UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2015
[  ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from __________ to__________
	Commission File Number: 333-168775

 

iWallet Corp.

(Exact name of registrant as specified in its charter)

 

Nevada	27-1830013
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

7394 Trade Street, San Diego, California 92121

(Address of principal executive offices)

 

1-800-508-5042

(Registrant’s telephone number)

___________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [X] Yes [ ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[ ] Yes [X] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[ ] Large accelerated filer Accelerated filer	[ ] Non-accelerated filer
[X] 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 [X] No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 33,919,419 as of August 13, 2015.

 

	TABLE OF CONTENTS
		Page
PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	8
Item 4:	Controls and Procedures	8
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	9
Item 1A:	Risk Factors	9
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	9
Item 3:	Defaults Upon Senior Securities	9
Item 4:	Mine Safety Disclosures	9
Item 5:	Other Information	9
Item 6:	Exhibits	9

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Our financial statements included in this Form 10-Q are as follows:

 

F-1	Condensed Interim Balance Sheets as of June 30, 2015 and December 31, 2014 (unaudited);
F-2	Condensed Interim Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2014 (unaudited);
F-3	Condensed Interim Statements of Cash Flows for the six months ended March 31, 2015 and 2014 (unaudited);
F-4	Condensed Interim Statement of Changes in Shareholders’ (Deficiency) Equity for the six month period ended June 30, 2015 (unaudited);
F-5	Notes to Condensed Interim Financial Statements.

 

These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended June 30, 2015 are not necessarily indicative of the results that can be expected for the full year.

iWallet Corp

Condensed Interim Balance Sheets

June 30, 2015 and December 31, 2014

 

	June 30, 2015				December 31, 2014
	(Unaudited)
Assets
Current assets
Cash	$	121,417			$	465,847
Funds held in attorney trust		—				20,000
Accounts receivable, net of allowance of $nil (2014 - $nil)		79,292				8,064
Prepaids and deposits (note 9)		161,697				211,534
Inventory (note 4)		166,508				138,819
Due from shareholder (note 7)		114,036				114,349
		642,950				958,613
Intangible assets (note 5)		129,410				116,336
	$	772,360			$	1,074,949
Liabilities
Current liabilities
Bank indebtedness - current (note 6)	$	4,200			$	4,347
Accounts payable (note 7)		230,004				235,391
Accrued liabilities (note 12)		70,316				45,916
Due to related party (note 7)		3,030				3,030
Advances from investor (note 7)		474				474
Tooling commitment liability (note 9)		41,153				41,153
Total Current Liabilities		349,177				330,311
Bank indebtedness - long-term (note 6)		10,567				13,764
Convertible debentures long-term (note 8)		460,186				—
		819,930				344,075
Shareholder's (deficiency) equity
Common shares, par value $0.001, 75,000,000 shares authorized; 33,919,419 issued (2014 - 33,919,419) (note 10)		33,919				33,919
Share to be issued		7,420				2,973
Additional paid-in capital		3,619,913				3,341,070
Deficit		(3,708,822	)			(2,647,088	)
		(47,570	)			730,874
	$	772,360			$	1,074,949

The accompanying notes are an integral part of these condensed interim financial statements. 

iWallet Corp

 

Condensed Interim Statements of Operations and Comprehensive Loss (Unaudited)

For the three and six month periods ended June 30, 2015 and 2014

 

	6 months ended June 30, 2015				6 months ended June 30, 2014				3 months ended June 30, 2015				3 months ended June 30, 2014
Sales	$	142,994			$	38,139			$	118,472			$	22,007
Cost of Sales		129,735				35,253				96,911				18,317
Gross Profit		13,259				2,886				21,561				3,690
Expenses
Share-based compensation		283,290				—				141,669				—
Salaries & wages		219,250				109,100				112,750				47,000
Office and general expenses		167,589				26,404				74,252				9,049
Research and development		191,178				11,533				102,839				10,391
Legal and professional fees		178,256				220,029				96,265				114,441
Travel		28,758				16,986				6,101				1,371
Rent		16,000				4,500				8,500				3,250
Interest and bank fees		8,960				12,952				8,383				7,486
Amortization of intangible assets		9,105				5,775				4,830				2,887
		1,102,386				407,279				555,589				195,875
Loss from operations before foreign exchange and provision for income taxes		(1,089,127	)			(404,393	)			(534,028	)			(192,185	)
Foreign exchange gain		27,393				—				5,719				—
Loss before provision for income taxes		(1,061,734	)			(404,393	)			(528,309	)			(192,185	)
Provision for income taxes		—				—				—				—
Net and comprehensive loss for periods		(1,061,734	)			(404,393	)			(528,309	)			(192,185	)
Loss per share- basic and diluted (note 13)		(0.03	)			(0.04	)			(0.02	)			(0.02	)
Weighted average number of shares outstanding basic and diluted (note 13)		33,919,419				10,000,000				33,919,419				10,000,000

 

The accompanying notes are an integral part of these condensed interim financial statements.

iWallet Corp

 

Condensed Interim Statement of Changes in Shareholders’ (Deficiency) Equity (Unaudited)

For the six month period ended June 30, 2015 and year ended December 31, 2014

 

	Class A Common Shares				Shares Amount				Shares to be issued				Additional Paid-in Capital				Deficit				Shareholder's (Deficiency) Equity
Balance, January 1, 2014		10,000,000			$	10,000			$	—			$	(9,989	)		$	(222,812	)		$	(222,801	)
Reverse recapitalization of Queensridge		9,037,147				9,037				—				-9,037				—				—
Private placement		6,662,335				6,662				—				1,992,039				—				1,998,701
Cost of issue		—				—				—				(217,815	)			—				(217,815	)
Issuance of common stock units on conversion of convertible debenture		3,222,120				3,222				—				673,423				—				676,645
Beneficial conversion feature		—				—				—				289,991				—				289,991
Broker common stock units		599,610				600				—				-600				—				0
Issuance of common stock units to management		4,398,207				4,398				—				623,058				—				627,456
Shares to be issued		—				—				2,973				—				—				2,973
Net and comprehensive loss		—				—				—				—				(2,424,276	)			(2,424,276	)
Balance, December 31, 2014		33,919,419			$	33,919			$	2,973			$	3,341,070			$	(2,647,088	)		$	730,874
Issuance of common stock units to management		—				—				—				278,843				—				278,843
Shares to be issued		—				—				4,447				—				—				4,447
Net and comprehensive loss		—				—				—				—				(1,061,734	)			(1,061,734	)
Balance, June 30, 2015		33,919,419			$	33,919			$	7,420			$	3,619,913			$	(3,708,822	)		$	(47,570	)

 

The accompanying notes are an integral part of these condensed interim financial statements. 

 

iWallet Corp

 

Condensed Interim Statements of Cash Flows (Unaudited)

For the six month periods ended June 30, 2015 and 2014

 

	2015				2014
Cash flow utilized in operating activities
Net and comprehensive loss for the periods	$	(1,061,734	)		$	(404,393	)
Items not affecting cash
Amortization of intangible assets		9,105				5,775
Share-based compensation		283,290				—
Interest expense		7,086				—
		(762,253	)			(398,618	)
Non-cash operating items resulted from changes in:
Accounts receivable		(71,228	)			(1,602	)
Prepaids and deposits		49,837				(95,301	)
Inventory		(27,689	)			(3,188	)
Accounts payable		(5,387	)			32,244
Accrued liabilities		24,400				38,025
		(792,320	)			(428,440	)
Cash flow utilized in investing activities
Additions to intangible assets		(22,179	)			(12,188	)
		(22,179	)			(12,188	)
Cash flow from financing activities
Funds paid to related party		—				(17,421	)
Funds repaid by (advanced to) shareholder		313				(52,368	)
Receipt of funds held in attorney trust		20,000				39,705
Repayment of bank indebtedness		(3,344	)			(2,634	)
Advances from investor		—				11,796
Proceeds from issuance of convertible debentures		453,100				228,000
		470,069				207,078
Decrease in cash		(344,430	)			(233,550	)
Cash, beginning of period		465,847				250,718
Cash, end of period	$	121,417			$	17,168

The accompanying notes are an integral part of these condensed interim financial statements.

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

1. Nature of Business and Going Concern

 

iWallet Corp ("the Company") is engaged in the design, development, manufacturing and sales of bio-metric locking wallets, which operate by scanning a user’s fingerprint to open the wallet.

 

iWallet Corporation (“iWallet”) was incorporated on November 18, 2009 in the State of California and is located at 7968 Arjons Drive, Suite D, San Diego, California 92126. On July 21, 2014 the Company merged with iWallet Acquisition Corporation (“Acquisition Sub”) (“the Merger”), a subsidiary formed by Queensridge Mining Resources, Inc. (“Queensridge”) for purposes of the Merger, which resulted in the Company becoming a wholley-owned subsidiary of Queensridge. Immediately following the merger the Acquisition Sub merged with and into Queensridge. Queensridge immediately changed its name to iWallet Corp and is continuing the business of iWallet as its only line of business.

 

The Company began trading on July 21, 2014 in the United States of America (“USA”) on the OTCQB Exchange under the ticker symbol IWAL.

 

The unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which contemplates continuation of the Company as a going concern.

 

As of June 30, 2015, the Company has a deficit of $3,708,822 (December 31, 2014 - $2,647,088) and has significant losses and negative cash flows from operations. As at June 30, 2015 the Company has working capital of $293,773 (December 31, 2014 - $628,302). There is no certainty that the Company will be successful in generating sufficient cash flow from operations or achieving and maintaining profitable operations in the near future to enable it to meet its obligations as they come due. As a result there is substantial doubt regarding the Company's ability to continue as a going concern. The Company may require additional financing to fund its operations, which may not be available at acceptable terms or at all. The Company plans on raising additional funds from completing financing arrangements, whether as continued subscriptions for convertible debentures or private placements.

 

The unaudited condensed interim financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. All adjustments, consisting only of normal recurring items, considered necessary for fair presentation have been included in these financial statements.

 

2. Significant Accounting Policies

 

Unaudited Condensed Interim Financial Statements

These unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and should be read in conjunction with those annual financial statements for the year ended December 31, 2014. In the opinion of management, these unaudited condensed interim financial statements reflect adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

3. Recently Adopted and Recently Issued Accounting Pronouncements

 

Recently Adopted Accounting Pronouncement

 

In April 2015, the FASB issued ASU 2015-3, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-3”). ASU 2015-3 requires issuance costs related to a recognized debt liability to be presented in the balance sheet as an offset against the recorded liability, similar to debt discounts. Such issuance costs were previously recorded as assets. The recognition and measurement guidance for debt issuance costs are unchanged. ASU 2015-3 is effective for annual periods beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The Company adopted this standard effective January 1, 2015, accordingly, the convertible debentures issued during the period (see note 8) have been recognized net of the of the issuance costs, which will be recognized using the effective interest method

 

Recently Issued Accounting Pronouncements

 

On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is not permitted. The Company is in the process of assessing the impact, if any, on its financial statements.

 

On August 27, 2014, the FASB issued a new financial accounting standard ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Sub-Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This standard provides guidance about management’s responsibility to evaluate whether there is a substantial doubt about the organization’s ability to continue as a going concern. The amendments in this Update apply to all companies. They become effective in the annual period ending after December 15, 2016, with early application permitted. The Company is in the process of assessing the impact, if any, on its financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory: Simplifying the Measurement of Inventory”. The amendments in this ASU require inventory measurement at the lower of cost and net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted by all entities as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the impact, if any, on its financial statements.

 

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

 

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

4. Inventory

 

	June 30, 2015				December 31, 2014
Raw materials and components	$	73,899			$	86,606
Finished goods		92,609				32,622
Goods in-transit		—				19,591
Total inventory	$	166,508			$	138,819

 

During the three and six month periods ended June 30, 2015, the Company recorded a provision relating to obsolete inventory of $nil (2014 - $nil).

 

5. Intangible Assets

 

	Cost				Accumulated Amortization				June 30, 2015 Net Book Value				Dec 31, 2014 Net Book Value
Patents	$	78,618			$	19,691			$	58,927			$	52,041
Trademarks		16,909				5,522				11,387				12,170
Software		51,680				5,917				45,763				36,125
Website Development (i)		16,000				2,667				13,333				16,000
Total intangible assets	$	163,207			$	33,797			$	129,410			$	116,336

(i) The Company engaged an arm's length third party vendor to complete development of their website and mobile application software. Development was completed in December 2014; accordingly, although ready for use, the costs were not amortized as of December 31, 2014. Amortization commenced during the three-month period ended March 31, 2015.

 

Amortization for the three month period ended June 30, 2015 was $4,830 (2014 - $2,887). Amortization for the six month period ended June 30, 2014 was $9,105 (2014 - $5,775).

 

	2015			$	8,160
	2016				16,321
	2017				16,321
	2018				16,321
	2019				16,321
	over 5 years				55,966
	Total			$	129,410

 

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

6. Bank Indebtedness

 

The bank indebtedness of the Company consists of a secured line of credit with a limit of $35,000 bearing interest at the annual prime rate plus 1.25%, which as at June 30, 2015 and December 31, 2014 was 4.5%, and with monthly repayments determined as follows:

 

a) the greater of:

i)

two percent (2%) of the outstanding principal balance outstanding on the last day of the billing period, or

ii)

$100, and

b) accrued interest since the date of the last payment.

 

On termination of the line of credit, the amount will become due over a period determined by the creditor of between thirty-six and eighty-four months, or over three to seven years, which at the time of the agreement was determined to be forty-eight months, or four years.

 

The line of credit is subject to various non-financial covenants that would constitute an event of default, notably: ownership change or sale of the business; closure or failure to maintain the related checking account; insolvency or any bankruptcy proceedings; or, any other defaults on other contracts with the creditor or with any other financial institution.

 

Security for the line of credit is the cash in the checking account held with the bank.

 

	June 30, 2015				December 31, 2014
Line of credit	$	14,767			$	18,111
Less: Current portion - estimated based on (a)(i) above		(4,200	)			(4,347	)
Long-term portion of debt	$	10,567			$	13,764

 

Principal repayments estimated based on (a)(i) above as at June 30, 2015:

 

	2016			$	2,015
	2017				5,214
	2018				3,338
	Total principal repayments			$	10,567

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

7. Related Party Transaction and Balances

 

	June 30, 2015				December 31, 2014
Balances
Current assets
Due from shareholder	$	114,036			$	114,349
Current liabilities
Due to related party	$	3,030			$	3,030
Advances from investor	$	474			$	474

 

The above balances are non-interest bearing, unsecured and due on demand. The related party is related by virtue of the common control and ownership by the Company's shareholder.

 

The advances from investor were funds advanced for purposes of covering operating expenses of the Company and $81,000 of these advances were formalized into a convertible debenture in the prior year (note 8). At December 31, 2013, the investor was also serving as interim Chief Financial Officer (“CFO”) and accordingly these transactions constitute related party transactions; however, on January 1, 2014 the investor resigned as interim CFO.

 

For the period ended June 30, 2015, the Company expensed $6,635 (2014 – $nil) to Shelter Rock International, LLC (“SRI”) for consulting services. No subsequent expenses have been recorded. The Principal of SRI is a director of the Company. As at June 30, 2015, the balance owing to SRI was $nil (December 31, 2014 – $2,788) included in accounts payable.

 

8. Convertible Debentures

 

In December of 2013, the Company entered into a series of secured convertible debenture agreements (the “convertible debentures”) with various investors amounting to $354,000. During the six months ended June 30, 2014, the Company closed on an additional $309,000 of convertible debentures with the same terms, inclusive of $81,000 of advances from investor formalized into a convertible debenture during the year, bringing the total convertible debentures outstanding to $663,000. The convertible debentures had an interest of 5% per annum calculated monthly and payable on maturity and had a maturity date of August 15, 2014.

 

On July 21, 2014, the Company completed the Transaction and forced conversion of the aggregate of $663,000 Convertible Debentures and $13,645 of accrued interest into 3,222,120 common stock and common stock purchase warrants at an exercise price of $0.20 and with a term of 24 months.

 

In fiscal 2015, the Company issued two tranches, one in April and one in June, of secured convertible debentures with identical terms and maturity dates (together, “the Debentures”) for gross proceeds of $492,500. The Company incurred $39,400 in broker’s commissions resulting in net proceeds of $453,100. The Debentures bear interest at a rate of 8% per annum, with interest payments due semi-annually. The Debentures mature on April 30, 2017. The Debentures are convertible at any time, in whole, to shares of common stock at a conversion price of $0.15 per share.

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

8. Convertible Debentures – continued

 

The conversion feature was determined to be an embedded derivative; however, since the instrument is a conventional convertible debenture the conversion feature was not bifurcated. Additionally, the conversion feature was determined not to be beneficial in both tranches as the fair value of the Company's share price at the date of issuance was less than the conversion price. Accordingly, no proceeds were allocated to the value of the conversion feature on initial recognition.

 

As previously noted, the Company has early adopted ASU 2015-03 “Imputation of Interest” and as a result has recognized the convertible debentures net of the related issuance costs of $39,400. These costs will be realized using an effective interest rate of 13.06%, for the April tranche and 13.83% for the June tranche. Imputed interest expense for the six month period ended June 30, 2015 was $7,086.

 

The change in the carrying value of the obligation during the period ended June 30, 2015 is as follows:

 

Carrying value of the convertible debenture		$	492,500
Less transaction costs			(39,400	)
Accrued interest			7,086
Total carrying value as of June 30, 2015			460,186

 

9. Tooling Commitment Liability

 

On May 26, 2011, the Company signed a contract with a supplier under which they are required to pay for tooling costs in addition to their regular purchase orders (the "tooling commitment"). Under the terms of the tooling commitment the Company was required to pay for 30% of the contracted tooling costs upon execution (the "tooling commitment deposit") and the remaining 70% over the purchase of 5,000 units over a nine month period (the "tooling commitment liability"). If 5,000 units were not purchased within those nine months, then the remaining amount was due within thirty days.

 

As of February 27, 2012, the Company had not reached the contracted level of purchases and an informal agreement to extend the period was made; however, by December 31, 2012 the Company had not complied and as a result, the entire amount would have been considered due.

 

On August 24, 2013, the Company entered into a revised agreement with the supplier that extended the term another twelve months to August 24, 2014. As of June 30, 2015, the contract has expired and the tooling commitment of $41,153 is due on demand.

 

The tooling commitment deposit is included in deposits and deferred costs and is capitalized into inventory as units are purchased based on the 5,000 unit commitment. The tooling deposit is capitalized into inventory based on the 5,000 unit commitment. As of June 30, 2015, $322 of the tooling commitment deposit was included in prepaids and deposits (December 31, 2014 - $6,682).

 

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

10. Share Capital

 

a)

Authorized Shares

The Company is authorized to issue 75,000,000 shares of Common Stock with a par value of $0.001 and had 33,919,419 shares of Common Stock issued and outstanding as of June 30, 2015. There were no changes to the authorized share capital for the six months ended June 30, 2015 and 2014.

 

b)

Share-based compensation

On September 2, 2014 the Company entered into an agreement with the Chief Executive Officer (CEO) to issue 4,398,207 shares, or 15% of the Company’s outstanding common stock as of July 21, 2014. The Company’s stock price was $0.30 at the time of issuance, resulting in a total value of $1,319,462. The shares will vest as to 1,172,855 on each of September 2, 2014, August 31, 2015 and August 31, 2016, and 879,642 shares on August 31, 2017. For the year ended December 31, 2014 1,172,855 shares have vested, with remaining amounts to be vested on each anniversary date. For the three and six month periods ended June 30, 2015 a total of $139,478 and $278,843 respectively (three and six month periods ended June 30, 2014 - $nil) has been expensed as stock-based compensation using the graded vesting method.

 

To account for subsequent dilution, the CEO is to maintain a 15% ownership at the end of the initial term of his employment contract August 31, 2017. Additional equity shall be issued and vested on each anniversary date.

 

Subsequent to the agreement, the Company completed a private placement for 199,833 common stock. The CEO is to be issued an additional 29,975 common stock. At the time of issuance, the Company’s stock price was $0.30 per share, resulting in a total value of $8,992. For the three and six month periods ended June 30, 2015, $2,191 and $4,447 respectively (three and six month periods ended June 30, 2014 - $nil) has vested which is presented as shares to be issued and expensed as stock-based compensation using the graded vesting method.

 

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

11. Warrants

 

The following is a continuity schedule of the Company’s common stock purchase warrants:

	No. of Warrants				Exercise Price
Issued July 21, 2014		6,479,002			$	0.60
Issued July 21, 2014 – broker warrants		583,110			$	0.60
Conversion of convertible debentures		3,222,120			$	0.20
Issued September 2, 2014		183,333			$	0.60
Issued September 2, 2014 – broker warrants		16,500			$	0.60
Expired		—			$	—
Outstanding and exercisable June 30, 2015 and December 31, 2014		10,484,065			$	0.48

 

The following is a summary of the common stock purchase warrants outstanding as of December 31, 2014 and June 30, 2015:

 

Exercise Price ($)				No. of Warrants				Expiry Date
	0.6				7,062,112			21-Jul-16
	0.2				3,222,120			21-Jul-16
	0.6				199,833			02-Sep-16
					10,484,065

 

 

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

12. Commitments and Contingencies

 

Legal Matters

From time to time, the Company may be involved in a variety of claims, suits, investigations and proceedings arising from the ordinary course of our business, collections claims, breach of contract claims, labor and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of current pending matters will not have a material adverse effect on its business, financial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverse impact on the Company because of legal costs, diversion of management resources and other factors.

 

Warranty Provisions

The Company is also exposed to warranty contingencies associated with the iWallet and has recorded a provision for these for the six months ended June 30, 2015 of $6,818 (2014 - $6,679) which is included in accrued liabilities, however, the actual amount of loss could be materially different.

 

The actual warranty claims for the six month period ended June 30, 2015 were $2,667 (June 30, 2014 - $3,027) which is included in cost of sales.

 

13. Basic and Diluted Loss Per Share

Basic and diluted loss per share is computed using the weighted average number of common stock outstanding. Diluted loss per share and the weighted average number of shares of common stock exclude 10,484,065 potentially dilutive warrants (note 11) and 29,975 shares (note 10(b)) since their effect is anti-dilutive.

 

14. Segmented Reporting

 

All of the Company's long-lived assets are located in the United States.

 

During the three month period ended June 30, 2015, the Company had sales primarily to domestic customers; however, additional international sales accounted for 22% of total sales, although no individual country was in excess of ten percent of sales.

 

During the six month period ended June 30, 2015, the Company had sales primarily to domestic customers; however, additional international sales accounted for 24% of total sales, although no individual country was in excess of ten percent of sales.

 

During the three month period ended June 30, 2014, the majority of the sales were domestic; however, total international sales accounted for 8% of total sales.

 

During the six month period ended June 30, 2014, the majority of sales were domestic; however, total international sales account for 14% of total sales although no individual country was in excess of ten percent of total sales.

iWallet Corp

 

Notes to Condensed Interim Financial Statements (Unaudited)

June 30, 2015 and 2014

 

15. Risk Management

 

Concentrations of Credit Risk

The Company’s cash balances are maintained in bank accounts in the United States. Deposits held in banks in the United States are insured up to $250,000 per depositor for each bank by the Federal Deposit Insurance Corporation. Actual balances at times may exceed these limits.

 

The Company performs on-going credit evaluations of its customers’ financial condition and generally does not require collateral from its customers. For the six month period ended June 30, 2015, two customers accounted for 65% of the company’s total revenue. For the period ended June 30, 2014, two customers accounted for 36% of total revenue. As of June 30, 2015, two customers accounted for 96% of the accounts receivable balance. As of December 31, 2014, two customers accounted for 97% of the accounts receivable balance.

 

Economic Dependence

For the six month ended June 30, 2015, the Company purchased 100% of its raw material inventory from six vendors. For the six month period ended June 30, 2015, one vendor assembled 100% of its finished goods inventory. For the six month period ended June 30, 2014, all raw materials were purchased and all finished goods inventory were assembled by one vendor.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Company Overview

 

We are a designer and developer of innovative, physical, personal security products that incorporate the latest security and communication technologies to protect against identity, personal and financial information theft. iWallet is a registered trademark in the United States. Our flagship product is a biometric locking luxury storage case that protects cash, credit cards and personal information with a proprietary fingerprint security system. The iWallet features a carbon fiber which protects credit cards from being read by many types of RF devices in public spaces. Using Bluetooth Smart technology, iWallet owners can tether the iWallet to a supported smart device. A proximity alarm sounds on both devices when separated by about five meters. In addition, GPS tracking capabilities can be achieved through the same Bluetooth Smart technology and the smart phone.

 

In addition to our retail sales strategy, we also intend to focus on developing and licensing the following new technologies based upon our design and utility patents: biometric touch sensors coupled with Bluetooth Smart technology, Zero Passwords, voice and gesture recognition, and other biometric physical communication through iWallet products. We are working with outside software companies to enhance the firmware in all of our products.

 

We are based in San Diego, California and our business was originally founded in 2009. The initial version of the iWallet generated sales of over $700,000 in the first eighteen months following it launch. With improved designs and a better manufacturing partner, iWallet is ready to re-launch the product on a larger scale. Established sales channels include Stebis in Belgium, Luxemburg and the Netherlands, the Urban Collection Loyalty program in the U.S., UK and Canada, Peters Of Kensington in Australia, Hontus group, Planet Traveler in the U.S., Vivadi in Latin America, Brentano in the UK, and Gold Tree, LTD in Asia. We have been licensed by Apple Inc. as an official Accessory Developer.

 

Products and Technology

 

At this time, we are preparing to re-launch our flagship product the iWallet 2.0. The suggested retail price will be $499. The new iWallets have the following features:

 

	•	Sleek, compact industrial design with carbon fiber case
	•	Pairs with the owner’s cellular phone via Bluetooth Smart technology
	•	Patented, exclusive tamper resistant locking mechanism utilizes innovative fingerprint biometric reader for unlocking
	•	Unique latch control that only consumes power during latching hence providing extended battery life
	•	RFID blocking capability for enhanced wireless protection
	•	Speaker providing audible feedback
	•	GPS tracking capabilities through the user’s smart phone

 

Over the course of the next twelve months, we intend to bring the following additional products to market: 

 

	•	Storage devices with co-branding luxury partners
	•	A secure passport case called the iPassport
	•	A women’s iWallet version
	•	A secure mobile personal safe in which to store pharmaceuticals
	•	A smart “padlock” with a biometric reader for gym lockers and other personal areas that require security

 

 

We hold over twenty patents and patent applications filed in various countries around the world. Our products are currently manufactured under contract by a manufacturer based in Zhuhai, China, Apollo Electronics. The suppliers for our raw materials are currently Future Electronics, Namiki Motors, Cotech Taiwan, Digital Persona, Avnet Electronics, Avnet Taiwan, and Apollo Electronics. Historically, our largest major customer has been Neiman Marcus, which has been the source of approximately 51% of our gross revenues over the past year. As we expand our sales and distribution channels, we expect that our customer base will diversify and that, in the future, our revenues will not be dependent upon one or a few major customers.

 

We hold both utility and design patents and patent applications. All of our current utility patents will remain in effect until September 14, 2027. The duration of our design patents varies by country. The expiration dates of our current design patents, by country, is as follows:

 

Canada	June 10, 2023
Europe	December 9, 2036
China	December 12, 2021
Japan	May 18, 2032
Russia	December 13, 2036
Singapore	December 9, 2026
Taiwan	December 9, 2023

Market and Competition Overview

 

Our primary target demographic will be consumers who are in the market for luxury secure storage cases and similar accessories. We do not believe that the $500 approximate retail price to the end user will be an obstacle for our initial target demographic.  The carbon fiber process is labor intensive to manufacture. High net worth individuals appreciate the advantages of carbon fiber construction and spend tens of thousands of dollars outfitting their automobiles and other accessories with this material.

 

A comparison of the iWallet to the leather or canvas sure storage accessories currently offered by several major fashion designers is below:

 

Brand

Model

Price

Material

Bluetooth (Anti-theft/loss)

Fingerprint Reader

RFID Anti-Theft

Owner Access Only

Cartier

Santos de Cartier

$

380

Leather

No

No

No

No

Salvatore Ferragamo

Bifold

$

350

Leather

No

No

No

No

Louis Vuitton

Classic

$

565

Canvas

No

No

No

No

Gucci

Bifold

$

550

Canvas

No

No

No

No

iWallet

Slim

$

529

Carbon Fiber

Yes

Yes

Yes

Yes

 

We believe the security, high technology, slim design, and carbon fiber construction of the iWallet product offerings can position it to compete for a share of the luxury secure accessories market.

 

Sales, Distribution and Growth Strategy

 

Our plan for marketing and raising awareness for the iWallet includes the following strategies:

 

	•	Sell and market at major trade shows that attract global buyers such as the CES.
	•	Align iWallet with high profile celebrities, bloggers, etc. for product validation.
	•	Optimize the company’s e-commerce strategy through a multi-lingual program which allows the customer to communicate in over 70 different languages.
	•	Continue worldwide media attention, primarily from BBC Worldwide, Fox News (Fox and Friends), Discovery Channel.
	•	Establish a global distribution network for the retail, incentive, and loyalty markets

 

 

Our established distribution channels for the iWallet, as originally launched, include the following:

 

•

Neiman Marcus in North America

 

•

Stebis in Belgium, Luxemburg and Netherlands

 

	•	Urban Collection Loyalty program in US, UK and Canada
	•	Peters of Kensington’s in Australia
	•	Hontus Group/Planet Traveler in US (co-branded)
	•	Vivadi in Latin America
	•	Oak Incentives in Canada
	•	Brentano in UK
	•	Gold Tree, LTD in Asia

 

The following are current prospective sales channels:

 

•

Co-branding for Dunhill and Ducati as well as other potential luxury partners. We are currently in partnering or licensing discussions with these companies.

 

•

TUMI

 

•

Brookstone

 

•

Dept. of Justice

 

•

Internal Revenue Service

 

We plan to increase our consumer off take within newly gained distribution at major regional high-end department stores, luxury specialty stores, and to expand to private brand stores. Together with our distribution partners, we are targeting major national retail channels. We believe a partnership with any one leading national chain would be transformative. We intend to develop our website towards wider market accessibility through links to other major potential purchasers. We will continue to be featured in ingadget.com and gizmodo.com, where the iWallet has been dubbed “The Fort Knox of Wallets.” We will also begin limited selling efforts in key international markets using further regional distributors in Europe, Asia, Canada, Australia, and South America. We are also in discussions with distribution companies in key opportunity geographies.

 

Recent Developments

 

We recently entered into strategic alliance with NEXT Biometrics Group ASA (OAX: NEXT) to incorporate NEXT Biometrics’ next generation, high-quality fingerprint imaging sensor modules into our portfolio of products, which will feature our patented BIO-BLU™ Biometric Bluetooth® smart locking technology. NEXT’s fingerprint sensors will be incorporated into our biometric products, designed to protect credit cards, jewelry, prescription medications and other valuables. Our BIO-BLU technology will allow customers to access any of their devices that are Bluetooth® connected via a secure biometric fingerprint sensor. BIO-BLU uses an encrypted data connection to any Bluetooth® host including smart phones, tablets and computers dependent on Bluetooth® 4.0, the most recent widespread deployment of the popular short-distance wireless communication protocol, which includes Bluetooth® Low Energy (BLE). We have committed to purchase a minimum of 10,000 NEXT NB-2020S sensors over the next twelve months.

 

Results of Operations for the Three and Six Months ended June 30, 2015 and 2014.

 

During the six months ended June 30, 2015, we generated sales of $142,994. Our cost of sales was $128,735, resulting in gross profit of $13,259. Our expenses for the six months ended June 30, 2015 were $1,139,680, and consisted of legal and professional fees of $178,256, share based compensation of $283,290, interest and bank charges of $6,854, office and general expenses of $206,989, research and development of $191,178, travel expenses of $28,758, rent of $16,000, salaries and wages of $219,250, and amortization of intangible assets of $9,105. We also recorded a foreign exchange gain of $27,393. Our net loss for the six months ended June 30, 2015 was $1,099,028. By comparison, during the six months ended June 30, 2014, we generated sales of $38,139. Our cost of sales was $35,253, resulting in gross profit of $2,886. Our expenses for the six months ended June 30, 2014 were $407,279, and consisted of legal and professional fees of $220,029, interest and bank charges of $12,952, office and general expenses of $26,404, research and development of $11,533, travel expenses of $16,986, rent of $4,500, salaries and wages of 109,100, and amortization of intangible assets of $5,775. Our net loss for the six months ended June 30, 2014 was $404,393.

 

During the three months ended June 30, 2015, we generated sales of $118,472. Our cost of sales was $96,911, resulting in gross profit of $21,561. Our expenses for the three months ended June 30, 2015 were $592,883, and consisted of legal and professional fees of $96,265, share based compensation of $141,669, interest and bank charges of $6,277, office and general expenses of $113,652, research and development of $102,839, travel expenses of $6,101, rent of $8,500, salaries and wages of $112,750, and amortization of intangible assets of $4,830. We also recorded a foreign exchange gain of $5,719. Our net loss for the three months ended June 30, 2015 was $565,603. By comparison, during the three months ended June 30, 2014, we generated sales of $22,007. Our cost of sales was $18,317, resulting in gross profit of $3,690. Our expenses for the three months ended June 30, 2014 were $195,875, and consisted of legal and professional fees of $114,441, interest and bank charges of $7,486, office and general expenses of $9,049, research and development of $10,391, travel expenses of $1,371, rent of $3,250, salaries and wages of 47,000, and amortization of intangible assets of $2,887. Our net loss for the three months ended June 30, 2014 was $192,185

 

Our expenses and net loss for the three and six months ended June 30, 2015 were larger than in the same periods last year primarily due to increased operating costs as we expanded our operations, personnel and marketing budgets and intensified our research and development efforts. Our sales have also increased as a result of our launch of the iWallet 2.0 and increased marketing and distribution efforts.

 

In order to significantly increase our revenue base and achieve profitability we will need to, among other matters, significantly increase our customer base and our distribution channels. We cannot assure you that we will be able to increase our revenue in this manner and achieve profitability on a consistent basis. As we expect to continue to invest in the development of our business, this investment could outpace growth in our revenue, and thereby impair our ability to achieve and maintain profitability in the near future. 

 

Liquidity and Capital Resources

 

As of June 30, 2015, we had current assets of $642,950, consisting of cash in the amount of $121,417, prepaid expenses and deposits of $161,697, inventory of $166,508, a loan due from a shareholder of $114,036, and accounts receivable of $79,292. Our current liabilities as of June 30, 2015 were $349,177, and consisted of the current portion of long term bank debt in the amount of $4,200, accounts payable of $230,004, accrued liabilities of $56,382, amounts due to a related party of $3,030, advances from an investor of $474, customer deposits of $13,934, and a liability for a manufacturer tooling commitment of $41,153. Our working capital as of June 30, 2015 was therefore $293,773.

  

Our bank indebtedness consists of a line of credit with a limit of $35,000, secured by cash on deposit in a checking account. The line bears interest at a rate of prime plus 1.25%. As of June 30, 2015, the balance owed was $14,767.

 

On May 7, 2015, we obtained new financing through the issuance of Secured Convertible Debentures dated April 30, 2015 (the “Debentures”) totaling $372,500. After broker’s selling commissions of $29,800, we received net proceeds of $342,700 from the debenture offering. The Debentures bear interest at a rate of eight percent (8%) per year, with interest payments due semi-annually beginning on October 31, 2015. The Debentures mature on April 30, 2017. On June 30, 2015, we closed a follow-on offering of Secured Convertible Debentures with the same terms. The follow-on offering raised a total of $120,000 from a total of four (4) investors, including one affiliate who subscribed for a $50,000 Debenture.

 

In order to continue our growth and development plan, however, we will require additional financing. Management is currently seeking additional debt and/or equity financing in order to fund the long term development of the company. There can be no assurance that we will be successful in raising additional funding, either through increased sales and debt and/or other equity financing arrangements. If we are not able to secure significant additional funding, the long term implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

 

Off Balance Sheet Arrangements

 

As of June 30, 2015, there were no off balance sheet arrangements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to include this item.

 

Item 4. Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2015. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, our disclosure controls and procedures were not effective. There have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2015. Management determined that the material weaknesses that resulted in controls being ineffective are primarily due to lack of resources and number of employees. Material weaknesses exist in the segregation of duties required for effective controls and various reconciliation and control procedures not regularly performed due to the lack of staff and resources.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Internal Controls

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any other pending legal proceeding. We are not aware of any other pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A. Risk Factors

 

A smaller reporting company is not required to include this item.

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in Extensible Business Reporting Language (XBRL).

SIGNATURE

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

 

	iWallet Corporation
Date:	August 17, 2015
	/s/ Jack B. Chadsey
By:	Jack B. Chadsey
Title:	Chief Executive Officer and Chief Financial Officer