UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________

FORM 10-K


x
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

[]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 33-16820-D

Arête Industries, Inc.
(Exact Name Of Registrant As Specified In Its Charter)

Colorado
84-1508638
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
   
P. O. Box 141 Westminster CO
80036
(Address of Principal Executive Offices)
(ZIP Code)

Registrant's Telephone Number, Including Area Code: (303) 427-8688
 
Securities registered under Section 12(b) of the Exchange Act: None
 
Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes [X] No []

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes [] No [X]
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 [] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item  405 of Regulation S-K is not contained herein, and will not be contained,  to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     []

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes []  No []
 
On March 24, 2011 the aggregate market value of the 332,453,054 common stock held by non-affiliates of the Registrant was approximately $13,963,028.
 
On March 24, 2011 the Registrant had 497,155,754 shares of common stock outstanding.
 
Large Accelerated Filer []
 
Accelerated Filer []
 
Non-Accelerated Filer []
 
Smaller Reporting Company [X]
 

 
 

 


 
  
PART I
 
  
 
ITEM1.
  
Description of Business
3
 
         
ITEM 1A.
 
Risk Factors
  6  
         
ITEM 1B
 
Unresolved Staff Comments
  12  
         
ITEM 2.
  
Description of Properties
 12
 
         
ITEM 3.
  
Legal Proceedings
 13
 
         
ITEM 4.
  
Submission of Matters to a Vote of Security Holders
  13
 
     
 
  
PART II
 
  
 
ITEM 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities
 13
 
         
ITEM 6.
 
Selected Financial Data
 15  
         
ITEM 7.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  15
 
         
ITEM 8.
  
Financial Statements and Supplementary Data.
23
 
         
ITEM 9.
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  24
 
         
ITEM 9-A(T)   
Controls and Procedures
 24  
         
ITEM 9-B
  
Other Information
  25
 
         
   
PART III
   
         
ITEM 10.
  
Directors, Executive Officers and Corporate Governance.
25
 
         
ITEM 11.
  
Executive Compensation
 29
 
         
ITEM 12.
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
31
 
         
ITEM 13.
  
Certain Relationships and Related Transactions, and Director Independence
32
 
         
ITEM 14.
  
Principal Accountant Fees and Services
  33
 
         
   
PART IV
   
         
ITEM 15.
  
Exhibits and Financial Statement schedules
  36
 


 
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Cautionary Note Regarding Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may”, “will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

Unless the context otherwise requires, references in this Annual Report to “The Company,” “Arete,” “we” “us,” “our” or “ours” refer to Arête Industries, Inc.

 
PART 1

ITEM 1. DESCRIPTION OF BUSINESS

Company Overview

Arête Industries, Inc. was incorporated in the state of Colorado in 1987. Our corporate office is located at 7260 Osceola Street, Westminster, Colorado 80030, and our telephone number is 303-427-8688. Our Website can be found at www.areteindustries.com.

We are a publicly traded company trading on the OTC Markets OTC-QB under the symbol: ARET. The Company has been publicly traded since 1987, and has over 4,000 shareholders.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 will be available through our Internet website as soon as reasonably practical after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
 
Mr. Charles Gamber is President, John R. Herzog is interim CFO, Mr. William Stewart is Secretary, and Mr. Donald W. Prosser continued his responsibilities as a Director and Chairman. Mr. Charles B. Davis joined the board because of his oil & gas background and great experience in the business. We are in the process of expanding the number of board members to at least seven.
 
Mr. Charles Gamber is President, John R. Herzog is interim CFO, Mr. William Stewart is Secretary, and Mr. Donald W. Prosser continued his responsibilities as a Director and Chairman. Mr. Charles B. Davis joined the board because of his oil & gas background and great experience in the business.
 
The Company was involved in many different business opportunities up to and until 2005, when the Board of Directors confirmed a new company focus on actively pursuing oil and gas acquisitions, including cash flow generating assets and pipelines. On September 12, 2006, we closed on an acquisition agreement with PBR Energy Inc. for a gas gathering pipeline for $330,000. Henceforth, the Company will focus on developing our existing properties, while continuing to pursue acquisitions of oil and gas properties with upside potential. We have spent the last quarter of fiscal 2008 negotiating and performing due diligence on a potential acquisition of oil and gas properties in Wyoming, Kansas, Colorado, and Montana. These properties have both operating leases and development opportunities. We completed the deal in early 2009 but have not been able to secure the financing.
  

 
- 3 -

 
 
Arête's future plans rely on its current Board of Directors, their expertise in oil and gas, finance, accounting and management.  The company has very good relationships with outside funding sources, oil and gas executives, and marketing experts. The Board is joined by several consultants who are providing shareholder communications, marketing, business development, and investment banking services.
 
Competitive Business Conditions

We operate in a highly competitive environment. Some of our competitors possess and employ financial resources substantially greater than ours and some of our competitors employ more technical personnel. Those companies may be able to charge less for gathering and transporting natural gas, and to evaluate, bid for, and purchase a greater number of properties and prospects than what our financial or technical resources permit. This would price us out of the market. Our ability to acquire additional properties and to find and develop reserves in the future will depend on our ability to identify, evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the natural gas industry.
 
Pricing for natural gas is based on regional supply and demand conditions.  To this extent we believe we receive gas gathering and transportation prices comparable to other gas gathering companies.  There is little risk in our ability to transport all the current production of our customer at current prices with a reasonable profit margin.  The risk of domestic overproduction at current prices is not deemed significant.  We view our primary pricing risk to be related to a potential decline in gas prices to a level which would make it uneconomical for our current customer to keep on producing natural gas and therefore to use our services.

Major Customers
 
We sold 98.5% of our gas production on a spot sale basis to United Energy Trading, Inc. and 1.5%  to Bear Paw Energy, Inc. during the year ended December 31, 2010.
 
Governmental Regulations

Regulation of Transportation of Natural Gas
 
Historically, the transportation of natural gas in interstate commerce has been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and regulations issued under those Acts by the Federal Energy Regulatory Commission (FERC).
 
In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future.
 
Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. The FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among other things, unbundling the sale of natural gas from the sale of transportation and storage services. The FERC’s orders are intended to foster increased competition within all phases of the natural gas industry.

We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition. Therefore, we cannot provide any assurance that the less stringent regulatory approach established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects our competitors

Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors.


 
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Employees
 
As of December 31st 2010, the company had no employees
 
Competition
 
Gas Gathering and Processing
 
Gas gathering systems are generally either acquired or developed pursuant to long-term contracts with gas producers or the shippers they service. The contracts generally run over a period of time which approximates a majority of the economic life of the gas producers’ wells. We believe that having such contracts and an existing gathering system in place provides a significant barrier to entry to third parties seeking to compete with us upon the expiration of our contracts.
 
When developing new gathering systems in areas where we do not have the advantage of existing systems in proximity to the development, we may be competing with other gathering system operators or the producer may elect to construct and own the system. In the case of other gathering system operators, many possess financial, technical and personnel resources substantially greater than ours.
 
Exploration and Production
 
The Company’s oil and gas exploration activities take place in a highly competitive and speculative business atmosphere. In seeking suitable oil and gas properties for exploration, development or acquisition, the Company competes with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources.
 
Environmental Regulation
 
All facilities and gathering systems that utilize compressors fueled by natural gas require Wyoming Oil and Gas Corporation Commission operating permits. All of our systems have these permits.
 
At the time of construction, storm water discharge permits are required as well as permits for surface discharging of hydrostatic test water. The Company has obtained all necessary construction permits.
 
Federal Spill Prevention Control and Countermeasure requirements apply to our facilities and we have approved plans in place.
 
County and state road crossing permits apply to pipelines and gathering systems crossing county and state highways. The Company is in compliance with these permitting requirements.
 
Intrastate Regulation
 
No regulatory body within the state of Wyoming controls the gathering rates we may charge.
 
 
 

 
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Safety and Maintenance
 
Gas Gathering and Processing
 
We contract with third parties to perform preventive and normal maintenance on our gathering systems and make repairs and replacements when necessary or appropriate. On our behalf, third parties also conduct routine and required inspections of our gathering and other assets as required by applicable code or regulation. External coatings and cathodic protection systems are used to protect against external corrosion. The systems are continually monitored and tested, and the results recorded, to ensure the early identification of any problem that may arise. We have contracted a third party to provide the necessary training to our employees as required by the Occupational Safety and Health Administration.
 
Seasonality - Gathering and Processing
 
Generally, but not always, the demand and price levels for natural gas increase during the colder winter months and decrease during the warmer summer months. In addition, pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can lessen seasonal demand fluctuations. Seasonal anomalies such as mild winters and summers sometimes lessen these fluctuations.
 
Intellectual Property
 
We do not currently have any patents, trademarks or licenses.
 
 
ITEM 1A. RISK FACTORS
 
The following risks with respect to our proposed business and financial condition should be carefully considered. These risks and uncertainties are not the only ones facing us. Other risks and uncertainties that have not been predicted or assessed by us may also adversely affect us. Some of the information in this report contains forward-looking statements that involve substantial risks and uncertainties. These statements can be identified by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” and “continue” or other similar words. Statements that contain these words should be carefully read for the following reasons:

·  The statements may disclose our future expectations;

·  The statements may contain projections of our future earnings or our future financial condition; and

·  The statements may state other “forward-looking” information.
 
Risks Related to Our Business and Industry
 
The risks and uncertainties described below are not the only risks facing us. Additional risks not presently known to us or which we consider immaterial based on information currently available to us may also materially adversely affect us. If any of the following risks or uncertainties actually occurs, our business, financial condition and results of operations could be adversely affected.
 
 Our future performance is difficult to evaluate because we have a limited operating history.
 
Our operations commenced with our acquisition of certain assets of PRB Gas Transportation, Inc. as of September 2006. As a result, we have little historical financial and operating information available to help you evaluate our performance or an investment in our common stock.
 

 
- 6 -

 

To fund our future growth we will require additional capital, which may not be available or may only be available on unfavorable terms.
 
Our future capital requirements depend on many factors, including development and acquisition opportunities, the availability of debt financing and the cash flow from our operations. To the extent that the funds available are insufficient to meet future capital requirements, we may need to reduce our development activity. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected.
 
Restrictions in credit agreements may prevent us from engaging in some beneficial transactions.
 
As we expand and require capital, we intend to enter into credit agreements with financial institutions to fund a portion of the capital requirements. To obtain funds under credit agreements we may be required to accept operating restrictions which would impair or prevent us from future transactions we deem to be beneficial for our future growth.
 
We depend on our chief executive and chief operating officers for critical management decisions and industry contacts.
 
We do not have a chief executive officer. During the first quarter the Company will address the hiring of a chief executive officer who is familiar with the public capital markets and oil & gas chief operating officer. They will plan the hire upon acquisition of additional oil & gas properties. The Company will use consultants and several of its directors for evaluation of the oil & gas acquisitions and financings. The lack of experience could have a material adverse effect on our business.
 
Competition for experienced technical personnel may negatively impact our operations.
 
Our acquisition strategy’s success could depend, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. As we continue to grow our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations.
 
A significant decrease in the supply of natural gas from our gas gathering customers could materially affect our results of operations and financial condition.
 
Investments by our gas gathering customers in the maintenance of existing wells and the further development of their reserves will affect their production rates and the volume of gas we gather. Drilling activity generally decreases as gas prices decrease. We have no control over our customers’ level of drilling activity, the amount of reserves underlying their wells and the rate at which their production from a well will decline. Drilling activity of our customers is affected by, among other things, prevailing and projected energy prices, demand for hydrocarbons, geological considerations, governmental regulation and the availability and cost of capital.
 
Any material nonpayment or nonperformance by our key customers could materially affect our results of operations and financial condition.
 
Some of our customers may be highly leveraged and subject to their own operating and regulatory risks.
 

 
- 7 -

 

Our operations are subject to operational hazards and unforeseen interruptions for which we may be inadequately insured.
 
Our operations, both gathering and processing and exploration and production, are subject to operational hazards and unforeseen interruptions such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materials releases, mechanical failures and other events beyond our control. These events might result in a loss of equipment or life, injury or extensive property damage, as well as an interruption in our operations. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our results of operations and financial condition.
 
Growing our business by constructing new gathering systems, or expanding existing ones, subjects us to construction and other risks.
 
We plan to grow our business, in part, by constructing new gathering systems and by expanding existing ones. We have no material significant commitments for new construction or expansion projects as of the date of this report. The construction of a new gathering system or the expansion of an existing gathering system, by adding  compressor stations or by adding a second gathering line along an existing gathering line, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. These projects may not be completed on schedule or at all or at the budgeted cost. In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if we build a new gathering system, the construction will occur over an extended period of time and we will not receive a material increase in revenue until after completion of the project. This could adversely affect our results of operations and financial condition.
 
Our business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile energy prices.
 
Our business depends on the level of activity in oil and gas exploration, development and production in markets worldwide. Oil and gas prices, market expectations of potential changes in these prices and a variety of political and economic and weather-related factors significantly affect this level of activity. Oil and gas prices are extremely volatile and are affected by numerous factors, including:
 
Worldwide demand for oil and gas;
The ability of the Organization of Petroleum Exporting Countries, commonly called “OPEC,” to set and maintain production levels and pricing;
The level of production in non-OPEC countries;
The policies of the various governments regarding exploration and development of their oil and gas reserves;
Local weather;

 
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Fluctuating pipeline takeaway capacity;
Advances in exploration and development technology;
The political environment surrounding the production of oil and gas;
Level of consumer product demand; and
The price and availability of alternative fuels.

Future oil and gas price declines or unsuccessful exploration efforts may result in write-downs of our exploration and production asset carrying values.
 
We follow the successful efforts method of accounting for our oil and gas properties. All property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending the determination of whether proved reserves have been discovered. If proved reserves are not discovered with an exploratory well, the costs of drilling the well are expensed.
 
The capitalized costs of our oil and gas properties, on a field basis, cannot exceed the estimated future net cash flows of that field. If net capitalized costs exceed future net revenues, we must write down the costs of each such field to our estimate of fair market value. Unproved properties are evaluated at the lower of cost or fair market value. Accordingly, a significant decline in oil or gas prices or unsuccessful exploration efforts could cause a future write-down of capitalized costs.
 
We review the carrying value of our properties quarterly based on prices in effect as of the end of each quarter or as of the time of reporting our results. Once incurred, a write-down of oil and gas properties cannot be reversed at a later date even if oil or gas prices increase.
 
Future oil and gas price declines may affect our ability to raise capital.
 
If oil and gas prices decrease there will be a corresponding negative impact on the value of our reserves. This could negatively affect our ability to borrow funds or raise capital in the equity markets.
 
Competition in our industry is intense, and many of our competitors have greater financial and technical resources than we do.
 
We face intense competition from major oil companies, independent oil and gas exploration and production companies, financial buyers and institutional and individual investors who are actively seeking oil and gas properties throughout the world, along with the equipment, expertise, labor and materials required to operate oil and gas properties. Many of our competitors have financial and technical resources vastly exceeding those available to us, and many oil and gas properties are sold in a competitive bidding process in which our competitors may be able to pay more for development prospects and productive properties or in which our competitors have technological information or expertise to evaluate and successfully bid for the properties that is not available to us. In addition, shortages of equipment, labor or materials as a result of intense competition may result in increased costs or the inability to obtain those resources as needed. We may not be successful in acquiring and developing profitable properties in the face of this competition.
 

 
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If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud
 
Our internal controls and operations are subject to extensive SEC regulation and reporting obligations. A company’s internal control over financial reporting is a process designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet certain reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Shares.
 
Risks Related to Our Common Stock
 
Our share price has fluctuated in the past and may continue to fluctuate in the future
 
The market price of our shares in the over-the-counter market has experienced significant volatility and may continue to fluctuate significantly. The market price of our shares may be significantly affected by factors such as the announcements of agreements, new products or product enhancements by us or our competitors and technological innovations by us or our competitors. In addition, while we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our shares, any statements or changes in estimates by analysts initiating or covering our shares or relating to the Oil and Gas industry could result in an immediate and adverse effect on the market price of our shares. Further, we cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the shares prevailing from time to time. Sales of a substantial number of shares or the perception that such sales could occur following the filing of this report, could have a material adverse effect on the market price of our shares.
 
Trading in shares of companies, such as ours, listed on the Pink Sheets in general and trading in shares of technology companies in particular have been subject to extreme price and volume fluctuations that have been unrelated or disproportionate to operating or other performance.
 

 
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The common stock is considered a “penny stock”
 
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of the common stock may drop below $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the securities and may affect the ability of investors to sell their shares.

We Have not Paid Cash Dividends in the Past and do not Expect to pay Cash Dividends in the Future.  Any Return on Investment may be Limited to the Value of Our Stock.
 
We have never paid cash dividends on our Common Stock and do not anticipate paying cash dividends on our Common Stock in the foreseeable future. The payment of cash dividends on our Common Stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay cash dividends, our Common Stock may be less valuable because a return on an investor’s investment will only occur if our Common Stock price appreciates.
 
Concentration of share ownership among our existing executive officers, Directors and principal stockholders may prevent others from influencing significant corporate decisions.
 
At December 31, 2010, our executive officers, Directors and principal stockholders beneficially own approximately 29.57% of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of Directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of ownership could be disadvantageous to other stockholders with interests different from those of our officers, Directors and principal stockholders.
 

 
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Access to Information
 
Our website address is www.areteindustries.com We make available, free of charge, on the “Filings” section of our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after these reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We also make available through our website other reports electronically filed with the SEC under the Securities Exchange Act of 1934, including our proxy statements and reports filed by officers and Directors under Section 16(a) of that Act. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None
 
 
ITEM 2. PROPERTIES
 
Description of Properties - Powder River Basin Geology
 
In December 1994, there were approximately 200 wells in the Powder River Basin producing coal-bed methane gas. Since 1994, over 15,000 gas wells have been drilled in this area and the State of Wyoming and the Bureau of Land Management (“BLM”) have the authority to grant over 15,000 additional drilling permits. Production in 1994 was 2.4 billion cubic feet, and production in 2003 was 3.46 billion cubic feet (Source: Wyoming Oil and Gas Conservation Commission). The average well-life of coal-bed methane well is estimated by the BLM to be eight to ten years.
 
Gas produced from Powder River Basin coals is almost 100% methane. The gas is generated during the coal forming process and is trapped in the coal beds by water. In order to produce the coal gas, the formation must first be dewatered. As the water is removed from the coal, the gas is desorbed from the coal. All of the coal-bed reservoirs are low pressure and require compression in order for the gas to be delivered to a pipeline transportation system.
 
Natural gas wells in the Powder River Basin area typically experience sharp declines in production volume in the first several years of production. Production then stabilizes and declines more ratably over a gas well’s average life of approximately eight to ten years. Other factors which influence the initial and long term productivity of the coal-bed methane wells are the depths of the coal fields, the initial gas saturation levels of the coal field and the well spacing.
 
Gas Gathering System
 
In September 2006, the Company acquired a gas gathering system (Pipeline and compressor station related assets) located in Campbell County, Wyoming. This system was constructed in late 2001 and began operations early in 2002. The system consists of 4.5 miles of 8-inch coated steel pipeline. This pipeline is currently transporting approximately 700,000 Mcf (thousand cubic feet) of coal bed methane per day and is cash flowing from its operations.
 
This system has a current throughput capacity of approximately 4 million cubic feet (“MMcf”) of gas per day. Gathering fees are subject to contracts which are life of lease or 10-year contracts expiring in 2012.
 

 
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Office Facilities
 
We currently lease office space, from a director, in Westminster, Colorado.
 
Storage Facilities
 
We currently rent a storage locker close to our office in Westminster, Colorado
 
 
ITEM 3. LEGAL PROCEEDINGS
 
None
 
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
(a) The following table sets forth the range of high and low bid price information for our Common Stock for each fiscal quarter for the past two fiscal years and for the first quarter of the current fiscal year as reported by the Pink OTC Markets Inc. and obtained from Yahoo Finance. High and low bid quotations which represent prices between dealers without adjustment for retail mark-ups, markdowns or commissions.
 
(b)
   
HIGH
BID
   
LOW
BID
 
             
   Year Ended December 31, 2010:
           
         First Quarter
  $ .0220     $ .0060  
Second Quarter
    .0165       .0085  
Third Quarter
    .0150       .0080  
Four Quarter
    .0230       .0090  
                 
   Year Ended December 31, 2009:
               
First Quarter
  $ .0060     $ .0015  
Second Quarter
    .0390       .0030  
Third Quarter
    .0220       .0050  
Four Quarter
    .0080       .0023  
                 
 
Since our shares have been quoted in the over-the-counter market on the Pink Sheets, the prices for our shares have fluctuated widely. There may be many factors that explain these variations. We believe that such factors include (a) the demand or lack thereof for our Common Stock, (b) the number of shares of our Common Stock available for sale, and (c) changes in the performance of the stock market in general, among others.


 
- 13 -

 

In recent years, the stock market has experienced extreme price and volume fluctuations that have had a substantial effect on the market prices for many small and emerging growth companies such as our company, which may be unrelated to the operating performances of the specific companies. Some companies that have experienced volatility in the market price of their stock have been the targets of securities class action litigation. If we became the target of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources and have an adverse effect on our ability to implement our business plan. In addition, holders of shares of our Common Stock could suffer substantial losses as a result of fluctuations and declines in the market price of our Common Stock.

 Holders

As of December 31, 2010, the approximate number of holders of record of shares of our Common Stock, $.001 par value per share, our only class of trading securities, was believed by management to be as follows:
 
 
Title of Class
Number of 
Record Holders
 
       
 
Common Stock, $.001 par value
5,007
 

The number of record holders of our Common Stock was determined from the records of our transfer agent and does include numerous beneficial owners of our Common Stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The above number of holders record is an estimate but the exact number of these shareholders is unknown to us.
 
Dividends
 
The Company has not paid any dividends with respect to its common stock and it is not anticipated that the company will pay dividends in the foreseeable future.  There are no accrued dividends outstanding on any class of preferred stock of the Company.
 
Penny Stock Rules
 
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
 

 
- 14 -

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
 
These disclosure requirements may have the effect of reducing the trading activity for our Common Stock. Therefore, stockholders may have difficulty selling our securities.
 
Our Transfer Agent

Computer Share Investor Services is the transfer agent for our Common Stock. They can be contacted at Computer Share, Inc., Registry Team, 250 Royal Street, Canton, MA 02021; phone: (303) 262-0378; facsimile: (303) 262-0700.

Recent Sales of Unregistered Securities
 
We had no sales of unregistered securities during the twelve month period ended December 31, 2010.
 
Repurchases of Equity Securities of the Issuer
 
None
 
 
ITEM 6. SELECTED FINANCIAL DATA
 
As a smaller reporting issuer (as defined by in Item 10(f)(1) of Regulation S-K), the Company is not required to report selected financial data specified in Item 301 of Regulation S-K.
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-looking information
 
This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may”, “will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

 
- 15 -

 

 
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the following discussion, contains trend analysis and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Annual Report on Form 10-K that are not statements of historical facts are forward-looking statements. These forward looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include without limitation:

Dependence on key management personnel;
 
Competitors with greater financial resources;
 
The ability of management to execute acquisition and expansion plans and motivate personnel in the execution of such plans;
 
Adverse publicity related to the company, or the industry;
 
An inability to arrange additional debt or equity financing;
 
The adoption of new, or changes in, accounting principles;
 
The costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002;
The interruptions or cancellation of existing contracts;
Economic downturn;
Price of natural gas.
 
Actual results may differ materially from those set forth in such forward-looking statements as a result of factors set forth elsewhere in this Annual Report on Form 10-K, including under “Risk Factors.” More information about factors that potentially could affect the Company’s financial results is included in our filings with the Securities and Exchange Commission. The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

General Overview
 
It is our desire to provide all parties who may read this MD&A an understanding of the Company’s past performance, its financial condition and its prospects of going forward in the future. Accordingly, we will discuss and provide our analysis of the following:
 
Overview of the business;
Critical accounting policies;
Results of operations;
Overview of business segments;
Liquidity, capital resources and outlook for 2010;
New accounting pronouncements.

 
 
- 16 -

 

We own and operate a natural gas gathering system (pipeline and compressor station related assets) in the Powder River Basin of Wyoming. We acquired this system in September 2006 and commenced operations shortly thereafter. The acquisition of the gas gathering system and working interests is intended to generate cash flow to enable us to service our debts and allow us to proceed with the proposed acquisition. We currently are in the process of due diligence and financing discussion for a potential acquisition. This proposed acquisition will include oil and gas properties in Montana, Wyoming, Colorado and Kansas. These properties include PUD’s and off-set opportunities with most of the leases. The plan also includes financing for the drilling of these opportunities and development of the sites.
 
Management Discussion

While we are very optimistic about our progress on this plan to benefit the shareholders of this company there are no assurances that we can resolve all of our debt obligations, meet remaining expenses, and gain any significant revenue for operations in the immediate future. We received a commitment to finance the debt, pipeline and working interests. These commitments are from outside parties as well as related parties and are more likely than not to happen. We are working out the debt issues and creating cash flow so as to be able to move to a final definitive agreement on the properties. The Company continues to rely upon infusions of cash borrowing from directors, officers, and consultants, and upon payment of compensation to officers, directors and consultants in the form of common stock and common stock options. We will continue to operate the Company on an austere program of minimum overhead. To achieve this, we will utilize the skills of our board members in the fields of business development, capital acquisition, corporate visibility, oil and gas development, geology and operations.

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. We have to incur cash costs for the due diligence, reserve studies, audits, and legal cost for these proposed acquisitions of oil and gas properties.

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. 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, and increased revenues from operations will most likely impair the ability of the Company to meet its obligations in the near-term.

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. 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.

 
- 17 -

 
 
Critical Accounting Policies

The following discussion and analysis of the results of operations and financial condition are based on the Company’s consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 2 of Notes to the Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. As a result, they are subject to uncertainty. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Actual results may differ from these estimates. All historical numbers are presented on a consolidated basis that includes all acquisitions and eliminates inter-company transactions.

Principles of Consolidation

The consolidated financial statements include the accounts of Arête Industries, Inc. and its subsidiary Aggression Sports, Inc. (inactive).  All the significant inter-company balances and transactions are eliminated in the consolidation. The Company is reporting its consolidated operations under the guidance of ASC 810 for consolidated companies.
  
Revenue Recognition

We recognize revenue from the pipeline operations at the time the gas is sold.

Use of Estimates

Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expense during the reporting periods. Accordingly, actual results could differ from those estimates.
 
Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Property and Equipment

Property and equipment are stated at cost. Costs of property maintenance and repairs are charged against operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the individual assets, as follows:

 
Equipment, and furniture
 5-7 years
 
       
 
Pipeline assets
  10 years
 



 
- 18 -

 

 
Stock-based Compensation

We account for equity instruments issued to employees for services based on the fair value of the equity instruments issued and accounts for equity instruments issued to other than employees based on the fair value of the consideration received or the fair value of the equity instruments, whichever is more reliably measurable.

Effective January 1, 2006, we implemented the provisions of ASC 718 “Share-Based Payment,” requiring us to provide compensation costs for our stock option plans determined in accordance with the fair value based method prescribed in ASC 718. We estimate the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provide for expense recognition over the service period, if any, of the stock option.

Results of Operations

Key selected financial and operating data for the years ended December 31, 2009 and 2010 are as follows. All references to the earnings per share are on a diluted basis. The following consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements.

The Company had $167,625 revenues for fiscal year ended December 31, 2010 and $182,245 revenues from operations for the fiscal year ended December 31, 2009. The decrease in revenue was due to low natural gas prices. The costs of the pipeline operations, mainly the compressor rental of $17,000 plus per month, we decided to evaluate the costs and our ability to operate the pipeline, so we shut-in the wells connected to our pipeline in mid December 2008 until mid February 2009 so we could retool and review costs.  We ordered new compressors from a different vendor which decreased the monthly costs to $9,100 per month. The related costs of operations also decreased due to the more efficient operations of the new compressors. We were able to restart our pipeline operations in February 2009 with an average production of 700,000 mmcf per day for the year 2009. With natural gas prices below $4.00 mmcf based on our production level we can only expect approximately $15,000 a month in gross production until we see higher natural gas prices.  In addition, due to higher costs and the price of natural gas, we are reviewing the wells related to the pipeline to see if they have more zones of production. There are deep natural wells related to the potential acquisition that could be hooked to the pipeline and would increase our production related to the pipeline. We are only using approximately two percent of the available capacity of the pipeline.

The following is a summary of the pipeline costs for the year-ended December 31, 2010 versus the year ended December 31, 2009.
             
   
December 31
       
   
2009
   
2010
 
 
           
 Cost of Production
  $ 92,910     $ 104,607  
 Transportation
    34,462       25,497  
 Testing
    794       137  
            Pumper
    30,000       43,300  
 Utilities
    3,113       3,090  
 Repairs
    16,696       3,012  
 Compressors
    76,132       131,492  
Truck and moving expense
    18,503       --  
            Property Taxes
    7,335       6,856  
 Land Rent
    9,600       9,600  
 Total
  $ 289,796     $ 327,591  

 
- 19 -

 

The other operating expenses for the year ended December 31, 2010 was $719,555 versus $81,629 for the year ended December 31, 2009. The increase of $637,926, includes $172,500 spent during fiscal 2010 for due diligence and review of the proposed acquisition of the oil and gas properties in Wyoming, Kansas, Colorado, and Montana. We also had $598,760 costs for consultants, financing, audits, director fees, and reserve studies that includes $6,674 in legal fees for the year ended December 31, 2010 versus none of the same costs, except $32,492 for legal expense for the year ended December 31, 2009.

Net loss from operations for the fiscal year ended December 31, 2010 was $927,307 as compared to a net loss from operations of $237,283for the fiscal year ended December 31, 2009. The increase in loss from operations of $609,024 includes the items discussed above relating to the pipeline, other operating costs, and acquisition due diligence.

Net loss for the fiscal year ended December 31, 2010 was $852,612 which includes $47,191 interest expense, income from extinguishment of debt income and interest income of $121,883 as compared to a net loss of $284,474 for the fiscal year ended December 31, 2009, which includes $47,191 interest expense.

As stated above, we had continued to operate the Company on an austere program of minimum overhead until mid fiscal 2010 when we were able to fund the due diligence, and complete the review of the acquisition on the oil and gas properties that we have contracted to purchase. We were able to complete the task of filing all needed SEC filings to make the Company current including the audits of all years, completion of business plan and pro forma numbers on the proposed acquisition. The completion of a plan of financing and the hiring of a management team to operate the business at a level needed for the proposed oil and gas operations. Members of the board of directors have provided the cash needed. 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 increasing the amount of variable costs, we have to continue 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 the acquisition is completed.  The execution of our business plan the operating costs of the Company will 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 December 31, 2010 of $2,110,583. This compares to a working capital deficit of $1,326,700 in the fiscal year ended December 31, 2009. During the 12-month period ended December 31, 2010 an aggregate of 4,000,000 shares of common stock were issued for aggregate consideration of $24,500 (avg. $0.006125 per share). This compares to the 12-month period ended December 31, 2009 in which an aggregate of 2,000,000 shares of common stock were issued for aggregate consideration of $10,000 (avg. $0.005 per share).

The Company had a stockholder's deficit at December 31, 2010 of $1,832,847. This is compared to stockholder's deficit at December 31, 2009 of $1,004,735. The stockholder's deficit increased due to the Company's net operating loss offset by an increase in payments for services with common stock.

The Company has net cash (used) for operating activities for the year ended December 31, 2010 of $(213,124) as compared to net cash (used) by operating activities of $(7,140) for the year ended December 31, 2010.

The Company had no net cash (used) in investing activities for the year ended December 31, 2010 as compared to no net cash (used) in investment activities for the year ended December 31, 2009.

The Company had net cash provided by financing activities of $212,350 that includes an advance of $215,000 from a related party and payment of $(2,650) to a related party for the year ended December 31, 2010 as compared to no net cash provided by financing activities for the year ended December 31, 2009.

At December 31, 2010, the Company had no material commitments for capital expenditures.

 
- 20 -

 
Management believes that the Company will continue to experience significant difficulty raising significant additional equity capital or attracting viable acquisition candidates until these matters have been resolved and the Company has completed a plan on its outstanding debt.  A substantial amount of our debt is owed to officers and directors and their related entities. The current plan is to convert as much of its debt to equity. Several of the directors have agreed to convert $500,000 of their debt at $0.08 per share in the second quarter 2011. In addition, we are planning a private raise of capital as part of our capital plan and there is no guarantee that we will be successful.

We rely on infusions of cash for operations from officers and directors, from deferral of salary and from services rendered for stock compensation, and from proceeds from sale of stock. We believe that our success depends upon our ability to generate revenue from oil and gas projects in the form of management fees and equity participation in revenue streams from projects it is currently pursuing and future projects developed from our business development activities introduced by its officers, directors and consultants.

We 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.
 
Contractual Obligations and Commercial Commitments
 
   
Payments Due by Period
 
Contractual Obligations
 
Total
   
2011
      2012-2013       2014-2015    
Thereafter
 
Long-term Debt
  $ 1,679,475     $ 687,350     $ 992,125     $ -     $ -  
Capital Leases
  $ -     $ -     $ -     $ -     $ -  
Operating Leases
  $ 18,150     $ 9,600     $ 3,450     $ 1,200     $ 3,900  
 
Off-Balance Sheet Arrangements
 
We do not currently have any off balance sheet arrangements falling within the definition of Item 303 of Regulation S-B.

Inflation

To date, inflation has not had a material impact on our operations.

New Accounting Pronouncements
 
In April 2009, the FASB issued ASC 805-10, "Accounting for Assets Acquired and Liabilities assumed in a Business Combination That Arise from Contingencies—an amendment of FASB Statement No. 141 (Revised December 2007), Business Combinations". ASC 805-10 addresses application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805-10 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805-10 will have an impact on our accounting for any future acquisitions and its financial statements.
 
In April 2009, the FASB issued ASC 805-10, "Accounting for Assets Acquired and Liabilities assumed in a Business Combination That Arise from Contingencies—an amendment of FASB Statement No. 141 (Revised December 2007), Business Combinations". ASC 805-10 addresses application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805-10 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805-10 will have an impact on our accounting for any future acquisitions and its financial statements.
 
In May 2009, the FASB issued ASC Topic 855, “Subsequent Events”. ASC Topic 855 established principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. ASC Topic 855 also requires disclosure of the date through which subsequent events are evaluated by management. ASC Topic 855 was effective for interim periods ending after June 15, 2009 and applies prospectively. Because ASC Topic 855 impacts the disclosure requirements, and not the accounting treatment for subsequent events, the adoption of ASC Topic 855 did not impact our consolidated results of operations or financial condition.

 
- 21 -

 

On January 1, 2009, the Company adopted ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (ASU 2009-05). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
 
Effective January 1, 2009, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 105-10, Generally Accepted Accounting Principles—Overall ("ASC 105-10"). ASC 105-10 establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout the financials have been updated for the Codification.
 
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, an entity may use the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. This ASU is effective October 1, 2009. We are currently evaluating the impact of this standard, but would not expect it to have a material impact on our results of operations or financial condition.
 
In December 2009, the FASB issued ASU 2009-17, Consolidation (Topic 810) —Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities. This update amends Topic 810 and is a result of SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140. This standard did not have a significant impact on the Consolidated Financial Statements when it was adopted on January 1, 2010. Management has reviewed and continues to monitor the pronouncements of the various financial and regulatory agencies and is currently not aware of any other pronouncements that could have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements andDisclosures (Topic 820) Improving Disclosures about Fair Value Measurements. This update provides amendment to the codification regarding the disclosures required for fair value measurements. The key amendments include: (a) a requirement to disclose transfer in and out of Level 1 and 2; (b) activity in Level 3 should show information about purchases, sales, settlements, etc. on a gross basis rather than as net basis; and (c) additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) —Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. This update provides clarification about Topic 810 (previously Statement of Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51) and clarifies that the de-recognition provisions of Topic 810 apply to (a) a subsidiary or group of assets that is a business or nonprofit activity; (b) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (c) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This update is effective for the first reporting period beginning after December 15, 2009. The Company adopted this update effective January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.
In September 2010, the SEC issued Release 33-9142 which amended the SEC’s rules and forms to remove the requirement for issuers that are neither accelerated filers nor large accelerated filers to obtain an auditor attestation report on internal control over financial reporting.  Therefore, smaller reporting companies will not need their auditors to test internal controls; however, management will still need to do its assessment for the year ended December 31, 2010.  We did not obtain an opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2010 due to this change in the requirement.
 

 
- 22 -

 


 
ITEM 8. FINANCIAL STATEMENTS
 
 

 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
 
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2009 AND 2010
 
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 

 

 

 

 
- 23 -

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
 
 

 
INDEX

 
Report of Independent Registered Public Accounting Firm
  F - 2
   
Consolidated Financial Statements:
  F - 3
   
Consolidated Balance Sheet – December 31, 2009 and 2010
  F - 3
   
Consolidated Statement of Operations – For the years ended December 31, 2009 and 2010
  F - 4
   
Consolidated Statement of Stockholders’ Deficit – For the years ended December 31, 2009 and 2010
  F - 5
   
Consolidated Statement of Cash Flows – For the years ended December 31, 2009 and 2010
  F - 6
   
Notes to Consolidated Financial Statements
  F - 8

 

 

 
F - 1

 

RONALD R. CHADWICK, P.C.
Certified Public Accountant
2851 South Parker Road, Suite 720
Aurora, Colorado  80014
Telephone (303)306-1967
Fax (303)306-1944


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Arête Industries, Inc.
Westminster, Colorado

I have audited the accompanying consolidated balance sheets of Arête Industries, Inc. and Subsidiaries as of December 31, 2009 and 2010, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with the audit standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arête Industries, Inc. and Subsidiaries at December 31, 2009 and 2010, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a working capital deficit and a stockholders’ deficit, and is delinquent on the payment of creditor liabilities including payroll taxes. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

March 28, 2011                                                                                            /s/ Ronald R. Chadwick, P.C.
Aurora, Colorado                                                                                            RONALD R. CHADWICK, P.C.


 
F - 2

 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 
             
             
             
   
December 31,
 
ASSETS
 
2009
   
2010
 
Current assets
           
    Cash and cash equivalents
  $ 16,764     $ 15,990  
    Revenue receivable
    21,693       12,625  
    Prepaid expenses
    -       523,611  
Total current assets
    38,457       552,226  
                 
Furniture and equipment, at cost, net of accumulated
               
    depreciation of $139,902(2009) and $173,076(2010)
    321,965       277,736  
                 
                 
                 
    $ 360,422     $ 829,962  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
    Accounts payable
  $ 493,719     $ 604,271  
    Accrued expenses
    145,754       267,373  
    Accrued payroll taxes
    233,559       111,690  
    Contracts payable
    -       975,000  
    Notes payable & advances from related parties
    492,125       704,475  
                 
Total current liabilities
    1,365,157       2,662,809  
                 
Stockholders' deficit
               
    Convertible Class A preferred stock; $10 face value,
               
      1,000,000 shares authorized
               
      Series 1, 30,000 shares authorized, 0 (2009)
               
      and 0 (2010) shares issued and outstanding
    -       -  
      Series 2, 25,000 shares authorized, 0 (2009)
               
      and 0 (2010) shares issued and outstanding
    -       -  
    Common stock, no par value; 499,000,000 shares
               
      authorized, 493,155,754 (2009) and 497,155,754 (2010)
               
      shares issued and outstanding
    13,587,403       13,611,903  
    Accumulated deficit
    (14,592,138 )     (15,444,750 )
                 
Total stockholders' deficit
    (1,004,735 )     (1,832,847 )
                 
                 
    $ 360,422     $ 829,962  
 
See accompanying notes.
 

 
F - 3

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF OPERATIONS
For the years ended
 
             
             
   
December 31,
 
   
2009
   
2010
 
Revenues
           
   Oil & gas revenue
  $ 182,245     $ 167,625  
   Other income
    -       -  
                 
Total revenues
    182,245       167,625  
                 
Operating expenses
               
   Oil & gas operating expenses
    289,796       327,591  
   Depreciation
    44,219       44,229  
   Rent
    3,884       3,554  
   Other operating expenses
    81,629       719,555  
                 
Total operating expenses
    419,528       1,094,929  
                 
Net loss from operations
    (237,283 )     (927,304 )
                 
Other income (expense):
               
    Extinguishment of debt
    -       121,870  
    Interest income
    -       13  
    Interest expense
    (47,191 )     (47,191 )
                 
Total other income (expense)
    (47,191 )     74,692  
                 
                 
Net income (loss)
  $ (284,474 )   $ (852,612 )
                 
Basic and diluted loss per share
    *       *  
                 
                 
Weighted average common shares outstanding
    493,000,000       495,000,000  
 
* Less than $.01 per share
 
See accompanying notes.
 

 
F - 4

 

 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT
For the years ended December 31, 2009 and 2010
 
 
   
Common Stock Shares
   
Amount
   
Accumulated Deficit
   
Notes Receivable
from Sale of Stock
   
Total
 
Balance at December 31, 2008
    491,155,754     $ 13,577,403     $ (14,307,664 )   $ (2,339 )   $ (732,600 )
                                         
    Issuance of common stock to directors
                                       
        and consultants for services
    2,000,000       10,000                       10,000  
                                         
    Reduction of stock receivable
                            2,339       2,339  
                                         
    Net loss
                    (284,474 )             (284,474 )
                                         
Balance at December 31, 2009
    493,155,754     $ 13,587,403     $ (14,592,138 )   $ -     $ (1,004,735 )
                                         
    Issuance of common stock to directors
                                       
        and consultants for services
    4,000,000       24,500                       24,500  
                                         
     Net loss
                    (852,612 )     -       (852,612 )
                                         
Balance at December 31, 2010
    497,155,754     $ 13,611,903     $ (15,444,750 )   $ -     $ (1,832,847 )
 
 
See accompanying notes.
 

 
F - 5

 

 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
 
   
December 31,
 
   
2009
   
2010
 
             
Cash flows from operating activities:
           
    Net (loss) income
  $ (284,474 )   $ (852,612 )
    Adjustments to reconcile net loss to net
               
      cash used in operating activities:
               
          Depreciation and amortization
    44,219       44,229  
          Stock  and options issued for services and
               
            interest on notes
    10,000       24,500  
          Non cash compensation for services
    -       549,389  
          Gain on reduction of notes receivables on sale of stock
    2,339       -  
          Gain on debt relief
    -       (121,869 )
         Changes in assets and liabilities:
               
            Accounts receivable
    (16,542 )     9,068  
            Advances
    30,000       -  
            Accounts payable
    150,631       110,552  
            Accrued expenses
    56,687       23,619  
Total adjustments
    277,334       639,488  
                 
                 
Net cash provided (used) in operating activities
    (7,140 )     (213,124 )
                 
Cash flows from investing activities:
               
                 
Net cash used in investing activities
    -       -  
                 
Cash flows from financing activities:
               
     Payments on notes payable & advances related parties
    -       (2,650 )
     Notes payable & advances related parties
    -       215,000  
Net cash provided by financing activities
    -       212,350  
                 
Net increase (decrease) in cash and cash equivalents
    (7,140 )     (774 )
Cash and cash equivalents at beginning of period
    23,904       16,764  
                 
Cash and cash equivalents at end of period
  $ 16,764     $ 15,990  
                 
Supplemental disclosure of cash flow information:
               
      2009       2010  
    Interest paid during the period
  $ 4,500     $ 10,848  
    Income taxes paid during the period
  $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
     During the year ended December 31, 2010 wages to officers and directors and fees to
               
        consultants of $24,500 were paid by the issuance of common stock
               
    During the year ended December 31, 2010 had non-cash expenses for contracts with consultants
               
           and contracts of $972,350 of which $ 448,739 were expensed leaving $523,611 in prepaid expenses
               
     During the year ended December 31, 2009 wages to officers and directors and fees to
               
        consultants of $10,000 were paid by the issuance of common stock
               
 
 
 
   
December 31,
 
   
2008
   
2009
 
             
Cash flows from operating activities:
           
    Net (loss)
  $ (643,214 )   $ (284,474 )
    Adjustments to reconcile net loss to net
               
      cash used in operating activities:
               
          Depreciation and amortization
    44,220       44,219  
          Stock  and options issued for services and
               
            interest on notes
    376,400       10,000  
          Gain on reduction of notes receivables on sale of stock
    1,574       2,339  
         Changes in assets and liabilities:
               
            Accounts receivable
    51,487       (16,542 )
            Advances
    (30,000 )     30,000  
            Accounts payable
    160,998       150,631  
            Accrued expenses
    33,447       56,687  
Total adjustments
    638,126       244,842  
                 
                 
Net cash provided (used) in operating activities
    (5,088 )     (7,140 )
                 
Cash flows from investing activities:
               
                 
Net cash used in investing activities
    -       -  
                 
Cash flows from financing activities:
               
                 
Net cash provided by financing activities
    -       -  
                 
Net increase (decrease) in cash and cash equivalents
    (5,088 )     (7,140 )
Cash and cash equivalents at beginning of period
    28,992       23,904  
                 
Cash and cash equivalents at end of period
  $ 23,904     $ 16,764  
                 
Supplemental disclosure of cash flow information:
               
      2008       2009  
    Interest paid during the period
  $ 17,500     $ 4,500  
    Income taxes paid during the period
  $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
     During the year ended December 31, 2009 wages to officers and directors and fees to
               
        consultants of $10,000 were paid by the issuance of common stock
               
                 
     During the year ended December 31, 2008 wages to officers and directors and fees to
               
        consultants of $376,400 were paid by the issuance of common stock
               
 
 
See accompanying notes.
 

 
F - 7

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010

1.      Summary of significant accounting policies

Nature of business:

Arête Industries, Inc. (Arête), formerly Travis Industries, Inc., a Colorado corporation was incorporated on July 21, 1987.  The Arête subsidiary, Aggression Sports, Inc. (Aggression Sports) was an outdoors sports product company which became a consolidated subsidiary through Arête’s increased investment, effective October 1, 2001 and abandoned in 2003. Arête is now operating a natural gas pipeline in Wyoming and in the process of acquiring oil and gas properties.

The consolidated financial statements of the Company include the accounts of Arête for the entire period and Aggression Sports 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.

The Company prior to fiscal 2007 was classified as a development stage entity. After the purchase of and continuing operations of the pipeline in Wyoming the Company no longer is classified as a development stage entity.  The Company is focused entirely on acquiring interests in traditional oil and gas ventures. In the oil and gas field, the Company is looking for conservative 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 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 and has purchased a natural gas transportation pipeline in 2006.

Basis of presentation:

The Company follows accounting principles generally accepted in the United States of America.  Certain prior period amounts have been reclassified to conform to the December 31, 2010 presentation. The financial statements have been prepared on the basis of the Company 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 energy sectors. The Company has incurred significant losses and at December 31, 2010, the Company has a working capital deficit of $2,110,583 and a stockholders’ deficit of $1,832,847.  In addition, the Company is delinquent on payment of payroll taxes, for the periods for fiscal year 2000 and prior.  As a result, substantial doubt exists about the Company’s ability to continue to fund future operations using its existing resources.

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 to support operations.
 
New Accounting Pronouncements:
 
In April 2009, the FASB issued ASC 805-10, "Accounting for Assets Acquired and Liabilities assumed in a Business Combination That Arise from Contingencies—an amendment of FASB Statement No. 141 (Revised December 2007), Business Combinations". ASC 805-10 addresses application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. ASC 805-10 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805-10 will have an impact on our accounting for any future acquisitions and its financial statements.
 

 
F - 8

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
 
 
In May 2009, the FASB issued ASC Topic 855, “Subsequent Events”. ASC Topic 855 established principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. ASC Topic 855 also requires disclosure of the date through which subsequent events are evaluated by management. ASC Topic 855 was effective for interim periods ending after June 15, 2009 and applies prospectively. Because ASC Topic 855 impacts the disclosure requirements, and not the accounting treatment for subsequent events, the adoption of ASC Topic 855 did not impact our consolidated results of operations or financial condition.
 
On January 1, 2009, the Company adopted ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (ASU 2009-05). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
 
Effective January 1, 2009, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 105-10, Generally Accepted Accounting Principles—Overall ("ASC 105-10"). ASC 105-10 establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout the financials have been updated for the Codification.
 
 
F - 9

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
 
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, an entity may use the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. This ASU is effective October 1, 2009. We are currently evaluating the impact of this standard, but would not expect it to have a material impact on our results of operations or financial condition.
 
In December 2009, the FASB issued ASU 2009-17, Consolidation (Topic 810) —Improvements to Financial Reporting by Enterprises Involved with VariableInterest Entities. This update amends Topic 810 and is a result of SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140. This standard did not have a significant impact on the Consolidated Financial Statements when it was adopted on January 1, 2010. Management has reviewed and continues to monitor the pronouncements of the various financial and regulatory agencies and is currently not aware of any other pronouncements that could have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements andDisclosures (Topic 820) Improving Disclosures about Fair Value Measurements. This update provides amendment to the codification regarding the disclosures required for fair value measurements. The key amendments include: (a) a requirement to disclose transfer in and out of Level 1 and 2; (b) activity in Level 3 should show information about purchases, sales, settlements, etc. on a gross basis rather than as net basis; and (c) additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) —Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. This update provides clarification about Topic 810 (previously Statement of Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51) and clarifies that the de-recognition provisions of Topic 810 apply to (a) a subsidiary or group of assets that is a business or nonprofit activity; (b) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (c) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This update is effective for the first reporting period beginning after December 15, 2009. The Company adopted this update effective January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.
 
In September 2010, the SEC issued Release 33-9142 which amended the SEC’s rules and forms to remove the requirement for issuers that are neither accelerated filers nor large accelerated filers to obtain an auditor attestation report on internal control over financial reporting.  Therefore, smaller reporting companies will not need their auditors to test internal controls; however, management will still need to do its assessment for the year ended December 31, 2010.  We did not obtain an opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2010 due to this change in the requirement.
 
Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
F - 10

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
 
Depreciation:

Furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful life of three to ten years using the straight-line and accelerated methods.

Revenue recognition:

The Company recognizes revenue as the gas is transported and sold.
 
Advertising costs:

The Company expenses the costs of advertising as incurred.  Advertising costs amount to $0 and $0 for the years ended December 31, 2009 and 2010 respectively.
 
Income taxes:

The Company accounts for income taxes under ASC 740. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company's temporary differences consist primarily of tax operating loss carry forwards and start-up costs capitalized for tax purposes.
  
Fair value of financial instruments:

Cash, accounts payable, accrued liabilities and notes payable are carried in the financial statements in amounts which approximate fair value because of the short-term maturity of these instruments.

Net loss per share:

Basic net loss per common share is based on the weighted average number of shares outstanding during each period presented. Options to purchase stock are included as common stock equivalents when dilutive.

Cash and cash equivalents:

For purposes of the statement of cash flows, the Company considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

2.      Delinquent amounts payable

As of December 31, 2009 and 2010, the Company is delinquent on payments of various amounts to creditors of its subsidiary company that includes payroll taxes, penalty and interest. 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.
 
 
F - 11

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010

3.       Advances Payable

Advances payable – related parties:

As of December 31, 2009 and 2010, the Company owed the related parties for unsecured, due on demand and working capital advances:
 
 
 
December 31,
 
 
 
2009
      2010  
          Advances – Donald Prosser (2)
  $ 220,000       220,000  
          Advances – Donald Prosser (3)
    4,290       4,290  
          Advances – Donald Prosser (1)
    --       215,000  
          Advances – Charles Gamber (3)
    4,966       4,966  
          Advances – William Stewart (3)
    20,219       20,219  
          Advances – William Stewart (2)
    75,000       75,000  
          Advances – Charles Davis (2)
    125,000       125,000  
          Advances – John Herzog (3)
    2,650       --  
          Advances – Charles Davis (2)                                                       
    40,000       40,000  
                 
 Balances
    492,125     $ 704,475  
_______________
 
(1) Donald W. Prosser pledged 21,500,000 shares of his Common stock to individuals in exchange for a loan of $215,000 with no interest due in May 2011. The advance was used as working capital.
(2) $460,000 of the advances bear interest at 9.6% per annum.
(3) $29,475 of the advances bear interest at 8.0% per annum.

The Company has related party payables of accrued interest to the officers and directors above of $ 152,943 at December 31, 2010. In addition, the Company owes an entity owned by Charles Davis, DNR Oil & Gas, Inc. The balance owed to DNR Oil & Gas, Inc. as of December 31, 2010 for expenses of $104,218 included in accounts payable and production to the operator of $460,799 also included in accounts payable.  Donald W. Prosser advanced $1,788 at no interest and Charles Davis advanced $13,300 at no interest. The Company accrued $98,000 for directors fees (see note 4).
 
4.   Contracts Payable

The Company had a director of the Company pay for consulting services related to the marketing of the Company, its financing and financial operations. The director paid the consultants 32,000,000 shares of his stock in exchange for the services valued at $ 230,000. One of the contracts is for a period of one year, the fiscal year 2010, amortized over that period. The second contract is for two years beginning January 1, 2010 and will be amortized over the two year period. The unused balance of the contact is carried as prepaid expenses. The stock will be repaid in equal shares when the Company has shares available to repay the stock and will be adjusted in the event of stock reverse on a prorate basis.

The Company owes a director for services related to the operations of the pipeline business and purchase of oil & gas property. The board of directors has agreed to pay the director on a three year contract beginning January 1, 2010 $245,000 to be paid in the form of 35,000,000 shares of common stock.  The expense will be amortized over the life of the contract at $30,625 per quarter and the unused balance being carried as prepaid expenses.  The contract will be paid in  shares of common stock when the Company has shares available to pay the contract and will be adjusted in the event of stock reverse on a prorate basis..

 
 
F - 12

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
 
The Company entered into a consulting contract for financing, structure, and investor services on March 2, 2010 for 80,000,000 shares of Common Stock valued at $500,000. The contract is for a period of three years and will be amortized over a thirty-six month period. The contract will be paid in  shares of common stock when the Company has shares available to pay the contract and will be adjusted in the event of stock reverse on a prorate basis.
 
The Company owes its directors for services for part of 2008, 2009, and 2010. They are accruing $98,000 during fiscal 2010 to be paid in the future with 6,602,273 shares of Common Stock valued at $0.0148 per share

5.      Preferred stock
 
The Company has designated Class A Convertible Preferred Stock and 1,000,000 shares authorized for issuance. The Class A preferred stock has a cumulative dividend at prime rate and is redeemable for cash at the rate of $10 per share plus accrued but unpaid dividends at the option of the Company. Each of the Class A preferred shares is convertible at any time after thirty days from issuance at face value and convertible into an equal amount of common stock at 100% of the average weekly closing bid price of the common stock. The Class A shares have certain voting rights and other rights and preferences as specified in the amended articles of incorporation of the Company. The Company intends to use Class A preferred stock for special funding situations and possibly as consideration for unpaid officers’ compensation.  On November 19, 2001, the board of directors designated a new series of Class A Preferred Stock as the Series 1 Convertible Preferred Stock. The Series 1 Convertible Preferred Stock is limited to 30,000 shares with a face value of $10 per share. The redemption price and liquidation preference for each share is $10 per share.  As of December 31, 2010, all previously issued shares of this Series 1 have been converted to Common Stock and retired. On December 19, 2001, the board of directors designated a new series of Class A Preferred Stock as the Series 2 Convertible Preferred Stock. The Series 2 Convertible Preferred Stock is limited to 25,000 shares with a face value of $10 per share. The redemption price and liquidation preference for each share is $10 per share.  As of December 31, 2010, all previously issued shares of this Series 2 have been converted to Common Stock and retired.  The Company has no present intention to re-issue any shares of its Preferred Stock.
 
6.      Common stock

Stock issuances:

During the years ended December 31, 2009 and 2010, 2,000,000 and 4,000,000 shares of the Company’s common stock, respectively, were issued to officers and directors for services.  Of the total common shares issued in fiscal year ended December 31, 2009, 2,000,000 shares of common stock were issued to consultants and for fees. Of the total common shares issued in fiscal year ended December 31, 2010, 3,500,000 shares of common stock were issued to consultants and for fees.

The Company has authorized shares of 500,000,000 shares of Common Stock and has issued 497,155,754 shares of Common Stock. They will have to increase their authorized common stock to meet the obligations described above by paying with Common Stock. The total of Common Stock obligated is 153,597,273 shares at December 31, 2010.
  
Stock options:

Stock Option Plans

The Company has established the Omnibus Stock Option and Compensation Plans for employees, directors and consultants or other advisors. The Company has reserved a maximum of 40,000,000 and 50,000,000 common shares under the 2003 and 2004 Plans, respectively, including 10,000,000 special incentive common stock purchase rights to officers, directors, employees and consultants.  Additionally, the 2004 Plan replaced a total of 8,500,000 stock options granted under the Company’s 2002 and 2003 Plans into the 2004 Plan.  The purchase price of each share of stock under the stock option plan will be determined by the Board of Directors or the Compensation Committee based on the fair market value as of the date of grant, determined by the closing sales price on the OTC Bulletin board on the last trading date before the date of grant. The stock option plans exercise terms do not exceed ten years.  As of December 31, 2010, no shares were available under the 2003 Plan and under the 2004 Plan.

 
F - 13

 


ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010

 
The following is a summary of stock option activity, all of which are currently exercisable:
 
   
 Weighted
 
 
 Option price
 Average
Number of
 
per share
exercise price
Shares
       
Balance, December 31, 2008
$.006 to $.22
 $  0.023
525,000
       
Granted
--
--
 --
Expired
--
--
(525,000)
Exercised
--
--
--
       
Balance, December 31, 2009
$         0.00
$    0.00
--
       
Granted
--
--
--
Expired
--
--
--
Exercised
--
--
--
       
Balance, December 31, 2010
$          0.00
 $      0.00
 --
 
The following is additional information with respect to those options outstanding at December 31, 2010:
 
 
Weighted
   
 
average
Weighted
 
 
contractual life
average exercise
Number of
Option price per share
in years
Price
Shares
       
$0.00
0.00
$0.00
        -0-
       
As of December 31, 2010, 0 options to purchase common stock outstanding under the 2002 stock option plan and 525,000 stock options that expired in 2009, were outstanding under previous plans.
 
7.      Income taxes

The book to tax temporary differences resulting in deferred tax assets and liabilities are primarily net operating loss carry forwards of $8,381,395 which expire in years through 2030.

As of December 31, 2009 and 2010, total deferred tax assets; liabilities and valuation allowances are as follows:
 
   
2009
   
2010
 
             
Deferred tax asset resulting from loss carry forward
  $ 2, 936,212     $ 3,268,744  
                 
Valuation allowance
    (2,936,212 )     (3,268,744 )
                 
Net deferred tax asset
  $ --     $ --  
                 

 
 
F - 14

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
 

A 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. The Company's net operating loss carry forwards expire as follows:
 
December 31, 2015
  $ 458,000  
2016
    224,000  
2017
    304,000  
2018
    835,000  
2019
    161,000  
2020
    1,055,000  
2021
    880,000  
2022
    353,000  
2023
    692,000  
2024
    805,000  
2025
    296,000  
2026
    74,879  
2027
    463,182  
2028
    643,211  
2029
    284,474  
2030
    852,642  
    $ 8, 381,395  
 
8.      Commitments and contingencies
 
The Company entered into a lease for roads and compressor space in Wyoming for the pipeline. This commitment began in October and paid annually in April. The expense in 2009 was $9,600 and the cost in 2010 was $9,600, included in pipeline costs. Storage rent expense for the years ended December 31, 2009 and December 31, 2010 amounted to $844 and $554 respectively. The Company uses office space and conference room space provided by a director for $3,000 rent for the years ended December 31, 2009 and for December 31, 2010.

The following is a schedule by years of minimum future rentals on non-cancelable operating leases as of December 31, 2010:
 
 
 
 
Compressor
       
     
Pad and Roads
   
End pad
   
Total
 
                           
 
2010                                                      
    13,000       600       13,600  
 
2011                                                      
    9,000       600       9,600  
 
2012                                                      
    2,250       600       2,850  
 
2013
    --       600       600  
  2014       --        600        600  
  2015     --        600        600  
 
Thereafter                                                         
    --       3,900       3,900  
 
Total minimum future rentals                                                                
  $ 11,250     $ 6,900     $ 18,150  
 

 
F - 15

 

 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 
ITEM 9A(T) CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that the we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses.

 
1.
As of December 31, 2010, we did not maintain effective controls over the control environment. Specifically, we have not formally adopted a written code of business conduct and ethics that governs the Company's employees, officers and directors. Additionally, we have not developed and effectively communicated to our employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d) (5) (ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

 
2.
As of December 31, 2010, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2010, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.

 
- 24 -

 


Changes in Internal Control Over Financial Reporting.

The annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

There have been no changes in our internal control over financial reporting during the latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

ITEM 9B. OTHER INFORMATION

None

 
PARTIII
 
ITEM 10. Directors, Executive Officers and Corporate Governance
 
Charles L. Gamber (60) Director and President.
 
Mr. Gamber joined the Company’s Board of Directors in September of 2003, serving as an independent Director, and as a member of the Company’s Nominating and Compensation Committees. Mr. Gamber is currently the President and CEO of 86 Phoenix, LLC, a real estate and property development corporation doing business in Colorado. Mr. Gamber has also served as a Director of Net Commerce, Inc., a public company from 2001 to the present. He has served as a consultant for Donald W. Prosser, PC and VCG Holding Corp., a publicly held company with an emphasis in areas of organizational needs, financial projects, and business development. Mr. Gamber has 14 years of sales and service experience in the restaurant industry. He has owned and operated All America Auto Transport of Colorado for 6 years, and was with Toyota Motor Distributors for 5 years, leaving them as a District Sales Manager to pursue his own interests. Mr. Gamber received a bachelor’s degree in Business Administration from Western State College in 1973.
 

 
- 25 -

 

 
John R. Herzog (64) Director and Acting Chief Financial Officer.
 
Mr. Herzog joined the Company’s Board of Directors in September of 2003, serving as independent Director, and as a member of the Company’s Audit, Nomination and Compensation Committees.  He brings a depth of concrete practical and entrepreneurial experience in business start-ups, turn-arounds, technology oriented business and technology development projects. From 1998 to 2000, Mr. Herzog served as Director of Billing Services for Eglobe, Inc., where he managed daily operations, conversion of the billing system, and generated an additional $1 million per year of revenue for this company. From 2000 to 2001, he served as director of IT for Anything Internet, Inc., a public company. Since 2001, Mr. Herzog has been President of Business Information Systems, Inc., developing applications, consulting on software development, business systems, and programming. Mr. Herzog has also served as a Director of Net Commerce, Inc., a public company from 2001 to the present. Mr. Herzog graduated from Drexel University in 1967 with a degree in Electrical Engineering, and in 1970 with a Master’s degree in Biomedical Engineering. He received a Doctorate from Temple University in 1976.
 
William W. Stewart (49) Director.
 
Mr. Stewart joined the board of directors on December 19, 2001 at the time the Company entered into a Letter of Intent with Mr. Stewart to form a subsidiary corporation to pursue acquisition and management of minor league sports franchises.  From December, 2001 until August, 2002, Mr. Stewart ran the operations and directed the business plan of Eagle Capital Funding Corp. (Eagle Capital) to pursue capital funding projects,   In addition to serving as an outside director; he serves as a member of the Company’s Audit, Nomination and Compensation Committees. Mr. Stewart worked in the brokerage industry as an NASD licensed registered representative from 1986 to 1994.  Mr. Stewart started his career with Boettcher and Company of Denver, Colorado and left the Principal Financial Group of Denver, Colorado in 1994 to open his own small-cap investment firm, S.W. Gordon Capital, Inc., where he has been its president since 1994 to the present.  He has consulted with many small companies, both public and private, on capital formation and mergers and acquisitions.  Mr. Stewart formerly served as CEO and is an owner of Larimer County Sports, LLC, a Colorado Limited Liability Company, which owns the Colorado Eagles Hockey Club a minor league professional hockey franchise in northern Colorado.  Mr. Stewart was born in The Pas, Manitoba, Canada.  Mr. Stewart attended the University of Denver on a full athletic scholarship where he played hockey from 1979 to 1983 as right wing and served as assistant captain during his senior year.  Mr. Stewart graduated with a BS, Business Administration from the University of Denver in 1983, with honors as a Student Athlete.
 
Donald W. Prosser      (59) Director and Chairman
 
Mr. Prosser joined the Company’s Board of Directors in September of 2003, serving as Director and member of the Company’s Compensation, Audit, and Compensation Committees. He has been designated as the Company’s Financial Expert under the Sarbanes-Oxley Act.  Mr. Prosser is a professional CPA, specializing in tax and securities accounting, and has represented a number of private and public companies serving in the capacity of CPA, member of boards of directors, and as Chief Financial Officer. Mr. Prosser brings to the Company his great depth of expertise in tax and securities compliance and accounting, corporate finance transactions and turn-around.

 
- 26 -

 


From 1997 to 1999, Mr. Prosser served as CFO and Director for Chartwell International, Inc, a public company publishing high school athletic information and providing athletic recruiting services. From 1999 to 2000, he served as CFO and Director for Anything Internet, Inc. and from 2000 to 2001, served as CFO and Director for its successor, Inform Worldwide Holdings, Inc., which is a publicly traded company. From 2001 to the present, Mr. Prosser serves as CFO and Director for Net Commerce, Inc, a public company selling internet services.  Since November 2002 through the present, Mr. Prosser serves as CFO of VCG Holding Corp., a public company engaged in the business of acquiring, owning and operating nightclubs, which provide premium quality entertainment, restaurant and beverage services in an up-scale environment to affluent patrons.  His accounting firm performs accounting service for VCG Holding Corp.

Mr. Prosser has been a Certified Public Accountant since 1975, and is licensed in the state of Colorado.  Mr. Prosser attended the University of Colorado from 1970 to 1971 and Western State College of Colorado from 1972 to 1975, where he earned a Bachelor’s degree in both accounting and history (1973) and a Masters degree in accounting – income taxation (1975).
 
Charles B. Davis    (54) Director
 
Mr. Davis joined Arête's Board of Directors in 2006, and serves as a member of the Company’s Nominating and Compensation Committees.   With over 25 years of experience in the oil and gas industry, Mr. Davis is a valuable addition to the board of the Company. From January 1981 to June 1983, Mr. Davis was Operations Manager for Keba Oil and Gas Co. where he was responsible for drilling, completion and producing operations. From July 1983 to April 1986, Mr. Davis was Vice-President of operations for Private Oil Industries. From April 1986 till August 1988, Mr. Davis did consulting work related to well site operations. Then in August 1988 Mr. Davis joined DNR Oil & Gas Inc. as president, running the day to day operations for 150 to 200 wells, and involved in exploration activities. Mr. Davis graduated from the University of Wyoming with a Bachelor of Science Degree.
 
Board Committees

Our Board of Directors oversees the business affairs of the Company and monitors the performance of our management. The Board of Directors has designated three standing committees: the Audit Committee, the Nominating Committee, and the Compensation Committee

Audit Committee.

The Audit Committee’s primary responsibilities are to monitor our financial reporting process and internal control system, to monitor the audit processes of our independent auditors, and internal financial management; and to provide an open avenue of communication among our independent auditors, financial and senior management and the Board. The Audit Committee reviews its charter annually and updates it as appropriate. The Committee met four times during the fiscal year 2010.

Audit Committee Financial Expert.

The Board has determined that Mr. Prosser is an audit committee financial expert as defined by Item 401(h) of Regulation S-B under the Securities Act and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.


 
- 27 -

 

Nominating Committee.

The Nominating Committee was also established in 2003. It identifies candidates for future Board membership and proposes criteria for Board candidates and candidates to fill Board vacancies, as well as a slate of directors for election by the shareholders at each annual meeting. The Committee annually assesses and reports to the Board on the Board Committee performance and effectiveness; reviews and makes recommendations to the Board concerning the composition, size and structure of the Board and its committees; and annually reviews and reports to the Board on director compensation and benefits matters. The Nominating Committee met one time during the fiscal year 2010.

Compensation Committee.

The Compensation Committee was established in 2003. It administers our incentive plans, sets policies that govern executives’ annual compensation and long-term incentives, and reviews management performance, compensation, development and succession. The Compensation Committee met one time during the fiscal year 2010 to review, among other things, compensation for the officers and directors.
  
Compliance with Section 16(a) of the Exchange Act.

The Company files reports under Section l5 (d) of the Securities Exchange Act of 1934; accordingly, directors, executive officers and 10% stockholders are not required to make filings under Section 16 of the Securities Exchange Act of 1934.

CODE OF BUSINESS CONDUCT AND ETHICS
 
Objective
 
The corporate philosophy of Arête Industries, Inc. and its subsidiaries is that good ethics and good business conduct go hand in hand. The conduct and values of its Company associates including directors, employees and consultants reflect upon the Company. These business standards provide a general framework of values and obligations that should be adhered to at all times. Corporate standards guide each Company associate’s professional conduct in regard to actions, words, sense of fairness, honesty and integrity. The Company is required to comply with laws in all jurisdictions, and the Code of Business Conduct and Ethics (the “Code”) supports and reflects our statutory compliance with such laws.
 
We have adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B of the Securities Act of 1933, as amended. The Code applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Upon written request, we will mail you a free copy of our Code. Please mail your request to the following address: Arête Industries Inc., P.O. Box 141, Westminster, Colorado 80036.


 
- 28 -

 

ITEM 11. EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
The following table sets forth the aggregate compensation paid by the Company for services rendered during the last two completed fiscal years:
 
SUMMARY COMPENSATION TABLE
         
Long Term Compensation
 
   
Annual Compensation
Awards
Payouts
 
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Name and Principal Position
Year or
Period Ended
 
$
Salary
 
$
Bonus
Other Annual Compensation
Restricted Stock Awards
($)
 
Option/ SAR’s
(#)
 
LTIP Payouts
($)
All Other Compensation ($)
                 
Charles Gamber, President, Director
12/31/10
12/31/09
12/31/08
$        -0-
$        -0-
$  63,000
           
                 
John Herzog, Acting CFO, Director
12/31/10
12/31/09
12/31/08
$        -0-
$        -0-
$  42,400
           
 
 
Option/SAR Grants Table
Option/SAR Grants in Last Fiscal Year
Individual Grants

There were no grants of options or stock to officers in the fiscal year ended December 31, 2010.

(1)  At the time of grant the exercise price exceeded the market price for the underlying common shares by 10%. See: Compensation of Directors, below.

 
- 29 -

 
 
 
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table.
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
 
 
(a)
(b)
(c)
(d)
(e)
 
 
     
Name
Shares
Acquired
on Exercise (#)
 
Value
Realized ($)
Number of
Securities
Underlying Unexercised
Options/SAR's at
FY-End (#)
Exercisable/
Unexercisable
Value of
Unexercised
In-the-Money
Options/SAR's
at FY-End
($)(1)
Exercisable/
Unexercisable
         
None
0
$   -0-
0
$ -0-
 
Compensation of Directors.
 
The directors are compensated for consulting services and may be reimbursed for their expenses in attending formal meetings of the board of directors. The following is the director’s compensation for the fiscal year ended December 31, 2010.
 
Charles Gamber
  $ 20,000 (2)  
William Stewart
  $ 20,000 (2)  
John Herzog
  $ 20,000 (2)  
Donald W Prosser
  $ 70,000 (1)  
Charles Davis
  $ 20,000 (2)  
_________________
(1)  
includes work related to the audit committee, accounting, and the SEC filings;
(2)  
includes payment of officers compensation;
  
 


 
 
- 30 -

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Security Ownership of Management

 
Name and Address of
Amount and Nature of
 
Title of Class
 Beneficial Owner
Beneficial Ownership
Percent of Class
       
 
Directors and Executive
     
Officers
 
   
       
Common Stock William W. Stewart
Direct:
5,000,000
  1.01% (1)
Director/Secretary
     
c/o P.O. 141 Westminster,
     
Colorado 80036
     
       
       
Common Stock Donald W Prosser
  Direct:
73,002,700
14.68% (2)
Director/Chairman
     
c/o  P.O. 141 Westminster,
     
Colorado 80036
     
       
       
Common Stock Charles L. Gamber
Direct:
11,500,000
2.31% (3)
Director & President
     
c/o  P.O. 141 Westminster,
     
Colorado 80036
     
 
       
Common Stock John R. Herzog
  Direct:
27,500,000
  5.53% (4)
Director
     
c/o  P.O. 141 Westminster,
     
Colorado 80036
     
       
       
Common Stock Charles Davis
  Direct:
  30,000,000
 6.03% (5)
Director & Acting CFO
     
c/o  P.O. 141 Westminster,
     
Colorado 80036
     
       
       
Common Stock Directors and Executive
 Total:
147,002,700
   29.57%(6)
Officers as a Group
     
 
 
 
- 31 -

 
_________________

(1)  Includes Directly Owned of 5,000,000 shares;
(2)  Includes Directly Owned of 73,002,700 shares;
(3)  Includes Directly Owned of 11,500,000 shares;
(4)  Includes Directly Owned of 27,500,000 shares;
(5)  Includes Directly Owned of 30,000,000 shares;
(6)  Includes Directly Owned of 147,002,700 common shares.
 Percentage calculated based on 497,155,754 common shares outstanding.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Transactions with Management and Others

During the fiscal years ended December 31, 2009 and December 31, 2010, transactions occurred with directors and executive officers relating to cash and non-cash compensation which are disclosed in the discussion and footnotes to Item 10 of this Report, Executive Compensation, and Item 11, Security Ownership of Certain Beneficial Owners and Management which are incorporated herein by reference. (See also: Notes 3 and 5, Notes to Audited Financial Statements.)

On September 13, 2006 we purchased the TOP Gathering System located in Campbell County, Wyoming for $330,000 cash from PRB Energy, Inc. The TOP system was constructed in late 2001 and began operations early in 2002. The system consists of 4.5 miles of 8-inch coated steel pipeline. The pipeline services producers of coal-bed methane in the Powder River Basin and is currently gathering from 33 wells operated by an independent natural gas company, transporting approximately 1.25 million cubic feet of gas per day. The gathering system has a current throughput capacity of approximately 4 to 30 million cubic feet (“MMcf”) of gas per day based on the compression attached to the pipeline. Our current fees of transportation will average $0.80 per thousand cubic feet (“Mcf”) and gathering fees are subject to contracts that expire 2012. Arête is in negotiations with the well owners and leaseholders of the current wells attached to the pipeline to purchase or participate in the development of the other gas zones in the region. The pipeline has capacity of three times as much gas as is presently being delivered, based on current compression, and developing the present leases would help fill that capacity. The funds of $400,000 in cash for the pipeline and related costs have been provided by two directors of the Company and an independent third party. The funds provided to the Company were as follows: $200,000 Director & Chairman Donald W. Prosser, $75,000 Director and Secretary William Stewart, and $125,000 Director Charles Davis. No formal plan has been finalized on the repayment of these funds. The Company anticipates that the debt structure will be in the form of a convertible note secured by the assets of the pipeline. The rate of interest is 9.6% and the terms of the conversion are still being negotiated.

Donald W. Prosser pledged 21,500,000 shares of his Common stock to individuals in exchange for a loan of $215,000 with no interest due in May 2011. The advance was used as working capital.

The Company had a director of the Company pay for consulting services related to the marketing of the Company, its financing and financial operations. The director paid the consultants 32,000,000 shares of his stock in exchange for the services valued at $ 230,000. One of the contracts is for a period of one year, the fiscal year 2010, amortized over that period. The second contract is for two years beginning January 1, 2010 and will be amortized over the two year period. The unused balance of the contact is carried as prepaid expenses. The stock will be repaid in equal shares when the Company has shares available to repay the stock and will be adjusted in the event of stock reverse on a prorate basis.

The Company owes a director for services related to the operations of the pipeline business and purchase of oil & gas property. The board of directors has agreed to pay the director on a three year contract beginning January 1, 2010 $245,000 to be paid in the form of 35,000,000 shares of common stock.  The expense will be amortized over the life of the contract at $30,625 per quarter and the unused balance being carried as prepaid expenses.  The contract will be paid in  shares of common stock when the Company has shares available to pay the contract and will be adjusted in the event of stock reverse on a prorate basis.

 
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The Company owes its directors for services for part of 2008, 2009, and 2010. They are accruing $98,000 during fiscal 2010 to be paid in the future with 6,602,273 shares of Common Stock valued at $0.0148 per share. The Company paid Mr. Gamber 500,000 shares of Common stock as part of his 2008 fee valued at $2,450.

The Officers and Directors have advances of $2,010,523 including the loans discussed above and they bear interest rates of 8% on advances of $29,475 and 9.6% on advances of $460,000. The total accrued to the Officers and Directors as of December 31, 2010 was $152,943. During the year ended December 31, 2010 the Officers and Directors were paid $10,848 in cash interest and $2,650 principal.

The Company paid Donald W Prosser $22,050 (3,500,000 shares of Common Stock) for due diligence on the proposed acquisition and work on financing for the year ended December 31, 2010. The Company also paid Mr. Prosser $3,000 for the year ended December 31, 2010 for the office, meeting and storage space at 7260 Osceola Street, Westminster, CO  80030.
 

 ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following relate to aggregate fees billed for the last two fiscal years by the Company’s principal accountants concerning the Company’s: (1) audit; (2) for assurance and services reasonably related to the audit; (3) for tax compliance, advice, and planning; and (4) for other fees provided by the principal accountant for the following:
 
1.
Audit Fees.  $-0- (2009) $13,000 (2010)
2.
Audit-Related Fees.  $-0-   (2009 & 2010)
3.
Tax Fees.  $-0-   (2009 & 2010)
4.
All Other Fees.    $-0-   (2009 & 2010)
.
Reading of the Form S-8, subsequent events procedures and Form 8-K.
5.
(i) The Company’s Audit Committee’s pre-approval policies and procedures (described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X), are:
 
Audit Committee Pre-Approval Policies and Procedures
 
As set forth in its charter, our Audit Committee has the sole authority to pre-approve all audit and non-audit services provided by our independent auditor. All services performed by Ronald R. Chadwick PC CPA in 2009 and 2010 were pre-approved by our Audit Committee. Having considered whether the provision of the auditors’ services other than for the annual audit and quarterly reviews is compatible with its independence, the Audit Committee has concluded that it is.
 
The Audit Committee on an annual basis reviews audit and non-audit services performed by the independent auditors. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. All requests for services to be provided by the independent auditor, which must include a description of the services to be rendered and the amount of corresponding fees, are submitted to the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent auditor that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its chair or any of its other members pursuant to delegated authority) for approval.
 
 
(ii) 100 per cent of the fees billed by the principal accountant were approved by the Audit Committee (described in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X).
 
6.
The percentage (if over 50%) of hours expended on the principal accountant’s engagement to audit the Company’s financial statements for the most recent fiscal year done by persons other than the principal accountant’s full-time, permanent employees, was:     Not applicable.
 
 

 
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PART IV
 
   ITEM 15. EXHIBITS
 
   Exhibit No.   Description
Ref. No
   
         EX-3.1        Restated Articles of Incorporation with Amendment adopted
 
                              by shareholders on September 1, 1998.
1
   
         EX-3.2        Bylaws adopted by the Board of Directors on October 1, 1998.
1
   
         EX-3.3        Bylaws adopted by the Board of Directors on March 15, 2011.
5
   
         EX-4.1        Designation of Class A Preferred Stock dated February 26, 2001
1
   
         EX-4.2        Designation of Series 1 Convertible Preferred
 
                             Adopted November 19, 2001
1
   
         EX-4.3        Designation of Series 2 Convertible Preferred
 
                            Adopted December 19, 2001.
1
   
        EX-10.1       2003 Omnibus Incentive Stock Compensation Plan
 
                             Adopted, August 21, 2003
2
   
        EX-10.2       2004 Omnibus Incentive Stock Compensation Plan
 
                             Adopted, August 4, 2004
3
   
       EX – 10.3     Purchase agreement with PRB for purchase of pipeline
4
   
        EX-21          Subsidiaries of the Registrant
5
   
        EX-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.
5
   
        EX-31.2       Certification of CFO Pursuant to 18 U.S.C, Section 7241, as adopted
 
                             and Section 302 of the Sarbanes-Oxley Act of 2002.
5
   
       EX-32.1       Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted
 
                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
5
   
       EX-32.2       Certification CFO Pursuant to 18 U.S.C. Section 1350, as adopted
 
                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
5


 
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Notes to Exhibits:

1.   These documents and related exhibits have been previously filed with the Securities and Exchange Commission, and by this reference are incorporated herein.

2.   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-KSB filed on September 4, 2003.

3.   These documents and related exhibits have been previously filed under the Company's periodic reports for periods ended during the fiscal year 12/31/04 and are incorporated herein by reference.

4.   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on September 18, 2006.
 
5.   Attached to this report on Form 10-K as Exhibits and incorporated herein by reference.


 

 
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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
   
Arête Industries, Inc.
       
March 30, 2011
 
By:
/s/ Charles L. Gamber
       
Charles L. Gamber
       
President

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

     
/s/ Charles L. Gamber
Charles L. Gamber
President
March 30, 2011
     
/s/ Donald W. Prosser
Donald W. Prosser
Chairman of the Board
March 30, 2011
     
/s/ John R. Herzog
John R. Herzog
Acting Chief Financial Officer
and Director
March 30, 2011
     
/s/William Stewart
William Stewart
Director
March 30, 2011
     
/s/ Charles Davis
Charles Davis
Director
March 30, 2011
     

 
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