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ALTERNET SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 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. 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 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. 16 -------------------------------------------------------------------------------- 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. 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 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. 18 -------------------------------------------------------------------------------- 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 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 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 20 -------------------------------------------------------------------------------- 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 21 -------------------------------------------------------------------------------- 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. 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 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. 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 customer's 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 Company's discounting practices, the size and volume of the Company's 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 Company's management, taking into consideration the market strategy. As the Company's 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 Company's 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 issuer's 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 Company's 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 Company's 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 Compensation-Stock 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 Company's interim and annual reporting periods beginning January 1, 2013, and applied prospectively. This accounting pronouncement did not have a material effect on the Company's consolidated financial statements. In March 2013, the FASB issued ASU No. 2013-05, Liabilities (Topic 830): Parent's 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. |