SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________
Commission file number: 333-104670
STRATABASE INC.
(Exact name of Registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
Suite 101 - 34595 3rd Ave Abbotsford
British Columbia, Canada V2S 8B7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: The registrant has one class of Common Stock with 10,914,972 shares
outstanding as of April 20, 2005.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 |_|
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |_| Item 18 |X|
BASIS OF PRESENTATION
The financial results of Stratabase Inc. ("Stratabase" or "the Company")
contained in this Form 20-F are reported in United States dollars and have been
prepared in compliance with accounting principles generally accepted in the
United States of America for the purposes of this annual report. In this annual
report, all dollar amounts are expressed in United States dollars except where
otherwise indicated.
FORWARD LOOKING INFORMATION
Certain statements in this annual report constitute "forward-looking
statements." Stratabase has based these forward-looking statements on its
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to future
revenues, expenses and profitability, the future development and expected growth
of Stratabase's business and the communications industry, Stratabase's ability
to successfully execute its business model and business strategy, projected
capital expenditures, and trends in government regulation.
Forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue," or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements, carefully
consider the risks outlined under Item 3.
Key Information -- Risk Factors.
Although Stratabase believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. Stratabase does not promise to
update forward-looking information to reflect actual results or changes in
assumptions.
TABLE OF CONTENTS
PART I 1
Item 1. Identity of Directors, Senior Management and Advisors 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
A. Selected Financial Data 1
B. Capitalization and Indebtedness 2
C. Reasons for the offer and use of proceeds 2
D. Risk Factors 2
Item 4. Information on Stratabase 7
A. History and Development of Stratabase 7
B. Business Overview 8
C. Organizational Structure 11
D. Description of Property 11
Item 5. Operating and Financial Review and Prospects 11
A. Operating Results 13
B. Liquidity and Capital Resources 16
C. Research and Development, Patents and Licenses, etc 17
D. Trend Information 17
E. Off-balance sheet arrangements 17
F. Tabular disclosure of contractual obligations 17
Item 6. Directors, Senior Management and Employees 18
A. Directors and Senior Management 18
B. Compensation 19
C. Board Practices 19
D. Employees 19
E. Share Ownership 19
Item 7. Major Shareholders and Related Party Transactions 21
A. Major Shareholders 21
B. Related Party Transactions 21
C. Interests of Experts and Counsel 21
Item 8. Financial Information 21
A. Financial Statements and Other Financial Information 21
B. Significant Changes 22
Item 9. The Offer and Listing 22
A. Offer and Listing Details 22
B. Plan of distribution 23
C. Markets 23
D. Selling shareholders 23
E. Dilution 23
F. Expenses of the issue 23
Item 10. Additional Information 23
A. Share Capital 23
B. Memorandum and Articles of Incorporation 23
C. Material Contracts 24
D. Exchange Controls 24
E. Taxation 24
F. Dividends and Paying Agents 27
G. Statement by Experts 27
H. Documents on Display 27
I. Subsidiary Information 28
Item 11. Quantitative and Qualitative Disclosures About Market Risk 28
Item 12. Description of Securities Other than Equity Securities 28
PART II 29
Item 13. Defaults, Dividend Arrearages and Delinquencies 29
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 29
Item 15. Controls and Procedures 29
Item 16. [Reserved] 29
Item 16A. Audit Committee Financial Expert 29
Item 16B. Code of Ethics 29
Item 16C. Principal Accountant Fees and Services 29
Item 16D. Exemptions from the Listing Standards for Audit Committees 30
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 30
PART III 30
Item 17. Financial Statements 30
Item 18. Financial Statements 30
Item 19. Exhibits 31
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following sets forth selected financial information of Stratabase for the
fiscal years ended December 31, 2004, 2003, 2002, 2001 and 2000. The selected
financial information may not be indicative of Stratabase's future performance
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the notes thereto included elsewhere in this annual report.
STATEMENT OF OPERATIONS DATA
(in U.S. dollars)
STRATABASE
YEARS ENDED DECEMBER 31,
2004 2003 2002 2001 2000
------------- ------------ ------------ ------------ --------------
Revenues $ - $ 5,000 $ 430,240 $ 2,360,452 $ 1,313,579
Cost of revenues 8,415 2,669 324,012 1,607,102 1,060,311
Gross margin (8,415) 2,331 106,228 753,350 253,268
Research and development 139,742 154,544 171,500 - -
General and administration 549,191 705,888 794,939 441,571 357,483
Income (loss) from operations (697,348) (858,101) (860,211) 311,779 (104,215)
Other income (expense), net 2,489 (169,175) 31,195 158,809 7,159
Income tax expense - - (85,629) (49,342) -
Net income (loss) $ (694,859) $(1,027,276) $ (914,645) $ 421,246 $ (97,056)
Net income (loss) per share:
Basic income (loss) per share $ (0.07) $ (0.13) $ (0.12) $ 0.06 $ (0.02)
Diluted income (loss) per share $ (0.07) $ (0.13) $ (0.12) $ 0.05 $ (0.02)
Basic weighted average number of
common shares outstanding
(in millions) 9.91 8.04 7.93 7.37 6.39
Diluted weighted average number of
common shares outstanding (in
millions)
N/A N/A N/A 8.11 N/A
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BALANCE SHEET DATA
(in U.S. Dollars)
STRATABASE
DECEMBER 31,
2004 2003 2002 2001 2000
------------- ------------ ------------ ------------ --------------
Cash and cash equivalents $ 52,187 $ 509,180 $ 134,093 $ 1,265,457 $ 219,801
Other current assets 5,329 14,674 113,836 46,386 144,287
Property and equipment, net 14,520 37,001 44,989 59,590 66,788
Other assets, net - 243,701 690,120 675,027 146,281
Total assets $ 72,036 $ 804,556 $ 983,038 $ 2,046,460 $ 577,157
Current liabilities $ 34,729 $ 64,933 $ 66,455 $ 901,125 $ 106,044
Common stock 9,915 9,915 8,034 7,719 6,654
Other capital accounts 2,558,090 2,565,547 1,717,112 1,031,534 779,623
(Accumulated deficit) retained (2,530,698) (1,835,839) (808,563) 106,082 (315,164)
earnings
Total liabilities and
stockholders' equity $ 72,036 $ 804,556 $ 983,038 $ 2,046,460 $ 577,157
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
An investment in Stratabase common shares involves certain risks. In evaluating
us and our business, investors should carefully consider the following risk
factors in addition to the other information included or incorporated by
reference in this 20-F.
We have a going concern opinion from our auditors, indicating the possibility
that we may not able to continue to operate.
For the years ended December 31, 2004, 2003 and 2002, we incurred net losses of
$694,859, $1,027,276 and $914,645, respectively. The Company has yet to receive
any revenues from sales of its new product line. These factors, among others,
indicate that Stratabase may be unable to continue operations in the future as a
going concern. These circumstances raise substantial doubt about our ability to
continue as a going concern, as described in the explanatory paragraph to our
independent auditors' report on our 2004 financial statements. The Company
expects sales from its new product line to fund long-term operations and will be
actively marketing its products during 2005. Management believes marketing and
operating expenses will be financed during the first six months of 2005 through
gross proceeds of $300,000 received from a private placement completed in
February 2005. The Company expects to need an additional $300,000 to cover costs
through the remainder of 2005. Such will be financed by additional equity
issuances. There can be no assurance that management's plans to market its new
products will be successful or that additional equity financing will be
available on favourable terms. No adjustment has been made in the accompanying
financial statements to the amounts and classification of assets and liabilities
which could result should Stratabase be unable to continue as a going concern.
If we cannot continue as a viable entity, our shareholders may lose some or all
of their investment in Stratabase.
In January 2003, the Company filed a proposal to effect a continuation of the
corporate jurisdiction from the State of Nevada to Canada on Form S-4 with the
United States Securities and Exchange Commission (SEC). The Form S-4 was
declared effective on or about July 7, 2004 and submitted to the stockholders of
the Company. The special meeting of stockholders to vote on the adoption of the
plan of conversion was held on August 17, 2004 and a majority of the
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shareholders approved the plan of conversion. Accordingly, the Company changed
its name to "Stratabase, Inc.," and continued to operate under the Canada
Business Corporations Act and is no longer a Nevada corporation. The Company has
never had any employees or operations in the U.S., and management believes the
continuation to Canada accurately reflects the nature of its operations.
Management of the Company believes that the continuation to Canada enables the
Company to benefit from scientific research and development grants that are not
available to non-Canadian corporations.
RISKS RELATING TO THE CONTINUANCE
We may owe additional U.S. taxes as a result of the conversion if our
conclusions relating to the value of our assets are incorrect.
For U.S. tax purposes, when we continued the company in Canada in the third
quarter of 2004, it was treated as though we sold all of our property and
received the fair market value for those properties. We were taxed on any income
or gains realized on that "sale." The fair market value of our assets was
greater than our tax basis of our assets and as a result we had a taxable gain
on the deemed "sale".
In connection with the continuation, we reviewed our assets, liabilities and
paid-up capital and the extent of our losses carried forward and believe that we
do not owe any U.S. federal income taxes as a result of the
conversion/continuance. Accordingly, we believe that no U.S. taxes are owing as
a result of the proposed conversion. It is possible that the facts on which we
based our assumptions and conclusions may be challenged by the Internal Revenue
Service. In particular, our determination of fair market value was based upon a
valuation of our assets and liabilities as of September 30, 2002. The value was
determined based upon the cash flows projected to be generated by our intangible
assets, discounted at a rate representative of an appropriate rate of return for
an alternative investment of equivalent risk. This discount rate was estimated
to be 25%. Underlying the valuation were key estimates of management's
projections of revenue and expenses for a six-year period which were based upon
on further estimates and assumptions surrounding our cost structure, development
of technology and continued market acceptance of our database products and
pricing.
There are other valuation methodologies which, if employed, may have yielded a
higher fair market value for our assets which would have resulted in a larger
taxable gain. One such method is the "market capitalization method" where the
implied value of our net assets is equal to the number of our common shares
outstanding multiplied by the quoted market price of our common stock on the OTC
Bulletin Board on the transaction date. Had the market capitalization method
been applied, the valuation of our assets would have been substantially higher
(as much as $9.6 million higher as of the September 30, 2002 valuation date)
than the value determined using the discounted cash flow method and would have
yielded significant taxable capital gains and taxes owing as a result of the
continuance. Management assessed the two methods, but did not consider the
"market capitalization method" an appropriate reflection of the value of our
company as a whole. Our Company's common stock is quoted on the OTC Bulletin
Board, has a small public float and is relatively thinly traded. Because of
these factors, we considered the quoted market price of our stock to be an
unreliable measure of the fair value of our net assets and accordingly sought a
more appropriate measure of value.
The valuation may be challenged by the Internal Revenue Service ("IRS"). Should
the IRS disagree with the valuation methodology we used or any of our
assumptions, they could reassess the deemed proceeds on the continuance to a
higher amount. We may not have tax losses carried forward from prior years
sufficient to cover any adjustments to the taxable gain required upon assessment
by federal tax authorities. Should our losses be insufficient, the tax liability
to our company could be significant and we may not have the available cash at
that time to settle the liability owing. Should we be unable to settle any such
liability, we may have to cease operations in which case our stockholders would
likely loose their investment in our company.
Management believes the methodology, estimates and assumptions are not only
reasonable but the most appropriate in these circumstances. Hence, we did not
apply to the federal tax authorities (the Internal Revenue Service in the United
States and the Canada Customs and Revenue Agency in Canada) for a ruling on this
matter and do not intend to do so. We have also made certain other assumptions
regarding the tax treatment of this transaction in order to reach our
conclusions and it may be possible for some of these assumptions to be
interpreted in a different manner which would be less favorable to us. You
should understand that it is possible that the federal tax authorities will not
accept our valuations or positions and claim that we owe taxes as a result of
this transaction.
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RISKS RELATING TO STRATABASE
At December 31, 2004 the Company had $22,787 of working capital. On February 14,
2005 the Company received $300,000 from a private placement. Based on
management's estimates, the proceeds from the private placement will be
sufficient to fund operations for approximately six months. Management expects
to begin marketing Relata during the first half of 2005 and expects Relata sales
to fund the long-term needs of the Company. However, in the event that we
require additional funding we anticipate that such funding will be in the form
of equity financing from the sale of our common stock. However, we cannot
provide investors with any assurance that we will be able to raise sufficient
funding from the sale of our common stock to fund the Company. We believe that
debt financing will not be an alternative for funding. The risky nature of this
enterprise and lack of tangible assets places debt financing beyond the
credit-worthiness required by most banks or typical investors of corporate debt
until such time as the economic viability of Relata can be demonstrated. We do
not have any arrangements in place for any future equity financing.
The stock price of our common shares may be volatile. In addition, demand in the
United States for our shares may be decreased by the change in domicile.
The market price of our common shares may be subject to significant fluctuations
in response to variations in results of operations and other factors.
Developments affecting the software industry generally, including general
economic conditions and government regulation, could also have a significant
impact on the market price for our shares. In addition, the stock market has
experienced a high level of price and volume volatility. Market prices for the
stock of many similar companies have experienced wide fluctuations which have
not necessarily been related to the operating performance of such companies.
These broad market fluctuations, which are beyond the control of Stratabase,
could have a material adverse effect on the market price of our shares.
If we do not grow by generating sales of our products and services, we will
never be able to achieve profitability.
For the year ended December 31, 2004 we had a net loss of $694,859. We
anticipate losses from operations to continue as we market our new product. If
revenues and spending levels are not adjusted accordingly, we may not generate
sufficient revenues to achieve profitability. Even if profitability is achieved,
we may not maintain or increase such profitability on a quarterly or annual
basis in the future.
If we do not grow, we will probably not become profitable. However, if we grow,
develop and increase the size of our business, the demands on our operational
systems will also increase. We will be required to further develop our
operational and financial systems and managerial controls and procedures. We
will also then need to expand, train and manage a larger team of staff. We do
not currently have the resources for this type of expansion and may not be
successful in our expansion efforts. Accordingly, we may limit or even entirely
negate our chances to be profitable if we do not grow or if we cannot manage our
growth.
Although we initially experienced rapid growth, now that we have revised our
business model it is possible we will not experience any further growth.
Although we experienced revenue growth during 2000 and 2001, we came to believe
that the specific open-source software business model we were using would not
result in substantial continued growth past that point. Therefore it was decided
by management to change our business model to focus instead on proprietary
software. This change will continue to place further demands on our operational
and financial resources.
We may not be able to install and implement adequate operational and financial
systems, procedures and controls in an efficient and timely manner, and our
current or planned systems, procedures and controls may not be adequate to
support our future operations. The difficulties associated with installing and
implementing these new systems, procedures and controls may place a significant
burden on our management and our internal resources. If we are unable to sell
our proprietary software services and generate profitability, we may not be able
to continue as a viable business entity.
Our chances of success will be diminished if we lose the services of our
officers or if potential conflicts of interest between our business and our
officers are not resolved in our favor.
4
We are highly dependent on the services provided by Mr. Trevor Newton, our
Chairman of the Board, President, Secretary, Treasurer and Chief Operating and
Executive Officer, and Mr. Fred Coombes, our Vice President of Corporate
Development. Neither of these two individuals has an employment agreement with
us nor do we have key-man life insurance on them. Since both may become active
in other unrelated businesses, they may not devote their full-time to our
affairs. This may cause conflicts of interest with our business in terms of time
and business opportunities. These conflicts may not be resolved in our favor.
Our business may be hurt if these conflicts are not resolved in our favor.
Since our expenses are paid for in Canadian dollars, an unfavorable currency
exchange rate would increase our net loss or decrease our net income.
Our operations are located in Canada. Accordingly, the majority of our expenses
are paid in Canadian dollars. We anticipate that most of our revenues will be
received in US dollars. Accordingly, if the value of the Canadian dollar
relative to the US dollar increases, then this could have a negative adverse
effect on our financial condition by reducing our net income.
Our software may contain defects that may harm our reputation, be costly to
correct, delay revenue and expose us to litigation.
Despite testing by us and our customers, errors may be found in our software
after commencement of distribution. If errors are discovered, we may not be able
to successfully correct them in a timely manner or at all. Errors and failures
in our software could result in a loss of, or delay in, market acceptance of our
software and the associated services that we sell to our customers and could
damage our reputation and our ability to convince users of the benefits of our
software. In addition, we may need to make significant expenditures of capital
resources in order to eliminate errors and failures. If our software fails, our
customers' systems may fail and they may assert claims for substantial damages
against us. In addition, our insurance policies may not adequately limit our
exposure with respect to this type of claim. A software liability claim, even if
unsuccessful, could be costly and time consuming. Claims related to the
occurrence or discovery of these types of errors or failures could result in a
decrease in sales and an increase in costs to remedy the failures in our
software.
We may be sued as a result of information retrieved from our website. On our
website we publish corporate information, sales material, software downloads,
limited general industry information, investor relations material and technical
support information. We may be subjected to claims for defamation, negligence,
copyright or trademark infringement or other claims relating to the information
we publish on our website. These types of claims have been brought, sometimes
successfully, against online services in the past. We could also be subjected to
claims based on content that is accessible from our website through links to
other websites. Our insurance may not adequately protect us against these types
of claims. Any lawsuit against us would result in a diversion of our resources
from focusing on implementing our business plan.
Our securities are referred to as "penny stocks" which are not perceived
favorably in the market place.
The SEC has adopted regulations which generally define a "penny stock" to be any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Our securities are subject to rules that impose additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
those with a net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must:
o make a special suitability determination for the purchase of such
securities;
o have received the purchaser's written consent to the transaction prior
to the purchase;
o deliver to the purchaser, prior to the transaction, a disclosure
schedule prepared by the Securities and Exchange Commission relating to
the penny stock market;
o disclose to the purchaser the commission payable to the broker-dealer
and the registered representative;
o provide the purchaser with current quotations for the securities;
o if he is the sole market maker, disclose that fact to the purchaser and
his presumed control over the market; and
5
o provide the purchaser with monthly statements disclosing recent price
information for the penny stock held in the account and information on
the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our securities in the market.
RISKS RELATING TO OUR STRATEGY AND OUR INDUSTRY
Since we face intense competition from other software and service suppliers, and
new competitors may enter our markets easily, we may not be able to overcome the
competition.
The market for Knowledge Worker Automation software, which includes Enterprise
and Customer Relationship Management software and services, is new, rapidly
evolving and intensely competitive. We expect competition to persist and
intensify in the future. We estimate that there are currently over 5,000 private
and public suppliers of Enterprise and Customer Relationship Management software
solutions worldwide and expect this number to grow. In addition, there are a
number of companies with large customer bases and greater financial resources
and name recognition, such as Oracle and Microsoft, which have increased their
presence in the market for Enterprise and Customer Relationship Management
software systems and services. These companies may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to their customers than we can.
Furthermore, barriers to entry are minimal. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. These companies may be able to leverage their existing
service organizations and provide higher levels of support on a more
cost-effective basis than we can. If we are not able to compete successfully
with current or future competitors, our business, operating results and
financial condition will be materially adversely affected.
If we do not succeed in the marketing of our products and services, we may not
generate a sufficient amount of sales to ever generate profits.
We cannot be certain that customers will want to purchase our products or engage
our services. We also cannot be certain that we can attract or retain a
sufficient number of the highly qualified services personnel that the expansion
of our business will need. In addition, this change in our business model has
required, and will continue to require, significant additional expenses and
development, financial and operational resources. These additional resources
will place further demands on our financial and operational resources and may
make it more difficult for us to achieve and maintain profitability.
We may enter into business combinations and strategic alliances which will
present us with additional challenges.
We may expand our operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
other companies. Any such transactions may create risks such as:
- - difficulty assimilating the operations, technology and personnel of the
combined companies;
- - disruption of our ongoing business;
- - problems retaining key technical and managerial personnel;
- - one-time in-process research and development charges and ongoing
expenses associated with amortization of goodwill and other purchased
intangible assets;
- - potential dilution to our stockholders;
- - additional operating losses and expenses of acquired businesses; and
- - impairment of relationships with existing employees, customers and
business partners.
Our inability to address these risks could result in not generating sufficient
revenue to achieve profitability.
Competition for skilled technical personnel in our industry is intense and our
business could suffer if we can not retain our employees or attract new ones.
Our future performance also depends upon our ability to attract and retain
highly qualified programming, technical, marketing and managerial personnel.
6
There is intense competition for skilled personnel, particularly in the field of
software engineering. If we do not succeed in retaining our personnel or in
attracting new employees, our business could suffer significantly.
In order to keep up with technological advances, we may have to incur additional
costs to modify our services or infrastructure.
Our market is characterized by rapidly changing technologies, evolving industry
standards, frequent new service introductions and changing customer demands. To
be successful, we must adapt to a rapidly evolving market by continually
enhancing our infrastructure, content, information and services to fulfill our
users' needs. We could incur additional costs if it becomes necessary to modify
services or infrastructure in order to adapt to these or other changes affecting
providers of Internet services. If we have to incur such additional costs, or if
we cannot adapt to changes in the marketplace, our net income will be directly
adversely affected.
If we do not improve our sales force, we may not generate revenues or become
profitable.
Since eliminating our second office we have lost the services of our two
salespeople. Currently we do not have any dedicated fulltime salespeople and are
looking to find suitable replacements. We do not have current relationships with
outside sales personnel or distributors. In order to grow, we must develop an
effective sales capability. Our ability to do so successfully involves a number
of factors. They include the competition in hiring and retaining suitable
personnel, our ability to integrate and motivate personnel and the length of
time it takes for new personnel to become effective. While we intend to market
our products and services via direct mail advertising and the Internet, there is
no assurance that these marketing efforts will be successful. Our failure to
develop and maintain an effective sales infrastructure would have a negative
effect upon our business prospects as we will not be able to generate a
sufficient amount of sales.
ITEM 4. INFORMATION ON STRATABASE
A. HISTORY AND DEVELOPMENT OF STRATABASE
Stratabase was incorporated under the laws of the State of Nevada on November
18, 1998 and commenced operations in January 1999. We completed our initial
public offering in February 2000. Our headquarters are located at 34595 3rd
Avenue, Suite 101, Abbotsford, BC, V2S.8B7, Canada. The telephone number is
(604) 504-5811.
We are presently incorporated under the Canada Business Corporations Act. In
January 2003, the Company filed a proposal to effect a continuation of the
corporate jurisdiction from the State of Nevada to Canada on Form S-4 with the
United States Securities and Exchange Commission (SEC). The Form S-4 was
declared effective on or about July 7, 2004 and submitted to the shareholders of
the Company. The special meeting of stockholders to vote on the adoption of the
plan of conversion was held on August 17, 2004 and a majority of the
shareholders approved the plan of conversion. Accordingly, the Company changed
its name to "Stratabase, Inc.," and continued to operate under the Canada
Business Corporations Act. "Continuance" is a process by which a corporation
which is not incorporated under the laws of Canada may change its jurisdiction
of incorporation to Canada. Under the Canada Business Corporations Act, if the
laws of its home jurisdiction allow for it and a resolution authorizing the
continuance is approved by 66 2/3% of the company's shareholders, the company
may be "continued" as a Canadian corporation by filing of Articles of
Continuance with the Director under the Canada Business Corporations Act. Under
the corporate law of Nevada, this process is treated as a conversion of the
outstanding shares of a Nevada company to shares of a Canadian company. The
business and operations of Stratabase following the conversion were identical in
most respects to our current business, except that we will no longer be subject
to the corporate laws of the State of Nevada but are subject to the Canada
Business Corporations Act. The Canadian company is liable for all the debts and
obligations of the Nevada company, and the officers and directors of the company
are the officers and directors of Stratabase. On August 17, 2004, Stratabase
filed a Form 8-A with the SEC registering its securities under Section 12(g) of
the Securities Act of 1933.
We had developed software which was designed to allow users to interface with
and manage databases and customer relationships. However, we did not charge
users for the use of our software. We expected that by giving the software away
for free and making it open source, the users would want to buy our databases of
sales leads and mailing lists. Our model also expected that these users would
want us to provide technical services to customize and improve the quality of
the databases we sold.
7
Currently we no longer support open source software, but rather have developed
proprietary software. Our proprietary software is called 'Relata', and will be
offered to users on a free trial basis for 1 month, and thereafter will be
billed at $50 per user per month. The software was released in a beta-version in
June 2003 and the final version will be marketed in 2005. Since the initial
beta-version, release, the Company has made significant changes to Relata. To
date the software has not generated any revenue. Since eliminating our second
office we have lost the services of our two salespeople who were selling custom
database and technical services. Currently we do not have dedicated salespeople
to sell custom database and technical services. We are looking to find suitable
replacements
For the three-year period ending December 31, 2004, the Company has expended a
total of $5,463 on office and computer equipment and $155,775 on the acquisition
of databases and domain names. The only other investing activity in the
three-year period ended December 31, 2004 was $150,000 advanced to an unrelated
party in 2002. The loan was recorded as a note receivable. Due to concerns over
the collectibility of the note, the total amount of the note along with accrued
interest was written off at December 31, 2003. The Company has filed suit
against the debtor in an attempt to recover the total amount owing at April 30,
2003 of $171,206 (plus interest accruing from the date of the default). The
Company does not have any capital expenditures currently in progress. All
capital activity has previously been undertaken in Canada.
B. BUSINESS OVERVIEW
Stratabase is a provider of Knowledge Worker Automation software. Knowledge
Worker Automation (KWA) software, of which Enterprise and CRM software are
components, is designed to allow enterprises to improve the efficiency of
knowledge workers. The KWA software we have produced consists of web-based
software tools. These tools allow enterprises to manage relationships and
contacts, administer and organize time allocations, collaborate with others,
manage data, automate communications and productivity reporting, and conduct
data synchronization.
We have developed both proprietary and open source software. Although in the
past we have focused predominantly on developing open source code software, we
have altered our direction to focus on proprietary software development.
It was originally thought by management that the demand for open source software
would increase significantly over time, and that open source software developers
would realize significant revenue from associated service contracts. While this
has indeed happened over the last four years in the software industry, we have
seen much of the anticipated service revenues go to established service
contractors such as the likes of IBM, and not to small companies like us.
Therefore it was determined by management that we can extract more value from
our software by keeping it proprietary, and offering it on a subscription basis
as a hosted solution.
We previously generated revenues by selling databases of sales leads and mailing
lists, and providing technical services aimed to customize and improve the
quality of the databases we sold. Such technical services and customization
substantially occurred prior to sale of databases. Our open source software was
designed to allow users to interface with and manage these databases, and
customer relationships. It was the expectation of management that by giving the
software away for free and making it open source, we would create demand for our
database and technical services.
Specifically, in 2001 and 2002, when we employed this open source business
model, 89% and 91%, respectively, of our revenues related to the provision of
databases to our customers and 11% and 9%, respectively, related to the
provision of technical and hardware services. However, the magnitude of these
revenues was not sufficient to generate the level of shareholder value that
management feels is expected by its shareholders. Therefore the decision was
made by management to alter Stratabase's business model to focus on proprietary
software and cease selling databases. Therefore, we are no longer supporting
open source code software. We have not yet begun selling our proprietary
software. However we did release the first phase of our proprietary software
(the software is called "Resync") in the last quarter of 2002 and continue to
offer it for free. Resync is downloaded approximately 1,000 times per month and
is designed to allow the migration of data between the several of the leading
applications and devices currently on the market. We do not know whether we will
be able to generate any revenue from Resync.
In June 2003 we released a beta-version of the second phase of our proprietary
software (the software is called "Relata"). Approximately 2,500 users have
already signed up for a free trial use of Relata. We have not derived any
revenue to date from our proprietary products. Although we intend to generate
8
sales of Relata by using direct mail advertising and the Internet, there is no
assurance that we will be successful. With the closing of our second office we
lost the services of our entire sales force, and therefore have not had an
active sales staff to sell our database services. Although we expect to rebuild
our sales staff in this area, we have not yet found suitable personnel for these
positions.
Subsequent to the release of the beta-version of Relata, we changed our focus
for Relata from customer relationship management to knowledge worker automation.
As a result, Relata was redesigned so that it could be used to improve the
productivity of individuals and workgroups. In particular, a completely new
front-end was developed and several new modules were added. Relata has been
designed for use with Resync.
Stratabase was incorporated under the laws of the State of Nevada on November
18, 1998 and commenced operations in January 1999. On August 17, 2004 the
company completed the process of becoming a Canadian company. For the period
from inception to December 31, 1999, we operated in the development stage.
Substantially all activity during this period through 1999 was devoted to the
raising of equity capital and development of our long-term business model, up
until the completion of our initial public offering in February 2000.
OUR FOCUS
We engineer Knowledge Worker Automation (KWA) software, of which Enterprise and
CRM software are components. The KWA software we have produced consists of
web-based software tools. These tools allow enterprises to manage relationships
and contacts, administer and organize time allocations, collaborate with others,
manage data, automate communications and productivity reporting, and conduct
data synchronization.
The software we have developed is:
- - mostly web-based, meaning that it can be accessed through a standard
web browser;
- - designed to appeal to the needs of enterprises with hundreds of
potential users:
- - adaptable, meaning that users can modify the functionality by
establishing preferences;
- - functionally reliable, as bug reports and performance statistics are
regularly monitored by our programming staff.
In addition to developing this KWA software, we have developed extensive written
documentation and user support materials. Our programming staff has prepared a
manual and other documentation that describes the features of our software and
advises the user on how best to utilize these features. Our staff monitors on a
daily basis the technical support inquiries and bug reports, and to a lesser
extent the software performance statistics, in order to ensure the software is
functionally reliable.
CORE PRODUCTS AND SERVICES
We have not yet begun selling our proprietary software. However we did release
the first phase of our proprietary software (the software is called "Resync") in
Q4 2002, but we are offering it as a free trial version for now. We do not know
whether we will be able to generate any revenue from Resync. We are currently
preparing to begin marketing the second phase of our proprietary software (the
software is called "Relata"). Although we plan to offer it as a hosted solution,
and charge users on a monthly basis for access to it, we do not know whether we
will be able to generate any revenue from this product. It is the current
intention of management to begin marketing Relata in 2005.
It is the intention of management to market Relata using direct mail and
internet advertising. However, we do not know if these methods of marketing
Relata will successfully generate any sales. The Company did not have any
revenue in 2004. During 2003, the Company had one sale for $5,000 to a customer
in the United States and in 2002 sales totaled $430,240 of which $392,730 were
in the United States and $37,510 were in Canada. The majority of the revenue
from 2003 and 2002 related to the sale of customized databases. We have not
derived any revenue to date from our Relata proprietary software.
Relata is designed to facilitate automation of specific knowledge worker tasks,
including, but not limited to, contact management, account management, outcomes
management, activities management, logging and document and file management and
basic group communication. All these activities are within the context of a
shared environment in a hosted setting which is accessible through a
web-browser. The Company's principal market will be North America and the main
customer target base will be customers who need to track customer contacts. The
software industry does not require the use of a significant amount of raw
materials and the business in general is not seasonal. The Company is not
subject to any significant governmental regulation other than those governing
the general operation of a business.
9
In the past we have utilized a business model built around the open source
software we have developed. Historically we have generated revenues by selling
databases of sales leads and mailing lists, and providing technical services
aimed to customize and improve the quality of the databases we sold; our open
source software was designed to allow users to interface with and manage these
databases, and customer relationships. The model hypothesized that by giving the
software away for free and making it open source, demand would be created for
our database and technical services. Customers who purchased databases from us
were not required to use our open source software. However it was easier to
manage and interface with these databases by using our open source software,
particularly when the databases were very large. . However, with the closing of
our second office we lost the services of two of our salespeople, and therefore
have not had an active sales staff to sell our database and technical services.
The Company does not expect to begin selling databases again in the future.
COMPETITION
In the broader market for Knowledge Worker Automation software, which includes
Enterprise and CRM software, there are a large number of well-established
companies that have significantly greater financial resources, larger
development staffs and more extensive marketing and distribution capabilities
than we do. These competitors include thousands of established software vendors,
some of them very large, including the likes of Microsoft and Siebel Systems,
and some of them much smaller, such as Pivotal, Hummingbird and Documentum. The
market for this software is broad and covers many aspects of enterprise
computing. Many of these competitors are well positioned vendors who have
established and stable customer bases and continue to attract new customers.
Most of these companies are larger and more experienced organizations than we
are. In addition, we face potential competition from many companies with larger
customer bases, greater financial resources and stronger name recognition than
we have.
Software markets are seldom characterized by traditional barriers to entry that
are found in many traditional markets. Accordingly, new competitors or alliances
among competitors can emerge and rapidly acquire significant market share.
We believe that the major factors affecting the competitive landscape for our
software and related services include:
- - name and reputation of software and service provider; - product performance
and functionality; - strength of relationships in the software community; -
availability of user applications; - ease of use; - networking capability; -
breadth of hardware compatibility; - quality of related services; - distribution
strength; and - alliances with industry partners.
Although we believe that we will compete favorably with many of our competitors
in a number of respects, including product performance and functionality and the
fact that our product will be offered as a hosted and web-based service, we
believe that many of our competitors enjoy greater name recognition, have
software which has more features than our software does, have superior
distribution capabilities and offer more extensive support services than we
currently do. In addition, there are significantly more applications available
for competing software solutions, than there are for ours. An integral part of
our strategy in the future, however, is to address these shortcomings by, among
other things, offering our software as a hosted and entirely web-based solution;
providing more services to our clients that have high associated margins; and,
enhancing the software's functionality.
INTELLECTUAL PROPERTY
The software we have developed falls into two categories: proprietary and open
source.
The proprietary software we have developed is the exclusive property of
Stratabase, and we retain all copyright and ownership of this intellectual
property.
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The open source software we have developed has been made available for licensing
under the GNU General Public License (GPL), pursuant to which anyone, generally,
may copy, modify and distribute the software, subject only to the restriction
that any resulting or derivative work is made available to the public under the
same terms. Therefore, although we retain the copyrights to the code, due to the
GPL and the open source nature of our software, the intellectual property
contained within the software does not belong to us, or to anyone else. That is
the nature of open source software. However, we do enter into confidentiality
and nondisclosure agreements with our employees and consultants.
We are pursuing registration of the Stratabase and Relata trademarks in the U.S.
However we may be unable to detect the unauthorized use of, or take appropriate
steps to enforce, our trademark rights. Although we have begun the registration
process of our trademarks in the U.S., it is not yet complete. Additionally, we
do not have any assurances that the trademark applications will be successful.
Failure to adequately protect our trademark rights could harm or even destroy
the Stratabase brand and impair our ability to compete effectively. The value to
creating market awareness of the Stratabase and Relata marks will be diminished
if we cannot protect the name. Furthermore, defending or enforcing our trademark
rights could result in the expenditure of significant financial and managerial
resources.
Although we do not believe that our business infringes on the rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual rights. In addition, there can be no assurance that such licenses
will be available on reasonable terms or at all.
C. ORGANIZATIONAL STRUCTURE
The Company is not part of a group and has no subsidiaries.
D. DESCRIPTION OF PROPERTY
We do not own any real property. Our offices are approximately 2,000 square feet
located at 34595 3rd Avenue, #101, Abbotsford, B.C., V2S.8B7, Canada. The office
is leased for a two-year lease that commenced on February 1, 2001. The lease was
renewed for an additional twelve month period and, upon expiry in 2004,
continues on a month-to-month basis. The monthly rent is approximately $1,350.
We believe that the facilities will be adequate for the foreseeable future. All
costs described in this section are stated in U.S. dollars as converted from
Canadian dollars. Accordingly, the costs may vary to some degree with the
currency exchange rate.
We leased a Bandwidth/Connectivity (fiber optic line) from Telus Corp. in
British Columbia. It was the subject of a three-year agreement which commenced
on February 1, 2001, and called for a monthly fee of CDN $1,000. The lease
terminated December 31, 2003 and we currently have a monthly agreement for
high-speed ADSL internet access.
Additionally, we pay an annual premium of approximately $1,500 for a one year
term comprehensive general liability insurance policy with the following
coverage: (i) general liability - $1,400,000; (ii) database - $150,000; (iii)
hardware - $125,000; and (iv) Flood/Earthquake - $185,000. (Figures are
converted from Canadian dollars).
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying audited
consolidated financial statements for the fiscal years ended December 31, 2004,
2003, 2002. These reports are presented in United States dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States, referred to in this annual report as US GAAP.
11
CRITICAL ACCOUNTING POLICIES:
The Company's discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, inventories, long-lived assets, income
taxes, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements:
On April 30, 2003, our note receivable from ACT came due and was not repaid.
Senior management of ACT has advised us that steps are being taken to settle the
outstanding note receivable in full. Management has considered the likelihood of
full collection of principal and interest in light of the plans laid out by ACT
and has recorded a provision for impairment in its Statement of Operations for
the $150,000 principal amount and $21,206 of unpaid interest to December 31,
2002. The Company is pursuing ACT for full collection of the amount outstanding,
but at this time the ultimate amount recoverable and the timing is
indeterminable. Any subsequent recovery will be recorded in the period it
occurs.
We account for impairment of long-lived assets, which include property and
equipment, databases and domain names, in accordance with the provisions of
Statement of Financial Accounting Standard ("SFAS") No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. An impairment review is performed
quarterly or whenever a change in condition occurs which indicates that the
carrying amounts of assets may not be recoverable. Such changes may include
changes in our business strategies and plans, which occurred during 2002 when we
changed our business focus to the development of proprietary software. We are
proceeding well toward the completion of our development and expected launch of
our new software in 2005. In conducting our impairment analyses, we largely
utilized information from independent valuation obtained in connection with our
plans to move to Canada. The impairment analysis employed involved assumptions
concerning the remaining useful lives of our databases and domain names (the
majority being 1-2 years), interest and discount rates, growth projections and
other assumptions of future business conditions and estimated proceeds on
disposal should we plan to sell the databases and domain names. The assumptions
employed were based on our judgment using internal and external data.
Based on our review, no impairment adjustment was considered necessary at
December 31, 2003 or 2002. At December 31, 2004, all of the databases and domain
names had been fully amortized. The estimated useful life of the long-lived
assets was assessed by management for each period. The determination of whether
or not long-lived assets have become impaired involves a significant level of
judgment in the assumptions underlying the approach used to determine the
estimated future cash flows expected to result from the use of those assets.
Changes in our strategy, assumptions and/or market conditions could
significantly impact these judgments and require adjustments to recorded amounts
of long-lived assets.
Software development costs are charged to expense until criteria for
capitalization under Statement of Position ("SOP) 98-1 are met. Capitalization
will commence when it becomes probable that the project will be completed, the
software will be used to perform the function intended and there is reasonable
assurance as to future cash flows resulting from the Company's proprietary
software. We have not previously generated revenue from sales of proprietary
software products. To date, cash flow constraints resulted in the timeframe for
completion of the project being lengthy. Due to uncertainty regarding the
project completion and cash flow to be generated from the proprietary software,
all expenditures relating to the project have been charged to expense as
incurred. At such point in time that such uncertainty disappears, costs will be
capitalized until such time that the proprietary software is substantially
complete and ready for its intended use.
These accounting policies are applied consistently for all years presented. Our
operating results would be affected if other alternatives were used. Information
about the impact on our operating results is included in the notes to our
financial statements.
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RECENT ACCOUNTING PRONOUNCEMENTS:
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment." SFAS No. 123(R) would require our company to measure all
employee stock-based compensation awards using a fair value method and record
such expense in its consolidated financial statements. In addition, SFAS No.
123(R) will require additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. For public entities that file as a small business issuer,
SFAS No. 123(R) is effective for the first interim or annual reporting period
beginning after December 31, 2005.
The implementation of this new standard is not expected to have a material
effect on the Company's financial statements.
In December 2004, FASB issued SFAS No. 153 to amend Opinion 29 by eliminating
the exception for non-monetary exchanges of similar productive assets and
replaces it with general exception for exchanges of non-monetary assets that do
not have commercial substance. A non-monetary exchange is defined to have
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange.
The implementation of this new standard is not expected to have a material
effect on the Company's financial statements.
A. OPERATING RESULTS
The following table sets forth the audited consolidated statement of operations
data for Stratabase for the fiscal years indicated:
STRATABASE
YEARS ENDED DECEMBER 31
2004 2003 2002
Revenues $ - $ 5,000 $ 430,240
Cost of revenues 8,415 2,669 324,012
Gross margin (8,415) 2,331 106,228
Research and development 139,742 154,544 171,500
General and administration 549,191 705,888 794,939
Loss from operations (697,348) (858,101) (860,211)
Other income (expense), net 2,489 (169,175) 31,195
Income tax expense - - (85,629)
Net loss $ (694,859) $(1,027,276) $ (914,645)
Net loss per share:
Basic and diluted $ (0.07 ) $ (0.13) $ (0.12)
Weighted average number of 9.91 8.04 7.93
common shares outstanding
(in millions)
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003:
RESULTS OF OPERATIONS
During the year ended December 31, 2004, we incurred a net loss of $694,859
compared to a net loss of $1,027,276 for the year ended December 31, 2003. Our
loss for the current year has decreased substantially over 2003 due to the
change in our business such that we have minimized our work force and shut down
operations located in Vancouver. Also included in the loss for the twelve months
ended December 31, 2003 is a $171,206 provision for impairment against amounts
lent (and unpaid interest) to Advanced Cell Technology ("ACT"). Our proprietary
software was only issued at the end of June 2003 and we have not derived revenue
from it to date. Although we have reduced our monthly operational expenses, we
have continued to realize net losses due to the lack of sales from our
proprietary software.
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REVENUES
We did not have any revenues for the twelve month periods ended December 31,
2004 while we had revenue of $5,000 for the prior twelve month period ended
December 31, 2003. Our Relata proprietary software was only issued in
beta-version at the end of June 2003 and we have not derived revenue from it to
date. Although we have reduced our monthly operational expenses, we have
continued to realize net losses due to the lack of sales from our proprietary
software. Development of our new proprietary software products had taken longer
than expected. Also, with the closing of our second office we lost the services
of two of our salespeople, and therefore have not had an active sales staff to
sell our database services. Although we expect to rebuild our sales staff in
this area, we have not yet found suitable personnel for these positions. We have
not derived any revenue to date from our proprietary products.
COST OF REVENUE
Cost of revenue for the year ended December 31, 2004 was $8,415 as we wrote-off
all of our remaining inventory. Cost of revenue for the year ended December
31, 2003 was $2,669 (including an inventory write-down of $1,683)
for our only sale in 2003.
RESEARCH AND DEVELOPMENT EXPENSES
During the year period ended December 31, 2004, we incurred $139,742 in research
and development costs pertaining to the development of our new proprietary
software. For the 2003, we incurred $154,544. The decrease in 2004 is primarily
related to an approximate $11,700 decrease in research and development salaries
and wages paid in 2004 compared to 2003. Research and development in both years
related to the development of our proprietary software for future sale. Such
costs in 2004 and 2003 substantially consist of salaries and wages for our
development staff.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative (G&A) expenses for 2004 were $549,191 as compared to
$705,888 for the prior year. G&A costs for the current period largely consist of
depreciation and amortization of databases and domain names, accounting and
professional fees, and salaries and wages. The decline in G&A expenses from 2004
to 2003 is largely attributable to the change of sales focus that resulted in a
sharp decline in revenues in 2003 that led to a reduction in general monthly
overhead in order to preserve cash. As well, we our professional fees were
higher in 2003 due to the initial filing of our registration statement in
connection with our continuation into Canada.
INTEREST AND OTHER INCOME (EXPENSE)
Interest and other income (expense) decreased from a net expense of $169,175 for
the year ended December 31, 2003 to $2,489 in income for the current twelve
months. Amounts for 2003 largely reflect the provision for a loan impairment of
$171,206 while the current period relates to interest earned. Our loan to ACT
came due on April 30, 2003 without payment or settlement. We have discussed this
matter with ACT management who have indicated that steps are being taken to
finance their company and repay outstanding loans made by our company and
others. However, due to uncertainty as to the amount and timing of collection,
we have recognized in 2003 a provision for impairment of this loan in the amount
of $171,206. We are pursuing ACT for full collection of the amount outstanding.
Any subsequent recovery will be recorded in the period it occurs. The loan
continues to accrue interest at 20% per annum. However, we are no longer
recognizing interest income on the loan in our financial statements until such
time that recoverability of such interest is deemed likely.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002:
RESULTS OF OPERATIONS
During the year ended December 31, 2003, we incurred a net loss of $1,027,276
compared to a net loss of $914,645 for the comparative period in 2002. Our net
loss for 2003 increased over 2002 due to the change in our business such that
only minimal revenue has been recognized to date in 2003 whereas $430,240 was
recognized in 2002. Also included in the loss for the year ended December 31,
2003 is a $171,206 provision for impairment against amounts lent (and unpaid
interest) to Advanced Cell Technology ("ACT"). Our proprietary software was only
issued at the end of June 2003 and we have not derived revenue from it to date.
Although we have reduced our monthly operational expenses, we have continued to
realize net losses due to the lack of sales from our proprietary software.
14
REVENUES
Revenues for the year ended December 31, 2003 were $ 5,000, compared to revenues
of $430,240 for the year ended December 31, 2002. Our Relata proprietary
software was only issued in beta-version at the end of June 2003 and we have not
derived revenue from it to date. Although we have reduced our monthly
operational expenses, we have continued to realize net losses due to the lack of
sales from our proprietary software. Development of our new proprietary software
products had taken longer than expected; also, with the closing of our second
office we lost the services of two of our salespeople, and therefore have not
had an active sales staff to sell our database services. Although we expect to
rebuild our sales staff in this area, we have not yet found suitable personnel
for these positions. We have not derived any revenue to date from our
proprietary products.
COST OF REVENUE
Cost of revenue for the year ended December 31, 2003 was $2,669 (including an
inventory write-down of $1,683) for our only sale in 2003 as compared to
$324,012 for the year ended December 31, 2002 when there was sales activity. In
the prior year, significant costs were incurred for programming wages, media
costs and renting databases. Over the past year, we have reduced our non-core
workforce and closed one of our offices in order to reduce expenses.
RESEARCH AND DEVELOPMENT EXPENSES
During the year ended December 31, 2003, we incurred $154,544 in research and
development ("R&D") costs pertaining to the development of our new proprietary
software, as compared to $171,500 for the year ended December 31, 2002. Such
costs in 2003 substantially consisted of salaries and wages for our development
staff. The decrease over the prior year is due to the reduction of our research
and development staff.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative (G&A) expenses for the years ended December 31, 2003
and 2002 were $705,888 and $794,939, respectively. The decline in G&A expenses
from 2002 to 2003 is largely attributable to $255,750 of stock option
compensation being recorded in 2002 for options granted in 2002 whereas no stock
options were granted and no stock option compensation recognized in 2003.
Additionally, due to the change of sales focus that resulted in a sharp decline
in revenues in 2003, we have reduced general monthly overhead in order to
preserve cash. This was offset by increases in certain 2003 G&A expenses
including professional fees associated with compliance with Sarbanes-Oxley Act
rules and the preparation of our S-4 Registration Statement regarding our
company's continuation into Canada.
INTEREST AND OTHER INCOME (EXPENSE)
Interest income expense changed from $31,195 for the year ended December 31,
2002 to $2,031 for the year ended December 31, 2003. Amounts for 2002 largely
reflect the interest earned on interest-bearing investments consisting of the
20% annual interest rate attached to our $150,000 loan to Advanced Cell
Technology ("ACT") made in the second quarter of 2002. Our loan to ACT came due
on April 30, 2003 without payment or settlement. We have discussed this matter
with ACT management who have indicated that steps are being taken to finance
their company and repay outstanding loans made by our company and others.
However, due to uncertainty as to the amount and timing of collection, we have
recognized in 2003 a provision for impairment of this loan in the amount of
$171,206. We are pursuing ACT for full collection of the amount outstanding. Any
subsequent recovery will be recorded in the period it occurs. The loan continues
to accrue interest at 20% per annum; however, subsequent to December 31, 2002 we
are no longer recognizing interest income on the loan in our financial
statements until such time that recoverability of such interest is deemed
likely.
15
INCOME TAXES
The provision for income tax was $nil for the years ended December 31, 2004 and
2003, as compared to $85,629 for 2002. The 2002 provision largely consisted of
$90,321 being recognized as tax expense in respect of stock option compensation,
the deduction benefit of which was recognized as additional paid-in capital.
Additionally, a loss-carryback was claimed in 2002 in the amount of
approximately $50,000. This was claimed to recover taxes previously paid and was
received during 2003. This recovery was offset by an additional valuation
allowance provided against previously recognized deferred tax assets.
During 2003, all deferred tax assets were fully offset by the valuation
allowance.
B. LIQUIDITY AND CAPITAL RESOURCES
(IN U.S. DOLLARS) AS AT DECEMBER 31,
2004 2003 2002
Cash and cash equivalents $ 52,187 $ 509,180 $ 134,093
Working capital 22,787 458,921 181,474
Net cash provided by (used in)
Operating activities (446,700) (472,987) (1,165,026)
Investing activities (2,836) (2,242) (306,160)
Financing activities - 860,016 344,000
As of December 31, 2004, we had $52,187 in cash, a decrease of 456,993 from
December 31, 2003. The decrease in cash is substantially due to continued
operating losses. Losses from operations are expected to continue in the future
as we shift our revenue model to marketing our new Relata proprietary software.
If revenues and spending levels are not adjusted accordingly, we may not
generate sufficient revenues to achieve profitability. Management believes
marketing and operating expenses will be financed in during the first six months
of 2005 through the proceeds of $300,000 received from a private placement
completed in February 2005. Even if profitability is achieved, we may not
maintain or increase such profitability on a quarterly or annual basis in the
future. Our policy is to pay all operational expenses when due, provided that
the vendor, in the normal course of business, has satisfied all necessary
conditions for payment.
Net cash used in operating activities during the twelve months ended December
31, 2004 was $446,700 compared to $472,987 during the year ended December 31,
2003. Although the net loss in 2003 ($1,027,276) was higher than in 2004
($694,859), we used less cash on operations in the current year largely due to
two non-cash items. In 2003, we had a provision for loan impairment of $171,206
related to the loan to ACT. In addition, amortization expense relating to our
investment in acquired databases and domain names, and other property and
equipment decreased from $303,923 in 2003 to $269,018 in 2004 The other
significant factor was that unlike 2004, recoverable taxes of $62,844 were
recognized in 2003.
In 2004, we purchased $2,836 of computer equipment. During the year ended
December 31, 2003, we made purchases of domain names totaling $1,014 and
computer equipment of $1,228. There were no financing activities in 2004 while
in 2003 we completed a private placement for proceeds of $860,016.
We have no long-term debt. We have reduced our expenses by downsizing staff and
closing one of our offices in 2003. We believe that our available cash, together
with future revenues, will be sufficient to fund our working capital
requirements for the first six months of 2005. We further believe that we can
generate sufficient liquidity through future sales and our current working
capital to carry out our operational activities. We have no long-term employment
contracts and can further reduce our work-force, as necessary, if revenues are
not sufficient to support our existing operations or until additional funding
can be obtained. Since we currently only have three people employed, any
significant further reductions in our work force may directly negatively affect
our operations. For example, if we dismiss an engineer, new product development
may be delayed.
The Company expects sales from its new product line to fund long-term operations
and will be actively marketing its products during 2005. Management believes
marketing and operating expenses will be financed over the first six months of
2005 through $300,000 of proceeds from private placement completed in February
2005. Notwithstanding, we cannot be certain that any required additional
financing will be available on terms favorable to us. If additional funds are
raised by the issuance of our equity securities, such as through the issuance
and exercise of warrants, then existing stockholders will experience dilution of
their ownership interest. We believe that debt financing will not be an
alternative for funding. The risky nature of this enterprise and lack of
tangible assets places debt financing beyond the credit-worthiness required by
most banks or typical investors of corporate debt until such time as the
economic viability of Relata can be demonstrated. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund
expansion, develop or enhance services or respond to competitive pressures.
16
GOING CONCERN CONSIDERATION
Our activities historically have been supported by available cash on hand and
revenues generated from the sales of our products and services. As indicated in
the accompanying balance sheet, at December 31, 2004 we had $52,187 in cash and
after $29,400 of current liabilities (net of certain other current assets) had
$22,787 in working capital. We estimate that our cash expenditures over the next
twelve months to be approximately $40,000 per month. These factors, among
others, indicate that Stratabase may be unable to continue operations in the
future as a going concern. The Company expects sales from its new product line
to fund long-term operations and will be actively marketing its products during
2005. Management believes marketing and operating expenses will be financed
during the first six months of 2005 through proceeds of $300,000 received from a
private placement completed in February 2005. The Company expects to need an
additional $300,000 to cover costs through the remainder of 2005. Such will be
financed by additional equity issuances. There can be no assurance that
management's plans to market its new products will be successful or that
additional equity financing will be available on favourable terms. No adjustment
has been made in the accompanying financial statements to the amounts and
classification of assets and liabilities which could result should Stratabase be
unable to continue as a going concern.
There is substantial doubt about our ability to continue as a going concern as
we have refocused our business model on our proprietary software and it has only
recently been released in beta-form and we have generated no revenue from it to
date. As a result we have incurred recurring operating losses. Accordingly, our
independent auditors included an explanatory paragraph in their report on the
December 31, 2004 financial statements regarding the substantial doubt about our
ability to continue as a going concern. Our financial statements contain
additional note disclosures describing the circumstances that lead to this
disclosure by our independent auditors.
C. RESEARCH AND DEVELOPMENT, PATENTS, AND LICENSES, ETC.
See Item 4.B Business Overview and 5.A Operating Results.
D. TREND INFORMATION
According to Peter Drucker, knowledge workers make up approximately 40% of the
American workforce and 50% of future workplace investments will focus on the
individual productivity of knowledge workers. Stratabase has changed its focus
to adjust to this trend in the marketplace. Subsequent to the beta-version
release of Relata, the company redesigned Relata from a focus on customer
relationship management to knowledge worker automation. Management believes that
the change in focus will better able the Company to compete in the software
industry.
E. OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements as of December 31, 2004 or of
the date of this report.
F. CONTRACTUAL OBLIGATIONS
Contractual Obligations Payments due by period
- -------------------------------------------------------- ------------------------------------------------------
TOTAL LESS 1-3 YEARS 3-5 YEARS MORE
THAN 1 THAN
YEAR FIVE
YEARS
- -------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Long Term Debt Obligations 0 0 0 0 0
Capital (Finance) Lease Obligations 0 0 0 0 0
Operating Lease Obligations 0 0 0 0 0
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities Reflected on the Company's
Balance Sheet Under the GAAP of the primary financial
statements 0 0 0 0 0
- -------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
At December 31, 2004, the Company's only obligations are trade payables and
accrued liabilities of $34,729. All of these obligations are due in less than
one year.
17
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The directors, officers and designers upon whose work the Company is dependent
of Stratabase are as follows:
NAME POSITION POSITION HELD
SINCE
Trevor Newton President, Secretary, Treasurer, Chief November, 1998
Executive Officer
Fred Coombes Vice President of Corporate Development November, 1998
and Director
Scott Praill Director October, 2002
Avinesh Bangar Chief Technology Manager July, 2000
The following summarizes certain biographical data concerning the directors and
senior management of Stratabase:
TREVOR NEWTON, age 36, since our incorporation to the present, has been our
President, Secretary, Treasurer and Chief Executive Officer. Mr. Newton oversees
all aspects of operations and business development for Stratabase. Mr. Newton
graduated from Simon Fraser University in 1993 with a Masters Degree in
Economics, and from the University of Victoria in 1991 with a Bachelor of
Science degree in Economics. From 1994 to 1995 Mr. Newton taught Economics and
Statistics at the University College of Fraser Valley, and from February 1996
until October 1996, Mr. Newton was a registered representative with a
broker-dealer. From October 1996 until 1999, Mr. Newton was employed at a
company which ran a financial website published financial information, such as
stock quotes and news, to its users 24 hours a day. His responsibilities
included the overseeing of all aspects of operations such as programming,
technical infrastructure and marketing.
FRED COOMBES, age 52, since our inception to the present, has been one of our
Directors and since January 20, 1999, to the present our Vice-President of
Corporate Development. Since 1987 to the present, Mr. Coombes has also acted as
the President of Co-ab Marketing, Ltd., an investor and corporate relations
firm.
SCOTT PRAILL, age 39, has served on our Board of Directors of Stratabase since
October 2002. Mr. Praill is a financial professional who has been employed by
leading companies such as Placer Dome and Westcoast Energy, and was a Senior
Accountant for Price Waterhouse, where his responsibilities included the
planning of financial statement audits and ensuring Canadian and U.S. GAAP
compliance. His duties have also included assessment of adequate financial
statement disclosure; preparing and reviewing financial information including
pro-forma financial statements for prospectuses, information circulars and other
offering documents related to acquisitions, mergers and the issuance of debt and
equity securities; evaluating public company operating results through financial
statement and financial ratio analysis; and reviewing financial internal control
systems and preparing reports for presentation to Audit Committees and Boards of
Directors. Mr. Praill has extensive experience in public company financial
reporting including compliance with Canadian and U.S. securities exchange
requirements and the preparation and review of financial statements. Mr. Praill
was the director of finance for Inflazyme Pharmaceuticals. Mr. Praill is
currently a self-employed financial consultant. Mr. Praill is also currently a
Director of American Goldrush Corporation, a privately held mining company. Mr.
Praill has earned the following designations: Chartered Accountant (BC, 1996),
Certified Public Accountant (Illinois, 2001), and a Bachelor of Science Degree
(Simon Fraser University, 1989).
AVINESH BANGAR, age 26, has served as Stratabase's Chief Technology Manager
since July, 2000. For the four years prior to July, 2000, Mr. Bangar was a full
time student. Mr. Bangar is an information technology professional with specific
expertise in system and network administration, database design, web application
development, software design and development, and technical documentation. Mr.
Bangar has worked as an information technology professional since graduating
from the University College of the Fraser Valley with his Computer Information
Systems degree in 2000. Mr. Bangar completed his A+, Sun Certified Systems
Administrator, and Citrix Certified Administrator certifications in 2001,
followed by his Masters in Computer Science in 2002. Mr. Bangar was recognized
and awarded by the International Who's Who of Information Technology as a
leading information technology professional in 2002. Mr. Bangar has been a
member of the IEEE Computer Society and the Association for Computing Machinery
since 2001.
18
Our directors have been elected to serve until the next annual meeting of
stockholders and until their successor(s) have been elected and qualified, or
until death, resignation or removal.
There are no family relationships between any directors or executive officers.
There are no arrangements or understandings pursuant to which any director or
member of senior management was selected as a director or member of senior
management, other than as provided for in the shareholders' agreement described
under Item 10.C of this annual report.
B. COMPENSATION
During the years ended December 31, 2004 and December 31, 2003, we paid to our
President and CEO $90,000 each year and we paid to our Vice President, Corporate
Development, $56,074 each year., in salaries and fees. The total amount set
aside or accrued for the year ended December 31, 2004 to provide for severance,
retirement and similar benefits for such persons was $Nil. There were no option
grants to any of the officers, directors or senior management during the ended
December 31, 2004.
C. BOARD PRACTICES
Our Articles provide that we must have a minimum of one (1) director and a
maximum of ten (10). At least 25% of our Board members must be Canadian
residents. The number of directors to be elected at a meeting of shareholders
shall be the number of directors whose term of office has expired or such other
number as the directors determine. If directors are not elected at a meeting of
shareholders, the incumbent directors continue in office until their successors
are appointed.
Our directors hold office until the earlier of their resignation, termination or
election of a successor. Each of Trevor Newton and Fred Coombes have been
members of our Board since November 1998 and Scott Praill has been a member of
our Board since October 2002.
None of the directors have a service contract or other agreement providing for
benefits upon termination of employment.
The Board of Directors has established an Audit Committee. Mr. Praill, the sole
member of the Audit Committee, is the audit committee financial expert. The
Audit Committee recommends engagement of the company's independent auditors, is
primarily responsible for approving the services perform by the independent
auditors and for reviewing and evaluating our accounting principles and its
system of internal accounting controls and has general responsibility in
connection with related matters.
The Board has established an Option Committee and a Compensation Committee, each
consisting of Messrs. Newton and Coombes. The Option Committee recommends and
grants options to individuals under the option plans adopted by the company. The
Compensation Committee recommends and grants compensation to individuals who
work for the company.
The Board does not have a nominating committee, the functions of which are
performed by the Board.
D. EMPLOYEES
As of December 31, 2004, 2003 and 2002 we had 3, 3, and 4 full-time employees
respectively, including Mr. Trevor Newton, Chairman of the Board, President,
Secretary, Treasurer and CEO. Mr. Newton supervises the company's operations. It
is anticipated that we will need to add additional managerial, technical and
administrative staff in the future in order to realize our business objectives.
We currently utilize 2 software programmers and outsource to outside software
contractors on an as-needed basis.
E. SHARE OWNERSHIP
The following table lists, as of April 20, 2005, the number of shares of common
stock beneficially owned by (i) each person or entity known to us to be the
beneficial owner of more than 5% of our outstanding common stock; (ii) each of
our officers and directors; and (iii) all of our officers and directors as a
group. Information relating to beneficial ownership of common stock by our
principal stockholders and management is based upon information furnished by
19
each person using "beneficial ownership" concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest.
The percentages below are calculated based on 10,914,972 shares of common stock
issued and outstanding, plus in the case of a person who has the right to
acquire additional shares within 60 days, any new shares which would be issued
to effect such acquisition.
OFFICERS, DIRECTORS,
AND 5% SHAREHOLDERS NUMBER OF SHARES BENEFICIAL OWNERSHIP (%)
------------------------------------------ ------------------------------- ------ -------------------------------
TREVOR NEWTON 2,897,400 (1) 26.00
FRED COOMBES 912,300 (2) 8.36
SCOTT PRAILL 60,000 (3) LESS THAN 1%
AVINESH BANGAR 35,000 (4) LESS THAN 1%
Y. DE JOIE 876,177 (5) 8.03
A. RAMIC 876,170 (5) 8.03
ALL DIRECTORS AND EXECUTIVE OFFICERS AS
A GROUP (4 PERSONS)*
3,904,700 34.74
(1) Includes 225,000 options to purchase common stock at a purchase price of
$0.60 per share, all of which are vested. The options expire on April 9, 2011.
(2) Includes 30,000 shares of common stock owned by Mr. Coombes' children,
Candice Coombes, Mackenzie Coombes and Carley Coombes.
(3) Scott Praill was granted 100,000 options pursuant to the 2002 Stock Option
Plan to purchase common stock at a purchase price of $1.30 per share. Of these
options, 60,000 are currently vested. The balance of his options vests as
follows: 20,000 on June 23, 2005 and 20,000 on December 31, 2005. The options
expire on October 22, 2012.
(4) Mr. Bangar was granted 35,000 options to purchase common stock at a purchase
price of $1.45 per share. All of these options are fully vested at December 31,
2004. These options expire on October 8, 2011.
(5) Does not include the warrants held by each of the above individuals, of
which 480,800 are not exercisable until December 23, 2005 and 480,800 are not
exercisable until December 23, 2006.
* These shares are attributed to Trevor Newton, Fred Coombes and Scott Praill.
The persons or entities named in this table, based upon the information they
have provided to us, have sole voting and investment power with respect to all
shares of common stock beneficially owned by them.
20
STOCK OPTION PLANS:
The Company has two option plans pursuant to which employees, directors and
consultants and other agents of the Company could receive shares. The Company
has a 2000 Stock Option Plan ("the 2000 Plan") and a 2002 Stock Option Plan
("the 2002 Plan"). There are 80,000 options available to be granted under the
2000 Plan and 1,420,000 available under the 2002 Plan
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
See Item 6.E.
There has been no significant change in the percentage ownership by any of the
major shareholders during the past 3 years.
The Company's major shareholders listed in Item 6.E above do not have voting
rights different than any of the other common shareholders of the Company.
United States Shareholders
On April 20, 2005, Stratabase had 65 registered shareholders with addresses in
the United States holding approximately 4,863,472 common shares which represents
approximately 44.6% of the total number of issued and outstanding shares.
Residents of the United States may beneficially own common shares registered in
the names of non-residents of the United States.
To the knowledge of the Company, there are no arrangements, the operation of
which may at a subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
During the 2001 fiscal year, we accepted non-interest bearing notes from Messrs.
Newton and Coombes for $200,000 and $175,000, respectively, for the 2001
exercise of stock options which were previously granted. The notes receivable
from each of Messrs. Newton and Coombes were written non-interest bearing and
were to be paid from the proceeds from the sale of the stock acquired through
the exercise of the stock options. The notes were due and payable on April 1,
2003. In May 2003, we reached an oral agreement with Messrs. Newton and Coombes
to settle the indebtedness by accepting 150,000 common shares of Stratabase as
payment in full for Mr. Newton's outstanding note and 130,000 common shares of
the Company as payment for Mr. Coombes' outstanding note, representing a total
value of $385,560 as compared to the $375,000 face value of the notes. The total
value was determined based on quoted market prices of our common stock on the
redemption date. The redemption and cancellation of these shares occurred in May
2003. No gain or loss was recognized on the redemption. Notwithstanding that the
indebtedness owed to us by Messrs. Newton and Coombes was evidenced by two
separate written promissory notes, we did not memorialize in a writing our
agreement to settle the indebtedness by issuing 150,000 and 130,000,
respectively, shares to said individuals.
On October 23, 2002, 100,000 options to purchase common stock were granted to
Scott Praill. The options are priced at $1.30 per option and expire October 22,
2012. At December 31, 2004, 60,000 of these options have vested. No other stock
options have been granted to directors or officers in the three-year period
ended December 31, 2004.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
Stratabase's Financial Statements, which are set forth in the accompanying index
to the Financial Statements included in this annual report, are filed as a part
of this annual report pursuant to Item 18.
21
LEGAL PROCEEDINGS
Not applicable.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock nor do we
anticipate paying any in the foreseeable future. Furthermore, we expect to
retain any future earnings to finance our operations and expansion. The payment
of cash dividends in the future will be at the discretion of our Board of
Directors and will depend upon our earnings levels, capital requirements, any
restrictive loan covenants and other factors the Board considers relevant.
B. SIGNIFICANT CHANGES
No significant change has occurred since the date of the audited consolidated
financial statements included in Item 18.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The following tables set forth the price history of the Company's
stock:
1. Annual high and low market prices for the last five full financial
years:
Year Market Price
- ------------ ------------------------------------------------
High Price Low Price
- ------------ ------------------------ -----------------------
2004 $1.25 $0.15
2003 $1.65 $0.23
2002 $3.37 $0.92
2001 $2.50 $0.63
2000 $3.00 $0.75
- ------------ ------------------------ -----------------------
2. High and low market prices for each full financial quarter during
the two most recent full financial years:
Financial Quarter Market Price
- ------------------------------- ---------------------------------------
Year Quarter High Price Low Price
- ---------------- -------------- ------------------- -------------------
2004 Fourth
Quarter of
2004 $0.35 $0.15
Third
Quarter of
2004 $0.42 $0.15
Second
Quarter of
2004 $0.65 $0.40
First
Quarter of
2004 $1.25 $0.51
2003 Fourth
Quarter of
2003 $0.45 $0.25
Third
Quarter of
2003 $0.70 $0.23
Second
Quarter of
2003 $1.55 $0.61
First
Quarter of
2003 $1.65 $1.20
22
3. High and low market prices for each of the six most recent months:
Month Market Price
- ------------------------------- ---------------------------------------
High Price. Low Price
- ------------------------------- ------------------- -------------------
February, 2005 $0.50 $0.40
January, 2005 $0.70 $0.35
December, 2004 $0.35 $0.16
November, 2004 $0.20 $0.16
October, 2004 $0.25 $0.15
September, 2004 $0.24 $0.15
- ------------------------------- ------------------- -------------------
B. PLAN OF DISTRIBUTION.
Not applicable.
C. MARKETS.
In July 2000 our common stock began trading on the Over the Counter Bulletin
Board sponsored by the National Association of Securities Dealers, Inc. under
the symbol "SBSF.OB". Subsequent to our continuance to Canada, our symbol was
changed to "SBASF.OB". The Over the Counter Bulletin Board is maintained by the
NASDAQ Stock Market, but does not have any of the quantitative or qualitative
standards such as those required for companies listed on the NASDAQ Small Cap
Market or National Market System.
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL.
Not applicable.
B. MEMORANDUM AND ARTICLES OF INCORPORATION
This section summarizes certain material provisions of the Company's charter and
bylaws.
The Company is authorized to issue shares of common stock (the "Common Shares")
as well as shares of preferred stock (the "Preferred Shares").
Subject to the rights of holders of Preferred Shares in the future, if any,
holders of the Common Shares are entitled to share equally on a per share basis
in such dividends as may be declared by the Board of Directors out of funds
legally available therefore. There are presently no plans to pay dividends with
respect to the Common Shares. Upon the Company's liquidation, dissolution or
winding up, after payment of creditors and the holders of any of the Preferred
Shares, if any, the Company's assets will be divided pro rata on a per share
basis among the holders of the Common Shares. The Common Shares are not subject
to any liability for further assessments. There are no conversions or redemption
privileges nor any sinking fund provisions with respect to the Common Shares and
the Common Shares are not subject to call. The holders of Common Shares do not
23
have any pre-emptive or other subscription rights. Holders of the Common Shares
are entitled to cast one vote for each share held at all shareholders' meetings
for all purposes, including the election of directors. The Common Shares do not
have cumulative voting rights.
None of the Preferred Shares are currently outstanding. The Board of Directors
has the authority, without further action by the holders of the outstanding
Common Shares, to issue preferred shares from time to time in one or more
series, to fix the number of shares constituting any series, and to fix the
terms of any such series, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference or
such series.
The Company's Bylaws provide that Board of Directors may, from time to time,
with or without the authority or the authorization of the shareholders, in such
amounts and on such terms as it deems expedient, cause the Company to borrow
money. The board may from time to time delegate to a committee, to a director,
or to an officer of the Company all or any of the powers conferred on the board
by law or the by-laws to such extent and in such manner as the board from time
to time determines.
Annual and special meetings of the shareholders may be called by the Board of
Directors. Notice of a shareholder meeting shall be given not less than 21 days
and not more than 60 days prior to the date of such meeting to each director,
the auditor of the Company, and each shareholder of record entitled to vote at
the meeting. A quorum for any shareholder meeting shall be persons present not
being less than two in number and holding or representing by proxy not less than
5% of the total number of issued shares entitled to vote at the meeting.
C. MATERIAL CONTRACTS
We have not entered into any material contracts, other than contracts entered
into in the ordinary course of business, for the two years immediately preceding
publication of this document.
D. EXCHANGE CONTROLS
There are no government laws, decrees or regulations in Canada which restrict
the export or import of capital or, subject to the following sentence, which
affect the remittance of dividends or other payments to nonresident holders of
Stratabase's common shares. However, any such remittance to a resident of the
United States is generally subject to non-resident tax pursuant to Article X of
the 1980 Canada-United States Income Tax Convention. See "Item 10.E Taxation"
for additional discussion on tax matters.
There are currently no limitations of general application imposed by Canadian
federal or provincial laws on the rights of non-residents of Canada to hold or
vote Stratabase's common shares. There are also no such limitations imposed by
the articles of incorporation with respect to Stratabase's common shares. There
are, however, certain requirements on the acquisition of control of Stratabase's
securities by non-residents of Canada. The INVESTMENT CANADA ACT requires
notification to and, in certain cases, advance review and approval by, the
Government of Canada, of the acquisition by a "non-Canadian" of "control" of a
"Canadian business", all as defined in the INVESTMENT CANADA ACT. Generally
speaking, in order for an acquisition to be subject to advance review and
approval, the asset value of the Canadian business being acquired must meet or
exceed certain monetary thresholds.
E. TAXATION
The following discussion is not intended to be, nor should it be construed to
be, legal or tax advice to any holder or prospective holder of common shares of
Stratabase and no opinion or representation with respect to the Canadian or
United States federal, state, provincial, local or other income tax consequences
to any such holder or prospective holder is made. Accordingly, holders and
prospective holders of common shares of Stratabase should consult their own tax
advisors about the federal, state, provincial, local and foreign tax
consequences of purchasing, owning and disposing of common shares of Stratabase.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
This summary is based upon the current provisions of the Income Tax Act
(Canada), the regulations there under, the current publicly announced
administrative and assessing policies of the Canada Revenue Agency, and all
specific proposals (the "Tax Proposals") to amend the Income Tax Act and
regulations announced by the Minister of Finance (Canada) prior to the date
24
hereof. This discussion is not exhaustive of all possible Canadian federal
income tax consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action, nor does it take into account provincial or foreign tax
considerations which may differ significantly from those discussed herein.
The summary applies to beneficial owners of common shares who, for the purposes
of the Income Tax Act, are residents of the United States and are not resident
in Canada, and who hold common shares of Stratabase as capital property.
Dividends
The Income Tax Act provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
Stratabase) to a non-resident of Canada shall be subject to a non-resident
withholding tax equal to 25% of the gross amount of the dividend or deemed
dividend.
Provisions in the Income Tax Act relating to dividend and deemed dividend
payments to and capital gains realized by non-residents of Canada who are
residents of the United States are subject to the 1980 Canada-United States
Income Tax Convention.
Article X of the 1980 Canada-United States Income Tax Convention provides that
the rate of Canadian non-resident withholding tax on dividends or deemed
dividends paid to a United States corporation that beneficially owns at least
10% of the voting shares of the corporation paying the dividend shall not exceed
5% of the dividend or deemed dividend, and in any other case, the rate of
non-resident withholding tax shall not exceed 15% of the dividend or deemed
dividend.
Disposition of Shares
The Income Tax Act provides that a non-resident person is subject to tax in
Canada on the disposition of "taxable Canadian property." Common shares of
Stratabase are considered to be "taxable Canadian property" as defined in the
Income Tax Act. Therefore, under the Income Tax Act, a non-resident would be
subject to tax in Canada on the disposition of common shares of Stratabase.
Article XIII of the 1980 Canada-United States Income Tax Convention provides
that gains realized by a United States resident on the disposition of shares of
a Canadian corporation may not generally be taxed in Canada unless the value of
the Canadian corporation is derived principally from real property situated in
Canada.
Generally, certain filing and reporting obligations exist where a non-resident
of Canada disposes of taxable Canadian property. In particular, the non-resident
must make an application to the Canada Revenue Agency in advance of the
disposition for the purpose of obtaining a certificate issued by the Canada
Revenue Agency pursuant to section 116 of the Income Tax Act. If the
non-resident fails to secure such certificate from the Canada Revenue Agency in
advance of the disposition, the purchaser is required to withhold and remit to
the Canada Revenue Agency 25% of the amount otherwise payable to the
non-resident.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed Treasury Regulations, published
Internal Revenue Service rulings, published administrative positions of the
Internal Revenue Service and court decisions that are currently applicable, any
or all of which could be materially and adversely changed, possibly on a
retroactive basis, at any time. In addition, this discussion does not consider
the potential effects, both adverse and beneficial, of any recently proposed
legislation that, if enacted, could be applied, possibly on a retroactive basis,
at any time. In addition, this discussion does not cover any state, local or
foreign tax consequences. The following is a discussion of United States federal
income tax consequences, under current law, generally applicable to a U.S.
Holder (as defined below) of common shares of Stratabase who holds such shares
as capital assets. This discussion does not address all potentially relevant
federal income tax matters and it does not address consequences peculiar to
persons subject to special provisions of federal income tax law, such as those
described below that are excluded from the definition of a U.S. Holder.
U.S. Holder
As used herein, a "U.S. Holder" includes a holder of common shares of Stratabase
who is a citizen or resident of the United States, a corporation created or
25
organized in or under the laws of the United States or of any political
subdivision thereof, any United States entity which is taxable as a corporation
for United States tax purposes and any other person or entity whose ownership of
common shares of Stratabase is effectively connected with the conduct of a trade
or business in the United States. A U.S. Holder does not include persons subject
to special provisions of federal income tax law, such as tax-exempt
organizations, qualified retirement plans, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies,
broker-dealers, nonresident alien individuals or foreign corporations whose
ownership of common shares is not effectively connected with the conduct of a
trade or business in the United States and shareholders who acquired their
shares through the exercise of employee stock options or otherwise as
compensation.
Dividends
Except as otherwise discussed below under "Passive Foreign Investment Company
Considerations," U.S. Holders receiving dividend distributions (including
constructive dividends) with respect to common shares of Stratabase are required
to include in gross income for United States federal income tax purposes the
gross amount of such distributions to the extent that Stratabase has current or
accumulated earnings and profits, without reduction for any Canadian income tax
withheld from such distributions. Such Canadian tax withheld may be credited,
subject to certain limitations, against the U.S. Holder's United States federal
tax liability or, alternatively, may be deducted in computing the U.S. Holder's
federal taxable income (but in the case of individuals, only if they itemize
deductions). See "Foreign Tax Credit." To the extent that distributions exceed
current or accumulated earnings and profits of Stratabase, they will be treated
first as a return of capital up to the U.S. Holder's adjusted basis in the
common shares (which adjusted basis must therefore be reduced) and thereafter as
a gain from the sale or exchange of the common shares. Preferential tax rates
for long-term capital gains are applicable to a U.S. Holder that is an
individual, estate or trust. Moreover, "qualified dividends" received by U.S.
Holders who are individuals, during tax years beginning before January 1, 2009,
from any "qualified foreign corporation" are subject to a preferential tax rate,
provided such individual U.S. Holder meets a certain holding period requirement.
A "qualified foreign corporation" is generally any corporation formed in a
foreign jurisdiction which has a comprehensive income tax treaty with the United
States or, if not, the dividend is paid with respect to stock that is readily
tradable on an established United States market. However, a "qualified foreign
corporation" excludes a foreign corporation that is a foreign personal holding
company, a foreign investment company, or a passive foreign investment company
for the year the dividend is paid or the previous year. Stratabase believes that
it qualifies as a "qualified foreign corporation". There are currently no
preferential tax rates for a U.S. Holder that is a corporation.
In general, dividends paid on common shares of Stratabase will not be eligible
for the same dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder which is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from Stratabase (unless
Stratabase is a "foreign personal holding company" as defined in Section 552 of
the Code, or a "passive foreign investment company" as defined below) if such
U.S. Holder owns shares representing at least 10% of the voting power and value
of Stratabase. The availability of this deduction is subject to several complex
limitations that are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian or other
foreign income tax with respect to the ownership of common shares of Stratabase
may be entitled, at the election of the U.S. Holder, to either a tax credit or a
deduction for such foreign tax paid or withheld. This election is made on a
year-by-year basis and generally applies to all foreign income taxes paid by (or
withheld from) the U.S. Holder during that year. There are significant and
complex limitations that apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holder's United States income tax liability that the U.S. Holder's foreign
source income bears to his or its worldwide taxable income. In the determination
of the application of this limitation, the various items of income and deduction
must be classified into foreign and domestic sources. Complex rules govern
income such as "passive income", "high withholding tax interest", "financial
services income", "shipping income" and certain other classifications of income.
In addition, U.S. Holders that are corporations and that own 10% or more of the
voting stock of Stratabase may be entitled to an "indirect" foreign tax credit
under Section 902 of the Code with respect to the payment of dividends by
Stratabase under certain circumstances and subject to complex rules and
limitations. The availability of the foreign tax credit and the application of
the limitations on the foreign tax credit are fact specific and holders and
prospective holders of common shares should consult their own tax advisors
regarding their individual circumstances.
26
Disposition of Shares
Except as otherwise discussed below under "Passive Foreign Investment Company
Considerations," a gain or loss realized on a sale of common shares will
generally be a capital gain or loss, and will be long-term if the shareholder
has a holding period of more than one year. The amount of gain or loss
recognized by a selling U.S. Holder will be measured by the difference between
(i) the amount realized on the sale and (ii) his or its tax basis in the common
shares. Gains and losses are netted and combined according to special rules in
arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations.
Individual U.S. Holders may carryover unused capital losses to offset capital
gains realized in subsequent years. For U.S. Holders that are corporations
(other than corporations subject to Subchapter S of the Code), any unused
capital losses may only be carried back three and forward five years from the
loss year to offset capital gains until such net capital losses are exhausted.
Foreign Personal Holding Company Considerations
Special rules apply to a U.S. Holder of a "foreign personal holding company" or
"FPHC" as defined in Section 552 of the Code. Stratabase will not be classified
as a FPHC for U.S. federal income tax purposes unless (i) five or fewer
individuals who are U.S. citizens or residents own or are deemed to own more
than 50% of the total voting power of all classes of stock entitled to vote or
the total value of Stratabase stock; and (ii) at least 60% (or 50% in certain
cases) of Stratabase's gross income consists of "foreign personal holding
company income," which generally includes passive income such as dividends,
interest, gains from the sale or exchange of stock or securities, certain rents,
and royalties. Stratabase believes that it is not a FPHC; however, no assurance
can be provided that Stratabase will not be classified as a FPHC in the future.
Passive Foreign Investment Company Considerations
If Stratabase is a "passive foreign investment company" or "PFIC" as defined in
Section 1297 of the Code, U.S. Holders will be subject to U.S. federal income
taxation under one of two alternative tax regimes at the election of each such
U.S. Holder. Section 1297 of the Code defines a PFIC as a corporation that is
not formed in the United States and either (i) 75% or more of its gross income
for the taxable year is "passive income", which generally includes interest,
dividends and certain rents and royalties or (ii) the average percentage, by
fair market value (or, if Stratabase elects, adjusted tax basis), of its assets
that produce or are held for the production of "passive income" is 50% or more.
The rules applicable to a FPHC take priority over the rules applicable to a
PFIC, so that amounts includable in gross income under the FPHC rules will not
be taxable again under the PFIC rules. Stratabase does not believe that it will
be a PFIC for the current fiscal year or for future years. Whether Stratabase is
a PFIC in any year and the tax consequences relating to PFIC status will depend
on the composition of Stratabase's income and assets, including cash. U.S.
Holders should be aware, however, that if Stratabase becomes a PFIC, it may not
be able or willing to satisfy record-keeping requirements that would enable U.S.
Holders to make an election to treat Stratabase as a "qualified electing fund"
for purposes of one of the two alternative tax regimes applicable to a PFIC.
U.S. Holders or potential shareholders should consult their own tax advisor
concerning the impact of these rules on their investment in Stratabase.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
Stratabase is subject to the informational requirements of the United States
Securities Exchange Act of 1934, as amended, such as to file reports and other
information with the SEC. Shareholders may read and copy any of Stratabase's
reports and other information at, and obtain copies upon payment of prescribed
fees from, the Public Reference Room maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
27
Stratabase is not required to file reports and other information with any
securities commissions in Canada.
As a foreign private issuer, Stratabase is exempt from the rules under the
United States Securities Exchange Act of 1934, as amended, prescribing the
furnishing and content of proxy statements to shareholders.
Stratabase will provide without charge to each person, including any beneficial
owner, on the written or oral request of such person, a copy of any or all
documents referred to above which have been or may be incorporated by reference
in this annual report (not including exhibits to such incorporated information
that are not specifically incorporated by reference into such information).
Requests for such copies should be directed to Stratabase at the following
address: Stratabase, Suite 101 - 34595 3rd Avenue, Abbotsford, British Columbia,
Canada, V2S 8B7 Attention: President, telephone number: 604-504-5811.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the potential risk of loss in the future earnings of
Stratabase due to adverse changes in financial markets. Stratabase is exposed to
market risk from changes in its common share price, foreign exchange rates and
interest rates. Inflation has not had a significant impact on Stratabase's
results of operations.
Foreign Currency Risk
While our financial statements are reported in US dollars and are intended to
comply with U.S. GAAP requirements, a portion of our business operations may be
conducted in Canadian dollars. Since June 1, 1970, the government of Canada has
permitted a floating exchange rate to determine the value of the Canadian dollar
as compared to the United States dollar. On April 20, 2005, the exchange rate in
effect for Canadian dollars exchanged for United States dollars, expressed in
terms of Canadian dollars was $1.2393. This exchange rate is based on the noon
buying rates in New York City for cable transfers in Canadian dollars, as
certified for customs purposes by the Federal Reserve Bank of New York.
Interest Rate Risk
In accordance with Company policy, cash equivalent and short-term investment
balances are primarily comprised of high-grade commercial paper and money market
instruments with original maturity dates of less than one month. Due to the
short-term maturity of its investments, Stratabase is not subject to significant
interest rate risk.
Any future financial impact would be based on actual developments in global
financial markets. Management does not foresee any significant changes in the
strategies used to manage interest and foreign exchange rate risks in the near
future.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
28
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of December 31, 2004.
This evaluation was carried out under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, Mr. Trevor Newton.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect internal controls
over financial reporting during the fourth fiscal quarter.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed on our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Stratabase's Board of Directors has determined that Scott Praill, member of the
audit committee of the Board of Directors, is an audit committee financial
expert as defined by the SEC, and is independent as defined in the listing
standards of the New York Stock Exchange.
ITEM 16B. CODE OF ETHICS
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. For purposes of this Item,
the term code of ethics means written standards that are reasonably designed to
deter wrongdoing and to promote:
- - honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
- - full, fair, accurate, timely, and understandable disclosure in reports and
documents that the issuer files with, or submits to, the Commission and in other
public communications made by the issuer; - compliance with applicable
governmental laws, rules and regulations; - the prompt internal reporting of
violations of the code to the board of directors or another appropriate person
or persons; and - accountability for adherence to the code.
The Company hereby undertakes to provide to any person without charge, upon
request, a copy of such code of ethics. Such request may be made in writing to
the board of directors at the address of the issuer.
ITEM 16C. PRINCIPAL ACCOUNTANT AND FEES
BDO Dunwoody LLP has served as the Company's Principal Accountant since April
30, 2003. Their pre-approved fees billed to the Company are set forth below:
29
FISCAL YEAR ENDING FISCAL YEAR ENDING
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------- --------------------
Audit Fees $ 48,838 $ 55,910
Audit Related Fees 0 0
Tax Fees $ 0 0
All Other Fees $ 0 $ 0
As of December 31, 2004, the Company's Audit Committee did not have a formal
documented pre-approval policy for the fees of the principal accountant. It is
in the process of adopting such a policy.
Audit committee pre-approval process:
From time to time, management of the Company recommends to and requests approval
from the audit committee for audit and non-audit services to be provided by the
Company's auditors. The audit committee considers such requests on a quarterly
basis, and if acceptable, pre-approves such audit and non-audit services. During
such deliberations, the audit committee assesses, among other factors, whether
the services requested would be considered "prohibited services" as contemplated
by the US Securities and Exchange Commission, and whether the services requested
and the fees related to such services could impair the independence of the
auditors.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither the Company nor any "affiliated purchasers" as defined in Section
240.10b-18(a)(3) of the Exchange Act purchased any shares of the Company.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable, as Stratabase has elected to provide financial statements
pursuant to "Item 18. Financial Statements."
ITEM 18. FINANCIAL STATEMENTS
Stratabase's financial statements commence on page F-1 of this annual report.
These financial statements are expressed in United States dollars and were
prepared in accordance with U.S. GAAP.
30
ITEM 19. EXHIBITS
(a) The following documents are filed as part of this report:
(1) Financial Statements
Reports of Independent Registered Public Accounting Firms Balance
Sheets as of December 31, 2004 and 2003 Statements of Operations and
Comprehensive Loss for the years ended December 31, 2004, 2003, and
2002. Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002. Statements of Cash Flows for the
years ended December 31, 2004, 2003, and 2002. Notes to the Financial
Statements
(2) Financial Statement Schedules
(3) Exhibits
Exhibit No. Description
1.1 Articles of Continuance
1.2 Bylaws
2.1 Specimen Certificate for Shares of the Registrant's Common Stock
2.2 Description of Capital Stock (contained in the Articles of Continuance
filed as Exhibit 1.1)
2.3 Form of Class A warrant issued in April 20031
2.4 Form of Class A warrant issued in December 20032
2.5 Form of Class B warrant issued in December 20033
4.1 Lease with SGS Enterprises4
4.2 Internet Business Service Agreement with BCTEL5
4.3 Distributor Agreement with COMTEX6
4.4 Internetworking Services Agreement with Telus Advanced Communications7
4.5 Lease Agreement with George P. and Sandra J. Andreasen8
12. Rule 13a-14(a)/15d-14(a) Certifications
13. Section 1350 Certifications
15.3 Stock Option Plan9
15.4 2002 Stock Option Plan10
1 Previously filed with the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2003
2 Previously filed with the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2003
3 Previously filed with the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2003
4 Incorporated herein by reference to the Company's Form SB-2, filed with
the Securities and Exchange Commission on August 8, 1999
5 Previously filed with the Company's Form 10-KSB for the year ended
December 31, 2000
6 Previously filed with the Company's Form 10-KSB for the year ended
December 31, 2000
7 Incorporated herein by reference to the Company's Form SB-2, filed on
August 8, 1999
8 Previously filed with Stratabase's Form 10-KSB for the year ended
December 31, 2000
9 Previously filed with the Company's Form S-8 on January 29, 2000
10 Previously filed with the Company's Form S-8 filed on February 12, 2002
31
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(EXPRESSED IN US DOLLARS)
CONTENTS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - BDO DUNWOODY LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - MOSS ADAMS LLP
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations and Comprehensive Loss
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Summary of Significant Accounting Policies
Notes to the Financial Statements
32
BDO DUNWOODY LLP 600 Cathedral Place
Chartered Accountants 925 West Georgia Street
Vancouver, BC, Canada V6C 3L2
Telephone: (604) 688-5421
Telefax: (604) 688-5132
E-mail: vancouver@bdo.ca
www.bdo.ca
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying balance sheets of Stratabase Inc. (a
development stage company) as of December 31, 2004 and 2003 and the related
statements of operations and comprehensive loss, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures, in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratabase Inc. as of December
31, 2004 and 2003, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company incurred a loss in 2004 of $694,859 and has an
accumulated deficit of $2,530,698 at December 31, 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ BDO DUNWOODY LLP
Chartered Accountants
Vancouver, Canada
February 1, 2005
33
MOSS-ADAMS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Stratabase, Inc.
We have audited Stratabase, Inc.'s statements of operations and comprehensive
loss, changes in stockholders' equity, and cash flows for the year ended
December 31, 2002. These financial statements are the responsibility of
Stratabase Inc.'s Management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Stratabase, Inc.'s operations and their
cash flows for the year ended December 31, 2002, in conformity with United
States generally accepted accounting principles.
/S/ MOSS ADAMS LLP
PORTLAND, OREGON
FEBRUARY 26, 2003
34
===================================================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(EXPRESSED IN US DOLLARS)
DECEMBER 31 2004 2003
- -------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 52,187 $ 509,180
Receivables - net of allowance for doubtful accounts
of $Nil (2003 - $8,599) 3,612 4,551
Prepaid expenses 1,717 1,708
Inventory - 8,415
--- --------------- --- ------------------
Total current assets 57,516 523,854
OFFICE EQUIPMENT (Note 3) 14,520 37,001
DATABASES AND DOMAIN NAMES, NET - 243,701
--- --------------- --- ------------------
TOTAL ASSETS $ 72,036 $ 804,556
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT
Accounts payable $ 5,795 $ 31,943
Accrued liabilities 28,934 32,990
--- --------------- --- ------------------
Total current liabilities 34,729 64,933
--- --------------- --- ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 1,000,000 shares,
authorized and unissued - -
Common stock, $0.001 par value, 25,000,000 shares
authorized, 9,914,972 shares issued and
outstanding at December 31, 2004 and 2003
respectively 9,915 9,915
Additional paid-in capital 2,586,506 2,586,506
Accumulated deficit (2,530,698) (1,835,839)
Accumulated other comprehensive loss (28,416) (20,959)
--- --------------- --- ------------------
Total stockholders' equity 37,307 739,623
--- --------------- --- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,036 $ 804,556
===================================================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
35
===================================================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(EXPRESSED IN US DOLLARS)
FOR THE YEARS ENDED DECEMBER 31 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------
REVENUE $ - $ 5,000 $ 430,240
-- ------------- --- --------------- -- --------------
COST OF REVENUE
Commissions - 986 111,641
Wages and subcontracting costs - - 94,345
Direct marketing costs - - 79,238
Hardware cost of sales - - 26,235
Internet connectivity - - 12,553
Write-down of inventory 8,415 1,683 -
-- ------------- --- --------------- -- --------------
8,415 2,669 324,012
-- ------------- --- --------------- -- --------------
GROSS PROFIT (LOSS) (8,415) 2,331 106,228
RESEARCH AND DEVELOPMENT (139,742) (154,544) (171,500)
GENERAL AND ADMINISTRATIVE EXPENSES )
including stock option compensation of $Nil
(2003 - $Nil, 2002 - $255,750) (549,191) (705,888 (794,939)
-- ------------- --- --------------- -- --------------
LOSS FROM OPERATIONS (697,348) (858,101) (860,211)
OTHER INCOME (EXPENSES)
Interest 2,489 2,031 31,195
Provision for note receivable impairment (Note 4) - (171,206) -
-- ------------- --- --------------- -- --------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (694,859) (1,027,276) (829,016)
Provision for income taxes - - (85,629)
-- ------------- --- --------------- -- --------------
NET LOSS (694,859) (1,027,276) (914,645)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments (7,457) (9,700) (4,178)
-- ------------- --- --------------- -- --------------
COMPREHENSIVE LOSS $ (702,316) $ (1,036,976) $ (918,823)
===================================================================================================================
BASIC AND DILUTED LOSS PER SHARE OF COMMON
STOCK $ (0.07) $ (0.13) $ (0.12)
===================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 9,914,972 8,036,037 7,928,372
===================================================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
36
====================================================================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(EXPRESSED IN US DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Accumulated
Additional Earnings Related Party Other Total
Common Stock Paid-in (Accumulated Notes Comprehensive Stockholders'
Shares Amount Capital Deficit) Receivable Loss Equity
- ----------------------------------- ---------- ----------- ------------- -------------- -------------- -------------- --------------
Balance, January 1, 2002 7,718,372 $ 7,718 $ 1,515,616 $ 106,082 $ (477,000) $ (7,081) $ 1,145,335
Exercise of common stock options 315,000 315 241,685 - - - 242,000
Related party notes received in
exchange - - - - (14,500) - (14,500)
For common stock options
exercised
Payments on related party notes
receivable - - - - 116,500 - 116,500
Compensation expense related to
common - - 255,750 - - - 255,750
stock options granted
US income tax benefits from common
stock - - 90,321 - - - 90,321
options exercised
Net loss and comprehensive loss - - - (914,645) - (4,178) (918,823)
---------- -- -------- -- ---------- -- ----------- --- ---------- -- ----------- -- -----------
Balance, December 31, 2002 8,033,372 8,033 2,103,372 (808,563) (375,000) (11,259) 916,583
Repayment of related party notes
receivable (Note 5) (280,000) (280) (374,720) - 375,000 - -
Private placement common stock
issuances 200,000 200 349,800 - - - 350,000
for cash (Note 6)
Private placement common stock
issuances 1,961,600 1,962 508,054 - - - 510,016
for cash (Note 6)
Net loss and comprehensive loss - - - (1,027,276) - (9,700) (1,036,976)
---------- -- -------- -- ---------- -- ----------- --- ---------- -- ----------- -- -----------
Balance, December 31, 2003 9,914,972 9,915 2,586,506 (1,835,839) - (20,959) 739,623
Net loss and comprehensive loss - - - (694,859) - (7,457) (702,316)
---------- -- -------- -- ---------- -- ----------- --- ---------- -- ----------- -- -----------
BALANCE, DECEMBER 31, 2004 9,914,972 $ 9,915 $ 2,586,506 $ (2,530,698) $ - $ (28,416) $ 37,307
====================================================================================================================================
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
37
==================================================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
FOR THE YEARS ENDED DECEMBER 31 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (694,859) $ (1,027,276) $ (914,645)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 269,018 303,923 281,326
Deferred income tax expense - - 45,548
Stock option compensation expense - - 255,750
US income tax benefit from common
stock options exercised - - 90,321
Provision for note receivable
impairment - 171,206 -
Write-down of inventory 8,415 1,683 -
Change in assets and liabilities:
Receivables 939 15,388 (16,122)
Taxes recoverable - 62,844 (62,844)
Prepaid expenses (9) 895 (2,603)
Inventory - (128) (7,087)
Accounts payable (26,148) (27,578) (782,423)
Accrued liabilities (4,056) 26,056 (1,982)
Income taxes payable - - (50,265)
--- ------------ --- -------------- -- ---------------
Net cash used in operating activities (446,700) (472,987) (1,165,026)
--- ------------ --- -------------- -- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of databases and domain names - (1,014) (154,761)
Acquisition of computer and office equipment (2,836) (1,228) (1,399)
Advance on note receivable - - (150,000)
--- ------------ --- -------------- -- ---------------
Net cash used in investing activities (2,836) (2,242) (306,160)
--- ------------ --- -------------- -- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments received from related parties - - 102,000
Proceeds from the issuance of common stock - 860,016 242,000
--- ------------ --- -------------- -- ---------------
Net cash provided by financing activities - 860,016 344,000
--- ------------ --- -------------- -- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7,457) (9,700) (4,178)
--- ------------ --- -------------- -- ---------------
NET INCREASE (DECREASE) IN CASH (456,993) 375,087 (1,131,364)
CASH, beginning of year 509,180 134,093 1,265,457
--- ------------ --- -------------- -- ---------------
CASH, end of year $ 52,187 $ 509,180 $ 134,093
==================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ - $ - $ -
Income taxes - - 63,261
NON-CASH ACTIVITIES
Inventory transferred to office equipment $ - $ 18,480 $ -
Related party notes (settled) received in
exchange for common stock $ - $ (375,000) $ 14,500
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
38
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the balance sheet date, and revenues and
expenses for the period then ended. Actual results could differ
significantly from those estimates.
REVENUE RECOGNITION
Prior to 2003, the Company generated revenues by selling customized
Customer Relationship Management ("CRM") services which are comprised
primarily of the provision of databases of sales leads and mailing
lists, and includes the provision of technical services aimed to
customize and improve the quality of the databases sold. Included in
the sale of databases was non-essential open-source software to allow
users to interface with and manage these databases and relationships.
Revenue on the sales of databases and technical services was recognized
when persuasive evidence of an arrangement existed and delivery had
occurred, provided the fee was fixed or determinable and collectibility
was probable. The majority of the databases sold required customer
payments in advance of delivery. There are no post-delivery performance
obligations in respect to past database sales and no rights of refund
exist. No database sales occurred during 2004 or 2003 and the Company
no longer sells databases.
Technical consulting service revenue, invoiced separately from database
sales, was recognized upon the completion of the services provided.
Hardware revenue was recognized at the time the goods were shipped,
when both title and risk of loss transferred to the customer, provided
that no significant obligations remained. The Company's shipping and
handling costs were included in the cost of revenue.
During 2002, the Company began development of proprietary software,
which it believes will be the primary source of revenue in the future.
During 2004, 2003, and 2002 the Company did not recognize any revenues
from the proprietary software developed.
39
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of 90 days or less to be cash equivalents.
INVENTORY
Inventory was comprised primarily of system hardware components and is
stated at the lower of cost or market. The Company determined cost
using the first-in, first-out (FIFO) method. During 2004, the Company
wrote off its remaining inventory.
OFFICE EQUIPMENT
Office equipment is recorded at cost and is depreciated using the
straight-line method over its useful life, which ranges from two to
five years. Depreciation expense charged to general and administrative
expenses was $25,317, $27,696 and $16,000 for 2004, 2003 and 2002,
respectively.
DATABASES AND DOMAIN NAMES
Databases and domain names were amortized over three years and two
years, respectively. Cost and accumulated amortization of the databases
at December 31, 2003 was $851,453 and $610,740, respectively. Cost and
accumulated amortization of the domain names at December 31, 2003 was
$15,615 and $12,627, respectively.
Amortization expense charged to operations was $243,701, $276,227 and
$265,326 for 2004, 2003 and 2002, respectively. At December 31, 2004,
all databases and domain names have been fully amortized. As the
Company does not intend to use the databases and domain names in its
proprietary software product, the cost and accumulated amortization
were written down to Nil at December 31, 2004.
LONG-LIVED ASSET IMPAIRMENT
Long-lived assets are evaluated for impairment when events or changes
in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to
result from the use of these assets and their eventual disposition is
less than their carrying amount. Impairment, if any, is assessed using
discounted cash flows. Because the Company has not yet generated
revenue from its proprietary products, the determination of whether or
not long-lived assets have become impaired involves a significant level
of judgment in the assumptions underlying the approach used to
determine the estimated future cash flows expected to result from the
use of those assets. Changes in the Company's strategy, assumptions
and/or market conditions could significantly impact these judgments and
require adjustments to recorded amounts of long-lived assets. During
the years ended December 31, 2004, 2003 and 2002, no write-downs of
long-lived assets were recognized.
40
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
SOFTWARE DEVELOPMENT COSTS
Software development costs associated with the Company's new
proprietary hosted software product are charged to expense until
criteria for capitalization under Statement of Position ("SOP) 98-1 are
met. Capitalization will commence when it becomes probable that the
project will be completed, the software will be used to perform the
function intended and there is reasonable assurance as to future cash
flows resulting from the Company's proprietary software. To date, due
to uncertainty regarding the project completion and cash flow to be
generated from the proprietary software, all expenditures relating to
the project have been charged to expense as incurred.
Software development costs incurred in 2002 and prior years in respect
of the Company's CRM product line were expensed as incurred until
technological feasibility in the form of a working model had been
established. No costs had been previously capitalized in connection
with the CRM product line.
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company follows the asset and liability method of accounting for
income taxes whereby deferred tax assets and liabilities are recognized
for the future tax consequences of differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
FOREIGN EXCHANGE TRANSLATION
The Company's functional currency is the Canadian dollar. Transactions
that are measured in US dollars are translated to Canadian dollars in
the following manner: All balance sheet accounts have been translated
using the current rate of exchange at the balance sheet date. Results
of operations have been translated using the average rates prevailing
throughout the year. Translation gains or losses resulting from the
changes in the exchange rates are accumulated as other comprehensive
income or loss in a separate component of stockholders' equity. All
amounts included in the accompanying financial statements and footnotes
are denominated in U.S. dollars.
STOCK OPTION PLANS
The Company applies Accounting Principles Board Opinion No. 25 (APB No.
25) and related interpretations in accounting for stock options granted
to employees and directors (for services performed as a director).
Accordingly, compensation costs are recognized as the difference
between the exercise price of each option and the market price of the
Company's stock at the date of each grant. No stock options were
granted during 2004 or 2003. Accordingly, no compensation costs were
recognized for the years ended December 31, 2004 and 2003. In 2002,
$255,750 was recognized in compensation expense under APB No. 25 in
respect of 300,000 stock options granted to an employee with an
exercise price below the quoted market price of the Company's common
stock on the grant dates. The weighted average discount offered to this
employee on options granted in 2002 was approximately $0.85 per stock
option.
41
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
STOCK OPTION PLANS - CONTINUED
The Company accounts for the grant of options to non-employees using
the fair value-based method prescribed in Statement of Financial
Accounting Standard ("SFAS") No. 123, using the Black-Scholes option
pricing model. There were no stock options granted to non-employees
during the years ended December 31, 2004, 2003 and 2002.
Compensation for unvested options is amortized over the vesting period.
Had compensation expense on options granted in prior periods been
determined based on the fair value at the grant dates, as described in
the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123, the Company's net loss and net
loss per share would have been as follows:
2004 2003 2002
--- ---------- --- ------------ --- ----------
Net loss, as reported $ (694,859) $ (1,027,276) $ (914,645)
Add: stock-based compensation
expense included in reported net
income, net of related taxes - - 163,680
Deduct total stock-based employee
compensation expense
determined under fair based
methods for all awards (18,646) (32,707) (219,376)
--------------------------------------------
Pro forma net loss $ (713,505) $ (1,059,983) $ (970,341)
============================================
Loss per common share:
Basic and diluted - as reported $ (0.07) $ (0.13) $ (0.12)
Basic and diluted - pro forma $ (0.07) $ (0.13) $ (0.12)
No stock options were granted in 2004 and 2003. The fair value of each
option granted in 2002 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1)
dividend yield of 0%, (2) expected volatility of 149%, (3) risk-free
rate of 3.16%, and (4) expected life of 1.13 years. The weighted
average fair value per share of options granted in 2002 was $1.04.
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic earnings (loss) per share of common stock is computed by dividing
net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share of common stock reflect the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
Company.
At December 31, 2004, 2003 and 2002, potential common shares of
4,758,200, 4,758,200, and 715,000 respectively, related to common stock
options and warrants were excluded from the computation of diluted
earnings per share since their effect was anti-dilutive.
42
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash,
receivables, accounts payable and accrued liabilities approximate fair
value because of the immediate or short-term maturity of these
financial instruments.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined to include all changes in equity
except those resulting from investments by owners and distributions to
owners. The Company's items of other comprehensive income (loss) are
foreign currency translation adjustments, which relate to investments
that are permanent in nature.
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004), "Share-Based Payment." SFAS No. 123(R) would require
our company to measure all employee stock-based compensation awards
using a fair value method and record such expense in its consolidated
financial statements. In addition, SFAS No. 123(R) will require
additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from share-based
payment arrangements. For public entities that file as a small business
issuer, SFAS No. 123(R) is effective for the first interim or annual
reporting period beginning after December 31, 2005.
In December 2004, FASB issued SFAS No. 153 to amend Opinion 29 by
eliminating the exception for non-monetary exchanges of similar
productive assets and replaces it with general exception for exchanges
of non-monetary assets that do not have commercial substance. A
non-monetary exchange is defined to have commercial substance if the
future cash flows of the entity are expected to change significantly as
a result of the exchange.
The implementation of these new standards is not expected to have a
material effect on the Company's financial statements.
43
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
1. NATURE OF ORGANIZATION AND OPERATIONS
Stratabase Inc. is a provider of Knowledge Worker Automation (KWA)
software, designed to enable corporations to save time and money by
improving the efficiency of knowledge workers. The Company's software
tools allow enterprises to manage relationships and contacts, administer
and organize time allocations, collaborate with others, manage data,
automate communications and productivity reporting and conduct data
synchronization. The Company has historically derived its revenue from
sales of customized databases to its clients. During 2002, the Company
began redefining its product line by developing its proprietary
software. The proprietary software (Relata) was released in beta form in
June 2003 and the Company expects to begin marketing Relata in the first
half of 2005. The Company has not yet generated revenue from this
proprietary software. This new proprietary software product line will be
the primary focus of the Company. The Company operates from Abbotsford,
British Columbia, Canada.
The accompanying financial statements have been prepared in US dollars
and in accordance with accounting principles generally accepted in the
United States on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business.
In January 2003, the Company filed a proposal to effect a continuation
of the corporate jurisdiction from the State of Nevada to Canada on Form
S-4 with the United States Securities and Exchange Commission (SEC). At
a Special Meeting of the stockholders of Stratabase Inc. held on August
17, 2004, a majority of the Company's stockholders voted in favour of
the plan of conversion. Accordingly, the Company filed the Articles of
Conversion in Nevada and obtained a Certificate of Continuance from the
Director of Business Corporations. As a result, the Company changed its
name to "Stratabase Inc." and continued to operate under the Canada
Business Corporations Act and is no longer a Nevada corporation. The
Company has never had any employees or operations in the U.S., and
management believes the continuation to Canada accurately reflects the
nature of its operations. The continuance had no impact on the Company's
financial statements. These financial statements are presented as a
continuation of the Nevada Company.
2. ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared in US dollars
and in accordance with accounting principles generally accepted in the
United States on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company began actively developing its
proprietary software product line during the second quarter of 2002, and
revenues declined due to the reduced resources for sales and marketing
of the Company's existing product line. During the year ended December
31, 2004, the Company incurred a loss of $694,859 and has an accumulated
deficit of $2,530,698 at December 31, 2004. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern.
The Company expects its new product line sales to fund long-term
operations and will be actively marketing its products during 2005.
Management believes marketing and operating expenses will be financed
during the first six-months of 2005 through proceeds of a private
placement completed in February 2005 in the amount of $300,000 (Note
12). The Company expects to need an additional $300,000 to cover costs
through the remainder of 2005. Such will be financed by additional
equity issuances. During the year ended December 31, 2003, the Company
also reduced its labour force and closed its Vancouver, British
Columbia, office in an effort to further reduce its operating and
general and administrative expenses.
44
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
2. ABILITY TO CONTINUE AS A GOING CONCERN - CONTINUED
The Company's ability to continue as a going concern is dependent on its
ability to sustain profitable operations and to generate sufficient cash
flow from financing and operations to meet its obligations as they
become payable. The Company's plans to deal with this uncertainty
include further reducing expenditures and raising additional capital or
entering into a strategic arrangement with a third party. Although there
are no assurances that management's plans to reduce expenditures and
raise additional capital will be realized, management believes that the
Company will be able to continue operations in the future. Accordingly,
no adjustment relating to the recoverability and classification of
recorded asset amounts and the classification of liabilities has been
made to the accompanying financial statements in anticipation of the
Company not being able to continue as a going concern.
3. OFFICE EQUIPMENT
2004 2003
---- -------------- ------ --------------
Computer hardware $ 99,043 $ 96,207
Computer software 12,924 12,924
Office furniture and equipment 12,137 12,137
-----------------------------------------
124,104 121,268
Accumulated depreciation (109,584) (84,267)
-----------------------------------------
$ 14,520 $ 37,001
=========================================
4. NOTE RECEIVABLE
In May 2002, the Company loaned $150,000 to Advanced Cell Technology
("ACT"), a private biotechnology company, in exchange for a convertible
promissory note receivable. The note is unsecured, bears interest at
20% per annum, matured on April 30, 2003, and was to be converted into
stock of ACT should ACT have proceeded with a preferred stock financing
prior to the note's maturity date. The Company accrued a receivable for
interest income, due under the terms of the promissory note, in the
amount of $21,206 at December 31, 2002. At April 30, 2003, the note
receivable was in default. The Company received notice from ACT of
their intention to settle the note receivable in full out of future
financing. With the uncertainty regarding the recoverability of the
note receivable, in 2003 the Company reserved the principal amount of
the note receivable and accrued interest outstanding at December 31,
2002 and fully reserve all additional accruals of interest. Any
subsequent recovery will be recorded in the period it occurs. The
Company has filed suit against ACT in pursuit of the recovery of the
loan.
45
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company had outstanding notes receivable from
two executive officers resulting from previous exercises of stock
options aggregating to $375,000. The notes receivable were unsecured,
non-interest-bearing and were to be paid from the proceeds from the sale
of stock acquired through the exercise of stock options, but no later
than April 1, 2003. On May 1, 2003, the Company reached agreement with
the noteholders to redeem for cancellation 280,000 shares of common
stock owned by the executive officers in full settlement of the
outstanding balance. The fair value of the common shares redeemed was
$385,560, based on the quoted market price of the Company's common stock
on the agreement date. No gain or loss was recognized on the
transaction.
6. STOCKHOLDER TRANSACTIONS
During April through July of 2002, pursuant to the Company's 2002 and
2000 stock option plans, 230,000, 10,000, and 75,000 common stock
options were exercised by employees at $0.50, $1.45, and $1.50 per
share, respectively, for total proceeds to the Company of $242,000. The
exercise of 10,000 shares at $1.45 was initially accomplished through
the exchange of notes receivable, which was subsequently paid by the
employee in 2002.
On April 7, 2003, the Company issued 200,000 units for an aggregate
purchase price of $350,000. Each unit consisted of one share of common
stock and one warrant. Until April 7, 2005, each warrant is exercisable
for one share of common stock at an exercise price of $2.50 per share.
On May 1, 2003, related-party notes receivable were settled in exchange
for the redemption of 280,000 shares of common stock (Note 5).
On December 23, 2003, the Company issued a total of 1,961,600 units at
$0.26 per unit, or aggregate proceeds of $510,016. Each unit consisted
of one share of common stock, one Class A warrant and one Class B
warrant. The Class A warrants are exercisable on or after December 23,
2005 for a period of two years at an exercise price of $0.45 per share
of common stock and the Class B warrants are exercisable on or after
December 23, 2006 for a period of four years at an exercise price of
$0.75 per share of common stock. The Company has the right, in its sole
discretion, to accelerate the exercise date of the warrants, to decrease
the exercise price of the warrants and/or extend the expiration date of
the warrants.
46
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
7. STOCK OPTION PLANS
In February 2000, the Company adopted its 2000 Stock Option Plan ("the
2000 Plan"). The 2000 Plan provides for the granting of up to 1,750,000
stock options to key employees, directors and consultants, of common
shares of the Company. Under the 2000 Plan, the granting of incentive
and non-qualified stock options, exercise prices and terms are
determined by the Company's Option Committee, a committee designated to
administer the 2000 Plan by the Board of Directors. For incentive
options, the exercise price shall not be less than the fair market
value of the Company's common stock on the grant date. (In the case of
options granted to an employee who owns stock possessing more than 10%
of the voting power of all classes of the Company's stock on the date
of grant, the option price must not be less than 110% of the fair
market value of common stock on the grant date.). Options granted are
not to exceed terms beyond ten years (five years in the case of an
incentive stock option granted to a holder of 10 percent of the
Company's common stock).
Activity under the 2000 Plan is summarized as follows:
Weighted
Available for Options Average Price
Grant Outstanding Per Share
---------------- ---------------- --------------
<c>
BALANCE OUTSTANDING,
January 1, 2002 - 700,000 $ 0.78
Options cancelled 100,000 (100,000) 1.45
Options granted (100,000) 100,000 1.30
Options exercised - (230,000) 0.50
---------------- ---------------- --------------
December 31, 2002 - 470,000 0.88
Options cancelled 80,000 (80,000) 1.03
---------------- ---------------- --------------
BALANCE OUTSTANDING,
December 31, 2003 and 2004 80,000 390,000 $ 0.85
================================================
BALANCE EXERCISABLE,
December 31, 2004 350,000 $ 0.80
December 31, 2003 315,000 $ 0.74
December 31, 2002 325,000 $ 0.70
During 2001, the Company adopted its 2002 Stock Option Plan ("the 2002
Plan"). The 2002 Plan provides for the granting of up to an additional
1,750,000 stock options to key employees, directors and consultants, of
common shares of the Company. Under the 2002 Plan, the granting of
incentive and non-qualified stock options, exercise prices and terms
are determined by the Company's Option Committee, a committee
designated to administer the 2002 Plan by the Board of Directors. For
incentive options, the exercise price shall not be less than the fair
market value of the Company's common stock on the grant date. (In the
case of options granted to an employee who owns stock possessing more
than 10% of the voting power of all classes of the Company's stock on
the date of grant, the option price must not be less than 110% of the
fair market value of common stock on the grant date.). Options granted
are not to exceed terms beyond ten years (five years in the case of an
incentive stock option granted to a holder of 10 percent of the
Company's common stock).
47
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
7. STOCK OPTION PLANS - CONTINUED
Activity under the 2002 Plan is summarized as follows:
Weighted
Available for Options Average Price
Grant Outstanding Per Share
---------------- ---------------- --------------
<c>
Initial shares reserved, January 2002 1,750,000 - $ -
Options granted (330,000) 330,000 0.80
Options exercised - (85,000) 1.49
---------------- ---------------- --------------
BALANCE OUTSTANDING,
December 31, 2002, 2003 and 2004 1,420,000 245,000 $ 0.57
================================================
BALANCE EXERCISABLE,
December 31, 2004 245,000 $ 0.57
December 31, 2002 and 2003 235,000 $ 0.53
The following table summarizes information concerning outstanding and
exercisable common stock options under the 2000 and 2002 Plans at
December 31, 2004:
Weighted Number of Weighted
Remaining Number of Average Options Average
Range of Options Contractual Exercise Currently Exercise
Exercise Prices Outstanding Life (in Years) Price Exercisable Price
------------------ ------------ --------------- -------------- ----------- ---------
$0.50 - $0.60 480,000 6.74 $ 0.55 480,000 $ 0.55
$1.30 - $1.45 155,000 7.59 $ 1.33 115,000 $ 1.35
------------ ----------
635,000 595,000
============ ==========
48
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
8. WARRANTS
Warrants Weighted Average
Exercise Price
-------------------- -----------------
BALANCE, December 31, 2001 and 2002 - $ -
Warrants granted 4,123,200 0.69
-------------------- -----------------
BALANCE, December 31, 2003 and 2004 4,123,200 $ 0.69
==================== =================
The following table lists the common share warrants outstanding at
December 31, 2004. Each warrant is exchangeable for one common share.
Quantity Exercise Price Expiry
------------- ----------------- -------------------
200,000 $2.50 April 7, 2005
1,961,600 $0.45 December 23, 2007
1,961,600 $0.75 December 23, 2010
-------------
4,123,200
=============
At December 31, 2004, only the warrants expiring in April 2005 were
exercisable.
9. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
2004 2003 2002
----- ------------ ---- ------------- --- ------------
CURRENT
US net operating loss carryback $ - $ - $ (50,240)
------------------------------------------------------
- - (50,240)
------------------------------------------------------
DEFERRED
Tax recovery based on statutory rates (247,509) (380,895) (216,236)
Increase in valuation allowance 247,509 380,895 352,105
------------------------------------------------------
- - 135,869
------------------------------------------------------
Provision for income taxes $ - $ - $ 85,629
======================================================
49
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
9. PROVISION FOR INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to the
Company's deferred tax assets are as follows:
2004 2003
---------------- ---------------
DEFERRED TAX ASSETS (LIABILITIES)
Net operating loss carryforwards $ 137,000 $ 467,000
Office equipment 5,000 22,000
Databases and domain names 278,000 211,000
Capital loss carryforwards - 33,000
-----------------------------------
420,000 733,000
Valuation allowance (420,000) (733,000)
Net deferred tax asset $ - $ -
===================================
No options were exercised in 2004 or 2003 requiring an income tax
effect to be assessed. The exercise of nonqualified stock options
in 2002 resulted in the recording of additional paid-in capital of
$90,321 and recognition of an additional $90,321 of deferred tax
assets related to a net operating loss carryforward.
Upon continuation to Canada, all losses carried forward expired. As
of December 31, 2004, the Company had available to offset future
taxable income, net Canadian operating loss carryforwards of
approximately $384,000. The carryforwards will begin expiring in
2014 unless utilized in earlier years.
The Company evaluates its valuation allowance requirements based on
projected future operations. When circumstances change and this
causes a change in management's judgement about the recoverability
of deferred tax assets, the impact of the change on the valuation
allowance is reflected in current income.
The provision for income taxes differs from the amount of income
tax determined by applying the applicable Canadian (2003 and 2002 -
U.S.) statutory federal income tax rate to pretax income as a
result of the following differences:
2004 2003 2002
------------------ ------------------ ----------------
Statutory federal income tax rate (36%) (34%) (34%)
Change in valuation allowance 36% 37% 43%
Other (-) (3) 1
------------------------------------------------------
-% -% 10%
======================================================
50
================================================================================
STRATABASE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
DECEMBER 31, 2004 AND 2003
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
Lease commitments - The Company leased office space in Abbotsford,
British Columbia, with monthly payments of approximately $1,350. The
Abbotsford lease expired in February 2004. The Company currently pays
the rent for its office on a month-to-month basis. Total rent expense
under this lease was $20,669, $ 21,623 and $30,429 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Management fees - The Company pays management fees for the services of
its vice president at the rate of $5,000 (including Canadian Goods and
Services Tax of 7%) a month. Compensation of $56,074 for the years
ended December 31, 2004 and 2003, and $47,710 for the year ended
December 31, 2002 has been recorded as management fees in the
accompanying financial statements.
11. SALES ACTIVITY
The Company's sales were distributed geographically as follows:
2004 2003 2002
----- ------------ ---- ------------- --- ------------
United States $ - $ 5,000 $ 392,730
Canada - - 37,510
------------------------------------------------------
$ - $ 5,000 $ 430,240
======================================================
During 2003, the Company had one sale for $5,000 (2002 - $225,000)
representing 100% (2002 - 52%) of total revenues.
12. SUBSEQUENT EVENT
On February 14, 2005, the Company issued a total of 1,000,000 units at
$0.30 per unit, for aggregate proceeds of $300,000. Each unit consisted
of one share of common stock, one Class A warrant and one Class B
warrant. The Class A warrants are exercisable on February 14, 2007 for
a period of five years at an exercise price of $0.50 per share of
common stock and the Class B warrants are exercisable on February 14,
2008 for a period of four years at an exercise price of $0.80. The
Company has the right, in its sole discretion, to accelerate the
exercise date of the warrants, to decrease the exercise price of the
warrants and/or extend the expiration date of the warrants.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STRATABASE
By /s/ Trevor Newton Dated: April 21, 2005
- ----------------------------------------------------
Trevor Newton
Chairman, President, Chief Executive and
Operating Officer, Secretary and Treasurer
By /s/ Fred Coombes Dated: April 21, 2005
- ----------------------------------------------------
Fred Coombes
Vice President of Corporate Development
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Chairman, President, Chief Dated: April 21, 2005
/s/ Trevor Newton Executive And Operating Officer, Secretary and Treasurer
- -----------------
Trevor Newton
(Principal Executive Officer and
Principal Financial Officer)
Vice President of Corporate Development
/s/ Fred Coombes Dated: April 21, 2005
- -----------------
Fred Coombes
Director
/s/ Scott Praill Dated: April 21, 2005
- -----------------
Scott Praill
52