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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________


FORM 10-Q

________


(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from   to   


Commission File No. 000-28423


VALIDIAN CORPORATION

 (Exact name of Registrant as specified in its charter)


NEVADA

 

58-2541997

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)


6 Gurdwara St., Suite 100, Ottawa, Ontario, Canada  K2E 5A3

(Address of principal executive offices)


Registrant’s telephone number:  613-230-7211


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨


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


Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company x


Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ¨  No x


APPLICABLE ONLY TO CORPORATE ISSUERS:


At November 13, 2012, 169,715,370 shares of the registrants common stock were outstanding.


SEC 1296 (1-12)

Potentialpersonswhoaretorespondtothecollectionofinformationcontainedinthisformarenot

requiredtorespondunlesstheformdisplaysacurrentlyvalidOMBcontrolnumber.



1



PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements


VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Unaudited Interim Consolidated, Condensed Balance Sheets

(In United States dollars)

 

September 30, 2012

 

December 31, 2011

Assets

 

 

 

Current assets:

 

 

 

     Cash and cash equivalents

$          426

 

$      11,957

     Value added taxes recoverable

5,753

 

8,422

Total Current assets

6,178

 

20,379


Property and equipment, net of accumulated depreciation of $43,176

 

 

 

    (December 31, 2011 - $38,487)

5,448

 

10,136

 

 

 

 

          Total assets

$        11,626

 

$      30,515


Liabilities and Stockholders’ Deficiency

 

 

 

Current liabilities:

 

 

 

     Accounts payable and accrued liabilities (note 11)

$  3,074,992

 

$ 2,577,249

     Accrued interest on promissory notes and 10% senior convertible notes    

 

 

 

        payable to related parties (note 11)

177,329

 

139,373

     Deferred revenue

320,000

 

320,000

     Promissory notes payable (notes 2, 11)

47,250

 

46,248

     Promissory notes payable to related parties (notes 2,11)

54,038

 

71,649

     Current portion of capital lease obligation (note 6)

--

 

2,009

     10% Senior convertible notes (notes 3, 11)

6,223,083

 

5,806,820

     10% Senior convertible notes payable to related parties (notes 3, 11)

659,445

 

659,445

     12% convertible notes (note 4)

--

 

177,227

     Convertible promissory notes (note 5)

44,622

 

26,921

          Total current liabilities

10,600,759

 

9,826,941

 

 

 

 

          Total liabilities

10,600,759

 

9,826,941

 

 

 

 

Stockholders’ deficiency (note 7):

 

 

 

Preferred stock ($0.001 par value.  Authorized 50,000,000 shares;  issued

 

 

 

  and outstanding Nil shares at September 30, 2012 and at December 31,

  2011)

--

 

--

 Common stock, ($0.001 par value.  Authorized 700,000,000 shares;

  issued and outstanding 169,715,370 and 141,593,004 shares at

  September 30, 2012 and December 31, 2011, respectively.)



169,715

 



141,593

Additional paid in capital

28,205,997

 

27,717,705

Deficit accumulated during the development stage

(38,936,411)

 

(37,627,290)

Retained earnings prior to entering development stage

21,304

 

21,304

Treasury stock (7,000 shares at September 30, 2012 and December 31, 2011, at cost)


(49,738)

 


(49,738)

          Total stockholders’ deficiency

(10,589,133)

 

(9,796,426)

 

 

 

 

Basis of presentation (note 1)

 

 

 

Contingent liabilities (note 12)

 

 

 

Subsequent events (note 16)


 

 

Total liabilities and stockholders’ deficiency

$        11,626

 

$      30,515


See accompanying notes to unaudited interim consolidated financial statements.



2




VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Unaudited Interim Consolidated, Condensed Statements of Operations

For the three and nine months ended September 30, 2012 and 2011

And for the Period from August 3, 1999 to September 30, 2012

(In United States dollars)

 


 

 

Period from

 

 Three Months Ended

Nine Months Ended

August 3, 1999

 

 September 30,

September 30,

To September

 

2012

2011

2012

2011

30, 2012

Expenses:


 




   Selling, general and administrative

$   93,962

$ 173,474

$   484,485

$ 448,547

$16,478,069

   Research and development

18,572

24,711

80,736

67,662

10,182,625

   Depreciation of property and equipment

1,127

1,268

4,689

3,856

452,234

   Gain on sale of property and equipment

--

--

--

--

(7,442)

   Write-off of prepaid services

--

--

--

--

496,869

   Write-off of deferred consulting services

--

--

--

--

1,048,100

   Write-off of accounts receivable

--

--

--

--

16,715

   Write-off of due from related party

--

--

--

--

12,575

   Loss on cash pledged as collateral for operating lease

--

--

--

--

21,926

   Write-down of property and equipment

--

--

--

--

14,750

 

113,661

199,453

569,910

520,065

28,716,421

 

 

 

 

 

 

Loss before the undernoted

(113,661)

(199,453)

(569,910)

(520,065)

(28,716,421)

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

  Interest income

--

--

--

--

61,728

  Gain (loss) on extinguishment of debt, accounts

 

 

 

 

 

       payable and accrued liabilities (note 8)

--

--

31,888

5,725

342,408

  Interest and financing costs (notes 9 and 11)

(199,301)

(337,123)

(763,400)

(872,432)

(10,487,027)

  Foreign exchange gain (loss)

(11,356)

70,164

(7,699)

31,575

(137,099)

 

(210,657)

(266,959)

(739,211)

(835,132)

(10,219,990)

 

 

 

 

 

 

Net loss

$(324,318)

$(466,412)

$(1,309,121)

$(1,355,197)

$(38,936,411)

 

 

 

 

 

 

Loss per common share – basic and diluted (note 11)

$(0. 00)

$(0.00)

$(0. 01)

$(0.01)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding during period


166,736,884


120,139,801


156,701,132


115,066,767

 













See accompanying notes to unaudited interim consolidated financial statements.



3





VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Unaudited Interim Consolidated, Condensed, Statements of Cash Flow

For the nine months ended September 30, 2012 and 2011

And for the Period from August 3, 1999 to September 30, 2012

(In United States dollars)

 

Nine Months

Ended

September 30,

Period from August 3, 1999 to

 

2012

2011

September 30, 2012

Cash flows from operating activities:




Net loss

$ (1,309,121)

$(1,355,197)

$ (38,936,411)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

Depreciation of property and equipment

4,689

3,856

452,234

Stock-based compensation

229,680

61,162

3,940,854

Non-cash interest and financing expense

747,304

865,374

10,433,972

Loss (gain) on extinguishment of debt and accrued liabilities

(31,888)

(5,725)

(342,408)

Non-cash penalties

--

--

166,900

Write-off of prepaid services

--

--

496,869

Write-off of deferred consulting services

--

--

1,048,100

Currency translation adjustment on liquidation of

   investment in foreign subsidiary


--


--


(26,212)

Gain on sale of property and equipment

--

--

(7,442)

Write-off of accounts receivable

--

--

16,715

Write-off of due to related party

--

--

12,575

Loss on cash pledged as collateral for operating lease

--

--

21,926

Write-down of property and equipment

--

--

14,750

Increase (decrease) in cash resulting from changes in:

 

 

 

Value added taxes recoverable

2,669

18,739

20,049

 Prepaid expenses

--

--

(61,557)

 Accounts payable and accrued liabilities

98,754

181,785

4,666,190

 Deferred revenue

--

--

320,000

 Due to a related party

--

--

(5,178)

Net cash used in operating activities

(257,913)

(230,006)

(17,768,074)

Cash flows from investing activities:

 

 

 

Additions to property and equipment

--

(3,120)

(546,943)

Proceeds on sale of property and equipment

--

--

            176,890

Cash pledged as collateral for operating lease

--

--

(21,926)

Net cash used in investing activities

--

(3,120)

(391,979)

Cash flows from financing activities:

 

 

 

Capital lease repayments

(2,009)

(3,008)

(30,489)

Issuance of promissory notes

29,601

10,000

4,900,373

Issuance of 10% senior convertible notes

242,000

161,500

3,877,500

Issuance of convertible promissory notes

65,000

125,500

250,500

Debt and equity issuance costs

(5,000)

(8,000)

(950,983)

Repayment of promissory notes

(46,785)

(32,767)

(305,499)

Repayment of 10% senior convertible notes

(37,000)

--

(30,000)

Proceeds from exercise of stock purchase warrants

--

--

412,500

Increase in due from related party

--

--

12,575

Issuance of common shares

--

--

8,030,000

Redemption of common stock

--

--

(49,738)

Issuance of 4% senior subordinated convertible debentures

--

--

2,000,000

Net cash provided by financing activities

245,807

253,225

18,109,739

 

 

 

 

Effects of exchange rates on cash and cash equivalents

575

4,307

15,940

Net increase (decrease) in cash and cash equivalents

(11,531)

14,406

(34,373)

Cash and cash equivalents:

 

 

 

Beginning of period

11,957

(1,877)

34,799

End of period

$         426

$        22,529

$          426

 

 

 

 

Supplementary information (note 13)



See accompanying notes to unaudited interim consolidated financial statements.





4



VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

(In United States dollars)


Validian Corporation (the “Company”) was incorporated in the State of Nevada on April 12, 1989 as CCC Funding Corp.  The Company underwent several name changes before being renamed to Validian Corporation on January 28, 2003.


Since August 3, 1999, the efforts of the Company have been devoted primarily to the development of a high speed, highly secure method of transacting business using the Internet, and to the sale and marketing of the Company’s products.  


1.  Basis of presentation


The accompanying consolidated financial statements include the accounts of Validian Corporation and its wholly owned subsidiaries (collectively, the "Company") after elimination of all significant intercompany balances and transactions. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While management has based its assumptions and estimates on the facts and circumstances currently known, final amounts may differ from such estimates.


The interim financial statements are unaudited but, in the opinion of management, include all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the financial position and results of operations of the Company for the periods presented. The results of operations for the three and are not necessarily indicative of the operating results for the full fiscal year ending December 31, 2012.  These unaudited interim financial statements have been prepared following accounting principles consistent with those used in the annual audited financial statements and should be read in conjunction with the annual audited financial statements for the year ended December 31, 2011.


Going concern


The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has no revenues, has negative working capital of $10,594,581, and stockholders’ deficiency of $10,589,133 as at September 30, 2012, and has incurred a loss of $1,309,121 and negative cash flow from operations of $257,913 for the nine months then ended.  Furthermore, the Company failed to settle certain 10% senior convertible notes and promissory notes plus accrued interest when they matured on various dates between October 2008 and December 2011.  As a result of these non-payment defaults, all of the 10% senior convertible notes, as well as $36,250 of the promissory notes were in default at September 30, 2012, in accordance with the default provisions of the respective notes, and consequently are due and payable on demand.  In addition, the Company expects to continue to incur operating losses for the foreseeable future, and has no lines of credit or other financing facilities in place.  


The Company expects to incur operating expenses of approximately $719,000 for the year ending December 31, 2012, subject to the availability of adequate funding.  In the event the Company cannot raise the additional funds necessary to finance its research and development and sales and marketing activities, it may have to cease operations.


All of the factors above raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan to address these issues includes raising capital through the private placement of equity, the exercise of previously-issued equity instruments and through the issuance of additional promissory notes.   The Company’s ability to continue as a going concern is subject to management’s ability to successfully implement these plans.  Failure to do so could have a material adverse effect on the Company’s position and or results of operations and could also result in the Company ceasing operations.  The consolidated financial statements do not include adjustments that would be required if the assets are not realized and the liabilities settled in the normal course of operations.


Even if successful in obtaining financing in the near term, the Company cannot be certain that cash generated from its future operations will be sufficient to satisfy its liquidity requirements in the longer term, and it may need to continue to raise capital by issuing additional equity or by obtaining credit facilities.  The Company’s future capital requirements will depend on many factors, including, but not limited to, the market acceptance of its products and the level of its promotional activities and advertising required to generate product sales.  No assurance can be given that any such additional funding will be available or that, if available, it can be obtained on terms favorable to the Company.







5



VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

(In United States dollars)




2.  Promissory notes payable


The following table sets forth the financial statement presentation of the promissory note proceeds on issuance, and the changes in the financial statement presentation of the balance allocated to the notes as at and for the periods ended September 30, 2012 and December 31, 2011:


 

Nine months

Year ended

 

ended September 30, 2012

December 31, 2011

 

(unaudited)

 

Balance beginning of period

$  117,897

$  112,007

 

 

 

Notes issued

29,601

18,500

 

 

 

Principal repaid

(46,785)

(32,767)

 

 

 

Principal settled through issuance of the Company’s 10% senior convertible

 

 

    Notes (note 5)

--

(83,960)

 

 

 

Adjustment for foreign currency translation

575

5,117

 

 

 

 

$   101,288

$  117,897

 

 

 

 

 

 

Due on demand, interest at 12%, unsecured, repayable in

 

 

  Canadian dollars

$    43,038

$  63,147

Due on demand, interest at 12%, unsecured, repayable in

 

 

  United States dollars

58,250

54,750

 

101,288

  117,897

Payable to related parties (note 11)

(54,038)

(71,649)

 

$    47,250

$   46,248

 

 

 


Included in interest and financing costs for the three and nine months ended September 30, 2012 is $3,013 (2011: $6,253) and $9,171 (2011:  $19,027), respectively, of interest on the promissory notes.  Interest on the promissory notes paid in cash during the three and nine months ended September 30, 2012 was $63 (2011:  $5,615) and $16,046 (2011:  $6,803), respectively.  







6



VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)




3.  10% Senior convertible notes


The following table sets forth the financial statement presentation of the note proceeds on issuance, and the changes in financial statement presentation of the balance allocated to the 10% senior convertible notes for the periods ended September 30, 2012 and December 31, 2011:


 

Nine months

Year

 

Ended

Ended

 

September 30, 2012

December 31, 2011

 

(unaudited)

 

Balance beginning of period

$  6,466,265

$  6,233,150

 

 

 

Note proceeds on issuance

757,111

1,903,810

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

(2,124)

(7,683)

            Allocated to additional paid-in capital

(55,268)

(179,847)

 

(699,719)

(187,530)

Allocated to additional paid-in capital for the intrinsic value of the

 

 

  beneficial conversion feature

(86,635)

(457,254)

Proceeds allocated to 10% senior convertible notes on issuance

613,084

    1,259,026

 

 

 

Accretion recorded as a charge to interest and financing costs

144,027

644,784

Principal matured and repaid through the issuance of new 10%

 

 

  senior convertible notes

(303,848)

(1,035,248)

Principal repaid in cash

(37,000)

--

 

 

 

Principal converted pursuant to the terms of the notes

--

(224,332)

Principal matured and repaid through the issuance of 12%

  convertible promissory notes (note 4)


--


(411,115)

 

6,882,528

6,466,265

Payable to related parties (note 11)

    (659,445)

    (659,445)

 


$ 6,223,083


$ 5,806,820


During the nine months ended September 30, 2012, the Company issued an aggregate of $757,111 of its 10% senior convertible notes.  $242,000 of the notes were issued for cash; $321,745 of the notes were issued in settlement of $303,848 in previously issued 10% senior convertible notes and $17,897 in accrued interest thereon; and $193,366 of the notes were issued in settlement of $177,227 in 12% convertible notes and $16,139 in accrued interest thereon.  During this period the Company also repaid $37,000 of the notes, and settled $3,020 in accrued interest thereon through the issuance of 100,657 shares of the Company’s common stock.  


Under the terms of the notes issued during the nine months ended September 30, 2012, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest into common stock of the company, at a rate of one common share for each $0.03 of debt converted.  The Company has the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, with the permission of the holders.  Interest on the notes is accrued until the notes are either repaid by the Company or converted by the holder.  At the Company’s option, interest may be paid either in cash or in common shares of the Company.  If interest is paid in common shares, the number of shares required for settlement will be calculated at the rate of conversion in effect for the conversion of the note principal.  $192,000 of the notes issued during the period are payable on demand; $565,111 mature on December 31, 2012.  







7



VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)



3.  10% Senior convertible notes (continued)


Holders of the notes issued during the nine months ended September 30, 2012 were granted 2,123,515 common shares of the Company upon issuance of the notes; $57,392, 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.


$86,635, representing the relative fair value of the beneficial conversion feature of the notes issued during the nine months ended September 30, 2012 was allocated to additional paid in capital.


The Company failed to settle certain of its 10% senior convertible notes plus accrued interest thereon when they matured on various dates between October 1, 2008 and December 31, 2011.  At September 30, 2012, 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 September 30, 2012, in accordance with the default provisions of the notes, and consequently are payable on demand.  Interest is accrued at the coupon rate on all notes outstanding past the maturity date.


The following table summarizes information regarding the 10% senior convertible notes outstanding at September 30, 2012:


Note

Conversion

Principal

Rate

$  5,871,021

$0.03

511,507

0.038

500,000

0.10

$  6,882,528

 



At September 30, 2012, $2,835,025 of the 10% senior convertible notes were secured by a first position lien on all of the assets of the Company.  The remaining $4,047,503 were unsecured.  As a result of the event of default noted above, holders of secured notes have the right to exercise their lien on all of the assets of the Company.


Included in interest and financing costs for the three months ended September 30, 2012 is $173,261 (2011:  $153,709) in coupon rate interest accrued on the 10% senior convertible notes, and $670 (2011: $128,760) in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.  Included in interest and financing costs for the nine months ended September 30, 2012 is $510,123 (2011:  $457,271) in coupon rate interest accrued on the 10% senior convertible notes, and $144,027 (2011:  $193,401) in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.  


At September 30, 2012, the fair value of the stock issuable to fully convert the 10% senior convertible note principal, was $2,141,615, which is $4,740,915 less than the principal outstanding on that date.













8



VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)



4.  12% Convertible notes


During the nine months ended September 30, 2012, $177,227 of the 12% convertible notes and $16,139 in accrued interest thereon were settled through the issuance of $193,366 in 10% senior convertible notes.


Included in interest and financing costs for the three and nine months ended September 30, 2012 is $nil (2011:  $5,468), and $1,757 (2011: $23,212), respectively, relating to accrued coupon-rate interest on the 12% convertible notes; also included in interest and financing costs for the three and nine months ended September 30, 2012 is $nil (2011:  $60,027) and $nil (2011:  $127,614), respectively, relating to the accretion of the relative fair value of the equity components of the 12% convertible notes at issuance.



5.  Convertible promissory notes


During the nine months ended September 30, 2012, the Company issued $65,000 of its convertible promissory notes for cash. $32,500 of these notes mature on February 25, 2013, and may be prepaid during the period from issuance to November 18, 2012, in whole or in part, at various rates ranging from 130% 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 November 18, 2012 or thereafter, into common stock of the Company.  $19,384, representing the relative fair value of the beneficial conversion feature of the notes, was allocated to additional paid in capital.


$32,500 of the notes issued during the nine months ended September 30, 2012 mature on June 21, 2013, and may be prepaid during the period from issuance to December 28, 2012, in whole or in part, at various rates ranging from 130% 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 28, 2012 or thereafter, into common stock of the Company.  $19,384, representing the relative fair value of the beneficial conversion feature of the notes, was allocated to additional paid in capital.


Also during the nine months ended September 30, 2012, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $97,500 of note principal, and $3,420 in accrued interest, into 16,748,184 common shares of the Company.


The convertible promissory 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.  The rate of conversion is to be calculated as the average of the lowest three trading prices during the ten day period immediately preceding such conversion, discounted by 42%.   


$15,500 of the convertible promissory notes which were outstanding at September 30, 2012, were issued prior to December 31, 2011, and matured on September 14, 2012; effective September 14, 2012, the maturity date of these notes was extended to December 31, 2012.  


The convertible promissory notes contain penalty provisions relating to events of default, pursuant to which the Company could be required not only to pay interest at the rate of 22% following such an event, but also to pay immediately 150% of the principal outstanding plus accrued interest and penalty interest; alternatively, the Company could be required, at the discretion of the holder, to issue stock in satisfaction of the value determined under such penalty provisions, at the rate of conversion in effect at such time as the holder so elects.  In addition to non-payment of the note principal and interest at maturity or failure to transfer stock on receipt of a notice of conversion from the holder, events of default include making an assignment or appointment of a receiver or trustee, ceasing operations, liquidating assets or entering into bankruptcy proceedings; certain money judgments filed against the Company; breach of covenants, representations or warranties under the note; delisting of the Company’s stock or failure to comply with the exchange act; failure to maintain property or rights which are necessary to the Company’s business; certain restatements of the Company’s financial statements as filed with the SEC during the preceding two years; effectuating a reverse stock split without first providing the holder with 20 days’ notice of such occurrence; replacing the Company’s transfer agent without first providing to the successor transfer agent, the necessary instructions to effect a transfer of stock to the holder pursuant to the terms of the note.  








9




VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)



5.  Convertible promissory notes (continued)


The discount to market conversion feature of the convertible promissory notes causes a theoretical possibility that the Company may be required to settle the notes by issuing more shares than are authorized.  Furthermore, this feature causes the notes to fall within the FAS 133 definition of a derivative liability.  Management has calculated that the maximum number of shares required to convert the principal plus accrued interest on the convertible notes at September 30, 2012 was 14,305,876, which represents less than 3% of the authorized, unissued shares at that date, and has also estimated that the fair value of the notes at September 30, 2012 approximates face value, therefore no adjustment for fair value restatement has been made.


The convertible promissory notes are being accreted to their face value over the term of the notes through periodic charges to interest expense, using the effective interest rate method.  During the three and nine months ended September 30, 2012, accretion of $18,432 (2011:  $39,009) and $86,041 (2011:  $49,791), respectively, was included in interest and financing costs.


Also included in interest and financing costs for the three and nine months ended September 30, 2012 is $789 (2011:  $1,246) and $4,302 (2011:  $2,877), respectively, relating to accrued coupon-rate interest on the convertible promissory notes; and $3,135 (2011:  $2,606) and $7,927 (2011:  $3,393), respectively, relating to the amortization of deferred finance fees incurred in connection with the placement of the convertible promissory notes.


At September 30, 2012, the fair value of the stock issuable to fully convert the convertible promissory note principal was $138,793, which exceeded the principal amount outstanding on that date by $58,293.



6.  Capital lease obligation:


During the nine months ended September 30, 2012, the Company repaid in full its obligations under a long-term lease for office equipment.































10




VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)



7.  Stockholders’ deficiency


(a)  Common stock transactions


During the nine months ended September 30, 2012, the Company issued an aggregate of 6,000,000 shares of its common stock as incentives for consultants to enter into consulting agreements with the company.  $187,500, representing the fair value of the stock at issuance, was allocated to shares and additional paid in capital, and was charged to expense.  


During the nine months ended September 30, 2012, the Company also issued an aggregate of 3,150,000 shares of its common stock as compensation for consulting services rendered.  $42,180, representing the fair value of the stock at issuance, was allocated to shares and additional paid in capital, and was charged to expense.  


On January 30, 2012, the Company issued 100,667 of its common shares in settlement of $3,020 in accrued interest on the 10% senior convertible notes.  $3,020 has been allocated to the stock and additional paid in capital to reflect this transaction.


During the nine months ended September 30, 2012, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $97,500 of note principal, and $3,420 of accrued interest thereon, into 16,748,184 common shares of the Company.  $100,920 has been allocated to the stock and additional paid in capital to reflect this transaction.


In connection with the issuance of the Company’s 10% senior convertible notes during the nine months ended September 30, 2012, the Company issued 2,123,515 shares of its common stock, with a relative fair value of $57,391, to the holders of the notes.



(b)  Transactions involving stock options


2,975,000 of the Company’s issued and outstanding stock options expired on June 19, 2012.



(c)

Stock-based compensation


The following table presents the total of stock-based compensation included in the expenses of the Company for the three and nine months ended September 30, 2012 and 2011:


 

Three Months Ended

September 30,

Nine Months Ended

September 30,

 

2012

2011

2012

2011

 

 

 

 

 

Selling, general and administrative

$ 20,000

$     45,000

$  229,680    

$    60,000

Research and development

--

1,162

--

1,162

Total stock-based compensation included in expenses

$ 20,000

$     46,162

$  229,680

$    61,162




8.  Gain on extinguishment of debt, accounts payable and accrued liabilities


On March 9, 2012, the Company paid $6,062 in settlement of accounts payable totaling $42,095.  The settlement resulted in a $4,145 reversal of value added tax credits, and a gain on settlement of $31,888.










11




VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)


9.  Interest and financing costs


Interest and financing costs include accrued and paid coupon rate interest; accretion and financing costs relating to the 10% senior convertible notes, 12% convertible notes, promissory notes, and convertible promissory notes; and the interest portion of capital lease payments.


10.  Loss per share


As the Company incurred a net loss during the nine months ended September 30, 2012, and during the nine months ended September 30, 2011, the loss and diluted loss per common share are based on the weighted-average common shares outstanding during the period.  The following outstanding instruments could have a dilutive effect in the future:


 

September 30, 2012

September 30, 2011

 

 (unaudited)

 (unaudited)

Shares issuable on conversion of 10%  senior

 

 

  convertible notes

 214,161,456

 191,984,154

Shares issuable on conversion of 12% convertible

  notes and accrued interest thereon

 

 --

 

 6,208,308

Shares issuable on conversion of convertible promissory

  notes and accrued interest thereon

 

 14,305,876

 

 4,987,188

Stock options

 4,725,000

 7,700,000

 

 233,192,332

 210,879,650



11.  Related party transactions


Included in 10% senior convertible notes payable (note 3) is $611,887 (December 31, 2011 – $611,887) payable to a director and to a company controlled by a director, and $47,558 (December 31, 2011 – $47,558) payable to an individual related to a director and a company controlled by an individual related to a director.  


Included in promissory notes payable (note 2) is $54,038 (December 31, 2011 - $71,649) payable to the director and to a company controlled by a director.


$177,329 (December 31, 2011 – $139,373) in accrued interest charges relating to the 10% senior convertible notes and promissory notes is included in accrued liabilities at September 30, 2012.  $18,215 (2011:  $18,770) and $54,488 (2011:  $56,607) is included in interest and financing costs for the three and nine months ended September 30, 2012, respectively.



12.  Contingent liabilities


On or around August 3, 2010, an agent of the Company was served notice of the commencement of legal action against the Company by a former consultant of the Company.  The plaintiff is seeking approximately $171,900 in unpaid fees relating to a service contract entered into by the Company and the consultant in January of 2007, plus legal and other costs.  The Company has retained legal counsel in order to contest this action, and to make a counter claim against the plaintiff, as it is the opinion of management that the work agreed to under the terms of the contract was not delivered by the consultant and that furthermore, the non-performance resulted in the Company not being able to deliver its product to potential customers at the time.


Neither the amount nor the likelihood of any liability that may arise as a result of this action is determinable at this time; accordingly, no amount in respect of this claim has been reflected in the financial statements for the period ended September 30, 2012.







12




VALIDIAN CORPORATION AND SUBSIDIARIES

A DEVELOPMENT STAGE ENTERPRISE

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

September 30, 2012

 (In United States dollars)



13.  Supplementary cash flow information


The Company paid no income taxes during the nine months ended September 30, 2012, nor during the nine months ended September 30, 2011.  Interest paid in cash during the nine months ended September 30, 2012 was $16,046 (2011:  $7,058).


Non-cash financing activities are excluded from the consolidated statements of cash flows.  The following is a summary of such activities for the nine months ended September 30, 2012 and 2011:


 

2012

2011

 

 

 

Issuance of the Company’s 10% senior convertible notes in settlement of

 

 

  previously issued 12% convertible notes and accrued interest thereon

$    193,366

$    303,847

Issuance of the Company’s 10% senior convertible notes in settlement of

 

 

  previously issued 10% senior convertible notes and accrued interest thereon

321,745

466,884

Issuance of the Company’s common stock on conversion of the 10% senior

 

 

  convertible notes plus accrued interest thereon

3,020

152,244

Issuance of the Company’s common stock on conversion of convertible

 

 

  promissory notes plus accrued interest thereon

100,920

41,600

Issuance of the Company’s common stock as incentive for entering into

 

 

  consulting services agreements

187,500

101,400

Issuance of the Company’s common stock as compensation to consultants

42,180

--

 

 

 

Issuance of the Company’s common stock in settlement of accounts payable

 

 

  and accrued liabilities

--

6,652

Issuance of the Company’s 10% senior convertible notes in settlement of

 

 

  accounts payable and accrued liabilities

--

50,000

Release of unused furniture in settlement of storage charges included in

 

 

 accounts payable and accrued liabilities

--

4,376

 

$    848,731         

$     1,220,813



14.  Fair value measurements


The carrying value of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities approximates fair value due to the short term to maturity of these instruments.  The carrying value of the 10% senior convertible notes, the convertible promissory notes, and the promissory notes approximate fair value, due to the issuance of certain of these debt instruments during the six weeks prior to the period ended September 30, 2012, under conditions substantially identical to those existing at September 30, 2012.  



15.  Recent accounting pronouncements


Management does not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.










13




Item 2.  Management’s Discussion and Analysis or Plan of Operations


FORWARD-LOOKING INFORMATION


We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements that we make in this report.  For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements.  This report contains statements that constitute “forward-looking statements.”  These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” or similar terms.  These statements appear in a number of places in this report and include statements regarding our intent, belief or current expectations with respect to many things, some of which are:


·

trends affecting our financial condition or results of operations for our limited history;

·

our business and growth strategies;

·

our technology;

·

the Internet; and

·

our financing plans.


We caution readers that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties.  In fact, actual results most likely will differ materially from those projected in the forward-looking statements as a result of various factors.  Some factors that could adversely affect actual results and performance include:


·

our limited operating history;

·

our lack of sales to date;

·

our requirements for additional capital and operational funding;

·

the failure of our technology and products to perform as specified;

·

the discontinuance of growth in the use of the Internet;

·

the enactment of new adverse government regulations; and

·

the development of better technology and products by others.


You should carefully consider and evaluate all of these factors.  In addition, we do not undertake to update forward-looking statements after we file this report with the SEC, even if new information, future events or other circumstances have made them incorrect or misleading.


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 2011 Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.  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 September 30, 2012 Interim 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 product is 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 management’s estimates, including estimates of current and future industry conditions.  A significant change to these assumptions could impact the estimated useful life of our commercial product resulting in a change to amortization expense and impairment charges.


Stock based compensation:


The Company accounts for its stock-based payments in accordance with FASB Accounting Standards Codification Topic 718 “Compensation – Stock Compensation”, which requires all share-based payments, including stock options granted by the Company 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 Company uses the Black Scholes option-pricing model, and has



14



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 Company’s circumstances is the stated vesting period of the award.


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.


RESULTS OF OPERATIONS


The Three months ended September 30, 2012 compared to the three months ended September 30, 2011


Revenue: We had no revenue during the three months ended September 30, 2012, nor during the three months ended September 30, 2011.  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, travel and other miscellaneous costs associated with supporting our research and development, sales and marketing and investor relations activities.  During the three months ended September 30, 2012, we incurred a total of $93,962, as compared to $173,474 during the nine months ended September 30, 2011.  There was an overall decrease in selling, general and administrative expenses of $79,512 (46%) during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.


The decrease in selling, general and administrative expense occurred primarily as a result of our having terminated the consulting agreements with two contractual personnel during the third quarter of 2011.  As we have not required the services provided by these individuals since the termination of their contracts, the fees incurred during the three months ended September 30, 2011 have no comparable cost during the three months ended September 30, 2012. Additionally, there has been a reduction in the stock-based component of the remuneration under certain consulting contracts, as a result of the trading value for our stock at the date of issuance during the three months ended September 30, 2012, being lower than the value at the date of issuance during the three months ended September 30, 2011.  These reductions were partially offset by higher legal costs associated with our defense against the legal charge against us brought by a former consultant, as well as higher regulatory costs associated with recent changes to our filing requirements.


We have made efforts to minimize selling, general and administrative expenses wherever possible, through measures such as reducing the number of personnel, postponing our Annual General Meeting, reducing the number of trade shows in which we participate, reducing travel costs, delaying production of new promotional material, and reducing our occupancy costs.  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 directly associated with the development of our software applications.  During the three months ended September 30, 2012, we incurred a total of $18,572, as compared to $24,711 during the three months ended September 30, 2011 on research and development activities. There was an overall decrease in research and development expenses of $6,139 (25%) during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.


The decrease in research and development expenses is due primarily to an decrease in fees paid to consultants for development work during the period.  Our level of expenditure for research and development activities is variable, as our activities in this area are tied to initiatives undertaken from time to time in response to the outcome of testing and feedback from test installations of our software products.


Interest and financing costs:  Interest and financing costs during the three months ended September 30, 2012 consisted of costs associated with our 10% senior convertible notes, our promissory notes, and our convertible promissory notes.  Interest and financing costs during the three months ended September 30, 2011 consisted of costs associated with our 10% senior convertible notes, our promissory notes, our 12% convertible notes, our convertible promissory notes, and interest on the capital lease.  During the three months ended September 30, 2012, we incurred $199,301 in interest and financing costs, a decrease of $137,822 (41%) from the $337,123 in interest and financing costs incurred during the three months ended September 30, 2011.  


The $199,301 in interest and financing costs we incurred during the three months ended September 30, 2012 is comprised of $177,063 of interest paid and payable to the holders of our debt; $670 of accretion of our 10% senior convertible notes; $18,432 of accretion of



15



our convertible promissory notes; and $3,135 of amortized deferred finance fees relating to the convertible promissory notes.  The $337,123 in interest and financing costs we incurred during the three months ended September 30, 2011 is comprised of $166,677 of interest paid and payable to the holders of our debt; $128,760 of accretion of our 10% senior convertible notes; $39,009 of accretion of our convertible promissory notes; $2,606 of amortized deferred finance fees relating to the 12% convertible notes; and $71 in interest on the capital lease..


We failed to settle certain of our promissory notes and 10% senior convertible notes, and accrued interest thereon, when they became due on various dates between October 1, 2008 and December 31, 2011, and a significant portion of these notes remain in default as at September 30, 2012.  In accordance with the default provision of the 10% senior convertible notes, and certain of the promissory notes, this has resulted in all of these notes becoming due and payable on demand as of the date of the default, or in the case of notes issued subsequent to the default, on the date of issuance, notwithstanding any other stated maturity date.  Consequently, the accretion relating to the equity components of either of these instruments issued since the initial event of default, and the amortization of any finance charges incurred thereon, has occurred in the period of issuance.   


As a result of the above, the accretion and finance charge components of interest and financing costs relating to the 10% senior convertible notes for the three months ended September 30, 2012, and for the three months ended September 30, 2011 relate only to notes issued during these periods. The fair value of the equity components relating to these classes of notes issued during the three months ended September 30, 2012 was less than the fair value of equity components relating to similar notes issued during the three months ended September 30, 2011, which resulted in a decrease of $128,090 (99%) in accretion related to these classes of notes.


Accretion of our convertible promissory notes decreased by $20,577 (53%) as a result of a net decrease of $45,000 (36%) in the principal outstanding on these notes at September 30, 2012 as compared to September 30, 2011, and the related decrease in the fair value of the beneficial conversion options being accreted.  


Interest paid and payable to the holders of our debt increased by $10,386 (6%), as a result of a net increase of $388,881 in principal outstanding on our interest-bearing debt during the period from September 30, 2011 to September 30, 2012.


Foreign exchange gain (loss):  Foreign exchange gain (loss) is comprised of realized and unrealized gains and losses on foreign currency translations, the majority of which relate to accounts payable and accrued liabilities, and obligations under our promissory notes, denominated in Canadian dollars.  During the three months ended September 30, 2012, the Canadian dollar gained strength relative to the United States dollar, resulting in an overall loss on foreign currency translations of $11,356; during the three months ended September 30, 2011, the United States dollar gained strength relative to the Canadian dollar, resulting in an overall gain on foreign currency translations of $70,164.


Net loss: We incurred a loss of $324,318 (rounded to $0.00 per share) for the three months ended September 30, 2012, compared to a loss of $466,412 (rounded to $0.00 per share) for the three months ended September 30, 2011.  Our revenues and future profitability are substantially dependent on our ability to:


·

raise additional capital to fund operations;

·

license 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 then-existing users; and

·

successfully develop related software applications.


The Nine months ended September 30, 2012 compared to the Nine months ended September 30, 2011


Revenue: We had no revenue during the nine months ended September 30, 2012, nor during the nine months ended September 30, 2011.  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, travel and other miscellaneous costs associated with supporting our research and development, sales and marketing and investor relations activities.  During the nine months ended September 30, 2012, we incurred a total of $484,485, as compared to $448,547, during the nine months ended September 30, 2011.  There was an overall increase in selling, general and administrative expenses of $35,938 (8%) during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.


The increase in selling, general and administrative expense occurred primarily as a result of recognizing $229,680 in expense relating to the fair value of 9,150,000 common shares of the Company’s common stock issued as signing bonuses and remuneration in connection with three new consulting agreements for investor relations and financing services.  During the nine months ended September 30, 2011 there were 2,500,000 common shares, with an aggregate fair value of $60,000, issued as incentive for new



16



consulting agreements and compensation for services rendered.  This increase of $169,680 (283%) in stock-based incentives was partially offset by a reduction in cash based consulting fees paid in relation to two contracts which were terminated during the third quarter of 2011, for which no similar services have been required since that time.


We have made efforts to minimize selling, general and administrative expenses wherever possible, through measures such as reducing the number of personnel, postponing our Annual General Meeting, reducing the number of trade shows in which we participate, reducing travel costs, delaying production of new promotional material, and reducing our occupancy costs.  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 directly associated with the development of our software applications.  During the nine months ended September 30, 2012, we incurred a total of $80,736, as compared to $67,662 during the nine months ended September 30, 2011 on research and development activities. There was an overall increase in research and development expenses of $13,074 (19%) during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.


The increase in research and development expenses is due primarily to an increase in fees paid to consultants for development work during the period.  During the nine months ended September 30, 2011, our research and development activities involved greater resources than we engaged during the nine months ended September 30, 2012.  Our level of expenditure for research and development activities is variable, as our activities in this area are tied to initiatives undertaken from time to time in response to the outcome of testing and feedback from test installations of our software products.


Interest and financing costs:  Interest and financing costs during the nine months ended September 30, 2012 and the nine months ended September 30, 2011 consisted of costs associated with our 10% senior convertible notes, our promissory notes, our 12% convertible notes, our convertible promissory notes, and interest on the capital lease.  During the nine months ended September 30, 2012, we incurred $763,400 in interest and financing costs, a decrease of $109,032 (12%) over the $872,432 in interest and financing costs incurred during the nine months ended September 30, 2011.  


The $763,400 in interest and financing costs we incurred during the nine months ended September 30, 2012 is comprised of $525,355 of interest paid and payable to the holders of our debt; $144,027 of accretion of our 10% senior convertible notes; $86,041 of accretion of our convertible promissory notes; $7,927 of amortized deferred finance fees relating to the convertible promissory notes; and $50 in interest on the capital lease.  The $872,432 in interest and financing costs we incurred during the nine months ended September 30, 2011 is comprised of $497,978 of interest paid and payable to the holders of our debt; $193,401 of accretion of our 10% senior convertible notes; $127,614 of accretion on our 12% convertible notes; $49,791 of accretion of our convertible promissory notes; $3,393 of amortized deferred finance fees relating to the 12% convertible notes; and $255 in interest on the capital lease.


We failed to settle certain of our promissory notes and 10% senior convertible notes, and accrued interest thereon, when they became due on various dates between October 1, 2008 and December 31, 2011, and a significant portion of these notes remain in default as at September 30, 2012.  In accordance with the default provision of the 10% senior convertible notes, and certain of the promissory notes, this has resulted in all of these notes becoming due and payable on demand as of the date of the default, or in the case of notes issued subsequent to the default, on the date of issuance, notwithstanding any other stated maturity date.  Consequently, the accretion relating to the equity components of either of these instruments issued since the initial event of default, and the amortization of any finance charges incurred thereon, has occurred in the period of issuance.   


As a result of the above, the accretion and finance charge components of interest and financing costs relating to the 10% senior convertible notes for the nine months ended September 30, 2012, and for the nine months ended September 30, 2011 relate only to notes issued during these periods. The fair value of the equity components relating to these classes of notes issued during the nine months ended September 30, 2012 was less than the fair value of equity components relating to similar notes issued during the nine months ended September 30, 2011, which resulted in a decrease of $49,374 (26%) in accretion related to these classes of notes.


There was a decrease of $127,614 (100%)  in accretion of our 12% convertible notes, as a result of all accretion having been recognized at date of issuance of these notes, as they were payable on demand.  These notes were issued during the first half of 2011, and were settled in full by February 2012, therefore there was no accretion during the nine months ended September 30, 2012.  


Accretion of our convertible promissory notes increased by $36,250 (73%).  The conversion of $97,500 in principal of the convertible promissory notes during the nine months ended September 30, 2012, prior to their maturity dates, resulted in accelerated accretion of the notes converted. During the nine months ended September 30, 2011, $40,000 of the convertible promissory notes were converted; the increase in accelerated accretion associated with conversions during the nine months ended September 30, 2012 as compared with those during the nine months ended September 30, 2011, is the main reason for the overall increase in the accretion charges for this class of notes.




17



Interest paid and payable to the holders of our debt increased by $27,377  (5%), as a result of a net increase of $388,881 in principal outstanding on our interest-bearing debt during the period from September 30, 2011 to September 30, 2012.


Foreign exchange gain (loss):  Foreign exchange gain (loss) is comprised of realized and unrealized gains and losses on foreign currency translations, the majority of which relate to accounts payable and accrued liabilities, and obligations under our promissory notes, denominated in Canadian dollars.  During the nine months ended September 30, 2012, the Canadian dollar gained strength relative to the United States dollar,  resulting in an overall loss on foreign currency translations of $7,699; during the nine months ended September 30, 2011, the United States dollar gained strength relative to the Canadian dollar, resulting in an overall gain on foreign currency translations of $31,575.  


Net loss: We incurred a loss of $1,309,121 (rounded to $0.01 per share) for the nine months ended September 30, 2012, compared to a loss of $1,355,197 (rounded to $0.01 per share) for the nine months ended September 30, 2011.  Our revenues and future profitability are substantially dependent on our ability to:


·

raise additional capital to fund operations;

·

license 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 then-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.  We have also received an aggregate of $316,650 in proceeds relating to “VAR” licensing agreements.  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.


Our cash and cash equivalents decreased by $11,531 during the nine months ended September 30, 2012, from a balance of $11,957 at December 31, 2011, to $426 at September 30, 2012.  Our net loss of $1,309,121 during the period, and resulting cash used in operations of $257,913, and the repayment of $17,184 of our promissory notes, net of $29,601 of new notes issued, were offset by an increase in cash resulting from the issuance of $205,000 of our 10% senior convertible notes, net of $37,000 in repayments; and proceeds, net of issuance costs, of $30,000, on the issuance of convertible promissory notes.  


We added an explanatory paragraph to our interim consolidated financial statements for the nine months ended September 30, 2012.  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 in the same period; and our accumulated deficit, raise substantial doubt regarding our ability to continue as a going concern.  At September 30, 2012, we had negative working capital of $10,594,581 and an accumulated deficit during the development stage of $38,936,411; for the nine months then ended we had a net loss of $1,309,121, and negative cash flow from operations of $257,913.  Furthermore, the Company failed to settle certain of its 10% senior convertible notes and promissory notes, plus accrued interest thereon when they matured on various dates from October 1, 2008 to December 31, 2011.  A substantial amount of these notes remain unpaid as of September 30, 2012.  All of the 10% senior convertible notes, as well as $36,250 of the promissory notes were in default at September 30, 2012 in accordance with the default provisions of the respective notes, and as a result are due and payable on demand.


We anticipate commercial sales during the first quarter of 2013, however we cannot be assured that this will be the case.  During the nine months ended September 30, 2012, we retained the services of three new consultants, and terminated the agreement with one consultant.  During the next six months we expect to engage one officer and director; we do not expect to hire additional personnel unless we are successful in raising significant funds through the issuance of our debt or equity securities.  We do not 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 securities.  We have engaged consultants to provide advice to us with respect to the raising of capital.  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 of our common stock 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 issuance of stock could cause some institutions or individuals to engage in short sales of



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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 taken steps 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 nine months ended September 30, 2012, we issued $205,000 of 10% senior convertible notes, net of $37,000 in repayments of these notes; $60,000 in convertible promissory notes, net of finance fees, which generated cash to fund operations.  During this period, we also issued $193,366 of our 10% senior convertible notes in settlement of previously issued 12% convertible notes, plus accrued interest thereon; $321,745 of our 10% senior convertible notes in settlement of previously issued 10% senior convertible notes plus accrued interest thereon; 100,667 shares of our common stock in settlement of $3,020 in accrued interest on our 10% senior convertible notes; and 961,538 shares of our common stock in settlement of $10,000 convertible promissory notes, all of which reduced the amount of cash that would otherwise have been required to settle these liabilities.  We also issued 6,000,000 shares of our common stock as signing bonuses for consultants entering into service contracts with the Company, and a further 3,150,000 shares as compensation to consultants, which also reduced the amount of cash which would otherwise have been required to retain the consultants.


Uses of Capital:  Over the past several years, we have scaled our development activities to the level of available cash resources.  Our plans with respect to future staffing will be dependant 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.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


N/A


ITEMS 4 AND 4T. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer has concluded that our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting


There were no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Management’s Report on Internal Controls over Financial Reporting


At December 31, 2011, management of the Company provided a report on internal controls over financial reporting.  Reference should be made to our annual report on Form 10-K for that report, wherein we reported that management’s assessment at December 31, 2011 was that the Company’s internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  


In connection with the preparation of the consolidated financial statements for the year ended December 31, 2011, our management identified the existence of certain significant internal control deficiencies that they considered to be material weaknesses.  In particular, the following weaknesses in our internal control system were identified at December 31, 2011:  (1) a lack of segregation of duties; (2) the lack of timely preparation of certain back up schedules; (3) finance staff’s lack of sufficient technical accounting knowledge; (4) a lack of independent Board oversight; and (5) signing authority with respect to corporate bank accounts.  A material weakness is a significant deficiency in one or more of the internal control components that alone or in the aggregate precludes our internal controls from reducing to an appropriately low level of risk that material misstatements in our financial statements will not be prevented or detected on a timely basis.  We considered these matters in connection with the period-end closing of accounts and preparation of the



19



related consolidated financial statements and determined that no prior period financial statements were materially affected by such matters.


Our size has prevented us from being able to employ sufficient resources at this time to enable us to have an adequate level of supervision and segregation of duties within our internal control system.  We will continue to monitor and assess the costs and benefits of additional staffing within the Company.


We were unable to eliminate the identified weaknesses with respect to the period covered by this report.  Set forth below is a discussion of the significant internal control deficiencies which have not been remediated.


Lack of segregation of duties.  Since commencing the development phase of our operations in August 1999, our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our internal control system.  Our controller is the only person involved in the data entry function, and since the departure of our chief financial officer in 2008, our chief executive officer has assumed the role of chief financial officer.  We are inadequately staffed at this time to ensure a sufficient level of segregation of duties.  As a result, this significant internal control deficiency had not been remediated as of the end of the period covered by this report, nor do we know if we will be able to remediate this weakness in the foreseeable future.  However, we will continue to monitor and assess the costs and benefits of additional staffing.


Lack of timely preparation of back up schedules.  Throughout 2011, we were able to complete most of our back up schedules in a timely manner, however, during this time we consistently experienced a lack of complete preparedness at the time our external independent accountants commenced their field work on a quarterly basis.  As such, we believe that this material weakness had not been remediated as of the end of the period covered by this report.  Inasmuch as this deficiency is related to our lack of adequate staffing, which is a condition which our size prohibits us from remediating, we do not know if we will be able to remediate this weakness in the foreseeable future.  We will continue to review our interim procedures, and to make changes wherever practicable to assist in remediating this deficiency.


Finance staff’s lack of sufficient technical accounting knowledge.  Due to the limited number of personnel, our finance staff does not have sufficient technical accounting knowledge to address all complex and non-routine accounting transactions that may arise.  These transactions are sometimes extremely technical in nature and require an in-depth understanding of generally accepted accounting principles.  As a result of this pervasive deficiency, these types of transactions may not be recorded correctly, potentially resulting in material misstatements of the financial statements of the Company.  To address this risk, the Company has a control whereby it consults with its auditors and advisors, as needed, in conjunction with the recording and reporting of complex and non-routine accounting transactions.  Management has concluded that this control was not operating effectively during the preceding year, as the Company did not consult with external advisors on certain complex and non-routine transactions and on certain of these transactions, errors were identified by our auditors.  All material misstatements detected by the audit have been corrected by the Company.  Any changes in the staff complement will be dependant upon the growth of our operations and the number of our staff to allow further technical accounting knowledge to address all complex and non-routine accounting transactions.  Management will continue to review existing consultation controls and, if appropriate, implement changes to its current internal control processes whereby more effective consultation will be performed.


Lack of independent Board oversight.  Our Board of Directors consists of only one individual who is also the Company’s sole signing officer. We have experienced difficulties in identifying suitable candidates to serve as independent Board members because of our size, the perceived additional liability to the public by prospective candidates and the excessive additional costs associated with the selection of a candidate including director fees and director liability insurance.  As such, our Board lacks the controls, depth of knowledge and perspective that such independence would provide.  


Signing authority with respect to corporate bank accounts.  Since the departure of our Chief Financial Officer and Treasurer in July 2008, the positions of Director, President, Chief Executive Officer, Chief Financial Officer, Executive Vice President, Secretary and Treasurer have been held by one person.  This individual has sole signing authority for the Company’s bank accounts.  Our Controller monitors our bank accounts on a regular basis, however there can be no assurance that unauthorized or unsupported transactions will not occur.


If we are unable to remediate the identified material weakness, there is a more than remote likelihood that a material misstatement to our SEC reports will not be prevented or detected, in which case investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our ability to raise additional capital and could also have an adverse effect on our stock price.







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PART II – OTHER INFORMATION


Item 1.  Legal Proceedings


On or around August 3, 2010, an agent of the Company was served notice of the commencement of legal action against the Company by a former consultant of the Company.  The plaintiff is seeking approximately $171,900 in unpaid fees relating to a service contract entered into by the Company and the consultant in January of 2007, plus legal and other costs.  The Company has retained legal counsel in order to contest this action, and to make a counter claim against the plaintiff, as it is the opinion of management that the work agreed to under the terms of the contract was not delivered by the consultant and that furthermore, the non-performance resulted in the Company not being able to deliver its product to potential customers at the time.


Neither the amount nor the likelihood of any liability that may arise as a result of this action is determinable at this time; accordingly, no amount in respect of this claim has been reflected in the financial statements for the period ended September 30, 2012.


Item 1a.  Risk Factors


In addition to other information set forth in this Report, you should carefully consider the risk factors previously disclosed in “Item 1A. to Part 1” of our Annual Report on Form 10-K for the year ended December 31, 2011.  There were no material changes to these risk factors during the nine months ended September 30, 2012.


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


None


Item 3.  Defaults upon Senior Securities


We failed to settle certain of our 10% senior convertible notes and our promissory notes, plus accrued interest thereon when they matured on various dates between October 1, 2008 and December 31, 2011.  A significant amount of these notes remained unpaid as of September 30, 2012, and were therefore in default and due and payable on demand.  Additionally, in accordance with the default provisions of the notes, this failure to settle the matured notes resulted in the remaining 10% senior convertible notes and accrued interest thereon becoming also due and payable on demand.  Notwithstanding our obligation to repay these amounts immediately, the note holders have verbally communicated to management their willingness to continue holding the notes until new terms are negotiated.  We will accrue interest on these unpaid balances at the coupon rate until a settlement is reached.


Until such time as the matured notes plus accrued interest thereon are settled, all of the 10% senior convertible notes, and $36,250 of the promissory notes will remain in default.


Item 4.  Mine Safety Disclosures


Not applicable.


Item 5.  Other Information


None


Item 6.  Exhibits


(a)  Exhibits.


     31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     101*

 

The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (iv) Notes to Financial Statements


*

In accordance with Rule 406T of Regulation S-T, the XBRL information in Exhibit 101 to this quarterly report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.





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SIGNATURES



In accordance with requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


VALIDIAN CORPORATION



By:    /s/   Bruce Benn

Bruce Benn


President, Chief Executive Officer

and Chief Financial officer

(principal executive officer)


Dated:  November 19, 2012








In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



By:    /s/   Bruce Benn

Bruce Benn


President, Chief Executive Officer

and Chief Financial officer

(principal financial and accounting officer)


Dated:  November 19, 2012

























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