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ALYI > SEC Filings for ALYI > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for ALTERNET SYSTEMS INC

Form 10-K for ALTERNET SYSTEMS INC


31-Mar-2014

Annual Report


Item 7. Management's 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.


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 Company's 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 Company's 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.


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 Utiba's 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 business's 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 competitive-not because we are perfect-but 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.


Alternet's vision is based on the following principles

[[Image Removed]]

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 Company's expected milestones are:

º 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);
º to provide end to end security for digital currencies;
º to launch the digital currency bank, fully compliant with government regulations, FX exchange capabilities;
º to invest in micro payment services to the unbanked and global diasporas;
º to invest in alternative financial services to the retail industry emerging markets;
º to attract key talent specialized in the digital economy; and
º 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 Company's 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.


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           Explanation for Change -
                      Expenses              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       Increase of $90,811    More activity providing greater information
relations                             to shareholders and other investors.
Management and Increase of $346,299   Increase in management wages during 2013 due
consulting                            to bonuses being accrued.
Office and     Decrease of $31,453    Decreased hosting fees incurred by IMS
general                               during 2013 because of decrease in sales.
                                      The hosting service was not required.
Professional   Decrease of $25,164    Decrease in overall legal services needed
fees                                  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 Company's 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.


The Company will be pursuing additional financing to fund ongoing operations and new initiatives. The Company's 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


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       301,991     1,230,214
accounts of $789,565 (2012 - $154,845)
           Prepaid cost of sales                                25,056       108,382
           Deposits and other assets                            40,500        31,858
      Fixed assets, net of accumulated amortization of         137,170       277,942
$119,006 (2012 - $116,025)
           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


The following table summarizes the financial results of ATS's 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 ATS's 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 Company's 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 Company's 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


In 2014, the Company's expected milestones are:

º 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);
º to provide end to end security for digital currencies;
º to launch the digital currency bank, fully compliant with government regulations, FX exchange capabilities;
º to invest in micro payment services to the unbanked and global diasporas;
º to invest in alternative financial services to the retail industry emerging markets;
º to attract key talent specialized in the digital economy; and
º 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 management's 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 Company's estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.


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 Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management's 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 Company's 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 Company's 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.

. . .

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