SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission File Number 000-27239
EDUVERSE.COM
(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada 88-0277072
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1135 Terminal Way
Suite 209
Reno, Nevada 89502-2168
(Address of Principal Executive Offices)
(775) 332-3325
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
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 [ ] No
[X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 13,087,434 shares of common stock
outstanding as of November 10, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
EDUVERSE.COM
Form 10-QSB
For the Fiscal Quarter ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION ....................................................1
Item 1. Financial Statements (Unaudited) ......................................1
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998. ...................................................2
Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998. ................................3
Consolidated Statements of Operations for the nine
months ended September 30, 1999 and 1998. ................................4
Consolidated Statements of Cash Flow for the nine
months ended September 30, 1999 and 1998. ................................5
Notes to Consolidated Financial Statements. ..............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................10
PART II. OTHER INFORMATION .......................................................17
Item 1. Legal Proceedings ....................................................17
Item 2. Recent Sales of Unregistered Securities ..............................17
Item 6. Exhibits and Reports on Form 8-K .....................................19
</TABLE>
i
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Financial Statements
The following historical financial data provided as of and for the nine
months ended September 30, 1999 have been derived from the Company's unaudited
internal consolidated interim financial statements and have been prepared in
accordance with United States generally accepted accounting principles. In the
opinion of the Company's management, contained within the financial statements
are all adjustments which are necessary for a fair representation of the
information pertaining to the Company's financial position as of September 30,
1999.
1
<PAGE>
eduverse.com
(formerly Perfect Future, Ltd.)
CONSOLIDATED BALANCE SHEET
As at September 30, 1999
(unaudited)
(Expressed in U.S. dollars)
<TABLE>
30-Sep 1999 31-Dec 1998
$ $
(unaudited) (audited)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash 96,811 37,757
Accounts receivable, less allowance of $nil 51,204 18,477
Finished goods inventory 15,892 44,421
Prepaid expense 0 5,651
- ------------------------------------------------------------------------------------------------------------------------
Total currents assets 163,907 106,306
Capital assets, net [note 3] 56,186 31,744
Deferred charge, net of accumulated amortization of $99,860 111,940 159,800
- ------------------------------------------------------------------------------------------------------------------------
332,033 297,880
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 57,169 102,778
Capital Lease obligations 0 7,041
Loans payable [note 5] 5,000 78,685
Current portion of royalty payable [note 6] 62,000 29,400
Unearned revenue 0 20,138
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 124,169 238,042
Royalty payable [note 6] 97,800 130,400
- ------------------------------------------------------------------------------------------------------------------------
221,969 368,442
- ------------------------------------------------------------------------------------------------------------------------
Commitment [note 6]
Stockholders' equity
share capital [note 7&8]
Common Stock - $0.001 par value
50,000,000 authorized, 12,753,434 issued and outstanding 12,753 11,607
Preferred stock - $0.001 par value
5,000,000 authorized, nil issued and outstanding 0 0
Additional paid in capital 1,132,020 286,127
Cumulative translation adjustment (1,257) 1,673
Deficit (1,033,452) (416,716)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 110,064 (70,562)
- ------------------------------------------------------------------------------------------------------------------------
(332,033) (297,880)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
eduverse.com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. dollars)
<TABLE>
Three Months Ended Three Months Ended
30-Sep 1999 30-Sep 1998
$ $
(unaudited) (unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Software Sales [note 4] 5,371 0
Distribution royalties 0 0
Other Income [note 4] 1,614 0
- --------------------------------------------------------------------------------------------------------------------
6,985 0
Cost of goods sold (17,445) 0
- --------------------------------------------------------------------------------------------------------------------
(10,460) 0
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Amortization of deferred charge 15,960 0
Depreciation 5,147 0
General and administration 93,556 59,287
Marketing 83,502 14,530
Research and development 86,090 36,946
- --------------------------------------------------------------------------------------------------------------------
284,255 110,763
- --------------------------------------------------------------------------------------------------------------------
Loss for the period (294,715) (110,763)
Deficit beginning of period (738,737) (46,332)
- --------------------------------------------------------------------------------------------------------------------
Deficit end of period (1,033,452) (157,095)
- --------------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss (1,033,452) (157,095)
Foreign currency translation (2,930) 0
- --------------------------------------------------------------------------------------------------------------------
Comprehensive loss (1,036,382) (157,095)
- --------------------------------------------------------------------------------------------------------------------
Basic and fully diluted loss per share (0.02) (0.01)
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 12,753,434 9,300,054
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
eduverse.com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. dollars)
<TABLE>
5-May-98
Nine Months (date of
Ended incorporation) to
30-Sep 1999 31-Dec 1998
$ $
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Software Sales [note 4] 100,520 0
Distribution royalties 40,581 0
Other Income [note 4] 98,854 0
- ---------------------------------------------------------------------------------------------------------------------
239,955 0
Cost of goods sold (53,328) 0
- ---------------------------------------------------------------------------------------------------------------------
186,627 0
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Amortization of deferred charge 47,860 0
Depreciation 12,463 0
General and administration 304,766 78,802
Marketing 216,053 20,024
- ---------------------------------------------------------------------------------------------------------------------
Research and development 222,221 58,269
- ---------------------------------------------------------------------------------------------------------------------
803,363 157,095
Loss for the period (616,736) (157,095)
- ---------------------------------------------------------------------------------------------------------------------
Deficit beginning of period (416,716) 0
- ---------------------------------------------------------------------------------------------------------------------
Deficit end of period (1,033,452) (157,095)
Comprehensive loss
- ---------------------------------------------------------------------------------------------------------------------
Net loss (1,033,452) (157,095)
- ---------------------------------------------------------------------------------------------------------------------
Foreign currency translation (2,930) 0
Comprehensive loss (1,036,382) (157,095)
- ---------------------------------------------------------------------------------------------------------------------
Basic and fully diluted loss per share (0.08) (0.02)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 12,753,434 9,300,054
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
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eduverse.com
(formerly Perfect Future, Ltd.)
CONSOLIDATED STATEMENT OF CASH FLOW
(Expressed in U.S. dollars)
<TABLE>
5-May-98
Nine Months (date of
Ended incorporation) to
30-Sep 1999 31-Dec 1998
$ $
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (616,736) (157,095)
Adjustment to reconcile net loss to net cash used
in operating activities:
Common shares issued for services rendered 42,294 2,999
Amortization of deferred charge 47,860 0
Depreciation 12,463 0
Stock based compensation 0 0
Changes in non-cash working capital items:
Accounts receivable (32,727) 0
Finished goods inventory 28,529 0
Prepaid expenses 5,651 0
Accounts payable (45,609) 13,753
Unearned revenue (20,138) 0
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (578,413) (140,343)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances (repayments) of loans (73,685) 8,118
Payments under capital lease obligations (10,168) (4,882)
Issuance of common stock 755,998 174,797
- ---------------------------------------------------------------------------------------------------------------------
Cash received on common stock to be issued 0 0
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 672,145 178,033
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (31,748) (10,635)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,748) (10,635)
- ---------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (2,930)
Net increase in cash 59,054 27,055
Cash, beginning of year 37,757 0
- ---------------------------------------------------------------------------------------------------------------------
Cash, end of the period 96,811 27,055
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The Company's consolidated financial statements for the period ended
September 30, 1999 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business for the foreseeable future. The
Company incurred losses of $294,715 and $616,736 for the three-month and
nine-month periods ended September 30, 1999, respectively. The ability of the
Company to continue as a going concern is dependent upon achieving profitable
operations and upon obtaining additional financing. The outcome of these matters
cannot be predicted at this time. No assurances can be given that the Company
will be successful in raising sufficient additional capital. Further, there can
be no assurance, assuming the Company successfully raises additional funds, that
the Company will achieve positive cash flow. If the Company is unable to obtain
adequate additional financing, management will be required to sharply curtail
the Company's operating expenses. These financial statements do not include any
adjustments to the specific amounts and classifications of assets and
liabilities, which might be necessary should the Company be unable to continue
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Eduverse Accelerated Learning Systems
(Canada) Inc. (British Columbia, Canada), ESL Pro Systems Inc. (Nevada) and M&M
Information and Marketing Services Inc. (Nevada). All significant intercompany
accounts and transactions have been eliminated.
Revenue recognition
Revenue from the sale of software products is recognized at the time
products are shipped to customers. Distribution royalty revenue is recognized
when the terms of the distribution agreement have been met. Consulting revenue
is recognized at the time the consulting services have been rendered.
3. CAPITAL ASSETS
Accumulated
Cost Depreciation Net book value
$ $ $
- --------------------------------------------------------------------------------
September 30, 1999
Computer equipment 60,004 14,289 45,715
Furniture and office equipment 12,390 1,919 10,471
72,394 16,208 56,186
- --------------------------------------------------------------------------------
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. MAJOR CUSTOMERS
For the nine-month period ended September 30, 1999, major customers
represented the following percentage of software sales and other income.
(a) One customer represented 72% of software sales.
(b) One customer represented 95% of other income.
5. LOANS PAYABLE
1999
$
----------------------------------------------------------------
Stockholder Loan 5,000
----------------------------------------------------------------
5,000
----------------------------------------------------------------
This loan is non-interest-bearing and has no specific terms of repayment.
6. DEFERRED CHARGE
On May 7, 1998, the Company, entered into a license agreement with Boswell
International Technologies Ltd. to acquire certain rights to developed software.
Pursuant to the license agreement, the Company is required to make certain
minimum annual royalty payments and may be required to pay additional amounts
based on sales levels for a minimum period of 3 years. Accordingly, the Company
has recorded a liability and deferred charge equal to the minimum royalty
payable of $211,800 (Cdn $325,000).
The minimum amounts repayable over the next three years to September 30 are
as follows:
$
--------------------------------------------------------------
2000 62,000
2001 97,800
--------------------------------------------------------------
159,800
--------------------------------------------------------------
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SHARE CAPITAL
(a) Authorized
The authorized capital of the Company consists of 50,000,000 shares of
common stock, par value $0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share.
(b) Issued and outstanding
<TABLE>
Number of Shares Amount
Common Shares # $
------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1998 11,607,046 11,607
Issued for cash pursuant to subscription agreements 1,071,316 1,071
Issued for services rendered 75,072 75
------------------------------------------------------------------------------------------------
Balance, September 30, 1999 12,753,434 12,753
------------------------------------------------------------------------------------------------
</TABLE>
During the period, the Company issued 1,071,316 shares of commo n stock
pursuant to subscription agreements at prices ranging from $0.48 to $1.00 per
share for cash of $755,998.
The Company also issued 75,072 shares of common stock for services rendered
at a deemed value of $42,294. These shares were issued at prices between $0.50
to $0.84 per share.
(c) Stock Options
The Board of Directors and shareholders amended the Stock Option Plan on
May 30, 1999 and again on June 30, 1999. The maximum number of shares of common
stock reserved for issuance pursuant to the Stock Option Plan has increased from
1,500,000 shares to 2,500,000 shares. As of September 30, 1999 a total of
1,477,500 options are issued and unexercised. Stock option transactions for the
period ended September 30, 1999 and the number of stock options outstanding are
summarized below:
<TABLE>
Number of Optioned
Common Shares Price Range
# $
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options granted as of December 31, 1998 1,262,500 $0.68 - $0.75
Options granted between January 1, 1999 and Sept. 30, 1999 215,000 $1.00 - $5.50
--------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 1,477,500 $0.68 - $5.50
--------------------------------------------------------------------------------------------------------
</TABLE>
The outstanding options expire at various dates beginning August 3, 2002
and ending May 12, 2003.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. SUBSEQUENT EVENTS
The following events have occurred subsequent to September 30, 1999:
(a) The Company issued 430,000 shares of common stock for which proceeds
of $215,000 were received.
(b) The Company granted 100,000 employee stock options at an exercise
price of $0.75. These options expire October 28, 2009.
(c) The Company cancelled 150,000 employee stock options which had been
issued to employees who are longer under the employ of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain information contained in the following discussion, except for statements
of historical fact, constitutes "forward-looking statements," including without
limitation statements containing the words "will," "may," "believes,"
"anticipates," "intends," "expects" and words of similar import, as well as all
predictions or projections of future results or events. Such forward-looking
statements involve known and unknown risks, uncertainties and numerous other
factors which may cause the actual results or achievements of the Company to be
materially different from any future results or achievements of the Company
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following: the Company's limited operating history,
history of losses and unproven business model, the Company's negative cash flow
and need for additional financing, the Company's ability to develop and market
new products, competition, management of growth and integration, future
technological changes, the Company's dependence on key personnel, marketing
relationships and third party suppliers and the Company's ability to protect its
intellectual property rights.
During the three-month period ended September 30, 1999, the Company continued to
focus on marketing its Internet- and Intranet-based products. On July 7, 1999,
the Company signed an agreement with the Ministry of University Affairs in
Thailand to provide English language instruction to approximately one million
university and technical school students in 24 public universities and 37
Information Technology campuses. Pursuant to this agreement, the Company
installed servers on the Ministry's UniNet network and has begun installation of
its ENGLISH PRO Network Edition on the network's workstations. On August 17,
1999, the Company signed an agreement with Africa News Service to provide
English language instruction on the African continent through the service's
electronic network distributing information from over 60 sources, including more
than 40 African news organizations. On August 20, 1999, the Company began
shipping a localized version of its ENGLISH PRO retail product to distributors
for the Mexico and South America markets. On September 16, 1999, the Company
signed an agreement with CSS Management Sdn. Bhd., in Kuala Lumpur, Malaysia to
place its ENGLISH PRO software in the SJK(C) Smart School Project, which is
offered to 1,290 National Type Chinese Schools and complements the Government's
Seventh Malaysia Plan to equip all schools with computers. On September 20,
1999, the Company signed a freeENGLISH Affiliate Program Agreement with I.Star
Sdn. Bhd., a wholly owned subsidiary of Star Publications (Malaysia) Bhd. (the
"Star"), Malaysia's largest English-language newspaper. Pursuant to this
agreement, the Star newspaper will promote eduverse.com's ENGLISH PRO Web
Edition software to its daily readership of more than one million people and
ENGLISH PRO Web Edition will also be made available on the Star's web site
(thestar.com.my), one of the most visited Web portals in the country. On
September 27, 1999, the Company signed a freeENGLISH Affiliate Program agreement
with MIMOS Berhad, the parent company of Internet service provider JARING
Services, the largest provider of Internet connectivity in Malaysia.
10
<PAGE>
Also during the period, the Company has continued the development of ENGLISH PRO
Web Edition, ENGLISH PRO Network Edition and its Internet web portal at
www.freeENGLISH.com, expanded the number of games and other features available
on the site, launched a new and improved corporate web site located at
www.eduverse.com, and increased its presence on the Internet by actively
promoting itself to educational web sites that can generate visitors to the
Company's freeENGLISH.com web site by providing links on their web sites. In
addition, the Company has focused marketing efforts on establishing partnership
agreements with US-based and international Internet web portals, educational
software companies with existing US market presence, and with PC manufacturers,
to resell the Company's products in their markets, has held meetings in Thailand
with potential advertisers to present the opportunity to advertise with ENGLISH
PRO Network Edition, and has been meeting with Ministries of Education in China
and Taiwan and pursuing initiatives there and in Colombia, Singapore and the
Hong Kong Special Autonomous Region to deliver ENGLISH PRO Network Edition into
school markets.
RESULTS OF OPERATIONS
Nine-Month Period Ended September 30, 1999
Revenues. The Company derives its revenues from retail sales of its
software products, royalties received from distributors of its software products
and consulting fees from services performed by senior management of the Company.
Royalties are fees paid by third parties to obtain the exclusive right to sell
the Company's software products in a country or region for a fixed period of
time. Other revenue items include non-software-related income, such as
consulting fees and bank interest. These consulting fees are determined on a
project-by-project basis taking into account the value of its input in the
project and the amount of hours required to complete the project. Revenues for
the three and nine-month periods ended September 30, 1999 were $6,985 and
$239,955 respectively compared to no revenues for the three and six-month period
ended September 30, 1998. This increase is primarily due to the introduction of
the Company's ENGLISH PRO Version 6.2 product into the retail marketplace in
Canada and the United States in December 1998 and March 1999, respectively, and
also due to increased consulting fees paid to the Company's executive officers.
A decrease to only $5,371 in sales for the third quarter 1999 are a reflection
of: the Company's new pricing policy that lowered the cost of its ENGLISH PRO
Version 6.2 from $59.99 to $29.99 and the resulting rebates in form of
additional product to the retailers on existing inventories; and the Company's
change of emphasis from its retail program to its Internet and Intranet
programs. The purpose of the retail program was to gain product awareness and
use the physical box as a marketing tool to launch the e-education Internet and
Intranet initiative. The bulk of future revenues will be generated from the sale
of advertising on the Company's Internet and Intranet programs. It is expected
that initial revenues from the advertising program will begin in fourth quarter
1999. Early in Year 2000, the retail program will be significantly reduced as
part of the Company's marketing strategies.
11
<PAGE>
Cost of Revenues. Cost of revenues consists of expenses associated with the
physical production of the "boxed" software packages that are sold in the retail
market and the deployment of the Company's Internet Web sites, including
Internet connection charges. During the three-month period ended September 30,
1999, cost of goods sold increased to $53,328 from $0.00 during the three-month
period ended September 30, 1998. Increase in the cost of goods reflects that the
Company did not take delivery and start selling its ENGLISH PRO 6.2 software
until November 1998, and thus did not have any product to sell, and no cost of
goods sold, for the three-month period ending September 30, 1998.
Company's software product was not introduced for sale until fourth quarter of
1998. The increase of $17,405 from the period ending June 30, 1999 reflects the
change in pricing policy of its ENGLISH PRO Version 6.2 and the subsequent
rebates in the form of product to its customers.
Amortization and Depreciation. Amortization and depreciation expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization of a license fee for the use of
software. Capital assets such as computer equipment and furniture and office
equipment are depreciated on a straight-line basis over their estimated useful
lives, computer equipment over three years and furniture and office equipment
over five years. The license fee for use of software is amortized on a
straight-line basis over the three-year minimum term of the license agreement
with Boswell International Technologies Ltd. The Company incurred depreciation
expenses of $5,147 and $12,463 respectively during the three-month and
nine-month periods ended September 30, 1999 and amortization expenses of $15,960
and $47,860 for the same periods.
General and Administration Expenses. General and administrative expenses
primarily consist of management, financial and administrative personnel expenses
and related costs and professional service fees. General and administrative
expenses increased by 57% and 286% to $93,556 and $304,766 during the
three-month and nine-month periods ended September 30, 1999, respectively,
compared to $59,287 and $78,802 for the same periods in 1998. The increases in
the 1999 three-month and nine-month periods reflect the hiring of additional
support staff and increased legal and accounting fees related to the
registration of the Company's common stock under the United States Securities
Exchange Act of 1934 and compliance with related reporting requirements.
Marketing Expenses. Marketing expenses consist primarily of marketing and
promotional costs relating to the development of the Company's brands as well as
personnel, travel and other costs. Marketing expenses increased by 474% and 979%
to $83,502 and $216,053 during the three-month and nine-month periods ended
September 30, 1999, respectively, compared to $14,530 and $20,024 for the same
periods in 1998. These increases were primarily attributable to increased travel
expenses incurred to promote the Company's Internet-enabled software products in
Southeast Asia and South America and the hiring of additional staff. The Company
anticipates marketing expenses will increase over the next 12 months as a result
of its current initiatives in Thailand and throughout Asia and Latin America,
which will require extensive travel for the Company's marketing staff and the
hiring of additional personnel.
12
<PAGE>
Research and Development Expenses. Research and development expenses
primarily include personnel costs relating to developing the Company's software
and maintaining and enhancing the features, content and functionality of the
Company's Internet Web site and related systems. Research and development
expenses were $86,090 and $222,221 for the three and nine-month period ended
September 30, 1999, respectively, which represent increases of 133% and 281%
from the same periods in 1998. These increases were primarily due to increased
staffing in the research and development team. The Company anticipates that its
research and development staff will continue to grow through the end of 1999 and
into 2000 as the Company focuses on improving and expanding the features and
availability of its Internet- and network-enabled software products.
Income Taxes. No provision for federal income taxes has been recorded for
the three period ended September 30, 1999 or the nine-month period ended
September 30, 1999, as a result of losses. As of September 30,1999, the Company
had approximately $1,033,452 of federal net operating loss carryforwards
available to offset future taxable income; these carryforwards expire in various
years beginning in 2018, if not previously utilized.
Liquidity and Capital Resources
Since inception, the Company has financed operations and met its capital
expenditure requirements primarily through private sales of equity securities,
which have resulted in net proceeds of $985,731 through September 30, 1999. At
September 30, 1999, the Company had $96,811 in working capital. Subsequent to
September 30, 1999 the Company's financing activities have netted the Company
$193,500.
The Company has not yet generated positive cash from operating activities.
Cash used in operating activities was $241,396 and $578,413 for the nine-month
period ended December 31, 1998 and the nine-month period ended September 30,
1999, respectively. The Company does not expect to generate positive cash from
operations for the year ending December 31, 1999.
To date, the Company's investing activities have consisted of capital
expenditures totaling $5,454 and $31,748 for the three-month and nine-month
periods ended September 31, 1999, respectively. The capital expenditures related
primarily to the acquisition of computer software and equipment as well as
furniture and fixtures used to support the Company's growing employee base.
Net cash provided by financing activities was $755,998 for the nine-month
period ended September 30, 1999. Subsequent to the nine-month period ending
September 30, 1999 financing activities netted the Company $193,500. Net cash
provided by financing activities resulted primarily from issuance of capital
stock, which was partially offset by principal payments on capital leases and
notes payable.
The Company does not foresee an immediate increase in operating expenses
until such time as revenues commence from the sale of advertisements in Thailand
and/or the Company is successful in raising equity or debt financing sufficient
to meet its current working capital requirements and support an increase in
operating expenses. The Company expects that it will first receive revenues from
advertising sales in the last quarter of 1999 and therefore projects that
increases in development and marketing expenses will coincide with these
revenues.
13
<PAGE>
The Company believes that available cash and cash equivalents combined with
anticipated operating revenues will be adequate to fund the Company's operations
over the next four months. Thereafter, the Company expects it will need to raise
additional capital to meet its long-term operating requirements. The Company may
encounter business initiatives that require significant cash commitments or
unanticipated problems or expenses that could result in a requirement for
additional cash before that time. If the Company raises additional funds through
the issuance of equity or convertible debt securities, the percentage ownership
of its shareholders would be reduced, and such securities might have rights,
preferences or privileges senior to its common stock. Additional financing may
not be available upon acceptable terms, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company's ability to
fund its expansion, take advantage of business opportunities, develop or enhance
its products or otherwise respond to competitive pressures would be
significantly limited, and the Company may be required to significantly restrict
its operations.
Foreign Currency Translation and Hedging
The Company is exposed to foreign currency fluctuations through its
operations in Canada. Substantially all of its revenues to date and
corresponding receivables have been in United States dollars. However, all
research and development expenses, customer support costs and administrative
expenses are in Canadian dollars.
The Company recorded a foreign exchange gain (loss) of ($1,257) and
($2,930) for the three and nine-months ended September 30, 1999, respectively.
As the foreign exchange gains (losses) were not significant, the Company does
not, at this time, engage in forward exchange contracts for the purpose of
hedging against fluctuations in the exchange rate between United States and
Canadian dollars. It is anticipated that advertising revenues generated in the
fourth quarter of 1999 and early in 2000 will be Thailand Bahts. This will
expose the Company to foreign currency fluctuations through its operations in
Thailand.
During the fourth quarter 1999 and the first two quarters of 2000, the
Company intends to engage in activities in foreign countries, namely Thailand,
Malaysia, Columbia, Taiwan and China. These activities will likely result in
development expenses related to the installation, support and maintenance of
ENGLISH PRO Network Edition on educational networks and sales and marketing
expenses related to generating advertising revenues in these regions. The
Company has no immediate plans for hedging against fluctuations in these
currencies.
Year 2000 Compliance
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example the
clock circuit in certain hardware may be incapable of holding a date beyond the
year 1999; some operating systems may recognize a date using "00" as the year
1900 rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material impact on companies through
business interruption or shutdown, financial loss, damage to reputation, and
legal liability to third parties.
14
<PAGE>
The Company has been assessing its exposure to risks relating to the Y2K
issue. These analysis and remediation issues are addressed in a four-phase plan
of action.
Phase I - Inventory and Risk Assessment. This Phase requires an inventory
and assessment of the business and information systems used by the Company,
including desktop hardware and software, network hardware and software, and
telephone systems. The Company uses Intel-based PC desktop products. In
connection with a review of this hardware the Company has determined that all
systems are Year 2000 compliant and contain four digit date codes. In addition
the Company uses "off the shelf" software for desktop applications. In
connection with a review of this software the Company has replaced its
accounting software. The Company's existing products are all Year 2000 compliant
and contain four digit date codes. As a result, the Company believes it has
completed this Phase. The Company's Internet Web sites are Y2K compliant. The
Company relies on Windows NT server software, Microsoft Internet Server software
and Microsoft SQL Server software, all of which, the Company has been informed,
are Y2K compliant. The Company does not have any contingency plans should the
Microsoft software not work on January 1, 2000.
Phase II - Remediation Cost Estimation. This Phase involves the analysis of
each Y2K compliance issue, determination of how such risks will be remediated
and the cost of such remediation. As indicated, the Company does not anticipate
needing to replace any additional hardware. It has upgraded some desktop
software with readily available prepackaged programs. Because of the Company's
limited operating history, it has not incurred significant time or expense in
connection with transferring data to any upgraded desktop software. The Company
believes it has completed this Phase.
Phase III - Remediation. This Phase includes the replacement or correction
of any necessary business or information systems. This Phase is complete for
both the information technology systems and the non-information technology
business systems.
Phase IV - Remediation Testing. This Phase includes the future date testing
of all remediation efforts made in Phase III to confirm that the changes made
bring the affected systems into compliance, no new problems have arisen as a
result of the remediation, and that all new systems which replaced non-compliant
systems are Y2K compliant regardless of whether vendors represent that such
systems are Y2K complaint. The Company believes it has completed this Phase and
is therefore Y2K compliant.
15
<PAGE>
Third Party Relationships. Even if the internal systems of the Company are
not materially affected by the Year 2000 problem, the Company's business,
financial condition and results of operations could be materially adversely
affected by disruption in the operation of enterprises with which the Company
interacts. The Company currently relies or plans to rely on third party
companies in connection with the manufacture and distribution of its products.
The Company plans to rely on Pac Services Inc. ("PAC") for the assembly and
distribution of the Company's packaged CD-ROM software products. PAC has
reported that it has developed a comprehensive plan to achieve Year 2000
compliance of its sensitive systems by the fall of 1999. However, PAC cannot
guarantee its Year 2000 compliance or that of its suppliers. While another
company could be retained to assemble and distribute the Company's packaged
CD-ROM software products, any interruption in PAC's assembly or distribution of
the Company's packaged CD-ROM software products could have a significant adverse
effect on the Company's business. The Company's servers in Thailand are Y2K
compliant, and the Company has been informed by the Ministry of University
Affairs that the Ministry is currently completing its Y2K readiness programs. If
the Ministry's UniNet network does not operate on January 1, 2000, the Company
will be unable to provide service on the UniNet until such time as the
Ministry's network is functional, which could have a material adverse effect on
the Company business and financial results.
Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Company's Y2K remediation efforts, or those of third parties
will be properly and timely completed, and the failure to do so could have a
material adverse effect on the Company, its business, results of operations, and
its financial condition. The Company has assessed and continues to assess the
risk of Y2K problems in the operation of its business. This includes an
examination of all computer-controlled processing and analytical equipment,
telephone, banking services, and water and power supply to the Company's
offices. The Company has completed the Y2K assessment and taken all corrective
action required through software upgrades and equipment modifications. Should
further problem areas be noted, corrective action will be taken to minimize
disruption of the Company's operations. Continuing assessment may result in the
identification of additional issues, which could have a material adverse effect
on the Company's results of operations. In addition, important factors that
could cause results to differ materially include, but are not limited to, the
ability of the Company to successfully identify systems which have a Y2K issue,
the nature and amount of remediation effort required to fix the affected system,
and the costs and availability of labor and resources to successfully address
the Y2K issues.
16
<PAGE>
The Company is engaged in business activities which rely on information
technology ("IT") systems, including billing and accounting systems, as well as
system connections for Internet customers and the Company's Internet servers.
All of the Company's hardware and software has been upgraded for Y2K compliance
and, accordingly, the Company does not believe that it will be materially
affected by Y2K problems, except potentially from third-party Internet and
telephone systems which could be impaired by partial system disruptions. The
Company relies on non-IT systems that may suffer from Y2K problems, including
telephone systems, facsimile and other office machines. Moreover, while the
Company relies on third parties that may suffer from Y2K problems that could
affect the Company's operations, it does not believe that such third-party Y2K
problems will affect the Company in a manner that is different or more
substantial than such problems affect other similarly situated companies. The
Company has designed a limited contingency plan with respect to Y2K problems
that may affect the Company or third-party suppliers.
The worst-case scenario pertaining to the Y2K issue would be an overall
failure of the Internet, electronic and telecommunications infrastructure. In
addition, the systems and services provided by the Company's third-party vendors
may fail to be Y2K compliant despite their representations to the contrary. The
failure by these entities or systems to be Y2K compliant could result in a
systemic failure beyond the Company's control, which could also prevent users
from accessing the Company's freeENGLISH.com Internet Web site, which would have
a material adverse effect on the Company's business, results of operations and
financial condition.
The foregoing is a "Year 2000 Readiness Disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Policy.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to, and none of the Company's property is
subject to, any material pending or threatened legal proceeding.
ITEM 2. CHANGES IN SECURITIES.
Recent Sales of Unregistered Securities
On July 17, 1999 the Company issued 2,345 shares of common stock to Vaughn
Barbon at a price per share of $0.853 for an aggregate purchase price of $2,000.
The shares were issued to a holder outside the United States pursuant to an
exclusion from registration under Regulation S under the Securities Act.
On October 21, 1999 the Company issued 4,000 shares of common stock to
Vaughn Barbon at a price per share of $0.50 for an aggregate purchase price of
$2,000. The shares were issued to a holder outside the United States pursuant to
an exclusion from registration under Regulation S under the Securities Act.
On November 8, 1999 the Company issued 60,000 shares of common stock to
Mark Chewter at a price per share of $0.50 for an aggregate purchase price of
$30,000. The shares were issued to a holder outside the United States pursuant
to an exclusion from registration under Regulation S under the Securities Act.
On November 8, 1999 the Company issued 50,000 shares of common stock to
Douglas Cairns at a price per share of $0.50 for an aggregate purchase price of
$25,000. The shares were issued to a holder outside the United States pursuant
to an exclusion from registration under Regulation S under the Securities Act.
17
<PAGE>
On November 8, 1999 the Company issued 40,000 shares of common stock to
Lambeth Investments Ltd. at a price per share of $0.50 for an aggregate purchase
price of $20,000. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On November 8, 1999 the Company issued 50,000 shares of common stock to
Michael Frost at a price per share of $0.50 for an aggregate purchase price of
$25,000. The shares were issued to a holder outside the United States pursuant
to an exclusion from registration under Regulation S under the Securities Act.
On November 8, 1999 the Company issued 30,000 shares of common stock to
Straun Robertson at a price per share of $0.50 for an aggregate purchase price
of $15,000. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On November 8, 1999 the Company issued 100,000 shares of common stock to
Jean de Gerlache de Gomery at a price per share of $0.50 for an aggregate
purchase price of $50,000. The shares were issued to a holder outside the United
States pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On November 8, 1999 the Company issued 40,000 shares of common stock to
Theodore M. Bardacke at a price per share of $0.50 for an aggregate purchase
price of $20,000. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On November 8, 1999 the Company issued 60,000 shares of common stock to
Michael Fernandez at a price per share of $0.50 for an aggregate purchase price
of $30,000. The shares were issued to a holder outside the United States
pursuant to an exclusion from registration under Regulation S under the
Securities Act.
On October 28, 1999 the Company issued 100,000 employee options to purchase
its common stock, with an exercise price of $0.75 per share. These options
expire October 28, 2009.
On November 9, 1999 the Company cancelled 150,000 employee options to
purchase its common stock, with an exercise price of $0.68 per share. These
options were cancelled as the employees that received the options are no longer
under the employ of the Company.
Since May 1998, the Company has issued an aggregate of 1,577,500 options to
purchase its common stock, with exercise prices ranging from $0.68 to $5.50 per
share, to employees, directors, advisors and service providers under its 1998
Stock Option Plan and its 1998 Directors Stock Option Plan. Of these options,
150,000 have been cancelled without being exercised, options for no shares have
been exercised and 1,427,500 options remain outstanding.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
(b) Form 8-K :
The registrant did not file any reports on Form 8-K during the three months
ended September 30, 1999.
Items 3, 4, and 5 are not applicable and have been omitted.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 15th day of
November, 1999.
EDUVERSE.COM
By: /s/ Mark E. Bruk
--------------------------------------
Mark E. Bruk, President, Chief
Executive Officer and Treasurer
<PAGE>
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 96,811
<SECURITIES> 0
<RECEIVABLES> 51,204
<ALLOWANCES> 0
<INVENTORY> 15,892
<CURRENT-ASSETS> 163,907
<PP&E> 0
<DEPRECIATION> 12,463
<TOTAL-ASSETS> 332,033
<CURRENT-LIABILITIES> 124,169
<BONDS> 0
0
0
<COMMON> 12,753
<OTHER-SE> (97,311)
<TOTAL-LIABILITY-AND-EQUITY> 332,033
<SALES> 239,955
<TOTAL-REVENUES> 239,955
<CGS> 53,328
<TOTAL-COSTS> 803,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (616,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (616,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616,736)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
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