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: March 31, 2005
--------------
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
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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 May 11, 2005, Registrant had 223,978,438 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 December 31, 2004
and March 31, 2005 (unaudited) 2
Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2005
(unaudited) 3
Consolidated Statement of Stockholders' Deficit
for the Three Months Ended March 31, 2005
(unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2005
(unaudited) 5-6
Notes to Unaudited Consolidated Financial
Statements at March 31, 2005 7-10
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Part II - Other Information 17
Signatures 18
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEET
December 31, 2004 and March 31, 2005
(Unaudited)
ASSETS
2004 2005
------------ ------------
Current assets:
Cash and cash equivalents $ 121 $ 881
Prepaid expenses 3,000 51,000
------------ ------------
Total current assets 3,121 51,881
Furniture and equipment, at cost net of accumulated
depreciation of $15,704 (2004) and $16,296 (2005) 3,969 3,377
------------ ------------
$ 7,090 $ 55,258
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable (Note 2) $ 262,019 $ 269,815
Accrued expenses 368,508 368,908
Accrued payroll taxes (Note 2) 289,363 289,363
Settlement due 18,650 18,650
Notes payable - related parties 3,437 61,187
------------ ------------
Total current liabilities 941,977 1,007,923
Commitments and contingencies (Notes 1, and 2)
Stockholders' deficit (Notes 5 and 6):
Common stock, no par value; 499,000,000 shares
authorized, 183,045,768 (2004) and 201,740,632 (2005)
shares issued and outstanding 11,811,498 11,904,440
Accumulated deficit (including $1,484,344 accumulated
during the development stage) (12,523,565) (12,634,285)
Notes receivable from sale of stock (222,820) (222,820)
------------ ------------
Total stockholders' deficit (934,887) (952,665)
------------ ------------
$ 7,090 $ 55,258
============ ============
See accompanying notes.
1
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 2004 and 2005
and from inception (August 1, 2003 to March 31, 2005)
(unaudited)
Inception to
2004 2005 March 31, 2005
------------- ------------- -------------
Operating expenses:
Depreciation $ 372 $ 592 $ 3,168
Rent 3,125 3,170 25,748
Other operating expenses 531,976 106,271 1,487,411
------------- ------------- -------------
Total operating expenses 535,473 110,033 1,516,327
------------- ------------- -------------
Total operating loss (535,473) (110,033) (1,516,327)
Other income (expense):
Loss on Sale of Investments -- -- (10,502)
Interest expense (4,192) (687) (37,098)
Interest and miscellaneous income 3,282 -- 13,129
------------- ------------- -------------
Total other income (expense) (910) (687) (34,471)
------------- ------------- -------------
Net loss from continuing operations (536,383) (110,720) (1,550,798)
Extinguishment of Debt (Note 2) 31,167 -- 54,054
------------- ------------- -------------
Net loss (Note 3) $ (505,216) $ (110,720) $ (1,496,744)
============= ============= =============
Basic and diluted loss per share from continuing operations $ (0.01) $ * $ (0.01)
============= ============= =============
Basic and diluted loss per share $ * $ * $ (0.01)
============= ============= =============
Weighted average common shares outstanding 103,400,000 190,600,000 140,000,000
============= ============= =============
* Less than $.01 per share
See accompanying notes.
2
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the three months ended March 31, 2005
(Unaudited)
Common stock
--------------------------- Accumulated
Shares Amount deficit
------------ ------------ ------------
Balance, December 31, 2004 183,045,768 $ 11,811,498 $(12,523,565)
Exercise of stock options (Note 5) 1,000,000 6,000 --
Issuance of common stock to employees
and consultants for services (Note 5) 16,724,864 81,592 --
Purchase of stock by directors in connection
with granted purchase rights 970,000 5,350 --
Net loss for the three months ended
March 31, 2005 -- -- (110,720)
------------ ------------ ------------
Balance, March 31, 2005 201,740,632 $ 11,904,440 $(12,634,285)
============ ============ ============
See accompanying notes.
3
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2004 and 2005
and from inception (August 1, 2003 to March 31, 2005)
(Unaudited)
Inception to
2004 2005 March 31, 2005
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (505,216) $ (110,720) $(1,496,744)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 372 592 3,168
Stock and options issued for services and
interest on notes 518,810 81,592 1,283,684
Changes in assets and liabilities:
Interest receivable (3,283) -- 44,325
Inventory -- -- 25,243
Prepaid expenses -- (48,000) (51,000)
Accounts payable (44,623) 7,796 (45,455)
Accrued expenses (228,430) 400 (207,990)
----------- ----------- -----------
Total adjustments 242,846 42,380 1,051,975
----------- ----------- -----------
Net cash used in operating activities (262,370) (68,340) (444,769)
Cash flows from investing activities:
Purchase of property and equipment (5,071) -- (5,072)
Purchase of Stock Investments (55,268) -- --
----------- ----------- -----------
Net cash provided (used) by investing activities (60,339) -- (5,072)
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 6,713
Proceeds from issuance of common stock -- 5,350 15,350
Proceeds from exercise of stock options 71,000 6,000 131,250
Note Receivable from sale of stock 15,000 -- 16,000
Payment of accrued wages 232,250 -- 232,250
Payment of note payable - related parties (11,573) 57,750 49,041
----------- ----------- -----------
Net cash provided by financing activities 306,677 69,100 450,604
----------- ----------- -----------
Net increase in cash and cash equivalents (16,032) 760 763
Cash and cash equivalents at beginning of period 25,345 121 118
----------- ----------- -----------
Cash and cash equivalents at end of period $ 9,313 $ 881 $ 881
=========== =========== ===========
(Continued on following page)
See accompanying notes.
4
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended March 31, 2004 and 2005
and from inception (August 1, 2003 to March 31, 2005)
(Unaudited)
(Continued from preceding page)
Inception to
Supplemental disclosure of cash flow information: 2004 2005 March 31, 2005
---- ---- --------------
Interest paid during the period $ - $ - $ -
==== ==== ===
Income taxes paid during the period $ - $ - $ -
==== ==== ===
Supplemental disclosure of non-cash investing and financing activities:
During the quarter ended March 31, 2004, 4,050 shares of Series 2 preferred
stock were used to exercise common stock options for the purchase of 4,050,000
common shares and 16,001 shares of Series 1 preferred stock were used to
exercise common stock options for the purchase of 8,000,700 common shares. In
addition wages to officers and directors and fees to consultants of $496,562
were paid by the issuance of common stock and the value assigned to stock
options issued was $22,248.
During the quarter ended March 31, 2004, 25,000,000 shares were issued to a
director as payment of accrued wages for $232,250, repurchase of a future
interest in stock distributions for $75,000, and payment for services for
$172,750.
During the quarter ended March 31, 2005 wages to officers and directors and fees
to consultants of $81,592 were paid by the issuance of common stock.
See accompanying notes.
5
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
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, 2004 and March 31, 2005, and the results of
operations and cash flows for the periods ended March 31, 2004 and 2005.
The Company is currently considered to be in the development stage as more
fully defined in Financial Accounting Standards Board Statement No. 7. The
Company has not generated any revenues from its activities in the oil and
gas business.
The Company formed Global Direct Marketing Services in October 1998 as an
operating subsidiary for its then ongoing operations as a direct mail
cooperative coupon advertising business. Certain assets and liabilities of
Arete were contributed to Global. The consolidated financial statements of
the Company include the accounts of Arete for the entire period, the
accounts of Global since inception, and Aggression Sports, Inc., a majority
owned subsidiary, now inactive, since October 1, 2001. All intercompany
accounts have been eliminated in the consolidation. All operations prior to
August 1, 2003 have been reclassified as discontinued.
Since August 1, 2003, the Company's financial statements have been prepared
on the basis of the Company being a development stage entity, having
discontinued several unsuccessful ventures including cessation of
operations of its subsidiary, Aggression Sports, Inc., 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 of developing opportunities in the
traditional and alternative and renewable energy sectors, and which
contemplates the formation of capital and management resources to pursue
development of new business opportunities. The recast of the Company as
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 recast its
financial statements to reflect this divergence from its past business
endeavors including losses from write down of assets and valuation of
assets held for disposal from discontinued operations. (See: Note 4 -
Discontinued Operations)
The Company has incurred significant losses and at March 31, 2005, the
Company has a working capital deficit of $ 956,042 and a stockholders'
deficit of $ 952,665. In addition, the Company is delinquent on payment of
payroll taxes and creditor liabilities. As a result, substantial doubt
exists about the Company's ability to continue to fund future operations
using its existing resources.
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.
6
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
2. Delinquent amounts payable
-------------------------------
As of March 31, 2005, the Company is delinquent on payments of various
amounts to creditors including payroll taxes. 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 $ 5,767,000
which expire in years through 2024.
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 required that it take the
decisive step to formally discontinue its former operations beginning
August 1, 2003. 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. There
is no effect in the current three month period of this reclassification.
During March 2000, the Company abandoned the direct mail and coupon
business. At March 31, 2005, the remaining liabilities of this division
were $58,230 in unpaid payroll taxes. As of the year ended December 31,
2004, and the quarter ended March 31, 2005, $54,054 and $ 0 respectively,
of debt were reclassified as extinguished. During 2003, the Company
abandoned the development of Aggression Sports Inc., a subsidiary. At March
31, 2005, the remaining liabilities of this division were $91,077 in trade
payables and $79,351 in unpaid payroll taxes. During the current quarter,
the company resolved to dissolve its two subsidiaries and has initiated
procedures to close out all inter-company accounts and consolidating
accounts related to these subsidiaries.
5. Stock transactions
During the quarter ended March 31, 2005, the Company issued a total of
16,724,864 common shares for compensation of officers, directors and
consultants, valued at an aggregate of $81,592, and issued 1,970,000 shares
on exercise of compensatory stock options and compensatory stock purchase
rights for proceeds to the Company of $11,350. Also, the Company made new
grants of stock options of 2,500,000 common shares to the directors
exercisable at $0.008 per share for up to $20,000.
7
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
5. Stock transactions (continued)
On March, 16, 2005, the Company and the CEO agreed to settle all consulting
services accrued through March 30, 2005 with a Convertible Promissory Note
for $60,000 with 8% interest from March 30, 2005 due on demand after July
1, 2005. The Promissory Note converts into 10,000,000 registered common
shares at $0.006 per common share. In addition, in consideration for the
payment of 10,000,000 registered common shares valued at $48,000,
representing compensation through June 30, 2005, the CEO agreed to
terminate his consulting agreement and negotiate quarterly compensation
with the compensation committee of the board each quarter commencing July
1, 2005.
Also, during the first quarter of 2005, 1,000,000 stock options granted to
the CEO in prior periods expired, and 2,000,000 stock options granted to a
consultant also expired.
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 quarter ended March 31, 2005 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:
2004 2005
---------- ----------
Net loss - as reported $(505,216) $(110,720)
Net loss - pro forma (505,216) (121,250)
Loss per share - as reported * *
Loss per share - pro forma * *
* - Less than $0.01 per share
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 2004 and 2005, dividend yield of 0%;
expected volatility of 100%, risk-free interest rate of 1.45% to 1.75%; and
expected life of .5 to 2 years.
8
ARETE INDUSTRIES, INC. AND SUBSIDIARIES
(A Development Stage Entity)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
6. Subsequent Events
Following the first quarter ended March 31, 2005, the Company issued total
compensation to certain directors and consultants of 13,943,571 registered
common shares valued at $55,390, and received an aggregate of $34,577 on
exercise of common stock options and special stock purchase rights for a
total of 8,294,235 registered common shares. Additionally, the company
granted compensation stock options to directors and officers of 7,500,000,
expiring 2 years from the date of grant, exercisable at $0.004 per share
for an aggregate of $30,000, of which 7,000,000 were exercised in the same
period, and 3,000,000 stock options to three directors, expiring 1 year
from the date of grant exercisable at $0.0035 per share for an aggregate of
$10,500.
During the fourth quarter of fiscal year ended December 31, 2004, the
Company formed a new subsidiary to pursue acquisitions of producing oil and
gas properties that were presented by one of the Company's directors. In
the first quarter of 2005, the Company began pursuing acquisition of a
specific property for this subsidiary and authorized three of its directors
to become officers and directors of the new subsidiary company to begin due
diligence and negotiations for acquisition of this prospect. Should this
prospect prove viable after full investigation, it is the Company's intent
to complete capitalization of the subsidiary and upon completion of an
acquisition, of which there is no assurance, the Company intends to
dividend a portion of its equity ownership in the subsidiary to the
Company's shareholders.
In April, 2005, the Company granted two directors stock compensation in the
amount of 2,500,000 common shares each as well as stock options to purchase
2,500,000 shares of common stock for $0.004 per share for their services in
bringing this prospect into the Company and completing the deal. On May 4,
2005, the Company's subsidiary, issued a total of 700,000 shares of its
common stock as founders shares of which 550,000 shares were issued to the
Company, or 78.6% and 150,000 common shares, or 21.4% of the total amount
issued, were issued in equal portions to each of the subsidiary's three
directors (who are also directors of the Company.)
As of the date of this report, the Company's subsidiary has not signed a
definitive purchase agreement nor has obtained any firm commitment for debt
or equity financing to pay the purchase price, although management believes
that execution of a definitive purchase agreement is immanent. Even if a
definitive purchase agreement is signed, the subsidiary must successfully
raise an amount of debt and equity capital to acquire the prospect, which
is subject to a rigorous time line, and there remain other components of
the deal to be completed prior to the anticipated closing date, therefore
there can be no assurances that this deal will be completed within the
anticipated time line of on or about June 1, 2005, during any extension
thereof or, if at all.
9
Item 2-Management's Discussion and Analysis/Plan of Operation
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
Company's common stock options issued to consultants are recorded at the fair
value of the Company's options computed using the Black-Scholes Model.
Plan of Operation.
In the third quarter of 2003 we discontinued our previous business development
activities to focus on traditional and alternative energy. As a result, we
entered the development stage. This required us to recast our former operations
as discontinued, write down certain fixed assets and inventory from discontinued
operations, and, as well, recast operating results into discontinued operations
and continuing operations, respectively, beginning August 1, 2003 and continuing
through 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. (See: Note 4 - Financial Statements).
10
During the Third Quarter of 2003, we began to pursue acquiring direct
participations in traditional oil and gas projects as well as sponsoring and
financing alternative and renewable energy projects. This included pursuing
lower-risk projects involving overlooked and by-passed reserves of domestic oil
and gas, and seeking funding through professional equity funds looking
specifically for such opportunities. Since inception of our new development
stage, we have reviewed numerous prospects and pursued funding and acquisition
efforts for two specific deals through an oil and gas investment banking
consultant which we contracted in June of 2004. Ultimately, the first deal was
terminated without cause by the seller of that project in April of 2004, and
after significant evaluation and due diligence on our part, the second group of
prospects initiated in May of 2004 did not qualify for financing, and in the
first quarter of 2005, we terminated our negotiations with the seller group for
this prospect. In the current period, we decided to pursue a much smaller and
ostensibly easier prospect to acquire and fund, which included a number of
producing shallow wells in Colorado with several potential re-entry and in-field
development wells for total cost of under $3 Million. That deal is currently
being pursued through a new subsidiary of the Company that will be operated by
three of our outside directors. We believe that this prospect can be purchased
potentially with debt against its existing production, and/or with one or more
tranches of equity funding to pay the purchase price and pursue drilling and
completion operations on the new and re-entry wells. If successful, this
prospect will cover operating costs of a small operation and possibly additional
investment capital for new prospects. Additionally, the CEO intends to continue
to seek out oil and gas re-work and re-entry prospects through a second
subsidiary company to be formed, looking to acquire funding through our
investment banking consultant's contacts and/or private investors through a
private placement through a joint venture or limited liability entity.
We have encountered numerous challenges to date ranging from competition for
prospects from parties with better staffing, track records and financing to the
extraordinary costs and time involved in developing and validating data about
prospective acquisition targets. The costs and time involved in pursuing this
business plan are substantial and are compounded by our lack of qualified
personnel, and the expense involved in maintaining the Company's compliance
responsibilities under the federal securities laws. We have decided to address
these challenges by pursuing different acquisition and financing strategies
through separate corporate subsidiaries in order to attract different oil and
gas prospects and funding sources. Therefore, until the Company has achieved
capital and revenue sufficient to purchase or option these prospects, it cannot
be assumed that if the Company locates a viable candidate for acquisition, that
it will be able to raise capital to make the acquisition, or for that matter
will be able to control the prospect for sufficient time to complete the
financing application process.
Due to the fact that the Company presently relies exclusively upon contributions
of time and operating cash from its directors and officers to pursue its
business plan, this has been increasingly taxing on these individuals, and has
resulted in substantial dilution to the Company's shareholders. It has become
the chief priority of management to achieve cash flow sufficient to cover our
overhead as soon as possible, which is largely the motivation to pursue a much
smaller initial project, through this new subsidiary, as described above. If we
are successful in the first and subsequent acquisitions through this or any
further subsidiary we form to acquire deals made through the efforts of our CEO,
directors or others, we intend to give our shareholders a direct interest in
these ventures through a registered dividend spin-off transaction designed to
allow these subsidiaries to pursue different ventures independently of the
company.
11
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.
While we are very optimistic about our progress in developing these projects and
confident in our overall approach to entering the oil and gas business, no
assurances can be made that the current projects will result in any significant
revenue for operations in the immediate future.
Financial Condition
In prior periods, we wrote off Aggression Sports, Inc.'s fixed assets and
inventory and molds held for disposal from discontinued. Additionally, we
continue to reduce certain amounts payable from discontinued operations as
extinguishment of debt, through the passage of statutes of limitation. We expect
future write-downs and reclassifications from discontinued operations and
extinguishment of debt to be nominal and incremental in nature.
As of the end of the quarter ended March 31, 2005, the Company had $55,258 in
total assets. This compares to total assets of $7,090 as of the fiscal year
ended December 31, 2004. Total liabilities were $1,007,923 as of March 31, 2005
compared to $941,977 as of the fiscal year ended December 31, 2004. Accounts
payable and accrued expenses at March 31, 2005 were $928,086 as compared to
$919,890 at December 31, 2004. During the quarter ended March 31, 2005, total
liabilities were increased by $65,946. Operating losses from continuing
operations were $110,720, contributing to the accumulated deficit as of March
31, 2005 of $12,634,285, as compared to an accumulated deficit as of December
31, 2004 of $12,523,565. (See: Note 1 to Financial Statements.)
The Company's subsidiary, Global Direct Marketing Services, Inc., which is now
inactive, has left an obligation of $58,230 in unpaid payroll taxes. During
2003, the Company abandoned the development of the Aggression Sports, Inc.
subsidiary. At March 31, 2005, the remaining liabilities of this subsidiary were
$91,077 in trade payables and $79,351 in unpaid payroll taxes. As of March 31,
2005, the consolidated entity owes $289,363 in unpaid payroll taxes of which
$151,782 applies specifically to the parent company for periods through the
fourth quarter of 2001. (See: Notes 1 and 2 to Financial Statements.)
During the quarter ended March 31, 2005, the Company continued to rely upon
infusions of cash from exercise of stock options by officers, directors and
consultants, and upon payment of compensation to officers, directors and
consultants in the form of common stock and common stock options. During the
quarter ended March 31, 2005, the Company paid $70,100 in compensation to
officers and directors, paid $10,492 to consultants and professionals with
16,724,864 shares of common stock.
As of March 31, 2005, executive salaries and bonuses of $286,624 were accrued
and unpaid, and the Company had $218,820 in notes receivable for stock sales
from former management members together with a note receivable for exercise of a
stock option of $4,000 from a third party for a total of $222,820.
12
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
2004.
The Company had no revenues from operations during the quarter ended March 31,
2005, and no revenues during the comparable period ended March 31, 2004. Net
loss from continuing operations for the quarter ended March 31, 2005 was
$110,720 as compared to a net loss from continuing operations of $536,383 for
the quarter ended March 31, 2004. The net loss during the quarter ended March
31, 2004 was offset by $31,167 in extinguishment of debt resulting in an
aggregate loss of $505,216. The net loss for the quarter ended March 31, 2005
was $110,720 as compared to a net loss for the comparable period in fiscal year
2004 of $505,216.
The Company occupies an executive suite on a month to month basis for monthly
rent of $1,000 per month. The Company rents space for file storage, furniture
and excess equipment as well as its Arete Outdoors inventory for $125 per month.
As stated above, we will continue to operate the Company on an austere program
of minimum overhead, while utilizing skills of its board members, independent
contractors as administrative staff and individual independent contractors with
expertise in business development, capital acquisition, corporate visibility,
oil and gas development, geology and operations 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.
Liquidity and Capital Resources
The Company had a working capital deficit as of March 31, 2005 of $956,042. This
compares to a working capital deficit of $938,856 as of December 31, 2004.
During the quarter ended March 31, 2005 an aggregate of 18,594,864 shares of
common stock were issued for aggregate consideration of $92,942 (for an average
of $0.005 per share).
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The Company had a stockholder's deficit at March 31, 2005 of $952,665. This is
compared to stockholder's deficit at December 31, 2004 of $934,887. The
stockholder's deficit increased due the Company's operating loss offset by the
payment of services with the issuance of stock and the exercise of stock options
for cash.
At March 31, 2005, the Company had no material commitments for capital
expenditures.
Due to its ongoing 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
internally raising significant additional equity capital or debt until these
matters have been resolved and the Company has eliminated a substantial amount
of its outstanding debt and/or achieves operating revenue from its proposed oil
and gas operations. The Company looks to earn management fees through its newly
formed subsidiary and revenue from proposed oil and gas development activities
that it can earn-in on successful financing and commencement of operations, of
which there is no assurance.
Unless and until it achieves success in its proposed activities, of which there
is no assurance, 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 or
revenue from proposed operations will most likely impair the ability of the
Company to meet its obligations in the near-term.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the Quarter ended March 31, 2005, 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.
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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: May 16, 2005
By: /s/ Thomas P. Raabe, CEO/ Interim CFO
--------------------------------------------------
Thomas P. Raabe, Principal Executive Officer
Interim Principal Financial and Accounting Officer
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