,498
|
$442,342
|
2,230
|
$ 2
|
3,900
|
$ 4
|
3,151
|
$ 3
|
$48,555,010
|
$(52,660,416)
|
$(49,738)
|
$(3,712,793)
|
Shares issued pursuant to the
|
|
|
|
|
|
|
|
|
|
|
|
|
terms of the 10% senior
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible notes at issuance and
|
|
|
|
|
|
|
|
|
|
|
|
|
subsequent modification (note 5)
|
10,499,001
|
10,500
|
|
|
|
|
|
|
57,235
|
|
|
67,735
|
Ser. C Conv. Preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issued in settlement of accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
payable, accrued liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting fees rendered (note 7(b))
|
|
|
|
|
|
|
258
|
0
|
118,200
|
|
|
118,200
|
Shares issued in connection
|
|
|
|
|
|
|
|
|
|
|
|
|
with the conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
and accrued interest
|
|
|
|
|
|
|
|
|
|
|
|
|
thereon (note 7(a))
|
147,604,844
|
147,603
|
|
|
|
|
|
|
540,829
|
|
|
688,432
|
Intrinsic value of the beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature of the
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
at date of issuance (note 6)
|
--
|
--
|
|
|
|
|
|
|
295,196
|
--
|
--
|
295,196
|
Shares issued pursuant to the
|
|
|
|
|
|
|
|
|
|
|
|
|
terms of the promissory notes
|
|
|
|
|
|
|
|
|
|
|
|
|
at issuance (note 7(a))
|
75,000
|
75
|
|
|
|
|
|
|
1,506
|
--
|
--
|
1,581
|
Net loss
|
|
|
|
|
|
|
|
|
|
(2,099,412)
|
|
(2,099,412)
|
Balances at December 31, 2017
|
600,502,343
|
$600,520
|
2,230
|
$ 2
|
3,900
|
$ 4
|
3,409
|
$ 3
|
$49,567,976
|
$(54,759,828)
|
$(49,738)
|
$(4,641,061)
|
35
Table of Contents
|
|
|
|
VALIDIAN CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 2017 and 2016
(In U.S. dollars)
|
|
|
|
|
2017
|
2016
|
|
|
|
Cash flows from operating activities:
|
|
|
Net loss
|
$ (2,099,412)
|
$ (4,261,008)
|
Items not involving cash:
|
|
|
Depreciation of property and equipment
|
|
|
Stock-based compensation expense (note 7(d))
|
71,771
|
466,554
|
Non-cash interest expense
|
921,475
|
669,502
|
Non-cash sale transaction (note 5)
|
--
|
(400,000)
|
Loss on extinguishment of debt and accrued liabilities
|
|
1,645,294
|
Change in non-cash operating working
|
|
|
capital (note 15)
|
579,064
|
135,119
|
|
|
|
Net cash used in operating activities
|
(527,102)
|
(1,744,539)
|
|
|
|
Cash flows from investing activities:
|
|
|
Additions to property and equipment
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
Bank indebtedness
|
103
|
|
Issuance of Ser.A conv. Preferred shares
|
--
|
1,225,000
|
Issuance of 10% senior convertible notes
|
151,235
|
70,000
|
Issuance of convertible promissory notes
|
351,000
|
973,611
|
Issuance of promissory notes
|
31,000
|
82,500
|
Debt issuance costs
|
(16,000)
|
(29,750)
|
Original issue discount
|
(18,000)
|
(57,611)
|
Repayment of promissory notes
|
(88,000)
|
|
Repayment of 10% senior convertible notes
|
(5,000)
|
(49,794)
|
Repayment of convertible promissory notes
|
(71,000)
|
(316,111)
|
|
|
|
Net cash provided by financing activities
|
335,338
|
1,897,845
|
|
|
|
Effects of exchange rates on cash and cash equivalents
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
(191,764)
|
153,306
|
Cash and cash equivalents, beginning of period
|
191,764
|
38,458
|
|
|
|
Cash and cash equivalents, end of period
|
$ --
|
$ 191,764
|
Supplementary information (note 16)
See accompanying notes to consolidated financial statements.
36
Table of Contents
1.
General:
Validian Corporation (the Corporation) was incorporated in the State of Nevada on April 12, 1989 as CCC Funding Corp. The Corporation underwent several name changes before being renamed to Validian Corporation on January 28, 2003.
Since August 3, 1999, the efforts of the Corporation have been devoted to the development of a high speed, highly secure method of transacting business using the internet, and to the sale and marketing of the Corporations products.
2.
Summary of significant accounting policies:
(a)
Future operations:
The consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern. The Corporation has had limited revenues to date, has negative working capital of $4,641,061, has accumulated a deficit of $54,759,828 as at December 31, 2017, and has incurred a loss of $2,099,412 and negative cash flow from operations of $527,102 for the year then ended. Furthermore, the Corporation failed to settle certain of its promissory notes and 10% senior convertible notes when they matured on various dates during the years 2007 through 2017, resulting in a condition of default for all of the 10% senior convertible notes and the promissory notes; a significant portion of these notes remain in default as at December 31, 2017. In addition, the Corporation expects to continue to incur operating losses for the foreseeable future and has no lines of credit or other financing facilities in place.
If the Corporation obtains further financing and generates revenue, it expects to incur operating expenditures of approximately $1,472,000 for the year ending December 31, 2018. In the event the Corporation cannot raise the 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 Corporations ability to continue as a going concern. Managements plans to address these issues include raising capital through the private placement of equity, the exercise of previously-issued equity instruments and through the issuance of additional promissory notes and convertible notes.
The Corporations 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 Corporations position and or results of operations and could also result in the Corporations 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 Corporation 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 Corporations 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 Corporation.
(b)
Principles of consolidation:
These consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and include the accounts of Validian Corporation and its wholly-owned subsidiaries, Sochrys Technologies Inc. and Evolusys S.A. All intercompany balances and transactions have been eliminated.
(c)
Cash and cash equivalents:
Cash and cash equivalents include liquid investments with original maturity dates of three months or less.
37
Table of Contents
2.
Summary of significant accounting policies (continued):
(d)
Property and equipment:
Property and equipment is stated at cost less accumulated depreciation and includes computer hardware and software. These assets are being depreciated on a straight-line basis over their estimated useful lives, as follows: computer hardware: 2 years; computer software: 1 year.
(e)
Leases:
Leases are classified as either capital or operating in nature. Capital leases are those which substantially transfer the benefits and risk of ownership to the Corporation. Assets acquired under capital leases are depreciated as described in note 1(d). Obligations recorded under capital leases are reduced by the principal portion of lease payments. The imputed interest portion of lease payments is charged to expense.
(f)
Prepaid expenses:
Prepaid consulting fees related to services to be rendered within twelve months from the balance sheet date are included in prepaid expenses. These costs are charged to expenses as the services are rendered. If for any reason circumstances arise which would indicate that the services will not be performed in the future, any remaining balance included in prepaid expenses will be charged to expense immediately.
(g)
Income taxes:
Deferred income taxes are determined using the asset and liability method, whereby deferred income tax is recognized based on temporary differences using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences between the carrying values of assets or liabilities used for tax purposes and those used for financial reporting purposes arise in one period and reverse in one or more subsequent periods. In assessing the realizability of deferred tax assets, management considers known and anticipated factors impacting whether some portion or all of the deferred tax assets will not be realized. To the extent that the realization of deferred tax assets is not considered to be more likely than not, a valuation allowance is provided.
(h)
Revenue recognition:
Revenue from sale of product licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable.
Revenue from product support contracts is recognized ratably over the life of the contract. Revenue from services is recognized at the time such services are rendered.
For contracts with multiple elements such as product licenses, product support and services, the Corporation follows the residual method. Under this method, the total fair value of the undelivered elements of the contract, as indicated by vendor specific objective evidence, is deferred and subsequently recognized when all criteria for recognizing revenue have been met. The difference between the total contract fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Vendor specific objective evidence for support and consulting services is obtained from contracts where these elements have been sold separately. Where the Corporation cannot determine the fair value of all of the undelivered elements, revenue is deferred until such time as it can be determined, or until all of the elements are delivered.
Revenues that have been prepaid but for which all elements have not been delivered, are reflected as deferred revenue on the consolidated balance sheet.
38
Table of Contents
2.
Summary of significant accounting policies (continued):
(i)
Research and development:
Costs related to research, design and development of software products are charged to research and development expenses as incurred unless they meet the generally accepted criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria and are expensed as incurred. To date the Corporation has not capitalized any software development costs.
(j)
Advertising expense:
Advertising costs are expensed upon the start of the scheduled advertising.
(k)
Foreign currency translation:
The functional currency for the financial statements of the Corporation is the United States dollar. Exchange gains or losses are realized due to differences in the exchange rate at the transaction date versus the rate in effect at the settlement or balance sheet date. Exchange gains and losses are recorded in the statement of operations.
(l) Stock-based compensation:
The Corporation accounts for stock-based compensation in accordance with the provisions of ASC Topic 718 Compensation stock compensation (ASC Topic 718). ASC Topic 718 requires all share-based payments, including stock options granted by the Corporation to its employees, to be recognized as expenses, based on the fair value of the share-based payments at the date of grant. For purposes of estimating the grant date fair value of stock-based compensation, the Corporation uses the Black Scholes option-pricing model and has elected to treat awards with graded vesting as a single award. The fair value of awards granted is recognized as compensation expense on a straight-line basis over the requisite service period, which in the Corporations circumstances is the stated vesting period of the award.
In adopting ASC Topic 718, the Corporation applied the modified-prospective transition method. Under this method, the Corporation has recognized compensation costs for all share-based payments granted, modified, or settled after January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which the requisite service had not been provided as of that date (unvested awards).
(m) Impairment or disposal of long-lived assets:
The Corporation accounts for long-lived assets in accordance with ASC Topic 360-10 Impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(n) Use of estimates:
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. Significant management estimates include assumptions used in estimating the fair value of convertible notes issued with common stock.
(o) Accounting for uncertainty in income taxes:
The Corporation does not recognize adjustments in the liability for unrecognized income tax benefits. As of December 31, 2017, the Corporation had approximately $11,950,000 of unrecognized tax benefits, all of which would affect the Corporations effective tax rate if recognized.
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3.
Property and equipment:
|
|
|
|
|
|
|
2017
|
|
|
Accumulated
|
Net book
|
|
Cost
|
depreciation
|
value
|
|
|
|
|
Computer hardware and software
|
$ 34,590
|
$ 34,590
|
$ --
|
|
$ 34,590
|
$ 34,590
|
$ --
|
|
|
|
|
|
|
|
2016
|
|
|
Accumulated
|
Net book
|
|
Cost
|
depreciation
|
value
|
|
|
|
|
Computer hardware and software
|
$ 34,590
|
$ 34,590
|
$ --
|
|
$ 34,590
|
$ 34,590
|
$ --
|
4.
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 years ended December 31, 2017 and 2016:
|
|
|
|
2017
|
2016
|
Balance at beginning of year
|
$ 112,784
|
$ 36,250
|
|
|
|
Note proceeds on issuance
|
35,000
|
82,500
|
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
|
(75)
|
(750)
|
Allocated to additional paid-in capital
|
(1,506)
|
(21,250)
|
|
(1,581)
|
(22,000)
|
|
|
|
Proceeds allocated to promissory notes on issuance
|
33,419
|
60,500
|
|
|
|
Accretion recorded as a charge to interest and financing costs
|
7,547
|
19,902
|
|
|
|
Principal repaid
|
(88,000)
|
--
|
Balance end of period
|
65,750
|
116,652
|
|
|
|
Payable to a related party (note 11)
|
(4,500)
|
--
|
|
|
|
Deferred finance charges
|
--
|
(3,868)
|
|
|
|
Balance at end of year
|
$ 61,250
|
$ 112,784
|
During the year ended December 31, 2017, the Company issued $35,000 of its promissory notes. The notes are payable on demand, and bear interest at the rate of 12% per annum. The Company issued 75,000 shares of its common stock to the investors at issuance; $1,581, representing the relative fair value of the shares, was charged to common stock and additional paid in capital.
During the year ended December 31, 2017, the Company also repaid $88,000 of the promissory notes, and $3,526 in accrued interest charges thereon.
The notes outstanding at December 31, 2017 bear interest at the rate of 12% per annum.
During the year ended December 31, 2016, the Corporation issued $82,500 of its promissory notes, for cash, and repaid $6,000 in accrued interest on the notes.
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Table of Contents
4.
Promissory notes payable (continued):
Under the terms of the notes issued during the year ended December 31, 2016, the Corporation had the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, until maturity on January 13, 2017; interest on these notes accrued at the rate of 10% and was due at maturity. These notes, and accrued interest thereon, were repaid in full on January 12, 2017.
Holders of the notes issued during the year ended December 31, 2016 were granted 750,000 common shares of the Corporation upon issuance of the notes; $22,000, 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. The notes are being accreted to their face value, using the interest rate method, over the term of the notes.
The Corporation also incurred $7,500 in finance charges relating to the issuance of these notes. The finance charges were deferred and are being recognized as expense over the term of the notes.
Promissory notes outstanding at December 31, 2016 included $36,250 which are due on demand and bear interest at 12%; and $82,500 which matured on January 13, 2017 and bore interest at the rate of 10% per annum
The promissory notes are unsecured.
Included in interest and financing costs for the year ended December 31, 2017 is $6,827 (2016: $7,594) of interest paid and payable to the holders of the promissory notes; $3,679 (2016: $19,902), of accretion charges; and $3,868 (2016: $3,632) of finance fees. Interest on the promissory notes paid in cash during the year ended December 31, 2017 was $3,526 (2016: $6,000).
5.
10% Senior convertible notes:
The following table sets forth the financial statement presentation of the 10% senior convertible note proceeds on issuance, and the changes in the financial statement presentation of the balance allocated to the notes as at and for the years ended December 31, 2017 and 2016:
|
|
|
|
2017
|
2016
|
Balance at beginning of year
|
$ 962,739
|
$ 6,721,291
|
|
|
|
Note principal on issuance and subsequent modification
|
211,235
|
70,000
|
Allocated to common stock and additional paid-in capital for
|
|
|
market value of stock issued to holders of the notes:
|
|
|
Allocated to common stock
|
(10,499)
|
(210)
|
Allocated to additional paid-in capital
|
(57,236)
|
(5,996)
|
|
(67,735)
|
(6,206)
|
Allocated to additional paid-in capital for the intrinsic value of the
|
|
|
beneficial conversion feature
|
--
|
(11,873)
|
Proceeds allocated to 10% senior convertible notes on issuance
|
143,500
|
51,921
|
|
|
|
Accretion recorded as a charge to interest and financing costs
|
67,735
|
18,079
|
Principal repayments in cash
|
(5,000)
|
(49,794)
|
Principal converted pursuant to the terms of the notes
|
--
|
(151,500)
|
Principal settled through the issuance of Ser. B conv. preferred stock
|
--
|
(2,835,025)
|
Principal settled through the issuance of Ser. C conv. Preferred stock
|
--
|
(2,792,233)
|
Balance at end of year
|
1,168,974
|
962,739
|
Payable to related parties (note 13)
|
--
|
--
|
|
$1,168,974
|
$ 962,739
|
During the year ended December 31, 2017,
the
Company issued $211,235 of its senior convertible notes, and repaid $5,000 in principal. $151,235 of the notes were issued for cash; $60,000 of the notes were issued in settlement of accounts payable and accrued liabilities.
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Table of Contents
5.
10% Senior convertible notes (continued):
Under the terms of the notes issued during the year ended December 31, 2017, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest thereon into common stock of the company, at a rate of one common share for each $0.03 of debt converted. The Corporation 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 Corporation or converted by the holders. At the Corporations option, interest may be paid either in cash or in common shares of the Corporation. 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. The notes matured on December 31, 2017.
Holders of the notes issued during the year were granted 10,499,001 common shares of the Company upon issuance and subsequent modification of the notes; $67,735, 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.
Notwithstanding the stated maturity dates, all of the notes issued during the year ended December 31, 2017 are payable on demand, pursuant to the default provisions of the notes, as described below.
During the year ended December 31, 2016, the Corporation issued an aggregate of $70,000 of its 10% senior convertible notes and settled an aggregate of $49,794 of these notes.
Also during the year ended December 31, 2016, holders of the notes exercised the conversion feature and converted $151,500 in principal, plus $36,922 in accrued interest thereon, into 6,280,729 common shares of the Corporations common stock.
The Corporation also settled $2,835,025 in principal and $248,850 in accrued interest through the issuance of 3,900 shares of its Series B convertible preferred stock, valued at $3,900,000; $2,792,233 in principal and $170,983 in accrued interest through the issuance of 3,580 shares of its Series C convertible preferred stock, valued at $3,579,966; $792,355 in accrued interest through the issuance of 1,005 shares of its Series A convertible preferred stock, valued at $1,005,000; and $400,000 in accrued interest through an exchange of $400,000 in accounts receivable. An aggregate net loss of $1,645,554 was realized in connection with the settlement of principal and accrued interest.
Under the terms of the notes issued during the year ended December 31, 2016, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest thereon into common stock of the company, at a rate of one common share for each $0.03 of debt converted. The Corporation 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 Corporation or converted by the holders. At the Corporations option, interest may be paid either in cash or in common shares of the Corporation. 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 issued during 2016 are payable on demand; $20,000 of the notes matured on December 31, 2016.
Notwithstanding the stated maturity dates, all of the notes issued during the year ended December 31, 2016 are payable on demand, pursuant to the default provisions of the notes, as described below.
Holders of the notes issued during the year ended December 31, 2016 were granted 210,000 common shares of the Corporation upon issuance of the notes; $6,206, 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 issued during the year ended December 31, 2016 was in-the-money. $11,873, representing the relative fair value of the beneficial conversion feature, was allocated to additional paid in capital.
The Corporation 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, 2017. At December 31, 2017, 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 December 31, 2017, 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.
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Table of Contents
5.
10% Senior convertible notes (continued):
The following table summarizes information regarding the 10% senior convertible notes outstanding at December 31, 2017:
|
|
Note
|
Conversion
|
Principal
|
Rate
|
$ 662,467
|
$ 0.030
|
6,506
|
0.038
|
500,000
|
0.100
|
$ 1,168,974
|
|
The maximum number of shares issuable on conversion of all 10% senior convertible notes outstanding at December 31, 2017 was 27,253,434. Interest is payable in stock or in cash, at the discretion of the Corporation, therefore the potential conversion of the interest portion has not been included in our calculated issuance requirement (note 9(a)).
All of the 10% senior convertible notes outstanding at December 31, 2017 were unsecured.
Included in interest and financing costs for the year ended December 31, 2017 is $105,655 (2016: $368,784) in coupon rate interest accrued on the 10% senior convertible notes; and $67,735 (2016: $18,079) in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.
At December 31, 2017, the fair value of the stock issuable to fully convert the 10% senior convertible note principal, was $245,281, which is $923,693 lower than the principal amount of the notes.
6. Convertible promissory notes:
During the year ended December 31, 2017, the Corporation issued $351,000 of its convertible promissory notes for cash.
$30,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 8%, mature on October 31, 2018, and may be prepaid during the period from issuance to April 29, 2018, 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 April 29, 2018, or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as the average of the three lowest trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.
$60,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 8%, mature on July 17, 2018, and may be prepaid during the period from issuance to January 13, 2018, 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 January 13, 2018, or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as the average of the three lowest trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.
$105,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 8%, mature on June 12, 2018, and may be prepaid during the period from issuance to December 8, 2017, 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 December 8, 2017, or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as the lowest trading price during the ten trading days immediately preceding such conversion, including the date of conversion, discounted by 45%.
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Table of Contents
6. Convertible promissory notes (continued):
$78,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 8%, mature on November 10 2017, and could be prepaid during the period from issuance to August 2, 2017, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment. The holder had the option to convert any balance of principal and interest which was unpaid at August 2, 2017, 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 42%.
$35,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 8%, mature on February 12, 2018, and can be prepaid during the period from issuance to August 11, 2017, 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 August 11, 2017, 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%.
$43,000 of the notes issued during the year ended December 31, 2017 bear interest at the rate of 12%, mature on November 30, 2017, and could be prepaid during the period from issuance to August 16, 2017, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment. The holder had the option to convert any balance of principal and interest which was unpaid at August 16, 2017, 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 42%.
$295,196, 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.
$16,000 in finance fees were incurred in relation to the convertible promissory notes issued during 2017 and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.
$18,000 in original issue discounts were incurred in relation to the convertible promissory notes issued during 2017 and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.
During the year ended December 31, 2017, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $659,687 of note principal, and $28,744 of accrued interest on the notes, into 147,654,844 common shares of the Corporation.
Also, during the year ended December 31, 2017, the Corporation exercised the prepayment option and issued aggregate cash payments of $114,864 in settlement of $71,000 in principal amount, plus accrued interest and prepayment bonus thereon of $43,864.
During the year ended December 31, 2016, the Corporation issued $973,611 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 year ended December 31, 2016 had a maturity date of on January 5, 2017 and could 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 had 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%.
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Table of Contents
6. Convertible promissory notes (continued):
$50,000 of the notes issued during the year ended December 31, 2016 had a maturity date of November 8, 2016 and could 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 had the option to convert any balance of principal and interest which was 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 year ended December 31, 2016 had a maturity date of February 22, 2017 and could 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 had 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 was 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 year ended December 31, 2016 had a maturity date of March 2, 2018. The holder had the option to convert any balance of principal and interest which was unpaid at August 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 two trading prices during the twenty-five trading days immediately preceding such conversion, discounted by 40%.
$100,000 of the notes issued during the year ended December 31, 2016 had a maturity date of December 15, 2016 and could 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 had the option to convert any balance of principal and interest which was unpaid at September 11, 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 45%.
$30,000 of the notes issued during the year ended December 31, 2016 had a maturity date of May 9, 2017 and could be prepaid during the period from issuance to November 5, 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 had the option to convert any balance of principal and interest which is unpaid at November 5, 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 45%.
$262,500 of the notes issued during the year ended December 31, 2016 matured on August 24, 2017 and could be prepaid during the period from issuance to February 24, 2017, 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 February 24, 2017, or thereafter, into common stock of the Company. The rate of conversion for these notes is calculated as 55% of the lowest closing bid price of the common stock during the ten prior trading days including the day upon which the conversion request is executed.
$100,000 of the notes issued during the year ended December 31, 2016 matured on May 31, 2017 and could be prepaid during the period from issuance to February 27, 2017, in full, at various rates ranging from 140% to 150% of the principal balance plus accrued interest to the date of prepayment. The holder had the option to convert any balance of principal and interest which was unpaid at February 27, 2017, 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 45%.
$60,000 of the notes issued during the year ended December 31, 2016 matured on November 30, 2017 and could be prepaid during the period from issuance to May 28, 2017, in part or in full, at various rates ranging from 120% to 150% of the principal balance plus accrued interest to the date of prepayment. The holder had the option to convert any balance of principal and interest which was unpaid at May 28, 2017, 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 45%.
45
Table of Contents
6. Convertible promissory notes (continued):
$165,000 of the notes issued during the year ended December 31, 2016 matured on December 29, 2017 and could be prepaid during the period from issuance to May 26, 2017, in full, at various rates ranging from 120% 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 was unpaid at May 26, 2017, 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 40%.
$858,278, 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.
$22,250 in finance fees were incurred in relation to the convertible promissory notes issued during 2016 and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.
$57,611 in original issue discounts were incurred in relation to the convertible promissory notes issued during 2016 and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.
During the year ended December 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $315,500 of note principal, and $13,142.32 of accrued interest on the notes, into 23,962,703 common shares of the Corporation.
Also, during the year ended December 31, 2016, the Corporation exercised the prepayment option and issued aggregate cash payments of $477,335 in settlement of $316,111 in principal amount, plus accrued interest and prepayment bonus thereon of $161,224.
The discount to market conversion feature of the convertible promissory notes causes a theoretical possibility that the Corporation may be required to settle the notes by issuing more shares than are authorized. Management has calculated that the maximum number of shares required to convert the principal plus accrued interest on the convertible notes at December 31, 2017 was 77,411,942, which represents approximately 77.8% of the authorized, unissued shares at that date, and has also estimated that the fair value of the notes at December 31, 2017 approximates face value, therefore no adjustment for fair value restatement has been made.
At December 31, 2017, the fair value of the stock issuable to fully convert the convertible promissory note principal was $656,155, which exceeds the principal amount by $448,343.
7.
Stockholders deficiency:
(a)
Common stock transactions:
In connection with the issuance of the Companys 10% senior convertible notes during year ended December 31, 2017, the Company issued 10,499,001 shares of its common stock, with a relative fair value of $67,735, to the holders of the notes. (note 5).
During the year ended December 31, 2017, holders of the convertible promissory notes exercised the conversion feature of the notes and converted an aggregate of $659,687 of note principal, plus $28,744 of accrued interest thereon, into 147,654,844 shares of the Companys common stock.
(note 6).
In connection with the issuance of the Companys promissory notes during the year ended December 31, 2017, the Company issued 75,000 shares of its common stock, with a relative fair value of $1,581, to the holders of the notes. (note 4).
In connection with the issuance of the Corporations 10% senior convertible notes during the year ended December 31, 2016, the Corporation issued an aggregate of 210,000 shares of its common stock, with a relative fair value of $6,206, to the holders of the notes (note 5).
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Table of Contents
7. Stockholders deficiency (continued):
(a) Common stock transactions (continued):
During the year ended December 31, 2016, the Corporation issued an aggregate of 9,100,000 shares of its common stock to consultants as partial consideration for services rendered and to be rendered. $283,330, representing the fair value of the stock at issuance, was allocated to shares and to additional paid in capital. $54,480, representing the value of services not yet rendered as at December 31, 2016, was charged to prepaid expense; $228,850 was charged to expense.
On various dates during the year ended December 31, 2016, holders of the 10% senior convertible notes exercised the conversion feature of the notes and converted an aggregate of $151,500 in principal and $36,922 in accrued interest, in exchange for 6,280,729 common shares of the Corporation (note 5).
During the year ended December 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes and converted an aggregate of $315,500 in principal and $13,142 in accrued interest, in exchange for 23,962,703 shares of the Corporations common stock. (note 6).
On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 200,000 shares of its common stock, valued at $5,740, in settlement of $6,000 in accounts payable. A net gain of $260 has been recognized in connection with this transaction.
In connection with the issuance of the Corporations promissory notes on August 10, 2016, the Corporation issued 750,000 shares of its common stock, with a relative fair value of $22,000, to the holders of the notes (note 4).
During the year ended December 31, 2016, holders of the Corporations Series C convertible preferred shares exercised the conversion feature of the shares and converted an aggregate of 429 Series C convertible preferred shares, in exchange for 14,300,000 shares of the Corporations common stock.
(b)
Preferred stock transactions:
Series A Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share. Convertible at any time by the shareholder into common stock of the Corporation, at $0.10 per common share. 10,000 shares authorized.
Series B Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share. Convertible at any time by the shareholder into common stock of the Corporation, at the rate of $0.03 per common share. 5,000 shares authorized.
Series C Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share. Convertible at any time by the shareholder into common stock of the Corporation, at the rate of $0.03 per common share. 5,000 shares authorized.
During the year ended December 31, 2017, the Corporation issued 78 of its Series C Convertible Preferred Stock in settlement of $78,000 of accounts payable and accrued liabilities.
During the year ended December 31, 2017, the Corporation issued 180 of its Series C Convertible Preferred Stock in settlement of $40,200 of consulting fees rendered.
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7. Stockholders deficiency (continued):
(b) Preferred stock transactions (continued):
On June 2, 2016, the Corporation issued 3,900 shares of its Series B Convertible Preferred stock, valued at $3,900,000, to holders of its 10% senior convertible notes in settlement of $2,835,025 in principal and $248,850 of accrued interest; a loss of $816,125 has been recognized in connection with this transaction.
On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 3,580 shares of its Series C Convertible Preferred stock, valued at $3,580,000, to holders of its 10% senior convertible notes in settlement of $2,792,233 in principal and 170,983 of accrued interest; an aggregate net loss of $616,784 has been recognized in connection with these transactions.
During the year ended December 31, 2016, holders of the Corporations Series C convertible preferred shares exercised the conversion feature of the shares and converted an aggregate of 429 Series C convertible preferred shares, in exchange for 14,300,000 shares of the Corporations common stock.
During the year ended December 31, 2016, $170,950, representing the effective discount implicit on issuance of 1,255 of the Series C convertible preferred shares, was recognized in relation to the fair value of the beneficial conversion feature of the shares at the date of issuance.
On May 31, 2016, the Corporations board of directors created three new classes of preferred stock:
On June 2, 2016, the Corporation issued 1,225 shares of its Series A Convertible Preferred stock for cash proceeds of $1,225,000.
Also, on June 2, 2016, the Corporation issued 1,005 shares of its Series A Convertible Preferred stock, valued at $1,005,000, to holders of its 10% senior convertible notes in settlement of $792,355 of accrued interest; a loss of $212,645 has been recognized in connection with this transaction.
(c)
Transactions involving stock options:
The Corporation has two incentive equity plans, under which a maximum of 10,000,000 options to purchase 10,000,000 common shares may be granted to officers, employees and consultants of the Corporation. The granting of options, and the terms associated with them, occurs at the discretion of the board of directors, who administers the plan. The fair value of unvested options is determined at the date of grant and are included in expense over the vesting period. As of December 31, 2017, a total of 7,500,000 options were granted under these plans, all with an exercise price of $0.04. The options expire on dates between May 12, 2020 and November 20, 2020 and are fully vested. 2,500,000 options remained available for grant under these plans as of December 31, 2017.
There were no transactions involving stock options during the years ended December 31, 2016 and December 31, 2017.
(d)
Summary of stock-based compensation:
The following table presents the total of stock-based compensation included in the expenses of the Corporation for the years ended December 31, 2017 and 2016:
|
|
|
|
2017
|
2016
|
Selling, general and administrative
|
$ 71,771
|
$ 466,554
|
Research and development
|
--
|
--
|
Total stock-based compensation included in expenses
|
$ 71,771
|
$ 466,554
|
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8.
Interest and financing costs:
Interest and financing costs include accrued interest, accretion and amortization of deferred financing costs and original issue discount relating to the convertible promissory notes; accrued interest, accretion and amortization of deferred financing costs on the promissory notes; and accrued interest and accretion on the 10% senior convertible notes.
9.
Loss on extinguishment of debt and accrued liabilities:
During the year ended December 31, 2017, the Corporation did not incur a loss on extinguishment of debt and accrued liabilities.
On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 200,000 shares of its common stock, valued at $5,740, in settlement of $6,000 in accounts payable. A net gain of $260 has been recognized in connection with this transaction.
On June 2, 2016, the Corporation issued 1,005 shares of its Series A Convertible Preferred stock, valued at $1,005,000, to holders of its 10% senior convertible notes in settlement of $792,355 of accrued interest; a loss of $212,645 has been recognized in connection with this transaction.
Also, on June 2, 2016, the Corporation issued 3,900 shares of its Series B Convertible Preferred stock, valued at $3,900,000, to holders of its 10% senior convertible notes in settlement of $2,835,025 in principal and $248,850 of accrued interest; a loss of $816,125 has been recognized in connection with this transaction.
On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 3,580 shares of its Series C Convertible Preferred stock, valued at $3,580,000, to holders of its 10% senior convertible notes in settlement of $2,792,233 in principal and $170,983 of accrued interest; an aggregate net loss of $616,784 has been recognized in connection with these transactions.
10.
Loss per share:
As the Corporation incurred a net loss during the years ended December 31, 2017 and 2016, the loss and diluted loss per common share are based on the weighted-average common shares outstanding during the year. The following outstanding instruments could have a dilutive effect in the future:
|
|
|
|
2017
|
2016
|
Stock issuable on conversion of the 10% senior
|
|
|
convertible notes
|
27,253,434
|
20,343,846
|
Stock issuable on conversion of the convertible
|
|
|
promissory notes and accrued interest thereon
|
77,411,942
|
34,618,076
|
Common shares issuable on conversion of the Series A convertible preferred stock
|
22,300,000
|
22,300,000
|
Common shares issuable on conversion of the Series B convertible preferred stock
|
130,000,000
|
130,000,000
|
Common shares issuable on conversion of the Series C convertible preferred stock
|
113,633,333
|
105,033,333
|
Stock issuable on exercise of the stock options
|
7,500,000
|
7,500,000
|
|
378,098,709
|
319,795,255
|
11.
Related party transactions:
$4,052 of accounts payable related to credit card expenses paid on behalf of the corporate shareholder.
$4,187 (2016: $4,001) in accrued interest charges relating to the 10% senior convertible notes and 12% promissory notes previously issued to a director and a company controlled by a director is included in accrued liabilities at December 31, 2017. $nil (2016: $24,007) in coupon-rate interest on these notes is included in interest and finance costs. $nil (2016: $8,452) and $nil (2016: $65,767) was paid to a director in settlement of note principal, and accrued interest, respectively.
An officer and director of a company who holds $4,500 (December 31, 2016: $nil) of the promissory notes is also an officer and director of the Company
.
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12.
Guarantees and Commitments:
a)
Guarantees
The Corporation has entered into agreements which contain features which meet the definition of a guarantee under ASC Topic 460 Guarantees (Topic 460). Topic 460 defines a guarantee to be a contract that contingently requires the Corporation to make payments (either in cash, financial instruments, other assets, common stock of the Corporation or through the provision of services) to a third party based on changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, liability or an equity security of the other party.
The Corporation has the following guarantees which are subject to the disclosure and measurement requirements of Topic 460:
The Corporation includes standard intellectual property indemnification clauses in its software license and service agreements. Pursuant to these clauses, the Corporation holds harmless and agrees to defend the indemnified party, generally the Corporations business partners and customers, in connection with certain patent, copyright or trade secret infringement claims by third parties with respect to the Corporations products. The term of the indemnification clauses is generally perpetual from the date of execution of the software license and service agreement. In the event an infringement claim against the Corporation or an indemnified party is successful, the Corporation, at its sole option, agrees that it will do one of the following: (i) procure for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes non-infringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund the residual value of the software license fees paid by the indemnified party for the infringing software. The Corporation believes the estimated fair value of these intellectual property indemnification clauses is minimal.
Historically, the Corporation has not made any significant payments related to the above-noted indemnities and accordingly, no liability related to the contingent features of these guarantees has been accrued in the financial statements.
13. Fair value measurements:
The carrying value of cash and cash equivalents, value added taxes recoverable, accounts payable and accrued liabilities approximates fair value due to the short term to maturity of these instruments. The carrying value of the promissory notes, 10% senior convertible notes and convertible promissory notes, approximates fair value due to the issuance subsequent to December 31, 2017 of new debt instruments having similar terms and conditions.
14. Income taxes:
Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities as reported for financial reporting purposes and such amounts as measured by tax laws. The tax effects of temporary differences that gave rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
|
|
|
|
2017
|
2016
|
Deferred tax asset:
|
|
|
Net operating loss carryforwards
|
$ 10,900,000
|
$ 10,490,000
|
Capital loss carryforwards
|
1,050,000
|
1,050,000
|
Total gross deferred tax asset
|
11,950,000
|
11,540,000
|
|
|
|
Valuation allowance
|
(11,950,000)
|
(11,540,000)
|
|
|
|
Net deferred taxes
|
$ --
|
$ --
|
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14. Income taxes (continued):
Income tax expense attributable to loss before income taxes was $nil (2016 - $nil) and differed from the amounts computed by applying the U.S. federal income tax rate of 34% (2016 - 34%) to the net loss as a result of the following:
|
|
|
|
2017
|
2016
|
Expected tax rate
|
34%
|
34%
|
Expected tax recovery applied to net
|
|
|
loss before income taxes
|
$ (714,000)
|
$ (1,449,000)
|
|
|
|
Increase (decrease) in taxes resulting from:
|
|
|
Change in valuation allowance
|
403,000
|
510,000
|
Compensation expense
|
24,000
|
159,000
|
Interest and financing costs
|
243,000
|
204,000
|
Other
|
44,000
|
576,000
|
|
$ --
|
$ --
|
The Corporation has net operating losses of $32,200,000 which are available to reduce U.S. taxable income and which expire as follows:
|
|
2019
|
$ 391,000
|
2020
|
675,000
|
2021
|
521,000
|
2022
|
897,000
|
2023
|
1,671,000
|
2024
|
4,205,000
|
2025
|
3,381,000
|
2026
|
3,088,000
|
2027
|
2,623,000
|
2028
|
2,401,000
|
2029
|
1,299,000
|
2030
|
1,258,000
|
2031
|
1,298,000
|
2032
|
1,229,000
|
2033
|
1,475,000
|
2034
|
1,404,000
|
2035
|
1,704,000
|
2036
|
1,496,000
|
2037
|
1,184,000
|
|
$ 32,200,000
|
The losses noted above are estimates, as the related tax returns have not been filed by the Corporation.
15. Change in non-cash operating working capital:
|
|
|
|
2017
|
2016
|
|
|
|
Value added taxes recoverable
|
$ 28,025
|
$ (10,388)
|
Prepaid expenses
|
--
|
(3,064)
|
Accounts payable
|
395,529
|
51,273
|
Accrued liabilities
|
155,510
|
97,298
|
|
$ 579,064
|
$ 135,119
|
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16. Supplementary cash flow information:
The Corporation paid no income taxes during the year ended December 31, 2017, nor during the year ended December 31, 2016. Interest paid in cash during the years ended December 31, 2017 and December 31, 2016 were $47,390 and $540,425, respectively.
Non-cash financing activities are excluded from the consolidated statement of cash flows. The following is a summary of such activities:
|
|
|
|
2017
|
2016
|
Issuance of the Corporations common stock as partial consideration for
|
|
|
services rendered
|
$ --
|
$ 283,330
|
Issuance of the Corporations common stock in settlement of 10%
|
|
|
senior convertible notes and accrued interest, on the holders
|
|
|
exercise of the conversion feature
|
--
|
188,422
|
Issuance of the Corporations common stock in settlement of convertible
|
|
|
promissory notes, and accrued interest thereon
|
688,431
|
328,642
|
Issuance of the Corporations common stock in settlement of
|
|
|
accounts payable and accrued liabilities
|
--
|
6,000
|
Issuance of the Corporations Series A convertible preferred shares in settlement
|
|
|
of accrued interest on the 10% senior convertible notes
|
--
|
792,355
|
Issuance of the Corporations Series B convertible preferred shares in settlement
|
|
|
of principal and accrued interest on the 10% senior convertible notes
|
--
|
3,083,875
|
Issuance of the Corporations Series C convertible preferred shares in settlement
|
|
|
of principal and accrued interest on the 10% senior convertible notes
|
--
|
2,963,216
|
Issuance of the Corporations Series C convertible preferred shares in settlement
of accounts payable, accrued liabilities and consulting fees
|
118,200
|
|
Accounts receivable settled with offset of accrued interest on the 10% senior
|
|
|
convertible notes
|
--
|
400,000
|
Issuance of the Corporations 10% senior convertible notes in
|
|
|
settlement of accounts payable and accrued liabilities
|
60,000
|
--
|
Issuance of the Corporations promissory notes in settlement of
|
|
|
accounts payable and accrued liabilities
|
4,000
|
--
|
Total
|
$ 870,631
|
$ 8,045,840
|
17.
Subsequent events:
On January 25, 2018, a holder of the convertible promissory notes exercised the conversion feature of the notes and converted $10,200 of note principal into 4,500,000 shares of the Companys common stock.
On February 8, 2018, a holder of the convertible promissory notes exercised the conversion feature of the notes, and converted $23,650 of note principal, plus $4,321.68 of accrued interest thereon, into 7,824,245 shares of the Companys common stock.
On February 12, 2018, a holder of the convertible promissory notes exercised the conversion feature of the notes, and converted $15,040 of note principal into 6,400,000 shares of the Companys common stock.
On February 15, 2018, the Company issued $6,000 of its promissory notes for cash. The notes are payable on demand, and bear interest at the rate of 12% per annum.
On March 5, 2018, the Company issued $15,000 of its promissory notes for cash. The notes are payable on demand, and bear interest at the rate of 12% per annum.
On March 9, 2018 a holder of the convertible promissory notes exercised the conversion feature of the notes, and converted $15,007.50 of note principal into 6,210,000 shares of the Companys common stock.
On March 13, 2018, the Company issued $12,500 of its promissory notes for cash. The notes are payable on demand, and bear interest at the rate of 12% per annum.
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17.
Subsequent events (continued):
On March 27, 2018, a holder of the convertible promissory notes exercised the conversion feature of the notes, and converted $25,000 of note principal, plus $1,594.44 of accrued interest thereon, into 9,123,307 shares of the Companys common stock.
During Q1 2018, the Company entered into legal proceedings with a provider of services regarding the amount of the balance owed by the Company for services rendered by the provider of services to the Company during 2017.
Except for the foregoing, we have evaluated subsequent events through the date the financial statements were issued. All material events have been disclosed.
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