Validian Corp (VLDI) SEC Annual Report (10-K) for 2016

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

VALIDIAN CORPORATION

(Name of registrant as specified in its charter)

Registrant's telephone number:  613-224-3535

Securities registered under Section 12(b) of the Exchange Act:   none

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share

Check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yes o  No ☑

Check whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act o

Check whether the registrant (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 ☑  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactice Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ☑ Yes    o No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☑

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 the definitions of " large accelerated filer, " " accelerated filer " and " smaller reporting company " in Rule 12b-2 of the Exchange Act.

Large accelerated filer o    Accelerated filer o     Non-accelerated filer o    Smaller reporting company ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ☑

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average between the closing bid ($0.034) and asked ($0.035) price of the registrant ' s Common Stock as of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, was $13,775,753, based upon the average between the closing bid and asked price ($0.0345) multiplied by the 399,297,189 shares of the issuer's Common Stock held by non-affiliates. (In computing this number, issuer has assumed all record holders of greater than 5% of the common equity and all directors and officers are affiliates of the registrant.)

The number of shares outstanding of each of registrant's classes of common equity as of April 7, 2017: 447,924,103.

DOCUMENTS INCORPORATED BY REFERENCE:  None.

1

VALIDIAN CORPORATION

Form 10-K

December 31, 2016

Table of Contents

PART I

4

Item 1.  Description of Business.

4

Item 1A.  Risk Factors

9

Item 2.  Description of Properties.

18

Item 3.  Legal Proceedings.

18

Item 4.  Mine Safety Disclosures

18

PART II

19

Item 5.  Market for Common Equity and Related Stockholder Matters.

19

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

21

Item 8.  Financial Statements.

30

Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosures.

58

Item 9A(T).  Controls and Procedures.

58

Item 9B.  Other Information.

60

PART III

61

Item 10. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a)

of the Exchange Act.

61

Item 11. Executive Compensation.

62

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

63

Item 13.  Certain Relationships and Related Transactions.

65

Item 14.  Principal Accountant Fees and Services

65

PART IV

66

Item 15.  Exhibits and Financial Statement Schedules

66

SIGNATURES

67

2

Table of Contents

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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," "will," 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 these things 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 future requirements for additional capital 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.

The information contained in the following sections of this report identify important additional factors that could materially adversely affect actual results and performance:  

*

"Part I. Item 1. Description of Business" especially the disclosures set out under the heading "Risk Factors"; and

*

"Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"

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.

3

Table of Contents

PART I

Item 1.  Description of Business.

Summary

Validian Corporation provides software products to assist public and private enterprises address the increasingly complex issues surrounding the protection of digital information and application security.  Validian Protect is software only cyber security technology comprising an Application and Data Protection Platform and a Data Protection Module, which protect the complete life cycle of data by providing secure access, retrieval, transfer, receipt, storage and usage of digital information on mobile, Cloud, web, local and network applications, devices, servers, databases and memory at rest, in transit and in usage using wired, wireless and mobile networks and most mainstream technology platforms. ValidianProtect enables the next generation of secure Mobile Messaging and Communications, Cloud Computing, Cloud Storage, Distributed Computing and Web Application and WebPortal Access and Usage, Software Defined Networking, the Internet of Things and SCADA, for computers, servers, data bases, intelligent sensors, tablets and SmartPhones. The Company provides solutions that can be customized to the client's business process to ensure end-to-end authenticity, integrity and custody of high value digital assets. Incorporated in the United States, Validian has offices in the United States and Canada.

Our Technology

Our technology is based upon our intellectual property and was used to develop our products.

Our Intellectual Property

Our intellectual property includes an addressing scheme, an authentication process and a key exchange process for all parties and application end points to a communication, thus offering an authentication model for secure access to applications and data, secure data exchanges, secure storage of data and secure usage of data. It also includes an encryption function using standard algorithms: that encrypts data from within an originating application and decrypts the data within the receiving application for secure transfer of data between applications; and that encrypts data for storage. It also enables IT managers on demand to change cyber security and information policies including encryption algorithms, keys, key life time and level of compression and to distribute these automatically, immediately and transparently to all end points without having to re-develop or re-install the software.      

Our technology provides benefits, by enabling users:

*

to protect the transfer, storage and usage of data through an integrated and seamless approach;

*

to develop and use existing interactive, distributed mobile, cloud, web, local and network applications (like e-commerce and m-commerce, e-banking and m-banking, e-health and m-health and e-loyalty and m-loyalty, mobile messaging and social media applications as well as  network applications in software defined networks, internet of things and SCADA) with an integrated security model; and

*

to dynamically change and distribute to all end points information and crypto policies, including encryption algorithms, keys, key life time and level of compression, without having to re-develop or re-install the software.

Based on this technology, we have developed the products described below.

4

Table of Contents

Target Market

Our business strategy is to license our technology either directly or through distribution channels to medium to large organizations that develop, market, sell, distribute or use software products where interaction with a distributed customer, employee and/or partner base is essential.  This includes:

*

IT departments that serve their organization with a variety of applications and implementation environments, according to the needs of the various internal departments. This implies writing applications to ensure the protection of the transfer, storage and usage of data within and between applications and over distributed networks; and

*

cloud platform and cloud solution providers, independent software vendors and developers serving a relatively large group of customers, on a regional or national basis and who must respond to a variety of conditions and platforms, as imposed by their customers in specific industrial sectors and secure the exchanges of data between, and protect the storage and usage of their data within, their customers' partners, suppliers and other participants.

Potential customer technology sectors include mainstream technology platforms such as:

*

Distributed Enterprise Environments including access to and communications by and with servers, systems, databases and computers (desktops, laptops and main frames);

*

Distributed Mobile Environments, including access to and communications by and with mobile devices (smartphones, tablets and phablets);

*

Clouds, including distributed cloud services, computing and storage;

*

Software Defined Networking (SDN), which is   an approach to computer networking that allows network administrators to manage network services through abstraction of higher-level functionality, on a software-only basis, instead of the traditional way of relying on more expensive hardware;

*

the internet-of-things (iot), which is the network of physical objects-devices, vehicles, buildings and other items, which are embedded with electronics, software, sensors, and network connectivity that enables these objects to collect and exchange data

*

Supervisory Control and Data Acquisition (SCADA) for Infrastructure (e.g. power grids) via, which is a system for remote monitoring and control that operates with coded signals over communication channels using typically one communication channel per remote station).

Potential customer industrial sectors include, among others:

*

cloud and mobile platform and device providers

*

software vendors and distribution services;

*

mobile messaging and social media;

*

telecommunications and mobile service providers

*

health care providers and suppliers;

*

governments;

*

defense and military solution and service providers;

*

transportation industry;

*

manufacturers in supply management chains;

*

financial institutions and insurance companies; and

*

post-production houses, studios and production companies in the digital media industry.

Marketing Strategy and Distribution Channels

5

Table of Contents

We have initiated a marketing program in North America, Latin America, Europe, the Middle East and Asia Pacific to bring our products to the marketplace. This program has two components: direct and channel sales.

Direct Sales

The direct sales approach entails making high-level contacts within the organizations of target customers to present the benefits and competitive advantages of our products.  Leads to such presentations are generated through existing contacts of management and sales representatives, and through attendance at and participation in specialized e-commerce and computer security trade shows, and the presentation of the benefits of our products in technical seminars attended by personnel with a mandate for application security.  

Channel Sales

In order to penetrate the market for our products, we are attempting to engage channel partners, in order to leverage their existing and future partner and customer bases, their development and technical resources and their marketing and sales resources. These channel partners include independent software vendors ("ISVs"), application service providers ("ASPs"), value-added resellers ("VARs"), independent marketing representatives ("IMRs"), system integrators ("SIs"), and original equipment manufacturers ("OEMs").  Potential channel partners are identified based upon their ability to penetrate specific markets more easily than we can. We believe major customers also will act as partners in their sector.  

Sales representatives and sales agents are promoting our products within these two channels.  The representatives are responding to queries and expressions of interest from those interested in becoming early adopters of our working models.  These early customers and distributors may have an impact on the product development schedule, as we will develop interfaces with users' existing systems in response to their feedback and individual requirements.

Currently, we have agreements with channel partners in the U.S. and Canada who have partners and customers in North America, Latin America, Europe, the Middle East and Asia Pacific.

Marketing Analysis

During the year ended December 31, 2016, we utilized the services of industry specialists in the cloud, mobile messaging and social media, health care, defense, public safety, banking, government and entertainment sectors. Their mandate was to identify specific areas and a limited number of organizations where our products would facilitate secure communication and the implementation of a strong security infrastructure with ease of deployment and management.

To support our sales force and these specialists, we have developed technical literature on the following topics:

*

provision, management and governance of cyber security;

*

features and benefits;

*

integration into current systems;

*

openness of the architecture;

*

future developments; and

*

implementation procedures.

6

Table of Contents

Estimated Sales Cycles

We expect that individual sales cycles will be from four to eight months in duration.  The territories where most potential customers reside are expected to be in North America, Europe and Asia Pacific.  At March 31, 2016 we had three sales representatives.

Marketing Expenses

The main expense factors for our marketing campaign are for:

*

personnel, both internal and outside specialists;

*

direct marketing to potential customers;

*

travel and living expenses;

*

web site development and maintenance;  

*

literature preparation and distribution; and

*

participation in trade shows;

For more information, please see "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Our Products

Currently, we offer one main product, ValidianProtect, that can be integrated quickly to handle and protect the storage, access, transfer, receipt and usage of data thereby further enabling rapid development of consistently high quality secure applications. Previous products, ShareProtect, MedicalProtect and MediaProtect, have been discontinued as we are now concentrating on supporting rapid development of mobile, cloud, web, local and network applications by our customers and by our channel partners and their customers.

ValidianProtect (previously known as "Application Security Infrastructure (ASI)")

ValidianProtect is application and data protection software only middleware that integrates rapidly into existing or new applications to seal off the application and its information from threats posed by malicious parties. Many different types of applications can be protected or existing applications extended; from legacy client/server applications, to fully distributed business and industrial applications, to more modern web, mobile and Cloud applications, easily and intuitively.

These applications can then be deployed on either a hosted, on-premises or cloud basis with the level of protection controlled dynamically by administrators.

The ValidianProtect product line consists of:

·

the Application & Data Protection Platform that protects against network-borne vulnerabilities such as intrusion, impersonation and interception

·

the Data Protection Module that protects against host-borne vulnerabilities such as memory-scanning and file system scanning as well as provides ready-built capabilities such as flexible control over usage and retraction of data and immediate alerts on the usage or attempted usage of data

·

a set of programming tools and SDKs that facilitate integration of the platform and module within the target application

7

Table of Contents

ValidianProtect creates a virtual closed system, which Validian calls a "Realm", that encompasses and protects applications and the complete life cycle of the data in various forms and stages, including access, retrieval, transfer, receipt, storage  as well as varying usage scenarios: creation, editing, modifying, opening on screen, reading and manipulation. The Realm ensures that only authorized application endpoints can participate and provides a protective barrier against cyber attacks, oftentimes even when other cyber security measures that are present (e.g. firewalls, intrusion and threat prevention, anti-virus and anti-malware) fail, or devices have been hacked, improperly accessed, infected with malware or otherwise compromised, even through zero-day vulnerabilities. There can be an unlimited number of interconnecting or non-interconnecting Realms.

Competition

Our ValidianProtect product competes primarily with application security implementations that usually are  a fragmented patchwork of various point solutions: crypto protocols such as SSL/TLS, PKI and PGP for encrypted transport of data, which must be supplemented by separate encryption for storage of data and a range of filter technologies to protect the network or perimeter like smart firewalls, intrusion and threat prevention systems, and anti-virus and anti-malware, which do not work together seamlessly and have security gaps between them that are exploited.

Research and Development

We spent the following amounts during the periods mentioned on research and development activities:

For more information, see: "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Intellectual Property Protection

We rely on common law and statutory protection of trade secrets and confidentiality agreements. We claim copyright in specific software products and various elements of our core technology, and have registered several trademarks in North America and in Europe.  

Our intellectual property includes an addressing scheme, an authentication process and a key exchange process for all parties to a communication, thus offering a strong trust model for secure exchanges. It also includes an encryption function using standard algorithms that encrypts data from within an originating application and decrypts within the receiving application.

We believe, but we cannot assure, that our technology and its implementation may be patentable.  We may file patent applications as we extend the development of our current technology, or as we develop new technology.  We have defined migration paths for the various products and developed schedules for that migration.  This defines the requirement for patent, trademarks and copyright protection, which we may apply for as required in order to prevent unauthorized use of our technology.

We cannot assure that we will be able to obtain or to maintain the foregoing intellectual property protection.  We also cannot assure that our technology does not infringe upon the intellectual property rights of others.  In the event that we are unable to obtain the foregoing protection or our technology infringes intellectual property rights of others, our business and results of operations could be materially

8

Table of Contents

and adversely affected.  For more information please see "Risk Factors - We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights, loss of business or increased costs." and "Claims by third parties that we infringe upon their proprietary technology could hurt our financial condition," below.

Employees

As at April 7, 2017, we had sixteen employees and contractual personnel, including one executive officer, three sales and marketing staff, eleven in research and development and one in administration.  Eleven are located in Ottawa, Canada, two are located in the U.S.A. and three are located in Europe. We also regularly engage technical consultants and independent contractors to provide specific advice or to perform certain marketing or technical tasks.

Item 1A.  Risk Factors

Our business operations and our securities are subject to a number of substantial risks, including those described below. If any of these or other risks actually occur, our business, financial condition and operating results, as well as the trading price or value of our securities could be materially adversely affected.

Risks relating to our Business

We are a development stage company, and our limited operating history makes evaluating our business and prospects difficult.

We are a development stage company, and our limited operating history makes it difficult to evaluate our current business and prospects or to accurately predict our future revenues or results of operations. The commercial acceptance of our products is unproven and therefore we may not be able to generate a sufficient number of revenue-paying customers to sustain operations.  Our revenue and income potential are unproven, and our business plan is constantly evolving. The Internet is constantly changing and software technology is constantly improving, therefore we may need to continue to modify our business plan to adapt to these changes. As a result of our being in the early stages of development, particularly in the emerging technology industry, we are more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.  As a result, we may never achieve profitability and we may not be able to continue operations if we cannot successfully address the risks associated with early stage development companies in emerging technologies.

We have a history of operating losses and we anticipate losses and negative cash flow for the foreseeable future.  Unless we are able to generate profits and positive cash flow we may not be able to continue operations.  

We incurred a net loss of $4,261,008, and negative cash flow from operations of $1,744,539 during the year ended December 31, 2016.  During the year ended December 31, 2015, we incurred a net loss of $3,253,648 and negative cash flow from operations of $811,029.  We expect operating losses and negative cash flow from operations to continue for the foreseeable future.

We will need to generate significant revenues to achieve profitability. Consequently, we may never achieve profitability.  Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If we are unable to achieve or sustain profitability in the future, we may be unable to continue our operations.  See "Part II.  Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations."

9

Table of Contents

We have drawn readers' attention to the uncertainty of our ability to continue as a going concern.

We have added an explanatory paragraph in our consolidated financial statements.  It states that our ability to continue as a going concern is uncertain due to our history of operating losses and difficulty in generating operating cash flows.  Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  These adjustments might include changes in the possible future recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

We will require additional capital to proceed with our business plan.  If we are unable to obtain such capital, we will be unable to proceed with our business plan and we will be forced to limit or curtail our operations.

We have an immediate requirement for additional working capital in order to proceed with our business plan.  We are currently pursuing alternatives regarding the raising of additional capital to fund operations.  For a discussion of our capital requirements, see the disclosure in "Part II. Item 7. Management's Discussion of Financial Condition and Results of Operation."  We do not currently have a commitment from any third party to provide financing and may be unable to obtain financing on reasonable terms or at all.  Furthermore, if we raise additional working capital through equity, our shareholders will experience dilution.  If we are unable to raise additional financing in the immediate future, and thereafter as required, we will be unable to grow or maintain our current level of business operations and, in fact, we will be forced to limit or curtail our operations.

The loss of any of our key personnel would likely have an adverse effect on our business.

Our future success depends, to a significant extent, on the continued services of our key personnel.  Our loss of any of these key people most likely would have an adverse effect on our business.  Competition for personnel throughout the industry is intense and we may be unable to retain our current personnel or attract, integrate or retain other highly qualified personnel in the future.  If we do not succeed in retaining our current personnel or in attracting and motivating new personnel, our business could be materially adversely affected.

The business environment is highly competitive and, if we do not compete effectively, we may experience material adverse effects on our operations.

The market for Internet security products and services is intensely competitive and we expect competition to increase in the future.  We compete with large and small companies that provide products and services that are similar to some aspects of our security products and services.  Our competitors may develop new technologies in the future that are perceived as being more secure, effective or cost efficient than the technology underlying our security products and services.  In particular, the Internet security market has historically been characterized by low financial entry barriers.

Some of our competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, technical and marketing resources than we do.  As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we will.  We believe that there may be increasing consolidation in the Internet security market and this consolidation may materially adversely affect our competitive position.  In addition, our competitors may have established or may establish financial or strategic relationships among themselves, with existing or potential customers, resellers or other third parties and rapidly acquire significant market share.  If we

10

Table of Contents

cannot compete effectively, we may experience future price reductions, reduced gross margins and loss of market share, any of which will materially adversely affect our business, operating results and financial condition.

If we are unable to develop market recognition, we may be unable to generate significant revenues and our results of operations may be materially adversely affected.

To attract customers we may have to develop a market identity and increase public awareness of our technology and products. To increase market awareness of our technology and our products, we will continue to make significant expenditures for marketing initiatives. However, these activities may not result in significant revenue and, even if they do, any revenue may not offset the expenses incurred in building market recognition. Moreover, despite these efforts, we may not be able to increase public awareness of our technology and our products, which would have a material adverse effect on our results of operations.

We must establish and maintain strategic and other relationships.

One of our significant business strategies has been to enter into strategic or other similar collaborative relationships in order to reach a larger customer base than we could reach through our direct sales and marketing efforts.  We may need to enter into additional relationships to execute our business plan.  We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms.  If we fail to enter into additional relationships, or maintain our existing relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our security services and communications services than we would otherwise.

Our success in obtaining results from these relationships will depend both on the ultimate success of the other parties to these relationships and on the ability of these parties to market our products successfully.

Furthermore, our ability to achieve future growth will also depend on our ability to continue to establish direct seller channels and to develop multiple distribution channels.  Failure of one or more of our strategic relationships to result in the development and maintenance of a market for our products and services could harm our business.  If we are unable to maintain our relationships or to enter into additional relationships, this could harm our business.

If we are unable to respond to rapid technological change and improve our products and services, our business could be materially adversely affected.

The Internet security industry is characterized by rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology.  As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, programming tools and computer language technology.  The introduction of products embodying new technologies and the emergence of new industry standards may render existing products obsolete or unmarketable.  In particular, the market for Internet and intranet applications is relatively new and is rapidly evolving.  Our future operating results will depend upon our ability to enhance our current products and to develop and introduce new products on a timely basis that address the increasingly sophisticated needs of our end-users and that keep pace with technological developments, new competitive product offerings and emerging industry standards.  If we do not respond adequately to the need to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, our operating results may be materially diminished.

11

Table of Contents

New products and services developed or introduced by us may not result in any significant revenues.

We must commit significant resources to developing new products and services before knowing whether our investments will result in products and services the market will accept.  The success of new products and services depends on several factors, including proper new definition and timely completion, introduction and market acceptance.  There can be no assurance that we will successfully identify new product and service opportunities, develop and bring new products and services to market in a timely manner, or achieve market acceptance of our products and services, or that products, services and technologies developed by others will not render our products, services or technologies obsolete or non-competitive.  Our inability to successfully market new products and services may harm our business.

We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights, loss of business or increased costs.

Our success depends to a significant degree upon the protection of our software and other proprietary technology.  The unauthorized reproduction or other misappropriation of our proprietary technology would enable third parties to benefit from our technology without paying us for it.  We rely on a combination of patent, trademark, trade secret and copyright laws, license agreements and non-disclosure and other contractual provisions to protect proprietary and distribution rights of our products.  We have filed a patent application covering certain aspects of our products in the United States, Canada and the European Union.  Although we have taken steps to protect our proprietary technology, they may be inadequate and the unauthorized use thereof could have a material adverse effect on our business, results of operations and financial condition.  Existing trade secret, copyright and trademark laws offer only limited protection.  Moreover, the laws of other countries in which we market our products may afford little or no effective protection of our intellectual property.  If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail.

Claims by third parties that we infringe upon their proprietary technology could hurt our financial condition.

If we discover that any of our products or technology we license from third parties violates third party proprietary rights, we may not be able to reengineer our product or obtain a license on commercially reasonable terms to continue offering the product without substantial reengineering.    In addition, product development is inherently uncertain in a rapidly evolving technology environment in which there may be numerous patent applications pending for similar technologies, many of which are confidential when filed.  Although we sometimes may be indemnified by third parties against claims that licensed third party technology infringes proprietary rights of others, this indemnity may be limited, unavailable or, where the third party lacks sufficient assets or insurance, ineffective.  We currently do not have liability insurance to protect against the risk that our technology or future licensed third party technology infringes the proprietary rights of others.  Any claim of infringement, even if invalid, could cause us to incur substantial costs defending against the claim and could distract our management from our business.  Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages.  A judgment could also include an injunction or other court order that could prevent us from selling our products.  Any of these events could have a material adverse effect on our business, operating results and financial condition.

12

Table of Contents

If our electronic security technology were breached, our business would be materially adversely affected.

A key element of our technology and products is our Internet security feature.  If anyone is able to circumvent our security measures, they could misappropriate proprietary information or cause interruptions or problems with hardware and software of customers using our products.  Any such security breaches could significantly damage our reputation.  In addition, we could be liable to our customers for the damages caused by such breaches or we could incur substantial costs as a result of defending claims for those damages. We may need to expend significant capital and other resources to protect against such security breaches or to address problems caused by such breaches. Security measures taken by us may not prevent disruptions or security breaches.    In the event that future events or developments result in a compromise or breach of the technology we use to protect a customer's personal information, our financial condition and business could be materially adversely affected.  

We face restrictions on the exportation of our encryption technology, which could limit our ability to market our products outside of the United States, Canada and Europe.

Some of our Internet security products utilize and incorporate encryption technology.  Exports of software products utilizing encryption technology are generally restricted by the United States and various other governments, particularly in response to the terrorist acts of September 11, 2001, ongoing terrorist attacks and actions by countries that the United States considers to be rogue.  If we do not obtain the required approvals, we may not be able to sell some of our products in international markets, which could materially adversely affect our results of operations.

Our operating results may prove unpredictable, and may fluctuate significantly.

Our operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control.  Factors which may cause operating results to fluctuate significantly include the following:

*

new technology or products introduced by us or by our competitors;

*

the timing and uncertainty of sales cycles and seasonal declines in sales;

*

our success in marketing and market acceptance of our products and services by our existing customers and by new customers;

*

a decrease in the level of spending for information technology-related products and services by our existing and potential customers; and

*

general economic conditions, as well as economic conditions specific to users of our products and technology.

Our operating results may be volatile and difficult to predict.  As such, future operating results may fall below the expectations of securities analysts and investors.  In this event, the trading price of our common stock may fall significantly.  

We expect to generate some revenues and incur some operating expenses outside of the United States.  If applicable currency exchange rates fluctuate our revenues and results of operations may be materially and adversely affected.

We expect that some portion of our revenues will be based on sales provided outside of the United States.  In addition, a significant portion of our operating expenses are incurred outside of the United States, and we expect that this will continue to be the case.  As a result, our financial performance will be affected by fluctuations in the value of the U.S. dollar to foreign currency. At the present time, we have no plan or

13

Table of Contents

policy to utilize forward contracts or currency options to minimize this exposure, and even if these measures are implemented there can be no assurance that such arrangements will be available, be cost effective or be able to fully offset such future currency risks.

Other risks associated with international operations could adversely affect our business operations and our results of operations.

There are certain risks inherent in doing business on an international level, such as:

*

unexpected changes in regulatory requirements, export and import restrictions;

*

controls relating to encryption technology that may limit sales in the future;

*

legal uncertainty regarding liability and compliance with foreign laws;

*

competition with foreign companies or other domestic companies entering into the foreign markets in which we operate;

*

tariffs and other trade barriers and restrictions;

*

difficulties in staffing and managing foreign operations;

*

longer sales and payment cycles;

*

problems in collecting accounts receivable;

*

political instability;

*

fluctuations in currency exchange rates;

*

software piracy;

*

seasonal reductions in business activity during the summer months in Europe and elsewhere; and

*

potentially adverse tax consequences.

Any of these factors could adversely impact the success of our international operations. One or more of such factors may impair our future international operations and our overall financial condition and business prospects.

Risks relating to our Common Stock

Our common stock price may be volatile.

The market prices of securities of Internet and technology companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies. Factors that may contribute to the volatility of the trading price of our common stock include, among others:

*

our quarterly results of operations;

*

the variance between our actual quarterly results of operations and predictions by stock analysts;

*

financial predictions and recommendations by stock analysts concerning Internet companies and companies competing in our market in general, and concerning us in particular;

*

public announcements of technical innovations relating to our business, new products or technology by us or our competitors, or acquisitions or strategic alliances by us or our competitors;

*

public reports concerning our products or technology or those of our competitors; and

*

the operating and stock price performance of other companies that investors or stock analysts may deem comparable to us.

14

Table of Contents

In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of Internet-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations.  Consequently, broad market fluctuations may have an adverse effect on the trading price of our common stock, regardless of our results of operations.

There is a limited market for our common stock.  If a substantial and sustained market for our common stock does not develop, our shareholders' ability to sell their shares may be materially and adversely affected.

Our common stock trades in the over-the-counter market and is quoted on the OTC Markets QB. Many institutional and other investors refuse to invest in stocks that are traded at levels below the Nasdaq Small Cap Market which could make our efforts to raise capital more difficult.  In addition, the firms that make a market for our common stock could discontinue that role.  OTC Markets QB stocks are often lightly traded or not traded at all on any given day.  We cannot predict whether a more active market for our common stock will develop in the future.  In the absence of an active trading market:

*

investors may have difficulty buying and selling or obtaining market quotations;

*

market visibility for our common stock may be limited; and

*

a lack of visibility for our common stock may have a depressive effect on the market price for our common stock.

Shares issuable upon the exercise of options, warrants and convertible debentures, or under anti-dilution provisions in certain agreements, could dilute stock holdings and adversely affect our stock price.

As of April 7, 2017, we have 7,500,000 outstanding options or warrants to purchase shares of our common stock.

We have two existing stock option plans, one of which had 412,302 shares remaining for issuance as of April 7, 2017, the second of which had 2,087,698 shares remaining for issuance as of April 7, 2017.  Future options issued under these plans may have dilutive effects.

Issuance of shares pursuant to the exercise of options, warrants, or anti-dilution provisions, could lead to subsequent sales of the shares in the public market, which could depress the market price of our stock by creating an excess in supply of shares for sale.  Issuance of these shares and sale of these shares in the public market could also impair our ability to raise capital by selling equity securities.

A large number of shares will be eligible for future sale and may depress our stock price.

As of April 7, 2017, we had outstanding 447,924,103 shares of our common stock, of which approximately 91,418,179 shares were "restricted securities" as that term is defined under Rule 144 promulgated under the Securities Act of 1933.  These restricted shares are eligible for sale under Rule 144 at various times, upon the expiry of the applicable holding period.  No prediction can be made as to the effect, if any, that sales of shares of common stock or the availability of such shares for sale will have on the market prices prevailing from time to time.  Nevertheless, the possibility that substantial amounts of our common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities.

15

Table of Contents

We do not intend to pay dividends in the near future.

Our board of directors determines whether to pay dividends on our issued and outstanding shares.  The declaration of dividends will depend upon our future earnings, our capital requirements, our financial condition and other relevant factors.  Our board does not intend to declare any dividends on our shares for the foreseeable future.

Our common stock may be deemed to be a "penny stock."  As a result, trading of our shares may be subject to special requirements that could impede our shareholders' ability to resell their shares.

Our common stock may be deemed to be a "penny stock" as that term is defined in Rule 3a51-1 of the Securities and Exchange Commission.  Penny stocks include stocks:

*

that are not traded on a national securities exchange that has been continuously registered since April 20, 1992 and has maintained quantitative initial and continued listing standards that are substantially similar to or stricter than the listing standards in place at January 8, 2004;

*

that are not traded on a securities exchange, a "junior tier" of an exchange or an automated quotation system sponsored by a registered national securities association that has established initial listing standards that meet or exceed specified criteria an maintains similar quantitative continued listing standards; or:

*

whose prices are not quoted on the NASDAQ automated quotation system ; or

*

of issuers with net tangible assets less than:

*

$2,000,000 if the issuer has been in continuous operation for at least three years; or

*

$5,000,000 if in continuous operation for less than three years, or

*

of issuers with average revenues of less than $6,000,000 for the last three years.

Section 15(g) of the Exchange Act, and Rule 15g-2 of the Securities and Exchange Commission, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks not less than two business days before a transaction is effected, and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account.  Moreover, Rule 15g-9 of the Securities and Exchange Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker-dealer:

*

to obtain from the investor information concerning his or her financial situation, investment experience and investment objectives;

*

to determine reasonably, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions;

*

to provide, not less than two business days before a transaction is effected, the investor with a written statement setting forth the basis on which the broker-dealer made the determination in the second bullet above; and

*

to receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives.  

Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them.

16

Table of Contents

Our current executive officer and director, and major stockholders own a significant percentage of our voting stock. As a result, they exercise significant control over our business affairs and policy.

As of April 7, 2017, our current executive officer and director, and holders of 5% or more of our outstanding common stock together beneficially owned approximately 10.8% of the outstanding common stock.  These stockholders are able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and may make some transactions more difficult or impossible to complete without the support of these shareholders.

Our restated articles of incorporation contain provisions that could discourage an acquisition or change of control of our company.

Our restated articles of incorporation authorize our board of directors to issue preferred stock without stockholder approval.  Provisions of our certificate of incorporation, such as the provision allowing our board of directors to issue preferred stock with rights more favorable than our common stock, could make it more difficult for a third party to acquire control of us, even if that change of control might benefit our stockholders.

We currently do not have an effective system of internal controls, and therefore we may not be able to detect fraud or report our financial results accurately, which could harm our business.

Effective internal controls are necessary for us to provide reliable financial reports and to detect and prevent fraud.  We periodically assess our system of internal controls to review their effectiveness and identify potential areas of improvement.  These assessments may conclude that enhancements, modifications or changes to our system of internal controls are necessary.  Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is expensive and requires considerable management attention.  Internal control systems are designed in part upon assumptions regarding the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. A consequence of these and other inherent limitations of control systems is that there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  If we fail to implement and maintain an effective system of internal controls or prevent fraud, we could suffer losses, could be subject to costly litigation, investors could lose confidence in our reported financial information, and our image and operating results could be harmed, which could have a negative effect on the trading price of our common stock.

We performed an assessment of our internal controls and our assessment has identified the existence of material weakness in internal controls.  In particular, the following weaknesses in our internal control system were identified:  (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.  Due to the size and resources of our company we may not be able to remediate in the foreseeable future all of the deficiencies identified.  If we are unable to remediate the identified material weaknesses, 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.

17

Table of Contents

Material weakness in our internal control over financial reporting require Validian to perform additional analyses and post-closing procedures that, if not performed effectively, may prevent Validian from reporting its financial results in an accurate and timely manner.

We may have difficulty implementing in a timely manner the internal controls procedures necessary to allow our management to report on the effectiveness of our internal controls, and we may incur substantial costs in order to comply with the requirements of the Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to us regarding corporate governance and financial reporting.  Among many other requirements is the requirement under Section 404 of the Act for management to report on our internal controls over financial reporting.  Although our management has begun the necessary processes and procedures for issuing its report on our internal controls, we cannot be certain that we will be successful in complying with Section 404, due to the limitations imposed by our size and resultant inadequate staffing, as is more fully described under "Item 9a.  Controls and Procedures".  We expect to devote substantial time and to incur costs to implement appropriate controls and procedures to ensure compliance, at such time as our size permits us to do so.  If we are not able to timely comply with the requirements set forth in Section 404, we might be subject to sanctions or investigations by regulatory authorities.  Any such action could adversely affect our business and financial results.

Our Corporate History

We were incorporated in Nevada on April 12, 1989 as CCC Funding Corp. to seek out one or more potential business ventures.  On January 28, 2003, we changed our name from Sochrys.com Inc. to Validian Corporation.

Item 2.  Description of Properties.

Our Canadian office is located at 6 Gurdwara Rd., Suite 205, Ottawa, Canada, K2E 8A3. The telephone number is (613) 224-3535.  Our United States office is located at 4651 Roswell Road, Suite B-106, Atlanta, Georgia 30342, telephone number (404) 256-1963.

Our Ottawa office is leased from a non-affiliated party per oral arrangement on a month-by-month basis.  The lease provides shared access to and use of 2,500 square feet.  Our Atlanta office is leased from a non-affiliated party per oral arrangement on a month-by-month basis.  The lease provides shared access to and use of 1,000 square feet.  

Item 3.   Legal Proceedings.

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

18

Table of Contents

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

(a)

Market Information -- The principal U.S. market in which our common stock, all of which are of one class, $.001 par value per share, is traded is in the over-the-counter market.  Our stock is quoted on the OTC Market QB under the symbol "VLDI".  

The following table sets forth the range of high and low bid quotes of our common stock for the periods noted as reported by the OTC Market QB.  These quotes reflect inter-dealer prices without retail mark-up, markdown or commission and may not necessarily represent actual transactions.  

MARKET PRICE OF COMMON STOCK

On April 7, 2017, the closing price of our common stock was $0.027 per share.

(b)

Holders -- There were approximately 235 holders of record of our common stock as of April 7, 2017, inclusive of those brokerage firms and/or clearing houses holding our securities for their clientele, with each such brokerage house and/or clearing house being considered as one holder.  The aggregate number of shares of common stock outstanding as of April 7, 2017 was 447,924,103 shares.  

(c)

Dividends -- We have not paid or declared any dividends upon our common stock since inception and, by reason of our present financial status and our contemplated financial requirements, we do not contemplate or anticipate paying any dividends in the foreseeable future (see Part I.  Item 1.  Description of Business:  Risk Factors).

19

Table of Contents

(d)

Sales of Unregistered Securities--During the three months ended December 31, 2016, we issued the following:

*

an aggregate of 3,012,922 shares of its common stock from October 3 to November 7, 2016 to holders of the 10% senior convertible notes, in settlement of $75,000 of principal and $15,388 in accrued interest on the notes.

*

an aggregate of 1,133,333 shares of its common stock on October 31, 2016 to a holder of 34 Series C Preferred Shares, in settlement of $34,000 of principal of the 34 Series C Preferred Shares.

*

2,121,474 shares of our common stock to an accredited investor pursuant to the conversion on November 17 of $30,000 in principal amount and $1,249 in accrued interest on our convertible promissory notes;

*

an aggregate of 395 of our Series C preferred shares on November 14, in settlement of $500,000 in principal of our 10% senior convertible notes;  

*

an aggregate of 13,166,667  shares of its common stock on November 21, 2016 to a holder of 395 Series C Preferred Shares, in settlement of $395,000 of principal of 395 Series C Preferred Shares.

During the period from January 1 to April 7, 2017, we issued the following:  

*

An aggregate of 3,635,727 shares of our common stock to accredited investors pursuant to conversions on February 28, and March 7, 2017 of an aggregate of $59,892 in principal amount plus accrued interest on our convertible promissory notes;

*

An aggregate of 1,081,306 shares of our common stock to accredited investors pursuant to conversions on March 7, 2017 of an aggregate of $15,641 in principal amount plus accrued interest on our convertible promissory notes;

*

An aggregate of 865,572 shares of our common stock to accredited investors pursuant to conversions on March 28, 2017 of an aggregate of $10,473 in principal amount plus accrued interest on our convertible promissory notes.

The foregoing securities were issued in reliance upon the exemption provided by Sections 3(a)(9) or 4(2) under the Securities Act of 1933 and the rules promulgated thereunder

20

Table of Contents

Item 6.  Selected Financial Data.

The selected financial data set forth below with respect to our consolidated statements of operations and cash flows for each of the two fiscal years ended December 31, 2016 and 2015 and with respect to the consolidated balance sheets as at December 31, 2016 and 2015, are derived from our audited consolidated financial statements included in Item 8 of this report.  The following selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

In this section, we explain our consolidated financial condition and results of operations for the years ended December 31, 2016 and December 31, 2015. As you read this section, you may find it helpful to refer to our Consolidated Financial Statements in Item 8 of this annual report.

21

Table of Contents

Until we acquired our former subsidiary, Graph-O-Logic, S.A. in August 1999, we had no material or substantive business operations.  Since then, our business has been as more fully described in " Part I, Item 1: Description of Business".  Accordingly, in this section we focus solely on the historical business operations of the subsidiary and our current business plan and operations.

Critical Accounting Policies

We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant accounting policies and methods used in preparation of the financial statements are described in note 2 to our 2016 Consolidated Financial Statements included with this Annual Report on Form 10-K for the year ended December 31, 2016.  We evaluate our estimates and assumptions on a regular basis, based on historical experience and other relevant factors.  Actual results could differ materially from these estimates and assumptions.  The following critical accounting policies are impacted by judgments, assumptions and estimates used in preparation of our December 31, 2016 Consolidated Financial Statements.

Research and development expenses :

We expense all of our research and development expenses in the period in which they are incurred.  At such time as our products are determined to be commercially available, we will capitalize those development expenditures that are related to the maintenance of the commercial products, and amortize these capitalized expenditures over the estimated life of the commercial product.  The estimated life of the commercial product will be based on 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 products resulting in a change to amortization expense and impairment charges.

Stock-based compensation :

The Corporation accounts for stock-based compensation in accordance with the provisions of ASC Topic 718 "Compensation – stock compensation").  ASC Topic 718 requires all share-based payments, including stock options granted by the Corporation to its employees, to be recognized as expenses, based on the fair value of the share-based payments at the date of grant.  For purposes of estimating the grant date fair value of stock-based compensation, the Corporation uses the Black Scholes option-pricing model, and has elected to treat awards with graded vesting as a single award.  The fair value of awards granted is recognized as compensation expense on a straight-line basis over the requisite service period, which in the Corporation'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.

22

Table of Contents

Plan of Operations

We are a development stage enterprise.  As such, our historical results of operations are unlikely to provide a meaningful understanding of the activities expected to take place during the period through December 31, 2017.  Our major initiatives through December 31, 2017 are:

*

obtaining commercial sales of our products, and continuing our current marketing program;

*

developing and improving product agents to perform specialized functions common to many e-commerce sites and m-commerce; and

*

furthering the development of our products.

For more information, please see "Part 1. Item 1: Description of Business – Our Technology."

Sales and Marketing Plans:  We will continue our marketing process with our focus being potential customers located in North America, Latin America, Europe, the Middle East and Asia Pacific.  The potential customers and our current marketing program are more fully described in "Part 1. Item 1: Description of Business - Target Market."  

We will continue to focus our marketing efforts on identifying potential customers by presenting technical seminars, participating in trade shows, using the services of social media, public relations firms, market research, the creation and dissemination of technical and commercial collateral materials, the maintenance and periodic re-design of our website, and the placement of advertisements in print and electronic publications.  Subject to our ability to obtain adequate funding, we plan on spending $100,000 on our marketing efforts during the year ending December 31, 2017.

Our sales representatives, who are compensated on a base compensation plus commission basis, will follow up with potential customers identified through our marketing efforts, with the objective of more fully explaining the benefits of our products and negotiating the terms of the licensing of our products.  Subject to our ability to obtain adequate funding, we expect to spend approximately $200,000 on our sales initiatives, including compensation and travel expenses, during the year ending December 31, 2017.  

Subject to our ability to obtain adequate funding, our sales and marketing expenditures for the year ending December 31, 2017 are expected to total $300,000.

Cost of Sales and Services:   In the event that our sales efforts are successful, we will need to assist our customers in the implementation of our products.  Depending on the success of our sales efforts, and subject to our ability to obtain adequate funding, we expect to spend $10,000 on training and related activities during the year ending December 31, 2017.

Product Development:  We plan on continuing to fund third parties to develop our key technology and related products, under the direction and management of our product management group and our senior management.  For more information please see "Part 1.  Item 1.  Description of Business - Our Technology".

We will improve and further develop our products based on responses from potential customers.  The costs associated with our product development activities are primarily those currently planned and thus are subject to a high degree of control.  Subject to our ability to obtain adequate funding, we estimate that the cost of our product development program during the year ending December 31, 2017 will be $900,000.

23

Table of Contents

General and Administrative Expenses:  Subject to our ability to obtain adequate funding, we expect to spend $262,000 on general and administrative activities during the year ending December 31, 2016.

In summary, provided we are able to obtain adequate funding, we expect to spend a total of $1,472,000 for all expenses during the year ending December 31, 2017, subject to our ability to generate revenues from the licensing of our products and our ability to raise additional capital.

Since entering the development stage, we have obtained financing through the private placement of preferred shares, debt, convertible debentures, common stock and warrants, and through the exercise of some of these warrants.     Until such time as we generate sufficient revenues from the licensing of our software applications, we will continue to be dependent on raising substantial amounts of additional capital through any one or a combination of debt offerings or equity offerings, including but not limited to:

*

debt instruments, including demand notes and convertible notes similar to those discussed below in "Liquidity and Capital Resources";

*

private placements of preferred shares and of common stock;

*

exercise of stock options at a weighted average exercise price of $0.04 per share; or

*

funding from potential clientele or future industry partners.

Results of Operations

In this section, we discuss our operations for the periods indicated and the factors affecting them that resulted in changes from one period to the other.

The fiscal year ended December 31, 2016 compared to the fiscal year ended December 31, 2015

Revenue:   On January 1, 2006 we entered into an agreement with a Value Added Reseller ("VAR"), pursuant to which we granted the VAR a license to sell our software to the VAR's customers for a period of three years.  As a result of subsequent delays in completing certain of our software products to a market ready stage, and in consideration of the general market decline during 2009, we have agreed to extend the expiry of this agreement, with terms to be negotiated upon completion of our current development initiatives.  Our fee for this license, excluding applicable sales taxes, was $155,000, of which $151,650 has been collected.  We will recognize revenue in connection with this sale once all of the criteria required for us to do so as set out in our accounting policies, have been met.

During the year ended December 31, 2010, we entered into an agreement with a VAR, pursuant to which we granted the VAR a license to sell our software to the VAR's customers for a period of one year.  A nonrefundable deposit of $165,000 was received in connection with this contract; revenue will be recognized under this contract as the conditions for recognizing revenue as set out in our accounting policies have been met.

During the year ended December 31, 2016, we entered into a Software License Agreement with a customer pursuant to which we granted a license to integrate and deploy our software in their application. An initial license fee of $400,000 was paid on signing for the license and integration, which integration was completed during 2016. A royalty per end point and/or end user is payable quarterly in arrears upon deployment of the application. We also entered into a Software License Agreement with another customer pursuant to which we granted a license to integrate and deploy our software in their application. An initial license fee of $75,000 was paid on signing for the license and another payment of $75,000 is due upon the integration, which is scheduled for completion during 2017, plus a royalty per end point and/or end user is payable quarterly in arrears upon deployment of the application.   

24

Table of Contents

Since August 1999, we have directed all of our attention towards the completion, and sales and marketing of our software applications.  We believe that if we are successful in our development and sales and marketing efforts, we will generate a source of revenue in the future from sales and/or licensing of our software applications.  

Selling, general and administrative expenses: Selling, general and administrative expenses consist primarily of personnel costs, professional fees, communication expenses, occupancy costs and other miscellaneous costs associated with supporting our research and development, sales and marketing and investor relations activities.  During the year ended December 31, 2016 we incurred a total of $897,497, as compared to $825,058, during the year ended December 31, 2015.  There was an overall increase in selling, general and administrative expenses of $72,439 (9%).

The increase in selling, general and administrative expenses occurred primarily as a result of an increase in remuneration for consultants engaged to assist in our sales and marketing, and investor relations activities.  There were also higher costs for marketing research, as we sought to develop appropriate strategies for introducing our products to the marketplace.  These increases were partially offset by a reduction in stock-based remuneration for administrative consultants.

We have made efforts to reduce these costs wherever possible, through measures such as reducing the number of personnel, reducing our occupancy costs, postponing our Annual General Meeting, reducing the number of trade shows in which we participate, reducing travel costs, and delaying production of new promotional material.  We will continue to carefully monitor our selling, general and administrative expenses as we work within current budgetary limits leading up to the full commercial release of our products.

Research and development expenses: Research and development expenses consist primarily of personnel costs, consulting fees and travel expenses directly associated with the development of our software applications.  During the year ended December 31, 2016, we spent $930,019 developing our software applications, compared to $607,780 during the year ended December 31, 2015.  There was an overall increase in research and development expenses of $322,239 (53%).

The increase in research and development expenses occurred primarily as a result of our engaging additional personnel to assist in our research and development activities; below is a summary of these activities during the year.

Q1 2016

During Q1 2016, the primary focus of our development activity was on migrating Validian's technology to particular cloud platforms; migrating Validian's technology to certain Linux platforms; supporting the development of added features into a trial customer's mobile communications application; developing an additional module of secure features and capabilities that can be integrated rapidly into existing or new applications and solutions; and supporting the integration of Validian's core technology by certain channel partners into their applications and solutions.

Q2 2016

During Q2 2016, the primary focus of our development activity was testing Validian's technology on a particular cloud platform, adding the ability to scale rapidly on that cloud platform, designing and architecting more secure features and capabilities for a third module to be developed and supporting the integration of Validian's core technology by certain channel partners into their applications and solutions

25

Table of Contents

Q3 2016

During Q3 2016, primary focus of our development activity was testing Validian's technology on a particular cloud platform, adding the ability to scale rapidly on that cloud platform, designing and architecting additional secure features and capabilities for a third module to be developed, and supporting the integration of Validian's core technology by certain channel partners and customers into their applications and solutions.

Q4 2016

During Q4 2016, the primary focus of our development activity was adding the ability and support for a number of roaming aspects and configurations to Validian's core technology, designing the ability of Validian's software and Validian-enabled applications to scale up and down automatically on cloud platforms, designing the migration of Validian's core technology to the Red Hat Enterprise Linux operating system and the Apple iOS operating system, supporting integration of Validian's core technology into partner and customer applications, and ongoing testing of these applications and Validian's core technology.  

Depreciation of property and equipment: Depreciation of property and equipment was $nil during the year ended December 31, 2016, a decrease of $847 (100%), from the $847 charged to depreciation expense during the year ended December 31, 2015.  All of our capital assets became fully depreciated during the year ended December 31, 2015, which eliminated the periodic depreciation charges associated with those assets, resulting in a reduction in expense year-to-year.  

Interest and financing costs :  Interest and financing costs during the year ended December 31, 2016 and during the year ended December 31, 2015 consisted of interest and financing costs associated with our 10% senior convertible notes, our convertible promissory notes, and our promissory notes.  During the year ended December 31, 2016, we incurred $1,209,927 in interest and financing costs, a decrease of $807,882 (40%) over the $2,017,809 in interest and financing costs incurred during the year ended December 31, 2015.  

The $1,209,927 in interest and financing costs we incurred during the year ended December 31, 2016 is comprised of $556,056 of interest paid and payable to the holders of our debt; $598,835 of accretion on our 10% senior convertible notes, our promissory notes and our convertible promissory notes; $28,266 in amortization of original issue discount on our convertible promissory notes; and $26,770 of financing costs.  The $2,017,809 in interest and financing costs we incurred during the year ended December 31, 2015 is comprised of $816,477 of interest paid and payable to the holders of our debt; $1,172,877 of accretion on our 10% senior convertible notes and convertible promissory notes; $122 in amortization of original issue discount on our convertible promissory notes; and $28,333 of financing costs.    

Aggregate interest and financing costs decreased by $807,882 (40%) during the year ended December 31, 2016 as compared with the year ended December 31, 2015. There was a decrease of $261,421 (32%) in coupon rate interest charges, which occurred primarily as a result of a net decrease of $5,334,053 in the principal balance of our interest-bearing notes during the year.  The decrease in interest resulting from the decrease in principal outstanding on our interest-bearing notes was partially offset by $142,280 in prepayment bonus incurred in accordance with the prepayment provision on our convertible promissory, notes during 2016, an increase of $33,830 (31%) over the $108,450 in prepayment bonus we incurred during 2015.  

26

Table of Contents

Charges to interest as a result of accretion decreased by $574,042 (49%), as a result of the equity components of notes issued during 2016 having a lower relative fair value than those issued during 2015.  

Financing costs relate to our convertible promissory notes and our promissory notes, and are deferred at issuance and amortized over the life of the note.  During the year ended December 31, 2016, we paid $29,750 in finance costs on new notes issued, as compared with $29,000 paid on new notes issued during the year ended December 31, 2015.  Financing costs recognized as expense through periodic amortization charges decreased by $1,563 (5%) during the year ended December 31, 2016 as compared with the year ended December 31, 2015.

During the year ended December 31, 2016, we paid $57,611 in original issue discount in connection with the issuance of our convertible promissory notes, which was deferred at issuance and is being amortized over the life of the note.  $28,266 in original issue discount was recognized as expense through periodic amortization charges during the year. During the year ended December 31, 2015, we paid $3,500 in original issue discount in connection with the issuance of our convertible promissory notes, which was deferred at issuance and is being amortized over the life of the note.  $122 in original issue discount was recognized as expense through periodic amortization charges during the year; there were no comparable costs during the year ended December 31, 2015.

Loss on extinguishment of debt and accrued liabilities:   During the year ended December 31, 2016, we recognized a net gain of $260 on the issuance of 200,000 shares of our common stock in settlement of $6,000 in accounts payable and accrued liabilities; a loss of $212,645 on the issuance of 1,005 shares of our Series A Convertible Preferred stock in settlement of $792,355 of accrued interest on our 10% senior convertible notes; a loss of $816,125 on the issuance of 3,900 shares of our Series B Convertible Preferred stock in settlement of $2,835,025 of our 10% senior convertible notes and $248,850 in accrued interest thereon; and a net loss of $616,784 on the issuance of 3,580 shares of our Series C Convertible Preferred stock in settlement of $2,792,233 of our 10% senior convertible notes and $170,983 in accrued interest thereon.

During the year ended December 31, 2015, we recognized a loss of $1,000 on the issuance of 166,667 shares of our common stock in settlement of $5,000 in accounts payable and accrued liabilities.

Other income (expense):  Other income (expense) is comprised of realized and unrealized gains and losses on foreign currency translations, the majority of which relate to accounts payable and accrued liabilities denominated in Canadian dollars.  During the year ended December 31, 2016 December 31, 2015, the Canadian dollar gained strength in relation to the United States dollar, resulting in a net loss of $53,271 on foreign currency translations.  During the year ended December 31, 2015, the Canadian dollar lost strength in relation to the United States dollar, resulting in a net gain of $198,846 on foreign currency translations.  

Net loss: We incurred a loss of $4,261,008 ($0.01 per share) for the year ended December 31, 2016, compared to a loss of $3,253,648 ($0.01 per share) for the year ended December 31, 2015.   Our revenues and future profitability and future rate of growth are substantially dependent on our ability to:

*

license the software applications to a sufficient number of clients;

*

be cash-flow positive on an ongoing basis;

*

modify the successful software applications, over time, to provide enhanced benefits to existing users; and

*

successfully develop related software applications.

27

Table of Contents

Liquidity and Capital Resources

General:  Since inception, we have funded our operations from private placements of debt and equity securities.  In addition, until September 1999, we derived revenues from consulting contracts with affiliated parties, the proceeds of which were used to fund operations.  Until such time as we are able to generate adequate revenues from the licensing of our software applications, we cannot assure that we will be successful in raising additional capital, or that cash from the issuance of debt securities, the exercise of existing warrants and options, and the placements of additional equity securities, if any, will be sufficient to fund our long-term research and development and selling, general and administrative expenses.

Our cash and cash equivalents increased by $153,306 during the year ended December 31, 2016, from a balance of $38,458 at December 31, 2015, to $191,764 at December 31, 2016, primarily as a result of our financing activities, which generated net proceeds of $1,897,845 from the issuance of our Series A Convertible preferred shares, our 10% senior convertible notes and our promissory notes, net of repayments and debt issuance costs.  This increase in cash was substantially offset by our net loss of $4,261,008 for the year, which resulted in net cash used in operations of $1,744,539.    Our cash and cash equivalents decreased by $58,945 during the year ended December 31, 2015, from a balance of $97,403 at December 31, 2014, to $38,458 at December 31, 2015, primarily as a result of our net loss of $3,253,648 for the year, which resulted in net cash used in operations of $811,029.  This decrease in cash was substantially offset by our financing activities, which generated $752,084 from the issuance of 10% senior convertible notes and convertible promissory notes, net of repayments and finance fees relating to these notes, and the repayment of our promissory notes.

As discussed elsewhere in this report, we have added an explanatory paragraph to our consolidated financial statements for the year ended December 31, 2016.  It states that our economic viability is dependent on our ability to finalize the development of our principal products, generate sales and finance operational expenses, and that these factors, together with our lack of revenues to date, our negative working capital, our loss for the year, as well as negative cash flow from operating activities, and our accumulated deficit, raise substantial doubt regarding our ability to continue as a going concern.  At December 31, 2016, we had negative working capital of $3,712,793 and an accumulated deficit of $52,660,416; we incurred a net loss of $4,261,008, and negative cash flow from operations of $1,744,539 for the year then ended; and note 2(a) to our consolidated financial statements for the year ended December 31, 2016 also discusses the continuing substantial doubt regarding our ability to continue as a going concern.

We had our first commercial sales during the year ended December 31, 2016; we anticipate further commercial sales during the second or third quarter of 2017, however we cannot be assured that this will be the case.  During the year ended December 31, 2016, we engaged nine new consultants to provide marketing and investor relations services; we did not hire any new employees.  We do not expect to hire any additional personnel during the next six months unless we are successful in raising significant funds through the issuance of our debt or equity securities.  We have not made, nor do we expect to make, any material commitments for capital equipment expenditures during the next twelve months.

We have an immediate requirement for additional working capital in order to proceed with our business plan.  We review our cash needs and sources on a month-to-month basis and we are currently pursuing appropriate opportunities to raise additional capital to fund operations.  Additional sources of capital could involve issuing equity or debt.  However, additional funding may not be available to us on reasonable terms, if at all.  The perceived risk associated with the possible sale of a large number of shares could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline.  In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause

28

Table of Contents

the price of our stock to decline.  We may be unable to raise additional capital if our stock price is too low.  A sustained inability to raise capital could force us to limit or curtail our operations.

We expect the level of our future operating expenses to be driven by the needs of our research and development and marketing programs offset by the availability of funds.  In addition, we have since inception made an effort to keep our expenses relatively low and conserve available cash until we begin generating sufficient operating cash flow.

Sources of Capital:    Our principal sources of capital for funding our business activities have been the private placements of debt and equity securities.  During the year ended December 31, 2016, we issued 1,225 of our Series A Convertible Preferred shares for proceeds of $1,225,000; $20,206, net of repayments, of our 10% senior convertible notes; $577,639, net of finance fees, original issue discount and repayments, in convertible promissory notes; and $75,000, net of finance fees, in promissory notes, which generated cash for funding operations.  We also issued 200,000 shares of our common stock in settlement of accounts payable; 6,280,729 shares of our common stock in settlement of 10% senior convertible notes and accrued interest thereon; 23,962,703 shares of our common stock in settlement of our convertible promissory notes and accrued interest thereon; 1,005 shares of our Series A convertible preferred shares in settlement of 10% senior convertible notes and accrued interest thereon; 3,900 shares of our Series B convertible preferred shares in settlement of 10% senior convertible notes and accrued interest thereon; and 3,580 shares of our Series C convertible preferred shares in settlement of 10% senior convertible notes and accrued interest thereon , all of which reduced the cash which would otherwise have been required to settle these liabilities.  We issued 210,000 shares of our common stock pursuant to the terms of 10% senior convertible notes issued during the year, and 750,000 shares of our common stock pursuant to the terms of promissory notes issued during the year, which reduced the rate of coupon interest which would otherwise have been reflected in these transactions.  In addition to these financing activities, we issued an aggregate of 9,100,000 shares of our common stock to consultants as consideration for services rendered and to be rendered, which reduced the amount of cash which would otherwise be required to engage these personnel.

During the period from January 1 to April 7, 2017, we issued $144,500, net of finance fees and original issue discount, of our convertible promissory notes, the proceeds of which were used to fund operations.  Additionally, we issued an aggregate of 5,582,605 shares of our common stock to holders of our convertible promissory notes on conversion of the notes and accrued interest thereon, which reduced the cash which would otherwise have been required to settle these liabilities.  

The Corporation has not entered into any off-balance sheet arrangement which would have provided the Corporation with a source of capital.

Uses of Capital:  Over the past several years, we have scaled our development activities to the level of available cash resources.  Research and development expenses for the year ended December 31, 2016 increased by approximately 53% as compared to the year ended December 31, 2015.  Selling, general and administrative expenses for the year ended December 31, 2016 increased by approximately 9% as compared to the year ended December 31, 2015.  The changes in these expenses occurred as a result of several factors, as explained under "Results of Operation."

Our plans with respect to future staffing will be dependent upon our ability to raise additional capital.  We have not entered into any off-balance sheet arrangements which would have resulted in our use of capital.

The cost to implement appropriate controls and procedures to ensure compliance with Section 404 of the Act is included in our budget for 2017.

Commitments:   We are not currently a party to any operating lease agreement, nor do we have any contingent liabilities.  

29

Table of Contents

Item 8. Financial Statements.

Consolidated Financial Statements of

VALIDIAN CORPORATION

Years ended December 31, 2016 and 2015

30

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Validian Corporation

We have audited the accompanying balance sheet of Validian Corporation as of December 31, 2015 and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 2015. Validian Corporation's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Validian Corporation as of December 31, 2015 and the results of its operations and its cash flows for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has no revenues, has negative working capital at December 31, 2015, and has incurred recurring losses and recurring negative cash flow from operating activities, which raises substantial doubt about its ability to continue as a going concern.  Management's plans concerning these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Seale and Beers, CPAs

Seale and Beers, CPAs

Las Vegas, Nevada

April 13, 2016

31

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Validian Corporation

We have audited the accompanying balance sheet of Validian Corporation as of December 31, 2016 and the related statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 2016.  Validian Corporation's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Validian Corporation as of December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has negative working capital at December 31, 2016, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern.  Management's plans concerning these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ AMC Auditing

AMC Auditing

Las Vegas, Nevada

April 14, 2017

32

Table of Contents

See accompanying notes to consolidated financial statements

33

Table of Contents

See accompanying notes to consolidated financial statements.

34

Table of Contents

35

Table of Contents

36

Table of Contents

Supplementary information (note 16)

See accompanying notes to consolidated financial statements.

37

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

1.

General:

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

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

2.

Summary of significant accounting policies:

(a)

Future operations:

The consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern.  The Corporation has had limited revenues to date, has negative working capital of $3,712,793, has accumulated a deficit of $52,660,416 as at December 31, 2016, and has incurred a loss of $4,261,008 and negative cash flow from operations of $1,744,539 for the year then ended.  Furthermore, the Corporation failed to settle certain of its promissory notes and 10% senior convertible notes when they matured on various dates during the years 2007 through 2016, resulting in a condition of default for all of the 10% senior convertible notes and the promissory notes; a significant portion of these notes remain in default as at December 31, 2016.  In addition, the Corporation expects to continue to incur operating losses for the foreseeable future, and has no lines of credit or other financing facilities in place.  

If the Corporation obtains further financing and generates revenue, it expects to incur operating expenditures of approximately $1,472,000 for the year ending December 31, 2017. In the event the Corporation cannot raise the funds necessary to finance its research and development and sales and marketing activities, it may have to cease operations.

All of the factors above raise substantial doubt about the Corporation's ability to continue as a going concern.  Management's plans to address these issues include raising capital through the private placement of equity, the exercise of previously-issued equity instruments and through the issuance of additional promissory notes and convertible notes.  

The Corporation'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 Corporation's position and or results of operations and could also result in the Corporation's ceasing operations.  The consolidated financial statements do not include adjustments that would be required if the assets are not realized and the liabilities settled in the normal course of operations.

Even if successful in obtaining financing in the near term, the Corporation cannot be certain that cash generated from its future operations will be sufficient to satisfy its liquidity requirements in the longer term, and it may need to continue to raise capital by issuing additional equity or by obtaining credit facilities.  The Corporation'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 Corporation.

38

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

2.

Summary of significant accounting policies (continued):

(b)

Principles of consolidation:

These consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and include the accounts of Validian Corporation and its wholly-owned subsidiaries, Sochrys Technologies Inc. and Evolusys S.A.  All intercompany balances and transactions have been eliminated.

(c)

Cash and cash equivalents:

Cash and cash equivalents include liquid investments with original maturity dates of three months or less.

(d)

Property and equipment:

Property and equipment is stated at cost less accumulated depreciation, and includes computer hardware and software.  These assets are being depreciated on a straight-line basis over their estimated useful lives, as follows:  computer hardware:  2 years; computer software:  1 year.

(e)

Leases:

Leases are classified as either capital or operating in nature.  Capital leases are those which substantially transfer the benefits and risk of ownership to the Corporation.  Assets acquired under capital leases are depreciated as described in note 1(d).  Obligations recorded under capital leases are reduced by the principal portion of lease payments.  The imputed interest portion of lease payments is charged to expense.

(f)

Prepaid expenses:

Prepaid consulting fees related to services to be rendered within twelve months from the balance sheet date are included in prepaid expenses.  These costs are charged to expenses as the services are rendered.  If for any reason circumstances arise which would indicate that the services will not be performed in the future, any remaining balance included in prepaid expenses will be charged to expense immediately.

(g)

Income taxes:

Deferred income taxes are determined using the asset and liability method, whereby deferred income tax is recognized based on temporary differences using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Temporary differences between the carrying values of assets or liabilities used for tax purposes and those used for financial reporting purposes arise in one period and reverse in one or more subsequent periods.  In assessing the realizability of deferred tax assets, management considers known and anticipated factors impacting whether some portion or all of the deferred tax assets will not be realized.  To the extent that the realization of deferred tax assets is not considered to be more likely than not, a valuation allowance is provided.

39

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

2.

Summary of significant accounting policies (continued):

(h)

Revenue recognition:

Revenue from sale of product licenses is recognized when all of the following criteria are met:  persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable.

Revenue from product support contracts is recognized ratably over the life of the contract.  Revenue from services is recognized at the time such services are rendered.

For contracts with multiple elements such as product licenses, product support and services, the Corporation follows the residual method.  Under this method, the total fair value of the undelivered elements of the contract, as indicated by vendor specific objective evidence, is deferred and subsequently recognized when all criteria for recognizing revenue have been met.  The difference between the total contract fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.  Vendor specific objective evidence for support and consulting services is obtained from contracts where these elements have been sold separately.  Where the Corporation cannot determine the fair value of all of the undelivered elements, revenue is deferred until such time as it can be determined, or until all of the elements are delivered.

Revenues that have been prepaid but for which all elements have not been delivered, are reflected as deferred revenue on the consolidated balance sheet.

(i)

Research and development:

Costs related to research, design and development of software products are charged to research and development expenses as incurred unless they meet the generally accepted criteria for deferral and amortization.  Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria and are expensed as incurred.  To date the Corporation has not capitalized any software development costs.  

(j)

Advertising expense:

Advertising costs are expensed upon the start of the scheduled advertising.  

(k)

Foreign currency translation:

The functional currency for the financial statements of the Corporation is the United States dollar.  Exchange gains or losses are realized due to differences in the exchange rate at the transaction date versus the rate in effect at the settlement or balance sheet date.  Exchange gains and losses are recorded in the statement of operations.

40

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

2.

Summary of significant accounting policies (continued):

(l) Stock-based compensation:

The Corporation accounts for stock-based compensation in accordance with the provisions of ASC Topic 718 "Compensation – stock compensation" (ASC Topic 718).  ASC Topic 718 requires all share-based payments, including stock options granted by the Corporation to its employees, to be recognized as expenses, based on the fair value of the share-based payments at the date of grant.  For purposes of estimating the grant date fair value of stock-based compensation, the Corporation uses the Black Scholes option-pricing model, and has elected to treat awards with graded vesting as a single award.  The fair value of awards granted is recognized as compensation expense on a straight-line basis over the requisite service period, which in the Corporation's circumstances is the stated vesting period of the award.

In adopting ASC Topic 718, the Corporation applied the modified-prospective transition method.  Under this method, the Corporation has recognized compensation costs for all share-based payments granted, modified, or settled after January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which the requisite service had not been provided as of that date (unvested awards).  

(m) Impairment or disposal of long-lived assets:

The Corporation accounts for long-lived assets in accordance with ASC Topic 360-10 "Impairment or disposal of long-lived assets".  This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(n) Use of estimates:

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results may differ from those estimates.  Significant management estimates include assumptions used in estimating the fair value of convertible notes issued with common stock.                   

(o) Accounting for uncertainty in income taxes:

The Corporation does not recognize adjustments in the liability for unrecognized income tax benefits.  As of December 31, 2016, the Corporation had approximately $11,540,000 of unrecognized tax benefits, all of which would affect the Corporation's effective tax rate if recognized.

41

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

3.

Property and equipment:

4.

Promissory notes payable:

The following table sets forth the financial statement presentation of the promissory note proceeds on issuance, and the changes in the financial statement presentation of the balance allocated to the notes as at and for the years ended December 31, 2016 and 2015:

During the year ended December 31, 2016, the Corporation issued $82,500 of its promissory notes, for cash, and repaid $6,000 in accrued interest on the notes.

Under the terms of the notes issued during the year ended December 31, 2016, the Corporation had the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, until maturity on January 13, 2017; interest on these notes accrued at the rate of 10% and was due at maturity.  These notes, and accrued interest thereon, were repaid in full on January 12, 2017.

42

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

4.

Promissory notes payable (cont'd):

Holders of the notes issued during the year ended December 31, 2016 were granted 750,000 common shares of the Corporation upon issuance of the notes; $22,000, representing the relative fair value of the common shares at the issuance date, was allocated to the common shares par value and additional paid in capital.  The notes are being accreted to their face value, using the interest rate method, over the term of the notes.

The Corporation also incurred $7,500 in finance charges relating to the issuance of these notes.  The finance charges were deferred and are being recognized as expense over the term of the notes.

$36,250 of the promissory notes are due on demand, and bear interest at 12%; $82,500 of the notes bear interest at the rate of 10% per annum and matured on January 13, 2017.  The promissory notes are unsecured.

Included in interest and financing costs for the year ended December 31, 2016 is $7,594 (2015: $5,192) of interest paid and payable to the holders of the promissory notes; $19,902 (2015: $nil), of accretion charges; and $3,632 (2015: $nil) of finance fees.  Interest on the promissory notes paid in cash during the year ended December 31, 2016 was $6,000 (2015:  $5,100).  

5.

10% Senior convertible notes:

The following table sets forth the financial statement presentation of the 10% senior convertible note proceeds on issuance, and the changes in the financial statement presentation of the balance allocated to the notes as at and for the years ended December 31, 2016 and 2015:

During the year ended December 31, 2016, the Corporation issued $70,000 of its 10% senior convertible notes, and repaid an aggregate of $49,794 of these notes.  

During the year, holders of the notes exercised the conversion feature and converted $151,500 in principal, plus $36,922 in accrued interest thereon, into 6,280,729 common shares of the Corporation's common stock.

43

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

5.

10% Senior convertible notes (continued):

The Corporation also settled $2,835,025 in principal and $248,850 in accrued interest through the issuance of 3,900 shares of its Series B convertible preferred stock, valued at $3,900,000; $2,792,233 in principal and $170,983 in accrued interest through the issuance of 3,580 shares of its Series C convertible preferred stock, valued at $3,579,966; $792,355 in accrued interest through the issuance of 1,005 shares of its Series A convertible preferred stock, valued at $1,005,000; and $400,000 in accrued interest through an exchange of $400,000 in accounts receivable.  An aggregate net loss of $1,645,554 was realized in connection with the settlement of principal and accrued interest.

Under the terms of the notes issued during the year ended December 31, 2016, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest thereon into common stock of the company, at a rate of one common share for each $0.03 of debt converted.  The Corporation has the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, with the permission of the holders.  Interest on the notes is accrued until the notes are either repaid by the Corporation or converted by the holders.  At the Corporation's option, interest may be paid either in cash or in common shares of the Corporation.  If interest is paid in common shares, the number of shares required for settlement will be calculated at the rate of conversion in effect for the conversion of the note principal.  $50,000 of the notes issued during 2016 are payable on demand; $20,000 of the notes matured on December 31, 2016.

Notwithstanding the stated maturity dates, all of the notes issued during the year ended December 31, 2016 are payable on demand, pursuant to the default provisions of the notes, as described below.

Holders of the notes issued during the year ended December 31, 2016 were granted 210,000 common shares of the Corporation upon issuance of the notes; $6,206, representing the relative fair value of the common shares at the issuance date, was allocated to the common shares par value and additional paid in capital.

At the date of issuance, the conversion feature of the notes issued during the year ended December 31, 2016 was in-the-money.  $11,873, representing the relative fair value of the beneficial conversion feature, was allocated to additional paid in capital.

During the year ended December 31, 2015, the Corporation issued an aggregate of $1,173,307 of its 10% senior convertible notes, and settled an aggregate of $1,257,902 of these notes.  $885,000 of the notes issued during the year, were issued for cash; $288,307 of the notes were issued in settlement of $256,890 of previously issued 10% senior convertible notes plus $31,417 in accrued interest thereon. During the year, holders of the notes exercised the conversion feature and converted $702,597 in principal, plus $777,015 in accrued interest thereon, into 49,352,824 common shares of the Corporation's common stock; $298,415 in principal of the notes, and $12,027 in accrued interest thereon, was repaid in cash; and $54,231 in accrued interest was settled by the Corporation on issuing 1,807,685 shares of its common stock.  

Under the terms of the notes issued during the year ended December 31, 2015, the holders are permitted, at any time, to convert all or a portion of the outstanding principal plus accrued interest thereon into common stock of the company, at a rate of one common share for each $0.03 of debt converted.  The Corporation has the option of pre-paying all or any portion of the balance outstanding on the notes at any time, without penalty or bonus, with the permission of the holders.  Interest on the notes is accrued until the notes are either repaid by the Corporation or converted by the holders.  At the Corporation's option, interest may be paid either in cash or in common shares of the Corporation.  If interest is paid in common shares, the number of shares required for settlement will be calculated at the rate of conversion in effect for the conversion of the note principal.  $1,018,307 of the notes are payable on demand; $145,000 of the notes matured on December 31, 2015; and $10,000 of the notes mature on December 31, 2016.

Notwithstanding the stated maturity dates, all of the notes issued during the year ended December 31, 2015 are payable on demand, pursuant to the default provisions of the notes, as described below.

44

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

5.

10% Senior convertible notes (continued):

Holders of the notes issued during the year ended December 31, 2015 were granted 2,595,500 common shares of the Corporation upon issuance of the notes; $100,067, representing the relative fair value of the common shares at the issuance date, was allocated to the common shares par value and additional paid in capital.

At the date of issuance, the conversion feature of the notes issued during the year ended December 31, 2015 was in-the-money.  $654,456, representing the relative fair value of the beneficial conversion feature, was allocated to additional paid in capital.

The Corporation failed to settle certain of its 10% senior convertible notes plus accrued interest thereon when they matured on various dates between October 1, 2008 and December 31, 2016.  At December 31, 2016, a significant portion of these notes remained in default for non payment.  As a result of these non-payment defaults, all of the 10% senior convertible notes are in default at December 31, 2016, in accordance with the default provisions of the notes, and consequently are payable on demand.  Interest is accrued at the coupon rate on all notes outstanding past the maturity date.

The following table summarizes information regarding the 10% senior convertible notes outstanding at December 31, 2016:

The maximum number of shares issuable on conversion of all 10% senior convertible notes outstanding at December 31, 2016 was 20,343,846.  Interest is payable in stock or in cash, at the discretion of the Corporation, therefore the potential conversion of the interest portion has not been included in our calculated issuance requirement (note 9(a)).

All of the 10% senior convertible notes outstanding at December 31, 2016 were unsecured.

Included in interest and financing costs for the year ended December 31, 2016 is $368,784 (2015: $685,623) in coupon rate interest accrued on the 10% senior convertible notes; and $18,079, (2015: $754,523) in accretion related to the relative fair value of the equity components of the 10% senior convertible notes at issuance.

At December 31, 2016, the fair value of the stock issuable to fully convert the 10% senior convertible note principal, was $610,315, which is $352,424 lower than the principal amount of the notes.

6.  Convertible promissory notes:

During the year ended December 31, 2016, the Corporation issued $973,611 of its convertible promissory notes for cash.  The notes bear interest at the rate of 8% until they mature, or until there is an event of default; thereafter, any portion of the principal or interest which has not been settled will be subject to interest at the rate of 22% per annum.

$55,000 of the notes issued during the year ended December 31, 2016 had a maturity date of on January 5, 2017, and could be prepaid during the period from issuance to July 3, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which is unpaid at July 3, 2016, or thereafter, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 40%.  

45

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

6.  Convertible promissory notes (continued):

$50,000 of the notes issued during the year ended December 31, 2016 had a maturity date of November 8, 2016, and could be prepaid during the period from issuance to July 29, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which was unpaid at July 29, 2016 or thereafter, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the ten trading days immediately preceding such conversion, discounted by 49%.  

$40,000 of the notes issued during the year ended December 31, 2016 had a maturity date of February 22, 2017, and could be prepaid during the period from issuance to August 20, 2016, in part or in full, at various rates ranging from 120% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which is unpaid at any time, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.  

$111,111 of the notes issued during the year ended December 31, 2016 had a maturity date of March 2, 2018.  The holder had the option to convert any balance of principal and interest which was unpaid at August 29, 2016 or thereafter, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest two trading prices during the twenty-five trading days immediately preceding such conversion, discounted by 40%.  

$100,000 of the notes issued during the year ended December 31, 2016 had a maturity date of December 15, 2016, and could be prepaid during the period from issuance to September 11, 2016, in full, at various rates ranging from 135% to 150% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which was unpaid at September 11, 2016 or thereafter, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.  

$30,000 of the notes issued during the year ended December 31, 2016 had a maturity date of May 9, 2017, and could be prepaid during the period from issuance to November 5, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which is unpaid at November 5, 2016, or thereafter, into common stock of the Company.  The rate of conversion for these notes was calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.  

$262,500 of the notes issued during the year ended December 31, 2016 mature on August 24, 2017, and may be prepaid during the period from issuance to February 24, 2017, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at February 24, 2017, or thereafter, into common stock of the Company.  The rate of conversion for these notes is calculated as 55% of the lowest closing bid price of the common stock during the ten prior trading days including the day upon which the conversion request is executed.

$100,000 of the notes issued during the year ended December 31, 2016 mature on May 31, 2017, and may be prepaid during the period from issuance to February 27, 2017, in full, at various rates ranging from 140% to 150% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at February 27, 2017, or thereafter, into common stock of the Company.  The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.  

46

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

6.  Convertible promissory notes (continued):

$60,000 of the notes issued during the year ended December 31, 2016 mature on November 30, 2017, and may be prepaid during the period from issuance to May 28, 2017, in part or in full, at various rates ranging from 120% to 150% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at May 28, 2017, or thereafter, into common stock of the Company.  The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 45%.  

$165,000 of the notes issued during the year ended December 31, 2016 mature on December 29, 2017, and may be prepaid during the period from issuance to May 26, 2017, in full, at various rates ranging from 120% to 150% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at May 26, 2017, or thereafter, into common stock of the Company.  The rate of conversion for these notes is calculated as the average of the lowest three trading prices during the twenty trading days immediately preceding such conversion, discounted by 40%.  

$858,278, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital; the notes are being accreted to their face value over the term of the notes, through periodic charges to interest expense using the effective interest rate method.

$22,250 in finance fees were incurred in relation to the convertible promissory notes issued during 2016, and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.  

$57,611 in original issue discounts were incurred in relation to the convertible promissory notes issued during 2016, and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.  

During the year ended December 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $315,500 of note principal, and $13,142.32 of accrued interest on the notes, into 23,962,703 common shares of the Corporation.

Also during the year ended December 31, 2016, the Corporation exercised the prepayment option and issued aggregate cash payments of $477,335 in settlement of $316,111 in principal amount, plus accrued interest and prepayment bonus thereon of $161,224.

During the year ended December 31, 2015, the Corporation issued $449,000 of its convertible promissory notes for cash.  

$53,500 of the notes issued during the year ended December 31, 2015 had a maturity date of October 12, 2015, and could be prepaid during the period from issuance to July 7, 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 had the option to convert any balance of principal and interest which was unpaid at July 7, 2015 or thereafter, into common stock of the Company.  

$53,500 of the notes issued during the year ended December 31, 2015 had a maturity date of December 4, 2015, and could 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 had the option to convert any balance of principal and interest which was unpaid at August 28, 2015, or thereafter, into common stock of the Company.  .

47

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

6.  Convertible promissory notes (continued):

$53,500 of the notes issued during the year ended December 31, 2015 matured on December 31, 2015 and could 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 had 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.  

$43,000 of the notes issued during the year ended December 31, 2015 matured on March 9, 2016, and could 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 had 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.  

$64,000 of the notes issued during the year ended December 31, 2015 mature on April 27, 2016, and could be prepaid during the period from issuance to January 19, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder had the option to convert any balance of principal and interest which was unpaid at January 19, 2016, or thereafter, into common stock of the Company.  

$54,000 of the notes of the notes issued during the year ended December 31, 2015 mature on Jun 4, 2016 and could be prepaid during the period from issuance to February 28, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which was unpaid at February 28, 2016, or thereafter, into common stock of the Company.  

$54,000 of the notes issued during the year ended December 31, 2015 mature on July 23, 2016 and may be prepaid during the period from issuance to April 19, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at April 19, 2016, or thereafter, into common stock of the Company.  

$73,500 of the notes issued during the year ended December 31, 2015 mature on November 20, 2017 and may be prepaid during the period from issuance to April 18, 2016, in full, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert all or any amount of the outstanding principal face amount of the note, plus accrued interest thereon, into common stock of the Company.  

The rate of conversion for $375,500 of the notes issued by the Corporation during the year ended December 31, 2015 is the average of the lowest three trading prices during the ten trading days immediately preceding such conversion, discounted by 49%; the rate of conversion for $73,500 of the notes issued by the Corporation during the year ended December 31, 2015 is the average of the lowest three trading prices during the ten trading days immediately preceding such conversion, discounted by 45%.  

$430,436, representing the relative fair value of the beneficial conversion feature of the notes at date of issuance, was allocated to additional paid in capital; the notes are being accreted to their face value over the term of the notes, through periodic charges to interest expense using the effective interest rate method.

$29,000 in finance fees were incurred in relation to the convertible promissory notes issued during 2015, and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.  

$3,500 in original issue discounts were incurred in relation to the convertible promissory notes issued during 2015, and are being charged to interest and financing costs over the term of the notes, using the effective interest rate method.  

48

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

6.  Convertible promissory notes (continued):

During the year ended December 31, 2015, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted $187,500 of note principal, and $7,495 of accrued interest on the notes, into 11,399,708 common shares of the Corporation.

Also during the year ended December 31, 2015, the Corporation exercised the prepayment option and issued aggregate cash payments of $358,827 in settlement of $241,000 in principal amount, plus accrued interest and prepayment bonus thereon of $117,827.

The discount to market conversion feature of the convertible promissory notes causes a theoretical possibility that the Corporation may be required to settle the notes by issuing more shares than are authorized.  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 December 31, 2016 was 34,618,076, which represents approximately 13% of the authorized, unissued shares at that date, and has also estimated that the fair value of the notes at December 31, 2016 approximates face value, therefore no adjustment for fair value restatement has been made.

At December 31, 2016, the fair value of the stock issuable to fully convert the convertible promissory note principal was $1,019,678, which exceeds the principal amount by $432,178.

7.

Stockholders' deficiency:

(a)

Common stock transactions:

In connection with the issuance of the Corporation's 10% senior convertible notes during the year ended December 31, 2016, the Corporation issued an aggregate of 210,000 shares of its common stock, with a relative fair value of $6,206, to the holders of the notes (note 5).

During the year ended December 31, 2016, the Corporation issued an aggregate of 9,100,000 shares of its common stock to consultants as partial consideration for services rendered and to be rendered. $283,330, representing the fair value of the stock at issuance, was allocated to shares and to additional paid in capital.  $54,480, representing the value of services not yet rendered as at December 31, 2016, was charged to prepaid expense; $228,850 was charged to expense.  

On various dates during the year ended December 31, 2016, holders of the 10% senior convertible notes exercised the conversion feature of the notes, and converted an aggregate of $151,500 in principal and $36,922 in accrued interest, in exchange for 6,280,729 common shares of the Corporation (note 5).

During the year ended December 31, 2016, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted an aggregate of $315,500 in principal and $13,142 in accrued interest, in exchange for 23,962,703 shares of the Corporation's common stock. (note 6).

On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 200,000 shares of its common stock, valued at $5,740, in settlement of $6,000 in accounts payable.  A net gain of $260 has been recognized in connection with this transaction.

In connection with the issuance of the Corporation's promissory notes on August 10, 2016, the Corporation issued 750,000 shares of its common stock, with a relative fair value of $22,000, to the holders of the notes (note 4).

During the year ended December 31, 2016, holders of the Corporation's Series C convertible preferred shares exercised the conversion feature of the shares and converted an aggregate of 429 Series C convertible preferred shares, in exchange for 14,300,000 shares of the Corporation's common stock.

49

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

7.    Stockholders' deficiency (continued):

In connection with the issuance of the Corporation's 10% senior convertible notes during the year ended December 31, 2015, the Corporation issued 2,595,500 shares of its common stock, with a relative fair value of $100,067, to the holders of the notes (note 5).

During the year ended December 31, 2015, the Corporation issued an aggregate of 13,300,000 shares of its common stock to consultants as partial consideration for services rendered and to be rendered. $505,300, representing the fair value of the stock at issuance, was allocated to shares and to additional paid in capital.  $237,704, representing the value of services not yet rendered as at December 31, 2015, was charged to prepaid expense; $267,596 was charged to expense.  

On various dates during the year ended December 31, 2015, holders of the 10% senior convertible notes exercised the conversion feature of the notes, and converted an aggregate of $702,597 in principal and $778,015 in accrued interest, in exchange for 49,352,824 common shares of the Corporation (note 5).

(a)

Common stock transactions (continued):

Also on various dates during the year ended December 31, 2015, the Corporation issued an aggregate of 1,807.685 of its common shares to holders of its 10% senior convertible notes, in settlement of $54,231 in accrued interest on the notes.

During the year ended December 31, 2015, holders of the convertible promissory notes exercised the conversion feature of the notes, and converted an aggregate of $187,500 in principal and $7,495 in accrued interest, in exchange for 11,399,708 shares of the Corporation's common stock. (note 6).

On December 7, 2015, the Corporation issued 166,667 shares of its common stock, valued at $6,000, in settlement of $5,000 in accounts payable.  A loss of $1,000 has been recognized in connection with this transaction.

(b)

Preferred stock transactions:

On May 31, 2016, the Corporation's board of directors created three new classes of preferred stock:

Series A Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share.  Convertible at any time by the shareholder into common stock of the Corporation, at $0.10 per common share.  10,000 shares authorized.

Series B Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share.  Convertible at any time by the shareholder into common stock of the Corporation, at the rate of $0.03 per common share.  5,000 shares authorized.

Series C Convertible Preferred Stock, par value $0.001 per share, stated value $1,000 per share.  Convertible at any time by the shareholder into common stock of the Corporation, at the rate of $0.03 per common share.  5,000 shares authorized.

On June 2, 2016, the Corporation issued 1,225 shares of its Series A Convertible Preferred stock for cash proceeds of $1,225,000.

Also on June 2, 2016, the Corporation issued 1,005 shares of its Series A Convertible Preferred stock, valued at $1,005,000, to holders of its 10% senior convertible notes in settlement of $792,355 of accrued interest; a loss of $212,645 has been recognized in connection with this transaction.

50

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

7.    Stockholders' deficiency (continued):

On June 2, 2016, the Corporation issued 3,900 shares of its Series B Convertible Preferred stock, valued at $3,900,000, to holders of its 10% senior convertible notes in settlement of $2,835,025 in principal and $248,850 of accrued interest; a loss of $816,125 has been recognized in connection with this transaction.

On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 3,580 shares of its Series C Convertible Preferred stock, valued at $3,580,000, to holders of its 10% senior convertible notes in settlement of $2,792,233 in principal and 170,983 of accrued interest; an aggregate net loss of $616,784 has been recognized in connection with these transactions.  

During the year ended December 31, 2016, holders of the Corporation's Series C convertible preferred shares exercised the conversion feature of the shares and converted an aggregate of 429 Series C convertible preferred shares, in exchange for 14,300,000 shares of the Corporation's common stock.

(b) Preferred stock transactions (continued):

$170,950, representing the effective discount implicit on issuance of 1,255 of the Series C convertible preferred shares, was recognized in relation to the fair value of the beneficial conversion feature of the shares at the date of issuance.

(c)

Transactions involving stock options:

The Corporation has two incentive equity plans, under which a maximum of 10,000,000 options to purchase 10,000,000 common shares may be granted to officers, employees and consultants of the Corporation.  The granting of options, and the terms associated with them, occurs at the discretion of the board of directors, who administers the plan.   The fair value of unvested options are determined at the date of grant and are included in expense over the vesting period.  As of December 31, 2016, a total of 7,500,000 options were granted under these plans, all with an exercise price of $0.04.  The options expire on dates between May 12, 2020 and November 20, 2020, and are fully vested.  2,500,000 options remained available for grant under these plans as of December 31, 2016.

There were no transactions involving stock options during the year ended December 31, 2016.  

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.  $207,794, 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.  

On November 20, 2015, the Company granted 1,000,000 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 November 20, 2020, with provision for early expiration in the event the holder ceases to be engaged by the Company prior to the stated expiry date.  $35,959, 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 1.69%; expected volatility of 291%; and an expected life of 5 years.  

51

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

7.    Stockholders' deficiency (continued):

(d)

Summary of stock-based compensation:

The following table presents the total of stock-based compensation included in the expenses of the Corporation for the years ended December 31, 2016 and 2015:

8.

Interest and financing costs:

Interest and financing costs include accrued interest, accretion and amortization of deferred financing costs and original issue discount relating to the convertible promissory notes; accrued interest, accretion and amortization of deferred financing costs on the promissory notes; and accrued interest and accretion on the 10% senior convertible notes.

9.

Loss on extinguishment of debt and accrued liabilities:

On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 200,000 shares of its common stock, valued at $5,740, in settlement of $6,000 in accounts payable.  A net gain of $260 has been recognized in connection with this transaction.

On June 2, 2016, the Corporation issued 1,005 shares of its Series A Convertible Preferred stock, valued at $1,005,000, to holders of its 10% senior convertible notes in settlement of $792,355 of accrued interest; a loss of $212,645 has been recognized in connection with this transaction.

Also on June 2, 2016, the Corporation issued 3,900 shares of its Series B Convertible Preferred stock, valued at $3,900,000, to holders of its 10% senior convertible notes in settlement of $2,835,025 in principal and $248,850 of accrued interest; a loss of $816,125 has been recognized in connection with this transaction.

On various dates during the year ended December 31, 2016, the Corporation issued an aggregate of 3,580 shares of its Series C Convertible Preferred stock, valued at $3,580,000, to holders of its 10% senior convertible notes in settlement of $2,792,233 in principal and $170,983 of accrued interest; an aggregate net loss of $616,784 has been recognized in connection with these transactions.

On December 7, 2015, the Corporation issued 166,667 shares of its common stock, valued at $6,000, in settlement of $5,000 in accounts payable.  A loss of $1,000 has been recognized in connection with this transaction.

52

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

10.

Loss per share:

As the Corporation incurred a net loss during the years ended December 31, 2016 and 2015, the loss and diluted loss per common share are based on the weighted-average common shares outstanding during the year.  The following outstanding instruments could have a dilutive effect in the future:

11.

Related party transactions:

Included in 10% senior convertible notes (note 5) is $nil (2015: $518,949) payable to the director and to a company controlled by the director, and $nil (2015: $47,558) payable to an individual related to the director and a company controlled by an individual related to the director.  

$4,001 (2015: $367,051) in accrued interest charges relating to these notes is included in accrued liabilities; $24,007 (2015: $60,487) in coupon-rate interest on these notes is included in interest and finance costs. $8,452 (2015: $56,939) and $65,767 (2015: $nil) was paid to a director in settlement of note principal, and accrued interest, respectively.

12.

Guarantees and Commitments:

a)

Guarantees

The Corporation has entered into agreements which contain features which meet the definition of a guarantee under ASC Topic 460 "Guarantees" (Topic 460).  Topic 460 defines a guarantee to be a contract that contingently requires the Corporation to make payments (either in cash, financial instruments, other assets, common stock of the Corporation or through the provision of services) to a third party based on changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, liability or an equity security of the other party.

The Corporation has the following guarantees which are subject to the disclosure and measurement requirements of Topic 460:

The Corporation includes standard intellectual property indemnification clauses in its software license and service agreements.  Pursuant to these clauses, the Corporation holds harmless and agrees to defend the indemnified party, generally the Corporation's business partners and customers, in connection with certain patent, copyright or trade secret infringement claims by third parties with respect to the Corporation's products.  The term of the indemnification clauses is generally perpetual from the date of execution of the software license and service agreement.  In the event an infringement claim against the Corporation or an indemnified party is successful, the Corporation, at its sole option, agrees that it will do one of the following:  (i) procure for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes non-infringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund the residual value of the software license fees paid by the indemnified party for the infringing software.  The Corporation believes the estimated fair value of these intellectual property indemnification clauses is minimal.

53

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

12.  Guarantees and Commitments (continued):

a)

Guarantees (continued)

Historically, the Corporation has not made any significant payments related to the above-noted indemnities and accordingly, no liability related to the contingent features of these guarantees has been accrued in the financial statements.

13.  Fair value measurements:

The carrying value of cash and cash equivalents, value added taxes recoverable, accounts payable and accrued liabilities approximates fair value due to the short term to maturity of these instruments.  The carrying value of the promissory notes, 10% senior convertible notes and convertible promissory notes, approximates fair value due to the issuance subsequent to December 31, 2016 of new debt instruments having similar terms and conditions.  

14.  Income taxes:

Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities as reported for financial reporting purposes and such amounts as measured by tax laws.  The tax effects of temporary differences that gave rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

Income tax expense attributable to loss before income taxes was $nil (2015 - $nil) and differed from the amounts computed by applying the U.S. federal income tax rate of 34% (2015 - 34%) to the net loss as a result of the following:

The Corporation has net operating losses of $31,016,000 which are available to reduce U.S. taxable income and which expire as follows:

54

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

14.  Income taxes (continued):

The losses noted above are estimates, as the related tax returns have not been filed by the Corporation.

15.  Change in non-cash operating working capital:

55

Table of Contents

VALIDIAN CORPORATION

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

(In U.S. dollars)

16.  Supplementary cash flow information:

The Corporation paid no income taxes during the year ended December 31, 2016, nor during the year ended December 31, 2015.  Interest paid in cash during the years ended December 31, 2016 and December 31, 2015 were $540,425 and $134,954, respectively.

Non-cash financing activities are excluded from the consolidated statement of cash flows.  The following is a summary of such activities:

17.

Subsequent events:

On January 3, 2017, the Corporation issued $78,000 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 November 10, 2017, and may be prepaid in full during the period from issuance to August 2, 2016, at various rates ranging from 125% to 145% of the principal balance plus accrued interest to the date of prepayment.  The holder has the option to convert any balance of principal and interest which is unpaid at July 2, 2017 or thereafter, into common stock of the Corporation. The rate of conversion for these notes is calculated as the average of the lowest three closing bid prices during the ten trading days immediately preceding such conversion, discounted by 42%.