iWallet Corp - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

iWallet Corporation

(Exact name of registrant as specified in its charter)

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.

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 November 18, 2014.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

These 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 September 30, 2014 are not necessarily indicative of the results that can be expected for the full year.

iWallet Corporation

Condensed Interim Balance Sheets

September 30, 2014 and December 31, 2013

Going Concern (note 1); Commitments and Contingencies (note 13)

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

iWallet Corporation

Condensed Interim Statements of Operations and Comprehensive Loss

for the three and nine month periods ended September 30, 2014 and 2013 (unaudited)

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

iWallet Corporation

Condensed Interim Statement of Changes in Shareholder's (Deficiency) Equity

for the nine month periods ended September 30, 2014 and 2013 and year ended December 31, 2013 (unaudited)

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

iWallet Corporation

Condensed Interim Statements of Cash Flows

for the nine month periods ended September 30, 2014 and 2013 (unaudited)

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

iWallet Corporation

Notes to Condensed Interim Financial Statements

September 30, 2014 and 2013 (unaudited)

1. Nature of Business and Going Concern

iWallet Corporation ("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.

The Company was incorporated on November 18, 2009 in the State of California and is located at 7394 Trade Street, San Diego, California 92121. On July 21, 2014 the Company merged with iWallet Acquisition Corporation (the “Acquisition Sub”), a subsidiary formed by Queensridge Mining Resources, Inc. (“Queensridge”) for purposes of the Merger, which resulted in the Company becoming a wholly-owned subsidiary of Queenridge. Immediately following the merger the Acquisition Sub merged with and into Queensridge. Queensridge immediately changed its name to iWallet Corporation and is continuing the business of iWallet as its only line of business.

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

The 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 September 30, 2014, the Company has incurred a deficit of $1,912,956 (December 31, 2013 - $222,812) and has significant losses and negative cash flows from operations. The Company completed a public listing transaction which raised additional funds and includes warrant agreements which may provide additional funds. However, 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 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 condensed interim 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, 2013. 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.

3. Recently Issued Accounting Standards and Recently Adopted Accounting Pronouncement

Income Taxes (ASC Topic - 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists" ("ASU 2013-11") was issued during July 2013. The FASB issued guidance on how to present an unrecognized tax benefit. The guidance is effective for annual periods beginning after December 15, 2013. Adoption of the accounting pronouncement does not have a material effect on these accompanying condensed interim financial statements.

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 impact on the condensed interim financial statements of adopting ASU 2014-09 will be assessed by management.

On August 27, 2014, the FASB issued a new financial accounting standard on going concern, 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.” The standard provides guidance about management’s responsibility to evaluate whether there is a substantial doubt about the organiziation’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 impact on the condensed interim financial statements of adopting ASU 2014-15 will be assessed by management.

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 condensed interim financial statements.

4. Inventory

5. Intangible Assets

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 September 30, 2014 and December 31, 2013 was 4.5%, and with monthly repayments determined as follows:

a) the greater of:

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 chequing account held with the bank.

7. Related Party Balances

The above balances are non-interest bearing, unsecured and due on demand. The related party is a shareholder of the Company and former CEO.

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 during the period (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.

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, of which $39,705 was held in attorney's trust to fund related closing costs. During the three months ending March 31, 2014 the Company closed on an additional $83,000 of convertible debentures with the same terms, bringing the total convertible debentures outstanding as at March 31, 2014 to $437,000. During the three months ending June 30, 2014 the Company closed on an additional $226,000 of convertible debentures with the same terms, inclusive of $81,000 of advances from investor formalized into a convertible debenture during the period (note 7), bringing the total convertible debentures outstanding as at June 30, 2014 to $663,000. The convertible debentures bear interest at 5% per annum calculated monthly and payable on maturity and had an original maturity date of June 30, 2014. During the quarter ended June 30, 2014, the Company extended the maturity to August 15, 2014, including the formalization of the advances from investor in note 7. As at September 30, 2014, the amount of interest paid is $13,645 upon conversion. The amount of interest accrued as of December 31, 2013 was $200.

Each convertible debenture contains a conversion option contingently exercisable upon the approval from the Securities and Exchange Commission or the TSX Venture Exchange for listing of its common shares. The conversion price is based on the price at which the Company sells or issues common shares or units, less a discount of 30%. A unit would consist of one common stock and one common stock purchase warrant entitling the holder to purchase one additional common share at an exercise price of $0.20 and with a term of 24 months. Similarly, the Company has the option to force conversion upon approval of a public listing at the same conversion price.

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 (see notes 11 and 12). Upon the occurrence of the public listing, the conversion feature of the Convertible Debenture was “in the money” and is therefore deemed to contain a beneficial conversion feature. The conversion price to the debenture holders is the price at which the Company issues common shares, less a 30% discount. The Company measured and recognized the conversion feature as a debt discount and an adjustment to additional paid-in capital of $289,991.

9. Tooling Commitment Deposit, Deferred Costs and 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 September 30, 2014, the Company had still not reached the contracted level of purchases however, a new contract is under negotiation.

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 commitment liability becomes due and is recognized into accounts payable as units are purchased and the corresponding deferred costs are capitalized into inventory, all of which is based on the 5,000 unit commitment.

During 2013, it was determined that based on the actual sales realized in 2013, the Company would likely not be able to meet the 5,000 unit commitment order. Accordingly, the deferred costs related to excess units was recognized as a provision for loss on the tooling commitment of $139,213 in the condensed interim statement of operations and comprehensive (loss).

During 2014, the actual sales realized in 2014 exceeded initial budgeted sales. As such the Company recognized a recovery on the tooling commitment of $48,414. This resulted in a reduction of the initial tooling commitment loss of $139,213 as of December 31, 2013 to $90,799 as of September 30, 2014.

10. Income Taxes

The Company calculates its income tax expense by estimating the annual effective tax rate and applying that rate to the year-to-date ordinary income at the end of the period.   The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets.  As of September 30, 2014 and 2013, the Company calculated its estimated annualized effective tax rate at 0% and 0%, respectively. The Company had no income tax expense on its $1,434,296 pre-tax loss for the nine months ended September 30, 2014.   The Company recognized no income tax expense based on its $158,901 pre-tax loss for the nine months ended September 30, 2013.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.   For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.  The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements within interest expense.   The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses.   As of September 30, 2014 and December 31, 2013, the Company had no uncertain tax positions.

The Company does not anticipate any significant changes to the total amounts of unrecognized tax benefits in the next twelve months. In many cases the Company's uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of September 30, 2014:

Federal 2009 – present

State 2009 – present

11. Share Capital

The Company is authorized to issue 75,000,000 shares of Common Stock with a par value of $0.001 and had 33,419,429 shares of Common Stock issued and outstanding as of September 30, 2014.

On July 21, 2014, the Company entered into a merger agreement with Queenridge Mining Resources Inc. (“Queensridge”) to complete the Merger whereby all of the issued and outstanding common stock of the Company will be exchanged for shares of Queensridge.

(i) The holder of the common shares of the Company exchanged their shares on a pro-rata basis for 10,000,000 newly-issued shares of common stock prior to the closing of the Merger.

(ii) The total number of Queensridge common shares issued and outstanding as of June 30, 2014 was 6,428,084 with a par value of $0.001 for a total of $6,428. On July 10, 2014 Queensridge completed a stock split transaction of the authorized and outstanding common stock. As a result, the authorized shares of common stock capital increased to 34,113,790. On July 21, 2014 prior to the Merger, Mr. Philip Stromer and certain other shareholders cancelled 25,076,643 shares. As a result, the remaining number of shares outstanding prior to the Merger was 9,037,157.

(iii) Concurrently with the Merger, the Company closed a Private Placement of 6,749,002 units (each a “Unit”) at $0.30 per Unit for gross proceeds of $1,943,701. Each Unit consists of one share of common stock and one common stock purchase warrant exercisable at $0.60 for a period of two years.

The agent of the Private Placement received 583,110 broker Units at an exercise price of $0.60 per Unit for a period of two years. Each Unit is comprised of one share of Common stock and one common stock purchase warrant exercisable at $0.60 for a period of two years.

The agent of the Private Placement received cash compensation of 9% of the gross proceeds of the financing for a total of $174,933 plus additional costs of $23,433 for legal expenses.

(iv) On September 2, 2014, the Company closed an additional private placement of 183,333 units at $0.30 per Unit for gross proceeds of $55,000. Each Unit consists of one share of common stock and one common stock purchase warrant exercisable at $0.60 for a period of two years.

The agent of the Private Placement received 16,500 broker Units at an exercise price of $0.60 per Unit for a period of two years. Each Unit consists of one share of common stock and one common stock purchase warrant exercisable at $0.60 for a period of two years.

The agent of the Private Placement received cash compensation at 9% of the gross proceeds of the financing for a total of $4,950 plus additional costs of $3,840 for legal expenses.

(v) In connection with the closing of the Merger, the Company issued 3,222,120 units at a price of $0.30 per Unit upon conversion of the Convertible Debentures for gross proceeds of $663,000 (see note 8). Each unit consists of one share of common stock and one common stock purchase warrant exercisable at $0.20 for a period of two years from conversion date.

(vi) 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 for 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. As of September 30, 2014 1,172,855 shares have been awarded to the CEO, with remaining amounts to be awarded on each anniversary date. As at September 30, 2014 a total of $402,251 has been expensed as stock-based compensation using the graded vesting method.

To account for subsequent dilution, the CEO is too maintained at 15% ownership at the end of the initial term August 31, 2017. Additional equity shall be issued and vested on each anniversary date. Subsequent to the agreement, the Company completed a private placement (note 11 (iv)) for 199,833 common stock. The member of management is to be issued an additional 29,975 common stock. As of September 30, 2014, $694 has vested which are presented as shares to be issued and expensed as stock-based compensation using the graded vested method.

12. Warrants

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

The following is a summary of the common stock purchase warrants outstanding as of September 30, 2014:

13. 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 period ended September 30, 2014 of $5,840 and the year ended December 31, 2013 of $3,062 included in accrued liabilities, however, the actual amount of loss could be materially different.

The actual warranty claims for the nine month period ended September 30, 2014 is $6,227 (nine month period ended September 30, 2013 - $3,169) included in cost of sales. The actual warranty claims for the three month period ended September 30, 2014 is $3,200 (three month period ended September 30, 2013 - $286).

14. 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 all potentially dilutive shares since their effect in anti-dilutive.

15. Segmented Reporting

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

During the nine month period ended September 30, 2014, the majority of the sales were domestic; however total international sales accounted for 8%. During the nine month period ended September 30, 2013, 54% of total sales were domestic while 46% of total sales were international. Of the 54% of international sales, Canada accounted for 11% of total sales. No other individual countries were in excess of ten percent of total sales.

During the three month period ended September 30, 2014, the majority of sales were domestic; however total international sales accounted for 5% of total sales. During the three month period ended September 30, 2013, 47% of total sales were domestic while 53% of total sales were international. Of the 53% international sales, Canada accounted for 20% and New Zealand accounted for 13% of total sales. No other individual countries were in excess of ten percent of total sales.

16. 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 nine month period ended September 30, 2014, one customer accounted for 52% of the Company’s total revenue (nine months ended September 30, 2013 – 10%).

For the three month period ended September 30, 2014, one customer accounted for 82% of the Company’s total revenue (three months ended September 30, 2013 – 35%).

As at September 30, 2014 one customer accounted for 100% of the accounts receivable balance (December 31, 2013 – 100%).

Economic Dependence

For the period ended September 30, 2014 the Company purchased 100% (2013 - 100%) of its wallet inventory from one vendor.

The accounts payable to this vendor is reflected in the carrying amount of the tooling commitment liability (see note 9).

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 were incorporated as “Queensridge Mining Resources, Inc.” on January 29, 2010, in the State of Nevada for the purpose of engaging in mineral exploration. On July 21, 2014, we entered into a Merger Agreement with iWallet Corporation, a private California corporation, whereby we acquired all of the issued and outstanding common stock of iWallet Corporation through a subsidiary. Following this merger, we merged the subsidiary with and into our corporation, and changed our name to “iWallet Corporation” as part of that process. As a result of entering into the Merger Agreement, we are in the business of designing and developing biometric locking wallets and related physical, personal security products.

Description of Business

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 or aluminum chassis and protects credit cards from being read by many types of RF devices in public spaces. Using a free app, 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 are expected to be available on future models.

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 its 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 Neiman Marcus in North America, Harrods in England, Highline Peak Group in Canada, and NeedItWantItGadgets in New Zealand. Our prospective sales channels include Dufry, Touch of Modern, Skymall, Travelsmith, Hammacher Schlemmer, and co-branding for Montblanc, Porsche Design, Ducati, Gucci, and Bugatti. We own the trademark “iWallet” for secure luxury storage cases connected to smartphones in the USA and have patents worldwide. We have been licensed by Apple Inc. as an official Accessory Developer.

Products and Technology

At this time, we are preparing to re-launch its flagship product and the iWallet 2.0. The suggested retail price will be $529. The new iWallets are expected to have the following features:

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

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 52% 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:

Market and Competition Overview

Our primary target demographic will be consumers who are in the market for high-end 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.

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

We believe the security, high technology, slim design, and carbon fiber construction of the iWallet 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:

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

The following are current prospective sales channels:

We plan to increase our consumer off take within newly gained distribution at major regional high-end department 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.

Results of Operations for the Three and Nine Months ended September 30, 2014 and 2013.

During the three months ended September 30, 2014, we generated sales of $64,476. Our cost of sales was $45,216, resulting in gross profit of $19,260. Our expenses for the three months ended September 30, 2014 were $1,305,011, and consisted of legal and professional fees of $478,313, share based compensation of $402,945, debt discount accretion of $289,991, subcontractor fees of $77,883, office and general expenses of $40,373, research and development of $41,506, travel expenses of $9,882, interest and bank fees of $2,131, rent of $7,500, and amortization of intangible assets of $2,901. We also recorded a recovery of $48,414 on our provision for a contractual tooling commitment. Our net loss for the three months ended September 30, 2014 was $1,285,751. By comparison, during the three months ended September 30, 2013, we generated sales of $13,139. Our cost of sales was $6,307, resulting in gross profit of $6,832. Our expenses for the three months ended September 30, 2013 were $11,122, and consisted of legal and professional fees of $4,695, office and general expenses of $2,845, travel expenses of $338, interest and other finance charges of $1,382, and amortization of intangible assets of $1,862. Our net loss for the three months ended September 30, 2013 was $4,290.

During the nine months ended September 30, 2014, we generated sales of $102,615. Our cost of sales was $80,469 resulting in gross profit of $22,146. Our expenses for the nine months ended September 30, 2014 were $1,712,290, and consisted of legal and professional fees of $698,342, share based compensation of $402,945, debt discount accretion of $289,991, subcontractor fees of $186,983, office and general expenses of $66,777, research and development of $53,039, travel expenses of $26,868, interest and bank fees of $15,083, rent of $12,000, and amortization of intangible assets of $8,676. We also recorded a recovery of $48,414 on our provision for a contractual tooling commitment. Our net loss for the nine months ended September 30, 2014 was $1,690,144. By comparison, during the nine months ended September 30, 2013, we generated sales of $45,145. Our cost of sales was $25,988, resulting in gross profit of $19,157. Our expenses for the nine months ended September 30, 2014 were $178,058, and consisted of legal and professional fees of $21,046, interest and other finance charges of $2,358, office and general expenses of $5,068, research and development of $1,387, travel expenses of $3,492, and amortization of intangible assets of $5,494, We also recorded a provision for loss on a tooling commitment in the amount of $139,213 and a provision for recovery of income taxes of $4,247. Our net loss for the nine months ended September 30, 2013 was $154,654.

Our expenses and net loss for the three and nine months ended September 30, 2014 were larger than in the same periods last year primarily due to increased legal and professional fees related to our preparations for becoming a public company, an increase in stock based compensation, and debt discount accretion. Our sales have also increased as a result of our launch of the iWallet 2.0 and increased marketing and distribution efforts.

Over the course of the remainder of the current fiscal year, we expect that our sales will increase significantly as we continue with our launch of the iWallet 2.0 and increase distribution of the product to various retailers and other outlets. In the final quarter of 2014, we expect to see increased revenues due to a ramp up of orders from our luxury retail partners for the holiday selling season. During 2014, we also made, and will continue to make, significant additional expenditures related to the continued development and expansion of our business. Specifically, the hiring of our new CEO, an increase in our marketing initiatives focused on new product introductions, new promotional and public relations materials, web site enhancements, and expenses related to new product design and development will result in increased expenses during the latter half of 2014. Furthermore, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these factors, to 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. 

Liquidity and Capital Resources

As of September 30, 2014, we had current assets of $1,492,400, consisting of cash in the amount of $1,021,008, deposits and deferred costs of $184,344, inventory of $107,219, a loan due from a shareholder of $127,794, and accounts receivable of $52,035. Our current liabilities as of September 30, 2014 were $329,008, and consisted of the current portion of long term bank debt in the amount of $4,618, accounts payable of $103,931, accrued liabilities of $113,151, amounts due to a related party of $16,475, advances from an investor of $474, and a liability for a manufacturer tooling commitment of $90,359. Our working capital as of September 30, 2014 was therefore $1,163,392.

In the months prior to our reverse merger, we engaged in a bridge financing transaction raising a total $663,000 through the sale of secured convertible promissory notes. Concurrent with the closing of the merger, these notes converted to 3,222,120 shares of common stock and 3,222,120 warrants to purchase shares of common stock at a price of $0.20, exercisable for two years.

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 September 30, 2014, the balance owed was $19,242.

Immediately upon closing of our reverse merger, we closed a private offering of Units at a price of $0.30 per Unit, each Unit consisting of one (1) share of common stock and one (1) warrant to purchase one share of common stock at a price of $0.60 per share, exercisable for two (2) years. A total of 6,479,002 shares of common stock and 6,479,002 warrants were issued to subscribers in the offering. The gross proceeds from the offering, prior to the deduction of agreed selling commissions and expenses, were $1,943,701. Net of broker’s commissions and expenses, we received net proceeds of $1,745,335.

As a result of the funds obtained through the offering, we believe that we have sufficient capital to execute our business development plan for the immediate future. In order to continue our growth and development plan over the longer term, however, we will require additional financing. Management is currently seeking additional 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 September 30, 2014, there were no off balance sheet arrangements.

Going Concern

As of September 30, 2014, the Company has incurred a deficit of $1,912,956 (December 31, 2013 - $222,812) and has significant losses and negative cash flows from operations. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.

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 September 30, 2014. 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 September 30, 2014, our disclosure controls and procedures were not effective. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2014. 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 and additional material weakness is our lack of a separate audit committee.

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

SIGNATURES

 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.