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 March 31, 2000
[ ] 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 [X ] No [
]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 13,649,794 shares of common stock
outstanding as of March 31, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION ...........................................................1
Item 1. Financial Statements (Unaudited) ............................................1
Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 ............2
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 ..................................................3
Consolidated Statements of Cash Flow for the three months
ended March 31, 2000 and 1999 ..................................................4
Notes to Consolidated Financial Statements - March 31, 2000 ....................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................12
PART II. OTHER INFORMATION .............................................................16
Item 1. Legal Proceedings ..........................................................16
Item 2. New Agreements .............................................................16
Item 3. Recent Sales of Unregistered Securities ....................................16
Item 4. Exhibits and Reports on Form 8-K ...........................................18
</TABLE>
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PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Financial Statements
The following historical financial data provided as of and for the three month
period ended March 31, 2000 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 March 31, 2000.
1
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eduverse.com
CONSOLIDATED BALANCE SHEETS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
As of March 31, 2000 (expressed in U.S. dollars)
31-Mar 31-Dec
2000 1999
$ $
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash 84,843 43,584
Accounts receivable less allowance of $4,933 and $6,292
at March 31, 2000 and December 31 1999, respectively 3,863 8,826
Finished goods inventory 18,421 17,296
Other receivable 14,635 10,123
Prepaid expenses and other 10,000 15,369
- ------------------------------------------------------------------------------------------------------------------
Total current assets 131,762 95,189
Capital assets, net [note 4] 49,366 53,096
- ------------------------------------------------------------------------------------------------------------------
Total assets 181,128 148,285
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current
Accounts payable 76,912 106,824
Accrued expenses 18,434 19,585
Loans payable [note 7] 5,000 10,000
Current portion of royalty payable [note 5] 110,000 104,400
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 210,346 240,809
Royalty payable [note 5] 48,900 48,900
- ------------------------------------------------------------------------------------------------------------------
259,246 289,709
- ------------------------------------------------------------------------------------------------------------------
Commitment [note 11]
Shareholders deficit
Share capital [note 9]
Common stock - $0.001 par value
Authorized shares: 50,000,000
Issued and outstanding: 13,649,794 shares at Mar 31,2000
and 13,185,089 shares at December 31, 1999 13,659 13,185
Preferred stock - $0.001 par value
Authorized shares: 5,000,000
Issued and outstanding: nil 0 0
Shares to be issued 110,000 3,078
Additional paid in capital 1,626,564 1,384,683
Accumulated deficit (1,828,341) (1,544,043)
Accumulated other eomprehensive income 0 1,673
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' deficit (78,118) (141,424)
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' deficit 181,128 148,285
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</TABLE>
See accompanying notes
2
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eduverse.com
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
(Expressed in U.S. dollars)
Period Period
ended ended
31-Mar 31-Mar
2000 1999
$ $
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Software sales [note 3] 1,558 80,453
Distribution royalties 0 20,000
- ------------------------------------------------------------------------------------------------------------------
Total revenues 1,558 100,453
Cost of goods sold 4,296 (37,030)
- ------------------------------------------------------------------------------------------------------------------
Gross profit 5,854 63,423
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Foreign currency transaction loss (14,266) 0
Deprecitation 4,881 3,240
General and administrative [note 6] 145,952 96,283
Marketing 62,966 49,241
Research and development 91,555 59,698
- ------------------------------------------------------------------------------------------------------------------
291,088 208,462
- ------------------------------------------------------------------------------------------------------------------
Operating loss (285,234) 145,039
Other income [note 12] 936 (41,691)
- ------------------------------------------------------------------------------------------------------------------
Net loss for the period (284,298) (103,348)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive loss
Net loss for the period (284,298) (103,348)
Foreign currency translation 0 0
- ------------------------------------------------------------------------------------------------------------------
Comprehensive loss for the period (284,298) (103,348)
- ------------------------------------------------------------------------------------------------------------------
Net loss per common share:
Basic and diluted (0.02) (0.01)
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares:
Basic and diluted 13,485,903 11,985,565
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</TABLE>
See accompanying notes
3
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eduverse.com
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
(Expressed in U.S. dollars)
Period Year
ended ended
31-Mar 31-Dec
2000 1999
$ $
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss (284,298) (1,127,327)
Adjustment to reconcile net loss to net cash used in
operating actvities:
Common shares to be issued for services rendered 0 3,078
Common shares issued for services rendered 8,600 52,752
Common shares issued in lieu of interest expense 7,000 20,677
Writedown and amortization of deferred charge 0 159,800
Depreciation 4,881 17,705
Effect of foreign currency (14,266) (33,217)
Stock based compensation 0 6,120
Beneficial conversion feature of inventory loan 0 2,143
Loss from theft of capital assets 0 294
Provisions for doubtful accounts 4,933 6,193
Changes in operating assets and liabilities:
Accounts receivable (4,963) 4,176
Finished goods inventory (9,830) 27,801
Other receivable (4,801) (9,834)
Prepaid expenses and other (5,369) (9,655)
Accounts payable 29,912 18,831
Accrued expenses (1,151) (98)
Unearned revenue 0 (21,054)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (269,352) (815,181)
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (1,882) (54,027)
Proceeds from insurance company for theft of capital assets 0 17,270
- ------------------------------------------------------------------------------------------------------------------
net cash used in investing activities (1,882) (36,757)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash proceeds from loan payable 0 10,000
Payments of loans payable (5,000) (79,764)
Payments under capital lease obligations 0 (7,224)
Repayments of royalty payable 0 (6,500)
Cash proceeds from issuance of common stock 209,500 971,695
Cash received on common stock to be issued 110,000 0
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 314,500 888,207
- ------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (2,007) (30,442)
Net increase in cash 41,259 5,827
Cash, beginning of period 43,584 37,757
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period 84,843 43,584
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
eduverse.com (the "Company") was incorporated on October 22, 1991, under the
laws of the State of Nevada, as Ward's Futura Automotive, Ltd. The Company's
name was subsequently changed to Perfect Future, Ltd. On June 11, 1998 its name
was changed to Eduverse Accelerated Learning Systems, Inc. and on May 19, 1999
to eduverse.com.
Pursuant to a series of transactions on May 28, 1998 and May 29, 1998, the
Company acquired all of the issued and outstanding share capital of ESL Pro
Systems Inc. ("ESL") and M&M Information and Marketing Services Inc. ("M&M"),
both Nevada companies incorporated on May 5, 1998 and under common control. The
Company exchanged 2,000,000 common shares and 7,000,000 common shares for all of
the outstanding share capital of ESL and M&M, respectively. As a result of these
acquisitions, the previous shareholders of ESL and M&M, as a group, owned more
than 50% of the issued and outstanding voting shares of the Company.
Consequently, this business combination has been accounted for as a reverse
acquisition whereby ESL and M&M are deemed to have been combined in a manner
similar to a pooling of interests, and to have acquired the Company.
Accordingly, these transactions represent the recapitalization of the businesses
of ESL and M&M on a combined basis.
These consolidated financial statements are issued under the name of the
Company, but are a continuation of the combined financial statements of ESL and
M&M and reflect the accounts of ESL and M&M since their inception at their
historic net book values. As at May 29, 1998, the Company had net monetary
assets of $1. For purposes of the acquisition, the fair value of the net
monetary assets of $1 has been ascribed to the 2,250,000 previously outstanding
common shares of the Company deemed to be issued in the acquisition.
Description of business
The Company is a technology-based company focused on developing and marketing
interactive multimedia educational software products. At March 31, 2000, the
Company's principal markets include Canada and U.S.A. The Company generates
revenues from the retail sale of its English language tutorial software products
ENGLISH PRO. In late 1998, the Company started pioneering a new e-commerce
educational delivery model that provides users with free access to online
education. The Company expects to generate the majority of its future revenues
from advertising revenues by including an advertiser's message as part of the
ENGLISH PRO tutorial. In 2000, 1999 and 1998, the Company recognized no
advertising revenues.
Going concern
The Company's financial statements for the year ended March 31, 2000 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 a loss of $284,298 for
the three-month period ended March 31, 2000, and as of March 31, 2000 had a
working capital deficiency of $78,118. Management recognizes that the Company
must obtain additional financial resources by raising capital from shareholders
or other sources or consider a reduction in operating costs to enable it to
continue operations with available resources. However, no assurances can be
given that the Company will be successful in raising 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. Accordingly, the
company's continuation as a going concern is in substantial doubt.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These financial statements do not include any adjustments to the carrying values
and classification of assets and liabilities, which may be necessary, if the
company is unable to continue its operations.
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 dot com inc. (British Columbia, Canada),
ESL Pro Systems Inc. (Nevada, USA), and M&M Information and Marketing Services
Inc. (Nevada, USA). All significant intercompany accounts and transactions have
been eliminated.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid financial
instruments with remaining maturities of three months or less when acquired and
which are readily convertible to cash.
Finished goods inventory
Finished goods inventory consists of English language tutorial software products
and is carried at the lower of weighted average cost and net realizable value.
Capital assets
Capital assets are stated at cost. Depreciation is computed on a straight-line
basis for financial reporting purposes over the estimated useful life of the
asset as follows:
Computer equipment 3 years
Furniture and office equipment 5 years
Web-site development costs
Web-site development costs have been expensed as incurred.
Impairment of long-lived assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
Leases
Leases which transfer substantially all the benefits and risks of ownership of
the leased property are accounted for as capital leases whereby the property is
recorded as an asset and the obligation incurred is recorded as a liability.
Under this method of accounting for leases, the asset is amortized on a
straight-line basis over its estimated useful life and the obligation, including
interest thereon, is amortized over the life of the lease. Operating lease
payments are expensed as incurred.
Financial instruments
At March 31, 2000, the Company has the following financial instruments: cash,
accounts receivable, other receivable, accounts payable, accrued expenses, loans
and royalty payable. The carrying value of these financial instruments is
considered to approximate fair value based on their short-term nature.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Advertising costs
Advertising costs are expensed as incurred. The Company incurred advertising
expense of $9,526 in 2000.
Deferred charge
The deferred charge represents a license fee for the use of software and was
being amortized on a straight-line basis over the three year minimum term of the
license agreement. As the Company does not expect to obtain any future value
from this licensing agreement, the entire deferred charge balance of $159,800
was written off to expense in 1999.
Income taxes
The Company accounts for income taxes using the liability method of tax
allocation. Under this method, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes at
enacted tax rates expected to be in effect when the differences reverse.
Research and development
Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a product
is established are capitalized. Technological feasibility is generally not
established until substantially all related product development is complete and
the product is released.
Stock-based compensation
The Company accounts for stock-based compensation to employees based on
Accounting Principles Board Opinion No. 25 and related interpretations, whereby
the intrinsic value of options granted is recorded at the measurement date. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation
for stock options granted to employees.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net loss per common share
The basic loss per share is computed by dividing the loss attributable to common
shareholders by the weighted average number of common shares outstanding for
that period. Diluted loss per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. For the periods
ended March 31, 2000 and 1999, there were no dilutive potential common shares
outstanding since the Company is in a loss position.
Foreign currency translation
In 2000 and 1999, the functional currency of the Company changed to the U.S.
dollar. Accordingly, for the Canadian subsidiary, monetary assets and
liabilities are translated into U.S. dollars at exchange rates prevailing at the
balance sheet date and non-monetary items are translated at exchange rates
prevailing at the historic rate. Revenue and expenses, except amortization are
translated at the average exchange rate in
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
the year. Amortization is translated at the same rate as the related
non-monetary assets. Gains or losses arising on this foreign currency
translation are recorded in income.
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. Revenue received in advance
of shipment is recorded as unearned revenue.
Comprehensive loss
Comprehensive loss includes all changes in shareholders' deficit during a period
except those resulting from capital transactions. Accumulated other
comprehensive income represents accumulated foreign currency adjustments for all
periods presented.
Recent pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 will be effective for the Company's year-end
December 31, 2001.
The Financial Accounting Standards Board has issued EITF 00-2 "Accounting for
Web Site Development Costs." EITF 00-2 will be effective for the Company's
year-end December 31, 2000.
The Company has not determined the impact, if any, of these pronouncements on
its consolidated financial statements.
3. MAJOR CUSTOMERS
For the three-month period ended March 31, 2000, 64% of software sales were
derived from one customer. At March 31, 2000, the aggregate accounts receivable
balance relating to this customer was $3,102.
For the same period 1n 1999 86% of software sales were derived from two
customers. At March 31, 1999, the aggregate accounts receivable balance relating
to this customer was $57,136.
4. CAPITAL ASSETS
<TABLE>
Accumulated Net Book
Cost Depreciation Value
$ $ $
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 2000
Computer equipment 59,723 19,664 40,059
Furniture and office equipment 13,113 3,806 9,307
- --------------------------------------------------------------------------------------------------
72,836 23,470 49,366
- --------------------------------------------------------------------------------------------------
March 31, 1999
Computer equipment 38,862 6,000 32,862
Furniture and office equipment 7,922 1,188 6,734
- --------------------------------------------------------------------------------------------------
46,784 7,188 39,596
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</TABLE>
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. DEFERRED CHARGE
On May 7, 1998, the Company's wholly owned subsidiary ESL PRO Systems Inc.
entered into a license agreement with Boswell International Technologies Ltd.
(Boswell) to acquire certain rights to developed software. Pursuant to the
license agreement, ESL PRO Systems Inc. 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.
In 1998, the Company capitalized the total value of the contract of $211,800 as
a deferred charge, to be amortized on a straight-line basis over the three-year
contract term. The Company also recorded a royalty payable for $211,800, to be
paid to Boswell based on a pre-determined schedule, as defined in the contract.
The Company was required to make a minimum royalty payment of $29,400 in 1999.
However, only $6,500 was repaid. Future minimum payments, including the
remaining amount due in 1999, under the terms of this contract are 2000 -
$104,400 and 2001 - $48,900.
As the Company is changing its software delivery system from in-store retail to
on-line delivery, it is no longer using the developed software licensed from
Boswell International Technologies Ltd. As no future benefit will be derived
from this deferred license fee, the amount of $159,800 has been written off to
expense for the year ended December 31, 1999.
6. RELATED PARTY TRANSACTIONS
General and administrative expenses include consulting fees of $15,000 and
$15,000 paid to officers of the Company during the three-month period ended
March 31, 2000 and the same period in 1999 respectively.
7. LOANS PAYABLE
March 31, 2000
$
- --------------------------------------------------------------------
Stockholder Loan --
Inventory Loans 5,000
Third Party Loan --
- --------------------------------------------------------------------
5,000
- --------------------------------------------------------------------
The Inventory Loans outstanding at March 31, 2000 bear interest at 70%. These
loans are unsecured, with no maturity date. At the option of the holder the
loans may be converted into common shares of the Company at a conversion rate
equal to 65% of the market value of the common stock on the date of conversion.
The amount of the beneficial conversion has been expensed in 1999 and is
presented in additional paid in capital.
The loan was paid out on April 28, 2000.
8. SHARE CAPITAL
[a] Authorized
The authorized capital of the Company consists of 50,000,000 voting common
shares with $0.001 par value and 5,000,000 non-voting preferred shares with
$.001 par value.
[b] Stock offering
In March 2000, the Company announced a financing via private placement offering
under Regulation D, Rule 506 of the Securities and Exchange Commission. The
Company intends to offer and sell 1,000,000
9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
units at $1 per unit, with each unit consisting of one share of restricted
common stock and two warrants. Each warrant entitles the holder to purchase one
additional share of restricted common stock at $2.50 per share and $5.00 per
share, respectively.
[c] Stock options
During the three-month period ended March 31, 2000 the Company cancelled 90,000
employee stock option.
The following table summarizes information about stock options under the plans
outstanding at March 31, 2000:
Number
Range of Outstanding at
Exercise December 31,
Prices 1999
- --------------------------------
$0.38 150,000
$0.68 - $1.00 1,147,500
$1.06 - $1.38 150,000
$2.50 - $3.50 20,000
$4.50 - $5.50 20,000
- --------------------------------
Total 1,487,500
9. INCOME TAXES
At December 31, 1999 the Company has a net operating loss for United States
income tax purposes of approximately $190,000 which will begin to expire in 2018
if not utilized.
In addition, the Company has non-capital losses for Canadian income tax purposes
of approximately $900,000 at December 31, 1999, which will begin to expire in
2005 if not utilized.
Deferred income taxes reflect the net effects of temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has recognized a
valuation allowance of $500,000 equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets.
10. COMMITMENTS
Operating lease
The Company leases its operating facilities on a month-to-month basis at a rate
of $1,500 per month. For the period ended March 31, 2000 and 1999, the Company
incurred rent expense of $6,521 and $4,853 respectively.
The Company has entered into a contract with a consultant who is to provide
investor relations services. Under the terms of this contract, the Company is
required to make monthly cash payments of $5,000 through November 2000.
12. OTHER INCOME
In 2000, the Company recognized $936 of revenues from interest generated on its
bank accounts.
10
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. SUBSEQUENT EVENTS
In April 2000, the Company issued 336,66 shares of common stock in exchange for
$295,000 in capital. These shares were issued at prices ranging from $0.75 -
$1.00 per share.
14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with the
presentation adopted in the current year.
11
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ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in these forward-looking statements as a result of various
factors, including those set forth in "risk factors" and elsewhere in this
registration statement. The following discussion should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
registration statement. See "Forward-looking Statements" and "Risk Factors."
Foreword-looking Statements
Except for statements of historical fact, certain information contained
herein constitutes "forward-looking statements," including without limitation
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, as well as all projections of future results. Such
forward-looking statements involve known and unknown risks, uncertainties and
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, competition, management of growth and integration, risks of
technological change, the Company's dependence on key personnel, marketing
relationships and the other risks and uncertainties described under "Description
of Business - Risk Factors" in this Form 10-QSB. Certain of the forward looking
statements contained in this registration statement are identified with
cross-references to this section and/or to specific risks identified under "Risk
Factors."
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 2000 Compared to Three-Month Period Ended
March 31, 1999
Revenues. The Company derives its revenues from the retail sales of its
software products and royalties received from distributors of its software
products. For the three-month period ended March 31, 2000, 64% of the Company's
software sales were derived from two customers. Revenues for the quarter ended
March 31, 2000 were $1,558 compared with $100,453 for the same period in 1999.
This decrease is primarily due to the Company's decision to exit the retail
sales of its ENGLISH PRO 6.2. The Company anticipates minimum revenues from
retail sales of its software products during 2000. In addition, it is
anticipated that additional revenues from the sale of advertising embedded in
the Company's Internet-enabled software product will be generated beginning the
third quarter of 2000.
Cost of Goods Sold. Cost of Goods Sold consists of expenses associated with
the physical production of the "boxed" software packages that are sold in the
retail market. During the three-month period ended March 31, 2000, cost of goods
sold decrease to $4,296 from ($37,030) for the same period in 1999. This
decrease is due to the Company's decision to exit the retail sales of its
ENGLISH PRO 6.2.
Amortization and Write Down of Deferred Charge. The amortized deferred
charge represents a license fee for the use of ENGLISH PRO 6.2 and was being
amortized on a straight-line basis over the three-year minimum term of the
license agreement. As the Company does not
12
<PAGE>
expect to obtain any future value from this licensing agreement, the entire
deferred charge balance of $159,800 was written off to expense in 1999. 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.
Depreciation Depreciation expenses consists of depreciation on computer
equipment, office equipment and furniture. 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. During the three-month period
ended March 31, 2000, depreciation expenses increased to $4,881 from $3,240 for
the same period in 1999. This is due to increased depreciation costs associated
with the increase in purchases of computer equipment by the Company.
General and Administrative 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 were $145,952 for the three-month period ended March 31, 2000, which
represents an increase of 52% over the same period in 1999. This increase is due
primarily to an increase in expenses related to hiring of personnel, and travel
expenses. In addition, legal and accounting fees associated with the filing on
The Company's 10-QSB and other matters relating to being a fully reporting
company. The Company anticipates that general and administrative expenses will
increase significantly in the next year due to the implementation of its
Internet/Intranet enabled software initiatives in South East Asia.
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 were $62,966 for the
three-month period ended March 31, 2000, which were 28% higher than those
incurred for the same period in 1999. This increase was primarily attributable
to increased travel expenses incurred to promote the Company's Internet-enabled
software products in South East Asia. The Company anticipates marketing expenses
will increase over the next 12 months as a result of its current initiatives in
Thailand and Malaysia throughout Asia and Latin America, which will require
extensive travel for the its marketing staff.
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 $91,555 for the three-month period ended March 31, 2000 which
represents an increase of 54% over the same period in 1999. This increase was
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 and into 2000 as the Company focuses on improving and expanding the
features and availability of its Internet/Intranet network-enabled software
products. Research and development costs are expensed as incurred. However,
computer software development costs incurred after technological feasibility of
a product is established are capitalized. Technological feasibility is generally
not established until substantially all related product development is complete
and the product is released.
Income Taxes. No provision for federal income taxes has been recorded in
1999 or 1998 as a result of losses. As of March 31, 2000 the Company had a net
operating loss for United States income tax purposes of approximately $190,000
which will begin to expire in 2018 if not utilized. In addition, the Company has
non-capital losses for Canadian income tax purposes of approximately $900,000 at
March 31, 2000, which will begin to expire in 2005 if not utilized.
13
<PAGE>
The Company has recognized a valuation allowance of $500,000 equal to the
deferred tax assets due to the uncertainty of realizing the benefits of the
asset.
Other Income. Other income during the three-month period ended March 31,
2000 decreased to $936 compared to $41,691 for the same period in 1999. Other
Income consisted of interest earned by the Company on its bank balances. The
Other Income in 1999 was the result of the sale of two web domains by the
Company. It is not anticipated the Company will be selling web domains in the
future.
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 $1,488,928 through March 31, 2000. At
March 31, 2000, the Company had $84,843 in cash and cash equivalents and a
working capital deficit of $78,118. On March 2000, the Company announced a
financing via private placement offering under Regulation D, Rule 506 of the
Securities and Exchange Commission. The Company intends to offer and sell
1,000,000 units at $1 per unit, with each unit consisting of one share of
restricted common stock and two warrants. Each warrant entitles the holder to
purchase one additional share of restricted common stock at $2.50 per share and
$5.00 per share, respectively. As of March 31, 2000 the Company has received
$110,000 of this offering.
The Company has not yet generated positive cashflows from operating
activities. Cash used in operating activities was $269,352 and $256,268 for the
three-month period ended March 31, 2000 and for the same period in 1999,
respectively. The Company does not expect to generate positive cash from
operations for the year ending December 31, 2000.
The Company's investing activities have consisted of capital expenditures
totaling $1,882 and $8,710 for the three-month period ended March 31, 2000 and
for the same period in 1999 respectively. The capital expenditures related
primarily to the acquisition of computer hardware used to support its growing
employee base.
Net cash provided by financing activities was $319,500 and $706,000 for the
three month-period ended March 31, 2000 and for the same period in 1999,
respectively. 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. During the three-month period ended March 31,
2000 the Company received $110,000 under its financing offering. Shares had not
been issued as of March 31, 2000.
The Company does foresee an increase in operating expenses in order to
implement its Internet/Intranet enabled applications in Thailand and Malaysia as
well as the continue upgrade of its software application. Further, the Company
expects to sign additional Ministries of Education and with implementations
beginning by the second quarter of 2000. The Company expects to fund these
increase with further issuance of common stock of the Company and from
advertising revenues that are expected to begin in the third quarter of 2000. On
April 27, 2000 the Company announced an agreement with the China Central
Educational Technology Center to provide educational software to China's primary
and secondary schools.
The Company believes that anticipated private placements of equity capital
and anticipated operating revenues will be adequate to fund the Company's
operations over the next nine months. Thereafter, the Company expects it will
need to raise additional capital to meet its
14
<PAGE>
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 it may significantly
restrict the Company's operations.
Foreign Currency Translation and Hedging
Foreign exchange gains (losses) have not been significant to date and 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.
During the second and third quarters of 2000, the Company intends to engage
in activities in foreign countries, namely Thailand, Malaysia, Columbia, Hong
Kong, 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.
Risk factors
The business of the Company involves a number of risks and uncertainties
that could cause actual results to differ materially from results projected in
any forward-looking statement in this report. These risks and uncertainties
include the risks set forth below. The Company's securities are speculative and
investment in the Company's securities involves a high degree of risk and the
possibility the investor will suffer the loss of the entire amount invested.
Limited Operating History; History of Losses; Increased Expenses
The Company incurred a net loss of $284,298 for three-month period ended
March 31, 2000. The Company has had minimal revenue since inception , it has
never been profitable and there can be no assurance that, in the future, the
Company will be profitable on a quarterly or annual basis. In addition, the
Company plans to increase its operating expenses to expand its sales and
marketing operations, fund greater levels of research and development, broaden
its customer support capabilities and increase its administration resources. In
view of the rapidly evolving nature of the Company's business, markets and
limited operating history, the Company believes that period-to-period
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
Need for Additional Financing
The Company has accumulated losses of $1,828,341 since it began operations
in May 1998 and will require additional working capital to complete its business
development activities and generate revenue adequate to cover operating and
further development expenses. The Company incurred a loss of $284,298 for the
three-month period ended March 31, 2000, and as of
15
<PAGE>
March 31, 2000 had a working capital deficiency of $78,118. Management
recognizes that the Company must obtain additional financial resources by
raising capital from shareholders or other sources or consider a reduction in
operating costs to enable it to continue operations with available resources.
However, no assurances can be given that the Company will be successful in
raising 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 financing,
management will be required to sharply curtail the Company's operating expenses.
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. AGREEMENTS
During the period ended March 31, 2000 the Company entered into the
following agreements:
Zap Me
The ZapMe agreement is a continuation of the Company's marketing activities
as a content provider whereby it provides its English language programs and
co-brands its product and educational games with web portals, ISP's and PC
manufacturers. This program will generate revenues on an equal basis. With
revenues projected in the third quarter of 2000.
ZapMe is a leading provider of quality technology and online education
content to schools and communities nationwide, has built America's largest
Internet media network specializing in education.
ITEM 3. RECENT SALES OF UNREGISTERED SECURITIES
On January 21, 2000, the Company issued an aggregate of 17,000 shares of
common stock to Rob Weston at a price per share of $0.50 in exchange for
principal payment of $5,000 and interest expense of $3,500 accrued on inventory
loan. 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 January 21, 2000, the Company issued 7,000 shares of common stock to
Marshall Farris at a price per share of $0.50 in exchange for interest expense
of $3,500 accrued on inventory loan. 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 January 21, 2000, the Company issued 4,000 shares of common stock to
Vaughn Barbon at a price per share of $0.50 for services rendered 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.
16
<PAGE>
On January 26, 2000 the Company issued 5,000 shares of common stock to
Vinai Roachthevilit at a price per share of $0.50 for an aggregate purchase
price of $2,500. 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 January 31, 2000 the Company issued 80,000 shares of common stock to
Marc Crimeni at a price per share of $0.50 for an aggregate purchase price of
$40,000. 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 January 31, 2000 the Company issued 80,000 shares of common stock to
Nick Sereda at a price per share of $0.50 for an aggregate purchase price of
$40,000. 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 January 31, 2000 the Company issued 20,000 shares of common stock to
Robert Ricco at a price per share of $0.50 for an aggregate purchase price of
$10,000. 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 January 31, 2000 the Company issued 40,000 shares of common stock to
Douglas Cairns 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 January 31, 2000 the Company issued 20,000 shares of common stock to
Desmond Duffy at a price per share of $0.50 for an aggregate purchase price of
$10,000. 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 January 31, 2000 the Company issued 20,000 shares of common stock to
Lambeth Investments Ltd. at a price per share of $0.50 for an aggregate purchase
price of $10,000. 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 January 31, 2000 the Company issued 20,000 shares of common stock to
Hugh Hutchison at a price per share of $0.50 for an aggregate purchase price of
$10,000. 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 January 31, 2000 the Company issued 10,000 shares of common stock to
Glen Warren Pendry at a price per share of $0.50 for an aggregate purchase price
of $5,000. 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 January 31, 2000 the Company issued 10,000 shares of common stock to
Nicholar James Smart at a price per share of $0.50 for an aggregate purchase
price of $5,000. 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 January 31, 2000 the Company issued 10,000 shares of common stock to
David Mandel at a price per share of $0.50 for an aggregate purchase price of
$5,000. 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 January 31, 2000 the Company issued 24,000 shares of common stock to Ray
Billing at a price per share of $0.50 for an aggregate purchase price of
$12,000. 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 January 31, 2000 the Company issued 15,000 shares of common stock to
Ethel Magnus at a price per share of $0.50 for an aggregate purchase price of
$7,500. 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 January 31, 2000 the Company issued 15,000 shares of common stock to
Chester Kmiec at a price per share of $0.50 for an aggregate purchase price of
$7,500. 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 January 31, 2000 the Company issued 50,000 shares of common stock to
O.E.M. Capital Corporation 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 March 1, 2000, the Company issued 13,520 shares of common stock to
Persian Distributors Inc. at a price per share of $0.50 for services rendered of
$6,760. 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 March 7, 2000, the Company issued 1,840 shares of common stock to Vaughn
Barbon at a price per share of $1.00 for services rendered of $1,840. The shares
were issued to a holder outside the United States pursuant to an exclusion from
registration under Regulation S under the Securities Act.
ITEM 4. 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 March 31, 2000.
18
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 12th day of May,
2000.
EDUVERSE.COM
By: /s/ Mark E. Bruk
--------------------------------------
Mark E. Bruk, President, Chief
Executive Officer and Treasurer
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