VALIDIAN CORP - FORM 10-Q - August 19, 2015

Attached files

file	filename
EX-32 - CERTIFICATION - VALIDIAN CORP	ex322.htm
EX-31 - CERTIFICATION - VALIDIAN CORP	ex312.htm
EX-32 - CERTIFICATION - VALIDIAN CORP	ex321.htm
EX-31 - CERTIFICATION - VALIDIAN CORP	ex311.htm

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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 June 30, 2015
	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 Rd., Suite 205, 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 August 15, 2015, 366,686,997 shares of the registrant’s common stock were outstanding.

SEC 1296 (1-12)

Potential persons who are to respond to the collection of information contained in this form are not

required to respond unless the form displays a currently valid OMB control number.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements


VALIDIAN CORPORATION AND SUBSIDIARIES Unaudited Interim Consolidated, Condensed Balance Sheets (In United States dollars)
	June 30, 2015	December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$ 40,191	$ 97,403
Value added taxes recoverable	31,744	34,955
Prepaid expenses	173,841	55,000
Total Current assets	245,776	187,358
Property and equipment, net of accumulated depreciation of $33,884
(December 31, 2014 - $33,743)	565	847

Total assets	$ 246,341	$ 188,205
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable and accrued liabilities (note 8)	$ 3,386,152	$ 3,979,699
Accrued interest on promissory notes and 10% senior convertible notes
payable to related parties (note 8)	337,242	306,564
Deferred revenue	320,000	320,000
Promissory notes payable (notes 2, 8)	46,250	46,250
10% Senior convertible notes (notes 3, 8)	6,287,634	6,182,441
10% Senior convertible notes payable to related parties (notes 3, 8)	597,061	623,445
Convertible promissory notes (note 4)	1,886	12,285
Total current liabilities	10,976,225	11,470,684

Total liabilities	10,976,225	11,470,684

Stockholders’ deficiency (note 5):
Preferred stock ($0.001 par value. Authorized 50,000,000 shares; issued
and outstanding Nil shares at June 30, 2015 and at December 31, 2014)	--	--
Common stock, ($0.001 par value. Authorized 700,000,000 shares; issued and outstanding 356,569,930 and 308,915,682 shares at June 30, 2015 and December 31, 2014, respectively.)	356,570	308,916
Additional paid in capital	35,705,748	33,433,153
Deficit	(46,742,464)	(44,974,810)
Treasury stock (7,000 shares at June 30, 2015 and December 31, 2014, at cost)	(49,738)	(49,738)
Total stockholders’ deficiency	(10,729,884)	(11,282,479)

Basis of presentation (note 1)
Subsequent events (note 12)
Total liabilities and stockholders’ deficiency	$ 246,341	$ 188,205

See accompanying notes to unaudited interim consolidated financial statements.


VALIDIAN CORPORATION AND SUBSIDIARIES Unaudited Interim Consolidated, Condensed Statements of Operations For the three and six months ended June 30, 2015 and 2014 (In United States dollars)

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Expenses:
Selling, general and administrative	$ 271,374	$ 144,487	$ 393,541	$ 235,512
Research and development	204,184	78,190	272,747	117,273
Depreciation of property and equipment	141	799	282	1,598
	475,699	223,476	666,570	354,383

Loss before the undernoted	(475,699)	(223,476)	(666,570)	(354,383)

Other income (expenses):
Interest and financing costs (notes 6 and 8)	(295,389)	(350,537)	(1,169,023)	(580,022)
Foreign exchange gain (loss)	(25,918)	(47,508)	67,940	(7,274)
	(321,307)	(398,045)	(1,101,083)	(587,296)

Net loss	$(797,006)	$(621,521)	$(1,767,653)	$(941,679)

Loss per common share – basic and diluted (note 7)	$(0. 00)	$(0. 00)	$(0. 00)	$(0. 00)

Weighted average number of common shares outstanding during period	341,403,516	263,821,735	331,461,369	258,195,797

See accompanying notes to unaudited interim consolidated financial statements.


VALIDIAN CORPORATION AND SUBSIDIARIES Unaudited Interim Consolidated, Condensed Statements of Cash Flow For the six months ended June 30, 2015 and 2014 (In United States dollars)
	Six Months Ended June 30,
	2015	2014
Cash flows from operating activities:
Net loss	$ (1,767,653)	$ (941,679)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	282	1,598
Stock-based compensation	330,453	97,952
Non-cash interest and financing expense	1,092,835	530,300
Increase (decrease) in cash resulting from changes in:
Value added taxes recoverable	3,212	(12,108)
Prepaid expenses	(5,000)	--
Accounts payable and accrued liabilities	(64,631)	18,843
Net cash used in operating activities	(414,104)	(305,094)
Cash flows from investing activities:
Net cash used in investing activities	--	--
Cash flows from financing activities:
Issuance of 10% senior convertible notes	545,000	133,000
Issuance of convertible promissory notes	203,500	211,500
Debt issuance costs	(13,500)	(11,500)
Repayment of promissory notes	--	(5,100)
Repayment of 10% senior convertible notes	(244,108)	(17,678)
Repayment of convertible promissory notes	(134,000)	(53,000)
Net cash provided by financing activities	356,892	257,222


Net increase (decrease) in cash and cash equivalents	(57,212)	(47,872)
Cash and cash equivalents:
Beginning of period	97,403	104,389
End of period	$ 40,191	$ 56,517

Supplementary information (note 9)

See accompanying notes to unaudited interim consolidated financial statements.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(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 six months ended June 30, 2015 are not necessarily indicative of the operating results for the full fiscal year ending December 31, 2015. 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, 2014.

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 $10,730,449, and stockholders’ deficiency of $10,729,884 as at June 30, 2015, and has incurred a loss of $1,767,653 and negative cash flow from operations of $414,104 for the six 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 2014. 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 June 30, 2015, 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 $720,000 for the year ending December 31, 2015, 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.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(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 June 30, 2015 and December 31, 2014:


	Six months	Year ended
	ended June 30, 2015	December 31, 2014
	(unaudited)
Balance beginning of period	$ 46,250	$ 57,339

Principal repaid	--	(11,089)

	$ 46,250	$ 46,250

Included in interest and financing costs for the three and six months ended June 30, 2015 is $1,385 (2014: $1,656) and $2,753 (2014: $3,235), respectively, of interest on the promissory notes. Interest on the promissory notes paid in cash during the three and six months ended June 30, 2015 was $nil (2014: $709) and $nil (2014: $927), respectively.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(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 June 30, 2015 and December 31, 2014:


	Six months	Year
	Ended	Ended
	June 30, 2015	December 31, 2014
	(unaudited)
Balance beginning of period	$ 6,805,886	$ 7,224,995

Note proceeds on issuance	833,307	302,500
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	(1,636)	(907)
Allocated to additional paid-in capital	(61,628)	(35,865)
	(63,264)	(36,772)
Allocated to additional paid-in capital for the intrinsic value of the
beneficial conversion feature	(472,124)	(190,144)
Proceeds allocated to 10% senior convertible notes on issuance	297,919	75,584

Accretion recorded as a charge to interest and financing costs	535,388	226,916
Principal repaid in cash	(244,108)	(26,178)
Principal converted in accordance with the terms of the notes	(253,500)	(695,431)
Principal repaid through the issuance of new 10% senior convertible
notes	(256,890)	--

	6,884,695	6,805,886
Payable to related parties (note 11)	(597,061)	(623,445)
	$ 6,287,634	$ 6,182,441

During the six months ended June 30, 2015, the Company issued an aggregate of $833,307 of its 10% senior convertible notes. $545,000 of the notes were issued for cash; $288,307 were issued in settlement of $256,890 of previously issued 10% senior convertible notes and $31,417 in principal thereon. The Company settled an aggregate of $745,498 in principal and $838,544 in accrued interest thereon. $244,108 in principal was repaid in cash; $256,890 in principal, plus $31,417 in accrued interest thereon was settled through issuance of new 10% senior convertible notes; holders of the notes exercise the conversion feature and converted $253,500 in principal, plus $742,116 in accrued interest into 33,187,213 common shares of the Company; and $54,230 in accrued interest on the notes was settled through the issuance of 1,807,685 of the Company’s common shares .

Under the terms of the notes issued during the six months ended June 30, 2015, 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. $638,307 of the notes are payable on demand; $145,000 of the notes mature on December 31, 2015.

Notwithstanding the stated maturity date, all of the notes issued during the six months ended June 30, 2015 are payable on demand, pursuant to the default provisions of the notes, as described below.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

3. 10% Senior convertible notes (continued)

Holders of the notes issued during the six months ended June 30, 2015 were granted 1,635,500 common shares of the Company upon issuance of the notes; $63,264, representing the relative fair value of the common shares at the issuance date, was allocated to the common shares par value and additional paid in capital.

At the date of issuance, the conversion feature of the notes was in-the-money. $472,124, representing the relative fair value of the beneficial conversion feature, was allocated to additional paid in capital.

The Company failed to settle certain of its 10% senior convertible notes plus accrued interest thereon when they matured on various dates between October 1, 2008 and December 31, 2014. At June 30, 2015, 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 June 30, 2015, 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 June 30, 2015:


Note	Conversion
Principal	Rate
$ 5,950,968	$0.03
511,507	0.038
500,000	0.10
$ 6,884,695

At June 30, 2015, $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 $4,049,670 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 and six months ended June 30, 2015 is $171,622 (2014: $176,358) and $341,437 ($2014: $350,625), respectively, in coupon rate interest accrued on the 10% senior convertible notes, and $34,044 (2014: $99,226) and $535,388 (2014: $122,226), respectively, in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.

At June 30, 2015, the fair value of the stock issuable to fully convert the 10% senior convertible note principal, was $6,855,477, which is $29,218 greater than the principal outstanding on that date.

4. Convertible promissory notes

During the six months ended June 30, 2015, the Company issued $203,500 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.

$53,500 of the notes issued during the six months ended June 30, 2015 mature on October 12, 2015, and may be prepaid during the period from issuance to April 9, 2015, 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 April 9, 2015 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 ten trading days immediately preceding such conversion, discounted by 49%. $53,500, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

4. Convertible promissory notes (continued)

$53,500 of the notes of the notes issued during the six months ended June 30, 2015 mature on December 4, 2015, and may be prepaid during the period from issuance to August 28, 2015, 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 August 28, 2015 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 ten trading days immediately preceding such conversion, discounted by 49%. $53,500, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital.

$53,500 of the notes of the notes issued during the six months ended June 30, 2015 mature on December 31, 2015, and may be prepaid during the period from issuance to September 23, 2015, 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 September 23, 2015 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 ten trading days immediately preceding such conversion, discounted by 49%. $53,500, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital.

$43,000 of the notes of the notes issued during the six months ended June 30, 2015 mature on March 9, 2016, and may be prepaid during the period from issuance to November 30, 2015, 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 November 30, 2015 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 ten trading days immediately preceding such conversion, discounted by 49%. $35,584, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital.

During the six months ended June 30, 2015, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $91,000 of note principal, plus $3,635 of accrued interest thereon, into 4,723,850 shares of the Company’s common stock.

The Company exercised the prepayment option of the notes during the six months ended June 30, 2015, and settled in cash $134,000 of the notes plus $65,409 of accrued interest and bonus interest thereon.

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.

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 June 30, 2015 was 16,730,143, which represents less than 5% of the authorized, unissued shares at that date, and has also estimated that the fair value of the notes at June 30, 2015 approximates face value, therefore no adjustment for fair value restatement has been made.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

4. Convertible promissory notes (continued)

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 six months ended June 30, 2015, accretion of $61,437 (2014: $42,120) and $205,857 (2014: 66,264), respectively, was included in interest and financing costs.

Also included in interest and financing costs for the three and six months ended June 30, 2015 is $20,948 (2014: $27,755) and $68,760 (2014: $30,606), respectively, relating to accrued coupon-rate and bonus interest on the convertible promissory notes; and $5,953 (2014: $3,422) and $14,829 (2014: $6,976), respectively, relating to the amortization of deferred finance fees incurred in connection with the placement of the convertible promissory notes.

At June 30, 2015, the fair value of the stock issuable to fully convert the convertible promissory note principal was $535,365, which exceeded the principal amount outstanding on that date by $331,865.

5. Stockholders’ deficiency

(a) Common stock transactions

During the six months ended June 30, 2015, the Company issued an aggregate of 6,300,000 shares of its common stock as remuneration for consulting services rendered and to be rendered. $236,500, representing the fair value of the stock at issuance, was allocated to shares and additional paid in capital; $89,659 was charged to expense during the period; $146,841 was allocated to prepaid expense, and will be charged to expense over the remaining service period.

During the six months ended June 30, 2015, holders of the 10% senior convertible notes exercised the conversion feature of the notes and converted an aggregate of $253,500 of note principal and $742,116 of accrued interest thereon, into 33,187,213 shares of the Company’s common stock.

During the six months ended June 30, 2015, the Company settled $54,230 in accrued interest on the 10% senior convertible notes through the issuance of 1,807,685 of the Company’s common shares

During the six months ended June 30, 2015, holders of the convertible promissory notes exercised the conversion feature of the notes and converted an aggregate of $91,000 of note principal and $3,635 in accrued interest thereon, into 4,723,850 shares of the Company’s common stock.

In connection with the issuance of the Company’s 10% senior convertible notes during the six months ended June 30, 2015, the Company issued 1,635,500 shares of its common stock, with a relative fair value of $63,264, to the holders of the notes.

(b) Transactions involving stock options

On May 12, 2015, the Company granted 6,500,000 options to consultants of the Company, in consideration for past service. The options vested immediately, have an exercise price of $0.04, and an expiry date of May 12, 2020, with provision for early expiration in the event the holder ceases to be engaged by the Company prior to the stated expiry date. $207,974, representing the fair value of the options at the date of issuance, has been included in expense. The fair value of the options was determined using the following weighted average assumptions: expected dividend yield of 0%; risk-free interest rate of 1.58%; expected volatility of 296%; and an expected life of 5 years.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

5. Stockholders’ deficiency (continued)

(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 six months ended June 30, 2015 and 2014:


	Three Months Ended June 30,		Six Months Ended June 30,
	2015	2014	2015	2014

Selling, general and administrative	$ 195,581	$ 74,618	$ 234,548	$ 97,952
Research and development	95,905	--	95,905	--
Total stock-based compensation included in expenses	$ 291,486	$ 74,618	$ 330,453	$ 97,952

6. Interest and financing costs

Interest and financing costs include accrued and paid coupon rate interest and accretion and financing costs relating to the 10% senior convertible notes and convertible promissory notes.

7. Loss per share

As the Company incurred a net loss during the six months ended June 30, 2015, and during the six months ended June 30, 2014, 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:


	June 30, 2015	June 30, 2014
	(unaudited)	(unaudited)
Shares issuable on conversion of 10% senior
convertible notes	195,772,969	217,565,469
Shares issuable on conversion of convertible promissory notes and accrued interest thereon	16,730,154	16,719,244
Stock options	6,500,000	--
	219,003,123	234,284,713

8. Related party transactions

Included in 10% senior convertible notes payable (note 3) is $549,503 (December 31, 2014 – $575,887) payable to a director and to a company controlled by a director, and $47,558 (December 31, 2014 – $47,558) payable to an individual related to a director and a company controlled by an individual related to a director.

$337,242 (December 31, 2014 – $306,564) in accrued interest charges relating to the 10% senior convertible notes is included in accrued liabilities at June 30, 2015. $15,366 (2014: $15,757) and $30,678 (2014 $31,517) is included in interest and financing costs for the three and six months ended June 30, 2015, respectively.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

9. Supplementary cash flow information

The Company paid no income taxes during the six months ended June 30, 2015, nor during the six months ended June 30, 2014. Interest paid in cash during the six months ended June 30, 2015 was $76,188 (2014: $49,722).

Non-cash financing activities are excluded from the consolidated statements of cash flows. The following is a summary of such activities for the six months ended June 30, 2015 and 2014:


	2015	2014

Issuance of the Company’s common stock on conversion of the 10% senior
convertible notes plus accrued interest thereon	$ 995,616	$ 360,000
Issuance of the Company’s common stock on conversion of convertible
promissory notes plus accrued interest thereon	94,635	55,120
Issuance of the Company’s common stock as compensation to consultants	236,500	204,700
Issuance of the Company’s stock purchase options as compensation to
consultants	207,794	--
Issuance of the Company’s 10% senior convertible notes in settlement of
previously issued 10% senior convertible notes and accrued interest thereon	288,308	--
Issuance of the Company’s common stock in settlement of accrued interest
on the 10% senior convertible notes	54,231	--
	$ 1,877,084	$ 619,820

10. Fair value measurements

The carrying value of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities approximates fair value due to the short term to maturity of these instruments. The carrying value of the 10% senior convertible notes, the convertible promissory notes, and the promissory notes approximate fair value, due to the issuance of certain of these debt instruments during the three months prior and/or subsequent to the period ended June 30, 2015, under conditions substantially identical to those existing at June 30, 2015.

11. Recent accounting pronouncements

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

12. Subsequent events

On July 1, 2015, the Corporation issued an aggregate of 1,000,000 shares as consideration for consulting services rendered and to be rendered.

On July 9 and 14, 2015, the Corporation issued an aggregate of $20,000 of its 10% senior convertible notes, for cash. The notes are payable on demand; 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 Corporation at a ratio of one common share for each $0.03 of debt converted; the Corporation may pre-pay all or any portion of the balance outstanding on the notes at any time without penalty or bonus, with permission from the holder; interest is payable on conversion of the notes, and may, at the Corporation’s option, be paid in either cash, or in common shares of the Corporation at the rate of one common share for each $0.03 of interest paid. The Corporation issued an aggregate of 60,000 shares of its common stock to the holders pursuant to the terms of these notes.

VALIDIAN CORPORATION AND SUBSIDIARIES

Notes to Unaudited Interim Consolidated, Condensed Financial Statements

June 30, 2015

(In United States dollars)

12. Subsequent events (continued)

[During the period from July 14 to July 20, 2015, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted an aggregate of $53,500 in principal and $2,140 in accrued interest, in exchange for 4,057,067 common shares of the Corporation.]

On July 23, 2015, the Corporation issued $64,000 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. The notes mature on April 27, 2016, and may be prepaid in full during the period from issuance to January 23, 2016, 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 January 23, 2016 or thereafter, into common stock of the Corporation. The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the ten trading days immediately preceding such conversion, discounted by 49%.

On August 4, 2015, holders of the 10% senior convertible notes exercised the conversion feature of the notes and converted an aggregate of $50,000 in principal, in exchange for 1,666,667 shares of the Corporation’s common stock.

On August 7, 2015, holders of the 10% senior convertible notes exercised the conversion feature of the notes and converted an aggregate of $100,000 in principal, in exchange for 3,333,333 shares of the Corporation’s common stock.

Except for the foregoing, we have evaluated subsequent events through the date the financial statements were issued. All material events have been disclosed.

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 2013 Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. 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 June 30, 2015 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 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 June 30, 2015 compared to the three months ended June 30, 2014

Revenue: We had no revenue during the three months ended June 30, 2015, nor during the three months ended June 30, 2014. 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 June 30, 2015, we incurred a total of $271,374, as compared to $144,487 during the three months ended June 30, 2014. There was an overall increase in selling, general and administrative expenses of $126,887 (88%) during the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

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 June 30, 2015, we incurred a total of $204,184, as compared to $78,190 during the three months ended June 30, 2014 on research and development activities. There was an overall increase in research and development expenses of $125,994 (161%) during the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

The primary reasons for this increase are: $95,905, representing the fair value of stock options granted to consultants engaged in our research and development, was included in expense during the three months ended June 30, 2015; there was no comparable transaction during the three months ended June 30, 2014; there was also an increase in cash-based consulting fees as a result of additional resources being required to complete our objectives for the period.

During the three months ended June 30, 2015, the primary focus of our development activity was testing Validian-enabled mobile applications including changing the information and crypto policies of levels of compression, encryption algorithms and cryptographic keys on the fly; testing secure peer-to-peer communications; developing a secure advertising channel; and research and/or development for extending our cyber security technology to secure access to servers and data bases and to protect the access, retrieval, transfer, receipt, and storage of digital information on servers, data bases and memory.

During the three months ended June 30, 2014, the primary focus of our development activity was the debugging of our ValidianProtect application pursuant to feedback received from our channel partners, based on their use of our trial version during the prior two quarters.

Interest and financing costs: Interest and financing costs during the three months ended June 30, 2015 and during the three months ended June 30, 2014 consisted of costs associated with our 10% senior convertible notes, our promissory notes, and our convertible promissory notes. During the three months ended June 30, 2015, we incurred $295,389 in interest and financing costs, a decrease of $55,148 (16%) from the $350,537 in interest and financing costs incurred during the three months ended June 30, 2014.

The $295,389 in interest and financing costs we incurred during the three months ended June 30, 2015 is comprised of $193,955 of interest paid and payable to the holders of our debt; $34,044 of accretion of our 10% senior convertible notes; $61,437 of accretion of our convertible promissory notes; and $5,953 of amortized deferred finance fees relating to the convertible promissory notes. The $350,537 in interest and financing costs we incurred during the three months ended June 30, 2014 is comprised of $205,769 of interest paid and payable to the holders of our debt; $99,226 of accretion of our 10% senior convertible notes; $42,120 of accretion of our convertible promissory notes; and $3,422 of amortized deferred finance fees relating to the convertible promissory notes.

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, 2014; a significant portion of these notes remain in default as at June 30, 2015. 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 components of interest and financing costs relating to the 10% senior convertible notes for the three months ended June 30, 2015, and for the three months ended June 30, 2014 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 June 30, 2014 was greater than the fair value of equity components relating to similar notes issued during the three months ended June 30, 2015, which resulted in a decrease of $65,182 (66%) in accretion related to these classes of notes.

Accretion of our convertible promissory notes increased by $19,317 (46%) primarily as a result of the settlement of $76,000 of these notes through conversion and prepayment, which resulted in an acceleration of the accretion which would otherwise occur over a longer time period.

Interest paid and payable to the holders of our debt decreased by $11,814 (6%), as a result of a net decrease of $113,944 in principal outstanding on our interest-bearing debt during the period from June 30, 2014 to June 30, 2015.

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 denominated in Canadian dollars. During the three months ended June 30, 2015, and during the three months ended June 30, 2014, the Canadian dollar gained strength relative to the United States dollar, resulting in an overall loss on foreign currency translations of $25,918 and $47,508, respectively.

Net loss: We incurred a loss of $797,006 (rounded to $0.00 per share) for the three months ended June 30, 2015, compared to a loss of $621,521 (rounded to $0.00 per share) for the three months ended June 30, 2014. 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 six months ended June 30, 2015 compared to the six months ended June 30, 2014

Revenue: We had no revenue during the six months ended June 30, 2015, nor during the six months ended June 30, 2014. 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 six months ended June 30, 2015, we incurred a total of $393,541, as compared to $235,512 during the six months ended June 30, 2014. There was an overall increase in selling, general and administrative expenses of $158,029 (67%) during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.

The increase in selling, general and administrative expense occurred primarily as a result of stock options granted to consultants during the period. $111,889, representing the fair value of options granted to consultants engaged in selling, general and administrative is included in expenses for the six months ended June 30, 2015; there was no comparable transaction during the six months ended June 30, 2014. There was also an increase in the value of stock-based fees paid to consultants for investor relations and related services, and in regulatory fees, during the six months ended June 30, 2015 as compared with the six months ended June 30, 2014.

Research and development expenses: Research and development expenses consist primarily of personnel costs directly associated with the development of our software applications. During the six months ended June 30, 2015, we incurred a total of $272,747, as compared to $117,273 during the six months ended June 30, 2014 on research and development activities. There was an overall increase in research and development expenses of $155,474 (133%) during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.

The primary reasons for this increase are: $95,905, representing the fair value of stock options granted to consultants engaged in our research and development, was included in expense during the six months ended June 30, 2015; there was no comparable transaction during the six months ended June 30, 2014; there was also an increase in cash-based consulting fees as a result of additional resources being required to complete our objectives for the period.

During the six months ended June 30, 2015, the primary focus of our development activity was the creation of a prototype to enable testing of our software on mobile applications.

During the six months ended June 30, 2014, the primary focus of our development activity was the debugging of our ValidianProtect application pursuant to feedback received from our channel partners, based on their prior use of our trial version.

Interest and financing costs: Interest and financing costs during the six months ended June 30, 2015 and during the six months ended June 30, 2014 consisted of costs associated with our 10% senior convertible notes, our promissory notes, and our convertible promissory notes. During the six months ended June 30, 2015, we incurred $1,169,023 in interest and financing costs, an increase of $589,001 (102%) from the $580,022 in interest and financing costs incurred during the six months ended June 30, 2014.

The $1,169,023 in interest and financing costs we incurred during the six months ended June 30, 2015 is comprised of $412,950 of interest paid and payable to the holders of our debt; $535,388 of accretion of our 10% senior convertible notes; $205,857 of accretion of our convertible promissory notes; and $14,828 of amortized deferred finance fees relating to the convertible promissory notes. The $580,022 in interest and financing costs we incurred during the six months ended June 30, 2014 is comprised of $384,556 of interest paid and payable to the holders of our debt; $122,226 of accretion of our 10% senior convertible notes; $66,264 of accretion of our convertible promissory notes; and $6,976 of amortized deferred finance fees relating to the convertible promissory notes.

As a result of the above, the accretion components of interest and financing costs relating to the 10% senior convertible notes for the six months ended June 30, 2015, and for the six months ended June 30, 2014 relate only to notes issued during these periods. The fair value of the equity components relating to these classes of notes issued during the six months ended June 30, 2015 was greater than the fair value of equity components relating to similar notes issued during the six months ended June 30, 2014, which resulted in an increase of $413,162 (338%) in accretion related to these classes of notes.

Accretion of our convertible promissory notes increased by $139,593 (211%) primarily as a result of the settlement of $225,000 of these notes through conversion and prepayment, which resulted in an acceleration of the accretion which would otherwise occur over a longer time period.

Interest paid and payable to the holders of our debt increased by $28,394 (7%), notwithstanding a net decrease of $113,944 in principal outstanding on our interest-bearing debt during the period from June 30, 2014 to June 30, 2015, as a result of bonus interest of $60,290 paid to the holders of our 10% convertible promissory notes on partial prepayment of the notes.

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 denominated in Canadian dollars. During the six months ended June 30, 2015, the United States dollar gained strength relative to the Canadian dollar, resulting in an overall gain on foreign currency translations of $67,940. During the six months ended June 30, 2014, the Canadian dollar gained strength relative to the United States dollar, resulting in an overall loss on foreign currency translations of $7,274.

Net loss: We incurred a loss of $1,767,653 (rounded to $0.00 per share) for the six months ended June 30, 2015, compared to a loss of $941,679 (rounded to $0.00 per share) for the six months ended June 30, 2014. 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 $57,212 during the six months ended June 30, 2015, from a balance of $97,403 at December 31, 2014, to $40,191 at June 30, 2015. The decrease in cash resulting from our net loss of $1,767,653 during the period, and resulting cash used in operations of $414,104 were substantially offset by the issuance of $300,892, net of repayments of $244,108, of our 10% senior convertible notes; and proceeds, net of issuance costs and repayments, of $56,000, on the issuance of convertible promissory notes.

We added an explanatory paragraph to our interim consolidated financial statements for the six months ended June 30, 2015. 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 June 30, 2015, we had negative working capital of $10,730,449 and an accumulated deficit of $46,742,464; for the six months then ended we had a net loss of $1,767,653, and negative cash flow from operations of $414,104. 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, 2014. A substantial amount of these notes remain unpaid as of June 30, 2015. All of the 10% senior convertible notes, as well as $36,250 of the promissory notes were in default at June 30, 2015 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 fourth quarter of 2015, however we cannot be assured that this will be the case. During the six months ended June 30, 2015, we entered into contracts with three new consultants. 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 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 six months ended June 30, 2015, we issued $300,892, net of repayments, of our 10% senior convertible notes, and $56,000 in convertible promissory notes, net of finance fees and repayments, which generated cash to fund operations. During this period, we also issued an aggregate of 34,994,898 shares of our common stock in settlement of $253,500 of our 10% senior convertible notes, plus $796,346 in accrued interest thereon; and 4,723,850 shares of our common stock in settlement of $91,000 of our convertible promissory notes plus $3,635 in accrued interest thereon, which reduced the amount of cash that would otherwise have been required to settle these liabilities. We also issued 6,300,000 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 changes in our internal control over financial reporting that occurred during the six months ended June 30, 2015 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, 2014, 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, 2014 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, 2014, 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, 2014: (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 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 2014, 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 operating effectively during the preceding year, as the Company consulted with external advisors on certain complex and non-routine transactions resulting in no material misstatements being identified during the year end audit. Although management has determined that this control was operating effectively during the year ended December 31, 2014, the finance staff’s lack of sufficient technical accounting knowledge nonetheless remains a continued weakness in our internal control system. 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.

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 was 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 contended that Mobile Secure, Inc. had failed to deliver certain software it had contracted with the Company to develop and deliver, and consequently were not entitled to payment of the balance of the contracted amount pursuant to the contract, which set out amounts to be paid to Mobile Secure, Inc. by the Company against the achievement of pre- determined deliverables to, and testing and acceptance by, the Company.

In accordance with a settlement agreement reached by the parties in January 2013, the Company paid Mobile Secure a total of $47,500 in scheduled installments over the period from January 2013 to February 2014. The settlement allowed the Company to reacquire certain contractual rights that it may otherwise have transferred under the prior contractual arrangements.

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, 2014. There were no material changes to these risk factors during the six months ended June 30, 2015.

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, 2014. A significant amount of these notes remained unpaid as of June 30, 2015, 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 June 30, 2015 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

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: August 19, 2015

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: August 19, 2015

VALIDIAN CORP - FORM 10-Q - August 19, 2015

Attached files

VALIDIAN CORP Reports