10QSB: ARETE INDUSTRIES INC
5/20/2003 4:22:03 PM
(EDGAR Online via COMTEX) -- Item 2 - 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 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.
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. The conversion privilege of the designated Series 1 and Series 2 Convertible Preferred Stock has been adjusted to reflect the effect of the referenced reverse stock 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 of its incubator client companies, its Arete Outdoors subsidiary and 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. Presently, 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 March 31, 2003, the Company had $169,775 in total assets and $1,337,453 in total liabilities, as compared to $176,871 and $1,334,973 at the end of fiscal year ended December 31, 2002, respectively. Accounts payable and accrued expenses at March 31, 2003 were $1,290,976 as compared to $1,288,791 at December 31, 2002. During the period ended March 31, 2003, the Company paid $75,000 in wages, resolved a wage claim for $7,258 and paid $ 54,237 in consulting fees with issuance of common stock and stock options. During April of 2003, the Chief Executive Officer exercised 1,000,000 in stock options with $5,000 in cash and payment of $15,000 of note payable; and a consultant exercised 1,000,000 in stock options with $20,000 in cash.
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 2 to Financial Statements.)
During the period ended March 31, 2003, the Company continued to rely upon infusions of cash from loans and cash advances by officers, directors and affiliates of the Company. As stated above, $3,545 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 and accounting expenses for corporate reporting. As of March 31, 2003, 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 operations during the first quarter of 2003 have been confined to business development activities of its officers, directors and consultants, and administrative bookkeeping tasks related to creditor and investor relations and securities act compliance. The Company is not providing new venture management or advisory activities and therefore not generating revenue from executive and management services.
The Company's revenues from operations for the quarter ended March 31, 2003 were $0. Operating expenses for the quarter ended March 31, 2003 were $147,908 resulting in an operating loss of $147,908. This included officer and director salaries of $75,000, and other operating expenses of $72,908, including accounting fees, consulting, bookkeeping, transfer agent fees, and storage fees. The Company moved to an executive suite on a month to month basis reducing its rent to $1,000 per month. The Company continues to rent storage space for file storage, furniture and excess equipment as well as its Arete Outdoors inventory for approximately $550 per month.
We envision operating the Company as a holding company in the future for other going concerns and revenue generating businesses, which will require minimal staff for accounting and administrative matters. Our future expectation is that monthly operating expenses will remain as low as possible until new opportunities are initiated, of which there can be no assurance, in which event, the operating costs of the Company may increase relative to the need for administrative and executive staff and overhead to provide support for these new business entities.
Liquidity and Capital Resources
The Company had a working capital deficit as of March 31, 2003 of $1,288,860. This compares to a working capital deficit of $1,287,373 as of December 31, 2002. During the quarter ended March 31, 2003 an aggregate of 7,700,000 shares of common stock were issued for aggregate consideration of $119,758 (avg. $0.016 per share) and the Company issued 355 shares of Series 2 Convertible Preferred Stock valued at face value of $3,545. Subsequent to March 31, 2003, 2,000,000 stock options were exercised at $0.02 per share for $25,000 in cash and payment of debt to an affiliate of the CEO in the amount of $15,000.
The Company had a stockholder's deficit at March 31, 2003 of $1,167,678. This is compared to stockholder's deficit at December 31, 2002 of $1,158,102. The stockholder's deficit increased due to the Company operating at a loss, offset by the issuance of preferred stock for cash and the conversion of certain notes payable.
At March 31, 2003, the Company had no material commitments for capital expenditures.
Due to its recent liquidity issues, the Company has defaulted on several short term obligations including for its operating overhead, trade payables, and state and federal employment taxes, resulting in tax liens being imposed on the Company's assets, which will have to be resolved with an infusion of new capital, of which no assurances can be made.
Management believes that the Company will experience significant difficulty raising significant additional equity capital or attracting viable acquisition candidates until these matters have been resolved and the Company has eliminated a substantial amount of its outstanding debt.
The Company has recently reduced the number of outstanding common shares to allow it to raise equity capital and to effect conversion and exercise of outstanding common stock options and conversion rights of preferred stock which has been reserved for issuance to insiders in exchange for their accrued cash advances, and for issuance in a private placement of up to $200,000 in Series 2 Convertible Preferred stock, which the Company is currently conducting to an affiliated entity. As of March 31, 2003, the Company had raised $188,970 in gross proceeds of this private placement and had 18,897 outstanding shares of Series 2 Convertible Preferred.
The Company may continue to be required to issue further 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-term.
Subsidiaries/Employees:
Arete Industries, Inc. has one full time employee, and two part-time corporate officers, and two part-time consultants presently engaged in developing and executing a marketing plan for its business development and capital funding businesses, as well as the automation and upgrading of the Company's shareholder and investor communication systems. The Company's subsidiary, Aggression Sports, Inc. presently has no employees other than its acting president, the Company's current CEO. The CEO operates and manages both entities and remains on a deferred salary basis for the first two quarters of 2003. He has accepted a 1,000,000 share stock grant valued at $15,000 and an Incentive stock option to purchase 1,000,000 shares of common stock at $0.0165 per share as compensation for services rendered during the first quarter of 2003, and the two outside directors each received a 2,000,000 stock grant valued at $30,000 each and an Incentive Stock Option to purchase 1,000,000 shares of common stock each at $0.0165 per share for compensation for the same period. Following the end of the first quarter of 2003, the company issued 1,000,000 shares of common stock to its CEO valued at $14,000 as compensation for services during the second quarter of 2003, and issued 1,000,000 common stock Incentive Options exercisable at $0.015 per share to each of its directors, as compensation for the same period. |
