Our unaudited condensed interim consolidated financial
statements for the six month period ended June 30, 2013 form part of this
quarterly report. They are stated in United States Dollars (US$) and are
prepared in accordance with United States generally accepted accounting
principles.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page | 4
ALTERNET SYSTEMS INC.
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
As at June 30,
2013 and December 31, 2012
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
|
26,513
|
|
|
5,751
|
|
Accounts
receivable, net
|
|
495,045
|
|
|
1,249,447
|
|
Prepaid cost of sales
|
|
14,625
|
|
|
108,382
|
|
Deposits
and other assets
|
|
80,600
|
|
|
53,643
|
|
Total current assets
|
|
616,783
|
|
|
1,417,223
|
|
Fixed assets
|
|
180,949
|
|
|
281,804
|
|
Intellectual property
|
|
1,600,000
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
2,397,732
|
|
|
3,299,027
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts
payable and accrued charges
|
|
1,638,906
|
|
|
1,457,054
|
|
Wages payable
|
|
1,448,861
|
|
|
821,628
|
|
Accrued
taxes
|
|
1,188,874
|
|
|
921,347
|
|
Deferred income
|
|
141,025
|
|
|
288,688
|
|
Advance
on loan payable
|
|
100,556
|
|
|
-
|
|
Other loans payable, net
of beneficial conversion feature
|
|
1,103,192
|
|
|
642,796
|
|
Due to
related parties
|
|
138,001
|
|
|
255,376
|
|
Current portion of
long-term debt
|
|
135,556
|
|
|
166,099
|
|
Current
portion of capital leases
|
|
9,351
|
|
|
30,028
|
|
Total current liabilities
|
|
5,904,322
|
|
|
4,583,016
|
|
Long term debt
|
|
-
|
|
|
69,039
|
|
Capital leases
|
|
1,218
|
|
|
5,043
|
|
|
|
5,905,540
|
|
|
4,657,098
|
|
|
|
|
|
|
|
|
Stockholders' deficiency
|
|
|
|
|
|
|
Capital
stock
Authorized:
100,000,000 common shares with a par value of
$0.00001
Issued
and outstanding: 90,955,968 common
shares
(2012
- 89,056,203)
|
|
909
|
|
|
890
|
|
Additional paid-in capital
|
|
14,188,411
|
|
|
13,849,991
|
|
Private placement
subscriptions
|
|
130,362
|
|
|
130,362
|
|
Obligation to issue shares
|
|
34,975
|
|
|
-
|
|
Deferred compensation
|
|
(65,625
|
)
|
|
-
|
|
Accumulated other comprehensive (loss)
|
|
(331,382
|
)
|
|
(331,349
|
)
|
Accumulated (deficit)
|
|
(16,450,735
|
)
|
|
(14,558,159
|
)
|
|
|
(2,493,085
|
)
|
|
(908,265
|
)
|
Non-controlling interest
|
|
(1,014,723
|
)
|
|
(449,806
|
)
|
|
|
(3,507,808
|
)
|
|
(1,358,071
|
)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
|
|
2,397,732
|
|
|
3,299,027
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements
Page | 5
ALTERNET SYSTEMS INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
AND COMPREHENSIVE (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
Six months
ended
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
519,582
|
|
|
217,015
|
|
|
956,558
|
|
|
276,300
|
|
COST OF SALES
|
|
335,133
|
|
|
76,065
|
|
|
651,831
|
|
|
114,032
|
|
GROSS PROFIT
|
|
184,449
|
|
|
140,950
|
|
|
304,727
|
|
|
162,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debts
|
|
634,720
|
|
|
853
|
|
|
636,491
|
|
|
853
|
|
Depreciation
|
|
19,404
|
|
|
26,714
|
|
|
40,532
|
|
|
37,385
|
|
Investor
relations
|
|
34,808
|
|
|
120
|
|
|
59,255
|
|
|
26,490
|
|
Management and consulting
|
|
782,365
|
|
|
358,466
|
|
|
1,094,088
|
|
|
690,361
|
|
Office and
general
|
|
25,214
|
|
|
26,317
|
|
|
45,045
|
|
|
74,192
|
|
Professional fees
|
|
143,199
|
|
|
71,463
|
|
|
257,087
|
|
|
172,300
|
|
Rent
|
|
32,372
|
|
|
32,659
|
|
|
64,620
|
|
|
64,355
|
|
Salaries
|
|
125,062
|
|
|
240,221
|
|
|
298,744
|
|
|
468,185
|
|
Travel
|
|
31,854
|
|
|
42,572
|
|
|
64,117
|
|
|
90,893
|
|
|
|
1,828,998
|
|
|
799,385
|
|
|
2,559,979
|
|
|
1,625,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE OTHER
ITEMS
|
|
(1,644,549
|
)
|
|
(658,435
|
)
|
|
(2,255,252
|
)
|
|
(1,462,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ITEMS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(293,691
|
)
|
|
(106,894
|
)
|
|
(416,147
|
)
|
|
(121,533
|
)
|
Gain (loss) on foreign exchange
|
|
116,256
|
|
|
(252,972
|
)
|
|
159,268
|
|
|
(253,147
|
)
|
Interest
income
|
|
-
|
|
|
511
|
|
|
-
|
|
|
878
|
|
Loss on lease expiration
|
|
(60,323
|
)
|
|
-
|
|
|
(60,323
|
)
|
|
-
|
|
Loss on
debt settlement
|
|
-
|
|
|
(67,234
|
)
|
|
-
|
|
|
(595,408
|
)
|
|
|
(237,758
|
)
|
|
(426,589
|
)
|
|
(317,202
|
)
|
|
(969,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE INCOME
TAXES
|
|
(1,882,307
|
)
|
|
(1,085,024
|
)
|
|
(2,572,454
|
)
|
|
(2,431,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
-
|
|
|
520
|
|
|
-
|
|
|
2,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE NON-
CONTROLLING INTEREST
|
|
(1,882,307
|
)
|
|
(1,085,544
|
)
|
|
(2,572,454
|
)
|
|
(2,434,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING
INTEREST
|
|
(493,516
|
)
|
|
(345,276
|
)
|
|
(679,878
|
)
|
|
(666,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET AND COMPREHENSIVE
LOSS
ATTRIBUTABLE TO ALTERNET
SYSTEMS INC.
|
|
(1,388,791
|
)
|
|
(740,268
|
)
|
|
(1,892,576
|
)
|
|
(1,768,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET
AND
COMPREHENSIVE LOSS PER
COMMON SHARE
|
|
$
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
COMMON
SHARES OUTSTANDING
|
|
90,775,385
|
|
|
81,427,561
|
|
|
90,283,958
|
|
|
79,761,052
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements
Page | 6
ALTERNET SYSTEMS INC.
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income attributable to Alternet Systems Inc.
|
|
(1,892,576
|
)
|
|
(1,768,028
|
)
|
Non-controlling interest
|
|
(679,878
|
)
|
|
(666,327
|
)
|
Add items
not affecting cash
|
|
|
|
|
|
|
Depreciation
|
|
40,532
|
|
|
37,385
|
|
Interest accrued
|
|
98,579
|
|
|
22,798
|
|
Bad debt expense
|
|
686,490
|
|
|
-
|
|
Shares for services
|
|
167,661
|
|
|
66,900
|
|
Accretion of debt discount
|
|
115,530
|
|
|
-
|
|
Unrealized foreign exchange (gain) loss
|
|
(158,854
|
)
|
|
-
|
|
Loss on lease expiration
|
|
60,323
|
|
|
-
|
|
Loss on debt settlement
|
|
-
|
|
|
595,408
|
|
Changes in non-cash
working capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
67,912
|
|
|
297,913
|
|
Prepaid cost of sales
|
|
93,757
|
|
|
(11,161
|
)
|
Deposits and other assets
|
|
(26,957
|
)
|
|
14,305
|
|
Accounts payable and accrued charges
|
|
347,172
|
|
|
(37,493
|
)
|
Wages payable
|
|
708,076
|
|
|
209,358
|
|
Accrued taxes
|
|
244,160
|
|
|
106,393
|
|
Deferred income
|
|
(147,663
|
)
|
|
(30,897
|
)
|
Due to related parties
|
|
(1,385
|
)
|
|
56,698
|
|
Net cash (used in) operating activities
|
|
(277,121
|
)
|
|
(1,106,748
|
)
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from loans
payable
|
|
463,000
|
|
|
300,000
|
|
Payments
for loans payable
|
|
(20,000
|
)
|
|
-
|
|
Payments for capital
leases
|
|
(24,502
|
)
|
|
(24,218
|
)
|
Payments
for long term debt
|
|
(99,582
|
)
|
|
(31,992
|
)
|
Net proceeds on sale of
common stock and subscriptions
|
|
-
|
|
|
750,000
|
|
Share
issue costs
|
|
(21,000
|
)
|
|
(8,996
|
)
|
Warrants issued
|
|
-
|
|
|
85,198
|
|
Net cash provided by financing activities
|
|
297,916
|
|
|
1,069,992
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH
|
|
(33
|
)
|
|
(12
|
)
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
20,762
|
|
|
(36,768
|
)
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
5,751
|
|
|
77,312
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
26,513
|
|
|
40,544
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements
Page | 7
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 1 NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
Alternet Systems Inc., through its subsidiaries (Alternet or
the Company), provides leading edge mobile financial solutions and mobile
security and related solutions. The former are offered throughout the Western
Hemisphere, but most actively in Central and South America and the Caribbean,
and the latter are offered globally.
These condensed consolidated financial statements have been
prepared on the basis of a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. At June
30, 2013, the Company had a working capital deficiency of $5,287,539. The
Companys continued operations are dependent on the successful implementation of
its business plan, its ability to obtain additional financing as needed,
continued support from creditors, settling its outstanding debts, and ultimately
attaining profitable operations. The accompanying condensed consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Interim Financial Statements
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (GAAP) for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of the results for
interim periods have been included. Results for interim periods should not be
considered indicative of results for a full year. These interim condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in the companys
Annual Report on Form 10-K for the year ended December 31, 2012, collectively
referred to as the 2012 Annual Report. The consolidated financial statements
include the accounts of the company and all of its subsidiaries in which a
controlling interest is maintained.
Page | 8
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Principles of Consolidation
These condensed consolidated financial statements include the
accounts of the following companies:
-
Alternet Systems Inc.
-
AI Systems Group, Inc., a wholly owned subsidiary of Alternet
-
Tekvoice Communications, Inc., a wholly owned subsidiary of Alternet
-
Alternet Transaction Systems, Inc. (ATS), a 51% owned subsidiary of
Alternet
-
Utiba Guatemala, S.A., a wholly-owned subsidiary of Alternet Transaction
Systems Inc.
-
International Mobile Security, Inc. (IMS), a 60% owned subsidiary of
Alternet
-
Megatecnica, S.A., a wholly owned subsidiary of International Mobile
Security, Inc.
-
Alternet Financial Solutions, L.L.C., wholly-owned subsidiary of Alternet
-
Alternet Payment Solutions, L.L.C., wholly-owned subsidiary of Alternet
The minority interests of ATS, IMS, and ATSs and IMSs wholly
owned subsidiaries have been deducted from earnings and equity. All significant
intercompany transactions and account balances have been eliminated.
Long-Lived Assets Including Other Acquired Intellectual
Property
Management monitors the recoverability of long-lived assets and
intangibles based on estimates using factors such as current market value,
future asset utilization, and future undiscounted cash flows expected to result
from its investment or use of the related assets. The Companys policy is to
record any impairment loss in the period when it is determined that the carrying
amount of the asset may not be recoverable. Any impairment loss is calculated as
the excess of the carrying value over estimated realizable value. The Company
did not recognize any impairment charges related to long-lived assets during the
six months ended June 30, 2013 and 2012.
Intangible assets deemed to have an indefinite life are not
amortized but are subject to impairment tests at each reporting date. The
Company assesses the impairment of intangible assets on a quarterly basis or
whenever events or changes in circumstances indicate that the fair value is less
than its carrying value. If the carrying amount of the intangible asset exceeds
its fair value, the intangible asset is considered impaired and the second step
of the test is performed to determine the amount of impairment loss, if any. The
Company did not recognize any impairment charges related to indefinite lived
intangible assets during the six months ended June 30, 2013 and 2012.
Page | 9
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Loss per Share
The Company computes net earnings (loss) per share in
accordance with ASC Topic 260,
Earnings Per Share
. Topic 260 requires
presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss
available to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period
including warrants using the treasury stock method. Diluted EPS excludes all
dilutive potential common shares if their effect is anti-dilutive. As the
Company has net losses, no common equivalent shares have been included in the
computation of diluted net loss per share as the effect would be
anti-dilutive.
At June 30, 2013, 2,009,863 (December 31, 2012 6,009,863)
warrants were excluded from the loss per share calculation as their effect would
be anti-dilutive.
Reclassification
Certain comparative figures have been reclassified in order to
conform to the current years presentation.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, Reporting of
Amounts Reclassified out of Accumulated Other Comprehensive Income, which is
included in ASC 220, Comprehensive Income. This update improves the reporting of
reclassification out of accumulated other comprehensive income. The guidance is
effective for the Companys interim and annual reporting periods beginning
January 1, 2013, and applied prospectively. Management does not anticipate that
the accounting pronouncement will have any material future effect on our
consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05,
Liabilities
(Topic 830): Parents Accounting for Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign
Entity or of an Investment in a Foreign Entity.
This ASU is effective for
interim and annual periods beginning after December 15, 2013 and requires the
release of any cumulative translation adjustment into net income upon
derecognition of certain subsidiaries or groups of assets within a foreign
entity or of an investment in foreign entity. Management does not anticipate
that the accounting pronouncement will have any material future effect on our
consolidated financial statements.
In July 2013, FASB issued ASU No. 2013-11,
Income Taxes
(Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
This ASU is effective for interim and annual periods beginning after
December 15, 2013. This update standardizes the presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax
credit carryforward exists. Management does not anticipate that the accounting
pronouncement will have any material future effect on our consolidated financial
statements.
Page | 10
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Accounting Pronouncements (continued)
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants, and the SEC did not, or are not believed by management to,
have a material impact on the Company's present or future financial position,
results of operations or cash flows.
NOTE 3 FIXED ASSETS
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Computer equipment
|
|
344,252
|
|
|
330,959
|
|
|
13,293
|
|
Computer equipment capital leases
|
|
40,880
|
|
|
15,931
|
|
|
24,949
|
|
Computer software
|
|
289,028
|
|
|
146,588
|
|
|
142,440
|
|
Equipment
|
|
10,576
|
|
|
10,309
|
|
|
267
|
|
|
|
684,736
|
|
|
503,787
|
|
|
180,949
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
NetBook
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Computer equipment
|
|
344,252
|
|
|
328,614
|
|
|
15,638
|
|
Computer equipment capital leases
|
|
156,746
|
|
|
58,452
|
|
|
98,294
|
|
Computer software
|
|
289,028
|
|
|
121,453
|
|
|
167,575
|
|
Equipment
|
|
10,576
|
|
|
10,279
|
|
|
297
|
|
|
|
800,602
|
|
|
518,798
|
|
|
281,804
|
|
Depreciation expense for the six months ended June 30, 2013 and
2012 was $40,532 and $37,385, respectively.
During the six months ended June 30, 2013, the Company recorded
a loss on its computer equipment capital lease for a previously capitalized
leased that matured during the period. The Company did not buyout the lease and
as result, the equipment converted to a month to month rental.
Page | 11
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 4 INTELLECTUAL PROPERTY
On January 25, 2011, the Company signed a Copyright Agreement
with a supplier for various intellectual properties of which $100,000 was due
upon signing of the agreement. As of June 30, 2013 and December 31, 2012, the
Company had $68,900 included in accounts payable and accrued charges relating to
this agreement.
In December 2011, the Company purchased four software licenses
from Utiba Pte. Ltd. (Utiba), a non-controlling interest investor in ATS,
valued at $1,500,000. Each license provides the Company the ability to offer
mobile financial services under a Software as a Services (SaaS) arrangement to
its customers by providing unlimited access to Utibas underlying platform.
Utiba is required to maintain the systems in working order and provide all
necessary services to the Company. As the licenses are for a service that is
emerging on a global scale and there is no set term for the service, the
licenses have been determined to have an indefinite life.
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
Convertible Debentures
On August 29, 2012, the Company issued a note payable in the
amount of $44,438. The note carries interest at the rate of 10% per annum and
was due on February 28, 2013. Since the note was not repaid on maturity, the
holder is entitled to convert all or any portion of the original principal face
value of the note into shares of common stock of the Company at a conversion
value of $0.075. The beneficial conversion feature discount resulting from the
conversion price being $0.045 below the market price on August 29, 2012 of $0.12
provided a value of $26,663. During the six months ended June 30, 2013, $8,596
of the debt discount was amortized. As of June 30, 2013, $47,810 (December 31,
2012 - $37,364) of principal, accrued interest, and unamortized debt discount on
this note was included in other loans payable. The note was not repaid by
February 28, 2013 and continues to accrue interest at the rate of 10% per
annum.
On September 26, 2012, the Company issued a note payable in the
amount of $60,000. The note carries interest at the rate of 10% per annum and
was due on March 31, 2013. Since the note was not repaid on maturity, the holder
is entitled to convert all or any portion of the original principal face value
of the note into shares of common stock of the Company at a conversion value of
$0.075. The beneficial conversion feature discount resulting from the conversion
price being $0.045 below the market price on September 26, 2012 of $0.12
provided a value of $36,000. During the six months ended June 30, 2013, $17,419
of the debt discount was amortized. As of June 30, 2013, $64,093 (December 31,
2012 - $44,175) of principal and accrued interest, and unamortized debt discount
on this note was included in other loans payable. The note was not repaid by
March 31, 2013 and continues to accrue interest at the rate of 10% per
annum.
Page | 12
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE (continued)
Convertible Debentures (continued)
On October 19, 2012, the Company issued a note payable in the
amount of $80,000. The note carries interest at the rate of 10% per annum and
was due on April 30, 2013. Since the note was not repaid on maturity, the holder
is entitled to convert all or any portion of the original principal face value
of the note into shares of common stock of the Company at a conversion value of
$0.075. The beneficial conversion feature discount resulting from the conversion
price being $0.085 below the market price on October 19, 2012 of $0.16 provided
a value of $80,000. During the six months ended June 30, 2013, $49,741 of the
debt discount was amortized. As of June 30, 2013, $84,953 (December 31, 2012 -
$31,881) of principal, accrued interest, and unamortized debt discount on this
note was included in other loans payable. The note was not repaid by April 30,
2013 and continues to accrue interest at the rate of 10% per annum.
On January 25, 2013, the Company issued a note payable in the
amount of $80,000. The note carries interest at the rate of 10% per annum and is
due on October 22, 2013. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value of $0.075. The beneficial conversion feature
discount resulting from the conversion price being $0.055 below the market price
on January 25, 2013 of $0.13 provided a value of $58,667. During the six months
ended June 30, 2013, $33,896 of the debt discount was amortized. As of June 30,
2013, $83,441 of principal, accrued interest, and unamortized debt discount on
this note was included in other loans payable.
On April 24, 2013, the Company issued a note payable in the
amount of $50,000. The note carries interest at the rate of 10% per annum and is
due on October 31, 2013. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value of $0.075. The beneficial conversion feature
discount resulting from the conversion price being $0.025 below the market price
on April 24, 2013 of $0.10 provided a value of $16,667. During the six months
ended June 30, 2013, $5,877 of the debt discount was amortized. As of June 30,
2013, $51,490 of principal, accrued interest, and unamortized debt discount on
this note was included in other loans payable.
Page | 13
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE (continued)
Other Loans Payable
On January 25, 2011, the Company signed a promissory note
whereby the Company agreed to repay a director $20,000 plus interest at 10% per
annum on April 25, 2011. This loan was not repaid on its maturity and has since
been renewed several times with the unpaid principal and interest being
capitalized to the loan balance on each renewal. As of June 30, 2013, the
Company owes this director $2,729 (December 31, 2012 - $2,598) of unpaid
principal and $135 (December 31, 2012 - $65) of accrued interest on a promissory
note which matured on June 30, 2013.
On February 9, 2011, the Company signed a promissory note
whereby the Company agreed to repay a director $5,000 plus interest at 10% per
annum on May 9, 2011. This loan was not repaid on its maturity and has since
been renewed several times with the unpaid principal and interest being
capitalized to the loan balance on each renewal. As of June 30, 2013, the
Company owes this director $6,025 (December 31, 2012 - $5,736) of unpaid
principal and $299 (December 31, 2012 - $289) of accrued interest on a
promissory note which matured on June 30, 2013. The balance owing is included in
due to related parties.
On February 11, 2011, the Company signed a promissory note
whereby the Company agreed to repay a director $8,988 plus interest at 10% per
annum on May 11, 2011. This loan was not repaid on its maturity and has since
been renewed several times with the unpaid principal and interest being
capitalized to the loan balance on each renewal. As of June 30, 2013, the
Company owes this director $10,828 (December 31, 2012 - $10,308) of unpaid
principal and $537 (December 31, 2012 - $520) of accrued interest on a
promissory note which matured on June 30, 2013. The balance owing is included in
due to related parties.
On July 1, 2013, the above three promissory notes were combined
into one note with all accrued interest being capitalized and the maturity date
being extended to December 29, 2013. All other terms remained the same.
Page | 14
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE (continued)
Other Loans Payable (continued)
On January 25, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $100,000 plus interest at 12% per
annum on April 24, 2012. On April 8, 2012, the Company signed a debt settlement
agreement with the creditor whereby the creditor converted the outstanding
principal and interest of $102,466 into 683,105 common shares of the Company and
409,863 warrants. Each warrant entitles the holder to purchase one common share
of the Company at an exercise price of $0.25 per share until October 8, 2013.
The Company issued 409,863 warrants on April 9, 2012, 113,889 common shares on
April 11, 2012, 400,000 common shares on April 19, 2012, 152,778 common shares
on April 26, 2012, and 16,438 common shares on May 7, 2012 resulting in a full
repayment of the loan. Using the Black-Scholes option pricing model, the fair
market value of the warrants at the time of issuance was determined to be
$85,198 with the following assumptions: (1) risk-free rate of interest of 0.07%,
(2) an expected life of 1.5 years, (3) expected stock price volatility of
178.93%, and (4) expected dividend yield of zero.
On February 1, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $200,000 plus interest at 24% per
annum on May 1, 2012. On May 1, 2012, the Company signed a new promissory note
with the creditor which capitalized the unpaid principal and interest of
$211,836 under the previous promissory note and extended the maturity date to
September 30, 2012. On October 1, 2012, the Company signed a new promissory note
with the creditor which capitalized the unpaid principal and interest of
$233,147 under the previous promissory note and extended the maturity date to
January 31, 2013. The note was not repaid by January 31, 2013; as a result,
$18,856 of unpaid interest was capitalized to the principal resulting in a total
principal balance outstanding of $252,003 which is incurring a late payment
charge of 0.10% per day on any unpaid balances. As of June 30, 2013, the Company
has accrued $32,494 of late payment charges which is included in the outstanding
principal and interest balance of $266,261 (December 31, 2012 - $14,104 of
interest in a principal and interest balance of $247,251).
On October 10, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $50,000 plus interest at 10% per
annum on April 8, 2013. On April 9, 2013, the Company signed a new promissory
note with the creditor which capitalized the unpaid principal and interest of
$52,479 under the previous promissory note and extended the maturity date to
October 6, 2013. As of June 30, 2013, the Company has accrued $1,194 (December
31, 2012 -$1,137) of interest relating to this loan.
On November 19, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $100,000 plus interest at 10% per
annum on May 18, 2013. The loan was not repaid by its maturity date; as such, a
late payment charge is being accrued on the unpaid principal and interest of
$104,959. As of June 30, 2013, the Company has accrued $9,052 (December 31, 2012
- $1,178) of interest relating to this loan.
Page | 15
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE (continued)
Other Loans Payable (continued)
On November 19, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $100,000 plus interest at 10% per
annum on May 18, 2013. The loan was not repaid by May 18, 2013 and continues to
accrue interest at the rate of 10% per annum. As of June 30, 2013, the Company
has accrued $6,137 (December 31, 2012 - $1,178) of interest relating to this
loan. On July 24, 2013, the creditor combined this loan with another matured
loan and extended the maturity date to January 20, 2014. All other terms
remained the same.
On December 5, 2012, the Company signed a promissory note
whereby the Company agreed to repay a creditor $25,000 plus interest at 10% per
annum on June 3, 2013. On June 3, 2013, the Company signed a new promissory note
with the creditor which capitalized the unpaid principal and interest of $26,240
under the previous promissory note and extended the maturity date to December 1,
2013. As of June 30, 2013, the Company has accrued $194 (December 31, 2012
-$185) of interest relating to this loan.
On January 24, 2013, the Company signed a promissory note
whereby the Company agreed to repay a creditor $50,000 plus interest at 10% per
annum on July 23, 2013. As of June 30, 2013, the Company has accrued $2,164 of
interest relating to this loan. On July 24, 2013, the creditor combined this
loan with another matured loan and extended the maturity date to January 20,
2014. All other terms remained the same.
On February 8, 2013, the Company signed a promissory note
whereby the Company agreed to repay a creditor $100,000 plus interest at 10% per
annum on August 7, 2013. As of June 30, 2013, the Company has accrued $3,918 of
interest relating to this loan. On July 24, 2013, the Company signed a new
promissory note with the creditor which capitalized the unpaid principal and
interest on this loan and the February 28, 2013 loan described below totaling
$164,295 under the notes and extended the maturity date to January 20, 2014.
On February 19, 2013, the Company signed a promissory note
whereby the Company agreed to repay a creditor $33,000 plus interest at 10% per
annum on May 20, 2013. The loan was not repaid by May 18, 2013 and continues to
accrue interest at the rate of 10% per annum. As of June 30, 2013, the Company
has accrued $1,193 of interest relating to this loan. The loan was paid in full
in July 2013.
On February 28, 2013, the Company signed a promissory note
whereby the Company agreed to repay a creditor $50,000 plus interest at 10% per
annum on August 27, 2013. As of June 30, 2013, the Company has accrued $1,685 of
interest relating to this loan. On July 24, 2013, the Company signed a new
promissory note with the creditor which capitalized the unpaid principal and
interest on this loan and the February 8, 2013 loan described above totaling
$164,295 under the notes and extended the maturity date to January 20, 2014.
Page | 16
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE (continued)
Advances on a Loan Payable
In June 2013, the Company received $100,000 from a creditor
relating to a promissory note dated August 5, 2013, which bears interest at 10%
per annum and matures on December 31, 2015. See Note 16.
NOTE 6 LONG-TERM DEBT
On April 1, 2012, the Company signed an Agreement with a
creditor to purchase various computer software valued at $213,900 and one year
technical support valued at $47,058. The loan requires one payment of $35,000 on
May 23, 2012 and seven quarterly payments of $35,495 starting October 1, 2012.
The loan includes an implicit interest rate of $7.51% and matures on April 1,
2014. As of June 30, 2013, the balance on the loan was $135,556 (December 31,
2012 -$235,138).
The remaining required principal payments over the next two
fiscal years are as follows:
2013
|
$
|
66,517
|
|
2014
|
|
69,039
|
|
|
$
|
135,556
|
|
NOTE 7 CAPITAL LEASES
On April 27, 2011, the Company signed a lease agreement with a
creditor to lease various computer equipment. The lease requires 24 monthly
payments of $3,620 including implicit interest of 14.99% and expires on May 1,
2013. As of June 30, 2013, the balance on the lease was $Nil (December 31, 2012
- $17,439).
On September 26, 2011, the Company signed a lease agreement
with a creditor to lease additional computer equipment. The lease requires 24
monthly payments of $668 including implicit interest of 12.75% and expires on
September 1, 2013. As of June 30, 2013, the balance on the lease was $1,961
(December 31, 2012 - $5,702).
On June 13, 2012, the Company signed a lease agreement with a
creditor to lease additional computer equipment. The lease requires a down
payment of $2,777 to be paid upon signing and 24 monthly payments of $396. The
lease includes implicit interest of 13.21% and expires on June 1, 2014. As of
June 30, 2013, the balance on this lease was $4,783 (December 31, 2012
-$6,772).
Page | 17
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 7 CAPITAL LEASES (continued)
On August 1, 2012, the Company signed a lease agreement with a
creditor to lease additional computer equipment. The lease requires a down
payment of $1,956 to be paid upon signing and 24 monthly payments of $282. The
lease includes implicit interest of 15.60% and expires on September 1, 2014. As
of June 30, 2013, the balance on this lease was $3,824 (December 31, 2012 -
$5,158).
The future minimum lease payments required under the capital
leases and the present value of the net minimum lease payments as of June 30,
2013, are as follows:
2013
|
$
|
6,078
|
|
2014
|
|
5,319
|
|
Net minimum lease payments
|
|
11,397
|
|
Less: Amount representing interest
|
|
(828
|
)
|
Present value of net minimum lease payments
|
|
10,569
|
|
Less: Current maturities of capital lease obligations
|
|
(9,351
|
)
|
Long-term capital lease obligations
|
$
|
1,218
|
|
NOTE 8 CAPITAL STOCK
Common Shares
The Company is authorized to issue up to 100,000,000 shares of
the Companys common stock with a par value of $0.00001.
On September 21, 2012, the Companys shareholders approved
through a majority vote to amend the Companys Articles of Incorporation by
increasing the authorized stock of the Company to 510,000,000 consisting of
500,000,000 common shares with a par value of $0.00001 per share and 10,000,000
preferred shares with a par value of $0.00001 per share. In addition, the
shareholders approved the 2012 Incentive Stock Option Plan whereby the Company
can grant stock options to employees of the Company to acquire up to a maximum
of 5% of the Companys authorized stock. Options granted under the plan are non
transferable, will vest over a period of three years, can have a maximum term of
five years from each vesting date, and are subject to the employee being
employed by the Company on the grant and exercise dates. The increase in the
authorized share capital and the acceptance of the 2012 Incentive Stock Option
Plan has been approved by the Securities Exchange Commission and the Company may
now seek formal shareholders approval.
Page | 18
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 8 CAPITAL STOCK (continued)
Effective January 29, 2008, the Company adopted a Retainer
Stock Plan for Professionals and Consultants (the 2008 Professional/Consultant
Stock Compensation Plan) for the purpose of providing the Company with the
means to compensate, in the form of common stock of the Company, eligible
consultants that have previously rendered services or that will render services
during the term of this 2008 Professional/Consultant Stock Compensation Plan. A
total of 6,000,000 common shares may be awarded under this plan. The Company
filed a Registration Statement on Form S-8 to register the underlying shares
included in the 2008 Plan. To date, 5,998,542 common shares valued at $431,631
relating to services provided have been awarded, leaving a balance of 1,458
shares which may be awarded under this plan.
During the six months ended June 30, 2013, the Company:
-
issued 704,876 common shares valued at $116,245 for employment incentives
in accordance with employment agreements;
-
issued 494,889 common shares valued at $62,861 for legal, consulting, and
investor relations services rendered; and
-
issued 700,000 common shares valued at $105,000 for investor relations to
be rendered over a twelve month period which were included in deferred
compensation.
As of June 30, 2013, the Company had $130,362 (December 31,
2012 - $130,362) in private placement subscriptions which are reported as
private placement subscriptions within stockholders deficit.
As of June 30, 2013, the Company is obligated to issue 385,498
common shares valued at $34,975 for services rendered by consultants during the
six months then ended.
Warrants
The Companys warrant transactions are summarized as
follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
$
|
|
Balance, December 31, 2012
|
|
6,009,863
|
|
|
0.25
|
|
Issued
|
|
-
|
|
|
-
|
|
Expired
|
|
4,000,000
|
|
|
0.25
|
|
|
|
|
|
|
|
|
Balance, June 30, 2013
|
|
2,009,863
|
|
|
0.25
|
|
All warrants issued can be called by the Company in the event
the average closing price of the common stock of the Company for any 60 day
period is $0.40 or greater.
Page | 19
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 8 CAPITAL STOCK (continued)
Warrants (continued)
The following table summarizes the warrants outstanding at June
30, 2013:
Warrants
|
|
Exercise
|
|
|
outstanding
|
|
price
|
|
Expiration date
|
|
|
$
|
|
|
|
|
|
|
|
409,863
|
|
0.25
|
|
October 8, 2013
|
841,270
|
|
0.25
|
|
October 11, 2013
|
758,730
|
|
0.25
|
|
November 30, 2013
|
|
|
|
|
|
2,009,863
|
|
|
|
|
The weighted average life of warrants outstanding at June 30,
2013 and December 31, 2012 was 0.33 years and 0.61 years, respectively. All
warrants outstanding had an intrinsic value of $Nil.
NOTE 9 - RELATED PARTY TRANSACTIONS
As of June 30, 2013, a total of $1,306,073 (December 31, 2012 -
$664,113) was payable to directors and officers of the Company of which
$1,285,520 (December 31, 2012 $644,531) was non-interest bearing and had no
specific terms of repayment and $20,553 (December 31, 2012 - $19,582) related to
loans detailed in Note 5. Of the amount payable, $116,628 (December 31, 2012 -
$58,401) was included in accounts payable for expense reimbursements, $1,169,792
(December 31, 2012 - $573,310) was included in wages payable for accrued fees,
and $19,653 (December 31, 2012 - $32,402) was included in due to related
parties.
During the six months ended June 30, 2013, the Company expensed
a total of $682,500 (June 30, 2012 - $290,000) in consulting fees, investor
relations and salaries paid to directors and officers of the Company. Of the
amounts incurred, $682,500 (June 30, 2012 - $176,042) has been accrued, and $Nil
(June 30, 2012 - $113,958) has been paid in cash.
As of June 30, 2013, the Company held an accounts receivable
from a company with a director in common with the Company for $789,565;
6,674,709 Venezuelan bolivar fuerte (VEF) (December 31, 2012 - $789,565; VEF
6,674,709) which the Company fully allowed for during the period due to
collectability uncertainty caused by the uncertainty of obtaining foreign
currency in Venezuela. In addition, the Company owes this company $118,348 (VEF
3,329,532) (December 31, 2012 - $221,969; VEF 3,329,532) which is non-interest
bearing, has no specific terms of repayment, and is included in due to related
parties.
Page | 20
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 10 DEFERRED COMPENSATION
On February 15, 2013, the Company signed an investor relations
agreement with a consultant to provide investor relations services for a term of
one year. The consultant will be compensated with monthly payments of $5,000 if
the Company is able to raise $1,000,000 by May 16, 2013. As the Company did not
raise the $1,000,000 by May 16, 2013, the monthly payments of $5,000 did not
commence. The consultant will also receive 700,000 shares, which are deliverable
in four equal tranches of 175,000 each on or before February 20, 2013, May 16,
2013, August 14, 2013, and November 12, 2013. On February 19, 2013, the Company
issued 700,000 shares in the name of the consultant valued at $105,000 of which
350,000 valued at $52,500 have been delivered to the consultant. The remaining
350,000 shares will be delivered to the consultant over the term of the contract
as described above. The value of the services is being expensed over the life of
the contract.
The Company recorded the aggregate fair value of the shares
issued pursuant to the above agreement as deferred compensation and amortizes
the costs of these services on a straight-line basis over the respective term of
the contract. During the six months ended June 30, 2013, the Company expensed
$39,375 relating to the above contract. The shares issued were all valued at
their market price on the date of issuance.
NOTE 11 OPERATING LEASES
The Company leases its operating and office facilities for
various terms under long-term operating lease agreements. The leases expire at
various dates through 2016 with one lease providing a renewal option of one year
and another providing a renewal option for three years. In the normal course of
business, it is expected that these leases will be renewed or replaced by leases
on other properties. One lease provides for increases in future minimum annual
rental payments and requires the Company to pay executory costs (real estate
taxes, insurance, and repairs).
Lease expense totaled $73,159 and $71,558 during the six months
ended June 30, 2013 and 2012, respectively.
The following is a schedule by year of future minimum rental
payments required under the operating lease agreements:
2013
|
$
|
280,311
|
|
2014
|
|
431,400
|
|
2015
|
|
425,702
|
|
2016
|
|
238,762
|
|
|
$
|
1,376,175
|
|
Total minimum lease payments do not include contingent rentals
that may be paid under certain leases because of use in excess of specified
amounts. Contingent rental payments were not significant for the six months
ended June 30, 2013 or 2012.
Page | 21
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 12 SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH
FLOWS
|
|
Six months ended
|
|
|
|
June 30, 2013,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
Interest paid
during the period in cash
|
|
11,868
|
|
|
8,664
|
|
Cash paid for income taxes
|
|
-
|
|
|
2,399
|
|
|
|
|
|
|
|
|
Supplemental non-cash financing and
investing activities
|
|
|
|
|
|
|
disclosures:
|
|
|
|
|
|
|
Shares
issued for debt repayment
|
|
-
|
|
|
641,507
|
|
Shares
issued for previously received share
subscriptions
|
|
-
|
|
|
500,000
|
|
Shares
obligated to be issued
|
|
34,975
|
|
|
(113,333
|
)
|
Equipment purchased through capital lease
|
|
-
|
|
|
11,134
|
|
Software
purchased through long-term debt
|
|
-
|
|
|
213,900
|
|
Value of beneficial conversion features
|
|
75,333
|
|
|
-
|
|
Shares
issued for share issue costs
|
|
21,000
|
|
|
-
|
|
Shares issued for deferred compensation
|
|
105,000
|
|
|
-
|
|
Shares
issued for wages and related benefits payable
|
|
85,795
|
|
|
-
|
|
NOTE 13 FAIR VALUE
Fair value accounting establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described below:
|
Level 1 Unadjusted quoted prices in active
markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
|
|
Level 2 Quoted prices in markets that are not
active, or inputs that are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
|
|
Level 3 Prices or valuation techniques that
require inputs that are both significant to the fair value measurement and
unobservable (supported by little or no market activity).
|
Page | 22
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 13 FAIR VALUE (continued)
The fair value of the Companys accounts receivable, accounts
payable and accrued liabilities, wages payable, accrued taxes, deferred income,
other loans payable, and due to related parties approximate their carrying
values. The Companys other financial instruments, being cash, are measured at
fair value using Level 1 inputs.
NOTE 14 CONCENTRATIONS
Concentrations in Sales to Few Customers:
During the six months ended June 30, 2013, the largest two
customers accounted for 39% and 26% of sales. Two other customers accounted for
58% and 29% of accounts receivable. During the six months ended June 30, 2012,
the two largest customers accounted for 65% and 21% of sales and 59% and 4% of
accounts receivable, respectively.
Concentrations in Sales to Foreign Customers
During the six months ended June 30, 2013 and 2012, 100% of the
Companys net sales were made to foreign customers. An adverse change in either
economic conditions abroad or the Companys relationship with significant
foreign distributors could negatively affect the volume of the Companys
international sales and the Companys results of operations.
Company is Dependent on Few Major Suppliers
The Company is dependent on Utiba Pte. Ltd. (Utiba), a
non-controlling interest investor in ATS, for all of its hosting services needs.
During the six months ended June 30, 2013 and 2012, products purchased from this
company were approximately 84% and 60% of cost of sales, respectively. The
Company is dependent on the ability of Utiba to provide uninterrupted services.
The loss of this supplier or a significant reduction in product availability
from this supplier could have a material adverse effect on the Company. The
Company believes that its relationship with this supplier are in good
standing.
NOTE 15 LAWSUIT
On September 20, 2012, the Company received a Demand for
Arbitration notice that it had been named as party in a claim whereby the
Claimant is seeking a judgment for damages that may exceed $1,000,000,
subsequently increased to $5,000,000 resulting from failure to perform its
obligations under an Agreement signed between the Claimant and the Companys
joint-venture partner. The Company was not party to the Agreement but was named
in the notice. The Company has engaged legal representatives which have
requested a motion for the lawsuit to be dismissed against the Company as it was
not party to the agreement in dispute. As of June 30, 2013 and December 31,
2012, no amounts have been accrued as management believes the claim is without
basis.
Page | 23
ALTERNET SYSTEMS INC.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
June 30, 2013
|
(Unaudited)
|
NOTE 16 SUBSEQUENT EVENTS
-
On July 1, 2013, the Company signed a new promissory note with a director
of the Company which capitalized the unpaid principal and interest on three
separate loans totaling $20,553 under previous promissory notes and extended
the maturity date to December 29, 2013.
-
On July 9, 2013, the Company issued 28,000 common shares valued at $2,520
to an investor relations consultant for a previously recorded obligation to
issue shares valued at $2,800.
-
On July 24, 2013, the Company signed a new promissory note with a creditor
which capitalized the unpaid principal and interest on two separate loans
totaling $164,295 under previous promissory notes and extended the maturity
date to January 20, 2014.
-
On August 5, 2013, the Company signed a new promissory note with a creditor
for a total of $550,000 which will be disbursed to the Company in three
tranches: Tranche A - $100,000 (received in June 2013); Tranche B - $200,000
by August 31, 2013; and Tranche C - $250,000 by September 30, 2013. The note
matures on December 31, 2015 and bears interest at 10% per annum with 5% per
annum being capitalized to the loan and 5% per annum being payable in cash at
each disbursements anniversary date. In the event of default, the creditor is
able to convert the unpaid principal and interest into common shares of ATS at
two times the principal amount outstanding with an exercise price being equal
to ATSs capital stock and paid in capital for the month immediately prior to
the Event of Default divided by the total outstanding shares of ATS of the
same month.
-
On August 7, 2013, the Company issued 31,111 common shares valued at $2,178
to an investor relations consultant.
Events occurring after June 30, 2013 were evaluated through the
date this Interim Report was issued, in compliance FASB ASC Topic 855
Subsequent Events, to ensure that any subsequent events that met the criteria
for recognition and/or disclosure in this report have been included.
Page | 24