Item 5. Market for Common
Equity and Related Stockholder Matters
Market for Common Stock
The Companys securities trade on the NASDs OTCQB under the
symbol ALYI.
The following table summarizes the high and low bid prices for
our common stock for the periods indicated as reported by the OTC Bulletin
Board:
|
2013
|
|
HIGH
|
|
|
LOW
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
$
|
0.18
|
|
$
|
0.09
|
|
|
Second Quarter
|
$
|
0.13
|
|
$
|
0.09
|
|
|
Third Quarter
|
$
|
0.09
|
|
$
|
0.04
|
|
|
Fourth Quarter
|
$
|
0.06
|
|
$
|
0.03
|
|
|
2012
|
|
HIGH
|
|
|
LOW
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
$
|
0.38
|
|
$
|
0.14
|
|
|
Second Quarter
|
$
|
0.30
|
|
$
|
0.13
|
|
|
Third Quarter
|
$
|
0.19
|
|
$
|
0.11
|
|
|
Fourth Quarter
|
$
|
0.17
|
|
$
|
0.12
|
|
Holders of Common Stock
On December 31, 2013, there were 95,737,389 shares outstanding.
There are 122 security holders, both held directly and through institutions or
stock brokerage firms.
8
Dividend Policy
We have not paid any cash dividends on our common stock and
have no present intention of paying any dividends on the shares of our common
stock. Our current policy is to retain earnings, if any, for use in our
operations and in the development of our business. Our future dividend policy
will be determined from time to time by our board of directors.
Recent Sales of Unregistered Securities
During the year ended December 31, 2013, the Company:
-
issued 1,140,590 common shares valued at $145,388 for employment
incentives in accordance with employment agreements;
-
issued 2,840,596 common shares valued at $199,048 for legal, consulting,
and investor relations services rendered;
-
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; and
-
issued 2,000,000 common shares valued at $100,000 for investor relations
to be released upon achieving certain benchmarks which were included in
deferred compensation.
During the year ended December 31, 2012, the Company:
-
issued 3,333,333 common shares valued at $500,000 for share subscriptions
received in the prior year;
-
issued 5,978,317 common shares valued at $1,210,344 for debt settlements
and convertible debenture agreements of which 2,138,358 shares valued at
$113,333 were obligated to be issued at December 31, 2011;
-
issued 372,703 common shares valued at $56,873 for employment incentives
in accordance with employment agreements;
-
issued 1,200,025 common shares valued at $204,803 for legal, accounting,
and consulting services rendered; and
-
cancelled 1,000,000 common shares valued at $140,000 previously issued for
employment incentives during the year ended December 31, 2011.
In addition, during the year ended December 31, 2012, the
Company issued common shares for the following subscriptions received during the
year:
-
on May 17, 2012, the Company issued 1,402,116 common shares at $0.10 per
share for total cash proceeds of $143,528;
-
on June 4, 2012, the Company issued 1,264,550 common shares at $0.10 per
share for total cash proceeds of $134,171; and
-
on December 26, 2012, the Company issued 2,333,333 common shares at $0.15
per share for total cash proceeds of $350,000.
9
Convertible Debenture Notes
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 year ended December 31, 2013, $8,596
(2012 $18,067) of the debt discount was amortized. As of December 31, 2013,
$50,051 (2012 - $37,364) of principal, accrued interest, and unamortized debt
discount on this note was included in other loans payable. The note is past due
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 year ended December 31, 2013, $17,419
(2012 - $18,581) of the debt discount was amortized. As of December 31, 2013,
$67,118 (2012 - $44,175) of principal and accrued interest, and unamortized debt
discount on this note was included in other loans payable. The note is past due
and continues to accrue interest at the rate of 10% per annum.
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 year ended December 31, 2013, $49,741 (2012 -
$30,259) of the debt discount was amortized. As of December 31, 2013, $88,986
(2012 - $31,881) of principal, accrued interest, and unamortized debt discount
on this note was included in other loans payable. The note is past due 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
was due on October 22, 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 $0.055 below the market price on January 25, 2013 of
$0.13 provided a value of $58,667. During the year ended December 31, 2013,
$58,667 of the debt discount was amortized. As of December 31, 2013, $87,474 of
principal, accrued interest, and unamortized debt discount on this note was
included in other loans payable. The note is past due and continues to accrue
interest at the rate of 10% per annum.
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
was due on October 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 $0.025 below the market price on April 24, 2013 of $0.10
provided a value of $16,667. During the year ended December 31, 2013, $16,667 of
the debt discount was amortized. As of December 31, 2013, $53,452 of principal,
accrued interest, and unamortized debt discount on this note was included in
other loans payable. The note is past due and continues to accrue interest at
the rate of 10% per annum.
10
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $2,864
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $6,324
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $11,365
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
On July 1, 2013, the above three promissory notes to one
director of the Company were combined which capitalized the unpaid principal and
interest on the three separate promissory notes totaling $20,553 into one
promissory note and extended the maturity date to December 29, 2013. All other
terms remained the same. The note is past due and continues to accrue interest
at the rate of 10% per annum. As of December 31, 2013, the Company has accrued
$1,036 (2012 - $874 for all three previous promissory notes) of interest
relating to this loan. The balance owed is included in due to related
parties.
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.
11
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 December 31, 2013, the
Company has accrued $75,507 of late payment charges which is included in the
outstanding principal and interest balance of $309,274 (2012 - $14,104 of
interest in a principal and interest balance of $247,251). The loan was repaid
in full subsequent to the year end.
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. The note was not repaid by October 6, 2013 and continues to
accrue interest at the rate of 10% per annum. As of December 31, 2013, the
Company has accrued $3,839 (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. On December 9, 2013, the Company paid the creditor $15,000 towards the
late payment charges. As of December 31, 2013, the Company has accrued $13,260
(2012- $1,178) of interest relating to this loan. The loan was repaid in full
subsequent to the year end.
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. 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. The loan was repaid in full
subsequent to the year end.
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. The note was not repaid by December 1, 2013 and continues to accrue
interest at the rate of 10% per annum. As of December 31, 2013, the Company has
accrued $1,517 (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. 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. The loan was repaid in full subsequent to the
year end.
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. On August 8, 2013, the Company signed a new promissory
note with the creditor which capitalized the unpaid principal and interest of
$104,959 under the previous promissory note and extended the maturity date to
February 4, 2014. The note was not repaid by February 4, 2014 and continues to
accrue interest at the rate of 10% per annum. As of December 31, 2013, the
Company has accrued $4,198 of interest relating to this loan.
12
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 continued to
accrue interest at the rate of 10% per annum. On July 17, 2013, the Company paid
the creditor $34,338 resulting in a full repayment of the loan.
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. On August 28, 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 February 24, 2014. As of December 31, 2013, the Company has accrued
$1,812 of interest relating to this loan. The Company signed a new promissory
note with the creditor which capitalized the unpaid principal and interest of
$55,082 and extended the maturity to February 24, 2015.
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. The note was not repaid by January 20, 2014
and continues to accrue interest at the rate of 10% per annum. As of December
31, 2013, the Company has accrued $7,247 (2012 - $1,178 on the previous
promissory note) of interest relating to this loan. The loan was repaid in full
subsequent to the year end.
On October 15, 2013, the Company signed a new promissory note
with a creditor for a total of $500,000 which is to be disbursed to the Company
in three tranches: Tranche A - $200,000 (received in November 2013); Tranche B -
$150,000 (received in December 2013); and Tranche C - $150,000 (received in
subsequently in January 2014). The note matures on April 15, 2014 and bears
interest at 5% per annum. In the event of default, the creditor is able to
convert the unpaid principal and interest into common shares of ATS as is
required in order for the shareholding of the creditor, when added to the 49%
shareholding of Utiba, be equal to 52.57% of the entire issued share capital of
ATS. As of December 31, 2013, the balance on the loan was $351,382 which
includes $1,382 of accrued interest. The loan was repaid in full subsequent to
the year end.
Long Term Debt
On August 5, 2013, the Company signed a new promissory note
with a creditor for a total of $550,000 which was to be disbursed to the Company
in three tranches: Tranche A - $100,000 (received in June 2013); Tranche B -
$200,000 by August 31, 2013 (received $100,000 in August 2013 and $100,000 in
September 2013); and Tranche C - $250,000 by September 30, 2013 (outstanding as
it has not yet been received by the Company). 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
respective 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. As
of December 31, 2013, the balance on the loan was $312,667 which includes
$12,667 of accrued interest.
The loan was repaid in full subsequent to the year end.
13
Recent Issuance of Non- Restricted Securities
Purchase of Equity Securities by the Issuer and
Affiliated Purchasers
We did not purchase any of our shares of common stock or other
securities during our fourth quarter of our fiscal year ended December 31,
2013.
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our
consolidated audited financial statements and the related notes that appear
elsewhere in this annual report. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to those discussed below and elsewhere in this
annual report.
Our consolidated audited financial statements are stated in
United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles.
14
2013 and Historical
Overview
Alternet Systems, Inc. operated in two distinct industries, mobile financial services and mobile security. In mobile financial services, the Company had unique features in its product offerings and was considered a global pioneer and market leader, consistently ranked by independent surveys amongst the top three in the world. The Company’s technology had been developed and improved over numerous years and provided clients with a complete suite of applications and functionality that addressed all current market applications and usage. The Company was geographically focused on the entire Western Hemisphere (North, Central and South America and the Caribbean), it was the market leader in terms of deployments.
Mobile Financial Services
In 2010, the Company launched its mobile financial and mobile
commerce suite of services, which it offered in equity partnership with leading mobile financial services software developer, Utiba Pte.. Utiba Americas
enjoyed exclusive rights to the Utiba software platform for the Americas region,
sold as a software license, or as a hosted service, also known as Software as a
Service (SaaS).
Demand for our mobile financial transaction services was driven
by the widespread adoption of mobile phone service and the existence of large
segments of the global population which possess a mobile phone, but do not
possess a bank account. The global mobile commerce industry was in its early
growth and adoption stages and several successful initiatives had been launched
worldwide by our competitors. We believe that as wireless usage expands, the
demand for our services would grow.
Since launching in 2010, the Company had implemented mobile
financial service solutions in Bolivia, Colombia, Ecuador, Guatemala, and
Honduras. Revenue would come from organic growth of its existing operations,
primarily from its hosted service, and the Companys robust sales pipeline with
many qualified opportunities throughout the region. The Company also benefited
from its name recognition and reputation, being one of the leading names in
mobile financial services.
Sales and marketing was accomplished through the Companys
existing sales staff, who contact potential clients directly, and through agent
sales, channel partners, trade shows, and industry associations. Marketing
materials such as brochures, web sites, and technical specifications were
continuously updated with an increased emphasis being placed on its offerings
for specific vertical industries, specifically the telecom, financial,
government and utilities sectors.
The Company had been successful in capturing a leading market
share in regional deployments and was widely recognized as having among the
broadest and most robust product offerings. In 2012, the Company was awarded a
multi country license sale agreement with Digicel Group, with an initial launch
in Haiti, as well as the sale of a license to Astra Holdings, S.A. a Central
America mobile payment service provider, that initially launched in Honduras and
was to expand into 5 Central America countries. It also successfully launched in
January 2013, the electronic top up platform for Corporación Digitel S.A. a
mobile network operator in Venezuela, and in August 2013 the Mobile Commerce
platform in Haiti, for Digicel.
15
The SaaS product offering had successfully garnered key clients in Guatemala, Bolivia, México and Latin America. The Company was working in several other projects with a regional player with a multi country reach. The Company continued to receive widespread interest as it was negotiating several SaaS proposals with regional banks and mobile payment service providers prior to the ATS Transaction discussed in Note 8 of the financial statements.
ATS also continued to actively work with MasterCard operations
in Latin America, developing a joint offering leveraging the brands strength and
Utibas market presence.
Digital and Mobile Security Software and Services
International Mobile Security (IMS) finalized the acquisition
of proprietary technology in early 2011 and was positioned to offer software and
security products in the global market segments of law enforcement, corporate,
and consumer sales. Sales efforts have been conducted in-house and through value
added resellers. Drivers of demand include smart phones and mobile tablet
computers.
In 2013 activities in IMS were wound down, except for
opportunities through Delma. IMS is expected to be restructured in 2014 with the
inclusion of additional services and products securing financial transactions
and digital currency.
Effective on October 15, 2013, the Company, Utiba, ATS and
Utiba Guatemala entered into an Asset Purchase Agreement in order to effect the
sale by ATS of all of its business and assets to Utiba. For more details refer
to the Company History and Business in PART 1
.
A Special Meeting of
Shareholders was held on February 21, 2014 and the necessary approval was
obtained with over 99% of the votes cast voting in favor. On March 4, 2014 the
ATS Transaction was finalized.
In 2014 Alternet will transform into an accelerator of high
growth, emerging mobile and digital, technology and services companies, in the
digital currency and the mobile and digital security fields. Our goal is to
expand the horizons of individuals and organizations, by providing a growth and
networking platform, empowering them to go beyond their expectations and goals
The new vision of Alternet is to accelerate the future of money
through the creation of a digital bank, building security around the digital
monetary ecosystem, and providing an exchange that allows for the movement from
virtual money to fiat currency
Our new product and service will offer consumers and businesss
the cost savings and speed associated with the internet while being compliant
with anti-money laundering procedures currency in place at US brokerage firms
and banks
Alternet has stayed competitivenot because we are perfectbut
because we make progress. Progress is about getting better, being better, doing
better. We are mission based. Alternet technology and people, move, communicate,
protects and empower the world.
The difficult part about progress is that great results take
time. But, the pay-back can be huge. Strategic investments in revolutionary new
products that have come to market in the past few years, are based on big bet
technologies, years in the making and delivered ahead of the competition.
16
Alternets vision is based on the following principles
Cloud based, secure, regulatory compliant, global currencies are needed to service this emerging market. As the usage and dependence of Smart Mobile Devices continues to increase there will be a need for more intelligent and effective Money.
In 2014, the Companys expected milestones are:
-
to enter into arrangements with select digital currencies, with the first
having taken place in February 2014 with Ven (refer to Note 16 in the
Consolidated Financial Statements Subsequent Events);
-
to provide end to end security for digital currencies;
-
to launch the digital currency bank, fully compliant with government
regulations, FX exchange capabilities;
-
to invest in micro payment services to the unbanked and global diasporas;
-
to invest in alternative financial services to the retail industry
emerging markets;
-
to attract key talent specialized in the digital economy; and
-
to prepare to up-list into a national exchange.
In 2014 we have entered into a relationship with VEN and Hub Culture to become a VEN Authority. This relationship will allow us to become an issuer of the VEN Currency on a global basis, leveraging the experience and the strength of this Digital Currency. We expect to start generating revenues from the sale of the currency, by the end of the second quarter 2014.
VEN is a global digital currency traded in international financial markets and originally used by members of a social network service, Hub Culture, to buy, share, and trade knowledge, goods, and services. The value of Ven is determined on the financial markets from a basket of currencies, commodities and carbon futures.
[2]
It trades against major currencies at floating exchange rates.
Hub Culture is an invitation-led social network service that operates the global digital currency Ven, and according to its website, is "the first to merge online and physical world environments. It was founded in November 2002. The Hub Culture group of companies is privately held with offices in Bermuda, Hong Kong, London and New York, with a network of knowledge brokers in over 20 locations worldwide. The web site is www.hubculture.com.
We will actively participate in the industry associations and promoting organizations, expecting to have an active involvement. We will also seek speaking and industry show participation, promoting our new initiatives.
Results of Operations
Results of Operations are for the year ended December 31, 2013
compared to the year ended December 31, 2012.
The Companys results, on a consolidated basis, reflect its own
results consolidated with its subsidiaries. For the remainder of this part, the
term Company refers to both the Company and its wholly owned and two majority
owned subsidiaries. Alternet has a controlling interest in both ATS
subsidiaries.
Net Sales
For the year ended December 31, 2013, the Company had net sales
of $3,141 versus $22,961, for the prior year The low sales was a result of the
Company focusing its efforts on Utiba, which was classified as a discontinued
operation at December 31, 2013. All revenue earned by Utiba was included in
discontinued operations.
IMS continued to underperform and management is reviewing
various options, including divestiture, reorganization or merger opportunities.
17
Selling, General and Administrative Expenses
The operating and administrative expenses for the year ended
December 31, 2013 totaled $1,505,881 as compared to $1,257,103 for the year
ended December 31, 2012. The table below details the major changes in
administrative expenditures for the year ended December 31, 2013 as compared to
the corresponding year ended December 31, 2012.
Expenses
|
Increase / Decrease in
Expenses
|
Explanation for Change
Year
Ended December 31, 2013 as
Compared to Year Ended December 31,
2012
|
Bad debts
|
Decrease of $14,228
|
Fewer accounts deemed uncollectible in 2013.
|
Investor relations
|
Increase of $90,811
|
More activity providing greater information to
shareholders and other investors.
|
Management and consulting
|
Increase of $346,299
|
Increase in management wages during 2013 due to
bonuses being accrued.
|
Office and general
|
Decrease of $31,453
|
Decreased hosting fees incurred by IMS during
2013 because of decrease in sales. The hosting service was not required.
|
Professional fees
|
Decrease of $25,164
|
Decrease in overall legal services needed
because fewer contracts required legal review.
|
Salaries
|
Decrease of $105,129
|
Decreased number of employees due to decreased
sales and increased consultants used.
|
Interest and Other Expenses
The Companys interest expense increased to $403,603 for the
year ended December 31, 2013 compared to $245,878 the previous year due to the
increase in loans received by the Company during the year, and the recording of
increased financing costs from $66,905 in 2012 to $151,090 in 2013 relating to
convertible debentures.
Net Loss
For the year ended December 31, 2013, the Company had a
comprehensive loss attributable to Alternet Systems, Inc. from continuing
operations of $1,872,719 or ($0.02) per share and an overall net and
comprehensive loss of $3,310,183 or ($0.04) per share, a decrease of 0.80% and
0.74% respectively, when compared to the corresponding year December 31, 2012
which had a net loss from continuing operations of $1,887,839 or ($0.02) per
share and an overall net and comprehensive loss of $3,334,946 or $(0.04) per
share.
Liquidity and Capital Resources
As of December 31, 2013, the Company had no cash in the bank
and no outstanding accounts receivable. At December 31, 2013, the Company had a
working capital deficiency of $5,168,849. Subsequent to the year end, the
Company closed the ATS Transaction, detailed in the Discontinued Operations
section below, which injected approximately $4.9 million of cash into the
Company.
18
The Company will be pursuing additional financing to fund
ongoing operations and new initiatives. The Companys ability to continue as a
going concern will be negatively affected if it is unsuccessful.
Accounts payable were $1,466,546 at December 31, 2013 compared
to accounts payable of $1,240,798 at December 31, 2012. Accounts receivable
decreased to $Nil for 2013 versus $19,233 for 2012.
Discontinued Operations
Effective October 15, 2013, the Company, Utiba, ATS, and Utiba
Guatemala entered into an Asset Purchase Agreement in order to effect the sale
by ATS of all of its business and assets to Utiba, as described below (ATS
Transaction). Consummation of the transactions set out in the APA are
conditions upon the approval of the shareholders of the Company.
Overview of the ATS Transaction and Consideration
Payable
The transaction involves the following components:
|
1
|
The sale pursuant to the Asset Purchase Agreement by ATS
of substantially all of its business and assets to Utiba (including the
assumption by Utiba of certain liabilities related to such business and
assets), in consideration for up to $3,100,000 in cash (the "Cash Purchase
Price") subject to certain adjustments related to certain net receivables
or liabilities, as the case may be, and reduction to the extent of certain
tax liabilities of ATS. The amount of $300,000 of the Cash Purchase Price
will be held back to cover certain claims that may be made under the
indemnification provisions of the Asset Purchase Agreement;
|
|
|
|
|
2
|
The entry by the Company into a non-compete covenant in
favor of Utiba and its affiliates in the mobile payment, top up and mobile
financial services industry for a period of 36 months, in consideration
for a payment in cash on closing of the transactions contemplated by the
Asset Purchase Agreement (the Closing) of $2,200,000;
|
|
|
|
|
3
|
The release by the Company of Utiba from all its
obligations under the ATS Shareholders Agreement in consideration for a
payment in cash on Closing of $200,000;
|
|
|
|
|
4
|
Upon Closing, Utiba shall transfer its 49% interest in
ATS to the Company so that the Company will own 100% of ATS after
Closing.
|
On March 4, 2014, the ATS Transaction closed with the Company
receiving $4,918,974 in proceeds. An additional $667,264 is being held in escrow
to cover certain claims that may be made under the indemnification provisions of
the Asset Purchase Agreement
19
As of December 31, 2013, the associated assets and liabilities
of the consolidated ATS business have been classified as held for sale and are
presented below:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
44,107
|
|
|
9,464
|
|
Accounts receivable, net of allowance for doubtful accounts of $789,565
(2012 - $154,845)
|
|
301,991
|
|
|
1,230,214
|
|
Prepaid cost of
sales
|
|
25,056
|
|
|
108,382
|
|
Deposits and other assets
|
|
40,500
|
|
|
31,858
|
|
Fixed assets, net of accumulated amortization of $119,006 (2012 -
$116,025)
|
|
137,170
|
|
|
277,942
|
|
Intellectual property
|
|
1,500,000
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
CURRENT ASSETS OF DISCONTINUED
OPERATIONS
|
|
2,048,824
|
|
|
3,157,860
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Accounts payable
and accrued charges
|
|
555,914
|
|
|
309,087
|
|
Deferred income
|
|
153,150
|
|
|
288,688
|
|
Long-term debt
|
|
69,039
|
|
|
235,138
|
|
Capital leases
|
|
5,042
|
|
|
35,071
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES OF DISCONTINUED
OPERATIONS
|
|
783,145
|
|
|
867,984
|
|
20
The following table summarizes the financial results of ATSs
consolidated discontinued operations for the years ended December 31, 2013 and
2012:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Revenue
|
|
1,185,912
|
|
|
1,332,974
|
|
Cost of Sales
|
|
1,136,976
|
|
|
923,076
|
|
Gross Margin
|
|
48,936
|
|
|
409,898
|
|
Operating Expenses
|
|
2,894,209
|
|
|
2,715,030
|
|
Net Loss Before Other Items
|
|
(2,845,273
|
)
|
|
(2,305,132
|
)
|
Other Items
|
|
44,970
|
|
|
(532,335
|
)
|
Net Loss Before Non-Controlling Interest
|
|
(2,800,303
|
)
|
|
(2,837,467
|
)
|
Non-Controlling Interest
|
|
(1,362,819
|
)
|
|
(1,390,349
|
)
|
|
|
|
|
|
|
|
Discontinued Operations for Alternet Systems, Inc.
|
|
(1,437,484
|
)
|
|
(1,447,107
|
)
|
The following table summarizes the cash flow of ATSs
consolidated discontinued operations for the years ended December 31, 2013 and
2012:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Operating Activities
|
|
(142,495
|
)
|
|
(1,476,026
|
)
|
Financing Activities
|
|
(196,127
|
)
|
|
(83,519
|
)
|
|
|
|
|
|
|
|
Cash Flows From Discontinued Operations
|
|
(338,622
|
)
|
|
(1,559,545
|
)
|
All other Disclosures in this Report that were impacted by this
discontinued operation have been reclassified accordingly.
Plan of Operations
Management is currently reviewing the strategic fit of
International Mobile Security (IMS), provider of mobile security solutions,
within the Companys overall vision and business focus. While the market for
IMS products, primarily the government, law enforcement and, to a lesser
degree, corporate segments, appears to be large and growing, IMS product
offering needs further refinement and development. Similarly, significantly more
management time will be required to address the current challenges and well as
additional resources, which may distract from the Companys primary focus.
For 2014 Alternet will transform into an accelerator of high
growth, emerging mobile and digital, technology and services companies, in the
digital currency and the mobile and digital security fields. Our goal is to
expand the horizons of individuals and organizations, by providing a growth and
networking platform, empowering them to go beyond their expectations and goals
The new vision of Alternet is to accelerate the future of money
through the creation of a digital bank, building security around the digital
monetary ecosystem, and providing an exchange that allows for the movement from
virtual money to fiat currency
Our new product and service will offer consumers and businesses
the cost savings and speed associated with the internet while being compliant
with anti-money laundering procedures in place at US brokerage firms and
banks
21
In 2014, the Companys expected milestones are:
-
to enter into arrangements with select digital currencies, with the first
having taken place in February 2014 with Ven (refer to Note 16 in the
Consolidated Financial Statements Subsequent Events);
-
to provide end to end security for digital currencies;
-
to launch the digital currency bank, fully compliant with government
regulations, FX exchange capabilities;
-
to invest in micro payment services to the unbanked and global diasporas;
-
to invest in alternative financial services to the retail industry
emerging markets;
-
to attract key talent specialized in the digital economy; and
-
to prepare to up-list into a national exchange.
Conclusion
The Company is entering into its next phase which will leverage
the experience and knowledge in mobile technology and financial services to
provide solutions in the digital currency and the mobile and digital security
fields. Investments in these fields are underway.
Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with the accounting principles generally accepted in the
United States of America. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by managements application of accounting policies. We believe that
understanding the basis and nature of the estimates and assumptions involved
with the following aspects of our financial statements is critical to an
understanding of our financial statements.
Basis of Presentation and Consolidation
These consolidated financial statements and related notes are
presented in accordance with accounting principles generally accepted in the
United States, and are expressed in United States dollars. These financial
statements include the accounts of the Company and its wholly owned and majority
owned subsidiaries. Our fiscal year-end is December 31.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the financial statement date and the reported amounts of revenues
and expenses during the reporting period. The Company regularly evaluates
estimates and assumptions related to the useful life and recoverability of
long-lived assets, fair value of convertible notes payable and derivative
liabilities. The Company bases its estimates and assumptions on current facts,
historical experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities and the
accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and
adversely from the Companys estimates. To the extent there are material
differences between estimates and the actual results, future results of
operations will be affected.
22
Accounts Receivable and Allowance for Doubtful
Accounts
Trade accounts receivable are stated at the amount the Company
expects to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining the
collectability of specific customer accounts: customer credit-worthiness, past
transaction history with the customer, current economic industry trends, and
changes in customer payment terms. Past due balances over 90 days and other
higher risk amounts are reviewed individually for collectability. If the
financial condition of the Companys customers were to deteriorate, adversely
affecting their ability to make payments, additional allowances would be
required. Based on managements assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to a valuation
allowance. Balances that remain outstanding after the Company has used
reasonable collection efforts are written off through a charge to the valuation
allowance and a credit to accounts receivable.
Foreign Currency Translation
The Companys functional currency and its reporting currency is
the United States Dollar. Foreign denominated monetary assets and liabilities
are translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders equity
(deficit), whereas gains or losses resulting from foreign currency transactions
are included in the results of operations.
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 an impairment charges related to long-lived assets during the
year ended December 31, 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 recognized any impairment charge of $100,000 (2012 - $Nil) related to
indefinite lived intangible assets during the year ended December 31, 2013.
23
Revenue Recognition
The Company entered into sales arrangements that may provide
for multiple deliverables to a customer. Software sales may include the sale of
a software license, implementation/customization services, and/or ongoing
support services.
In order to treat deliverables in a multiple-deliverable
arrangement as separate units of accounting, the deliverables must have
standalone value upon delivery. If the deliverables have standalone value upon
delivery, the Company accounts for each deliverable separately. Licenses,
support fees, and hosted services have standalone value as such services are
often sold separately. In determining whether implementation/customization
services have standalone value, the Company considers the following factors for
each agreement: availability of the services from other vendors, the nature of
the services, the timing of when the services contract was signed in comparison
to the services start date, and the contractual dependence of the customization
service on the customers satisfaction with the implementation/customization
services work.
To date, the Company has concluded that all of the services
included in multiple-deliverable arrangements executed have standalone value
when multiple deliverables included in an arrangement are separated into
different units of accounting. The arrangement consideration is allocated to the
identified separate units based on a relative selling price hierarchy. The
Company determines the relative selling price for a deliverable based on its
vendor-specific objective evidence of selling price (VSOE), if available, or
its best estimate of selling price (BESP), if VSOE is not available. The
Company has determined that third-party evidence of selling price (TPE) is not
a practical alternative due to differences in its service offerings compared to
other parties and the availability of relevant third party pricing information.
The amount of revenue allocated to delivered items is limited by contingent
revenue, if any.
The Company has not established VSOE for a majority of its
revenue due to lack of pricing consistency, the customer specific requests, and
other factors. Accordingly, the Company uses its BESP to determine the relative
selling price.
The Company determined BESP by considering its overall pricing
objectives and market conditions. Significant pricing practices taken into
consideration include the Companys discounting practices, the size and volume
of the Companys transactions, the geographic area where services are sold, its
market strategy, historic contractually stated prices and prior relationships,
and future service sales with certain customers. The determination of BESP is
made through consultation with and approval by the Companys management, taking
into consideration the market strategy. As the Companys market strategies
evolve, the Company may modify its pricing practices in the future, which could
result in changes in selling prices.
Revenue was recognized upon delivery or when services were
performed, provided that persuasive evidence of a sales arrangement exists, both
title and risk of loss have passed to the customer, and collection was
reasonably assured. Persuasive evidence of a sales arrangement existed upon
execution of a written sales agreement or signed purchase order that constituted
a fixed and legally binding commitment between the Company and the buyer.
Specifically, revenue from the sale of licenses is recognized when the title of
the license transfers to the customer while revenue from
implementation/customization services performed is recognized upon successful
completion of a User Acceptance Test (UAT). If a successful UAT was never
achieved and the sales arrangement was cancelled, the Company recognized any
deferred revenue not required to be refunded to the customer.
The Companys payment terms vary by client. To reduce credit
risk in connection with software license and support sales, the Company may,
depending upon the circumstances, require significant deposits prior to
delivery. In some circumstances, the Company may require payment in full for its
products prior to delivery.
24
For support and hosted services, the Company sold customers
service agreements that were recorded as deferred revenue and provided for
payment in advance on either an annual or other periodic basis. Revenue for
these support services was recognized ratable over the term of the agreement.
Deferred Income
The Company recognizes revenues as earned. Amounts billed in
advance of the period in which service is rendered are recorded as a liability
under Deferred income.
Debt with Conversion Options
The Company accounts for convertible debentures in accordance
with ASC Topic 470-20,
Debt with Conversion and Other Options
, which
applies to all convertible debt instruments that have a net settlement
feature, which means instruments that by their terms may be settled either
wholly or partially in cash upon conversion. Accordingly, the liability and
equity components of convertible debt instruments that may be settled wholly or
partially in cash upon conversion should be accounted for separately in a manner
reflective of their issuers nonconvertible debt borrowing rate. Conversion
features determined to be beneficial to the holder are valued at fair value and
recorded to additional paid in capital. Any discount derived from determining
the fair value to the debenture conversion features is amortized to interest
expense over the life of the debenture. The unamortized costs, if any, upon the
conversion of the debentures is expensed to interest immediately.
Leases
The Company leases operating facilities which include switches,
other network equipment, and premises. Rentals payable under operating leases
are charged to the statements of operation on a straight line basis over the
term of the relevant lease. For capital leases, the present value of future
minimum lease payments at the inception of the lease is reflected as an asset
and a liability in the statement of financial position. Amounts due within one
year are classified as short-term liabilities and the remaining balance as
long-term liabilities.
Fair Value of Financial Instruments
The Company has determined the estimated fair value of
financial instruments using available market information and appropriate
valuation methodologies. The carrying value of the Companys financial
instruments, consisting of accounts receivable, checks in excess of bank
balances, accounts payable and accrued liabilities, wages payable, accrued
taxes, other loans payable, stock-based compensation, warrants, and due to
related parties, approximate their fair value due to the relatively short
maturity of these instruments.
Income Taxes
The Company accounts for income taxes under a method which
requires the Company to recognize deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements carrying amounts and tax basis of assets and liabilities
using enacted tax rates. The Company recognizes the tax benefit from an
uncertain tax position only if it is more likely than not the tax position will
be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such positions are then measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon settlement.
25
Stock-Based Compensation
The Company accounts for its share-based compensation plans in
accordance with the fair value recognition provisions of ASC 718
CompensationStock Compensation
. The Company utilizes the Black-Scholes
option pricing model as its method for determining the fair value of stock
option grants. ASC 718 requires the fair value of all share-based awards that
are expected to vest to be recognized in the statements of operations over the
service or vesting period of each award. The Company uses the straight-line
method of attributing the value of share-based compensation expense for all
stock option grants over the requisite service period.
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 December 31, 2013, Nil (2012 - 6,009,863) warrants were
excluded from the loss per share calculation as their effect would be
anti-dilutive.
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. This accounting pronouncement did
not have a material effect on the Companys 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 did not 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. This accounting pronouncement did not have any
material future effect on our consolidated financial statements.
26
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.
Item 8. Financial Statements and Supplementary Data
ALTERNET SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
28
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Alternet Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Alternet Systems, Inc. and subsidiaries as of December 31, 2013 and 2012, and
the related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the entity's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Alternet Systems, Inc. as of December 31, 2013 and 2012, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the entity will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the entity has suffered
recurring losses from operations and has a working capital and equity
deficiencies that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ StarkSchenkein, LLP
Denver, Colorado
March 31, 2014
29
ALTERNET SYSTEMS INC.
|
CONSOLIDATED BALANCE SHEETS
|
As of December
31, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
-
|
|
|
19,233
|
|
Deposits and other assets
|
|
21,785
|
|
|
21,785
|
|
Current assets of discontinued operations
|
|
2,048,824
|
|
|
3,157,860
|
|
Total current assets
|
|
2,070,609
|
|
|
3,198,878
|
|
Fixed assets, net
|
|
2,733
|
|
|
3,862
|
|
Intellectual property
|
|
-
|
|
|
100,000
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
2,073,342
|
|
|
3,302,740
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Checks
issued in excess of bank balance
|
|
168
|
|
|
3,713
|
|
Accounts payable and
accrued charges
|
|
1,466,546
|
|
|
1,240,798
|
|
Wages
payable
|
|
1,672,273
|
|
|
821,628
|
|
Accrued payroll taxes
|
|
1,671,353
|
|
|
921,347
|
|
Other
loans payable, net of beneficial conversion feature
|
|
1,543,509
|
|
|
642,796
|
|
Due to related parties
|
|
102,464
|
|
|
255,376
|
|
Current liabilities of discontinued operations
|
|
783,145
|
|
|
867,984
|
|
Total current liabilities
|
|
7,239,458
|
|
|
4,753,642
|
|
Long term debt
|
|
312,667
|
|
|
-
|
|
|
|
7,552,125
|
|
|
4,753,642
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficiency)
|
|
|
|
|
|
|
Capital
stock
|
|
|
|
|
|
|
Authorized:
100,000,000 common shares with a par value of
$0.00001
Issued
and outstanding: 95,737,389 common shares (2012 - 89,056,203)
|
|
957
|
|
|
890
|
|
Additional paid-in capital
|
|
14,453,693
|
|
|
13,849,991
|
|
Private placement
subscriptions
|
|
130,362
|
|
|
130,362
|
|
Obligation to issue shares
|
|
2,800
|
|
|
-
|
|
Deferred compensation
|
|
(113,125
|
)
|
|
-
|
|
Accumulated other comprehensive income
|
|
(331,332
|
)
|
|
(331,349
|
)
|
Accumulated deficit
|
|
(17,939,881
|
)
|
|
(14,629,698
|
)
|
|
|
(3,796,526
|
)
|
|
(979,804
|
)
|
Non-controlling interest
|
|
(1,682,257
|
)
|
|
(471,098
|
)
|
|
|
(5,478,783
|
)
|
|
(1,450,902
|
)
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
|
|
2,073,342
|
|
|
3,302,740
|
|
The accompanying notes are an integral part of these
consolidated financial statements
30
ALTERNET SYSTEMS INC.
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
|
For the years
ended December 31, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
REVENUE
|
|
3,141
|
|
|
22,961
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
Bad debts
|
|
7,646
|
|
|
21,874
|
|
Bank
charges
|
|
2,438
|
|
|
9,324
|
|
Depreciation
|
|
1,129
|
|
|
1,603
|
|
Investor
relations
|
|
146,346
|
|
|
55,535
|
|
Licenses, dues, and
insurance
|
|
3,565
|
|
|
893
|
|
Management and consulting
|
|
635,430
|
|
|
289,131
|
|
Marketing
|
|
3,830
|
|
|
3,793
|
|
Office
and general
|
|
22,458
|
|
|
53,911
|
|
Professional fees
|
|
229,968
|
|
|
255,132
|
|
Rent
|
|
33,874
|
|
|
40,990
|
|
Salaries
|
|
384,405
|
|
|
489,534
|
|
Telephone
and utilities
|
|
13,939
|
|
|
16,259
|
|
Travel
|
|
20,853
|
|
|
19,124
|
|
|
|
1,505,881
|
|
|
1,257,103
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE OTHER ITEMS
|
|
(1,502,740
|
)
|
|
(1,234,142
|
)
|
|
|
|
|
|
|
|
OTHER ITEMS
|
|
|
|
|
|
|
Interest expense
|
|
(403,603
|
)
|
|
(245,878
|
)
|
Gain on
foreign exchange
|
|
100,601
|
|
|
51,380
|
|
Interest income
|
|
-
|
|
|
1,875
|
|
Impairment of intellectual property
|
|
(100,000
|
)
|
|
-
|
|
Loss on debt settlement
|
|
-
|
|
|
(579,375
|
)
|
Forgiveness and adjustment of old accounts payable
|
|
18,425
|
|
|
-
|
|
|
|
(384,577
|
)
|
|
(771,998
|
)
|
|
|
|
|
|
|
|
NET LOSS FROM CONTINUING OPERATIONS
|
|
(1,887,317
|
)
|
|
(2,006,140
|
)
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST FROM CONTINUING OPERATIONS
|
|
(14,618
|
)
|
|
(118,301
|
)
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO ALTERNET SYSTEMS
INC. FROM CONTINUING OPERATIONS
|
|
(1,872,699
|
)
|
|
(1,887,839
|
)
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
(1,437,484
|
)
|
|
(1,447,107
|
)
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO ALTERNET SYSTEMS
INC.
|
|
(3,310,183
|
)
|
|
(3,334,946
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements
31
ALTERNET SYSTEMS INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the years
ended December 31, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income attributable
to Alternet Systems Inc.
|
|
(3,310,183
|
)
|
|
(3,334,946
|
)
|
Non-controlling interest
|
|
(14,618
|
)
|
|
(118,301
|
)
|
Add items not affecting
cash
|
|
|
|
|
|
|
Depreciation
|
|
1,129
|
|
|
1,603
|
|
Interest accrued
|
|
266,626
|
|
|
85,953
|
|
Bad debt expense
|
|
7,646
|
|
|
21,874
|
|
Shares for services
|
|
344,436
|
|
|
261,676
|
|
Reversal of shares for services
|
|
-
|
|
|
(140,000
|
)
|
Warrants issued in debt settlement
|
|
-
|
|
|
85,198
|
|
Accretion of debt discount
|
|
151,090
|
|
|
66,905
|
|
Unrealized foreign exchange (gain) loss
|
|
(55,040
|
)
|
|
-
|
|
Deferred compensation
|
|
91,875
|
|
|
-
|
|
Loss on debt settlement
|
|
-
|
|
|
579,375
|
|
Impairment of intellectual property
|
|
100,000
|
|
|
-
|
|
Changes in non-cash
working capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
11,587
|
|
|
142,376
|
|
Deposits and other assets
|
|
-
|
|
|
2,895
|
|
Accounts payable and accrued charges
|
|
394,826
|
|
|
957,168
|
|
Wages payable
|
|
779,987
|
|
|
897,847
|
|
Accrued payroll taxes
|
|
750,006
|
|
|
415,514
|
|
Due to related parties
|
|
(99,879
|
)
|
|
205,336
|
|
Net cash (used in) operating activities
|
|
(580,512
|
)
|
|
130,473
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from loans
payable
|
|
1,013,000
|
|
|
759,438
|
|
Payments
for loans payable
|
|
(69,338
|
)
|
|
(20,000
|
)
|
Checks issued in excess
of bank balance
|
|
(3,545
|
)
|
|
3,713
|
|
Net
proceeds on sale of common stock and subscriptions
|
|
-
|
|
|
627,699
|
|
Share issue costs
|
|
(21,000
|
)
|
|
(8,996
|
)
|
Net cash provided by financing activities
|
|
919,117
|
|
|
1,361,854
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH
|
|
17
|
|
|
47
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM CONTINUING
OPERATIONS
|
|
338,622
|
|
|
102,014
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS
|
|
(338,622
|
)
|
|
(1,559,545
|
)
|
NET DECREASE IN CASH DURING THE YEAR
|
|
-
|
|
|
(67,171
|
)
|
|
|
|
|
|
|
|
CASH, BEGINNING OF YEAR
|
|
-
|
|
|
67,171
|
|
|
|
|
|
|
|
|
CASH, END OF YEAR
|
|
-
|
|
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements
32
ALTERNET SYSTEMS INC.
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Placement
|
|
|
Deferred
|
|
|
Obligation to
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Subscriptions
|
|
|
Compensation
|
|
|
Issue shares
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2011
|
|
74,171,826
|
|
|
738
|
|
|
11,171,559
|
|
|
630,362
|
|
|
-
|
|
|
113,333
|
|
|
(11,294,752
|
)
|
|
(331,396
|
)
|
|
319,121
|
|
|
608,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for debt settlements
|
|
5,978,317
|
|
|
60
|
|
|
1,210,284
|
|
|
-
|
|
|
-
|
|
|
(113,333
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,097,011
|
|
Shares issued for services
|
|
1,572,728
|
|
|
15
|
|
|
261,661
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
261,676
|
|
Shares issued for cash
|
|
4,999,999
|
|
|
50
|
|
|
627,649
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
627,699
|
|
Cancellation of shares issued for services
|
|
(1,000,000
|
)
|
|
(6
|
)
|
|
(139,994
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(140,000
|
)
|
Share subscriptions from prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
years issued
|
|
3,333,333
|
|
|
33
|
|
|
499,967
|
|
|
(500,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Share issue costs
|
|
-
|
|
|
-
|
|
|
(8,996
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,996
|
)
|
Warrants issued for debt
|
|
-
|
|
|
-
|
|
|
85,198
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
85,198
|
|
Beneficial conversion features
|
|
-
|
|
|
-
|
|
|
142,663
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
142,663
|
|
Foreign exchange translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47
|
|
|
-
|
|
|
47
|
|
Subsidiary shares issued to non-
controlling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
671,000
|
|
|
671,000
|
|
Adjustment to non-controlling interest accounts payable
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,442
|
|
|
47,442
|
|
Non-controlling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,508,661
|
)
|
|
(1,508,661
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,334,946
|
)
|
|
-
|
|
|
-
|
|
|
(3,334,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2012
|
|
89,056,203
|
|
|
890
|
|
|
13,849,991
|
|
|
130,362
|
|
|
-
|
|
|
-
|
|
|
(14,629,698
|
)
|
|
(331,349
|
)
|
|
(471,098
|
)
|
|
(1,450,902
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements
33
ALTERNET SYSTEMS INC.
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Placement
|
|
|
Deferred
|
|
|
Obligation to
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Subscriptions
|
|
|
Compensation
|
|
|
Issue shares
|
|
|
Deficit
|
|
|
Income
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2012
|
|
89,056,203
|
|
|
890
|
|
|
13,849,991
|
|
|
130,362
|
|
|
-
|
|
|
-
|
|
|
(14,629,698
|
)
|
|
(331,349
|
)
|
|
(471,098
|
)
|
|
(1,450,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
6,681,186
|
|
|
67
|
|
|
549,369
|
|
|
-
|
|
|
(205,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
344,436
|
|
Share issue costs
|
|
-
|
|
|
-
|
|
|
(21,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(21,000
|
)
|
Beneficial conversion features
|
|
-
|
|
|
-
|
|
|
75,333
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75,333
|
|
Services provided per terms of the contract
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
91,875
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
91,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to issue shares
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,800
|
|
Foreign exchange translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
17
|
|
Adjustment to non-controlling interest accounts payable
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
166,278
|
|
|
166,278
|
|
Non-controlling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,377,437
|
)
|
|
(1,377,437
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,310,183
|
)
|
|
-
|
|
|
-
|
|
|
(3,310,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2013
|
|
95,737,389
|
|
|
957
|
|
|
14,453,693
|
|
|
130,362
|
|
|
(113,125
|
)
|
|
2,800
|
|
|
(17,939,881
|
)
|
|
(331,332
|
)
|
|
(1,682,257
|
)
|
|
(5,478,783
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements
34
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
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. As detailed in Note 16, Subsequent Events,
the Company, with the ATS Transaction detailed in Note 8, Discontinued
Operations,, will be changing considerably in 2014 and beyond. Accordingly,
comments related to 2013 will not necessarily be applicable to future years.
These 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 December 31,
2013 the Company had a working capital deficiency of $5,168,849 (2012 -
$1,554,764). 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 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
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and are prepared in US dollars unless otherwise noted.
Principles of Consolidation
These 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 Transactions Systems (ATS), Inc., a 51% owned subsidiary of
Alternet
-
Utiba Guatemala, S.A., a wholly-owned subsidiary of Alternet Transactions
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.
35
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use of Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the financial statement date and the reported amounts of revenues
and expenses during the reporting period. The Company regularly evaluates
estimates and assumptions related to the useful life and recoverability of
long-lived assets, fair value of convertible notes payable and derivative
liabilities. The Company bases its estimates and assumptions on current facts,
historical experience and various other factors that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities and the
accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and
adversely from the Companys estimates. To the extent there are material
differences between estimates and the actual results, future results of
operations will be affected.
Cash and Cash Equivalents
The Company considers all liquid investments, with an original
maturity of three months or less when purchased, to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount the Company
expects to collect. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. Management considers the following factors when determining the
collectability of specific customer accounts: customer credit-worthiness, past
transaction history with the customer, current economic industry trends, and
changes in customer payment terms. Past due balances over 90 days and other
higher risk amounts are reviewed individually for collectability. If the
financial condition of the Companys customers were to deteriorate, adversely
affecting their ability to make payments, additional allowances would be
required. Based on managements assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to a valuation
allowance. Balances that remain outstanding after the Company has used
reasonable collection efforts are written off through a charge to the valuation
allowance and a credit to accounts receivable.
36
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Equipment
Fixed assets are recorded at cost and depreciated at the
following rates:
|
Computer equipment
|
-
|
30% declining
balance basis
|
|
Computer software
|
-
|
30% declining balance basis
|
|
Equipment
|
-
|
20% declining
balance basis
|
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 an impairment charges related to long-lived assets during the
year ended December 31, 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 recognized an impairment charge of $100,000 (2012 - $Nil) related to
indefinite lived intangible assets during the year ended December 31, 2013.
Revenue Recognition
The Company entered into sales arrangements that may provide
for multiple deliverables to a customer. Software sales may include the sale of
a software license, implementation/customization services, and/or ongoing
support services.
In order to treat deliverables in a multiple-deliverable
arrangement as separate units of accounting, the deliverables must have
standalone value upon delivery. If the deliverables have standalone value upon
delivery, the Company accounts for each deliverable separately. Licenses,
support fees, and hosted services have standalone value as such services are
often sold separately. In determining whether implementation/customization
services have standalone value, the Company considers the following factors for
each agreement: availability of the services from other vendors, the nature of
the services, the timing of when the services contract was signed in comparison
to the services start date, and the contractual dependence of the customization
service on the customers satisfaction with the implementation/customization
services work.
37
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue Recognition (continued)
To date, the Company has concluded that all of the services
included in multiple-deliverable arrangements executed have standalone value
when multiple deliverables included in an arrangement are separated into
different units of accounting. The arrangement consideration is allocated to the
identified separate units based on a relative selling price hierarchy. The
Company determines the relative selling price for a deliverable based on its
vendor-specific objective evidence of selling price (VSOE), if available, or
its best estimate of selling price (BESP), if VSOE is not available. The
Company has determined that third-party evidence of selling price (TPE) is not
a practical alternative due to differences in its service offerings compared to
other parties and the availability of relevant third party pricing information.
The amount of revenue allocated to delivered items is limited by contingent
revenue, if any.
The Company has not established VSOE for a majority of its
revenue due to lack of pricing consistency, the customer specific requests, and
other factors. Accordingly, the Company uses its BESP to determine the relative
selling price.
The Company determined BESP by considering its overall pricing
objectives and market conditions. Significant pricing practices taken into
consideration include the Companys discounting practices, the size and volume
of the Companys transactions, the geographic area where services are sold, its
market strategy, historic contractually stated prices and prior relationships,
and future service sales with certain customers. The determination of BESP is
made through consultation with and approval by the Companys management, taking
into consideration the market strategy. As the Companys market strategies
evolve, the Company may modify its pricing practices in the future, which could
result in changes in selling prices.
Revenue was recognized upon delivery or when services were
performed, provided that persuasive evidence of a sales arrangement exists, both
title and risk of loss have passed to the customer, and collection was
reasonably assured. Persuasive evidence of a sales arrangement existed upon
execution of a written sales agreement or signed purchase order that constituted
a fixed and legally binding commitment between the Company and the buyer.
Specifically, revenue from the sale of licenses is recognized when the title of
the license transfers to the customer while revenue from
implementation/customization services performed is recognized upon successful
completion of a User Acceptance Test (UAT). If a successful UAT was never
achieved and the sales arrangement was cancelled, the Company recognized any
deferred revenue not required to be refunded to the customer.
The Companys payment terms vary by client. To reduce credit
risk in connection with software license and support sales, the Company may,
depending upon the circumstances, require significant deposits prior to
delivery. In some circumstances, the Company may require payment in full for its
products prior to delivery. For support and hosted services, the Company sold
customers service agreements that were recorded as deferred revenue and provided
for payment in advance on either an annual or other periodic basis. Revenue for
these support services was recognized ratable over the term of the agreement.
38
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Deferred Income
The Company recognizes revenues as earned. Amounts billed in
advance of the period in which service is rendered are recorded as a liability
under Deferred income.
Debt with Conversion Options
The Company accounts for convertible debentures in accordance
with ASC Topic 470-20,
Debt with Conversion and Other Options
, which
applies to all convertible debt instruments that have a net settlement
feature, which means instruments that by their terms may be settled either
wholly or partially in cash upon conversion. Accordingly, the liability and
equity components of convertible debt instruments that may be settled wholly or
partially in cash upon conversion should be accounted for separately in a manner
reflective of their issuers nonconvertible debt borrowing rate. Conversion
features determined to be beneficial to the holder are valued at fair value and
recorded to additional paid in capital. Any discount derived from determining
the fair value to the debenture conversion features is amortized to interest
expense over the life of the debenture. The unamortized costs, if any, upon the
conversion of the debentures is expensed to interest immediately.
Leases
The Company leases operating facilities which include switches,
other network equipment, and premises. Rentals payable under operating leases
are charged to the statements of operation on a straight line basis over the
term of the relevant lease. For capital leases, the present value of future
minimum lease payments at the inception of the lease is reflected as an asset
and a liability in the statement of financial position. Amounts due within one
year are classified as short-term liabilities and the remaining balance as
long-term liabilities.
Foreign Currency Translation
The Companys functional currency and its reporting currency is
the United States Dollar. Foreign denominated monetary assets and liabilities
are translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders equity
(deficit), whereas gains or losses resulting from foreign currency transactions
are included in the results of operations.
39
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Fair Value of Financial Instruments
The Company has determined the estimated fair value of
financial instruments using available market information and appropriate
valuation methodologies. The carrying value of the Companys financial
instruments, consisting of accounts receivable, checks in excess of bank
balances, accounts payable and accrued liabilities, wages payable, accrued
payroll taxes, other loans payable, stock-based compensation, warrants, and due
to related parties, approximate their fair value due to the relatively short
maturity of these instruments.
Income Taxes
The Company accounts for income taxes under a method which
requires the Company to recognize deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements carrying amounts and tax basis of assets and liabilities
using enacted tax rates. The Company recognizes the tax benefit from an
uncertain tax position only if it is more likely than not the tax position will
be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such positions are then measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon settlement.
Stock-Based Compensation
The Company accounts for its share-based compensation plans in
accordance with the fair value recognition provisions of ASC 718
CompensationStock Compensation
. The Company utilizes the Black-Scholes
option pricing model as its method for determining the fair value of stock
option grants. ASC 718 requires the fair value of all share-based awards that
are expected to vest to be recognized in the statements of operations over the
service or vesting period of each award. The Company uses the straight-line
method of attributing the value of share-based compensation expense for all
stock option grants over the requisite service period.
40
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
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 December 31, 2013, Nil (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. This accounting pronouncement did
not have a material effect on the Companys 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. This accounting pronouncement did
not have any material effect on our consolidated financial statements.
41
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Accounting Pronouncements (continued)
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. This accounting pronouncement did not have any
material effect on our consolidated financial statements.
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
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Computer equipment
|
|
320,933
|
|
|
319,700
|
|
|
1,233
|
|
Computer software
|
|
75,128
|
|
|
73,866
|
|
|
1,262
|
|
Equipment
|
|
10,576
|
|
|
10,338
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406,637
|
|
|
403,904
|
|
|
2,733
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
320,933
|
|
|
319,171
|
|
|
1,762
|
|
Computer software
|
|
75,128
|
|
|
73,325
|
|
|
1,803
|
|
Equipment
|
|
10,576
|
|
|
10,279
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406,637
|
|
|
402,775
|
|
|
3,862
|
|
Depreciation expense in 2013 and 2012 was $1,129 and $1,603,
respectively.
42
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
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 December 31, 2013, the Company had $68,900
(2012 - $68,900) included in accounts payable and accrued charges relating to
this agreement. As the Company has not been able to derive any revenues from the
intellectual properties, management decided to impair the assets at December 31,
2013.
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 year ended December 31, 2013, $8,596
(2012 $18,067) of the debt discount was amortized. As of December 31, 2013,
$50,051 (2012 - $37,364) of principal, accrued interest, and unamortized debt
discount on this note was included in other loans payable. The note is past due
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 year ended December 31, 2013, $17,419
(2012 - $18,581) of the debt discount was amortized. As of December 31, 2013,
$67,118 (2012 - $44,175) of principal and accrued interest, and unamortized debt
discount on this note was included in other loans payable. The note is past due
and continues to accrue interest at the rate of 10% per annum.
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 year ended December 31, 2013, $49,741 (2012 -
$30,259) of the debt discount was amortized. As of December 31, 2013, $88,986
(2012 - $31,881) of principal, accrued interest, and unamortized debt discount
on this note was included in other loans payable. The note is past due and
continues to accrue interest at the rate of 10% per annum.
43
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
Convertible Debentures
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
was due on October 22, 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 $0.055 below the market price on January 25, 2013 of
$0.13 provided a value of $58,667. During the year ended December 31, 2013,
$58,667 of the debt discount was amortized. As of December 31, 2013, $87,474 of
principal, accrued interest, and unamortized debt discount on this note was
included in other loans payable. The note is past due 2013 and continues to
accrue interest at the rate of 10% per annum.
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
was due on October 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 $0.025 below the market price on April 24, 2013 of $0.10
provided a value of $16,667. During the year ended December 31, 2013, $16,667 of
the debt discount was amortized. As of December 31, 2013, $53,452 of principal,
accrued interest, and unamortized debt discount on this note was included in
other loans payable. The note is past due 2013 and continues to accrue interest
at the rate of 10% per annum.
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $2,864
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $6,324
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
44
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
(continued)
Other Loans Payable (continued)
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. On July 1, 2013, the director
combined this loan with a total unpaid principal and interest balance of $11,365
with two other matured loans and extended the maturity date to December 29,
2013. All other terms remained the same.
On July 1, 2013, the above three promissory notes to one
director of the Company were combined which capitalized the unpaid principal and
interest on the three separate promissory notes totaling $20,553 into one
promissory note and extended the maturity date to December 29, 2013. All other
terms remained the same. The note was not repaid by December 29, 2013 and
continues to accrue interest at the rate of 10% per annum. As of December 31,
2013, the Company has accrued $1,036 (2012 - $874 for all three previous
promissory notes) of interest relating to this loan. The balance owing is
included in due to related parties.
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.
45
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
(continued)
Other Loans Payable (continued)
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 December 31, 2013, the
Company has accrued $75,507 of late payment charges which is included in the
outstanding principal and interest balance of $309,274 (2012 - $14,104 of
interest in a principal and interest balance of $247,251). The loan was repaid
in full subsequent to the year end.
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. The note was not repaid by October 6, 2013 and continues to
accrue interest at the rate of 10% per annum. As of December 31, 2013, the
Company has accrued $3,839 (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. On December 9, 2013, the Company paid the creditor $15,000 towards the
late payment charges. As of December 31, 2013, the Company has accrued $13,260
(2012- $1,178) of interest relating to this loan. The loan was repaid in full
subsequent to the year end.
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. 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. Refer to the promissory
note dated July 24, 2013 for further details. The loan was repaid in full
subsequent to the year end.
46
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
(continued)
Other Loans Payable (continued)
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. The note was not repaid by December 1, 2013 and continues to accrue
interest at the rate of 10% per annum. As of December 31, 2013, the Company has
accrued $1,517 (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. 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. Refer to the promissory note dated July 24, 2013
for further details. The loan was repaid in full subsequent to the year end.
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. On August 8, 2013, the Company signed a new promissory
note with the creditor which capitalized the unpaid principal and interest of
$104,959 under the previous promissory note and extended the maturity date to
February 4, 2014. The note was not repaid by February 4, 2014 and continues to
accrue interest at the rate of 10% per annum. As of December 31, 2013, the
Company has accrued $4,198 of interest relating to this loan.
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 continued to
accrue interest at the rate of 10% per annum. On July 17, 2013, the Company paid
the creditor $34,338 resulting in a full repayment of the loan.
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. On August 28, 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 February 24, 2014. As of December 31, 2013, the Company has accrued
$1,812 of interest relating to this loan. The Company signed a new promissory
note with the creditor which capitalized the unpaid principal and interest of
$55,082 and extended the maturity to February 24, 2015.
47
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 5 CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS
PAYABLE
(continued)
Other Loans Payable (continued)
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. The note was not repaid by January 20, 2014
and continues to accrue interest at the rate of 10% per annum. As of December
31, 2013, the Company has accrued $7,247 (2012 - $1,178 on the previous
promissory note) of interest relating to this loan. The loan was repaid in full
subsequent to the year end.
On October 15, 2013, the Company signed a new promissory note
with a creditor for a total of $500,000 which is to be disbursed to the Company
in three tranches: Tranche A - $200,000 (received in November 2013); Tranche B -
$150,000 (received in December 2013); and Tranche C - $150,000 (received in
subsequently in January 2014). The note matures on April 15, 2014 and bears
interest at 5% per annum. In the event of default, the creditor is able to
convert the unpaid principal and interest into common shares of ATS as is
required in order for the shareholding of the creditor, when added to the 49%
shareholding of Utiba, be equal to 52.57% of the entire issued share capital of
ATS. As of December 31, 2013, the balance on the loan was $351,382 which
includes $1,382 of accrued interest. The loan was repaid in full subsequent to
the year end.
NOTE 6 LONG-TERM DEBT
On August 5, 2013, the Company signed a new promissory note
with a creditor for a total of $550,000 which was to be disbursed to the Company
in three tranches: Tranche A - $100,000 (received in June 2013); Tranche B -
$200,000 by August 31, 2013 (received $100,000 in August 2013 and $100,000 in
September 2013); and Tranche C - $250,000 by September 30, 2013 (outstanding as
it has not yet been received by the Company). 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
respective 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. As
of December 31, 2013, the balance on the loan was $312,667 which includes
$12,667 of accrued interest.
The remaining required principal payments over the next two
fiscal years are as follows:
2014
|
$
|
-
|
|
2015
|
|
300,000
|
|
|
$
|
300,000
|
|
The loan was repaid in full subsequent to the year end.
48
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 7 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.
Effective January 29, 2008, the Company adopted a Retainer
Stock Plan for Professional 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 maybe awarded under this plan.
During the year ended December 31, 2013, the Company:
-
issued 1,140,590 common shares valued at $145,388 for employment
incentives in accordance with employment agreements;
-
issued 2,840,596 common shares valued at $199,048 for legal, consulting,
and investor relations services rendered;
-
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 (See Note 9); and
-
issued 2,000,000 common shares valued at $100,000 for investor relations
to be released upon achieving certain benchmarks which were included in
deferred compensation (See Note 9).
During the year ended December 31, 2012, the Company:
-
issued 3,333,333 common shares valued at $500,000 for share subscriptions
received in the prior year;
-
issued 5,978,317 common shares valued at $1,210,344 for debt settlements
and convertible debenture agreements of which 2,138,358 shares valued at
$113,333 were obligated to be issued at December 31, 2011;
-
issued 372,703 common shares valued at $56,873 for employment incentives
in accordance with employment agreements;
-
issued 1,200,025 common shares valued at $204,803 for legal, accounting,
and consulting services rendered; and
-
cancelled 1,000,000 common shares valued at $140,000 previously issued for
employment incentives during the year ended December 31, 2011.
49
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 7 CAPITAL STOCK (continued)
Common Shares (continued)
In addition, during the year ended December 31, 2012, the
Company issued common shares for the following subscriptions received during the
year:
-
on May 17, 2012, the Company issued 1,402,116 common shares at $0.10 per
share for total cash proceeds of $143,528;
-
on June 4, 2012, the Company issued 1,264,550 common shares at $0.10 per
share for total cash proceeds of $134,171; and
-
on December 26, 2012, the Company issued 2,333,333 common shares at $0.15
per share for total cash proceeds of $350,000.
At December 31, 2013, the Company had $130,362 (2012 -
$130,362) in private placement subscriptions which are reported as private
placement subscriptions within stockholders deficit.
The shares which were not issued as at December 31, 2013 or
December 31, 2012 were not used to compute the total weighted average shares
outstanding as at December 31, 2013 or December 31, 2012, respectively, and were
thus not used in the basic net loss per share calculation.
Losses Per Share
As at December 31, 2013, the Company had a weighted average of
91,636,234 (2012 82,767,827) common shares outstanding resulting in basic and
diluted net and comprehensive loss per common share from continuing operations
of $0.02 (2012 - $0.02), basic and diluted net and comprehensive loss per common
share from discontinued operations of $0.02 (2012 $0.02), and basic and
diluted net and comprehensive loss per common share of $0.04 (2012 - $0.04).
50
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 7 CAPITAL STOCK (continued)
Warrants
The Companys warrant transactions are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
$
|
|
Balance, December 31, 2011
|
|
6,569,444
|
|
|
0.23
|
|
Issued
|
|
2,009,863
|
|
|
0.25
|
|
Expired
|
|
(2,569,444
|
)
|
|
0.19
|
|
Balance, December 31, 2012
|
|
6,009,863
|
|
|
0.25
|
|
Expired
|
|
(4,000,000
|
)
|
|
0.25
|
|
Cancelled
|
|
(2,009,863
|
)
|
|
0.25
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
-
|
|
|
-
|
|
|
a)
|
In conjunction with the 3,333,333 common shares issued on
June 15, 2011, the Company issued 2,000,000 warrants exercisable at $0.25
per share for a period of one and a half years. The warrants were valued
at $207,846 calculated using the Black-Scholes option pricing model
assuming a life expectancy of one and a half years, a risk free rate of
0.05%, a forfeiture rate of 0%, and volatility of 273.13%. In addition to
these warrants, the Company signed a Stock Grant Agreement with the
shareholder allowing the shareholder to receive up to an additional
569,444 common shares of the Company (bonus shares). The shareholder
will receive 0.284722 bonus shares for each warrant exercised. The bonus
shares were valued at $68,333 calculated using the Black-Scholes option
pricing model assuming a life expectancy of one and a half years, a risk
free rate of 0.05%, a forfeiture rate of 0%, and volatility of 273.13%.
These warrants, totaling 2,569,444, expired on December 31,
2012.
|
|
|
|
|
b)
|
In conjunction with two subscription agreements signed on
December 21, 2011, the Company issued 4,000,000 warrants exercisable at
$0.25 per share for a period of one and a half years. The warrants were
valued at $398,752 calculated using the Black-Scholes option pricing model
assuming a life expectancy of 1.53 years, a risk free rate of 0.01%, a
forfeiture rate of 0%, and volatility of 180.97%.
|
|
|
|
|
c)
|
In conjunction with a debt settlement agreement signed on
April 8, 2012, the Company issued 409,863 warrants exercisable at $0.25
per share for a period of one and a half years. The warrants were valued
at $85,198 calculated using the Black-Scholes option pricing model
assuming a life expectancy of 1.50 years, a risk free rate of 0.07%, a
forfeiture rate of 0%, and volatility of 178.93%. The value of these
warrants is included in bank charges and interest on the consolidated
statement of operations.
|
51
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 7 CAPITAL STOCK (continued)
Warrants (continued)
|
d)
|
In conjunction with 1,402,116 common shares issued on May
17, 2012, the Company issued 841,270 warrants exercisable at $0.25 per
share for a period of one year and five months. The warrants were valued
at $122,122 calculated using the Black-Scholes option pricing model
assuming a life expectancy of 1.42 years, a risk free rate of 0.10%, a
forfeiture rate of 0%, and volatility of 179.99%.
|
|
|
|
|
e)
|
In conjunction with 1,264,550 common shares issued on
June 4, 2012, the Company issued 758,730 warrants exercisable at $0.25 per
share for a period of one and a half years. The warrants were valued at
$89,840 calculated using the Black-Scholes option pricing model assuming a
life expectancy of 1.5 years, a risk free rate of 0.07%, a forfeiture rate
of 0%, and volatility of 172.01%.
|
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.
The Company had no warrants outstanding at December 31, 2013.
The following table summarizes the warrants outstanding at December 31, 2012:
Warrants
|
|
Exercise
|
|
|
outstanding
|
|
price
|
|
Expiration date
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
0.25
|
|
June 30, 2013
|
409,863
|
|
0.25
|
|
October 8, 2013
|
841,270
|
|
0.25
|
|
October 11, 2013
|
758,730
|
|
0.25
|
|
November 30, 2013
|
|
|
|
|
|
6,009,863
|
|
|
|
|
The weighted average life of warrants outstanding at December
31, 2013 and 2012 was 0 years and 0.61 years, respectively. All warrants
outstanding had an intrinsic value of $Nil.
52
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 8 DISCONTINUED OPERATIONS
On October 15, 2013 and subsequently amended in its entirety on
January 6, 2014, the Company, Utiba Pte. Ltd. (Utiba), a non-controlling
interest investor in ATS, ATS, and Utiba Guatemala entered into an Asset
Purchase Agreement in order to effect the sale by ATS of all of its business and
assets to Utiba, as described below (the ATS Transaction). For such
transaction to proceed, the Company will require shareholders approval. On
February 21, 2014, the Companys shareholder approved the transaction.
Overview of the ATS Transaction and Consideration
Payable
|
1
|
The sale pursuant to the Asset Purchase Agreement by ATS
of substantially all of its business and assets to Utiba (including the
assumption by Utiba of certain liabilities related to such business and
assets), in consideration for up to $3,100,000 in cash (the "Cash Purchase
Price") subject to certain adjustments related to certain net receivables
or liabilities, as the case may be, and reduction to the extent of certain
tax liabilities of ATS. The amount of $300,000 of the Cash Purchase Price
will be held back to cover certain claims that may be made under the
indemnification provisions of the Asset Purchase Agreement;
|
|
|
|
|
2
|
The entry by the Company into a non-compete covenant in
favor of Utiba and its affiliates in the mobile payment, top up and mobile
financial services industry for a period of 36 months, in consideration
for a payment in cash on closing of the transactions contemplated by the
Asset Purchase Agreement (the Closing) of $2,200,000;
|
|
|
|
|
3
|
The release by the Company of Utiba from all its
obligations under the ATS Shareholders Agreement in consideration for a
payment in cash on Closing of $200,000;
|
|
|
|
|
4
|
Upon Closing, Utiba shall transfer its 49% interest in
ATS to the Company so that the Company will own 100% of ATS after
Closing.
|
On March 4, 2014, the ATS Transaction closed with the Company
receiving $4,918,974 in proceeds. An additional $667,264 is being held in escrow
to cover certain claims that may be made under the indemnification provisions of
the Asset Purchase Agreement
53
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 8 DISCONTINUED OPERATIONS (continued)
As of December 31, 2013, the associated assets and liabilities
of the consolidated ATS business have been classified as discontinued operations
and are presented below:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
44,107
|
|
|
9,464
|
|
Accounts receivable, net of allowance for doubtful accounts of $789,565
(2012 - $154,845)
|
|
301,991
|
|
|
1,230,214
|
|
Prepaid cost of
sales
|
|
25,056
|
|
|
108,382
|
|
Deposits and other assets
|
|
40,500
|
|
|
31,858
|
|
Fixed assets, net of accumulated amortization of $119,006 (2012 -
$116,025)
|
|
137,170
|
|
|
277,942
|
|
Intellectual property
|
|
1,500,000
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
CURRENT ASSETS OF DISCONTINUED
OPERATIONS
|
|
2,048,824
|
|
|
3,157,860
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Accounts payable
and accrued charges
|
|
555,914
|
|
|
309,087
|
|
Deferred income
|
|
153,150
|
|
|
288,688
|
|
Long-term debt
|
|
69,039
|
|
|
235,138
|
|
Capital leases
|
|
5,042
|
|
|
35,071
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES OF DISCONTINUED
OPERATIONS
|
|
783,145
|
|
|
867,984
|
|
54
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 8 DISCONTINUED OPERATIONS (continued)
The following table summarizes the financial results of ATSs
consolidated discontinued operations for the years ended December 31, 2013 and
2012:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Revenue
|
|
1,185,912
|
|
|
1,332,974
|
|
Cost of Sales
|
|
1,136,976
|
|
|
923,076
|
|
Gross Margin
|
|
48,936
|
|
|
409,898
|
|
Operating Expenses
|
|
2,894,209
|
|
|
2,715,030
|
|
Net Loss Before Other Items
|
|
(2,845,273
|
)
|
|
(2,305,132
|
)
|
Other Items
|
|
44,970
|
|
|
(532,335
|
)
|
Net Loss Before Non-Controlling Interest
|
|
(2,800,303
|
)
|
|
(2,837,467
|
)
|
Non-Controlling Interest
|
|
(1,362,819
|
)
|
|
(1,390,349
|
)
|
|
|
|
|
|
|
|
Discontinued Operations for Alternet Systems, Inc.
|
|
(1,437,484
|
)
|
|
(1,447,107
|
)
|
The following table summarizes the cash flow of ATSs
consolidated discontinued operations for the years ended December 31, 2013 and
2012:
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Operating Activities
|
|
(142,495
|
)
|
|
(1476,026
|
)
|
Financing Activities
|
|
(196,127
|
)
|
|
(83,519
|
)
|
|
|
|
|
|
|
|
Cash Flows From Discontinued Operations
|
|
(338,622
|
)
|
|
(1,559,545
|
)
|
All other Notes to the consolidated financial statements that
were impacted by this discontinued operation have been reclassified
accordingly.
55
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 9 - RELATED PARTY TRANSACTIONS
As of December 31, 2013, a total of $1,637,710 (2012 -
$664,113) was payable to directors and officers of the Company of which $668,195
(2012 $644,531) was non-interest bearing and had no specific terms of
repayment, $21,589 (2012 - $19,582) related to loans detailed in Note 5, and
$947,926 (2012 - $Nil) related to unpaid wages of prior years incurring interest
at 10% per annum effective January 1, 2013. Of the amount payable, $145,229
(2012 - $58,401) was included in accounts payable for expense reimbursements,
$1,484,802 (2012 - $573,310) was included in wages payable for accrued fees and
interest, and $7,679 (2012 - $32,402) was included in due to related parties.
During the year ended December 31, 2013, the Company expensed a
total of $910,000 (2012 - $807,500) in consulting fees and salaries paid to
directors and officers of the Company. Of the amounts incurred, $872,084 (2012 -
$445,417) has been accrued, $37,916 (2012 - $113,958) has been paid in cash and
$Nil (2012 - $248,125) has been paid through the issuance of shares. During the
year ended December 31, 2012, the Company signed debt settlement agreements with
two directors and one officer of the Company to settle total accrued wages of
$305,625 and expense reimbursements of $40,457 by issuing 2,628,738 shares of
the Companys common stock. One director and the officer sold their debt
settlement agreements to an unrelated third party. All shares were issued during
the year ended December 31, 2012.
As of December 31, 2013, the Companys discontinued operations
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) (2012 -
$789,565; VEF 6,674,709) which the Company fully allowed for during the year due
to collectability uncertainty caused by the uncertainty of obtaining foreign
currency in Venezuela. In addition, the Company owes this company $94,784 (VEF
5,971,438) (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.
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 $0.15 per share,
the closing price of the stock on the issue date, for a total value of $105,000.
As of December 31, 2013, all of the shares have been issued to the consultant.
The value of the services is being expensed on a straight-line basis over the
life of the contract.
56
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 10 DEFERRED COMPENSATION (continued)
In October 2013, the Company signed an investor relations
agreement with another consultant to provide investor relations services for a
term of one year. The consultant will be compensated with two monthly payments
of $10,000 from the date of signing (paid). The consultant will also receive
2,000,000 shares, which are deliverable upon certain benchmarks of the Companys
share price. On November 6, 2013, the Company issued 2,000,000 shares in the
name of the consultant valued at $0.05 per share, the closing price of the stock
on the issue date, for a total value of $100,000 of which none have been
delivered to the consultant. The remaining 2,000,000 shares will be delivered to
the consultant when the benchmarks of the contract have been met. If the
contract is terminated and the consultant does not meet the stages of the
benchmarks, the Company can cancel any shares not delivered to the consultant.
The value of the services is being expensed when the benchmarks are met. As at
December 31, 2013, none of the benchmarks had been met.
The Company recorded the aggregate fair value of the shares
issued pursuant to the above agreements as deferred compensation. During the
year ended December 31, 2013, the Company expensed $91,875 relating to the above
contracts. The shares issued were all valued at their market price on the date
of issuance.
NOTE 11 INCOME TAXES
There is no provision for federal or state income taxes for the
years ended December 31, 2013 and 2012 since the Company has established a
valuation allowance equal to the total deferred tax asset related to losses
incurred during such periods.
A reconciliation of the effect of applying the federal
statutory rate and the effective income tax rate used to calculate the Company's
income tax provision is as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes
|
|
(1,887,317
|
)
|
|
(2,005,685
|
)
|
Effective tax rate
|
|
40.50%
|
|
|
40.50%
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(764,400
|
)
|
|
(812,300
|
)
|
Share issue costs
|
|
(8,500
|
)
|
|
(3,600
|
)
|
Non-deductible items
|
|
224,900
|
|
|
238,700
|
|
Other deductible items
|
|
(400
|
)
|
|
(400
|
)
|
Tax benefits not recognized
|
|
548,400
|
|
|
577,600
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
-
|
|
|
-
|
|
57
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 11 INCOME TAXES (continued)
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before
income taxes
|
|
(2,800,283
|
)
|
|
(2,835,368
|
)
|
Effective tax rate
|
|
40.50%
|
|
|
40.50%
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(1,134,100
|
)
|
|
(1,148,300
|
)
|
Non-deductible items
|
|
159,400
|
|
|
105,500
|
|
Other deductible items
|
|
(30,100
|
)
|
|
(26,300
|
)
|
Tax benefits not recognized
|
|
1,004,800
|
|
|
1,069,100
|
|
Income tax expense
|
|
-
|
|
|
-
|
|
Deferred tax assets and liabilities and related valuation
allowance as of December 31, 2013 and 2012 are as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Capital loss carryforwards -
continuing operations
|
|
40,500
|
|
|
-
|
|
Net operating
loss carryforwards - continuing operations
|
|
6,002,300
|
|
|
5,494,500
|
|
Net operating loss carryforwards
- discontinued operations
|
|
2,727,200
|
|
|
1,716,800
|
|
|
|
8,770,000
|
|
|
7,211,300
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Capital assets continuing
operations
|
|
(800
|
)
|
|
(900
|
)
|
Capital assets
discontinued operations
|
|
(50,100
|
)
|
|
(44,500
|
)
|
|
|
(50,900
|
)
|
|
(45,400
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
|
8,719,100
|
|
|
7,165,900
|
|
Valuation allowance
|
|
(8,719,100
|
)
|
|
(7,165,900
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
-
|
|
|
-
|
|
Based on the Company's historical losses and its expectation of
continuation of losses for the foreseeable future, the Company has determined
that it is not more likely than not that the deferred tax assets will be
realized and accordingly, has provided a valuation allowance.
58
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 11 INCOME TAXES (continued)
At December 31, 2013, the Company has available unused net
operating loss carryforwards of approximately $20.5 million that expire from
2021 to 2033 for federal tax purposes and approximately $15.8 million for
Florida state tax purposes, which expire from 2027 to 2033. Additionally, the
Company has loss carryforwards of approximately $1,500 in Guatemala and $9,700
in Ecuador.
As of December 31, 2013, the Company believes that it has no
liability for uncertain tax provisions. If the Company were to determine there
were an uncertain tax provisions, the Company would recognize the liability and
related interest and penalties within income tax expense. As of December 31,
2013, the Company has no provisions for interest or penalties related to
uncertain tax positions.
The Company files income tax returns in Guatemala, Ecuador, and
the U.S. including both the federal jurisdiction and Florida state jurisdiction.
There are no income tax examinations currently underway in any jurisdictions,
however to the extent that net operating losses have been utilized in either the
current or preceding years such losses may be subject to future income tax
examination.
NOTE 12 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 $220,809 and $143,116 during the year
ended December 31, 2013 and 2012, respectively.
The following is a schedule by fiscal year of future minimum
rental payments required under the operating lease agreements:
2014
|
$
|
351,060
|
|
2015
|
|
345,362
|
|
2016
|
|
262,404
|
|
|
$
|
958,826
|
|
59
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 12 OPERATING LEASES (continued)
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 years ended
December 31, 2013 or 2012.
All of the above leases were transferred to Utiba upon closing
of the ATS Transaction described in Note 8.
NOTE 13 SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH
FLOWS
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
$
|
|
|
$
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
Interest paid
during the year in cash
|
|
35,572
|
|
|
25,137
|
|
Cash paid for income taxes
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Supplemental financing and investing non-cash
|
|
|
|
|
|
|
disclosures:
|
|
|
|
|
|
|
Shares issued for debt repayment
|
|
-
|
|
|
1,210,344
|
|
Shares
issued for previously received share subscriptions
|
|
-
|
|
|
500,000
|
|
Value of beneficial conversion
features
|
|
75,333
|
|
|
142,663
|
|
Shares obligated
to be issued
|
|
(2,800
|
)
|
|
(113,333
|
)
|
Wages payable converted to other
loans payable
|
|
-
|
|
|
421,504
|
|
Equipment
purchased through capital lease
|
|
-
|
|
|
18,957
|
|
Software purchased through long
term debt
|
|
-
|
|
|
213,900
|
|
Shares issued
for share issue costs
|
|
21,000
|
|
|
-
|
|
Shares issued for deferred
compensation
|
|
205,000
|
|
|
-
|
|
Shares issued
for wages and related benefits payable
|
|
85,795
|
|
|
-
|
|
60
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 14 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).
|
The fair value of the Companys accounts receivable, cheques
issued in excess of bank balance, accounts payable and accrued liabilities,
wages payable, accrued taxes, customer deposits, 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 15 LAWSUIT
On May 10, 2010, the Company received noticed that they had
been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a
judgment of $6,889 including interest of $1,444 for unpaid invoices. The Company
had 30 days to respond to the notice before a default judgment is awarded. As at
December 31, 2013, the full amount has been accrued and is included in accounts
payable.
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 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. On September 25, 2013, a settlement agreement was
signed between the Claimant and the Companys joint-venture partner; as such,
the Company was cleared of any obligations under the lawsuit.
61
ALTERNET SYSTEMS INC.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31,
2013 and 2012
|
NOTE 16 SUBSEQUENT EVENTS
|
On January 2, 2014, the Company issued 70,000 common
shares valued at $2,800 to an investor relations consultant for a
previously recorded obligation to issue shares valued at $2,800.
|
|
On January 13, 2014, the Company signed an agreement with
a consultant to provide consulting services for a term of one year. The
consultant will be compensated $7,500 per month for the term of the
contract and will receive 500,000 common shares of the Company. The
consultant can earn success fees of up to 1,000,000 upon reaching certain
benchmarks. On March 10, 2014, the Company issued the 500,000 common
shares to the consultant at $0.14 per share for a total value of $70,000.
|
|
On February 3, 2014, the Company issued 70,000 common
shares valued at $1,400 to an investor relations consultant for services
rendered.
|
|
On February 24, 2014, the Company issued 650,000 common
shares valued at $52,000 to legal counsel for services rendered.
|
|
On February 25, 2014 the Company was awarded Ven
Authority status through a strategic partnership with Hub Culture. As part
of the strategic transaction, Hub Culture has subscribed for 5 million
shares of the Company at $0.10 per share in the first ever acquisition of
a public company stake using digital currency. Alternet and Hub Culture
will jointly be working together to introduce new products and services to
Ven users globally.
|
|
On March 3, 2014, the Company issued 23,333 common shares
valued at $3,500 to an investor relations consultant for services
rendered.
|
|
On March 4, 2014 the Company finalized the ATS
Transaction and received $4,918,974 in payment in accordance with the
Asset Purchase Agreement. An additional $667,264 is being held in escrow
to cover certain claims that may be made under the indemnification
provisions of the Asset Purchase Agreement. Upon Closing, Utiba
transferred its 49% interest in ATS to the Company so that the Company now
owns 100% of ATS.
|
|
On March 4, 2014, the Company signed a lease for new
office space in Miami Florida. The lease is for a term of one year
commencing March 1, 2014 and requires payments of $1,800 per month.
|
Events occurring after December 31, 2013 were evaluated through
the date this Annual 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.
62