UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________

FORM 10-Q
_____________________

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended:  June 30, 2011

Or

 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from ___________________ to _______________________

Commission File Number 33-16820-D

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, Colorado
80036
(Address of Principal Executive Offices)
(Zip Code)

303-427-8688
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes   ¨ No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨ Yes   x No

Large
Accelerated Filer r
 
Accelerated
Filer r
 
Non-Accelerated Filer r
 (Do not check if a smaller reporting company)
 
Smaller Reporting
Company þ

As of August 15, 2011, Registrant had 7,701,848 shares of common stock issued and outstanding.

 
1

 

Table of Contents

 
 


 
Part 1 - Financial Information
  Page  
       
 
Item 1 - Financial Statements (Unaudited)
  3  
       
 
Item 2 - Management’s Discussion and Analysis and Results of Operations
 10  
       
 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
  13  
       
 
Item 4 - Controls and Procedures
  14  
       
 
Part 2 - Other Information
   
       
 
Item 1 - Legal Proceedings
 14  
       
 
Item 2 - Sales of Unregistered Equity Securities and Use of Proceeds
  14  
       
 
Item 3 - Defaults upon Senior Securities
  14  
       
 
Item 4 - Submission of Matters to a Vote of Security Holders
  14  
       
 
Item 5 - Other Information
  14  
       
 
Item 6 - Exhibits
  15  
 
 

 
2

 

Part 1 - Financial Information

Item 1 - Financial Statements (Unaudited)

 
 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
           
 
CONSOLIDATED BALANCE SHEET
           
 
(UNAUDITED)
           
               
               
     
December 31,
   
June 30,
 
ASSETS  
2010
   
2011
 
Current assets
             
    Cash and cash equivalents
    $ 15,990     $ 21,457  
    Prepaid expenses
      85,139       459,028  
    Revenue receivable
      12,625       794  
Total current assets
      113,754       481,279  
                   
Furniture and equipment, at cost net of accumulated
               
    depreciation of $173,076(2010) and $206,241(2011)
    277,736       255,626  
                   
Deposit and deferred costs Oil & Gas Purchase
    -       500,000  
                   
      $ 391,490     $ 1,236,905  
                   
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
Current liabilities
                 
    Accounts payable
    $ 604,271     $ 598,550  
    Accrued expenses
      267,373       87,365  
    Accrued payroll taxes
      111,690       111,690  
    Contacts payable
      536,528       18,750  
    Notes payable
      -       250,000  
    Notes payable & advances related parties
    704,475       105,219  
                   
Total current liabilities
      2,224,337       1,171,574  
                   
Stockholders' equity (deficit)
                 
    Convertible Class A preferred stock; $10 face value,
               
      1,000,000 shares authorized
                 
      Series 1, 30,000 shares authorized, 0 (2010)
               
      and 0 (2011) shares issued and outstanding
    -       -  
      Series 2, 25,000 shares authorized, 0 (2010)
               
      and 0 (2011) shares issued and outstanding
    -       -  
    Common stock, no par value; 4,990,000 shares
               
      authorized, 4,972,635 (2010) and 7,664,476 (2011)
    13,611,903       16,804,154  
      shares issued and outstanding
                 
    Accumulated deficit
      (15,444,750 )     (16,738,823 )
                   
Total stockholders' equity (deficit)
      (1,832,847 )     65,331  
                   
                   
      $ 391,490     $ 1,236,905  

See accompanying notes
 
 
3

 
 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended and six months,
(UNAUDITED)

                         
   
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Ending June 30,
   
Ending June 30,
   
Ending June 30,
   
Ending June 30,
 
   
2010
   
2011
   
2010
   
2011
 
Revenues
                       
   Oil & gas revenue
  $ 42,088     $ 15,983     $ 100,481     $ 45,639  
   Other income
    -       -       -       -  
                                 
Total revenues
    42,088       15,983       100,481       45,639  
                                 
Operating expenses
                               
   Oil & gas operating expenses
    82,142       43,619       167,649       111,373  
   Depreciation
    11,055       11,055       22,110       22,110  
   Rent
    863       956       1,670       2,143  
   Acquisition expense
    -       457,500       -       457,500  
   Other operating expenses
    176,614       320,689       339,810       712,423  
                                 
Total operating expenses
    270,674       833,819       531,239       1,305,549  
                                 
Net loss from operations
    (228,586 )     (817,836 )     (430,758 )     (1,259,910 )
                                 
Other income (expense):
                               
    Interest income
    -       139       1       279  
    Interest expense
    (11,798 )     (22,697 )     (23,595 )     (34,442 )
                                 
Total other income (expense)
    (11,798 )     (22,558 )     (23,594 )     (34,163 )
                                 
                                 
Net (loss)
  $ (240,384 )   $ (840,394 )   $ (454,352 )   $ (1,294,073 )
                                 
Basic and diluted loss per share
    (0.05 )     (0.12 )     (0.09 )     (0.22 )
                                 
                                 
Weighted average common shares outstanding
    4,930,000       6,985,000       4,930,000       5,995,000  
 
 
 
See accompanying notes
 
 
4

 
 
 
ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the six months ended June 30, 2011
(UNAUDITED)
 
                         
                         
                         
   
Common Stock
Shares
   
Amount
   
Accumulated
Deficit
   
Total
 
Balance at December 31, 2010
    4,972,635     $ 13,611,903     $ (15,444,750 )   $ (1,832,847 )
    Issuance of common stock to directors
                               
        and consultants for services
    1,690,841       1,753,751               1,753,751  
    Issuance of common stock in exchange
                               
        for debt conversion:
                               
        1) Notes to common stock
    835,000       835,000               835,000  
        2) Notes to common stock officers and directors
    62,500       500,000               500,000  
    Issuance of common stock in exchange
                               
       for cash
    103,500       103,500               103,500  
     Net loss
                    (1,294,073 )     (1,294,073 )
Balance at June 30, 2011
    7,664,476     $ 16,804,154     $ (16,738,823 )   $ 65,331  
 

See accompanying notes

 
5

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
For the six months ended, June 30,
(UNAUDITED)
 
     
2010
 
2011
           
Cash flows from operating activities:
     
    Net (loss)
   
      $     (454,352)
 
 $       (1,294,073)
Adjustments to reconcile net loss to net
     
cash used in operating activities:
     
Depreciation and amortization
                22,110
 
                22,110
Stock issued for services, note payments and
     
            interest on notes
   
                      -
 
              469,500
Non cash compensation for services
              211,805
 
              264,584
Changes in assets and liabilities:
     
            Accounts receivable
   
                 7,179
 
                11,832
            Accounts payable
   
              122,644
 
                (5,721)
            Accrued expenses
   
                85,327
 
                72,991
Total adjustments
   
              449,065
 
              835,296
           
           
Net cash provided (used) in operating activities
                (5,287)
 
            (458,777)
           
Cash flows from investing activities:
     
Deposit oil and gas properties
                      -
 
            (500,000)
           
Net cash used in investing activities
                      -
 
            (500,000)
           
Cash flows from financing activities:
     
     Notes payable receipts
   
                      -
 
              870,000
Proceeds from sale of common stock
                      -
 
              103,500
Reciept of advances - related parties
                      -
 
                      -
Payment of advances - related parties
                      -
 
                (9,256)
           
Net cash provided by financing activities
                      -
 
              964,244
           
Net increase (decrease) in cash and cash equivalents
                (5,287)
 
                 5,467
Cash and cash equivalents at beginning of period
                16,764
 
                15,990
           
Cash and cash equivalents at end of period
 $             11,477
 
 $             21,457
           
Supplemental disclosure of cash flow information:
     
     
2010
 
2011
Interest paid during the period
 
 $                    -
 
 $             17,755
Income taxes paid during the period
 $                   -
 
 $                     -
 
               
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
    During the quarter ended June 30, 2011 non-cash expenses for contracts with consultants amounted to $264,584.
 
    During the quarter ended June 30, 2011 wages to officers and directors and fees to
 
 
 
        consultants of $1,284,251 were paid by the issuance of common stock
 
 
    During the year ended June 30, 2010 non-cash expenses for contracts with consultants amounted to $211,805.
 
    During the quarter ended June 30, 2011, notes payable of $1,335,000 were converted into common stock.
 
    During the quarter ended June 30, 2010 wages to officers and directors and fees to
 
        consultants of $0 were paid by the issuance of common stock
 
 
 
 
See accompanying notes


 
6

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011

1. Basis of Presentation

The accompanying financial statements have been prepared by the Company and its subsidiary, without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the financial position as of December 31, 2010 and June 30, 2011, and the results of operations, stockholders’ equity (deficit), and cash flows for the periods ended June 30, 2010 and June 30, 2011.

The Company purchased and is operating a gas pipeline in Wyoming. Aggression Sports, Inc. (inactive) has discontinued operations and is consolidated in the Company’s financial statements.  All intercompany accounts have been eliminated in the consolidation.

The Company has incurred significant losses and at June 30, 2011, the Company has a working capital deficit of  $690,295 and a stockholders' equity of $65,331. 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 and common stock options.

2. Reclassifications

A reclassification was made on the December 31, 2010 balance sheet and June 30, 2010 cash flow statement. It was determined that a prepaid expense and a payable should not have been recorded for consulting services which were to be paid in stock but the stock had not been issued .

3. Delinquent amounts payable

As of June 30, 2011, the Company is delinquent on payments of various payroll taxes and penalties from the fiscal years prior to fiscal 2002. 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.

4. 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 as of December 31, 2010, which expires in years through 2030.

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.

5. Discontinued Operations

The Company's decision to pursue projects and investments in traditional oil and gas required that it take the decisive step to formally discontinue its former operations beginning August 1, 2003. This decision is reflected by a change in the presentation of the Company's financial statements to segregate discontinued operating results in previous periods from continuing operations going forward. There is no effect in the current three month period of this reclassification.

During 2003, the Company abandoned the development of Aggression Sports Inc., a subsidiary. At June 30, 2011, the remaining liabilities of this division were $0 in trade payables and $79,351 in unpaid payroll taxes.


 
7

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
 
6. Stock transactions

On April 11, 2011 the Company held its annual meeting. The shareholders voted to reverse split the common stock of the Company 100 for 1. The effective date of the reverse split was April 18, 2011.  All references to shares have been restated to reflect the reverse stock split if it had occurred at the beginning of the earliest period presented.

During the quarter ended June 30, 2011, the Company had the following common stock issuances:

·  
The Company issued common stock to pay its contract obligations and the pledged shares in exchange for the
pledged stock of the directors of 1,540,000 shares of common stock,
·  
The board of directors authorized three of the directors to exchange $500,000 of their loans and advances to the company for 62,500 shares of common stock or $8.00 per common share,
·  
The Company issued 72,841 shares of common stock for its obligation for directors fees accrued of 128,000,
·  
The Company sold 103,500 shares of common stock for cash of $103,500,
·  
The Company issued 75,000 shares for consulting services, related to the acquisition of properties, valued at $457,500,
·  
The Company paid 3,000 shares of common stock in exchange for loan fees of $12,000, and
·  
The Company exchanged $835,000 of notes for 835,000 shares of common stock

7.   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 320,000 shares of his stock in exchange for the services valued at $ 330,000. 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 was repaid in equal shares during the second fiscal quarter and was adjusted for the 100 to 1 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 350,000 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 was paid in equal shares during the second fiscal quarter and was adjusted for the 100 to 1 stock reverse on a prorate basis. The shares were issued in may 2011.

The Company entered into a consulting contract for financing, structure, and investor services on March 2, 2010 for 800,000 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 was paid in equal shares during the second fiscal quarter and was adjusted for the 100 to 1 stock reverse on a prorate basis. 770,000 shares were issued in May 2011.
 
The Company owes its directors for services for part of 2008, 2009, 2010 and first quarter 2011. They are accruing $128,000 during fiscal 2010 and first quarter  of fiscal 2011to be paid in the future with 72,841 shares of Common Stock valued at an average of  $1.76 per share. All shares were issued in May 2011.
 
8.  Notes payable
 
The Company received proceeds from a bridge loan of $250,000 from two individuals at 12% interest. The loan is secured by shares of common stock owned by the CEO of the Company and due on August 31, 2011.
 
8.  Advances – related parties
 
The officers and directors of the Company have advanced funds to pay for the filing and other necessary costs of the Company. The following are the advances from the officers and directors:

As of December 31, 2010 and June 2011, the Company owed the related parties are unsecured, due on demand, and working capital advances:
 

 
8

 

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
 
 
 
   
2010
   
2011
 
          Advances – Donald Prosser (2)
  $ 220,000     $ 20,000  
          Advances – Donald Prosser (3)
    4,290       --  
          Advances – Donald Prosser (1)
    215,000       --  
          Advances – Charles Gamber (3)
    4,966       --  
          Advances – William Stewart (3)
    20,219       20,219  
          Advances – William Stewart (2)
    75,000       25,000  
          Advances – Charles Davis (2)
    125,000       --  
          Advances – Charles Davis (2)                                                                                 
    40,000       40,000  
    
               
Balances
  $ 704,475     $ 105,219  
__________________
(1) Donald W. Prosser pledged 735,000 shares of his Common stock to individuals in exchange for a loan of $735,000 with no interest due in May 2011. The advance was used as working capital. John Herzog pledged 100,000 shares of his Common stock to individuals in exchange for a loan of $100,000 with no interest due in May 2011.
(2) $460,000 at December 31, 2010 and $85,000 at June 30, 2011 of the advances bear interest at 9.6% per annum.
(3) $29,475 at December 31, 2010 and $20.19 at June 30, 2011 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 $ 32,630 at June 30 2011. 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 June 30, 2011 for expenses of $105,748 included in accounts payable and production to the operator of $475,955 also included in accounts payable. The Company accrued $30,000 for directors fees (see note 6).

9. Purchase and sales agreement for purchase of oil & gas assets
 
May 25, 2011,  the Company entered into a Purchase and Sale Agreement and other related agreements and documents with the Tucker Family Investments, LLLP, DNR Oil & Gas, Inc. (“DNR”), and Tindall Operating Company (collectively, the “Sellers”) for the purchase of certain oil and gas operating properties in Colorado, Kansas, Wyoming, and Montana (collectively, the “Original Purchase and Sale Agreement”).  DNR is owned by a director of the Company, Charles B. Davis.  The consideration for the purchase was determined by arms-length bargaining between management of the Company and Mr. Davis, and the Company used reports of independent engineering firms to analyze the purchase price. The base purchase price for the properties was $10 million, of which the Company paid a nonrefundable down payment of $500,000 and the remaining $9.5 million was financed by the Sellers pursuant to a promissory note due July 1, 2011. The Company was unable to arrange the funding to pay the $9.5 million promissory note due on July 1, 2011, and therefore, the note was not paid. On July 29, 2011, the Company and Sellers entered into an Amended and Restated Purchase and Sale Agreement regarding the acquisition by the Company of the oil and gas properties. The material terms of the agreement are a base purchase price for the properties of $11 million to be paid by an initial payment of Nine Hundred Thousand and 00/l00 Dollars ($900,000.00), comprised of (i) a credit in the amount of Five Hundred Thousand and 00/l00 Dollars ($500,000.00) previously paid by Buyer in connection with the Original Purchase and Sale Agreement; and (ii) Four Hundred Thousand and 00/l00 Dollars ($400,000.00) in immediately verifiable funds contemporaneously with the execution of the Agreement. The entire amount of the Initial Payment is non-refundable under any circumstances. The remaining principal balance of the base purchase price in the amount of Ten Million One Hundred Thousand and 00/l00 Dollars ($10,100,000.00), together with interest at the monthly interest rate of Eighty Three Hundredths of One Percent (0.83%), will be paid to Sellers in three monthly payments, with $3,700,000.00 due August 15, 2011 (extended to August 31, 2011), and $3,200,000.00 due on each of September 15, 2011 and October 15, 2011.  The properties proposed to be purchased will be assigned to the Company only upon payment in full of the base purchase price. Potential additional purchase price payments would be due under the following circumstances.  If the Company increases is proven producing net oil reserves or net gas reserves by drilling or recompletion on certain of the acquired properties in Colorado and Kansas, then the Company will pay $250,000 for every 20,000 bbl or 150,000 mcf increase respectively, which amount will be increased by a factor if the Nymex prices for oil or gas stay above a specified price floor for more than 60 days.  Cumulative payments under the additional purchase price factor for the Colorado and Kansas properties are limited to $5 million.  The Company will also make similar payments to Sellers if the Company increases reserves in the Wyoming properties, and the Company will make additional payments under a formula by which Sellers and the Company will share proceeds of sales or production from untapped formations on the properties to be acquired in Wyoming.  Cumulative payments under the additional purchase price factor for the Wyoming properties are limited to $20 million. The aggregate of all additional purchase price payments from all factors is capped at $25 million. The Company also has an agreement for the right to receive a portion of the proceeds from sale of certain of the properties that could be sold before payment in full of the base purchase price and assignment of the properties to the Company. If those properties are sold by the Sellers prior to being assigned to the Company, the Company’s share of sales proceeds will be credit against the base purchase price owed.

 
9

 

Item 2 - Management's Discussion and Analysis and Results of Operations
 
Forward Looking Statement
 
Some of the statements contained in this quarterly report of Arête Industries, Inc., a Colorado corporation (hereinafter referred to as "we", "us", "our", "Company" and the "Registrant") discuss future expectations, contain projections of our plan of operation or financial condition or state other forward-looking information. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. From time to time, we also may provide forward-looking statements in other materials we release to the public.
 
Critical accounting policies

The Company has identified the accounting policies described below as critical to its business operations and the understanding of the Company's results of operations. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout this section where such policies affect the Company's reported and expected financial results. The preparation of this Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities of the Company, revenues and expenses of the Company during the reporting period and contingent assets and liabilities as of the date of the Company's financial statements. There can be no assurance that the actual results will not differ from those estimates.

Stock issuances

The Company has relied upon the issuance of shares of its common and preferred stock, and options to purchase its common stock and preferred stock to fund much of the Company's operations. The following describes the methods used to record various stock related transactions.

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.

Compensation related to the issuance of stock options to employees and directors is recorded at the intrinsic value of the options, which is the market price of the Company's common stock less the exercise price of the option at the measurement date. The Company's common stock issued to consultants is recorded at the market price of the Company's common stock at the measurement date. The Company's common stock options issued to consultants are recorded at the fair value of the Company's options computed using the Black-Scholes Model.

Plan of Operation

In 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 900,000 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.

 
10

 


May 25, 2011,  the Company entered into a Purchase and Sale Agreement and other related agreements and documents with the Tucker Family Investments, LLLP, DNR Oil & Gas, Inc. (“DNR”), and Tindall Operating Company (collectively, the “Sellers”) for the purchase of certain oil and gas operating properties in Colorado, Kansas, Wyoming, and Montana (collectively, the “Original Purchase and Sale Agreement”).  DNR is owned by a director of the Company, Charles B. Davis.  The consideration for the purchase was determined by arms-length bargaining between management of the Company and Mr. Davis, and the Company used reports of independent engineering firms to analyze the purchase price. The base purchase price for the properties was $10 million, of which the Company paid a nonrefundable down payment of $500,000 and the remaining $9.5 million was financed by the Sellers pursuant to a promissory note due July 1, 2011. The Company was unable to arrange the funding to pay the $9.5 million promissory note due on July 1, 2011, and therefore, the note was not paid. On July 29, 2011, the Company and Sellers entered into an Amended and Restated Purchase and Sale Agreement regarding the acquisition by the Company of the oil and gas properties. The material terms of the agreement are a base purchase price for the properties of $11 million to be paid by an initial payment of Nine Hundred Thousand and 00/l00 Dollars ($900,000.00), comprised of (i) a credit in the amount of Five Hundred Thousand and 00/l00 Dollars ($500,000.00) previously paid by Buyer in connection with the Original Purchase and Sale Agreement; and (ii) Four Hundred Thousand and 00/l00 Dollars ($400,000.00) in immediately verifiable funds contemporaneously with the execution of the Agreement. The entire amount of the Initial Payment is non-refundable under any circumstances. The remaining principal balance of the base purchase price in the amount of Ten Million One Hundred Thousand and 00/l00 Dollars ($10,100,000.00), together with interest at the monthly interest rate of Eighty Three Hundredths of One Percent (0.83%), will be paid to Sellers in three monthly payments, with $3,700,000.00 due August 15, 2011 (extended to August 31, 2011), and $3,200,000.00 due on each of September 15, 2011 and October 15, 2011.  The properties proposed to be purchased will be assigned to the Company only upon payment in full of the base purchase price. Potential additional purchase price payments would be due under the following circumstances.  If the Company increases is proven producing net oil reserves or net gas reserves by drilling or recompletion on certain of the acquired properties in Colorado and Kansas, then the Company will pay $250,000 for every 20,000 bbl or 150,000 mcf increase respectively, which amount will be increased by a factor if the Nymex prices for oil or gas stay above a specified price floor for more than 60 days.  Cumulative payments under the additional purchase price factor for the Colorado and Kansas properties are limited to $5 million.  The Company will also make similar payments to Sellers if the Company increases reserves in the Wyoming properties, and the Company will make additional payments under a formula by which Sellers and the Company will share proceeds of sales or production from untapped formations on the properties to be acquired in Wyoming.  Cumulative payments under the additional purchase price factor for the Wyoming properties are limited to $20 million. The aggregate of all additional purchase price payments from all factors is capped at $25 million. The Company also has an agreement for the right to receive a portion of the proceeds from sale of certain of the properties that could be sold before payment in full of the base purchase price and assignment of the properties to the Company. If those properties are sold by the Sellers prior to being assigned to the Company, the Company’s share of sales proceeds will be credit against the base purchase price owed.

Financial Condition

In prior periods, we wrote off Aggression Sports, Inc.'s fixed assets and inventory and molds held for disposal from discontinued operations. Additionally, we continue to reduce certain amounts payable from discontinued operations as extinguishment of debt, through the passage of statutes of limitation. We expect future write-downs and reclassifications from discontinued operations and extinguishment of debt to be nominal and incremental in nature.

As of the end of the six months ended June 30, 2011, the Company had $1,236,905 in total assets. This compares to total assets of $391,490 as of the fiscal year ended December 31, 2010. Total liabilities were $1,171,574 as of June 30, 2011 compared to $2,224,337 as of the fiscal year ended December 31, 2010. Accounts payable and accrued expenses at June 30, 2011 were $797,605 as compared to $983,334 at December 31, 2010. Advances and notes payable to related parties at June 30, 2011 were $105,219 as compared to $704,475 at December 31, 2010. During the six months ended June 30, 2011, total liabilities were decreased by $1,052,763.  Net (loss) was $(1,294,073), increasing the accumulated deficit as of June 30, 2011 to $16,738,823, as compared to an accumulated deficit as of December 31, 2010 of $15,444,750.

During 2003, the Company abandoned the development of the Aggression Sports, Inc. subsidiary. At June 30, 2011, the remaining liabilities of this subsidiary were $111,690 in unpaid payroll taxes.

 
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During the quarters ended June 30, 2011, the Company continued to rely upon infusions of cash from loans and loans of stock by officers and directors and sales of common stock.  During the quarter ended June 30, 2011, the Company had the following common stock issuances:
·  
The Company issued common stock to pay its contract obligations and the pledged shares in exchange for the
pledged stock of the directors of 1,540,000 shares of common stock,
·  
The board of directors authorized three of the directors to exchange $500,000 of their loans and advances to the company for 62,500 shares of common stock or $8.00 per common share,
·  
The Company issued 72,841 shares of common stock for its obligation for directors fees accrued of $128,000,
·  
The Company sold 103,500 shares of common stock for cash of $103,500,
·  
The Company issued 75,000 shares for consulting services related to the acquisition of properties, valued at $475,000,
·  
The Company paid 3,000 shares of common stock in exchange for loan fees of $12,000, and
·  
The Company exchanged $835,000 of notes for 835,000 shares of common stock.


We are now in the process of locating financing to complete the payment of the Purchase and Sale contract for oil and gas properties in Wyoming, Colorado, Kansas, and Montana. We are also a looking to arrange a sale, joint venture, or secured financing against several of the properties included in the purchase. We believe that these plans will help to complete the purchase, drilling, and operational financing needed for the next year. We do not have any signed agreements on the items we are arranging so the outcome of the financing is still unknown at this time. If the financing arrangement do not get completed it could affect the future operations of the Company.

Results of operations for the Six Months ended June 30, 2011 Compared to Six Months ended June 30, 2010.

The Company had $45,639 in revenues from operations during the six months ended June 30, 2011, and $100,481 in revenues during the comparable period ended June 30, 2010. The price of natural gas for the six months ended June 30, 2011 was below $3.50 per mcf .  Net loss from operations for the six months ended June 30, 2011 was $(1,259,910) as compared to a net loss from operations of $(430,758) for the six months ended June 30, 2010. The net loss of $(1,294,073) during the six months ended June 30, 2011 included interest expense of $34,442. The net loss for the six months ended June 30, 2010 was $(454,352) included interest expense of $23,595.

Results of operations for the Three Months ended June 30, 2011 Compared to Three Months ended June 30, 2010.

The Company had $15,983 in revenues from operations during the quarter ended June 30, 2011, and $42,088 in revenues during the comparable period ended June 30, 2010. The price of natural gas for the three months ended June 30, 2011 was below $3.50 per mmcf.  Net loss from operations for the quarter ended June 30, 2011 was $(817,836) as compared to a net loss from operations of $(228,586) for the quarter ended June 30, 2010. The net loss of $(840,394) during the quarter ended June 30, 2011 includes interest expense of $22,697. The net loss for the quarter ended June 30, 2010 was $(240,384) and includes interest expense of $11,798.

The Company rents space for file storage and furniture for $1,393 for the six months ended June 30, 2011. The Company uses space rented by Director for meetings and to keep current records and pays $750 per quarter or $1,500 for the six months ended June 30, 2011.

As stated above, we will continue to operate the Company on an austere program of minimum overhead, while utilizing skills of its board members, independent contractors as administrative staff and individual independent contractors with expertise in business development, capital acquisition, corporate visibility, oil and gas development, geology and operations with the use of our common stock as incentives during the development of our business model. Further as opportunities for participation in profitable revenue producing projects come forward, we intend that consultants and advisors will be offered compensation from revenues or interests, direct participations, royalties or other incentives from the specific projects to which they contribute. While reducing the amount of variable costs, there is almost no way to reduce or offset our fixed expenses related to office expense, legal, accounting, transfer agent fees, Securities Act reporting, corporate governance, and shareholder communications. Our future expectation is that monthly operating expenses will remain as low as possible until new opportunities are initiated, of which there can be no assurance, in which event, the operating costs of the Company may increase relative to the need for administrative and executive staff and overhead to provide support for these new business activities. The other operating expenses increase by $391,734 for the six months ended June 30, 2011 due to the costs of due diligence, reserve studies, accounting, legal, and costs related to the purchase of the properties in described in the purchase and sale agreement.


 
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Liquidity and Capital Resources

The Company had a working capital deficit as of June 30, 2011 of $690,295. This compares to a working capital deficit of $2,110,583 as of December 31, 2010.

The Company had a stockholder's equity at June 30, 2011 of $65,331. This is compared to stockholder's deficit at December 31, 2010 of $1,832,847. The stockholder's equity decreased due the Company's operating loss and increase by the sale of common stock.

The Company has net cash (used) by operating activities for the six months ended June 30, 2011 of $(458,777) as compared to net cash (used) by operating activities of $(5,287) for the six months ended June 30, 2010.

The Company had cash used in investing activities of $500,000 for deposit on acquisition for the six months ended June 30, 2011 and had no net cash used in investing activities for the six months ended June 30, 2010.

The Company had net cash provided by financing activities for the six months ended June 30, 2011 of $964,244 that includes sale of common stock of $103,500 and proceeds from loans of $870,000 less payments of $9,256 for advances – related parties as compared to no net cash provided by financing activities for the six months ended June 30, 2010.

At June 30, 2011, the Company had no material commitments for capital expenditures.

Management believes that the Company will experience significant difficulty internally raising significant additional equity capital or debt until these matters have been resolved and the Company has eliminated a substantial amount of its outstanding debt and/or achieves operating revenue from its oil and gas operations. The Company looks to earn management fees through its newly formed subsidiary and revenue from proposed oil and gas development activities that it can earn-in on successful financing and commencement of operations, of which there is no assurance.

Unless and until it achieves success in its proposed activities, of which there is no assurance, the Company may continue to be required to issue further stock to pay executives, consultants and other employees, which may have a continuing dilutive effect on other shareholders of the Company. Failure of the Company to acquire additional capital in the form of either debt or equity capital or revenue from proposed operations will most likely impair the ability of the Company to meet its obligations in the near-term.

 
Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company is defined by Rule 229.10 (f)(1) as a “Smaller Reporting Company” and is not required to provide or disclose the information required by this item.
 
 
 
 
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Item 4 - Controls and Procedures

As of June 30, 2011, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder.

Further, there were no changes in our internal control over financial reporting during the first fiscal quarter that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION


Item 1 - Legal Proceedings.

None


Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.

The Company sold 1,001,000 shares of Common stock for $1,438,500.  The Common stock was sold $103,500 of cash and $1,335,000 in exchange for conversion of notes payable. The proceeds were used to finance the operations and the down-payment for the purchase of the oil & gas properties as described in the Purchase and Sale agreement reported in an form 8-K filed May 25, 2011 and form 8-K/A filed August 4, 2011.


Item 3 - Defaults upon Senior Securities.

None


Item 4 - Submission of Matters to a Vote of Securities Holders.

None


Item 5 - Other Information.

None


Item 6. Exhibits

The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein.
 
31.1
Certification of CEO pursuant to Rule 13a-14(a)  or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of CFO pursuant to Rule 13a-14(a)  or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
32.2
Certification of CFRO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 
 

 
14

 

ARÊTE INDUSTRIES, INC.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

By:   
/s/ Donald W Prosser, CEO
 
Donald W Prosser, Principal Executive Officer
 
Dated: August 22, 2011
   
   
By:   
/s/ John Herzog, Interim CFO
 
John Herzog
 
Interim Principal Financial and Accounting Officer
 
Dated: August 22, 2011


 
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