10KSB: ARETE INDUSTRIES INC
4/15/2003 7:55:17 PM
(EDGAR Online via COMTEX) -- Item 6-Management's Discussion and Analysis
Critical accounting policies:
The Company has identified the accounting policies described below as critical to its business operations and the understanding of the Company's results of operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout this section where such policies affect the Company's reported and expected financial results. The preparation of this Annual Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities of the Company, revenues and expenses of the Company during the reporting period and contingent assets and liabilities as of the date of the Company's financial statements. There can be no assurance that the actual results will not differ from those estimates.
Stock issuances:
The Company has relied upon the issuance of shares of its common and preferred stock, and options to purchase its common stock and preferred stock to fund much of the Company's operations. The following describes the methods used to record various stock related transactions.
Stock issued for services is valued at the market price of the Company's stock at the date of grant.
Compensation related to the issuance of stock options to employees and directors is recorded at the intrinsic value of the options, which is the market price of the Company's common stock less the exercise price of the option at the measurement date. The Company's common stock issued to consultants is recorded at the market price of the Company's common stock at the measurement date. The measurement date is generally the date the options are fully vested.
Revenue recognition:
The Company has provided management services to companies in the process of developing new products with no operations. These management fees have not been recorded as revenue when such services were performed since collectibility was not reasonably assured.
Research and development:
The Company has advanced funds to start-up companies. When these advances were used for research and development by the start-up companies, these amounts were recorded as research and development expense in the Company's financial statements. Overview.
Effective July 15, 2002, the Company enacted a recapitalization of its outstanding common shares by effecting a 20 to 1 reverse stock split, done without changing the total amount of authorized common shares. All references herein to common stock have been restated to reflect the effect of this reverse split.
By the beginning of fiscal 2001, the Company had initiated downsizing operations of its incubation services and facilities. By the end of the second quarter of fiscal 2001, the Company had reduced corporate overhead by eliminating all but two executive officers who were accruing salaries and had terminated all operations at its Arete Outdoors subsidiary and terminated the ABS and 7GT projects. By the end of fiscal 2001, the Company had moved into the smaller of its two office suites and terminated its lease on the remaining space. During the first half of fiscal 2002, the Company continued resolving outstanding debts including salaries and accounts and notes payable to non-affiliates and affiliates; and focused on completing a recapitalization and restructuring of its capital structure, which required incurring the expense of holding a shareholders meeting, that was held on July 2, 2002. During the third quarter of fiscal 2002, we dismantled operations, preserved our assets and resources, and maintained our current reporting status as a public company in order to preserve our continuity and our ability to launch our new corporate vision. In December 2002, the Company moved its corporate offices into an executive suite, reducing its overhead to an absolute minimum. Concurrently, having obtained shareholder approval to restructure the Company's capital structure, the CEO with the two other board members engaged aggressively in the development of new sources of capital and new acquisition prospects conforming to our business development objectives. Finally, we continue our efforts to compromise or resolve outstanding obligations including accrued employee compensation, withholding and other taxes, operating and trade payables of the Company and its former subsidiary operations. To date these efforts have been funded by cash advances, infusions from related parties, and by the issuance of common stock for services. The Company will be required to rely upon ongoing financial support from these parties for the foreseeable future.
Financial Condition
As of December 31, 2002, the Company had $176,871 in total assets and $1,334,973 in total liabilities, as compared to $252,087 and $1,837,518 at the end of fiscal year ended December 31, 2001, respectively. Accounts payable and accrued expenses at December 31, 2002 were $1,288,292 as compared to $1,553,300 at December 31, 2001. During 2002, the Company resolved or settled $344,000 in accrued wages, paid $160,014 in notes payable to affiliates, paid $100,000 in notes to non-affiliates with the issuance of Preferred Stock, paid an outstanding wage claim of $8,000 with issuance of 400,000 shares of common stock, and paid $126,710 in consulting services and director's compensation with 9,483,333 shares of common stock. Also, during 2002, the Company received $185,425 in the form of cash and cash advances from a related party for issuance of Series 2 Convertible Preferred Stock pursuant to a subscription agreement signed in December 2001. The Company had a revolving line of credit of $50,000, which was paid off in 2001 with the proceeds of two certificates of deposit that had been pledged as collateral against the note. The note was secured by two separate certificates of deposit in the amount of $25,000 each, one of which was pledged by the Company's CEO, the other was purchased with proceeds of a stock purchase by the CEO. Subsequently, the CEO contributed his certificate of deposit to the Company in exchange for shares of common stock.
The Company's subsidiary, Global Direct Marketing Services, Inc., which is now inactive, has left an obligation of trade payables of $87,625 and unpaid 1999 payroll taxes of $58,230 remaining from its printing and direct mail advertising business. The Company owes approximately $97,352 in unpaid Federal payroll taxes for calendar years 1995 through 1997 including penalties and interest. The Company owes approximately $110,842 in 2000 and $22,138 in 2001, respectively, in accrued payroll taxes, including penalties and interest. (See: Note 3 to Financial Statements.)
During the period ended December 31, 2002, the Company continued to rely upon infusions of cash from loans and cash advances by officers and directors of the Company. As stated above, $185,425 was also received in partial payment of a subscription agreement for purchase of Series 2 Preferred Stock. The proceeds were used for overhead, payment of corporate obligations, legal fees, accounting expenses for corporate reporting, and expenses of conducting the Company's annual shareholders meeting. As of December 31, 2002, executive salaries and bonuses of $518,873 were accrued and unpaid, and the Company had $218,820 in notes receivable for stock sales from former management members.
Results of operations
The Company's revenues from operations for the fiscal year ended December 31, 2002 were $ 0 as compared to $11,255 for the fiscal year ended December 31, 2001. Operating expenses for the fiscal year ended December 31, 2002 were $416,344 resulting in an operating loss of $416,344, as compared to operating expenses of $1,049,664, and an operating loss of $ 1,038,409 for the fiscal year ended December 31, 2001.
Significant operating costs for the year ended December 31, 2002 included salaries for Arete Industries of $139,000, of which $60,000 was deferred and unpaid salaries. Other Operating Expenses of $277,344 consisted of salaries, rent and office expense, shareholder communication, consulting and legal fees. The salary cost of the Company reflects a decrease over fiscal year 2001 in employees from three to one compared to the prior year.
Total other expenses of $20,223 included $13,129 in interest and miscellaneous income, an interest expense of $33,352 resulting in a net loss of $436,567. Liquidity and Capital Resources
The Company had a working capital deficit as of December 31, 2002 of $1,287,373. This compares to a working capital deficit of $1,757,367 in the fiscal year ended December 31, 2001. The $469,994 decrease in working capital deficit for the fiscal year 2002 is attributable to a decrease in accrued expenses from $852,323 (fye 2001) to $576,333 (fye 2001) and an increase in accounts payable from $411,849 (fye 2001) to $ 422,697 (fye 2002) and an increase in accrued payroll taxes from $289,128 (fye 2001) to $289,761 (fye 2001). During the 12-month period ended December 31, 2002 an aggregate of 9,983,333 shares of common stock were issued for aggregate consideration of $136,710, (avg. $0.014 per share.)
The CEO has accrued salaries and the CEO and an affiliate of the directors have advanced cash to the Company to fund operations, primarily for cash accruals and equity.
During 2002, the CEO had advanced an aggregate of $21,608 in cash or cash equivalents to the Company for company expenses. The CEO and a former officer and director forgave an aggregate of $344,000 in accrued salary and bonus in exchange for certain preferential rights to future dividend distributions. Also, an affiliate of the CEO received 16,001.4 shares of Series 1 Preferred Stock in payment of a note payable to the affiliate of $160,014 for accrued cash advances to the Company. The CEO also accrued $60,000 for salary for the first two quarters of 2002 and was paid 2,000,000 shares of common stock for compensation for services for the last two quarters of 2002 valued at $26,000, along with a stock option to purchase 2,000,000 shares of common stock. The two other directors each received 2,000,000 common shares valued at $26,000 each plus were granted stock options to purchase 2,000,000 shares each as compensation for services in 2002. An affiliate owned equally by the three directors advanced $185,425 to the Company and received 18,543 shares of Series 2 Preferred Stock during 2002. Following the 2002 year end, as of March 31, 2003, additional advances of $3,545 were made by this related party in exchange for an additional 355 shares of Series 2 Preferred. Following the end of the 2002 fiscal year end, the CEO received an additional 1,000,000 common shares for services through the first quarter of fiscal 2003, valued at $15,000 1,000,000 common shares for services through the second quarter of fiscal 2003, valued at $14,000 plus a stock option to purchase 1,000,000 common shares for $0.0165 per share for the first quarter and a stock option to purchase 1,000,000 common shares for $0.0155 per share for the second quarter. Also, following the end of fiscal year 2002, the other two directors each received 2,000,000 shares of common stock valued at $30,000 each, and stock options to purchase 1,000,000 common shares for $0.0165 per share as compensation for services through the end of the first quarter of fiscal 2003, plus stock options to purchase 1,000,000 shares each for $0.0155 per share as compensation for services through the end of the second quarter of fiscal 2003. (See: Executive Compensation Tables and Notes thereto.)
During fiscal year ended December 31, 2002, including the issuances referred to in the previous two paragraphs, the Company issued 9,483,333 shares of its common stock valued at $126,710 in lieu of salary and expenses.
The Company requires additional infusions of equity capital for its business development operations described elsewhere in this report. The Company continues to seek sources of capital including venture capital, angel investors and through private placement of debt or equity; and is seeking strategic alliances with potential customers and partners. Due to the current financial condition of the Company and the volatility in the market for its common stock, no assurance can be made that the Company will be successful in raising any substantial amount of capital through the sale of equity or debt securities, or with bank debt on favorable terms in the near future. Due to such conditions the Company may continue to be required to issue further common stock to pay executives, consultants and other employees, which may have a continuing dilutive effect on other shareholders of the Company. Failure of the Company to acquire additional capital in the form of either debt or equity capital will most likely impair the ability of the company to meet its obligations in the near future or medium term. |
