UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________

FORM 10-Q

_____________________

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

For the quarterly period ended ~~September~~March 3031, ~~2015~~2016

☐ 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.)

7260 Osceola Street, Westminster, Colorado 80030

(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. ☒ Yes ☐ ~~Yes ☒~~ No ~~(1)~~

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☒

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

As of ~~November~~December 1623, ~~2015~~2016, the Registrant had 1314,~~130~~295,413 shares of common stock issued and outstanding.

1 Explanatory Note: The Company is a voluntary filer with the Securities and Exchange Commission but it has filed all Exchange Act reports for the preceding 12 months.

ARÊTE INDUSTRIES, INC.

Table of Contents

Page Part 1 - Financial Information 3 Item 1 - Financial Statements 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18 Item 4 - Controls and Procedures 19 Part 2 - Other Information 19 Item 1 - Legal Proceedings 19 Item 1A - Risk Factors 19 Item 2 - Sales of Unregistered Equity Securities and Use of Proceeds 19 Item 3 - Defaults upon Senior Securities 19 Item 4 - Mine Safety Disclosures 19 Item 5 - Other Information 19 Item 6 – Exhibits 20 Signatures 21

	Page
Part 1 - Financial Information		3
Item 1 - Financial Statements		3
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk		19
Item 4 - Controls and Procedures		20
Part 2 - Other Information		20
Item 1 - Legal Proceedings		20
Item 1A - Risk Factors		20
Item 2 - Sales of Unregistered Equity Securities and Use of Proceeds		20
Item 3 - Defaults upon Senior Securities		20
Item 4 - Mine Safety Disclosures		20
Item 5 - Other Information		20
Item 6 – Exhibits		21
Signatures		22

Part 1 – ~~FINANCIAL~~Financial ~~INFORMATION~~Information

Item 1 - Financial Statements

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

ARÊTE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS (Unaudited)
As of
	March 31,			December 31,
ASSETS	2016			2015

Current Assets:
Cash and cash equivalents	$	322,793		$	521,666
Accounts receivable - oil and gas sales		19,225			2,539
Subscription receivable		-			105,000
Prepaid expenses and other		42,189			32,554

Total Current Assets		384,207			661,759

Property and Equipment:
Oil and gas properties, at cost, successful efforts method:
Proved properties		8,431,283			8,683,273
Unproved properties		154,972			154,836
Furniture and equipment		22,522			22,522
Total property and equipment		8,608,777			8,860,631
Less accumulated depreciation, depletion and amortization		(3,400,522	)		(3,245,522	)

Net Property and Equipment		5,208,255			5,615,109

TOTAL ASSETS	$	5,592,462		$	6,276,868

~~UNAUDITED~~The ~~CONSOLIDATED~~Accompanying ~~BALANCE~~Notes ~~SHEETS~~are an Integral Part of These Financial Statements

	December 31,			September 30,
ASSETS	2014			2015
Current Assets:
Cash and equivalents	$	30,755		$	2,109
Oil and gas sales receivable		14,521			63,325
Receivable from DNR Oil & Gas, Inc.:
Oil and gas sales, net of production costs		89,147			39,173
Other		78,273			-
Prepaid expenses and other		34,222			21,840
Total Current Assets		246,918			126,447
Property and Equipment:
Oil and gas properties, at cost, successful efforts method:
Proved properties		10,222,668			10,267,669
Unevaluated properties		348,836			348,836
Natural gas gathering system		442,195			442,195
Furniture and equipment		22,522			22,522
Total property and equipment		11,036,221			11,081,222
Less accumulated depreciation, depletion and amortization		(2,840,173	)		(3,349,871	)
Net Property and Equipment		8,196,048			7,731,351
TOTAL ASSETS	$	8,442,966		$	7,857,798

The Accompanying Notes are an Integral Part of These Financial Statements.

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

ARÊTE INDUSTRIES, INC.
CONDENSED BALANCE SHEETS, Continued (Unaudited)
As of
	March 31,			December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY	2016			2015
Current Liabilities:
Accounts payable:
Trade accounts payable		107,073			64,896
Accounts payable - DNR Oil & Gas, Inc.		309,421			501,281
Accounts payable - directors and affiliates		22,500			-
Dividends payable:
Dividends payable		5,425			-
Dividends payable - directors and affiliates		43,084			-
Accrued interest expense:
Accrued interest expense		2,662			2,532
Accrued interest expense - directors and affiliates		11,811			9,442
Notes and advances payable - current portion:
Notes and advances payable		349,956			989,853
Notes and advances payable - directors and affiliates		134,116			13,152
Current portion of asset retirement obligations		419,094			409,621
Other accrued costs and expenses		84,827			68,577
Total Current Liabilities		1,489,969			2,059,354
Long-Term Liabilities:
Notes and advances payable, net of current portion:
Notes and advances payable		806,781			173,519
Notes and advances payable - Directors and affiliates		27,110			151,379
Asset retirement obligations, net of current portion		599,645			585,576
Total Long-Term Liabilities		1,433,536			910,474
Total Liabilities		2,923,505			2,969,828
Commitments and Contingencies (Notes 6, 7 and 8)
Stockholders' Equity:
Convertible Class A preferred stock; $10,000 face value per share, authorized 1,000,000 shares:
Series 1; 30,000 shares authorized, none issued and outstanding.		-			-
Series 2; authorized 2,500 shares, 272 and 267 shares issued and outstanding in 2016 and 2015, respectively, liquidation preference $2,720,000.		2,720,000			2,670,000
Common stock, no par value; 499,000,000 shares authorized, 14,295,413 issued and outstanding in 2016 and 2015.		21,502,635			21,502,635
Accumulated deficit		(21,553,678	)		(20,865,595	)
Total Stockholders' Equity		2,668,957			3,307,040
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,592,462		$	6,276,868

UNAUDITED CONSOLIDATED BALANCE SHEETS, Continued

	December 31,			September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY	2014			2015
Current Liabilities:
Accounts payable:
Payable to DNR Oil & Gas, Inc.:
Operator fees and other		36,000			128,253
Unrelated parties		43,365			72,621
Notes and advances payable - current portion:
Directors and affiliates		288,258			288,567
Unrelated parties		872,239			970,400
Accrued interest expense		3,279			31,377
Accrued consulting - related party		21,800			23,700
Director fees payable in common stock		20,900			-
Current portion of asset retirement obligations		191,843			297,700
Other accrued costs and expenses		63,642			148,777
Total Current Liabilities		1,541,326			1,961,395
Long-Term Liabilities:
Contingent acquisition costs payable to DNR Oil & Gas, Inc.		250,000			250,000
Notes and advances payable, net of current portion:
DNR Oil & Gas, Inc.		792,151			792,151
Directors and affiliates		62,440			49,206
Unrelated parties		63,534			25,640
Asset retirement obligations, net of current portion		557,170			506,500
Total Long-Term Liabilities		1,725,295			1,623,497
Total Liabilities		3,266,621			3,584,892
Commitments and Contingencies (Notes 3, 4, 10 and 13)
Stockholders' Equity:
Convertible Class A preferred stock; $10,000 face value per share, authorized 1,000,000 shares:
Series 1; authorized 30,000 shares, no shares issued and outstanding in 2014 and 2015		-			-
Series 2; authorized 2,500 shares, no shares issued and outstanding in 2014 and 2015		-			-
Common stock, no par value; authorized 499,000,000 shares, issued and outstanding 12,558,459 in 2014 and 13,130,413 in 2015		21,294,887			21,384,285
Accumulated deficit		(16,118,542	)		(17,111,379	)
Total Stockholders' Equity		5,176,345			4,272,906
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	8,442,966		$	7,857,798

The Accompanying Notes are an Integral Part of These Financial Statements.

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES



ARÊTE INDUSTRIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)


	For the three months ended March 31,
	2016			2015
Revenues:
Oil sales	$	153,983		$	187,149
Natural gas sales		28,218			55,516
Royalty revenues		898			941
Sale of oil and natural gas properties		-			27,120
Total revenues		183,099			270,726
Operating Expenses:
Oil and gas producing activities:
Lease operating expenses		282,558			216,799
Production taxes		14,114			18,425
Depreciation, depletion, amortization and accretion		178,542			207,969
Impairment expense		252,000			-
Gas gathering:
Operating expenses		-			1,406
Depreciation		-			11,055
General and administrative expenses:
Director fees		10,000			10,000
Investor relations		1,907			3,163
Legal, auditing and professional fees		29,171			12,565
Consulting fees executive services-Related Parties		16,500			47,400
Other adminstrative expenses		15,166			19,154
Depreciation		-			142
Total operating expenses		799,958			548,078
Operating loss		(616,859	)		(277,352	)

Other income (expense)
Interest income (expense), net		(22,715	)		(27,158	)
Total other expense		(22,715	)		(27,158	)
Loss before income taxes		(639,574	)		(304,510	)
Income tax benefit (expense)		-			-
Net loss attributable to Arête Industries, Inc.	$	(639,574	)	$	(304,510	)
Net Loss Applicable to Common Stockholders:
Net loss	$	(639,574	)	$	(304,510	)
Preferred stock dividends declared		(48,509	)		-
Net loss applicable to common stockholders	$	(688,083	)	$	(304,510	)
Loss Per Share Applicable to Common Stockholders:
Basic	$	(0.05	)	$	(0.02	)

Diluted	$	(0.05	)	$	(0.02	)
Weighted Average Number of Common Shares Outstanding:
Basic		14,295,400			12,810,000

Diluted		14,295,400			12,810,000


The Accompanying Notes are an Integral Part of These Financial Statements.

UNAUDITED CONSOLLIDATED STATEMENTS OF OPERATIONS

	Three months Ended September 30,						Nine Months Ended September 30,
	2014			2015			2014			2015
Revenues:
Oil and natural gas sales	$	555,984		$	253,235		$	1,721,223		$	730,460
Sale of oil and natural gas properties		108,479			-			350,951			27,120
Royalty revenues		755			514			2,525			4,455
Total revenues		665,218			253,749			2,074,699			762,035
Operating Expenses:
Oil and gas producing activities:
Lease operating expenses		196,134			270,719			566,068			685,587
Production taxes		52,245			29,101			143,891			66,900
Depreciation, depletion, amortization and accretion		210,335			189,335			502,180			531,292
Gas gathering:
Operating expenses		609			-			7,979			1,406
Depreciation		11,055			11,055			33,165			33,165
General and administrative expenses:
Director fees		10,000			13,333			10,450			35,333
Investor relations		2,448			30,897			37,634			41,525
Legal, auditing and professional fees		37,109			6,458			115,753			80,313
Consulting fees executive services-related parties		41,250			43,333			168,750			126,733
Other adminstrative expenses		18,084			20,699			59,166			65,138
Depreciation		143			143			428			428
Total operating expenses		579,412			615,073			1,645,464			1,667,820
Operating income (loss)		85,806			(361,324	)		429,235			(905,785	)
Interest expense		(33,350	)		(28,372	)		(103,328	)		(87,052	)
Total other expense		(33,350	)		(28,372	)		(103,328	)		(87,052	)
Income (loss) before income taxes		52,456			(389,696	)		325,907			(992,837	)
Income tax benefit (expense)		-			-			-
Net income (loss) attributable to Arete Industries, Inc.	$	52,456		$	(389,696	)	$	325,907		$	(992,837	)
Net Income (Loss) Applicable to Common Stockholders:
Net income (loss)	$	52,456		$	(389,696	)	$	325,907		$	(992,837	)
Redemption of Preferred Stock		17,951			-			17,951			-
Accrued Preferred stock dividends		(1,875	)		-			(9,375	)		-
Net income (loss) applicable to common stockholders	$	68,532		$	(389,696	)	$	334,483		$	(992,837	)
Earnings (Loss) Per Share Applicable to Common Stockholders:
Basic	$	0.01		$	(0.03	)	$	0.03		$	(0.08	)
Diluted	$	0.01		$	(0.03	)	$	0.03		$	(0.08	)
Weighted Average Number of Common Shares Outstanding:
Basic		12,408,000			12,966,000			12,532,000			12,764,000
Diluted		12,408,000			12,966,000			12,532,000			12,764,000

The Accompanying Notes are an Integral Part of These Financial Statements.

ARÊTE INDUSTRIES, INC. ~~AND SUBSIDIARIES~~

UNAUDITED ~~CONSOLIDATED~~CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY ~~(DEFICIT)~~

For the Nine Months Ended September 30, 2015

	Class A Preferred Stock				Common Stock				Accumulated
	Shares		Amount		Shares		Amount		Deficit			Total
Balances, January 1, 2014		-	$	-		12,558,459	$	21,294,887	$	(16,118,542	)	$	5,176,345

Common Stock Issued for Services - Related Parties		-		-		206,666		32,516		-			32,516
Common Stock Issued for Directors Fees		-		-		530,288		75,232		-			75,232
Issuance of common stock for oil and gas acquisition		-		-		1,000,000		100,000		-			100,000
Issuance of series A2 preferred stock		177		1,770,000		-		-		-			1,770,000
Preferred stock issued for settlement of debt with a related party		90		900,000		-		-		-			900,000
Net loss		-		-		-		-		(4,747,053	)		(4,747,053	)
Balances, December 31, 2015		267	$	2,670,000		14,295,413	$	21,502,635	$	(20,865,595	)	$	3,307,040
Issuance of series A2 preferred stock		5		50,000		-		-		-			50,000
Preferred stock dividends										(48,509	)		(48,509	)
Net loss		-		-		-		-		(639,574	)		(639,574	)
Balances, March 31, 2016		272	$	2,720,000		14,295,413	$	21,502,635	$	(21,553,678	)	$	2,668,957

	Common Stock				Accumulated
	Shares		Amount		Deficit			Total
Balances, December 31, 2014		12,558,459	$	21,294,887	$	(16,118,542	)	$	5,176,345
Common Stock Issued for Services - Related Parties		216,666		33,166					33,166
Common Stock Issued for Directors Fees		355,288		56,232					56,232
Net loss						(992,837	)		(992,837	)
Balances, September 30, 2015		13,130,413	$	21,384,285	$	(17,111,379	)	$	4,272,906

The Accompanying Notes are an Integral Part of These Financial Statements.

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2014 and 2015

ARÊTE INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

	For the three months ended March 31,
	2016			2015
Cash Flows from Operating Activities:
Net loss	$	(639,574	)	$	(304,510	)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization		155,000			202,225
Accretion of discount on asset retirement obligations		23,542			16,941
Gain on sale of oil and gas properties		-			(27,120	)
Impairment expense		252,000			-
Changes in operating assets and liabilities:
Accounts receivable		(16,686	)		77,309
Prepaid expenses and other		(9,635	)		(9,349	)
Accounts payable		42,177			(829	)
Accounts payable - related parties and director's fees		22,500			-
Accounts payable - DNR Oil & Gas, Inc.		(191,860	)		-
Other accrued expenses and accrued interest		18,749			54,249
Net cash provided by (used in) operating activities		(343,787	)		8,916
Cash Flows from Investing Activities:
Capital expenditures for property and equipment		(146	)		(61,962	)
Proceeds from sale of oil & gas properties		-			50,000
Net cash used in investing activities		(146	)		(11,962	)
Cash Flows from Financing Activities:
Proceeds from notes payable		25,500			-
Principal payments on notes payable		(35,440	)		(6,493	)
Proceeds received from subscription receivable		105,000			-
Proceeds received from issuance of Series A2 Preferred Stock		50,000			-
Net cash provided by (used in) financing activities		145,060			(6,493	)
Net decrease in cash and equivalents		(198,873	)		(9,539	)
Cash and equivalents, beginning of period		521,666			30,755

Cash and equivalents, end of period	$	322,793		$	21,216

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	19,219		$	17,067
Accrued dividends	$	48,509		$	-
The Accompanying Notes are an Integral Part of These Financial Statements.

	2014			2015
Cash Flows from Operating Activities:
Net income (loss)	$	325,907		$	(992,837	)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization		486,061			509,698
Accretion of discount on asset retirement obligations		49,712			55,187
Gain on sale of oil and gas properties		(350,951	)		(27,120	)
Common stock issued in exchange for services		-			55,165
Changes in operating assets and liabilities:
Accounts receivable		(208,639	)		79,443
Prepaid expenses and other		(2,552	)		25,715
Accounts payable		83,069			118,044
Directors fees and officers services payable		19,200			-
Accrued costs and expenses		12,781			115,133
Net cash provided by (used in) operating activities		414,588			(61,572	)
Cash Flows from Investing Activities:
Capital expenditures for property and equipment		(449,791	)		(64,416	)
Proceeds from sale of oil and gas properties		263,438			50,000
Net cash provided by (used in) investing activities		(186,353	)		(14,416	)
Cash Flows from Financing Activities:
Proceeds from notes and advance payable		622,638			67,000
Principal payments on notes payable		(1,080,776	)		(19,658	)
Redemption of common stock		(228,000	)		-
Redemption of preferred stock		(15,500	)		-
Net cash provided by (used in) financing activities		(701,638	)		47,342
Net increase (decrease) in cash and equivalents		(473,403	)		(28,646	)
Cash and equivalents, beginning of period		476,323			30,755
Cash and equivalents, end of period	$	2,920		$	2,109
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	77,589		$	55,913
Cash paid for income taxes	$	-		$	-
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Additions to oil & gas property financed in accounts payable	$	-		$	3,465
Common Stock Issued as a prepayment for services	$	-		$	13,333
Common Stock issued for directors fees payable	$	-		$	20,900
Conversion of A-1 Series Preferred Stock to Notes Payable	$	62,000		$	-

The Accompanying Notes are an Integral Part of These Financial Statements.

~~ARÊTE~~Note ~~INDUSTRIES,~~1 ~~INC.~~- ~~AND~~Organization ~~SUBSIDIARIES~~and Nature of Operations

~~NOTES~~Arête TOIndustries, ~~UNAUDITED~~Inc. ~~CONSOLIDATED~~("Arête" ~~FINANCIAL~~or ~~STATEMENTS~~the "Company"), is a Colorado corporation that was incorporated on July 21, 1987. The Company seeks to focus on acquiring interests in traditional oil and gas ventures, and seek properties that offer profit potential from overlooked and by-passed reserves of oil and natural gas, which may include shut-in wells, in-field development, stripper wells, re-completion and re-working projects. In addition, the Company's strategy includes purchase and sale of acreage prospective for oil and natural gas and seeking to obtain cash flow from the sale and farm out of such prospects.

~~September~~Note ~~30,~~2 ~~2015~~- Summary of Significant Accounting Policies

1. Organization and Nature of Operations

Arête Industries, Inc. ("Arête" or the "Company"), is a Colorado corporation that was incorporated on July 21, 1987. The Company owns 100% of Arete Energy, Inc., which is an inactive subsidiary that has no assets, liabilities or operations. Arête has operated a natural gas gathering system in Wyoming since 2006 and on July 29, 2011, the Company purchased oil & natural gas properties in Colorado, Montana, Kansas, and Wyoming.

The Company seeks to focus on acquiring interests in traditional oil and gas ventures, and seek properties that offer profit potential from overlooked and by-passed reserves of oil and natural gas, which may include shut-in wells, in-field development, stripper wells, re-completion and re-working projects. In addition, the Company's strategy includes purchase and sale of acreage prospective for oil and natural gas and seeking to obtain cash flow from the sale and farm out of such prospects.

2. Summary of Significant Accounting Policies

Basis of presentation

~~The~~These ~~accompanying unaudited consolidated financial~~ statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States ("GAAP") for interim financial information. They do not include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to ~~consolidated~~ financial statements included in Arête's Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015 as filed with the SEC. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the financial position as of ~~December~~March 31, ~~2014~~2016, and ~~September~~December 3031, 2015, and the results of operations, changes in stockholders' equity, and cash flows for the ~~periods~~quarters ended ~~September~~March, 3031, ~~2014~~2016, and 2015. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for a full year. The Company's ~~2014~~2015 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.

In connection with the preparation of its unaudited condensed ~~consolidated~~ financial statements, the Company evaluated events subsequent to the balance sheet date of ~~September~~March 3031, ~~2015~~2016, through the filing date of this report.

~~Use~~Liquidity ofand ~~Estimates~~Management's Plans

The Company has reported net operating losses during the three months ended March 31, 2016, and for the fiscal year ended December 31, 2015. The Company also has negative working capital at March 31, 2016, and is currently in default with two of its creditors for which it has notes payable. This recent history of operating losses, negative working capital and defaults, along with the recent decrease in commodity prices, may adversely affect the Company's ability to access the capital it needs to continue operations on terms acceptable to the Company when such capital is needed. However, due to the Company's capital raise through the use of it's Series A2 Preferred Stock (Note 6 - Stock transactions and preferred stock dividends), its entry into an extension of some of its key notes payable to long-term debt (Note 7 - Notes and advances payable) and the acquisition of additional producing wells and properties at the end of fiscal year 2015, the Company believes that it has sufficient ability to raise additional capital to fund its current operations over, at least, 12 months from the report date of this filing and therefore, that it has mitigated substantial doubt about its ability to continue as a going concern. Still, the Company's ability to continue as a going concern is dependent upon its ability to successfully accomplish its business plan and continue to secure other sources of financing and attain continuously profitable operations. The Company continues to pursue additional sources of financing but there can be no assurance that such financing will be completed on terms favorable to the Company, if at all.

Use of estimates

Preparation of the Company's financial statements in accordance with GAAP requires management to make various assumptions, judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ from amounts initially established.

The most significant areas requiring the use of assumptions, judgments and estimates relate to the volumes of natural gas and oil reserves used in calculating depreciation, depletion and amortization ("DD&A"), the amount of expected future cash flows used in determining possible impairments of oil and gas properties and the amount of future capital costs used in these calculations. Assumptions, judgments and estimates also are required in determining future asset retirement obligations, and impairments of undeveloped properties~~, and in valuing stock-based payment awards~~.

~~The~~Oil ~~only~~and ~~component~~Gas ofproducing ~~comprehensive income that is applicable to the Company is net income (loss). Accordingly, a separate statement of comprehensive income (loss) is not included in these financial statements.~~activities

~~Principles~~The Company's oil and gas exploration and production activities are accounted for using the successful efforts method. Under this method, all property acquisition costs and costs of ~~Consolidation~~exploratory and development wells are capitalized when incurred, pending determination of whether the well has proved reserves. If an exploratory well does not result in proved reserves, the costs of drilling the well are charged to expense and included within cash flows from investing activities in the Statements of Cash Flows. The costs of development wells are capitalized whether productive or nonproductive. Oil and gas lease acquisition costs are also capitalized.

The consolidated financial statements of the Company include the accounts of Arête and its inactive subsidiary, Arete Energy, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

~~ARÊTE~~Other ~~INDUSTRIES~~exploration costs, ~~INC~~including certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. ~~AND~~The ~~SUBSIDIARIES~~sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the unit-of-production DD&A rate. A gain or loss is recognized for all other sales of proved properties and is classified in other operating revenues. Maintenance and repairs are charged to expense, and renewals and betterments are capitalized to the appropriate property and equipment accounts.

~~NOTES~~ The TOCompany ~~UNAUDITED~~estimates ~~CONSOLIDATED~~the ~~FINANCIAL~~expected ~~STATEMENTS~~undiscounted future cash flows of its oil and gas properties and compares such undiscounted future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and gas properties to fair value. The factors used to determine fair value include, but are not limited to, recent sales prices of comparable properties, the present value of estimated future cash flows, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected. Once incurred, a write-down may not be reversed in a later period. For the quarters ended March 31, 2016 and 2015, the Company recorded impairment expense of $252,000 and $0, respectively, against its oil and gas properties.

~~September~~The 30provision for DD&A of oil and gas properties is calculated based on proved reserves on a field-by-field basis using the unit-of-production method. Natural gas is converted to barrel equivalents, ~~2015~~BOE, at the rate of six Mcf of natural gas to one barrel of oil. Estimated future dismantlement, restoration and abandonment costs, which are net of estimated salvage values, are taken into consideration.

Unproved oil and gas properties are periodically assessed for impairment on a project-by-project basis. These impairment assessments are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of such projects. If the estimated future net cash flows attributable to such projects are not expected to be sufficient to fully recover the costs invested in each project, the Company will recognize an impairment loss at that time. There was no provision for impairment recorded against its unproved property at March 31, 2016 and 2015.

Revenue recognition

The Company records revenues from the sale of crude oil, natural gas and natural gas liquids ("NGL") when delivery to the purchaser has occurred and title has transferred. The Company uses the sales method to account for gas imbalances. Under this method, revenue is recorded on the basis of gas actually sold by the Company. In addition, the Company will record revenue for its share of gas sold by other owners that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company also reduces revenue for other owners' gas sold by the Company that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company's remaining over and under produced gas balancing positions are considered in the Company's proved oil and gas reserves. Gas imbalances at March 31, 2016 and December 31, 2015 were not material.

Earnings per share

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted net income (loss) attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding and other dilutive securities. The only potentially dilutive securities for the diluted earnings per share calculations consist of Series A2 preferred stock that is convertible into common stock at an exchange price of $2.00 per common share. As of March 31, 2016, the convertible preferred stock had an aggregate liquidation preference of $2,720,000 and was convertible to 1,360,000 shares of common stock. These shares were excluded from the earnings per share calculation because they would be anti-dilutive.

New Accounting Pronouncements

In April 2015, the FASB issued new authoritative accounting guidance requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying value of the related debt liability. This guidance is to be applied using a retrospective method and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.

There are no other new significant accounting standards applicable to the Company that have been issued but not yet adopted by the Company as of September 30, 2015, and through the filing date of this report that have not been disclosed above or in the 2014 Form 10-K.

3. Oil and Gas Properties

The Company has participated as a working interest owner in the four horizontal wells, which were drilled and completed in Campbell County, Wyoming in the Turner zone and one well in Converse County, Wyoming in the Turner Zone during 2014. The fees received as part of this participation for the quarter ended September 30, 2014 was $350,951. The Company had no participation fees for the quarter ended September 30, 2015. The following is a description of the wells:

1) The Thielen #1-21 is in Section 21 Township 43N Campbell County Wyoming. This well was drilled to a total depth of approximately 15,350 including the lateral. The Company has an approximate 1.06% working interest and the well is producing.

2) The Thielen #2-21 is in Section 21 Township 43N Campbell County Wyoming. This well was drilled to a total depth of approximately 15,330 feet including the lateral. The Company has an approximate 1.06% working interest and the well is producing.

3) The Starlight Federal 28H is located in Section 7, Township 43N Campbell County Wyoming. This well was drilled to a total depth of approximately 15,310 including the lateral. The Company has an approximate 0.7025% working interest and the well is producing.

4) The Starlight Federal 30H is located in Section 7, Township 43N Campbell County Wyoming. This well was drilled to a total depth of approximately 15,310 including the lateral. The Company has an approximate 1.450088% working interest and the well is producing.

5) The Wibaux Gold Federal 4076-10-03-1SH is located in Section 10, Township 43N Converse County Wyoming. This well was drilled to a total depth of approximately 20,185 including the lateral. The Company has an approximate 0.2697755% working interest and the well is producing.

4. Income taxes

The book to tax temporary differences resulting in a net deferred tax asset are primarily net operating loss carry forwards of approximately $8.3 million, which expire in 2018 through 2030. 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. For the quarter ended September 30, 2015, the Company did not recognize any income tax benefit due to the valuation allowance.

~~ARÊTE~~The ~~INDUSTRIES,~~following ~~INC.~~table ~~AND~~sets ~~SUBSIDIARIES~~forth the calculation of basic and diluted earnings per share:

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Three month period ended March 31,
	2016			2015
Net loss available to common shareholder's – Basic	$	(688,083	)	$	(304,510	)
Plus: Preferred stock dividends		-			-
Net loss available to common shareholder's – Diluted	$	(688,083	)	$	(304,510	)
Weighted average common shares outstanding – Basic		14,295,400			12,810,000
Add: Dilutive effect of stock options		-			-
Add: Dilutive effect of preferred stock		-			-
Weighted average common shares outstanding – Diluted		14,295,400			12,810,000

Net loss per common share:
Basic	$	(0.05	)	$	(0.02	)
Diluted	$	(0.05	)	$	(0.02	)

~~September~~New ~~30,~~accounting ~~2015~~pronouncements

5In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." ~~Stock~~ASU ~~transactions~~2016-01 changes certain guidance related to the recognition, measurement, presentation and ~~preferred~~disclosure ~~stock~~of ~~dividends~~financial instruments. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted for the majority of the update, but is permitted for two of its provisions. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

~~During~~In ~~the nine~~February ~~month~~2016, ~~period ended~~FASB ~~September~~issued ~~30,~~ASU ~~2015~~2016-02, ~~the~~"Leases." ~~Company~~ASU ~~issued~~2016-02 ~~571,954~~requires ~~shares~~the recognition of ~~common~~lease ~~stock~~assets ~~for~~and ~~compensation~~lease liabilities by lessees for ~~services;~~those ~~106,140~~leases ~~shares~~currently ofclassified ~~common~~as ~~stock~~operating ~~were~~leases ~~issued~~and ~~for~~makes ~~board~~certain ~~services~~changes atto $0the way lease expenses are accounted for.20 ~~per~~This ~~share in~~update ~~2014~~is ~~and 165,815~~effective ~~and~~for ~~83,333~~fiscal ~~shares~~years ofbeginning ~~common~~after ~~stock~~December ~~were~~15, ~~issued~~2018 and for ~~board~~interim ~~services at~~periods ~~$0.13~~beginning ~~and~~the $0following year.16 ~~per~~This ~~share,~~update ~~respectively,~~should inbe ~~2015,~~applied ~~and~~using 50a modified retrospective approach,~~000~~ and ~~166,666~~ ~~shares~~early ofadoption ~~common~~is ~~stock~~permitted. ~~were~~The ~~issued~~Company atis ~~$0.13~~evaluating the new guidance and ~~$0.16,~~has ~~respectively, for~~not ~~service~~determined ~~and~~the ~~consulting~~impact bythis ~~three~~standard ~~related~~may ~~parties~~have on its consolidated financial statements.

6In March 2016, the FASB issued ASU No. ~~Notes~~2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal versus agent guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was issued in May 2014 ("ASU 2014-09"). Further, in April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and ~~advances~~Licensing. ~~payable~~This ASU also amends ASU 2014-09 and is related to the identification of performance obligations and accounting for licenses. The effective date and transition requirements for both of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. That is, the guidance under these standards is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for annual periods, and interim period within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the provisions of this standard and assessing its impact on the Company's condensed consolidated financial statements and disclosures.

~~Notes~~In ~~payable~~August ~~consist~~2016, FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides cash flow statement guidance for debt payments or debt Extinguishment costs, settlement of Zero-Coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the ~~following~~effective asinterest rate of the ~~date~~borrowing, ~~indicated:~~contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the provisions of this standard and assessing its impact on the Company's condensed consolidated financial statements and disclosures.

	December 31, 2014		September 30, 2015
Officers, directors and affiliates:
Note payable, interest at 7.5%, due March 2016	$	150,000	$	150,000
Notes payable, interest 7.0%, due January 2017		79,970		67,046
Notes payable, interest varies (see explanation below)		792,151		792,151
Collateralized note payable (see below)		120,728		120,728
Total officers, directors and affiliates		1,142,849		1,129,924
Less: Current portion of officers, directors, and affiliates		288,258		288,567
Long-term portion of officers, directors, and affiliates	$	854,591	$	841,357
Unrelated parties:
Notes payable, interest at 7.5%, due March 2016	$	100,000	$	100,000
Note payable, interest variable (see below)		549,105		616,105
Note payable, interest at 7.0%, due August 2016		62,000		62,000
Notes payable, interest at 7.0%, due January 2017		41,668		34,935
Notes payable, interest at 7.0%, due August 2015		183,000		183,000
Total unrelated parties		935,773		996,040
Less: Current portion of unrelated parties		872,239		970,400
Long-term portion of unrelated parties	$	63,534	$	25,640

Note 3 - Oil and Gas Properties

OnThe ~~April~~following ~~29,~~table ~~2013,~~sets ~~the~~forth ~~Company~~information ~~executed~~concerning ~~a promissory note under which~~ the Company's agreed to pay Apex Financial Services Corp, a Colorado corporation, ("Apex") the principal sum of $1,000,000, with interest accruing at an annual rate of 7.5%, with principal and interest due on May 31, 2014. The Company also agreed to assign 75% of its operating income from its oil and gas operations and any lease or well sale or any other assets sales to Apex to secure the debt. Apex is 100% owned by the CEO, director, and shareholder of the Company, Nicholas L. Scheidt. The Company borrowed the full amount of principal on the note, and also paid a loan fee of $10,000. In the event of default on the note and failure to cure the default in ten days, Apex may accelerate payment and the annual interest rate on the note will accrue at 18%. Default includes failure to pay the note when due or if the Company borrows any other monies or offers security in the Company or in the collateral securing the note prior to the note being paid in full. The outstanding principal balance as of September 30, 2015, was $120,728. During March 2015, the Company and Apex entered into an amendment extending the maturity date to March 30, 2016.properties:

On January 28, 2014, the Company entered into a line of credit loan agreement for $1,500,000 due January 15, 2015, extended to January 28, 2016. The terms of the note are as follows: 1) the accrued interest is payable monthly starting February 28, 2014, 2) the interest rate is variable based on an index calculated based on a prime rate as published by the Wall Street Journal index (currently 3.25%) plus an add on index with the current and minimum rate of 6.5%., the note has draw provisions, with the first draw of $479,701 4) the note is secured by seven wells and leases owned by the Company, a certificate of deposit for $500,000 at CityWide Bank pledged by a related party, and 5) the personal guarantee of Nicholas Scheidt, Chief Executive Officer. The amount eligible for borrowing on the Credit Facility is limited to the lesser of (i) 65% of the Company's PV10 value of its carbon reserves based upon the most current engineering reserve report or (ii) 48 month cumulative cash flow based upon the most current engineering reserve report. In addition to the borrowing base limitation, the Company is required to maintain and meet certain affirmative and negative covenants and conditions in order to draw advances on the Credit Facility. The Credit Facility contains certain representations, warranties, and affirmative and negative covenants applicable to the Company, which are customarily applicable to senior secured loan facilities. Key covenants include limitations on indebtedness, restricted payments, creation of liens on oil and gas properties, hedging transactions, mergers and consolidations, sales of assets, use of loan proceeds, change in business, and change in control. The above-referenced promissory notes contain customary default and acceleration provisions and provide for a default interest rate of 21% per annum. In addition, the Credit Facility contains customary events of default, including: (a) failure to pay any obligations when due; (b) failure to comply with certain restrictive covenants; (c) false or misleading representations or warranties; (d) defaults of other indebtedness; (e) specified events of bankruptcy, insolvency or similar proceedings; (f) one or more final, non-appealable judgments in excess of $50,000 that is not covered by insurance; (g) change in control (25% threshold); (h) negative events affecting the Guarantor; and (i) lender in good faith believes itself insecure. In an event of default arising from the specified events, the Credit Facility provides that the commitments thereunder will terminate and the Lender may take such other actions as permitted including, declaring any principal and accrued interest owed on the line of credit to become immediately due and payable. The Credit Facility is secured by a security interest in substantially all of the assets of the Company, pursuant to a Security Agreement, Deed of Trust and Assignment of As-Extracted Collateral entered into between the Company and Citywide Banks. The outstanding principal balance as of September 30, 2015, was $616,105.

	March 31, 2016			December 31, 2015
Proved oil and gas properties at cost, net of impairment	$	8,431,283		$	8,683,273
Unproved oil and gas properties at cost, net of impairment		154,972			154,836
Accumulated depreciation, depletion and amortization		(3,378,000	)		(3,223,000	)
Oil and gas properties, net	$	5,208,255		$	5,615,109

~~ARÊTE~~During ~~INDUSTRIES~~the three month period ended March 31, ~~INC~~2016 and 2015, the Company recorded depletion expense of $155,000 and $202,225, respectively. ~~AND~~The ~~SUBSIDIARIES~~Company recorded impairment expense of $252,000 and $0 for the three months ended March 31, 2016 and 2015, respectively.

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~Acquisitions

In 2011, the Company entered into a purchase and sale agreement ("DNR and Tindall PSA") and other related agreements and documents with Tucker Family Investments, LLLP, which is refered to as "Tucker"; DNR Oil & Gas, Inc. which is refered to as "DNR"; and Tindall Operating Company, which is refered to as "Tindall", and collectively are refered to as the "Sellers", for the purchase of certain oil and gas operating properties in Colorado, Kansas, Wyoming, and Montana. DNR is owned primarily by an officer and director of the Company, Charles B. Davis, and he is an affiliate of Tucker and Tindall. The consideration for the purchase was determined by 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 was paid in full on September 3029, ~~2015~~2011.

On January 119, ~~2014~~2016, but effective December 31, 2015, (the "Effective Date") the Company ~~memorialized~~entered ~~its~~into ~~short~~a Settlement Agreement with Tucker, DNR and Tindall regarding the DNR and Tindall PSA and other related matters. In consideration of the amounts indicated below, the parties (i) terminated Exhibits C and C-~~term~~2 to the DNR and Tindall PSA for all purposes; (ii) extinguished all liabilities ~~into~~of ~~formal~~the ~~promissory~~Company ~~notes.~~under ~~These~~Exhibit ~~certain~~C ~~outstanding~~of ~~advances~~the DNR and ~~other~~Tindall ~~notes~~PSA ~~payable~~including ~~are~~$250,000 ~~now~~related ~~included~~to the increase in ~~single~~oil prices after the acquisition; (iii) agreed that the promissory ~~notes~~note of $792,151 due to DNR (See Note 7 – Notes and Advances Payable) and accrued interest thereon was paid in full; and (iv) released each other against any and all claims which have been ~~reported~~raised ~~previously~~or could have been raised among them. Specifically, Exhibits C and C-2 to the DNR and Tindall PSA related to potential payments that would have needed to have been made by the Company in ~~its~~the ~~financial~~event ~~statements~~oil prices increased to certain levels and related to certain payments to have been made by the Company in the event it sold certain properties purchased under the DNR and Tindall PSA. ~~Information~~ ~~concerning~~Exhibits ~~these~~C and C-2 were terminated and extinguished (including any amounts owed thereunder including an alleged amount of $250,000 under Exhibit C to the DNR and Tindall PSA) in exchange for 25 fully paid nonassessable restricted shares of our 7% Series A2 Convertible Preferred Stock. Consideration to pay the above promissory ~~notes~~note in full consisted of the issuance to DNR of 65 fully paid, nonassessable restricted shares of its 7% Series A2 Convertible Preferred Stock, and paying DNR $303,329 in cash, which was paid during the three month period ended March 31, 2016. A description of the terms of the 7% Series A2 Convertible Preferred Stock, including its terms of conversion into shares of the Company's common stock is set forth below in Note 6 - Stock transactions and preferred stock dividends. The Company recorded an expense of $141,099 included in other operating expense in the ~~table~~statement ~~below~~of operations at December 31, 2015, as a result of this transaction. At March 31, 2016, the Company's only remaining liabilities to DNR are related to oil and gas operations and are in Accounts payable – DNR Oil & Gas, Inc. on the balance sheet.

Name of Holder	Position	Principal Amount		Interest Rate			Monthly P&I Payment Amount		Number of Monthly Payments
Donald W. Prosser	Former Director	$	28,500		7.00	%	$	564.33		60
Charles B. Davis	COO & Director	$	66,500		7.00	%	$	1,316.78		60

On December 30, 2015, the Company completed an asset acquisition pursuant to a purchase and sale agreement executed on November 25, 2015, but effective December 1, 2015 (the "Wellstar Purchase and Sale Agreement ") with Wellstar Corporation (the "Seller"), an unaffiliated corporation. The assets acquired were producing oil and gas leases in Sumner County, Kansas and Kimball County, Nebraska (collectively, the "Properties" and individually, the "Padgett Properties" and the "Nebraska Properties"). The Company acquired 51% of Seller's interest (ranging from 47% to 100% of the working interests) in the Padgett Properties and acquired 100% of the Seller's interest (100% of the working interests) in the Nebraska Properties for aggregate consideration of $1,100,000 and the issuance of 1,000,000 shares of the Company's restricted common stock valued at $0.10 per share at the date of closing, or $100,000.

~~The~~Note ~~above-referenced~~4 ~~promissory~~– ~~notes~~Fair ~~contain~~Value ~~customary default and acceleration provisions and provide for a default interest rate of 18% per annum. The outstanding principal balances as of September 30, 2015, was $67,046.~~Measurements

InFASB ~~addition~~ASC 820, ~~the~~"Fair ~~Company~~Value ~~also~~Measurements ~~issued~~and anDisclosures", ~~unsecured~~establishes ~~promissory~~a ~~note~~framework infor ~~the~~measuring ~~amount~~fair ofvalue. ~~$792,151~~That onframework ~~January~~provides 1,a ~~2014~~fair tovalue ~~DNR~~hierarchy ~~Oil~~that &prioritizes ~~Gas,~~the ~~Inc.~~inputs ~~("DNR"). DNR~~to isvaluation atechniques ~~company~~used ~~controlled~~to ~~by the~~measure ~~Chief~~fair ~~Operating Officer and director, Charles B~~value. ~~Davis.~~ The ~~DNR~~hierarchy ~~note~~gives ~~accrues interest at~~ the ~~rate~~highest ofpriority ~~2.50%~~to ~~for~~unadjusted ~~the~~quoted ~~calendar~~prices ~~years~~in ~~2014~~active ~~and~~markets ~~2015,~~for ~~4.00%~~identical ~~for~~assets ~~the~~and ~~calendar~~liabilities ~~year~~(Level ~~2016,~~1 ~~6.00%~~measurements) ~~for~~and the ~~calendar~~lowest ~~year~~priority ~~2017~~to ~~and~~unobservable ~~8.00%~~inputs ~~for~~(Level ~~the~~3 ~~remainder~~measurements). ofThe ~~the~~three ~~term~~levels of the ~~DNR~~fair ~~note. The~~value ~~DNR~~hierarchy ~~note~~under ~~matures~~FASB onASC ~~January~~820 1,are ~~2019. The~~described ~~DNR note requires payments~~ as follows:

•- ~~One~~Level ~~payment~~1 of– ~~$250~~Observable inputs,~~000~~ such as unadjusted quoted prices in ~~2016;~~active markets, for substantially identical assets and liabilities.

•- ~~One~~Level ~~payment~~2 of– ~~$250~~Observable inputs other than quoted prices within Level 1 for similar assets and liabilities. These include quoted prices for similar assets and liabilities in active markets,~~000~~ quoted prices for identical assets and liabilities in ~~2017;~~markets that are not active, or other inputs that are observable or can be corroborated by observable market data. If the asset or liability has a specified or contractual term, the input must be observable for substantially the full term of the asset or liability.

•- ~~One~~Level ~~payment~~3 of– ~~$250~~Unobservable inputs that are supported by little or no market activity,~~000~~ ingenerally ~~2018;~~requiring a significant amount of judgment by management. The assets or liabilities fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

• The balance of principal and accrued interest on or before January 1, 2019.

The DNR note contains customary default and acceleration provisions and provides for a default interest rate of 18% per annum. The note is subordinated to the Bank Line of Credit. The outstanding principal balance as of September 30, 2015 was $792,151.

In June 2013, in connection with the conversions of Series A1 Preferred Stock by Burlingame Equity Investors II, LP and Burlingame Equity Investors Master Fund, LP, the Company issued unsecured promissory notes in the original principal amounts of $48,000 and $552,000, respectively, with interest at 7% per annum payable quarterly and all unpaid interest and principal due on July 23, 2014. The Company entered into an extension agreement with the holders of these two existing notes, whereby the Company made a principal payment on the balance in exchange for an extension of the maturity date to January 15, 2015, and entered into another extension agreement further extending the maturity date to January 28, 2016. Information concerning the principal pay down is set forth in the following table.

Name of Holder	Principal Balance Before Pay down		Principal Pay down		Remaining Principal Balance
Burlingame Equity Investors II, LP	$	44,000	$	26,251	$	17,749
Burlingame Equity Investors Master Fund, LP		506,000	$	340,749	$	165,251

~~ARÊTE~~The ~~INDUSTRIES,~~methods ~~INC~~described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. ~~AND~~Further, ~~SUBSIDIARIES~~although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

~~NOTES~~Upon TOcompletion ~~UNAUDITED~~of ~~CONSOLIDATED~~wells, ~~FINANCIAL~~the ~~STATEMENTS~~Company records an asset retirement obligation at fair value using Level 3 assumptions.

~~September~~Nonfinancial 30assets and liabilities are measured at fair value on a nonrecurring basis upon impairment. The following table sets forth by level, ~~2015~~within the fair value hierarchy, the Company's assets and liabilities at fair value:

On August 15, 2014, the Company executed a Promissory Note to an individual for the redemption of 10 shares of Series A-1 Preferred Stock. The terms of the Promissory Note are as follows: $62,000 with an interest rate of 7% payable in two payments of $31,000 each plus interest, due August 15, 2015, and August 15, 2016, respectively. The Company did not make the August 15, 2015, payment and is currently in default on this note. The Company is negotiating new terms with the note holder.

	Level 1		Level 2		Level 3
March 31, 2016
Proved oil and gas properties	$	-	$	-	$	5,053,283

~~All~~The ofFollowing ~~the~~table ~~notes~~sets ~~payable~~forth ~~shown~~a ~~above~~reconciliation ~~are~~of ~~unsecured,~~the ~~except~~change ~~the~~in ~~Apex~~fair ~~note.~~value ~~Accrued~~of ~~interest~~the onCompany's ~~notes~~proved ~~amounted~~oil toand ~~$3,279~~gas asproperties offrom December 31, ~~2014~~2015 ~~and~~to $March 31,~~377~~ ~~as of September 30, 2015.~~2016:

7. Asset retirement obligations (ARO)

Balance December 31, 2015	$	5,460,273
Additions		10
DD&A expense		(155,000	)
Balance at March 31, 2016, prior to impairment		5,305,283
Pre-tax non-cash impairment		(252,000	)
Balance March 31, 2016	$	5,053,283

AThe ~~reconciliation~~carrying amounts of ~~the~~other ~~Company's~~financial ~~asset~~instruments ~~retirement~~including ~~obligations~~cash ~~for~~and ~~the~~cash ~~quarter~~equivalents, ~~ended~~accounts ~~September 30~~receivable, ~~2015~~account payables, isaccrued liabilities and long term debt in our balance sheet approximates fair value as ~~follows:~~of March 31, 2016 and December 31, 2015.

Balance, December 31, 2014	$	749,013
Liabilities incurred		—
Accretion expense		55,187
Revisions to estimate		—
Balance, September 30, 2015		804,200
Less current asset retirement obligations		(297,700	)
Long-term asset retirement obligations	$	506,500

Note 5 - Income taxes

The book to tax temporary differences resulting in deferred tax assets and liabilities are primarily net operating loss carry forwards of approximately $8.3 ~~Subsequent~~million ~~events~~which expire in 2018 through 2035. 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. For the quarter ended March 31, 2016, the Company did not recognize any income tax benefit due to the valuation allowance.

~~There~~The ~~are~~Company norecognizes ~~material~~the ~~subsequent~~tax ~~events~~benefit ~~after~~from ~~September~~an 30uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, ~~2015~~based upon the technical merits of the position. As of March 31, 2016, the Company had no unrecognized tax benefits.

Note 6 - Stock transactions and preferred stock dividends

Common stock

There were no shares of common stock issued during the three month period ended March 31, 2016.

Preferred stock

On December 11, 2015, the Company began a private placement of its Series A2 7% Preferred Convertible Stock with a maximum amount of 600 shares at $10,000 per share or $6,000,000. At March 31, 2016, the Company had sold subscriptions equal to $1,820,000 (182 shares) and issued to DNR 90 shares fully paid ($900,000), nonassessable restricted shares of its 7% Series A2 Convertible Preferred Stock as part of the consideration for a settlement agreement entered into with DNR.

~~Item~~Note 27 - ~~Management's~~Notes ~~Discussion~~ and ~~Analysis~~advances ~~of Financial Condition and Results of Operations~~payable

~~Forward-looking~~Notes ~~information~~payable consist of the following as of the date indicated:

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.


	March 31, 2016		December 31, 2015
Officers, directors and affiliates:
Notes payable, interest 7.0%, due January 2019 (1)		40,498		43,803
Collateralized note payable (2)		120,728		120,728

Total officers, directors and affiliates		161,226		164,531
Less: Current portion of officers, directors, and affiliates		134,116		13,152

Long-term portion of officers, directors, and affiliates	$	27,110	$	151,379

Unrelated parties:
Notes payable, interest at 7.5%, due April 2016 (3)	$	100,000	$	100,000
Note payable, due March 2017 (4)		167,348		169,660
Note payable, interest variable (see below) due June 28, 2018 (5)		591,995		616,105
Note payable, interest at 7.0%, due August 2016 (6)		62,000		62,000
Notes payable, interest at 7.0%, due January 2017 (7)		30,141		32,606
Notes payable, interest at 7.0%, due January 2016, Extended to May 2016 (8)		183,000		183,000
Notes payable, interest at 4.957%, due October 2017 (9)		22,253		-

Total unrelated parties		1,156,737		1,163,371
Less: Current portion of unrelated parties		349,956		989,853

Long-term portion of unrelated parties	$	806,781	$	173,519

~~Management's~~(1) ~~Discussion~~On ~~and~~January ~~Analysis~~1, of2014, ~~Financial~~we ~~Condition~~memorialized ~~and~~certain ~~Results~~short-term ofliabilities ~~Operations should be read together~~ with ~~our~~one ~~audited~~of ~~financial statements and related notes included in~~ our ~~Annual Report on Form 10-K and the financial statements and footnotes included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q~~directors, ~~including~~Charlie ~~the following discussion~~Davis, ~~contains~~into ~~trend~~a ~~analysis~~formal ~~and~~promissory ~~other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995~~note. ~~Any~~This ~~statements~~not inaccrues ~~this~~interest ~~Quarterly~~at ~~Report~~a onrate ~~Form 10-Q that are not statements~~ of ~~historical facts are forward-looking statements~~7.0% ~~These~~with ~~forward-looking~~monthly ~~statements~~payments ~~made~~equal ~~herein~~to ~~are based on our current expectations~~$1,316 ~~involve~~(principal ~~a number of risks~~ and ~~uncertainties~~interest) and ~~should~~will ~~not~~mature beon ~~considered~~January as1, ~~guarantees of future performance~~2019. ~~The factors that could cause actual results to differ materially include without limitation:~~

•(2) ~~unsuccessful~~On ~~drilling~~April 29, 2013, the Company executed a promissory note under which the Company agreed to pay Apex Financial Services Corp, a Colorado corporation, ("Apex") the principal sum of $1,000,000, with interest accruing at an annual rate of 7.5%, with principal and ~~completion~~interest ~~activities~~due on May 31, 2014, and subsequently extended to March 31, 2017. The Company also agreed to assign 75% of its operating income from its oil and gas operations and any lease or well sale or any other asset sales to Apex to secure the ~~possibility~~debt. Apex is 100% owned by the CEO, director, and shareholder of ~~resulting~~the ~~write-downs;~~Company, Nicholas L. Scheidt. The Company borrowed the full amount of principal on the note, and also paid a loan fee of $10,000. In the event of default on the note and failure to cure the default in ten days, Apex may accelerate payment and the annual interest rate on the note will accrue at 18%. Default includes failure to pay the note when due or if the Company borrows any other monies or offers security in the Company or in the collateral securing the note prior to the note being paid in full.

•(3) ~~capital~~On ~~requirements~~March 28, 2012, the Company executed a promissory note with Pikerni, LLC ("Pikerni"). This note was extended and ~~uncertainty~~amended on April 1, 2015. The note accrues interest at 7.5% and is payable quarterly. The maturity date of ~~obtaining~~the ~~additional~~note ~~funding~~is April 1, 2016, with principal payments of $5,000 due on ~~terms~~June ~~acceptable~~30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016, and the remaining principal balance of $80,000 due on April 1, 2016. At March 31, 2016, the Company was in default on this note. The Company is currently negotiating an amendment with Pikerni to ~~us;~~cure the default.

• our lack of capital;

• price volatility of oil and natural gas prices, and the effect that lower prices may have on our earnings and stockholders' equity;

• a decline in oil or natural gas production or oil or natural gas prices, and the impact of general economic conditions on the demand for oil and natural gas and the availability of capital;

• geographical concentration of our operations;

• increases in the cost of drilling, completion and gas gathering or other costs of production and operations;

• our ability to successfully drill wells that produce oil or natural gas in commercially viable quantities;

• failure to meet our proposed drilling schedule;

• adverse variations from estimates of reserves, production, production prices and expenditure requirements, and our inability to replace our reserves through acquisition, exploration and development activities;

• our current level of indebtedness and the effect of any increase in our level of indebtedness;

• limited control over non-operated properties;

• reliance on limited number of customers;

• title defects to our properties and inability to retain our leases;

• our ability to retain key members of our senior management and key consulting resources;

• federal and state regulations and laws;

• impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation;

• federal and state legislation and regulatory initiatives relating to hydraulic fracturing;

• risks in connection with evaluating potential acquisitions, integration of significant acquisitions, and difficulty managing our growth and the related demands on our resources;

• developments in the global economy;

•(4) ~~financing~~On March 28, 2012, the Company executed a Promissory Note with Fairfield Management Group, LLC, subsequently assigned to Donald Prosser (former CFO and Director) ("Prosser") during the fiscal year ended December 31, 2015. The note has a principal balance of $150,000, accrues interest ~~rate~~at ~~exposure;~~7.5% payable monthly and has a maturity date of March 31, 2016, which was subsequently extended to March 31, 2017.

•On ~~effects~~December 31, 2013, the Company executed a promissory note with Prosser for $28,500. This note accrues interest at a rate of ~~competition;~~7.0% with monthly payments equal to $564 (principal and interest) and matures on January 1, 2019.

•(5) ~~effect~~On January 28, 2014, we entered into a line of ~~seasonal~~credit ~~factors~~loan agreement for $1,500,000 due January 15, 2015, subsequently extended to June 28, 2018. The terms of the note are as follows: 1) the accrued interest is payable monthly starting February 28, 2014, 2) the interest rate is variable based on an index calculated based on a prime rate as published by the Wall Street Journal index (currently 3.5%) plus an add on index with the current and minimum rate of 6.5%, the note has draw provisions and is collateralized by the wells and leases owned by the Company, a certificate of deposit for $500,000 at CityWide Banks pledged by a related party, and 5) the personal guarantee of Nicholas Scheidt, Chief Executive Officer. The amount eligible for borrowing on the Credit Facility is limited to the lesser of (i) 65% of the Company's PV10 value of its carbon reserves based upon the most current engineering reserve report or (ii) 48 month cumulative cash flow based upon the most current engineering reserve report. In addition to the borrowing base limitation, the Company is required to maintain and meet certain affirmative and negative covenants and conditions in order to draw advances on the Credit Facility. The Credit Facility contains certain representations, warranties, and affirmative and negative covenants applicable to the Company, which are customarily applicable to senior secured loan facilities. Key covenants include limitations on indebtedness, restricted payments, creation of liens on oil and gas properties, hedging transactions, mergers and consolidations, sales of assets, use of loan proceeds, change in business, and change in control. At March 31, 2016, the Company was in compliance with all of the covenants. The above-referenced promissory note contains customary default and acceleration provisions and provides for a default interest rate of 21% per annum. In addition, the Credit Facility contains customary events of default, including: (a) failure to pay any obligations when due; (b) failure to comply with certain restrictive covenants; (c) false or misleading representations or warranties; (d) defaults of other indebtedness; (e) specified events of bankruptcy, insolvency or similar proceedings; (f) one or more final, non-appealable judgments in excess of $50,000 that is not covered by insurance; (g) change in control (25% threshold); (h) negative events affecting the Guarantor; and (i) lender in good faith believes itself insecure. In an event of default arising from the specified events, the Credit Facility provides that the commitments thereunder will terminate and the Lender may take such other actions as permitted including, declaring any principal and accrued interest owed on the line of credit to become immediately due and payable. The Credit Facility is secured by a security interest in substantially all of the assets of the Company, pursuant to a Security Agreement, Deed of Trust and Assignment of As-Extracted Collateral entered into between the Company and Citywide Banks

•(6) ~~lack~~On ofAugust ~~availability~~15, 2014, the Company redeemed the remaining 10 shares of ~~drilling~~Series ~~rigs~~A-1 Convertible Preferred Stock outstanding for consideration of $77,500, ~~equipment~~of which $15,500 ~~supplies~~was paid in cash and the remaining amount as a promissory note for $62,000. ~~insurance~~The note accrues interest at 7% per annum, ~~personnel~~payable ~~and~~in ~~oil~~two ~~field~~installments ~~services;~~as ~~and~~follows;

•a. ~~further~~A ~~sales~~payment orof ~~issuances~~$31,000, ofplus ~~common~~accrued ~~stock.~~and unpaid interest was payable on August 15, 2015

~~Finally,~~b. ~~our~~A ~~future~~payment ~~results~~of ~~will depend upon various other risks and uncertainties~~$31, ~~including~~000, ~~but~~plus ~~not~~accrued ~~limited~~and ~~to,~~unpaid ~~those~~interest ~~detailed~~shall inbe ~~the~~payable ~~section entitled "Risk Factors" included in our Annual Report~~ on ~~Form~~August 10-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws15, ~~we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.~~2016

The Company did not make the August 15, 2015 principal payment and is currently in default on this note. The Company is negotiating new terms with the note holder.

(7)

On December 31, 2013, the Company executed a promissory note with Pikerni for $49,500. This note accrues interest at a rate of 7.0% with monthly payments equal to $980 (principal and interest) and matures on January 1, 2019.

(8)

In June 2013, in connection with the conversions of Series A-1 Preferred Stock by Burlingame Equity Investors II, LP and Burlingame Equity Investors Master Fund, LP, the Company issued unsecured promissory notes in the original principal amounts of $48,000 and $552,000, respectively, with interest at 7% per annum payable quarterly and all unpaid interest and principal due on July 23, 2014. We have agreed with the holders of these two existing notes to extend the maturity date of the notes to June 18, 2018.

(9)

On March 1, 2016, the Company executed a Commercial Premium Finance Agreement – Promissory Note in the amount of $25,976 to finance one of its insurance policies. This note accrues interest at a rate of 4.957% and matures on October 17, 2016 with monthly payments equal to $3,247 (principal and interest).

Note 8 - Asset retirement obligations

A reconciliation of the Company's asset retirement obligations ("ARO") at March 31, 2016, is as follows:

Balance, December 31, 2015	$	995,197
Accretion expense		23,542

Balance, March 31, 2016		1,018,739

Less current asset retirement obligations		(419,094	)

Long-term asset retirement obligations	$	599,645

Note 9 - Subsequent events

On September 29, 2016, a complaint was filed against the Company and two others in the Superior Court of Arizona, Maricopa County, entitled Eric Langan, Paul McNulty, Patricia Quick, Stony Point Fund, L.P., and Jeffrey H. Wallen, D.D.S., P.C. vs. Arête Industries, Inc., Don Prosser, and Charles Davis. The complaint alleges that defendants Prosser and Davis made certain material representations to the plaintiffs in connection with the alleged purchase by the plaintiffs of $555,000 in common stock of the Company. The complaint alleges that the alleged misrepresentations were deliberate and requests damages against all of the defendants to compensate the plaintiffs for their alleged injuries resulting from the alleged misrepresentations, including punitive damages. The Company and the other defendants believe the action is entirely without merit and intend to vigorously defend the proceeding.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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 in our Annual Report on Form 10-K and the financial statements and footnotes included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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.

General Overview

We are an independent energy company engaged in the acquisition, exploration and development of oil, natural gas and natural gas liquids ("NGL's") in the United States. Our strategy is to deliver net asset value per share growth to our investors via attractive investments within the oil and gas industry. We seek properties that offer profit potential from overlooked and by-passed reserves of oil and natural gas, which may include shut-in wells, in-field development, stripper wells, re-completion and re-working projects. In addition, we seek acreage, prospective for oil and natural gas, to purchase in order to obtain cash flow from the re-sale and farm out of such prospects.

We do not intend to operate any of the properties in which we have an interest. As a result, we have limited ability to exercise influence over, and control the risks associated with operations of these properties. The failure of an operator of our wells to adequately perform operations, an operator's breach of the applicable agreements or an operator's failure to act in ways that are in our best interests could reduce our ability to be successful in finding reserves and could create a liability for us for the operator's failure to properly operate the project and adhere to applicable safety and environmental standards.

It is our desire to provide an understanding of the Company's past performance, its financial condition and its prospects for the future. Accordingly, we discuss and provide our analysis of the following:

•

Results of operations;

•

Liquidity and capital resources;

•

Contractual obligations;

•

Off balance sheet arrangements;

•

Critical accounting policies;

•

New accounting pronouncements.

Oil, Gas, and NGL Prices

Our financial condition and the results of our operations are significantly affected by the prices we receive for our oil, gas, and NGL production, which can fluctuate dramatically. Our oil and gas is sold under our operators contracts paying us various industry posted prices, adjusted for basis differentials. We are paid the average of the daily settlement price for the respective posted prices for the period in which the product is sold, adjusted for quality, transportation and location differentials.

14We expect future prices for oil, gas, and NGLs to continue to be volatile. In addition to supply and demand fundamentals, as a global commodity, the price of oil is affected by real or perceived geopolitical risks in all regions of the world as well as the relative strength of the dollar compared to other currencies. Oil markets continue to be unstable as a result of over-supply. While we have realized production declines in the United States, declines elsewhere in the world are required to balance the market.

Results of Operations for the ~~Three~~Quarters ~~and Nine Months~~ Ended ~~September~~March 3031, ~~2014~~2016 and 2015

Presented below is a discussion of our results of operations for the Quarters Ended ~~September~~March 3031, ~~2014~~2016 and 2015.

Loss from operations

Loss from operations for the three months ended March 31, 2016 and 2015 was $616,859 and $277,352, respectively. The loss from operations compared to the prior year was greater by $339,507. This was primarily due to a noncash impairment charge of $252,000 to reduce the carrying value of our proved oil and gas properties, as well as, decreased oil prices and a sale of an oil and gas asset in the prior period of $27,120. In addition, lease operating expenses and accretion increased in the current period, while production taxes, DD&A and general and administrative ("G&A") expenses decreased. The discussion below further explains our results of operations for the three months ended March 31, 2016 and 2015.

Oil and Gas Producing Activities

The results of our producing oil and gas properties in Wyoming, Colorado, Kansas and Montana are presented below for the three ~~and~~months ~~nine month periods~~ ended ~~September~~March 3031, ~~2014~~2016 and 2015:

	Three Months Ended						~~Nine Months Ended~~
	2014			2015			2014			2015
	March 31,
Oil Sales	$	484,386		$	230,728		$	1,433,994		$	617,906
	2016			2015
Natural Gas Sales		71,598			22,507			287,229			112,554
Oil Sales	$	153,983		$	187,149
Sale of oil and natural gas properties		108,479			-			350,951			27,120
Natural Gas Sales		28,218			55,516
Royalty revenues		755			514			2,525			4,455
Royalty sales		898			941
Total Revenue		665,218			253,749			2,074,699			762,035
Sale of oil and gas properties		-			27,120
Production Taxes		(52,245	)		(29,101	)		(143,891	)		(66,900	)
Total Revenue		183,099			270,726
Lease Operating Expense		~~(196~~282,~~134~~558	)		~~(270~~216,~~722~~799	)		~~(566,068~~	)		~~(685,587~~	)
Depreciation, depletion, amortization and accretion		(210,335	)		(189,335	)		(502,180	)		(531,292	)
Production Taxes		14,114			18,425
Net	$	206,504		$	(235,409	)	$	862,560		$	(521,744	)
Depreciation, depletion, amortization ("DD&A")		155,000			191,028
Net barrels of oil sold		5960			5,495			16,727			14,400
Accretion		23,542			16,941
Net mcf of gas sold		14,627			12,199			50,859			47,071
Impairment expense		252,000			-
Boe		8,398			7,528			25,204			22,245
Total Operating expenses		727,214			443,193
Average price for oil	$	81.27		$	41.99		$	85.73		$	42.91
Net operating loss before general and administrative expense		(544,115	)		(172,467	)
Average price for gas	$	4.89		$	1.85		$	5.65		$	2.39
Net barrels of oil sold		5,532			4,937
Lease operating expense per BOE	$	23.35		$	35.96		$	22.46		$	30.82
Net mcf of gas sold		15,104			20,060
DD&A per BOE	$	25.05		$	25.25		$	19.93		$	23.88
Boe		8,049			8,280
Average price for oil	$	27.84		$	37.91
Average price for gas	$	1.87		$	2.77
Lease operating expense per BOE	$	35.10		$	26.18
DD&A per BOE	$	19.26		$	23.07

Our oil and gas sales are primarily attributable to our properties in Kansas and Wyoming. WeOur ~~realized lower~~ oil ~~and~~sales ~~gas~~for ~~revenue during~~ the three ~~and nine~~ months ~~periods~~ ended ~~September~~March 3031, 2016 and 2015, ofwere $~~253~~153,~~658~~983 and $~~816~~187,~~088~~149, ~~compared~~respectively, toa ~~the~~decrease ~~same~~of ~~periods~~$33,166 inor ~~the prior year~~17.7%. This isdecrease ~~due~~can tobe ~~lower~~attributed ~~realized~~to ~~prices~~the ~~and lower sales volumes. The~~ average realized oil price ~~for~~in the ~~three~~first ~~and~~quarter ~~nine~~of ~~month periods ended September 30~~2016, ~~2014,~~which ~~were~~was $~~81.~~27 ~~and $85~~.~~73 per barrel~~84, ~~respectively,~~ compared to ~~the~~$37.91 ~~average~~per ~~realized~~barrel ~~oil~~in ~~price~~2015 for the ~~three~~same ~~and~~period. ~~nine~~This ~~month~~decrease ~~periods~~in ~~ended~~price ~~September 30, 2015,~~ of $4110.9907 ~~and~~or ~~$42~~26.~~91 per barrel (a decrease of 48~~6% ~~and~~reduced ~~50%), respectively. This decrease negatively impacted~~ our oil sales revenues ~~resulting~~by ~~in lower sales of~~ $~~215~~49,~~866~~721. ~~and~~We ~~$616,596~~offset ~~for~~this ~~the~~impact ~~three~~of ~~and~~lower ~~nine~~prices ~~months~~in ~~periods~~2016 ~~ended~~by ~~September~~producing 305,532 ~~2015,~~barrels ~~respectively.~~of Inoil ~~addition,~~compared weto ~~produced 465 and 2~~4,~~327~~937 ~~fewer~~ barrels of oil during the same ~~periods,~~period ~~which~~the ~~resulted~~prior ~~in lower oil sales of approximately $37~~year,~~792~~ ~~and~~which ~~$199,492,~~increased ~~respectively. This decrease in our~~ oil sales ~~production~~by ~~is attributed to the natural decline of production in our wells and to the inclement weather in March~~$16, ~~April and May~~555, ~~which~~offsetting ~~made it difficult to get back to~~ the ~~tank~~depressed ~~batteries~~average ~~and~~realized ~~pick up the oil to transport it to the market~~price. ~~The~~This ~~wells~~increase ~~automatically shut-~~in ~~once~~our ~~the~~oil ~~tanks~~sales ~~batteries became full. Our~~ production ~~did~~can ~~increase~~be ~~compared~~attributed to the ~~three~~wells month period ended June 30, 2015, by 1,527 barrels of oil. The average price per barrel compared to the three months ended June 30, 2015, decreased from $50.41 to $41.99. The result of the increased production offset the lower prices and we ~~realized~~acquired ~~an increase~~ in ~~revenue~~December ~~of $30,699 compared to the prior quarter~~2015.

~~The~~Our ~~average realized~~ natural gas ~~prices,~~sales ~~including~~for ~~proceeds~~the ~~from~~three ~~sales~~months ofended ~~natural~~March ~~gas liquids~~31, ~~was~~2016 ~~$4.89~~ and ~~$5.65~~2015, ~~per~~were ~~Mcf~~$28,218 ~~for the three~~ and ~~nine month periods ended September 30~~$55, ~~2014~~516, respectively, ~~compared~~a todecrease ~~average realized natural gas prices~~ of $~~1.85~~27,298 ~~and~~or $49.2%.39 ~~per~~The ~~Mcf~~average ~~for~~realized ~~the~~natural ~~three~~gas ~~and nine month periods ended September 30~~prices, ~~2015,~~including ~~respectively.~~proceeds ~~Our~~from sales ~~volumes~~of ~~for~~ natural gas ~~decreased 2~~liquids,~~428~~ ~~and 3,788 Mcf~~ for the three ~~and nine~~ months ~~periods~~ ended ~~September~~March 3031, 2016 and 2015, ~~compared~~was to$1.87 ~~the~~and ~~same~~$2.77 ~~periods~~per inMcf, ~~the~~a ~~prior~~decrease ~~year~~of $0.90 or 32.5%. Our natural gas has a high BTU content and this decline in the average realized gas price can be attributed to the lower realized prices received for the natural gas liquids sold compared to the prior year. The impact on natural gas sales in the current year due to the lower realized prices resulted in adecreased ~~decrease~~natural ofgas ~~$37,206~~sales ~~and~~of $~~153~~18,~~282~~038. ~~for~~This ~~the~~decrease ~~three~~due ~~and~~to ~~nine~~reduced ~~months~~natural ~~periods~~gas ~~ended~~prices ~~September~~were ~~30,~~further ~~2015,~~impacted ~~respectively.~~by ~~The~~a decrease in ~~volumes impacted~~ natural gas ~~sales~~volumes, ~~negatively~~which bydecreased ~~$11~~4,~~885~~956 ~~and~~Mcf ~~$21,393,~~or ~~respectively~~24.7% ~~for~~resulting ~~the~~in ~~same~~a ~~periods~~further reduction of natural gas sales by $9,260.

~~During~~Lease operating expense per Barrel of Oil Equivalent ("BOE") for the ~~nine~~three months ended ~~September~~March 3031, ~~2014~~2016 and 2015, wewas ~~sold~~$35.10 aand ~~small~~$26.18, ~~working~~respectively, ~~interest~~an increase of $8.92 or 34.1% compared to the same period in ~~five~~2015. Many of the wells included in our acreage have been producing for a ~~promote~~decade ~~fee~~or longer and the cost of ~~$350,951~~workovers and normal maintenance are charged to expense in the period the costs are incurred. The Weincrease ~~continue~~in the cost per BOE can be attributed to ~~evaluate~~the ~~our~~increased ~~portfolio~~maintenance ofand ~~properties~~chemical work performed during the three month period ended March 31, 2016, in order to enhance production and ~~will~~curtail ~~sell~~the ~~additional~~natural ~~properties~~decline ifcurve. LOE wefor ~~believe~~the athree ~~sale~~month period ended March 31, 2016 and 2015, were $282,558 and $216,799, which was an increase of $65,759 or 30.3%, compared to the same period in the prior year. The increase in LOE costs can be ~~completed~~attributed onto ~~terms~~the ~~that~~new ~~provide~~wells ~~attractive~~we ~~returns~~acquired n December 2015.

Production taxes ~~on a per BOE basis~~ for the three ~~and nine~~ months ended ~~September~~March 3031, 2016 and 2015, ~~decreased~~were ~~44%~~$14,144 and ~~54%~~$18,425, respectively, ina ~~line with the~~ decrease inof ~~production revenues~~$4,311 ~~compared~~or ~~to the same periods in 2014~~23.4%. We generally expect absolute production tax expense to trend as a percentage with oil, gas, and NGL production revenue. Production taxes as a percentage of revenue for the three months ended March 31, 2016 and 2015, were 7.7% and 7.6%, which is consistent with what we would expect. Product mix, the location of production, and incentives to encourage oil and gas development can all impact or change the amount of production tax we recognize.

1517

~~Lease~~Under ~~operating~~successful ~~expense~~efforts ~~per~~accounting, ~~Barrel~~DD&A ofexpense ~~Oil~~is ~~Equivalent~~separately ~~("BOE")~~computed for ~~the~~each ~~three~~producing ~~and~~field ~~nine~~based ~~months~~on ~~periods~~geologic ~~ended~~and ~~September~~reservoir ~~30, 2015, were $35~~delineation.96 ~~and~~The ~~$30.82~~capital ~~per~~expenditures ~~BOE,~~for anproved ~~increase~~properties offor ~~54%~~each ~~and~~field ~~37%, respectively,~~ compared to the ~~same~~proved ~~periods~~reserves incorresponding ~~2014.~~to ~~Many~~each ofproducing ~~the~~field ~~wells~~determine ~~included~~a inweighted ~~our~~average ~~acreage~~DD&A ~~have~~rate ~~been producing~~ for acurrent ~~decade or longer and the cost of workovers and normal maintenance are charged to expense in the period the costs are incurred~~production. ~~The~~ ~~increase~~Future inDD&A ~~the~~rates ~~cost~~will ~~per BOE can~~ be ~~attributed~~adjusted to ~~lower~~reflect ~~production~~future ~~volumes~~capital expenditures and aproved ~~workover~~reserve ~~project~~changes ~~related~~in tospecific ~~our~~areas. ~~Kansas~~Our ~~and~~DD&A ~~Wyoming~~expense ~~wells. LOE~~ for the three months ended ~~September~~March 3031, 2016 and 2015, ~~was~~were $74155,~~588~~000 ~~higher~~and ~~compared~~$191,028, toa ~~the~~decrease ~~same~~of ~~period~~$36,028 inor ~~the prior year~~18. ~~LOE~~9%. ~~for~~This ~~the~~decrease ~~nine~~can ~~months~~be ~~ended~~attributed ~~September 30, 2015, was $119,519 higher compared~~ to ~~the~~a ~~same~~lower ~~period~~depletable inbase ~~the~~because ~~prior~~of ~~year. The~~a ~~majority~~write down of ~~this~~oil ~~increase~~and ~~can~~gas beproperties ~~attributed~~at toDecember ~~workover~~31, ~~costs~~2015, ~~incurred~~against ~~during~~impairment ~~the~~expense, ~~three~~as ~~months~~well ~~ended~~as, ~~September~~an ~~30,~~increase ~~2015.~~in Wethe ~~anticipate~~reserve ~~this~~base ~~work~~related to ~~have~~the aacquisition ~~favorable~~of ~~impact~~additional onproducing ~~production~~wells ~~beginning~~ in ~~the~~December ~~fourth~~31, ~~quarter~~2015, ofwhich ~~this~~reduced ~~fiscal~~the ~~year~~DD&A rate.

~~Under~~We ~~successful~~perform ~~efforts~~assessments ~~accounting,~~of ~~DD&A~~our ~~expense~~long-lived isassets ~~separately~~to ~~computed~~be ~~for~~held ~~each~~and ~~producing~~used, ~~field~~including ~~based~~oil onand ~~geologic~~gas ~~and~~properties, ~~reservoir~~whenever ~~delineation.~~events ~~The~~or ~~capital~~circumstances ~~expenditures~~indicate ~~for~~that ~~proved~~the ~~properties~~carrying ~~for~~value ~~each~~of ~~field~~those ~~compared~~assets tomay ~~the~~not ~~proved~~be ~~reserves~~recoverable. ~~corresponding~~To tothe ~~each~~extent ~~producing~~such ~~field~~assessments ~~determine~~indicate a ~~weighted~~reduction ~~average~~of ~~DD&A~~the ~~rate~~estimated ~~for~~useful ~~current~~life ~~production.~~or ~~Future~~estimated ~~DD&A~~future ~~rates~~cash ~~will~~flows beof ~~adjusted~~our tooil ~~reflect~~and ~~future~~gas ~~capital~~properties, ~~expenditures~~the ~~and~~carrying ~~proved~~value ~~reserve~~may ~~changes~~not inbe ~~specific~~recoverable ~~areas.~~and ~~Our~~therefore ~~DD&A~~an ~~rate~~impairment ~~has~~charge ~~increased~~would asbe arequired ~~result~~to ofreduce athe ~~lower~~carrying ~~reserve~~value ~~base~~of ~~compared~~the proved properties to ~~the~~their ~~prior~~fair ~~year~~value.

~~Gas~~The ~~Gathering~~cash ~~Activities~~flow model we use to assess proved properties for impairment includes numerous assumptions. The primary factors that may affect estimates of future cash flows are (i) future reserve adjustments, both positive and negative, to proved reserves and appropriate risk-adjusted probable and possible reserves, (ii) results of future drilling activities, (iii) Management's price outlook and (iv) increases or decreases in production costs and capital costs associated with those reserves. All inputs to the cash flow model are evaluated at each measurement date.

WeAs ~~have owned and operated~~ a ~~natural~~result ~~gas gathering system (pipeline and compressor station) for coal bed methane properties in the Powder River Basin~~ of ~~Wyoming~~our ~~since~~proved ~~2006.~~property Weimpairment ~~have~~assessments, ~~had no revenues since June 2011 due to low natural gas prices which resulted in all wells in the field being shut-in. While this field is shut-in~~ we dorecognized ~~continue to perform routine maintenance to ensure it is in~~ a ~~safe~~$252,000 ~~condition~~noncash ~~and~~impairment wecharge ~~continue~~ to ~~depreciate~~reduce the ~~gathering~~carrying ~~system.~~values ~~Operating~~of ~~expenses~~our ~~for~~proved ~~the~~properties ~~three~~at ~~and~~March ~~nine month periods ended September 30~~31, ~~2015, were $0 and $1,406, respectively, compared to $609 and $7,979 during the same periods in the prior year~~2016.

General and Administrative

Presented below is a summary of general and administrative expenses for the three ~~and nine~~ months ~~periods~~ ended ~~September~~March 3031, ~~2014~~2016 and 2015:

Three Months Ended

Nine Months Ended

Three Months ended

2014

2015

2014

2015

March 31,

General and administrative expenses:

2016

2015

Director fees

10,000

1310,~~333~~000

~~10,450~~

~~35,333~~

Investor relations

21,~~448~~907

303,~~987~~163

~~37,634~~

~~41,525~~

Legal, auditing and professional fees

3729,~~109~~171

612,~~458~~565

~~115,753~~

~~80,313~~

Consulting fees - Related Parties

4116,~~250~~500

4347,~~333~~400

~~168,750~~

~~126,733~~

Other adminstrative expenses

1815,~~084~~166

2019,~~699~~154

~~59,166~~

~~65,138~~

Depreciation

~~143~~-

~~143~~142

~~428~~

109,034

114,863

392,181

349,470

Total G&A Expense

72,744

92,424

General and administrative expenses ~~increased~~decreased $519,~~830~~680 or 21.3% for the three ~~months~~month period ended ~~September~~March 3031, ~~2015~~2016, compared to the same period in ~~the~~2015. ~~prior~~This ~~year~~reduction ~~and~~is ~~decreased~~primarily ~~$42,710~~due ~~for~~to ~~the~~a ~~nine~~decrease ~~months~~in ~~period~~related ~~ended~~party ~~September~~consulting ~~30,~~fees. During 2015 there was a monthly charge of $10,000 ~~compared~~charged to ~~the~~related ~~same~~party ~~period~~consulting infees ~~2014~~under an agreement with DNR, whereby executive level expertise is provided for our existing and prospective oil and gas properties. The ~~increase~~total ~~for~~monthly charge under the ~~three~~operating ~~month~~agreement ~~period~~was ~~ended~~$18,000, of which $8,000 is ~~attributable~~allocated to ~~higher~~lease ~~costs~~operating ~~related~~expense. toDNR ~~director~~is ~~fees~~an affiliate of Charles B. Davis, ~~investor~~an ~~relations~~executive officer and ~~other~~director ~~general~~of the Company. We re-negotiated this agreement in 2016 and ~~administrative~~are ~~costs,~~no ~~offset~~longer bypaying ~~lower~~the ~~legal~~$10,000 ~~auditing,~~consulting ~~professional~~fee ~~and~~in ~~consulting~~2016 ~~costs.~~and ~~The~~are ~~reduction~~only ~~for~~paying the ~~nine~~operating ~~months~~fee ~~period~~which ~~ended~~increased ~~September~~to 30$13,000 ~~2015~~compared to $8,000 isin ~~due~~the toprior anyear. ~~effort~~This by$30,000 ~~management~~reduction toof ~~reduce~~related ~~costs,~~party ~~with~~consulting ~~emphasis~~expense ~~put~~was onoffset ~~reducing~~by ~~legal,~~increased ~~professional~~general ~~and~~corporate ~~consulting~~legal fees. ~~These~~ ~~reductions~~Management ~~have~~continues ~~been~~to ~~slightly~~focus ~~offset~~on ~~with~~reducing ~~higher~~general ~~director~~and ~~fees~~administrative ~~and~~expenses ~~investor~~as ~~relations~~a ~~costs,~~cost ~~however~~per BOE, ~~the~~which ~~director~~decreased ~~fees~~$2.12 ~~are~~per ~~satisfied~~BOE ~~with~~or ~~the~~19.0% ~~Company's~~to ~~stock~~$9.04 inper anBOE ~~effort~~at toMarch ~~preserve~~31, ~~working~~2016, ~~capital~~compared to ~~help~~$11.16 ~~fund~~per ~~operations~~BOE in the prior year for the same period.

There is a monthly charge of $10,000 charged to professional fees under an agreement with DNR, whereby executive level expertise is provided for our existing and prospective oil and gas properties. The total monthly charge under the operating agreement is $18,000, of which $8,000 is allocated to lease operating expense. DNR is an affiliate of Charles B. Davis, an executive officer and director of the Company.

Income (loss) from operations

Loss from operations for the three and nine month periods ended September 30, 2015, was $389,696 and $992,837 compared to income of $52,456 and $325,907 for the same periods in 2014. The loss is attributed to a decrease in oil and gas revenues of $411,469 and $1,312,664 or 62% and 63% for the three and nine months periods ended September 30, 2015, compared to the same periods in the prior year. We also experienced an increase of $35,661 and $22,356 or 6% and 1% increase in operating expenses. See discussion above for additional information on revenues and operating expenses.

Interest Expense

Interest expense ~~decreased~~for ~~approximately~~the ~~$4,978~~three ~~and~~months ~~$16,276~~ended ~~during~~March ~~the~~31, ~~three~~2016 and ~~nine~~2015, ~~months~~was ~~periods~~$22,715 ~~ended~~and ~~September 30~~$27, ~~2015~~158, ~~compared~~a todecrease ~~the~~of ~~same~~$4,443 ~~periods~~or ~~in 2014~~16.4%. The decrease of interest expense was due to a decrease in debt compared to the same period the last year. We recorded $3,014 of interest expense to related parties at March 31, 2016 and paid $645 to one of the related parties. The remaining interest expense was due to unrelated parties, of which we made payments of $19,904 at March 31, 2016.

Liquidity and Capital Resources

We ~~had~~have areported ~~working~~net ~~capital~~operating ~~deficit~~losses asduring ofthe ~~September~~three 30months ended March 31, ~~2015~~2016, ofand $1for the fiscal year ended December 31,~~834,948,~~ ~~compared~~2015. toWe aalso had negative working capital ~~deficit~~at ofMarch $131,~~294~~ 2016,~~408~~ atand ~~December~~we ~~31,~~are ~~2014.~~currently ~~This~~in ~~increase~~default with two of our creditors for which we have notes payable for an aggregate amount of $~~540~~162,~~940~~000. ~~increase~~In inorder to execute our ~~working~~drilling ~~capital~~plans ~~deficit~~and ~~can~~to be ~~attributed~~in a position to ~~lower~~seek ~~current~~to ~~assets~~acquire ofadditional ~~$120,471~~interests in oil and ~~higher~~gas ~~current~~properties ~~liabilities~~that ofmeet ~~$420~~our objectives,~~069~~ we need to obtain significant additional financing. ~~The~~This ~~decrease~~recent inhistory ~~current~~of ~~assets~~operating ~~can~~losses, benegative ~~attributed~~working tocapital aand defaults, along with the recent decrease in commodity prices, may adversely affect our ability to access the ~~Company's~~capital ~~cash~~we ~~position~~need ~~and~~to ~~lower~~continue ~~accounts~~operations ~~receivable~~on ~~related~~terms acceptable to ~~oil~~us ~~and~~when ~~gas~~such ~~sales~~capital is needed. ~~The~~Historically, ~~increase~~we inhave ~~current~~used ~~liabilities~~a isline ~~attributed~~of tocredit, ~~costs~~preferred ~~incurred~~stock ~~for~~offerings ~~the~~and ~~workovers~~sales ~~incurred~~of inoil ~~the~~and ~~third~~gas ~~quarter~~properties ~~that~~in ~~were~~order ~~not~~to ~~paid~~fund atour ~~September~~operations. ~~30,~~In late 2015, ~~accrued~~we ~~property~~raised ~~taxes~~approximately ~~that~~$1.7 ~~are~~million ~~paid~~through ~~twice~~a ~~annually~~private placement of our Series A2 Preferred Stock. We have successfully negotiated extensions with some of our key notes payable holders resulting in ~~April~~extending ~~and~~the ~~October~~due date out two years. Since 2011, we have sold various interests in some of our ~~long~~oil ~~term~~and ~~debt~~gas ~~has~~properties, ~~become~~which ~~current~~have ~~and~~resulted ~~our~~in ~~some~~aggregate net proceeds from these sales of $6,377,000. Still, our ~~asset~~ability ~~retirement~~to ~~obligations~~continue ~~became~~as ~~current~~a ~~during~~going concern is dependent upon the ~~third~~ability ~~quarter~~to successfully accomplish our business plan and continue to secure other sources of financing and attain continuously profitable operations. The Company continues to pursue additional sources of financing but there can be no assurance that such financing will be completed on terms favorable to the Company, if at all.

InWe ~~order~~had toa ~~meet~~working ~~our goals and objectives, we will need to seek additional~~ capital, ~~likely~~deficit ~~through~~as ~~asset~~of ~~sales and debt or equity financings~~March 31, to2016 ~~continue~~of ~~our~~approximately ~~proposed operations~~$1.1 Wemillion, ~~can~~compared ~~give no assurance that we will be able~~ to ~~raise~~a ~~such~~working capital ondeficit ~~such~~of ~~terms~~approximately ~~and~~$1.4 ~~conditions~~million weat ~~deem reasonable~~December 31, ~~if at all~~2015. WeThe ~~will~~decrease ~~have~~in ~~limited~~our ~~financial~~deficit ~~resources~~was ~~until~~primarily ~~such~~due ~~time~~to ~~that~~a wepayment ~~are~~made ~~able~~ to ~~generate~~DNR ~~such~~related ~~additional financing or additional cash flow from operations. Our ability~~ to ~~achieve~~a ~~profitability~~settlement ~~and~~agreement ~~positive~~of ~~cash~~approximately ~~flow~~$300,000 isthat ~~dependent~~was ~~upon~~included ~~our~~in ~~ability~~accounts payable to ~~exploit~~DNR, ~~our oil~~ and ~~gas~~a ~~properties,~~decrease ~~generate~~in ~~revenue from~~ our ~~business~~current ~~operations~~notes ~~and~~payable ~~control~~due ~~our costs. Should we be unable~~ to ~~raise~~executing ~~adequate~~some ~~capital~~amendments oron tovarious ~~meet~~notes ~~the~~payable ~~other above objectives, it is likely~~ that weextended ~~would~~the ~~have~~due todate ~~substantially~~making ~~curtail~~those ~~our~~related ~~business~~notes ~~activity~~long orterm ~~cease operating, and that our investors would incur substantial losses of their investment~~debt.

~~Our~~We ~~operating~~used ~~cash~~$343,787 ~~flow resulted~~ in aoperating ~~net~~cash ~~outflow~~flow ofduring ~~$61,572 for~~ the ~~nine~~three ~~months~~month period ended ~~September~~March 3031, ~~2015,~~2016 compared to ~~operating~~positive ~~cash~~cashflow ~~flow~~ of $~~414~~8,~~588~~916 ~~for~~generated through operating activities during the same period in ~~2014~~the prior year. This ~~decrease~~was isprimarily ~~attributed~~related to ~~significantly~~ lower oil and natural gas prices, ~~resulting~~which resulted in alower ~~net~~revenues ~~loss~~of approximately $87,000 and ~~paying~~due ~~down~~to ~~accounts~~the ~~payables~~payment of approximately $300,000 due to DNR related to a settlement agreement.

WeInvesting activities used ~~$14,416~~net cash of ~~cash~~$146, ~~flows~~which was related to ~~investing~~the ~~activities~~payment ~~for~~of ~~capital~~some ~~expenditures~~leasehold ~~during~~costs ~~the~~in ~~nine~~which ~~month~~we ~~period~~own ~~ended~~a ~~September~~very ~~30,~~small ~~2015,~~working ~~compared~~interest in. We used $~~186~~11,~~353~~962 of cash ~~flows~~during ~~used~~the inthree ~~investing~~month ~~activities~~period ~~for~~ended ~~capital~~March ~~expenditures~~31, ~~during~~2015, ~~the~~related ~~same~~to ~~period~~oil inand ~~the~~gas ~~prior~~capital ~~year~~expenditures.

~~During~~We had $145,060 of net cash provided by financing activities for the ~~nine~~quarter ~~month~~ended ~~period~~March 31, 2016. For the quarter ended ~~September~~March 3031, 2015, we ~~made~~had ~~principal~~net ~~payments~~cash offinancing ~~$19,658~~activities ~~and~~use ~~borrowed~~of ~~an additional~~ $676,~~000~~493. onWe ~~our~~entered ~~line~~into ofa ~~credit~~short-term ~~resulting~~note inpayable awith ~~net~~an ~~cash~~unrelated ~~inflow~~party for ~~financing~~net ~~activities~~proceeds of $4725,~~342~~500 ~~compared~~ to ~~net~~finance ~~cash~~our ~~used~~D&O Insurance liability policy, we made principal payments on our debts in ~~financing~~the ~~activities~~amount of $~~701~~35,~~638~~440, ~~during~~we ~~the~~received ~~same~~$105,000 ~~period~~related into the ~~prior~~A2 ~~year.~~Preferred InStock issued during the prior year, weas ~~borrowed~~well ~~$622~~as,~~638,~~ ~~repaid~~receiving ~~borrowings~~proceeds of $150,~~080,776, and redeemed $228,~~000 infor ~~common~~an ~~stock~~additional sale of ~~the~~5 ~~Company~~shares ~~and~~of ~~redeemed~~our ~~series~~A2 ~~A-1~~Preferred ~~preferred stock for $15,500~~Stock.

Part of our strategy is to monitor the current production of our properties, seek to develop them with infield drilling, and explore sales and purchases of additional leases and operating wells with upside. We are currently evaluating several opportunities for drilling in Wyoming, Colorado, and Oklahoma. We also expect to evaluate acquisitions that are consistent with our business objective of acquiring interests in traditional oil and gas ventures, and seeking properties that offer profit potential from overlooked and by-passed reserves of oil and natural gas. The Company has participated as a working interest owner in the four horizontal wells which were drilled and completed in Campbell County, Wyoming in the Turner zone and one well in Converse County, Wyoming in the Turner Zone. The following is a description of the wells:

In order to execute our development drilling plans and to acquire additional interests in oil and gas properties that meet our objectives, we need to obtain significant additional financing. We acquired our existing properties in July 2011, and from time to time we have sold our interests in some of those properties, which resulted in aggregate net proceeds from three sales of $6,377,000, which was used to repay acquisition indebtedness. We intend to only sell properties that can be liquidated for a premium and there can be no assurance that we will continue to generate any proceeds from the sale of our properties.

If oil and gas prices remain at these low levels beyond 2015 and additional debt or equity funding is unavailable on acceptable terms, or at all, our strategy would include some or all of the following: (i) shut-in any marginal or uneconomic wells, (ii) attempt to negotiate the issuance of common stock in exchange for services, and (iii) review and implement other opportunities to reduce general, administrative and operating expenses.

The failure to successfully implement one or all of these strategies may cause the Company to curtail its operations, sell its assets and result in the failure of its business.

Contractual Obligations and Commercial Commitments

As of September 30, 2015, we have future minimum lease payments of approximately $5,000. This amount is payable during the periods ending September 30, 2016, 2017, 2018, 2019 and 2020 in the amounts of $1,000 each year respectively.

Off-Balance Sheet Arrangements

In connection with the related party acquisition of oil and gas properties in the third quarter of 2011, we acquired interests in certain geologic zones of the properties. ~~The~~This ~~Colorado~~agreement ~~and~~contained ~~Kansas~~several ~~properties~~arrangements ~~provide~~that ~~for~~would ~~additional~~require ~~consideration~~us ~~that~~to ispay ~~payable~~certain toamounts ~~the~~depending ~~related~~on ~~party~~certain ~~sellers~~thresholds ifmet. ~~proved~~However, ~~producing~~on ~~reserves~~January ~~are~~19, ~~increased~~2016, ~~relating~~but toeffective December 31, 2015, we entered into a settlement agreement with the Sellers of these properties, ~~through~~whereby ~~drilling~~in orconsideration ~~recompletion~~of ~~activities~~the ~~over~~amounts aindicated ~~period~~below, the parties (i) terminated Exhibits C and C-2 to the DNR and Tindall PSA for all purposes; (ii) extinguished all liabilities of ~~ten~~the ~~years~~Company ~~after~~under Exhibit C of the ~~closing~~DNR ~~date.~~and ~~First~~Tindall PSA including $250,000, related to the ~~extent~~increase ~~that~~in oil ~~reserves~~prices ~~increase,~~after the ~~sellers~~acquisition; ~~are~~(iii) ~~entitled~~agreed that the promissory note owed by us to ~~additional~~DNR ~~consideration~~in the amount of $~~250~~792,~~000~~151 ~~for~~and accrued interest thereon was paid in full; and (iv) released each ~~increase~~other ofagainst ~~20,000~~any ~~net~~and ~~barrels~~all claims which have been raised or could have been raised among them. ~~Second~~Specifically, Exhibits C and C-2 to the ~~extent~~DNR and Tindall PSA related to potential payments that would have been needed to be made by us in the event oil prices increased to certain levels and ~~gas~~related ~~prices~~to ~~increase,~~certain ~~the~~payments ~~sellers~~that ~~are~~would ~~entitled~~have been needed to ~~additional~~be ~~consideration~~made asby us in the ~~targeted~~event ~~price~~we ~~thresholds~~sold ~~are~~certain ~~exceeded~~properties ~~for~~purchased ~~periods~~under ofthe 61Purchase ~~days~~and Sale Agreement. ~~The~~Exhibits ~~increase~~C inand ~~purchase~~C-2 ~~price~~were ~~for~~terminated and extinguished (including any amounts owed thereunder including $250,000 under Exhibit C to the ~~Kansas~~Purchase and ~~Colorado~~Sale ~~properties~~Agreement) isin ~~limited~~exchange for 25 fully paid, nonassessable restricted shares of our 7% Series A2 Convertible Preferred Stock. Consideration to apay ~~maximum~~the above promissory note in full consisted of us issuing to DNR 65 fully paid, nonassessable restricted shares of our 7% Series A2 Convertible Preferred Stock, and paying DNR $5303,329 ~~million~~in cash, which was paid during the three month period ended March 31, 2016.

The acquired properties that are located in Wyoming and Montana provide a similar formula as used for the Colorado and Kansas properties that could result in an obligation for additional purchase consideration to the extent that we perform future drilling or recompletion activities in formations that were not producing as of the September 29, 2011 closing date. Furthermore, if we sell properties where reserves have been proved up through drilling or recompletion, the sellers have retained an interest of 70% in the net sales proceeds (after we receive a recovery of 125% of the original purchase allocation in the amended and restated purchase agreement). The increase in purchase price for all properties (Colorado, Kansas, Wyoming and Montana) is limited to a maximum of $25 million.

Due to consideration retained by the related party sellers from sales of properties through the fourth quarter of 2014, and $500,000 of consideration payable in December 2014 due to a sustained increase in oil prices over $90 and $100 per barrel, the maximum future consideration has been reduced by approximately $5.8 million to $19.2 million as of June 30, 2015.

Critical Accounting Policies

Please refer to Note 2 - Summary of Significant Accounting Policies and Use of Estimates included in Part II, Item 8 of our 2014 Annual Report on Form 10-K for discussion of our accounting policies and estimates.

New Accounting Pronouncements

Please refer to Note 2 - Summary of Significant Accounting Policies and Use of Estimates under Part I, Item 1 of this report for new accounting matters.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

The Company is a "Smaller Reporting Company" as defined by Rule 229.10 (f)(1) and is not required to provide or disclose the information required by this item.

1819

Item 4 - Controls and Procedures

As of ~~September~~March 3031, ~~2015~~2016, 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 not 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. As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015, the ineffectiveness of our disclosure controls and procedures is due primarily to (i) our Board of Directors does not currently have any independent members that qualify as an audit committee financial expert, (ii) we have not developed and effectively communicated our accounting policies and procedures, and (iii) our controls over financial statement disclosures were determined to be ineffective.

Further, there were no changes in our internal control over financial reporting ~~during~~subsequent ~~the~~to ~~second~~March ~~fiscal~~31, ~~quarter~~2016, and through the filing date 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.

From time to time, the Company is a party to routine litigation and proceedings that are considered part of the ordinary course of its business. ~~The~~On September 29, 2016, a complaint was filed against the Company isand ~~not~~two ~~aware~~others in the Superior Court of ~~any~~Arizona, Maricopa County, entitled Eric Langan, Paul McNulty, Patricia Quick, Stony Point Fund, L.P., and Jeffrey H. Wallen, D.D.S., P.C. vs. Arête Industries, Inc., Don Prosser, and Charles Davis. The complaint alleges that defendants Prosser and Davis made certain material ~~current~~representations to the plaintiffs in connection with the alleged purchase by the plaintiffs of $555,000 ~~pending~~in common stock of the Company. The complaint alleges that the alleged misrepresentations were deliberate and requests damages against all of the defendants to compensate the plaintiffs for their alleged injuries resulting from the alleged misrepresentations, orincluding ~~threatened~~punitive ~~litigation~~damages. The Company and the other defendants believe the action is entirely without merit and intend to vigorously defend the proceeding.

Item 1A - Risk Factors.

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015, as filed with the SEC on ~~April~~May 1510, ~~2015~~2016. The risk factors in our Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015, in addition to the other information set forth in this quarterly report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition or results of operations.

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

~~During~~Beginning ~~the nine~~in ~~month~~December ~~period ended September 30,~~ 2015, the Company ~~issued~~began ~~571,954~~privately offering up to 600 shares of ~~common~~its ~~stock~~newly ~~for~~created ~~compensation~~7% ~~for~~Series ~~services;~~A2 ~~106,140~~Convertible ~~shares~~Preferred ofStock ~~common~~at ~~stock~~a ~~were~~purchase ~~issued~~price ~~for~~per ~~board~~share ~~services~~equal atto $~~0.20~~10,000 ~~per~~for ~~share in~~aggregate ~~2014~~consideration ~~and 165,815~~of ~~and~~up 83to $6,~~333 shares~~000,000. As of ~~common~~March ~~stock~~31, ~~were~~2016, ~~issued~~the ~~for~~Company ~~board~~had ~~services at~~sold ~~$0.13~~subscriptions ~~and~~equal to $01,820,000 (182 shares).16 The ~~per~~shares ~~share~~of in7% ~~2015,~~Series ~~and~~A2 ~~50,000~~Convertible ~~and 166,666~~Preferred ~~shares~~Stock ofissued ~~common~~as ~~stock~~described above were ~~issued~~sold atin ~~$0.13~~reliance ~~and~~upon ~~$0.16,~~the ~~respectively, for~~exemption ~~service~~from ~~and~~registration ~~consulting~~provided by ~~three~~Section ~~related~~4(2) ~~parties. These~~of ~~shares~~the ~~were~~Securities ~~issued~~Act inand ~~private~~Rule ~~transactions~~506(b) ~~pursuant~~promulgated tothereunder. These ~~exemptions~~securities ~~from~~qualified ~~registration~~for ~~afforded~~exemption byunder ~~section~~Rule 506 promulgated under Section 4(~~a)(~~2) of the Securities ~~and~~Act ~~Exchange~~because ~~Act~~the issuance of ~~1933~~securities ~~and~~by ~~Regulation~~the ~~D. No~~Company ~~underwriting~~did ornot ~~agents~~involve a "public offering" based upon the following factors: (i) a limited number of securities were ~~involved~~issued into a limited number of offerees with whom the ~~foregoing~~Company ~~issuances~~had ~~and~~preexisting business relationships; (ii) there was no ~~underwriting~~public ~~discounts~~solicitation in connection with any offers or ~~commissions~~sales ~~were~~of ~~paid. The~~the securities; ~~sold~~(iii) ~~are~~each ~~subject~~offeree towas ~~restrictions.~~an "accredited investor" as such term is defined by Rule 501 under the Securities Act; and (iv) the investment intent of the offerees.

Item 3 - Defaults upon Senior Securities.

None

Item 4 - Mine Safety Disclosures.

Not Applicable

Item 5 - Other Information.

None

1920

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 the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2	Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

101

The following materials are filed herewith: (i) XBRL Instance, (ii) XBRL Taxonomy Extension Schema, (iii) XBRL Taxonomy Extension Calculation, (iv) XBRL Taxonomy Extension Labels, (v) XBRL Taxonomy Extension Presentation, and (vi) XBRL Taxonomy Extension Definition. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

2021

ARÊTE INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

By: /s/ Nicholas Scheidt, CEO

Nicholas L Scheidt, Principal Executive Officer

Dated: ~~November~~December 1623, ~~2015~~2016

By: /s/ Tristan R. Farel

Tristan R. Farel, Chief Financial Officer

Dated: ~~November~~December 1623, ~~2015~~2016

2122

Filing Compare · ARETE INDUSTRIES INC