-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0zEljHplaONFgGDYgmXls6CiTOHgABzYQWn+SLEQnb8GZ9/T3VTnwBUoyCM0Pp/ TibRfDTXZYmMPUlEOZelHA== 0001079974-06-000202.txt : 20060526 0001079974-06-000202.hdr.sgml : 20060526 20060525193215 ACCESSION NUMBER: 0001079974-06-000202 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060526 DATE AS OF CHANGE: 20060525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARETE INDUSTRIES INC CENTRAL INDEX KEY: 0000820901 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841063149 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-16820-D FILM NUMBER: 06868457 BUSINESS ADDRESS: STREET 1: 7260 OSCEOLA STREET CITY: WESTMINSTER STATE: CO ZIP: 80030 BUSINESS PHONE: 303-652-3113 MAIL ADDRESS: STREET 1: 7260 OSCEOLA STREET CITY: WESTMINSTER STATE: CO ZIP: 80030 FORMER COMPANY: FORMER CONFORMED NAME: TRAVIS INDUSTRIES INC DATE OF NAME CHANGE: 19930614 FORMER COMPANY: FORMER CONFORMED NAME: TRAVIS INVESTMENTS INC DATE OF NAME CHANGE: 19890427 10QSB 1 arete10qsb_5252006.txt QUARTERLY REPORT FOR PERIOD ENDED 3/31/2006 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, 2006 [] 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.) P. O. Box 141 Westminster, CO 80036 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (303) 652-3113 --------------------------------------------------- (Registrant's telephone number, including area code) 7102 La Vista Place, Suite 100, Niwot, CO 80503 --------------------------------------------------- (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. [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 22, 2006, Registrant had 282,655,754 shares of common stock, No par value, outstanding. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [X] No [] Transitional Small Business Disclosure Format (check one): YES [] NO [X] ARETE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. -------- Consolidated Financial Statements: Index to Consolidated Financial Statements 1 Consolidated Balance Sheet at December 31, 2005 and March 31, 2006 (unaudited) 2 Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2006 (unaudited) 3 Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 2006 (unaudited) 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (unaudited) 5-6 Notes to Unaudited Consolidated Financial Statements at March 31, 2006 7-10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II - Other Information 16 Signatures 17 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED BALANCE SHEET December 31, 2005 and March 31, 2006 (Unaudited) 2005 2006 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 224 $ 6,522 Prepaid expenses 3,000 3,000 ------------ ------------ Total current assets 3,224 9,522 Furniture and equipment, at cost net of accumulated depreciation of $17,747 (2005) and $18,291 (2006) 1,925 1,381 ------------ ------------ $ 5,149 $ 10,903 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 185,202 $ 87,666 Accrued expenses 366,464 366,425 Accrued payroll taxes 289,363 289,363 Settlement due 18,650 18,650 Notes payable - related parties 31,704 40,870 ------------ ------------ Total current liabilities 891,383 802,974 ------------ ------------ Minority interest liability -- (503) ------------ ------------ Stockholders' deficit (Notes 5 and 6): Common stock, no par value; 499,000,000 shares authorized, 262,155,754 (2005) and 282,655,754 (2006) shares issued and outstanding 12,462,975 12,525,025 Accumulated deficit (including $1,956,232 accumulated during the development stage) (13,126,389) (13,093,773) Notes receivable from sale of stock (222,820) (222,820) ------------ ------------ Total stockholders' deficit (886,234) (791,568) ------------ ------------ $ 5,149 $ 10,903 ============ ============ See accompanying notes 2 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended March 31, 2005 and 2006 and from inception (August 1, 2003 to March 31, 2006) (Unaudited)
Inception to 2005 2006 March 31, 2006 ------------- ------------- ------------- Sales $ -- $ -- $ -- Other income -- 3,000 3,789 ------------- ------------- ------------- Total revenues -- 3,000 3,789 ------------- ------------- ------------- Operating expenses: Depreciation $ 592 544 $ 6,414 Rent 3,170 -- 33,413 Other operating expenses 106,271 69,703 2,127,861 ------------- ------------- ------------- Total operating expenses 110,033 70,247 2,167,688 ------------- ------------- ------------- Total operating loss (110,033) (67,247) (2,163,899) Other income (expense): Loss on Sale of Investments -- -- (10,502) Interest expense (687) -- (40,442) Interest and miscellaneous income -- -- 23,494 ------------- ------------- ------------- Total other income (expense) (687) -- (27,450) ------------- ------------- ------------- Net loss from continuing operations (110,720) (67,247) (2,191,349) Minority interest -- 2,004 2,004 Extingusihment of Debt -- 97,859 233,113 ------------- ------------- ------------- Net income (loss) $ (110,720) $ 32,617 $ (1,956,232) ============= ============= ============= Basic and diluted loss per share from continuing operations $ -- $ * $ (0.01) ============= ============= ============= Basic and diluted loss per share $ * $ * $ (0.01) ============= ============= ============= Weighted average common shares outstanding 190,600,000 272,445,000 180,400,000 ============= ============= =============
* Less than $.01 per share See accompanying notes 3 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT For the three months ended March 31, 2006 (Unaudited)
Common stock ----------------------------- Accumulated Shares Amount deficit ------------ ------------ ------------ Balance, December 31, 2005 262,155,754 $ 12,462,975 $(13,126,389) Issuance of common stock to employees and consultants for services & directors 20,500,000 62,050 -- Net loss for the three months ended March 31, 2006 -- -- 32,617 ------------ ------------ ------------ Balance, March 31, 2006 282,655,754 $ 12,531,025 $(13,093,773) ============ ============ ============
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, 2005 and 2006 and from inception (August 1, 2003 to March 31, 2006) (Unaudited)
Inception to 2005 2006 March 31, 2006 ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (110,720) $ 32,617 $(1,956,232) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 592 544 5,164 Loss related to subsidiary spun-off -- -- 284,872 Stock and options issued for services and interest on notes 81,592 62,050 1,504,096 Changes in assets and liabilities: Interest receivable -- -- 44,325 Inventory -- -- 25,243 Prepaid expenses (48,000) -- (3,000) Accounts payable 7,796 (97,536) (230,180) Accrued expenses 400 (40) (210,474) ----------- ----------- ----------- Total adjustments 42,380 (34,982) 1,420,046 ----------- ----------- ----------- Net cash used in operating activities (68,340) (2,365) (536,185) Cash flows from investing activities: Purchase of property and equipment -- -- (5,072) Minority interest receivable -- (503) (503) ----------- ----------- ----------- Net cash provided (used) by investing activities -- (503) (5,575) Cash flows from financing activities: Proceeds from issuance of preferred stock -- -- 6,713 Proceeds from issuance of common stock 5,350 -- 17,727 Proceeds from exercise of stock options 6,000 -- 246,750 Note Receivable from sale of stock -- -- 16,000 Payment of accrued wages -- -- 232,250 Payment of note payable - related parties 57,750 9,167 28,725 ----------- ----------- ----------- Net cash provided by financing activities 69,100 9,167 548,165 ----------- ----------- ----------- Net increase in cash and cash equivalents 760 6,298 6,404 Cash and cash equivalents at beginning of period 121 224 118 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 881 $ 6,522 $ 6,522 =========== =========== ===========
See accompanying notes 5 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ended March 31, 2005 and 2006 and from inception (August 1, 2003 to March 31, 2006) (Unaudited) (Continued from preceding page)
Inception to 2005 2006 March 31, 2006 ----------- ----------- ----------- Supplemental disclosure of cash flow information: 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, 2005 wages to oficers and directors and fees to consultants of $81,592 were paid by the issuance of common stock. During the quarter ended March 31, 2006 wages to oficers and directors and fees to consultants of $62,050 were paid by the issuance of common stock. 6 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2006 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, 2005 and March 31, 2006, and the results of operations and cash flows for the periods ended March 31, 2005 and 2006. 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. 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) During the fiscal quarter ended March 31, 2006 the results of operations and balance sheet of its subsidiary Avatar Technology Group will be consolidated in these financial statements. The Company has incurred significant losses and at March 31, 2006, the Company has a working capital deficit of $ 793,452 and a stockholders' deficit of $ 791,568. 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. 2. Delinquent amounts payable -------------------------- As of March 31, 2006, 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. 7 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2006 3. Income taxes ------------ The book to tax temporary differences resulting in deferred tax assets and liabilities are primarily net operating loss carry forwards of $ 6,063,000 which expire in years through 2025. 100% valuation allowance has been established against the deferred tax assets, as utilization of the loss carry forwards 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, 2006, the remaining liabilities of this division were $58,230 in unpaid payroll taxes. As of the year ended December 31, 2005, and the quarter ended March 31, 2006, $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, 2006, the remaining liabilities of this division were $91,077 in trade payables and $79,351 in unpaid payroll taxes. 5. Stock transactions ------------------ During the quarter ended March 31, 2006, the Company issued a total of 20,500,000 common shares for compensation of officers, directors and consultants, valued at an aggregate of $62,050. 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, 2006 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: 2005 2006 ------------ ---------- Net income (loss) - as reported $(110,720) $ 32,617 Net income (loss) - pro forma (121,250) 29,617 Loss per share - as reported * * Loss per share - pro forma * * * - Less than $0.01 per share 8 ARETE INDUSTRIES, INC. AND SUBSIDIARIES (A Development Stage Entity) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2006 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 2005 and 2006, 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. 6. Subsequent Events In May 2006, the Company received a letter of intent for due diligence rights to pursue a merger. The letter of intent included a $25,000 deposit. The process will continue after the filing of the Company's first fiscal quarter report for 2006. The Company's subsidiary Avatar has received revenue and contracts for its business. They are pursuing their direction and continuing of their operating plan in light of merger plans of the parent Company. No disposition of Arete's share in Avatar has been made as of May 22, 2006. The Company is continuing to evaluate opportunities for it's subsidiary Aggression Sports LTD. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. 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. We were able to develop and small oil & gas operation in Arete's subsidiary Colorado Oil & Gas, Inc. In September Arete's spun-off 95% of its ownership of Colorado Oil & Gas, Inc. in the form of a dividend of one share of Colorado Oil & Gas, Inc. for every two hundred and fifty shares of Arete shares owned on the record date. Arete Energy Development Group LTD was originally formed as a Colorado corporation on April 29, 2004 as a subsidiary of Arete Industries, Inc. for the purpose of pursuing a joint venture in oil and gas. The joint venture opportunity for Arete Energy Development Group LTD was abandoned with no further activity occurring in Arete Energy Development Group Ltd. as we were unable to develop the business or raise the funds needed to enter into a business plan that made sense. The name was changed to Avatar Energy Development Group, LTD. in September 2004 in anticipation of developing an alternative energy business. The corporation remained dormant until late 2005. The board decided to change the direction of Avatar Energy Development Group, LTD to pursue a technology related business which was consistent with the expertise of one of the current directors. The board approved a name change to Avatar Technology Group, Inc. The main business focus for Avatar Technology Group is the delivery of technology solutions for small to medium size businesses as well as public entities. These solutions include business services, custom software development and web design, network security services and IT solutions. Avatar has secured reseller/affiliate agreements with major partners in each area to deliver these services primarily through a website model. Avatar Technology Group maintains a website at www.avtekgroup.com. Avatar plans to market these services to specific vertical markets using advertising in print media and targeted opt in email campaigns. Most of the services are based on a recurring revenue model. All of the technology solution offerings were selected to be complimentary to each other. Arete as part of its new business plan developed in mid 2005 has began the process of pursuing a merger candidate for the parent company Arete Industries, Inc. as soon as possible. To make a merger an alterative for the future of Arete and its shareholders we have begun the task of settling old liabilities including the payroll taxes, wages and other related payroll liabilities. The ownership of and the future of Aggression Sports, Inc. and its related liabilities have added to the process. We are pursuing a merger or active business for Aggression Sports, Inc. and have to be able to settle their debt as part of the process. We have had some discussions with a candidate but have no plan or letter of intent. 11 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 an we will 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. In the first quarter of 2006 we have begun identifying possible merger candidates and have begun discussions on a merger with more than one company. We have asked the merger candidates for a non refundable amount of $25,000 to be put up by them to move this process forward. The main requirement for a merger to take place will be the resolution of all remaining debt that the company has outstanding that would allow for a merger candidate to accept a proposal of debt liquidation and allow us to move forward with a merger. While we are very optimistic about our progress in identifying merger candidates to benefit the shareholders of this company there are no assurances that we can resolve all of our debt obligations meet remaining expenses gain any significant revenue for operations in the immediate future. We received a letter of intent for due diligence, with a payment of $25,000, that calls for the due diligence period to last no longer than June 8, 2006. We are now to be able to work the debt issues out and move to a definitive agreement during this period. 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, 2006, the Company had $10,903 in total assets. This compares to total assets of $5,149 as of the fiscal year ended December 31, 2005. Total liabilities were $802,974 as of March 31, 2006 compared to $891,383 as of the fiscal year ended December 31, 2005. Accounts payable and accrued expenses at March 31, 2006 were $743,454 as compared to $841,029 at December 31, 2005. During the quarter ended March 31, 2006, total liabilities were decreased by $88,419. Net income was $32,617, reducing the accumulated deficit as of March 31, 2006 of $13,093,773, as compared to an accumulated deficit as of December 31, 2005 of $13,126,389. 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, 2006, the remaining liabilities of this subsidiary were $91,077 in trade payables and $79,351 in unpaid payroll taxes. As of March 31, 2006, 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. 12 During the quarter ended March 31, 2006, 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, 2006, the Company paid $33,000 in compensation to officers and directors, paid $29,050 to consultants and professionals with 20,500,000 shares of common stock. As of March 31, 2006, 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. Results of operations - --------------------- The Company had $3,000 in revenues from operations during the quarter ended March 31, 2006, and no revenues during the comparable period ended March 31, 2005. Net loss from continuing operations for the quarter ended March 31, 2006 was $67,247 as compared to a net loss from continuing operations of $110,720 for the quarter ended March 31, 2005. The net loss during the quarter ended March 31, 2006 was offset by $97,859 in extinguishment of debt and reduction of the share loss if its subsidiary that is 67% owned of $2004, resulting in net income of $32,617 for the period. The net loss for the quarter ended March 31, 2005 was $110,720. The Company rents space for file storage and furniture for $125 per month. The Company uses space rented by Colorado Oil & Gas for meetings and to keep current records and pays no rent. 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. 13 Liquidity and Capital Resources - ------------------------------- The Company had a working capital deficit as of March 31, 2006 of $793,452. This compares to a working capital deficit of $888,159 as of December 31, 2005. During the quarter ended March 31, 2006 an aggregate of 20,500,000 shares of common stock were issued for aggregate consideration of $62,050 (for an average of $0.003 per share). The Company had a stockholder's deficit at March 31, 2006 of $791,568. This is compared to stockholder's deficit at December 31, 2005 of $886,234. The stockholder's deficit decreased due the Company's operating income and the payment of services with the issuance of stock. At March 31, 2006, 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. Item 3. Controls and Procedures ----------------------- As of March 31, 2006, our Chief Executive Officer and Chief Financial Officer (the "Certifying Officers") conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports 14 that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder. Further, there were no changes in our internal control over financial reporting during the first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. During the Quarter ended March 31, 2006, 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 Exhibit 31.1 Certification of CEO Pursuant to 18 U.S.C, Section 7241, as adopted and Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Interim 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 Pursuant to 18 U.S.C, Section 1350, as adopted and Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Interim CFO Pursuant to 18 U.S.C, Section 1350, as adopted and Section 906 of the Sarbanes-Oxley Act of 2002. 16 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 25, 2006 By: /s/ Charles L. Gamber, CEO -------------------------------------------------- Charles L. Gamber, Principal Executive Officer By: /s/ John Herzog, Interim CFO -------------------------------------------------- John Herzog, Interim Principal Financial and Accounting Officer 17 EX-31.1 2 arete10qsbex311_5252006.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL ACCOUNTING OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles L. Gamber, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Arete Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: May 25, 2006 By: /s/ Charles L. Gamber --------------------------------------------- Charles L. Gamber, Chief Executive Officer EX-31.2 3 arete10qsbex312_5252006.txt Exhibit 31.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL ACCOUNTING OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Herzog, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Arete Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including any consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: May 25, 2006 By: /s/ John Herzog --------------------------------------------- John Herzog, Interim Chief Financial Officer EX-32.1 4 arete10qsbex321_5252006.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Arete Industries, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles L. Gamber, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: May 25, 2006 By: /s/ Charles L. Gamber ------------------------------------------ Charles L.Gamber, Chief Executive Officer EX-32.2 5 arete10qsbex322_5252006.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Arete Industries, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Herzog, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: May 25, 2006 By: /s/ John Herzog -------------------------------------------- John Herzog, Interim Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----