UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
¨ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER: 000-31909
ALTERNET SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA | 88-0473897 |
(State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
organization) |
#610 815 West Hastings Street
Vancouver, British Columbia
(Address of principal executive offices)
V6C 1B4
(Zip Code)
(604) 608-2540
(Registrants telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter
period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes x
No ¨
As of September 30, 2003, the Registrant had 16,950,029 shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one) Yes ¨ No x
2
TABLE OF CONTENTS
3
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTERNET SYSTEMS INC.
(A Development Stage Company)
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
ALTERNET SYSTEMS INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||
2003 | 2002 | |||||
(Unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash | $ | 3,318 | $ | 203 | ||
Accounts receivable | - | 17,125 | ||||
Prepaid expenses | 3,758 | 3,758 | ||||
7,076 | 21,086 | |||||
LICENSE RIGHTS, net of amortization (Note 4) | - | 18,000 | ||||
FURNITURE AND EQUIPMENT, net of depreciation | 574 | 739 | ||||
$ | 7,650 | $ | 39,825 | |||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable and accrued liabilities | $ | 475,343 | $ | 132,227 | ||
Loan payable | 3,000 | - | ||||
Deferred license revenue | 21,675 | 5,010 | ||||
Due to related parties (Note 6) | 20,450 | 12,782 | ||||
520,468 | 150,019 | |||||
COMMITMENTS AND CONTINGENCIES (Notes 1, 4 and 7) | ||||||
STOCKHOLDERS EQUITY (CAPITAL DEFICIENCY) | ||||||
Capital stock (Note 5) | ||||||
Common stock, $0.00001 par value, 100,000,000 shares authorized | ||||||
16,950,029 (2002 16,144,085) issued and outstanding | 169 | 161 | ||||
Additional paid-in capital | 871,340 | 659,668 | ||||
Private placement subscriptions | 88,896 | 3,650 | ||||
Obligation to issue shares | 487,150 | - | ||||
Accumulated other comprehensive income (loss) | (5,185 | ) | 733 | |||
Deficit accumulated during development stage | (1,955,188 | ) | (774,406 | ) | ||
(512,818 | ) | (110,194 | ) | |||
$ | 7,650 | $ | 39,825 |
The accompanying notes are an integral part of these interim consolidated financial statements
ALTERNET SYSTEMS INC.
(A Development Stage Company)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months | Three months | Nine months | Nine months | October 13, | |||||||||||
ended | ended | ended | ended | 2000 (inception) | |||||||||||
September 30, | September 30, | September 30, | September 30, | to September 30, | |||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | |||||||||||
LICENSE FEES AND HARDWARE | |||||||||||||||
SALES | $ | 50,970 | $ | 40,923 | $ | 73,842 | $ | 58,398 | $ | 142,610 | |||||
COST OF SALES | |||||||||||||||
Royalties | 1,236 | - | 6,316 | - | 6,316 | ||||||||||
Installation costs and other | 649 | 46,090 | 2,050 | 48,115 | 51,953 | ||||||||||
1,885 | 46,090 | 8,366 | 48,115 | 58,269 | |||||||||||
GROSS PROFIT (LOSS) | 49,085 | (5,167 | ) | 65,476 | 10,283 | 84,341 | |||||||||
EXPENSES | |||||||||||||||
Bad debts | - | 17,125 | 17,125 | ||||||||||||
Depreciation and amortization | 15,055 | 1,755 | 18,165 | 5,265 | 31,847 | ||||||||||
License fees | 84,000 | 60,000 | 252,000 | 180,000 | 612,000 | ||||||||||
Management and consulting | 61,913 | 22,080 | 263,187 | 60,916 | 355,010 | ||||||||||
Office and general | 31,255 | 21,115 | 77,048 | 50,696 | 201,576 | ||||||||||
Marketing | 128,874 | 25,585 | 486,791 | 57,140 | 608,899 | ||||||||||
Professional fees | 8,029 | 10,134 | 38,625 | 29,915 | 119,755 | ||||||||||
Training and documentation | 13,440 | - | 93,317 | - | 93,317 | ||||||||||
342,566 | 140,669 | 1,246,257 | 383,932 | 2,039,529 | |||||||||||
NET LOSS FOR THE PERIOD | $ | (293,481 | ) | $ | (145,836 | ) | $ | (1,180,782 | ) | $ | (373,649 | ) | $ | (1,955,188 | ) |
BASIC NET LOSS PER SHARE | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.02 | ) | |||
WEIGHTED AVERAGE COMMON | |||||||||||||||
SHARES OUTSTANDING | 16,950,029 | 15,672,446 | 16,529,335 | 15,346,800 |
The accompanying notes are an integral part of these interim consolidated financial statements
ALTERNET SYSTEMS INC.
(A Development Stage Company)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months | Nine months | October 13, | |||||||
ended | ended | 2000 (inception) | |||||||
September 30, | September 30, | to September | |||||||
2003 | 2002 | 30, 2003 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
Net loss for the period | $ | (1,180,782 | ) | $ | (373,649 | ) | $ | (1,955,188 | ) |
Adjusted for item not involving cash: | |||||||||
Depreciation and amortization | 18,165 | 5,265 | 31,847 | ||||||
Non-cash stock based compensation | 640,750 | - | 640,750 | ||||||
Bad debts | 17,125 | - | 17,125 | ||||||
Gain on disposal of asset | - | - | (215 | ) | |||||
Changes in operating assets and liabilities: | |||||||||
Changes in accounts receivable | - | (30,619 | ) | (17,125 | ) | ||||
Changes in inventory | - | (6,057 | ) | - | |||||
Changes in prepaid expenses | - | (2,139 | ) | (3,758 | ) | ||||
Changes in deferred license revenue | 16,665 | 5,615 | 21,675 | ||||||
Changes in accounts payable | 343,116 | 140,680 | 551,203 | ||||||
NET CASH FLOWS USED IN OPERATING ACTIVITIES | (144,961 | ) | (260,904 | ) | (713,686 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Loan payable | 3,000 | - | 3,000 | ||||||
Advances (to) from related parties | 7,668 | (20,944 | ) | 16,612 | |||||
Obligation to issue shares | - | 62,300 | - | ||||||
Net proceeds on sale of common stock and subscriptions | 143,326 | 237,280 | 704,709 | ||||||
NET CASH FLOWS FROM FINANCING ACTIVITIES | 153,994 | 278,636 | 724,321 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Acquisition of furniture and equipment | - | (1,056 | ) | (2,206 | ) | ||||
Cash acquired on reverse acquisition of SchoolWeb | - | - | 74 | ||||||
NET CASH FLOWS USED IN INVESTING ACTIVITIES | - | (1,056 | ) | (2,132 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (5,918 | ) | (3,091 | ) | (5,185 | ) | |||
INCREASE IN CASH | 3,115 | 13,585 | 3,318 | ||||||
CASH, BEGINNING OF PERIOD | 203 | 5,669 | |||||||
CASH, END OF PERIOD | $ | 3,318 | $ | 19,254 | $ | 3,318 |
OTHER SIGNIFICANT NON-CASH TRANSACTIONS:
During the period the Company issued 640,000 shares for services valued at
$153,600.
The Company is obligated to issue 1,671,000 common shares under employment contacts
for services valued at $487,150. Refer to Note 7.
The accompanying notes are an integral part of these interim consolidated financial statements
ALTERNET
SYSTEMS INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|
(Unaudited) |
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION |
The Company was incorporated on June 26, 2000 in the State of Nevada as North Pacific Capital Corp. and was organized for the purpose of creating a corporate vehicle to locate and acquire an operating business. On December 19, 2001 the Company changed its name to Schoolweb Systems Inc. and on May 14, 2002 the Company changed its name to Alternet Systems Inc. (Alternet or the Company). On November 6, 2000, the Company filed a Form 10SB registration statement with the United States Securities and Exchange Commission (SEC) and as a result is subject to the regulations governing reporting issuers in the United States. On March 14, 2003 the Company was listed for quotation on the Over the Counter Bulletin Board. By agreement dated July 2, 2001 and completed September 10, 2001, Alternet issued 12,343,000 shares of restricted common stock to the shareholders of Schoolweb Holdings Inc. (SW Holdings), a development stage company incorporated October 13, 2000 in the State of Nevada, in exchange for all of the issued and outstanding shares of SW Holdings. On June 26, 2002 SW Holdings changed its name to AI Systems Group, Inc. (AI Systems). The acquisition resulted in the former shareholders of SW Holdings acquiring 90.1% of the then outstanding shares of the Company and has been accounted for as a reverse merger with SW Holdings being treated as the accounting parent and Alternet, the legal parent, being treated as the accounting subsidiary. Accordingly, the consolidated results of operations of the Company include those of SW Holdings for all periods shown and those of the Alternet since the date of the reverse acquisition. The results of operations of SW Holdings are from its inception, October 13, 2000 and include the results of its wholly-owned subsidiary, AI Systems Group (Canada) Ltd. (formerly SchoolWeb Systems (Canada) Ltd.), a company incorporated April 17, 2001 in the Province of British Columbia. Refer to Note 3. SW Holdings, through a License Agreement dated January 1, 2001, distributes, markets, sells and licenses in the United States and Canada, certain proprietary software and hardware systems technology known as SchoolWeb used for caching Internet and multimedia files on special servers (refer to Note 4). The 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 September 30, 2003 the Company had a working capital deficiency of $513,392 (2002 - $128,933). The Company has incurred losses since inception and further losses are anticipated before the Company reaches a commercial stage raising substantial doubt as to the Companys ability to continue as a going concern. The Companys continued operations are dependent on the successful implementation of its business plan, its ability to obtain additional financing as needed, and ultimately to attain profitable operations. Unaudited Interim Financial Statements The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulation S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2002 included in the Companys Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements included in the Form 10-KSB. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AI Systems Group, Inc. and AI Systems Group (Canada) Ltd. All significant intercompany transactions and account balances have been eliminated. |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Use of Estimates and Assumptions Preparation of the Companys financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 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. License Rights The Company amortizes the cost of acquiring license rights on a straight-line basis over the term of the license. The Company evaluates the carrying amount of its unamortized license rights against the undiscounted future anticipated cash flows associated with them. If the evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value, an impairment provision is recorded to adjust the carrying value of the license rights to their fair value. During the third quarter the Company wrote off the carrying balance of the AII license. Refer to Note 4. Furniture and Equipment Furniture and equipment are recorded at cost and depreciated on a declining balance basis at a rate of 30% per annum. Revenue recognition The Company licenses its SchoolWeb system on a prepaid basis for terms ranging from one to three years. The Company recognizes license revenues on a straight-line basis over the license term upon completion of the required hardware and software installations and upon acceptance by the purchasers and collection is reasonably assured. License fees paid in advance are recorded as deferred revenue. The Company has generated revenues from hardware sales in connection with the testing of the SchoolWeb system. Hardware sales are recognized upon completion and acceptance of installation by the purchasers and collection is reasonably assured. Foreign Currency Translation The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation, 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, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, the Company has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS No. 148), an amendment of Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation (SFAS No. 123). The purpose of SFAS No. 148 is to: (1) provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, (2) amend the disclosure provisions to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock-based employee compensation, and (3) to require disclosure of those effects in interim financial information. The disclosure provisions of SFAS No. 148 were effective for the Company for the year ended December 31, 2002. |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont) |
The Company has elected to continue to account for stock options granted to employees and officers using the intrinsic value based method in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148 as described above. Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the estimated fair value of the Companys stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and pro-rata for future services over the option-vesting period. In addition, with respect to stock options granted to employees, the Company provides pro-forma information as required by SFAS No. 123 showing the results of applying the fair value method using the Black-Scholes option pricing model. In accordance with SFAS No. 123, the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation An Interpretation of APB Opinion No. 25 (FIN 44), which provides guidance as to certain applications of APB 25. FIN 44 is generally effective July 1, 2000 with the exception of certain events occurring after December 15, 1998. Income taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. As at March 31, 2003 the Company had net operating loss carryforwards; however, due to the uncertainty of realization the Company has provided a full valuation allowance for the deferred tax assets resulting from these loss carryforwards. Net Loss per Common Share Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. Warrants were not included in the calculation of weighted average number of shares because the effect would be anti-dilutive. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The adoption of SFAS 141 has not had a material impact on the Companys financial position or results of operations. |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd) |
In July 2001, the FASB issued Statement
of Financial Accounting Standards No. 142 (SFAS 142), Goodwill
and Intangible Assets, which revises the accounting for purchased
goodwill and intangible assets. Under SFAS 142, goodwill and intangible
assets with indefinite lives will no longer be amortized and will be tested
for impairment annually or whenever events or circumstances indicate that
the estimated fair value is less than the related carrying value as determined
on a reporting unit basis. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS 142 has not had a material
impact on the Companys financial position or results of operation.
|
NOTE 3 ACQUISITION OF SW HOLDINGS |
By agreement dated July 2, 2001 and completed September 10, 2001, SW Systems acquired 100 % of the issued and outstanding shares of SW Holdings in exchange for 12,343,000 shares of restricted common stock of SW Systems. At the time of this transaction, the former shareholders of SW Holdings acquired 90.1% of the 13,693,000 total issued and outstanding shares of SW Systems. This acquisition has been accounted for as a recapitalization using accounting principles applicable to reverse acquisitions with SW Holdings being treated as the accounting parent (acquirer) and SW Systems being treated as the accounting subsidiary (acquiree). The value assigned to the capital stock of consolidated SW Systems on acquisition of SW Holdings is equal to the book value of the capital stock of SW Holdings plus the book value of the net assets of SW Systems as at the date of the acquisition. The book value of SW Systems capital stock subsequent to the acquisition is calculated and allocated as follows: |
SW Holdings capital stock | $ | 153,103 | ||
SW Systems net assets (liabilities) | (7,904 | ) | ||
$ | 145,199 | |||
Capital stock | $ | 137 | ||
Additional paid-in capital | 145,062 | |||
$ | 145,199 |
These consolidated financial statements
include the results of operations of SW Holdings since October 13, 2000
(inception) and the results of operations of SW Systems since the date
of the reverse acquisition on September 10, 2001. |
NOTE 4 - LICENSE AGREEMENT |
By agreement dated January 1, 2001, SW Holdings entered into an agreement with Advanced Interactive Inc. (AII) and Advanced Interactive (Canada) Inc. (AIC) whereby SW Holdings acquired exclusive and non-exclusive rights and licenses to commercialise, distribute and market AII and AIC technology, products and services in the United States and Canada for a period of five years renewable for a further five years at SW Holdings option. SW Holdings issued 2,500,000 shares on June 29, 2001 valued at $.01 per share or $25,000 to acquire the license. SW Holdings must pay royalties equal to 40% of net revenue received plus a fixed amount of $10,000 per month in the first year, $20,000 per month in year two, and increasing by $8,000 per month in each of the subsequent years to a maximum of $84,000 per month in year ten. After year three, the fixed monthly payment is reduced by the amount of royalties otherwise payable. Effective September 10, 2001 SW Holdings, AII and AIC amended the original agreement such that AI and AIC received an additional 500,000 shares valued at $5,000 which Alternet issued on September 10, 2001. Also effective September 10, 2001 the President and director of AII and AIC became a director of the Company until May 16, 2003 when this director resigned. |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 4 - LICENSE AGREEMENT (continued) |
A total of $362,901 in unpaid monthly license fees and related costs owing to AII is included in accounts payable. On October 14, 2003, AI Systems terminated its software license agreement (the "License Agreement") with AII. The License Agreement was terminated for a number of reasons including the failure by AII to grant to AI Systems North American exclusivity for technologies and software licensed under the License Agreement. AI Systems has advised AII that it does not intend to pay the $362,901 in unpaid monthly license fees and other costs. AI Systems has also advised AII that it intends to cancel the 3,000,000 common shares issued to AII under the terms of the License Agreement. AII has advised AI Systems, in writing, that it considers the agreement now to be a non-exclusive license that is still in effect and that unpaid monthly license fees and related costs are still due to AII. The software licensed under the License Agreement is no longer used in any products that Alternet sells. The terms of the License Agreement state that if either party has a dispute with the other party the dispute should be submitted to arbitration for settlement. If this were to occur, or if other proceedings including court proceedings were to be commenced, such arbitration or other proceedings could involve claims for monetary or other damages, recovery of the unpaid monthly license payments, royalty payments or other claims and would likely be significant and material to the business of Alternet Systems and to its liquidity and capital resources. |
NOTE 5 CAPITAL STOCK |
To September 30, 2003, the Company has not granted any stock options. During the nine months ended September 30, 2003 the Company completed a private placement of 165,944 units at a price of $.35 per unit for total proceeds of $58,080 of which 3,650 had been received at December 31, 2002. Each unit consists of one common share and one share purchase warrant entitling the holder to acquire an additional share at a price of $0.50 per share to March 14, 2005. During the nine months ended September 30, 2003 the Company issued 640,000 shares for services valued at $153,600 of which $16,800 is prepaid. Also during the nine months ended September 30, 2003 the Company received $88,896 towards future private placements, the terms of which are being negotiated. The Company is obligated to issue 1,671,000 common shares under consulting, management and marketing contacts for services valued at $487,150. Refer to Note 7. A summary of the Companys warrants at September 30, 2003 and the changes for the period is as follows: |
Weighted | Weighted | |||||||
Warrants | Average | Average | ||||||
Outstanding | Exercise | Remaining | ||||||
Price | Life | |||||||
December 31, 2002 | 1,557,514 | $0.50 | 1.27 years | |||||
Granted | 165,944 | $0.50 | ||||||
Exercised | - | - | ||||||
Cancelled | - | - | ||||||
Expired | - | - | ||||||
September 30, 2003 | 1,723,458 | $0.50 | 0.87 years |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 5 CAPITAL STOCK (continued) |
Effective March 1, 2003 the Company
adopted the Alternet Systems Inc. Retainer Stock Plan for Employees, Directors
and Consultants (the Plan) for the purpose of providing the
Company with the means to compensate employees, directors and consultants
for their efforts in furthering the future success of the Company. The
Plan allows for direct awards of common stock as a reward or incentive
to employees or as consideration to directors or consultants for their
services. A total of 5,000,000 shares may be awarded under this Plan.
The Plan will terminate February 29, 2008. To date 1,671,000 shares valued
at $487,150 have been awarded but have not yet been issued. |
NOTE 6 RELATED PARTY TRANSACTIONS |
At September 30, 2003 a total of $20,450 is owing to directors. Amounts due from related parties are non-interest bearing and have no specific terms of repayment. During the nine months ended September 30, 2003, the following amounts were incurred to directors of the Company or its subsidiary, a company with a director in common and a company controlled by a shareholder of the Company. |
Nine months ended | |||||||
September 30, | |||||||
2003 | 2002 | ||||||
Consulting | $ | 110,583 | $ | 45,319 | |||
License fees | 252,000 | 180,000 | |||||
Marketing | 152,910 | 40,159 | |||||
Royalties | 6,316 | - | |||||
$ | 521,809 | $ | 265,478 | ||||
Of the amounts incurred above, the license
fees and royalties were incurred to AII and AIC. AII and AIC became related
to the Company effective September 10, 2001 when the President and director
of AII and AIC became a director of the Company until May 16, 2003 when
this director resigned. During the year ended December 31, 2002, the Company
issued 228,571 common shares at a price of $0.35 per share to settle debt
of $80,000 owing to AII. Included in accounts payable are license fees
totalling $302,162 and royalties and other expenses totalling $60,739owing
to AII which are currently under dispute (refer to Note 4). |
|||||||
NOTE 7 COMMITMENTS | |||||||
Effective February 1, 2003 and March
1, 2003 the Company signed twenty-four month consulting, management and
marketing agreements which require payment in cash and shares of the Companys
common stock on a monthly basis. The Company also signed two other marketing
agreements covering shorter time periods which require payment in shares
of the Companys common stock on a monthly basis. The remaining future
commitments are as follows: |
Number | ||||||
Cash | of shares | |||||
2003 | $ | 66,000 | 486,000 | |||
2004 | 264,000 | 1,944,000 | ||||
2005 | 41,000 | 314,000 | ||||
$ | 371,000 | 2,744,000 | ||||
In addition, certain agreements required
signing bonuses of a total of 462,000 common shares. During the period
the Company expensed $844,250 in connection with these agreements of which
$687,250 represents the fair value of the share consideration. |
ALTERNET
SYSTEMS INC. (A Development Stage Company) NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 |
(Unaudited) |
NOTE 8 INCOME TAXES |
The Company and its subsidiaries have
tax losses which may be available to reduce future years taxable
income, that result in deferred tax assets. Management believes that the
realization of the benefits from these deferred tax assets appears uncertain
due to the Companys limited operating history and losses to date.
Accordingly a full, deferred tax asset valuation allowance has been provided
and no deferred tax asset benefit has been recorded. |
4
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL OPERATIONS AND FINANCIAL RESULTS
The following discussion should be read in conjunction with the Companys consolidated financial statements and the notes thereto. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
The statements contained herein, other than historical information, are or may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and involve factors, risks and uncertainties that may cause the Companys actual results to differ materially from such statements. These factors, risks and uncertainties, include the relatively short operating history of the Company; market acceptance and availability of products and services; the impact of competitive products, services and pricing; possible delays in the shipment of new products; and the availability of sufficient financial resources to enable the Company to expand its operations.
Critical Accounting Policies
We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we used in applying the critical accounting policies. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely event that would result in materially different amounts being reported.
Revenue Recognition
The Company licenses its SchoolWeb system on a prepaid basis for terms ranging from one to three years. The Company recognizes license revenues on a straight line basis over the license term upon completion of the required hardware and software installations and upon acceptance by the purchasers. License fees paid in advance are recorded as deferred revenue.
Development of the Company
The Companyssubsidiary, in January of 2001, entered into a software license agreement (the License Agreement) with Advanced Interactive Inc. (AII) by which it acquired the North American rights to market and distribute AIIs broadcast / caching software (the SchoolWeb software system it currently markets and distributes). The License Agreement was terminated in October 2003 as the Company was no longer using the licensed software in its SchoolWeb and other software products and as the Company had experienced disputes with AII as to AIIs delivery of exclusivity on software products, service contracts and other items.
Upon termination of the License Agreement, the Company informed AII that it did not intend to make any further license payments and intended to cancel those shares which were issued by it to AII under the terms of the License Agreement.
The Company, since it first entered into the License Agreement, has hired a number of additional consultants and employees and now has two persons employed full-time in product development, two-full time sales and marketing persons and a total of four (4) other persons employed in management or administrative positions.
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All of these persons are contract consultants and the Company utilizes the services of other consultants when necessary for individual projects.
On March 6, 2002, AII and Hewlett Packard (Canada) entered into an agreement (the Hewlett Packard Agreement) where AII agreed that the broadcast caching software it had licensed to the Company would be sold in conjunction with Hewlett Packard hardware and with financing provided by a division of Hewlett Packard (Canada), Hewlett Packards leasing and finance division. Effective March 6, 2002 but executed on April 10, 2002, the Company granted to AII its consent to the Hewlett Packard Agreement. As a result, the Company must only sell broadcast caching server software (including the SchoolWeb software system) in conjunction with Hewlett Packard hardware and with financing provided by Hewlett Packards leasing and finance division. The Hewlett Packard had a one year term renewable at the option of the parties but expired in March of 2003 without renewal. The Company does not intend to renew the Hewlett Packard Agreement or seek a new agreement with Hewlett Packard.
Securities of the Company commenced trading on the NASDs OTCBB in March of 2003. The Company anticipates applying to list on the new BBX Exchange which is to replace the NASDs OTCBB in January of 2004. At this time, the Company meets the published listing requirements of the new BBX Exchange save and except that it may have to appoint additional independent directors both to its board of directors and to an audit committee. As the BBX Exchange and SEC requirements for independent audit committees for small business issuers do not yet appear to be final, the exact requirements the Company will have to meet are not determined yet.
The Company continues to develop its software products, primarily the SchoolWeb software system. The Company intends, in succeeding quarters, to begin marketing the SchoolWeb system in the United States and has two planned installations in the United States which will occur during the last quarter of fiscal year 2003. At this point, a total of 55 schools in Canada are using the SchoolWeb system and a total of 3 First Nations (native) communities in Canada are using the SchoolWeb system. Installation at another First Nations community in Northern British Columbia is continuing and is expected to be completed in the last quarter of fiscal year 2003.
The Company does not anticipate any additional hirings in the remaining quarter of fiscal 2003 and cannot predict, given its short operating history and the fact that its products are new, what its revenues, if any, will be for the last quarter of the fiscal year 2003.
With the termination of the License Agreement, the Company ceased to outsource its product development and now performs this function internally. The Company continues to modify and update its products, product brochures and other software accessories. The Company is commencing the operation of a help desk for its software clients in the last quarter of fiscal year ending December 2003.
These functions were functions originally expected to be performed by Advanced Interactive Inc. under the terms of the License Agreement. While the Companys internal costs will rise as a result of performing these functions, it is expected that this increase in costs will be more than offset by the savings of not paying license fees under the License Agreement with Advanced Interactive Inc.
RESULTS OF OPERATIONS:
With the closing of the SchoolWeb Agreement in September of 2001, the Companys results, on a consolidated basis, reflected its own results consolidated with its subsidiary, AI Systems Group Inc. (formerly known as SchoolWeb Holdings Inc). For the remainder of this part, the term Company refers to both the Company and its wholly owned subsidiary, AI Systems Group Inc.
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Net Sales
For the period ending September 30, 2003, the Company had sales of $73,482. During the corresponding period to September 30, 2002, the Company had sales of $58,398. The increase in sales is attributable to the fact that the SchoolWeb and 1nterLink products are becoming more widely known in the marketplace. In the corresponding period of 2002, the Company was, and still is, building recognition for its products and distribution.
Net Loss
For the period ending September 30, 2003, the Company had a net loss of $1,180,782 or $(0.07) per share. The net loss for the corresponding period to September 30, 2002 was $373,649 or $(0.02) per share. The increased loss was due primarily to: an increase in marketing expenses, management and consulting fees, office expense and an increase in license fees due to Advanced Interactive Inc.
Gross Profit
Gross Profit was $65,476 compared to $10,283 for the period ended September 30, 2002.
Selling, General and Administrative Expenses
For the period ended September 30, 2003, the Company incurred office and general expenses of $77,048; marketing expenses of $486,791; management and consulting fees of $263,187; fees payable under the License Agreement of $252,000; and $38,625 in professional fees. Training and documentation fees were $93,317. For the corresponding period to September 30, 2002, the Company had office and general expenses of $50,696; marketing expenses of $57,140; management and consulting fees of $60,916; fees payable under the License Agreement of $180,000 and professional fees of $29,915.
The increase in office and general expense, marketing and management and consulting expense this period, compared to the corresponding period to September 30, 2002, is a result of increased activity in marketing the SchoolWeb and 1nterLink products since their commercial launch in May 2002 and the increase in consulting expense due to product development consulting. The increase in management and consulting fees, while high, is believed by management to be a good investment given that the Company is now performing internally product development work that previously was to be performed by AII under the terms of its License Agreement. It is hoped that in succeeding quarters, with the additional fees payable under the License Agreement being eliminated, that overall selling, general and administrative expenses will fall.
During the period, a total of $797,750was expensed by the Company in connection with management and sales and marketing agreements entered into by the Company. $647,750represented the fair value of share consideration where shares were issued as compensation for services rendered. Readers should consult Note 7 to the financial statements for an explanation of this expense.
License fees payable to Advanced Interactive Inc. have increased each year to $28,000/month compared to $20,000 per month during the period to September 30, 2002, as per the revision to the License Agreement entered into in August of 2002. The total outstanding amount of license fees, royalties and other costs payable to Advanced Interactive Inc. as of September 30, 2003 are $362,901. However, the Company has advised Advanced Interactive Inc. that it does not intend to pay these fees for a number of reasons disclosed in the Companys report on Form 8K filed October 10, 2003 and, as noted above, the elimination of future
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payments to Advanced Interactive Inc. are expected to have a positive effect on the Companys overall selling, general and administrative expenses.
Interest and other expenses
The Company had no material interest expenses.
Liquidity and Capital Resources
As at September 30, 2003, the Company had $3,318 cash in the bank, accounts receivable of $0 and prepaid expenses of $3,758. This compares to $19,254 cash in the bank, accounts receivable of $30,619 and prepaid expenses of $3,758 as at September 30, 2002. The changes in liquidity and capital resources are due mostly to changes in selling, general and administrative expenses detailed above.
The Company remains reliant, to a great extent, on obtaining equity or debt financing in the future. In the event that the Company is unable to obtain this equity or debt financing in the future, it may be unable to continue operations.
Audit Fees
During the period ended September 30, 2003, the Company incurred approximately $11,000 in fees to its principal independent accountant.
Inflation
Management does not believe that inflation had a material adverse affect on the financial statements for the periods presented.
Currency Risks and Fluctuations
The Companys revenues to date and for the foreseeable future are received in Canadian dollars. The Canadian dollar has, in the quarter ending September 30, 2003, appreciated against the US dollar in which the Companys financial statements are prepared. If this trend continues, and given that some major expenses of the Company are fixed in US dollars, the Company could benefit from currency fluctuations.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Registrant is not a party to any material pending legal proceedings and, to the best of its knowledge, no such action by or against the Registrant has been threatened.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three month period ending September 30, 2003, the Registrant issued no securities and the number of issued and outstanding shares remained unchanged between June 30, 2003 and September 30, 2003.
Effective February 1, 2003 and March 1, 2003 the Company signed twenty-four month consulting, management and marketing agreements which require payment in cash and shares of the Companys common stock on a monthly basis. The remaining future commitments are as follows:
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Fiscal year 2003: 486,000 common shares
Fiscal year 2004: 1,944,000 common shares
Fiscal year 2005: 314,000 common shares
In addition, certain of these agreements required the issuance of a total of 462,000 common shares as signing bonuses. At September 30, 2003 and subsequent to the date of this filing, none of these common shares have been issued for this period. Under these agreements, the Company is obligated to issue a total of 1,671,000 common shares to September 30, 2003.
The Company has advised Advanced Interactive Inc., to which it had issued 3,000,000 common shares under the terms of its License Agreement with that company, that it intends to cancel all of Advanced Interactive Inc.s 3,000,000 common shares. If it were to cancel these shares, its issued and outstanding share capital would decrease by 3,000,000 common shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) | Reports on Form 8-K. The Registrant
filed one report on Form 8K during the three months ending September 30,
2003. This report was filed on EDGAR September 9, 2003. The Registrant
filed one report on Form 8K subsequent to the period end. This report
was filed on EDGAR October 10, 2003. |
(b) | Exhibits. Exhibits included or incorporated by reference herein: See Exhibit Index below. |
EXHIBIT INDEX
Number | Exhibit Description |
3.1 | Articles of Incorporation (incorporated
by reference to Exhibit 3 of the Registration Statement on Form 10-SB
filed on September 28, 2000). |
3.2 | Certificate of Amendment to Articles
of Incorporation (incorporated by reference to Exhibit 2 of the Form 10-SB
filed on September 28, 2000). |
3.3 | Certificate of Amendment to Articles
of Incorporation dated October 13, 2000. (incorporated by reference to
Exhibit 3.3 of the Form 10-QSB filed on November 7, 2000) |
3.4.1 | ByLaws (incorporated by reference to
Exhibit 3.3 of the Form 10-QSB filed on November 7, 2001) |
31.1 | |
32.1 | |
32.2 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALTERNET SYSTEMS, INC. | |
Dated: November 14, 2003 | By: /s/ Michael Dearden |
Michael Dearden, President, CEO | |
and Director | |
By: /s/ Griffin Jones | |
Griffin Jones, Treasurer, Director, | |
Chief Financial Officer and Chief | |
Accounting Officer | |
By: /s/ Patrick Fitzsimmons | |
Patrick Fitzsimmons, Vice-President | |
Director | |
By: /s/ Greg Protti, | |
Greg Protti, Vice-President and Director |