FORM 10-QSB - Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the period ended: September 30, 2003
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 33-16820-D
ARETE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1508638
------------------------------ ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7102 La Vista Place, Suite 100, Niwot, CO 80503
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(303) 652-3113
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
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.
[ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicated by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 12, 2003, Registrant had 73,092,626 shares of common stock, No
par value, outstanding.
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Consolidated Financial Statements:
Index to Consolidated Financial Statements 1
Consolidated Balance Sheet at September 30, 2003 and
December 31, 2002 (unaudited) 2
Consolidated Statements of Operations for the Three
Months Ended September 30, 2003 and 2002 (unaudited) 3
Consolidated Statements of Operations for the Nine
Months Ended September 30, 2003 and 2002 (unaudited) 4
Consolidated Statement of Stockholders' Deficit for
the Nine Months Ended September 30, 2003 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements
at September 30, 2003 7-11
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Part II - Other Information 19
Signatures 20
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEET
December 31, 2002 and September 30, 2003
(Unaudited)
ASSETS
------
2002 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 381 $ 3,904
Accrued interest receivable 24,632 34,479
Inventory 20,302 --
Inventory and molds held for disposal (Note 4) -- 25,244
Prepaid expenses 2,285 --
------------ ------------
Total current assets 47,600 63,627
Furniture and equipment, at cost net of accumulated
depreciation of $74,309 (2002) and $13,328 (2003) 97,056 1,273
Intellectual property 32,215 --
------------ ------------
$ 176,871 $ 64,900
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable (Note 2) $ 422,697 $ 431,954
Accrued expenses 576,333 580,549
Accrued payroll taxes (Note 2) 289,761 289,761
Settlement due 18,650 18,650
Notes payable - related parties 27,532 15,978
------------ ------------
Total current liabilities 1,334,973 1,336,892
Commitments and contingencies (Notes 1 and 2)
Stockholders' deficit (Notes 5 and 6):
Convertible Class A preferred stock; $10 face value,
1,000,000 shares authorized:
Series 1, 30,000 shares authorized, 16,001
shares issued and outstanding 160,014 160,014
Series 2, 25,000 shares authorized, 18,542 (2002)
and 20,000 (2003) shares issued and outstanding 185,425 200,000
Common stock, no par value; 499,000,000 shares
authorized, 34,399,581 (2002) and 59,474,581 (2003)
shares issued and outstanding 9,592,587 9,961,807
Accumulated deficit (Including $81,898 accumulated
during the development stage) (10,877,308) (11,327,868)
Deferred compensation -- (27,125)
Notes receivable from sale of stock (218,820) (238,820)
------------ ------------
Total stockholders' deficit (1,158,102) (1,271,992)
------------ ------------
$ 176,871 $ 64,900
============ ============
See accompanying notes.
2
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended September 30, 2002 and 2003
(Unaudited)
2002 2003
------------ ------------
Operating expenses:
Depreciation $ -- $ 200
Rent -- 2,277
Other operating expenses -- 78,469
------------ ------------
Total operating expenses -- 80,946
------------ ------------
Total operating loss -- (80,946)
Other income (expense):
Interest expense (16,360) (4,234)
Interest and miscellaneous income 3,277 3,282
------------ ------------
Total other income (expense) (13,083) (952)
------------ ------------
Net loss from continuing operations (13,083) (81,898)
Net loss from discontinued operations (including loss on disposal
of $102,006 in 2003) (Note 4) (135,309) (118,813)
------------ ------------
Net loss (Note 3) $ (148,392) $ (200,711)
============ ============
Basic and diluted loss per share from continuing operations $ * $ *
============ ============
Basic and diluted loss per share $ 0.01 $ *
============ ============
Weighted average common shares outstanding 28,900,000 54,100,000
============ ============
* Less than $.01 per share
See accompanying notes.
3
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 2002 and 2003
(Unaudited)
2002 2003
------------ ------------
Operating expenses:
Depreciation $ -- $ 200
Rent -- 2,277
Other operating expenses -- 78,469
------------ ------------
Total operating expenses -- 80,946
------------ ------------
Total operating loss -- (80,946)
Other income (expense):
Interest expense (21,229) (13,560)
Interest and miscellaneous income 9,833 9,847
------------ ------------
Total other income (expense) (11,396) (3,713)
------------ ------------
Net loss from continuing operations (11,396) (84,659)
Net loss from discontinued operations (including loss on disposal
of $102,006 in 2003) (Note 4) (277,205) (365,901)
------------ ------------
Net loss (Note 3) $ (288,601) $ (450,560)
============ ============
Basic and diluted loss per share from continuing operations $ * $ *
============ ============
Basic and diluted loss per share $ (0.01) $ (0.01)
============ ============
Weighted average common shares outstanding 25,900,000 46,600,000
============ ============
* Less than $.01 per share
See accompanying notes.
4
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the nine months ended September 30, 2003
(Unaudited)
Series 1 Series 2
preferred stock preferred stock Common stock
------------------- ------------------- ----------------------- Accumulated
Shares Amount Shares Amount Shares Amount deficit
-------- -------- --------- -------- ---------- ---------- -------------
Balance, December 31, 2002 16,001 $ 160,014 18,542 $185,425 34,399,581 $9,592,587 $(10,877,308)
Issuance of Series 2 preferred stock
to reimburse advances made to the
Company (Note 5) -- -- 1,458 14,575 -- -- --
Exercise of stock options (Note 5) -- -- -- -- 3,500,000 65,500 --
Issuance of common stock to employees
and consultants for services (Note 5) -- -- -- -- 21,575,000 286,983 --
Value of stock options granted to consultants
(Note 5) -- -- -- -- -- 16,737 --
Net loss for the nine months ended
September 30, 2003 -- -- -- -- -- -- (450,560)
-------- -------- --------- -------- ---------- ---------- -------------
Balance, September 30, 2003 16,001 $160,014 20,000 $200,000 59,474,581 $9,961,807 $(11,327,868)
======== ======== ========= ======== ========== ========== =============
See accompanying notes.
5
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2002 and 2003
(Unaudited)
2002 2003
---- ----
Cash flows from operating activities:
Net loss $(288,601) $(450,560)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 24,504 21,050
Stock issued and options granted for services 110,146 276,595
Impairment loss -- 102,006
Changes in assets and liabilities:
Interest receivable (9,833) (9,847)
Prepaid expenses 424 2,285
Accounts payable 8,452 9,257
Accrued expenses 95,943 4,216
--------- ---------
Total adjustments 229,636 405,562
--------- ---------
Net cash used in operating activities (58,965) (44,998)
Cash flows from investing activities:
Purchase of property and equipment (200) --
Security deposit 5,216 --
--------- ---------
Net cash provided by investing activities 5,016 --
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 54,930 14,575
Proceeds from exercise of stock options -- 65,500
Note Receivable from sale of stock -- (20,000)
Payment of note payable - related parties -- (11,554)
--------- ---------
Net cash provided by financing activities 54,930 48,521
--------- ---------
Net increase in cash and cash equivalents 981 3,523
Cash and cash equivalents at beginning of period 110 381
--------- ---------
Cash and cash equivalents at end of period $ 1,091 $ 3,904
========= =========
See accompanying notes.
6
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
1. Summary of significant accounting policies
-----------------------------------------------
Basis of presentation:
The accompanying financial statements have been prepared by the Company,
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of December 31, 2002 and September 30, 2003, and the results of
operations and cash flows for the periods ended September 30, 2002 and
2003.
The financial statements have been prepared on the basis of the Company
being a development stage entity, having discontinued several unsuccessful
ventures including: (i) cessation of operations of its subsidiary,
Aggression Sports, Inc.; and (ii) having discontinued operations as a
business development company focused on developing certain bond and other
funding vehicles for growth stage companies; and having embarked on an
entirely new business. The new business consists of developing
opportunities in the traditional and alternative and renewable energy
sectors, which contemplates the formation of capital and management
resources to pursue development of new business opportunities in these
areas. The reclassification of the Company as in its development stage is
intended to more correctly and accurately reflect the current status of the
Company and to properly record results of operations and changes in
financial condition as it pursues its new business plan. As shown in the
accompanying financial statements, the Company has changed its financial
statements to reflect this divergence from its past business endeavors
including losses from the write down of assets and valuation of assets held
for disposal from discontinued operations. The Company has incurred
significant losses and at September 30, 2003, the Company has a working
capital deficit of $1,273,265 and a stockholders' deficit of $1,271,992. In
addition, the Company is delinquent on payment of payroll taxes and
creditor liabilities pursuant to the plan of reorganization entered in
September of 1995. As a result, substantial doubt exists about the
Company's ability to continue to fund future operations using its existing
resources.
On December 19, 2001, a new Series of the Company's Class A Preferred Stock
was designated and the Company initiated a private placement to related
parties of up to 25,000 shares of Series 2 Convertible Preferred Stock, in
a proposed placement of up to $200,000 of such preferred stock at $10 per
share face value. As of September 30, 2003, the Company received proceeds
of $200,000 for the purchase of 20,000 shares of Series 2 Convertible
Preferred Stock from an affiliate. As a development stage company, the
Company continues to rely on infusions of debt and equity capital to fund
operations. The Company relies principally on cash infusions from its
directors and affiliates, deferred compensation and expenses from the
executive officers, and paid a significant amount of personal services,
salaries and incentives in the form of common stock and common stock
options.
The Company has embarked on an entirely new business focusing on acquiring
interests in traditional oil and gas ventures as well as development of
alternative and renewable energy projects. In the oil and gas field, the
Company is looking for conservation oriented projects that offer high
profit, low risk projects including overlooked and by-passed reserves of
natural gas, which will include shut-in and in-field development, stripper
wells, re-completion and re-working projects. The Company is interested in
combining traditional oil and gas investments with projects that advance
and exploit the use of alternative and renewable energy including bio-mass,
co-generation, solar, wind, municipal and organic waste conversion to
bio-fuels, and alternative electrical energy feed stocks. The Company will
seek to make investments for direct participations in the revenue streams
from such projects on a project finance basis, as well as through
acquisition of management, capital, and assets by one or more acquisitions
of going concerns. Also under consideration is creation and operation of
one or more investment funds to engage in energy related, socially
responsible investments. While the Company contemplates focusing all of its
energy and resources on this plan for the indefinite future, it has not
entirely abandoned its vision of assisting promising emerging and high
growth-stage businesses with financial and board level managerial support
with a view of taking such companies public through a registered rights
offering or dividend distribution to the Company's shareholders.
7
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
2. Delinquent amounts payable
-----------------------------
As of September 30, 2003, the Company is delinquent on payments of various
amounts to creditors including payroll taxes and $62,316 to creditors
required to be paid under the terms of its plan of reorganization. Failure
to pay these liabilities could result in liens being filed on the Company's
assets and may result in assets being attached by creditors resulting in
the Company's inability to continue operations.
3. Income taxes
-----------------
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $4,513,000
which expire in years through 2023.
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonably assured.
The Company's net operating losses are restricted as to the amount which
may be utilized in any one year.
4. Discontinued Operations
----------------------------
The Company's decision to pursue projects and investments in traditional
oil and gas as well as the `New' alternative and renewable Energy business
is an entirely new business direction that requires that it take the
decisive step to formally discontinue its former operations. This decision
is reflected by a change in the presentation of the Company's financial
statements to segregate discontinued operating results in previous periods
from continuing operations going forward. The effect in the current three
month period of this reclassification includes a write-down of inventory
and fixed assets held for disposal from discontinued operations of
$102,006, and a loss of $16,807 from discontinued operations. The effect in
the current nine month period of this reclassification includes a
write-down of assets from discontinued operations of $102,006, and a loss
of $263,895 from discontinued operations.
5. Stock transactions
-----------------------
Effective July 15, 2002, the shareholders of the Company approved a 20 for
1 reverse stock split. All common share references in these financial
statements have been revised to reflect the reverse split.
By agreement dated March 6, 2003, the Company engaged a consultant to
provide corporate communications support for a period of six months from
such date for compensation of 3,000,000 common shares and stock options to
purchase up to 4,000,000 common shares for $0.015 per share for a period
expiring 6 months from such date (valued at $16,737). 1,500,000 of these
shares were issued in the first quarter valued at $22,500 and the Company
issued the second 1,500,000 shares during the second quarter valued at
$30,000.
8
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
5. Stock transactions (continued)
-----------------------------------
On January 29, 2003, the Company issued 5,000,000 shares of common stock
valued at $75,000, and granted stock options to purchase 3,000,000 shares
at $0.0165 per share to its officers and directors for compensation for the
first quarter. These options are exercisable beginning 79 days from the
date of issuance and for a period of two years thereafter. During the third
quarter, 2,000,000 of these options were cancelled. Additionally during the
first quarter, 1,000,000 shares of common stock were issued to one
consultant for services performed valued at $15,000. On April 1, 2003, the
Company issued 1,000,000 common shares to the CEO for compensation valued
at $14,000 or $0.014 per share and granted stock options to purchase
3,000,000 common shares at $0.0155 per share to its officers and directors
for compensation in the second quarter. These options are exercisable for a
period beginning September 30, 2003 and expiring on April 1, 2005. During
the third quarter, 1,000,000 of these options were cancelled. On April 3,
2003, the CEO and a consultant exercised 1,000,000 common stock options
each for $0.02 per share for a total of $25,000 in cash and payment of
$15,000 in notes payable to the CEO. Additionally, during the second
quarter, 1,000,000 shares of common stock were issued to one consultant for
services performed valued at $20,000. Also, during the third quarter
4,000,000 stock options granted originally granted in 2001 and 2002 to two
directors and exercisable for $0.02 per share, were cancelled.
On March 7, 2003, the Company issued 200,000 shares of common stock valued
at $7,258 in final settlement of a wage claim.
During the second quarter, the Company inadvertently issued shares and/or
granted stock options which exceeded the number of common shares allocated
to its 2002 Incentive Stock Option Plan by 683,333 shares. Certain of these
include shares reserved for issuance on exercise of outstanding stock
options. During the third quarter, as stated above certain of these options
were cancelled, and a total of 7,000,000 stock options were restricted from
exercise unless and until other options were cancelled, or such options
included under a subsequently authorized incentive stock option plan in
sufficient number to allow their exercise.
On July 21, 2003, Mr. Gerald J. Brandimarte resigned as an officer and
director of the Company, agreeing to cancel his outstanding stock options
to purchase up to 4,000,000 shares of common stock (including 2,000,000
shares cancelled as discussed above.)
On July 27, 2003 the Company issued 1,000,000 common shares for consulting
services to an outside consultant valued at $9,100.
By agreement dated August 4, 2003, the Company engaged a corporate
consultant to provide advisory services, recommendations and to make
introductions to assist the Company in refining and executing its business
plan, including corporate finance, mergers and acquisitions and corporate
visibility. The agreement is for an initial term of 6 months from its
execution date and is renewable for additional periods. The Company paid an
initial consulting fee 7,000,000 common shares valued at $0.01 per share or
$70,000, $47,000 of which was expensed in the current period and the
balance of $23,000 was deferred and expensed during the fourth quarter.
Also, on August 4, 2003, the Company issued 1,000,000 shares of common
stock valued at $10,000 to a consultant for printing, direct mail and
further media services, and issued 500,000 common shares each to its
remaining two directors for compensation valued at $5,000 each.
9
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
5. Stock transactions (continued)
------------------------------------
During the third quarter, the Company received $6,713 from an affiliated
company toward a subscription for Series 2 Preferred Stock and on August
14, 2003 was issued 671 shares of such preferred stock, completing the
$200,000 subscription agreement executed by such affiliate. These shares of
the Series 2 Preferred Stock are convertible into 20,000,000 shares of
common stock.
On August 21, 2003, the board of directors of the Company adopted the 2003
Omnibus Stock Option and Compensation Plan, designating up to 40,000,000
common shares that may be issued thereunder, redesignated 5,000,000 stock
options previously granted to this Plan, and designated 7,000,000 new stock
options exercisable at $0.01 per share, in direct grants to the two
directors, plus set aside 10,000,000 shares issuable under the new 2003
Plan as employee stock purchase rights, priced at $0.01 per share. The
Company also authorized and filed a Registration Statement on Form S-8
covering the shares designated under such Plan. The Company intends to
submit the new 2003 Plan for shareholder approval at its next annual or
special shareholder meeting, during the first or second quarter of 2004.
On September 8, 2003 a consultant exercised an option to purchase 1,000,000
shares of common stock at $0.02 per shares, with a full recourse promissory
note.
On September 25, 2003 the Company appointed three new independent
directors, created Audit, Compensation and Nominating Committees of the
independent directors, and issued stock compensation of 125,000 common
shares valued at $1,375 plus stock options to purchase 250,000 shares of
common stock at $0.011 per share to each new director as compensation for
the fourth quarter of 2003. On September 29, 2003, two of the new directors
exercised their stock options for 250,000 shares each with cash of $2,750
each. The third director exercised his stock option, subsequent to the end
of the third quarter for $2,750.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation costs for the Company's stock option
plans been determined based on the fair value at the grant date for awards
during the period ended September 30, 2003 in accordance with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
2002 2003
---- ----
Net loss - as reported $ (288,601) $ (450,560)
Net loss - pro forma (310,033) (531,713)
Loss per share - as reported (0.01) (0.01)
Loss per share - pro forma (0.01) (0.01)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003, dividend yield of 0%; expected
volatility of 100%, risk-free interest rate of .86% to 1.75%; and expected
life of .17 to 2 years.
10
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
6. Subsequent Events
----------------------
On October 9, 2003, the Company issued 1,168,045 common shares valued at
$12,849 to two professional contractors for legal and bookkeeping services.
On October 15, 2003, the Company, via its compensation committee, renewed
the employment agreement of the Company CEO, authorized resumption of
accrual of annual salary of $180,000 per year in the event of non-payment,
and paid October salary of $15,000 with 1,250,000 common shares.
On November 3, 2003, the Company signed an engagement with a company and an
individual, for shareholder public relations, and product advertising and
electronic media consulting, and paid the shareholder public relations
company 300,000 restricted shares of common stock valued at $3,600 and the
product advertising and electronic media consulting company 400,000 shares
of unrestricted common stock valued at $4,800, for a one month
consulting/advertising program from each beginning November 15, 2003.
On November 4, 2003, the Company extended a consulting agreement entered
into with an unaffiliated party in August, 2003 and paid an additional
4,250,000 shares in consulting fees valued at $59,400.
On November 10, 2003, three directors exercised stock options for a total
of 6,250,000 shares for consideration of $38,250 in cash, and exchange of
800 shares of the Company's Series 2 Convertible Preferred Stock valued at
$40,000.
11
Item 2-Management's Discussion and Analysis
Critical accounting policies
The Company has identified the accounting policies described below as critical
to its business operations and the understanding of the Company's results of
operations. The impact and any associated risks related to these policies on the
Company's business operations is discussed throughout this section where such
policies affect the Company's reported and expected financial results. The
preparation of this Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities of the
Company, revenues and expenses of the Company during the reporting period and
contingent assets and liabilities as of the date of the Company's financial
statements. There can be no assurance that the actual results will not differ
from those estimates.
Stock issuances:
The Company has relied upon the issuance of shares of its common and preferred
stock, and options to purchase its common stock and preferred stock to fund much
of the Company's operations. The following describes the methods used to record
various stock related transactions.
Stock issued for services is valued at the market price of the Company's stock
at the date of grant.
Compensation related to the issuance of stock options to employees and directors
is recorded at the intrinsic value of the options, which is the market price of
the Company's common stock less the exercise price of the option at the
measurement date. The Company's common stock issued to consultants is recorded
at the market price of the Company's common stock at the measurement date. The
measurement date is generally the date the options are fully vested.
Revenue recognition:
The Company has provided management services to companies in the process of
developing new products with no operations. These management fees have not been
recorded as revenue when such services were performed since collectibility was
not reasonably assured.
12
Overview
The Company has determined to discontinue certain operations in favor of
exclusively focusing its resources on developing business opportunities in the
Energy sector as more specifically described herein, and as a result, has
entered the development stage, recasting former operations as discontinued and
has written down certain fixed assets and inventory from discontinued operations
of its Aggression Sports, Inc. subsidiary, as held for disposition as well as
recasting operating results into discontinued operations and continuing
operations, respectively, for the current period. As a result, operating
results, including losses, expenses and revenues attributed to discontinued
operations are stated separately from these same items from continuing
operations. Therefore, since the current and past business operations relate to
entirely different businesses, the financial statements now provide two separate
comparisons of the current and comparable prior period for continuing
operations, and the same for discontinued operations.
During the quarter ended September 30, 2003, the Company filed a Current Report
on Form 8-K reporting events transpiring following the end of the second quarter
reported in its Form 10Q-SB for the period ended June 30, 2003 filed on August
19, 2003. The disclosures and exhibits contained in such current report are
incorporated herein by reference, which information is summarized below, but
qualified in its entirety by the more detailed disclosure contained in such
Current Report.
Effective July 15, 2002, the Company enacted a recapitalization of its
outstanding common shares by effecting a 20 to 1 reverse stock split, done
without changing the total amount of authorized common shares. All references
herein to common stock have been restated to reflect the effect of this reverse
split. The conversion privilege of the designated Series 1 and Series 2
Convertible Preferred Stock has been adjusted to reflect the effect of the
referenced reverse stock split.
During fiscal years 2000 and 2001, the Company operated as a business incubator
for its Arete Outdoors subsidiary and a software development project of a
language teaching software system. Initially funded internally, the Company was
unable to complete follow-on funding for these projects and they were
terminated. Since the second quarter of 2002, the Company has been in the
process of recapitalization and reconfiguration of its business plan and
operations, and has been operating under a business model as a business
development company looking to acquire interests in emerging, high-growth
private companies and develop advanced funding vehicles through its public
company status for the source of capital to acquire and assist these prospective
opportunities. In August 2003, after the resignation of one of the three
officers and board members responsible for executing the capital formation
portion of the business model, the Company realized that the business direction
it had been pursuing was not likely to bear fruit, and began to evaluate the
possibility of engaging in an entirely new business of acquiring direct
participations in traditional oil and gas projects as well as sponsoring and
financing alternative and renewable energy projects. In September the Company
formally took the first steps to engage in this new direction with the
appointment of independent outside directors and formation of an Audit,
Compensation and Nominating Committees, and retention of professionals and
consultants to assist in the formation of capital and development of new
business opportunities. Taking this new direction requires a break from the
remnants of opportunities that have been abandoned or put in suspense, and a
sharp focus on pursuing these parallel paths in a single industry, both in terms
of expense of company resources and in its financial accounting and corporate
governance policies and practices. This has resulted in a reclassification of
the Company to a development stage entity, and in the current period, has
resulted in a substantial write down of assets from discontinued operations.
(See: Note 4 - Financial Statements).
13
Additionally, we continue our efforts to compromise or resolve outstanding
obligations including accrued employee compensation, withholding and other
taxes, operating and trade payables of the Company and its former subsidiary
operations. To date these efforts have been funded by cash advances, infusions
from related parties, and by the issuance of common stock for services. The
Company will be required to rely upon ongoing financial support from these
parties for the foreseeable future.
On September 25, 2003 the Company expanded its board of directors to five
members to appoint three new independent board members, and created three
committees, a Compensation Committee, an Audit Committee and a Nominating
Committee consisting of the three new independent board members. The
Compensation Committee has been authorized to determine officer compensation and
administer and authorize grants under compensation plans. The Audit Committee
sets Company financial and auditing policies, and includes a financial expert as
required under new legislation and SEC rules. The Nominating Committee makes
director nominations for the annual meeting of shareholders. The two current
board members have authority to renew or defer renewal of the terms of the
independent directors in their discretion prior the end of each successive term.
The board appointed the three new board members for contemporaneous three month
terms coterminous with each fiscal quarter, to be compensated on a quarterly
basis. The Company has determined also to actively recruit senior, highly
qualified and high profile individuals involved in the energy sector to serve as
advisory board member, to assist us locating and evaluating deals for funding,
and in making other introductions to potential investment partners and service
providers.
The Company plans to continue to take aggressive measures to bring in profitable
revenue producing projects in traditional and the `New Energy' area of
alternative and renewable energy while remaining extremely frugal with our cash
and other resources. We intend to avoid expansion of overhead in favor of
outsourcing professional services, recruiting professionally qualified and high
profile experienced and well connected advisory board members in traditional and
alternative energy. We also intend to ensure that transactional costs of deals
in which the Company engages are shared by the various parties to such deals,
and/or funded from proceeds of third party financings or from revenue streams.
The Company's CEO continues to devote full time to the business of the Company
accessing the expertise of the board members and outside consultants. In order
to compensate the CEO other officers and these consultants without revenue or
equity capital available to the Company has endeavored to provide incentives
through direct issuances of common stock and granting of stock options. Aided by
its drastic reductions in overhead, the Company has been nominally successful in
raising cash for operating expenses with proceeds of exercise of stock options,
cash advances and contributions by affiliates and insiders. None-the-less the
lack of liquidity in the public market for the Company's common stock has
restricted the possibilities for raising equity capital, and the lack of
adequate working capital for business development, has impeded the Company's
progress in executing its new business plan. While management has been very
active in its business development activities of late, there are currently no
specific projects or funding opportunities currently under contract, and no
assurances can be made that the current projects will result in any significant
revenue for operations in the immediate future.
14
Financial Condition
As stated above, beginning in the current quarter, we have principally written
down Aggression Sports, Inc.'s fixed assets and inventory and molds held for
disposal from discontinued operations either entirely or by a percentage that we
have estimated would reasonably be recovered from liquidation or by selling the
entire business opportunity outright to a third party. Total assets as
of September 30, 2003 were $64,900 after a write-down of $102,006 of fixed
assets, inventory, intellectual property and molds held for disposal relative to
discontinued operations in the current quarter. This compares to total assets of
$176,871 as of the fiscal year ended December 31, 2002. Total Liabilities were
1,336,892 as of September 30, 2003 as compared to $1,334,973 as of December 31,
2002. Accounts payable and accrued expenses at September 30, 2003 were
$1,302,264 as compared to $1,288,791 at December 31, 2002. Together with
operating losses from continuing operations of $84,659, the net loss from
discontinued operations of $365,901 (including loss on disposal of assets of
$102,006) resulted in a net loss of $450,560 contributing to the accumulated
deficit as of September 30, 2003 of $11,327,868, as compared to an accumulated
deficit as of December 31, 2002 of 10,877,308. (See: Note 4 to Financial
Statements.)
The Company's subsidiary, Global Direct Marketing Services, Inc., which is now
inactive, has left an obligation of trade payables of $87,625 and unpaid 1999
payroll taxes of $58,230 remaining from its printing and direct mail advertising
business. The Company owes approximately $231,531 in unpaid Federal payroll
taxes for calendar years 1995 through 1997, 2000 and 2001. Further the Company
owes $62,316 to creditors under its Plan of Reorganization confirmed in
September 1995. (See: Note 2 to Financial Statements.)
During the period ended September 30, 2003, the Company continued to rely upon
infusions of cash from exercise of stock options, loans and cash advances by
officers, directors and affiliates of the Company. During the third quarter of
2003, $6,713 was received in partial payment of a subscription agreement for
purchase of Series 2 Preferred Stock, and $25,500 was received from exercise of
stock options. The proceeds were used for overhead, payment of corporate
obligations, legal fees and accounting expenses for corporate reporting. As of
September 30, 2003, executive salaries and bonuses of $518,873 were accrued and
unpaid, and the Company had $218,820 in notes receivable for stock sales from
former management members together with notes receivable for exercise of a stock
option of $20,000 from a third party, for a total of $238,820.
Results of operations
As stated above, the Company discontinued former operations and set about
pursuing a new business plan in the energy industry as a development stage
entity and reported results of continuing operations and of discontinued
operations separately for the current period and the comparable period of fiscal
2002.
15
The Company had no revenues from operations in during the three month period
ended September 30, 2003, nor during the comparable period ended September 30,
2002. Net loss from continuing operations for the three month period ended
September 30, 2003 was $81,898 as compared to a net loss from continuing
operations of $13,083 for the three month period ended September 30, 2002. [The
loss from continuing operations for 2002 was solely the result of interest
accrual on notes payable and interest earned on notes receivable on investments,
a majority of which continues to be outstanding.] Net loss from discontinued
operations during the three month period ended September 30, 2003 of $118,813
included a write down for loss on disposal of assets relating to discontinued
operations of $102,006. The net loss from discontinued operations as reclassed
from the three month period ended September 30, 2002 was $135,309. This resulted
in an aggregate net loss for the three month period ended September 30, 2003 of
$200,711 compared to a net loss for the comparable period in fiscal year 2003 of
$148,392.
The Company had no revenues from operations in during the nine month period
ended September 30, 2003, and only $379 during the comparable period ended
September 30, 2002. Net loss from continuing operations for the nine month
period ended September 30, 2003 were $84,659 as compared to a net loss from
continuing operations of $11,396 for the nine month period ended September 30,
2002. [The loss from continuing operations for 2002 was solely the result of
interest accrual on notes payable and interest earned on notes receivable on
investments, a majority of which continues to be outstanding.] Net loss from
discontinued operations during the nine month period ended September 30, 2003 of
$365,901 included a write down for loss on disposal of assets relating to
discontinued operations of $102,006. The net loss from discontinued operations
as reclassed from the nine month period ended September 30, 2002 was $277,205.
This resulted in an aggregate net loss for the nine month period ended September
30, 2003 of $450,560 compared to a net loss for the comparable period in fiscal
year 2002 of $288,601.
In January 2003, the Company moved to an executive suite on a month to month
basis reducing its rent to $1,000 per month. The Company continues to rent
storage space for file storage, furniture and excess equipment as well as its
Arete Outdoors inventory for approximately $125 per month.
As stated above, we will continue to operate the Company on an austere program
of minimum overhead, while obtaining access to expertise in the areas we are
pursuing with the use of our common stock and common stock options as incentives
during the development stage of our new business model. Further as opportunities
for participation in profitable revenue producing projects come forward, we
intend that consultants and advisors will be offered compensation from revenues
or interests, direct participations, royalties or other incentives from the
specific projects to which they contribute. While reducing the amount of
variable costs, there is almost no way to reduce or offset our fixed expenses
related to office expense, legal, accounting, transfer agent fees, Securities
Act reporting, corporate governance, and shareholder communications. Our future
expectation is that monthly operating expenses will remain as low as possible
until new opportunities are initiated, of which there can be no assurance, in
which event, the operating costs of the Company may increase relative to the
need for administrative and executive staff and overhead to provide support for
these new business activities.
16
Liquidity and Capital Resources
The Company had a working capital deficit as of September 30, 2003 of
$1,273,265. This compares to a working capital deficit of $1,287,373 as of
December 31, 2002. During the quarter ended September 30, 2003 an aggregate of
11,875,000 shares of common stock were issued for aggregate consideration of
$128,725 (for an average of $0.0108 per share) and the Company issued 671 shares
of Series 2 Convertible Preferred Stock valued at face value of $6,713.
The Company had a stockholder's deficit at September 30, 2003 of $1,271,992.
This is compared to stockholder's deficit at December 31, 2002 of $1,158,102.
The stockholder's deficit increased due to the Company operating at a loss,
offset by the exercise of stock options for cash, payment of notes payable to
insiders, and the issuance of preferred stock for cash.
At September 30, 2003, the Company had no material commitments for capital
expenditures.
Due to its recent liquidity issues, the Company has defaulted on several short
term obligations including for its operating overhead, trade payables, and state
and federal employment taxes, resulting in tax liens being imposed on the
Company's assets, which will have to be resolved with an infusion of new
capital, of which no assurances can be made.
Management believes that the Company will experience significant difficulty
raising significant additional equity capital or attracting viable acquisition
candidates until these matters have been resolved and the Company has eliminated
a substantial amount of its outstanding debt.
During the second quarter of 2002, the Company reduced the number of outstanding
common shares to allow it to raise equity capital and to effect conversion and
exercise of outstanding common stock options and conversion rights of preferred
stock which has been reserved for issuance to insiders in exchange for their
accrued cash advances, and for issuance in a private placement of up to $200,000
in Series 2 Convertible Preferred stock, which the Company completed on August
14, 2003 and had 20,000 outstanding shares of Series 2 Convertible Preferred.
The Company may continue to be required to issue further stock to pay
executives, consultants and other employees, which may have a continuing
dilutive effect on other shareholders of the Company. Failure of the Company to
acquire additional capital in the form of either debt or equity capital will
most likely impair the ability of the company to meet its obligations in the
near-term.
17
Subsidiaries/Employees
Arete Industries, Inc. has its CEO on a full time basis and its second director
who serves part-time as a corporate officer. A third executive officer and
director resigned during the current quarter. The Company appointed three
independent directors during the third quarter to serve on the Company's newly
formed Audit, Compensation and Nominating Committees of the Board of Directors.
The Company employs independent contractors for special services including
accounting services, shareholder relations, marketing and business plan
development, and business development, merger and acquisition services. The
Company's subsidiary, Aggression Sports, Inc. presently has no employees other
than its acting president, the Company's current CEO. The CEO operates and
manages both entities. As described elsewhere herein, the CEO and the other two
directors did receive compensation in the form of stock and Incentive Stock
Options during the first three quarters of fiscal year 2003. Subsequent to the
end of the third quarter 2003, the Compensation Committee approved renewal of
the CEO's employment agreement, setting his annual salary at $180,000 and
approving accrual of such salary commencing the fourth quarter of 2003 forward
until further notice.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the Period ended September 30, 2003, there were no material pending legal
proceedings initiated by or against the Company or any of its officers,
directors or subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31.1 Certification of CEO and CFO Pursuant to 18 U.S.C, Section 7241,
as adopted and Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of CEO and CFO Pursuant to 18 U.S.C, Section 1350,
as adopted and Section 906 of the Sarbanes-Oxley Act of 2002.
A Current Report on Form 8-K was filed on September 4, 2003 disclosing in Item 5
thereof, Other Information, certain material events since the date of the
Company's Second Quarterly Report on Form 10-QSB for the period ended June 30,
2003, including certain cancellations and suspensions from exercise of certain
outstanding stock options, and disclosing the adoption of, and a summary of
material provisions and grants made, under the Company's 2003 Omnibus Stock
Option and Incentive Plan, including certain designated grants to board members,
including the re-grant of 5,000,000 stock options previously granted and
reserved under the Company's former plan for 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARETE INDUSTRIES, INC.
Date: November 19, 2003
By: /s/ Thomas P. Raabe, CEO/ Interim CFO
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Thomas P. Raabe, CEO/ Interim CFO
Interim Principal Financial and Accounting Officer
20