UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to_____________
Commission file number 333 - 38558
KODIAK ENERGY, INC
.
(Exact name of registrant as specified in its charter)
|
Delaware
|
65-0967706
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
Suite 1120, 833 4th Avenue S.W. Calgary, AB T2P 3T5
(Address of principal executive offices - Zip code)
(403) 262-8044
(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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
X
No ___
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):
|
Large Accelerated Filer ___
|
Accelerated Filer ___
|
|
Non-Accelerated Filer
X
(Do not check if a smaller reporting company)
|
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
X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes
X
No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 110,407,186 common shares, $.001 par value, as at August 13, 2009.
KODIAK ENERGY, INC.
INDEX
|
PART I.
|
FINANCIAL INFORMATION
|
3
|
|
|
|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
3
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
|
3
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)
|
4
|
|
|
|
|
|
|
Condensed Consolidated Statement of Shareholders’ Equity from January 1, 2010 through June 30, 2010 (unaudited)
|
5
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)
|
6
|
|
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
|
|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
19
|
|
|
|
|
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
26
|
|
|
|
|
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
27
|
|
|
|
|
|
ITEM 4T
|
CONTROLS AND PROCEDURES
|
27
|
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
29
|
|
|
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
29
|
|
|
|
|
|
ITEM 1A.
|
RISK FACTORS
|
29
|
|
|
|
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
29
|
|
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
29
|
|
|
|
|
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
29
|
|
|
|
|
|
ITEM 5.
|
OTHER INFORMATION
|
29
|
|
|
|
|
|
ITEM 6.
|
EXHIBITS AND REPORTS ON FORM 8-K
|
29
|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
|
KODIAK ENERGY, INC.
|
|
|
Condensed Consolidated Balance Sheets
|
|
|
(Going Concern Uncertainty-Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and short term deposits
|
|
$
|
27,342
|
|
|
$
|
2,058
|
|
|
Accounts receivable
|
|
|
609,681
|
|
|
|
403,907
|
|
|
Prepaid expenses and deposits
|
|
|
178,500
|
|
|
|
151,390
|
|
|
Total current assets
|
|
|
815,523
|
|
|
|
557,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
292,451
|
|
|
|
296,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (Note 3)
|
|
|
1,945,625
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties, Full cost accounting (Note 4)
|
|
|
|
|
|
|
|
|
|
Devaluated properties
|
|
|
7,919,254
|
|
|
|
6,823,400
|
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(2,703,554
|
)
|
|
|
(2,165,997
|
)
|
|
Net
|
|
|
5,215,700
|
|
|
|
4,657,403
|
|
|
Undeveloped properties excluded from amortization
|
|
|
21,765,530
|
|
|
|
26,081,786
|
|
|
Furniture and fixtures, net
|
|
|
61,725
|
|
|
|
64,862
|
|
|
|
|
|
27,042,955
|
|
|
|
30,804,051
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,096,554
|
|
|
$
|
31,657,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,449,535
|
|
|
$
|
2,267,139
|
|
|
Accrued liabilities
|
|
|
379,520
|
|
|
|
281,522
|
|
|
Operating line of credit (Note 6)
|
|
|
1,127,184
|
|
|
|
-
|
|
|
Note payable (Note 2)
|
|
|
-
|
|
|
|
1,364,036
|
|
|
Current debt (Note 7)
|
|
|
1,212,222
|
|
|
|
538,831
|
|
|
Total current liabilities
|
|
|
5,168,461
|
|
|
|
4,451,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities (Note 7)
|
|
|
2,975,230
|
|
|
|
3,400,489
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations (Note 8)
|
|
|
1,350,869
|
|
|
|
1,285,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,494,560
|
|
|
|
9,137,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value: $0.001 per share; 10,000,000 shares authorized, nil issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 110,407,186 shares issued and outstanding as of June 30, 2010 and December 31, 2009
|
|
|
110,407
|
|
|
|
110,407
|
|
|
Additional paid in capital
|
|
|
50,785,117
|
|
|
|
50,851,469
|
|
|
Accumulated comprehensive gain (loss)
|
|
|
212,293
|
|
|
|
(416,905
|
)
|
|
Deficit
|
|
|
(33,293,543
|
)
|
|
|
(28,283,170
|
)
|
|
Stockholders' equity attributable to Kodiak Energy, Inc.
|
|
|
17,814,274
|
|
|
|
22,261,801
|
|
|
Non controlling interest
|
|
|
2,787,720
|
|
|
|
258,127
|
|
|
Total stockholders' equity
|
|
|
20,601,994
|
|
|
|
22,519,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
30,096,554
|
|
|
$
|
31,657,559
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements
|
|
|
KODIAK ENERGY, INC.
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
(Going Concern Uncertainty-Note 1)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
939,872
|
|
|
$
|
-
|
|
|
$
|
1,665,265
|
|
|
$
|
-
|
|
|
Other
|
|
|
3,536
|
|
|
|
-
|
|
|
|
3,577
|
|
|
|
-
|
|
|
Total revenue
|
|
|
943,408
|
|
|
|
-
|
|
|
|
1,668,842
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
471,531
|
|
|
|
1,002
|
|
|
|
774,766
|
|
|
|
2,172
|
|
|
General and administrative
|
|
|
628,201
|
|
|
|
356,427
|
|
|
|
1,280,721
|
|
|
|
849,889
|
|
|
Depletion and depreciation
|
|
|
370,954
|
|
|
|
16,034,536
|
|
|
|
4,781,263
|
|
|
|
16,042,324
|
|
|
Interest
|
|
|
86,093
|
|
|
|
93
|
|
|
|
162,353
|
|
|
|
304
|
|
|
Total expenses
|
|
|
1,556,779
|
|
|
|
16,392,058
|
|
|
|
6,999,103
|
|
|
|
16,894,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations
|
|
|
(613,371
|
)
|
|
|
(16,392,058
|
)
|
|
|
(5,330,261
|
)
|
|
|
(16,894,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of debt
|
|
|
72,657
|
|
|
|
-
|
|
|
|
72,657
|
|
|
|
-
|
|
|
Loss on disposal of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,164
|
)
|
|
Interest income
|
|
|
792
|
|
|
|
725
|
|
|
|
792
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(539,922
|
)
|
|
|
(16,391,333
|
)
|
|
|
(5,256,812
|
)
|
|
|
(16,895,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(539,922
|
)
|
|
|
(16,391,333
|
)
|
|
|
(5,256,812
|
)
|
|
|
(16,895,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non controlling interest
|
|
|
141,834
|
|
|
|
11,780
|
|
|
|
246,439
|
|
|
|
15,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO KODIAK ENERGY, INC.
|
|
$
|
(398,088
|
)
|
|
$
|
(16,379,553
|
)
|
|
$
|
(5,010,373
|
)
|
|
$
|
(16,880,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share (basic and fully diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding (basic and fully diluted)
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(398,088
|
)
|
|
$
|
(16,379,553
|
)
|
|
$
|
(5,010,373
|
)
|
|
$
|
(16,880,088
|
)
|
|
Foreign currency translation gain (loss)
|
|
|
1,840,031
|
|
|
|
4,418,525
|
|
|
|
629,198
|
|
|
|
3,933,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
1,441,943
|
|
|
|
(11,961,028
|
)
|
|
|
(4,381,175
|
)
|
|
|
(12,946,630
|
)
|
|
Comprehensive loss attributable to non controlling interest
|
|
|
141,834
|
|
|
|
11,780
|
|
|
|
246,439
|
|
|
|
15,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Kodiak Energy, Inc.
|
|
$
|
1,583,777
|
|
|
$
|
(11,949,248
|
)
|
|
$
|
(4,134,736
|
)
|
|
$
|
(12,930,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements
|
|
|
KODIAK ENERGY, INC.
|
|
|
Condensed Consolidated Statement of Shareholders' Equity
|
|
|
From January 1, 2010 through June 30, 2010
|
|
|
(Going Concern Uncertainty-Note 1)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred shares
|
|
|
Common shares
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Non-Controlling
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (loss)
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance, January 1, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
110,407,186
|
|
|
$
|
110,407
|
|
|
$
|
50,851,469
|
|
|
$
|
(416,905
|
)
|
|
$
|
(28,283,170
|
)
|
|
$
|
258,127
|
|
|
$
|
22,519,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324,070
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
324,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in ownership of majority owned subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,519
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129,956
|
|
|
|
366,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of non-controlling interest in Cougar Energy, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(626,941
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(258,127
|
)
|
|
|
(885,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
629,198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
629,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in Cougar Oil and Gas
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,904,203
|
|
|
|
2,904,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,010,373
|
)
|
|
|
(246,439
|
)
|
|
|
(5,256,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
110,407,186
|
|
|
$
|
110,407
|
|
|
$
|
50,785,117
|
|
|
$
|
212,293
|
|
|
$
|
(33,293,543
|
)
|
|
$
|
2,787,720
|
|
|
$
|
20,601,994
|
|
The accompanying notes are an integral part of these condensed financial statements
|
KODIAK ENERGY, INC.
|
|
|
Condensed Consolidated Statements of Cash Flows
|
|
|
(Going Concern Uncertainty-Note 1)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,010,373
|
)
|
|
$
|
(16,880,088
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Loss from non controlling interest, net of tax
|
|
|
(246,439
|
)
|
|
|
(15,842
|
)
|
|
Depreciation and depletion
|
|
|
4,781,263
|
|
|
|
16,042,324
|
|
|
Accretion of discount on debt
|
|
|
139,207
|
|
|
|
-
|
|
|
Accretion of asset retirement obligation
|
|
|
45,376
|
|
|
|
-
|
|
|
Stock based compensation
|
|
|
324,070
|
|
|
|
294,719
|
|
|
Gain on settlement of debt
|
|
|
(72,657
|
)
|
|
|
-
|
|
|
Loss on disposal of fixed assets
|
|
|
-
|
|
|
|
(2,164
|
)
|
|
Working capital changes (Note 16)
|
|
|
5,712
|
|
|
|
193,432
|
|
|
Net cash used in operating activities
|
|
|
(33,841
|
)
|
|
|
(367,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(1,135,950
|
)
|
|
|
(394,186
|
)
|
|
Purchases of other assets
|
|
|
-
|
|
|
|
(14,293
|
)
|
|
Net cash used in investing activities
|
|
|
(1,135,950
|
)
|
|
|
(408,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Shares issued or issuable
|
|
|
-
|
|
|
|
(98,648
|
)
|
|
Advances on the revolving line of credit
|
|
|
1,127,184
|
|
|
|
472,890
|
|
|
Non controlling interest contribution
|
|
|
-
|
|
|
|
416,339
|
|
|
Net proceeds from long term debt
|
|
|
227,083
|
|
|
|
1,874
|
|
|
Net cash provided by financing activities
|
|
|
1,354,267
|
|
|
|
792,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency rate change on cash
|
|
|
(159,192
|
)
|
|
|
(42,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
25,284
|
|
|
|
(25,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,058
|
|
|
|
75,175
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
27,342
|
|
|
$
|
49,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements
|
|
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
1. ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements include the accounts of Kodiak Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us” or “our”), and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the periods indicated. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.
Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2009 Annual Report on Form 10-K.
Going Concern Uncertainty
These consolidated financial statements have been prepared assuming the Company will continue as a going concern, which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company has not generated positive cash flow since inception and has incurred operating losses and will need additional working capital for its future planned activities. The success of these programs is yet to be determined. These conditions raise doubt about the Company’s ability to continue as a going concern. Continuation of the Company as a going concern is dependent upon obtaining sufficient working capital to finance ongoing operations. The Company’s strategy to address this uncertainty includes additional equity and debt financing; however, there are no assurances that any such financings can be obtained on favorable terms, if at all. These financial statements do not reflect the adjustments or reclassification of assets and liabilities that would be necessary if the Company were unable to continue its operations.
2. PURCHASE OF SUBSIDIARY
On January 25, 2010, the Company, through its subsidiary Cougar Energy Inc. (“Cougar”), completed its merger with Ore-More Resources (“Oremore”) with the issuance of 36,0876,972 (12,692,324 pre split)
(b)
shares of Ore-more for 8,461,549 shares of Cougar. In accordance with U.S. GAAP, the transaction was accounted for as a reverse acquisition and Cougar was deemed the accounting acquirer. Cougar’s net assets were carried forward at their existing accounting basis and all of Ore-Mores’ assets and liabilities were revalued at fair value as of the acquisition date. The consolidated financial statements of the Company for June 30, 2010 include the operations of Ore-More from January 1, 2010. Ore-More contributed no revenue and immaterial earnings for the period January 1, 2010 to June 30, 2010.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
2. PURCHASE OF SUBSIDIARY
|
The following table summarizes the calculation of the fair value of consideration transferred to acquire Ore-more:
|
|
|
|
|
|
|
|
|
|
Cougar shares issued
|
|
5,630,913
|
(a)
|
|
Multiplied by
|
|
$
|
0.61
|
(b)
|
|
|
|
$
|
3,451,468
|
|
|
|
|
|
|
|
The following table summarizes the calculation of the fair value of consideration transferred by Kodiak to acquire Ore-More:
|
Assets acquired:
|
|
|
|
|
Current
|
|
|
|
|
Cash
|
|
$
|
7,611
|
|
|
Accounts receivable
|
|
$
|
1,326,786
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Current
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
(5,693
|
)
|
|
Operating Line
|
|
$
|
-
|
|
|
Current debt
|
|
$
|
(97,927
|
)
|
|
Inter- Company Payables
|
|
|
|
|
|
|
|
$
|
1,230,777
|
|
|
NCI eliminated
|
|
$
|
626,949
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
3,451,468
|
|
|
|
|
|
|
|
|
Good will on acquisition
|
|
$
|
1,593,742
|
|
The allocation of the purchase price to the consolidated assets and liabilities of Ore-More resulted in goodwill of $1,593,742 which is the difference between the aggregate of the fair value of Ore-Mores’ net assets and the value of the eliminated non-controlling interest and the fair market value of the consideration effectively transferred. The goodwill is not expected to be deductible for tax purposes.
Prior to the merger, Ore-more had acquired from a third party the right to collect debt of $1,357,713 from the Company. Pursuant to the merger agreement, in addition to issuing common shares to the Company, Ore-more extinguished the $1,357,713 note receivable and cancelled 12,200,000 of its own common shares. Following the closing of the transaction, Ore-More changed its name to Cougar Oil and Gas Canada, Inc.
Upon the completion of the merger, Kodiak directly hold approximately 64.58% of the outstanding shares of Cougar Oil and Gas Canada. This remaining 35.48% was accounted for by the Company as a non-controlling interest.
|
(a)
|
In accordance with ASC 805-40 this represents the Number of Shares Cougar would have had to issue to give the owners of Ore-more the same percentage equity interest in the combined entity that results from the reverse acquisition.
|
|
(b)
|
Represents the stock price of Cougar's private placement to unrelated parties on December 16, 2009, adjusted for the Ore-More 3- 1 reverse stock split effectuated on January 25, 2010.
|
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
3. ACQUISITION OF NON CONTROLLING INTEREST OF COUGAR ENERGY, INC.
In April 2010, the Company’s majority owned subsidiary, Cougar Oil and Gas Canada, issued 2,940,228 shares of its common stock to acquire the outstanding 4.8% non controlling interest of Cougar Energy, Inc. The acquisition cost of $366,475 was valued based on the underlying fair value of the common stock issued at the time of the acquisition. The excess of the purchase price over carrying value of the non controlling interest resulted in goodwill of $366,475.
Upon the completion of the acquisition, Kodiak directly holds approximately 61.56% of the outstanding shares of Cougar Oil and Gas Canada. This remaining 38.44% was accounted for by the Company as a non-controlling interest as part of stockholders’ equity at $2,787,720 as of June 30, 2010.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-19 (ASU 2010-19), Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of May 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB issued ASU
2010-14, "Accounting for Extractive Activities — Oil & Gas." ASU
2010-14 amends paragraph 932-10-S99-1 due to SEC Release No. 33-8995, "Modernization of Oil and Gas Reporting." The amendments to the guidance on oil and gas accounting are effective August 31, 2010, and are not expected to have a significant impact on the Company's financial position
Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements. No pronouncements affecting our financial statements have been issued since the filing of our 2009 Annual Report on Form 10-K.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
5. CAPITAL ASSETS
|
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation and
Depletion
|
|
|
Net book Value
June 30, 2010
|
|
|
Oil and Gas Properties:
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
7,919,254
|
|
|
$
|
2,703,554
|
|
|
$
|
5,215,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeveloped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
32,045,784
|
|
|
|
17,410,720
|
|
|
|
14,635,064
|
|
|
United States
|
|
|
11,773,333
|
|
|
|
4,642,867
|
|
|
|
7,130,466
|
|
|
|
|
|
43,819,117
|
|
|
|
22,053,587
|
|
|
|
21,765,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
|
172,591
|
|
|
|
110,866
|
|
|
|
61,725
|
|
|
Total
|
|
$
|
53,337,357
|
|
|
$
|
25,481,494
|
|
|
$
|
27,042,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation and
Depletion
|
|
|
Net book Value
December 31, 2009
|
|
|
Oil and Gas Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
6,823,400
|
|
|
$
|
2,165,997
|
|
|
$
|
4,657,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undeveloped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
32,441,500
|
|
|
|
17,634,524
|
|
|
|
14,806,976
|
|
|
United States
|
|
|
11,773,677
|
|
|
|
498,867
|
|
|
|
11,274,810
|
|
|
|
|
|
44,215,177
|
|
|
|
18,133,391
|
|
|
|
26,081,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
|
168,166
|
|
|
|
103,304
|
|
|
|
64,862
|
|
|
Total
|
|
$
|
51,206,743
|
|
|
$
|
20,402,692
|
|
|
$
|
30,804,051
|
|
During the six months ended June 30, 2010, the Company capitalized $7,402 (June 30, 2009 - $92,518) of general and administrative personnel costs attributable to acquisition, exploration and development activities. Future capital costs included in the depletion calculation for June 30, 2010 were $539,170 (June 30, 2009 - Nil)
There were no additions to Canadian undeveloped properties during the six months ended June 30, 2010. Changes are a result of foreign currency translation.
Full Cost Accounting Ceiling Test on Canadian Proved Oil and Gas Properties
At June 30, 2010, a ceiling test was performed on the Company's properties subject to depletion. Costs of unproved properties aggregating $21,765,530 and future abandonment costs of $299,643 have been excluded from this test. This test disclosed that the carrying costs of the Company's depletable Canadian properties did not exceeded their net present value and consequently no ceiling write-down was required.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
Unproved Properties
During the six months ended June 30, 2010 certain unproved properties in the United States were allowed to expire. These properties were removed from undeveloped properties at their carrying value of $4,144,344 and have been included in depletion and depreciation the statement of operations.
6
. OPERATING LINE OF CREDIT
During the six months ended June 30, 2010 the Company reached formal agreement with a Canadian bank for two credit facilities. The first credit facility is a revolving demand loan in the amount of Cdn$1,485,000 bearing an interest rate of prime interest plus 3.5%. The second credit facility is a non-revolving acquisition/development demand loan bearing an annum interest rate of prime plus 3.0%. Under the terms of the Agreement, the two credit facilities are committed for the development of existing proved non-producing /undeveloped petroleum and natural gas reserves. As at June 30, 2010 $1,127,184 of the revolving line was drawn (December 31, 2009 – Nil) . There was Nil drawn on the second facility.
7. LONG TERM AND SHORT TERM LIABILITIES
The Company has the following liabilities:
|
|
|
June 30, 2010
|
|
|
Amount due to vendor of acquired properties present value of total amount due
|
|
$
|
4,086,042
|
|
|
Deposit obligation relating to undeveloped properties
|
|
|
44,920
|
|
|
Amount of discount to be accreted in the future (at 7.5% annually - .0625% per month)
|
|
|
(509,290
|
)
|
|
Total Amount due
|
|
|
3,621,672
|
|
|
Less: Current portion
|
|
|
646,442
|
|
|
Long-term portion
|
|
$
|
2,975,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
646,442
|
|
|
Other short-term debt
|
|
|
565,780
|
|
|
Total short-term debt
|
|
$
|
1,212,222
|
|
The Company has the right to prepay the vendor loan in full, without penalty, semi-annually commencing March 31, 2010 at a proportionate discount to the original purchase price. The indebtedness is secured by a debenture covering a fixed and floating charge over Cougar's interest in the acquired properties.
During the six months ended June 30, 2010, non cash interest of $139,207 was recorded as interest expense in relation to the discount on the vendor acquired indebtedness.
During the six months ended June 30, 2010 the total amounts owing on the note payable were extinguished as a result of the share exchange with Ore-More as noted in Note 2.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
8. ASSET RETIREMENT OBLIGATIONS
Changes in the carrying amounts of the asset retirement obligations associated with the Company’s oil and natural gas properties are as follows:
|
Asset retirement obligations, December 31, 2009
|
|
$
|
1,285,614
|
|
|
Foreign exchange
|
|
|
1,175
|
|
|
Additions
|
|
|
18,704
|
|
|
Accretion
|
|
|
45,376
|
|
|
Asset retirement obligations, June 30, 2010
|
|
$
|
1,350,869
|
|
At June 30, 2010, the estimated total undiscounted amount required to settle the asset retirement obligations was $3,066,997 (December 31, 2009 - $3,033,143). These obligations will be settled at the end of the useful lives of the underlying assets, which currently extends up to 15 years into the future. This amount has been discounted using a credit adjusted risk-free interest rate of 7.5% and a rate of inflation of 2.5%.
9. STOCK OPTION PLAN AND STOCK BASED COMPENSATION
The Company has a stock option plan under which it may grant options to its directors, officers, employees and consultants for up to a maximum of 10% of its issued and outstanding common shares at market price at the date of grant for up to a maximum term of five years. Options are exercisable equally over the first three years of the term of the option.
|
|
|
June 30, 2010
|
|
|
|
|
Weighted average Exercise
|
|
|
|
|
Price
|
|
|
Shares
|
|
|
Outstanding at beginning of period
|
|
$
|
0.57
|
|
|
|
6,060,000
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
Options forfeited
|
|
|
1.25
|
|
|
|
(555,000
|
)
|
|
Outstanding at end of period
|
|
|
0.54
|
|
|
|
5,505,000
|
|
|
Exercisable at end of period
|
|
$
|
0.73
|
|
|
|
2,371,667
|
|
Significant option groups outstanding at June 30, 2010 and December 31, 2009 and related weighted average price and life information follow:
|
|
|
Outstanding
|
|
Exercisable
|
|
Range of
Exercise Price
|
|
Number
outstanding
at June 30, 2010
|
|
|
Weighted
Average
remaining
Contractual life
|
|
|
Weighted
average
Exercise Price
|
|
|
Aggregate
intrinsic
value
|
|
Number
outstanding
at June 30,
2010
|
|
|
Weighted
average
Exercise
price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
.28-1.28
|
|
|
4,725,000
|
|
|
|
3.89
|
|
|
|
0.32
|
|
|
|
-
|
|
|
|
1,625,000
|
|
|
|
1.02
|
|
|
|
-
|
|
|
|
1.29-2.28
|
|
|
680,000
|
|
|
|
1.40
|
|
|
|
1.41
|
|
|
|
-
|
|
|
|
680,000
|
|
|
|
1.41
|
|
|
|
-
|
|
|
|
2.29-3.28
|
|
|
100,000
|
|
|
|
2.42
|
|
|
|
2.58
|
|
|
|
-
|
|
|
|
66,667
|
|
|
|
2.58
|
|
|
|
-
|
|
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
A summary of options granted and outstanding under the plan is presented below.
|
|
|
|
Nonvested
Options
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
|
Non vested at December 31, 2009
|
|
|
|
4,756,667
|
|
|
|
0.25
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
Vested
|
|
|
(1,523,334
|
)
|
|
|
0.26
|
|
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.19
|
|
|
Non vested at June 30, 2010
|
|
|
|
3,133,333
|
|
|
|
0.25
|
|
Cougar Oil and Gas Canada Stock Option Plan
Cougar Oil and Gas Canada has a stock option plan under which it may grant options to its directors, officers, employees and consultants for up to a maximum of 10% of its issued and outstanding common shares at market price at the date of grant for up to a maximum term of five years. Options are exercisable equally over the first three years of the term of the option.
A summary of options granted and outstanding under the plan is as follows
|
June 30, 2010
|
|
|
Weighted Average
|
|
|
Exercise Price
|
|
Shares
|
|
$
|
2.02
|
|
35,000
|
|
|
2.38
|
|
600,000
|
|
$
|
2.36
|
|
635,000
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Number outstanding at June 30, 2010
|
|
|
Weighted Average remaining Contractual life
|
|
|
Weighted average Exercises Price
|
|
|
Aggregate intrinsic value
|
|
Number outstanding at June 30, 2010
|
|
|
Weighted average Exercise price
|
|
|
Aggregate Intrinsic Value
|
|
|
35,000
|
|
|
|
4.75
|
|
|
|
2.02
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
600,000
|
|
|
|
4.92
|
|
|
|
2.38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
635,000
|
|
|
|
|
|
|
|
2.36
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cougar Energy, Inc. Stock Option Plan
Cougar Energy, Inc. has a stock option plan under which it may grant options to its directors, officers, employees and consultants for up to a maximum of 10% of its issued and outstanding common shares at market price at the date of grant for up to a maximum term of five years. Options are exercisable equally over the first three years of the term of the option.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
A summary of options granted and outstanding under the plan is as follows
|
June 30, 2010
|
|
|
Weighted Average
|
|
|
Exercise Price
|
|
Shares
|
|
$
|
0.65
|
|
625,000
|
|
|
1.30
|
|
295,000
|
|
$
|
0.86
|
|
920,000
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Number outstanding at June 30, 2010
|
|
|
Weighted Average remaining Contractual life
|
|
|
Weighted average Exercises Price
|
|
|
Aggregate intrinsic value
|
|
Number outstanding at June 30, 2010
|
|
|
Weighted average Exercise price
|
|
|
Aggregate Intrinsic Value
|
|
|
|
625,000
|
|
|
|
3.54
|
|
|
|
0.65
|
|
|
|
-
|
|
|
|
208,336
|
|
|
|
0.65
|
|
|
|
-
|
|
|
|
295,000
|
|
|
|
4.34
|
|
|
|
1.30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
920,000
|
|
|
|
|
|
|
|
0.86
|
|
|
|
|
|
|
|
208,336
|
|
|
|
0.65
|
|
|
|
-
|
|
Warrants
During years ended December 31, 2006, 2007, 2008 and 2009, the Company, as part of certain private placement financings, issued warrants that are exercisable in common shares of the Company. A summary of such outstanding warrants follows:
|
|
|
Exercise Price ($)
|
|
Expiry Date
|
|
Equivalent Shares
Outstanding
|
|
|
Weighted Average
Years to Expiry
|
|
|
Issued June 30, 2006
|
|
3.50
|
|
Jun. 30/11
|
|
1,130,000
|
|
|
1.00
|
|
In accordance with FASB ASC 718, the Company uses the Black-Scholes option pricing method to determine the fair value of each warrant granted and the amount is recognized as additional expense in the statement of earnings over the vesting period of the warrants.
10. NON CONTROLLING INTEREST
A reconciliation of the non controlling loss attributable to the Company:
|
Net loss Attributable to the Company and transfers (to) from non-controlling interest for the six months ended June 30, 2010
|
|
|
|
|
|
|
|
Net loss attributable to Kodiak
|
|
$
|
663,805
|
|
|
Transfer (to) from the non-controlling interest
|
|
|
|
|
|
Average non-controlling interest percentage
|
|
|
37.13
|
%
|
|
Net loss attributable to the Company and transfer (to) from non-controlling interest
|
|
|
246,439
|
|
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
The following table summarizes the changes in Non Controlling Interest from December 31, 2009 to June 30, 2010:
|
|
|
|
|
|
Balance, January 1, 2010
|
|
$
|
258,127
|
|
|
Transfer (to) from the non-controlling interest as a result of change in ownership (See Notes 2 and 3 above)
|
|
|
2,776,032
|
|
|
Net loss attributable to the Company
|
|
|
(246,439
|
)
|
|
Net loss attributable to the Company and transfer (to) from non-controlling interest
|
|
|
2,787,720
|
|
11. LOSS PER SHARE
A reconciliation of the numerator and denominator of basic and diluted loss per share is provided as follows:
|
|
|
For the three months ended June 30, 2010
|
|
|
For the three months ended June 30, 2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss per share.
|
|
|
|
|
|
Net loss
|
|
|
(398,088
|
)
|
|
|
(16,379,553
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
For the six months ended June 30, 2010
|
|
|
For the six months ended June 30, 2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Numerator for basic and diluted loss per share.
|
|
|
|
|
|
Net loss
|
|
|
(5,010,373
|
)
|
|
|
(16,880,088
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
110,407,186
|
|
|
|
110,023,998
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.15
|
)
|
Basic loss per share is based on the weighted average number of shares outstanding during the periods. Diluted loss is per share is based on the weighted average number of shares and all dilutive potential shares outstanding during the periods. The Company had outstanding stock options and warrants as at June 30, 2010 and 2009, as disclosed in note 9 that were anti dilutive due to the net loss of those periods.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of June 30, 2010 and 2009, the Company had lease commitments for vehicles, office rent and office equipment. The following lease commitments for the years shown:
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
Amounts payable in:
|
|
|
|
|
|
|
|
2010
|
|
$
|
96,556
|
|
|
$
|
13,666
|
|
|
2011
|
|
|
172,003
|
|
|
|
24,983
|
|
|
2012
|
|
|
167,752
|
|
|
|
-
|
|
|
2013
|
|
$
|
42,409
|
|
|
$
|
-
|
|
13. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of financial instruments, which include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, other current liabilities, revolving credit facility and debt approximate their fair values due to their short maturities and variable interest rate on the revolving credit facility and fixed rates which approximate market rates on notes payable.
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
14. RELATED PARTY TRANSACTIONS
For the six months ended June 30, 2010, the Company paid $Nil (March 31, 2009 – $24,107), to Harbour Oilfield Consulting Ltd., a company owned by the Vice-President Operations of the Company for consulting services. Of this amount, $nil (June 30, 2009 - $6,910) was capitalized to Unproved Oil and Gas Properties and $nil (June 30, 2009 -$17,197) was charged to General and Administrative Expense.
For the six months ended June 30, 2010 and 2009, the Company paid $19,135 (June 30, 2009 - $58,627) to Director and the former Chief Financial Officer. Of this amount, $6,608 was payable at June 30, 2010. The Company paid $57,876 to a Company owned and controlled by the chairman of the Company for management consulting services. Of this amount, $9,863 was payable on June 30, 2010. The Company paid the wife of the chairman of the Company $12,674 for administration consulting services. Of this amount, $3,787 was outstanding on June 30, 2010. These amounts were charged to General and Administrative Expense.
These related party transactions were non arm's length transactions in the normal course of business and agreed to by the related parties and the Company based on negotiations and Board approval and accordingly had been measured at the exchange amounts.
15. SEGMENTED INFORMATION
The Company’s two geographical segments are the United States and Canada. Both segments use accounting policies that are identical to those used in the consolidated financial statements. The Company’s geographical segmented information is as follows:
|
|
|
Three Months Ended June 30, 2010
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
|
U. S.
|
|
|
Canada
|
|
|
Total
|
|
|
U. S.
|
|
|
Canada
|
|
|
Total
|
|
|
Revenue, net of royalties
|
|
$
|
-
|
|
|
$
|
943,408
|
|
|
$
|
943,408
|
|
|
$
|
-
|
|
|
$
|
1,668,842
|
|
|
$
|
1,668,842
|
|
|
Income during the Evaluation Period:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net Loss
|
|
|
(4,209
|
)
|
|
|
(393,879
|
)
|
|
|
(398,088
|
)
|
|
|
(4,152,273
|
)
|
|
|
(858,100
|
)
|
|
|
(5,010,373
|
)
|
|
Capital Assets
|
|
|
7,132,466
|
|
|
|
19,910,489
|
|
|
|
27,042,955
|
|
|
|
7,132,466
|
|
|
|
19,910,489
|
|
|
|
27,042,095
|
|
|
Total Assets
|
|
|
7,135,892
|
|
|
|
22,960,663
|
|
|
|
30,096,555
|
|
|
|
7,135,892
|
|
|
|
22,960,663
|
|
|
|
30,096,555
|
|
|
Capital Expenditures
|
|
|
(1,496
|
)
|
|
|
1,506,937
|
|
|
|
1,505,441
|
|
|
|
1,656
|
|
|
|
1,134,294
|
|
|
|
1,135,950
|
|
|
|
|
Three Months Ended June 30, 2009
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
U. S.
|
|
|
Canada
|
|
|
Total
|
|
|
U. S.
|
|
|
Canada
|
|
|
Total
|
|
|
Revenue, net of royalties
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income during the Evaluation Period:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net Loss
|
|
|
4,629
|
|
|
|
16,374,924
|
|
|
|
16,379,553
|
|
|
|
21,076
|
|
|
|
16,859,012
|
|
|
|
16,880,088
|
|
|
Capital Assets
|
|
|
11,277,319
|
|
|
|
14,031,951
|
|
|
|
25,309,270
|
|
|
|
11,277,319
|
|
|
|
14,031,951
|
|
|
|
25,309,270
|
|
|
Total Assets
|
|
|
11,281,042
|
|
|
|
14,576,735
|
|
|
|
25,857,777
|
|
|
|
11,281,042
|
|
|
|
14,576,735
|
|
|
|
25,857,777
|
|
|
Capital Expenditures
|
|
|
20,172
|
|
|
|
464,449
|
|
|
|
484,620
|
|
|
|
26,730
|
|
|
|
706,653
|
|
|
|
733,383
|
|
KODIAK ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
16. CHANGES IN NON-CASH WORKING CAPITAL
|
|
|
Six Months Ended
June 30, 2010
|
|
|
Six Months Ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
(205,774
|
)
|
|
|
(33,275
|
)
|
|
Prepaid Expenses and Deposits
|
|
|
(23,410
|
)
|
|
|
17,819
|
|
|
Accounts Payable
|
|
|
182,399
|
|
|
|
251,686
|
|
|
Accrued Liabilities
|
|
|
97,998
|
|
|
|
(42,798
|
)
|
|
Other
|
|
|
(45,501
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,712
|
|
|
|
193,432
|
|
17. SUBSEQUENT EVENTS
In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events through the date of filing.
On July 7, 2010, Cougar Oil and Gas Canada, Inc, a majority owned subsidiary of the Company acquired 2,176 hectares or 5,377 acres of mineral rights in Alberta, Canada. The mineral rights are immediately adjacent to existing Trout leases and are all within the identified Trout Core Area. The lease types are a standard provincial 5 year Petroleum and Natural Gas lease including all formations from surface to basement. These leases will also benefit from the recently announced Alberta royalty incentives, which include a 5% New Well Royalty Rate for the first year of production.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION UPDATE
FORWARD LOOKING STATEMENTS
From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission. Words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project or projected", or similar expressions are intended to identify "forward-looking statements". Such statements are qualified in their entirety by reference to and are accompanied by the above discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions other than those mentioned elsewhere in this management's discussion and analysis that could have a material adverse effect on the Company's consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue, (ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so, (iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future and, (vi) a very competitive and rapidly changing operating environment. The risks identified here are not all inclusive. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.
The financial information set forth in the following discussion should be read in conjunction with the consolidated financial statements of Kodiak Energy, Inc. included elsewhere herein.
PLAN OF OPERATION
Oil and Gas Leases and Development Rights
As our projects in Kodiak - EL 413 and Sofia New Mexico - were long term projects and subject to external influences such a commodity prices, pipeline status, overall investment climate and etc, it has been difficult to raise equity financing for such purposes in the last 24 months. During this time we reduced internal costs to a minimum and continue to hold Kodiak’s costs at that level.
Based on advice from the investment community on how to finance going forward and the stage of the projects that Kodiak was at, it was decided to place the CREEnergy project into a subsidiary and finance that project in conjunction with Lucy, as a Canadian conventional Oil and Gas operations based subsidiary. In that way, specific financing could be raised with equity initially for this project and then as it matured into non conventional debt and finally into conventional debt instruments.
To have arranged the private placements into Kodiak at the time of the world recession would have been at such a discount to the already depressed market as to have been very dilutive to the Kodiak shareholders. We tried very hard for many months to arrange financing during those difficult times – in Canada, Europe and various institutions in the USA.
We financed the CREEnergy project and Cougar operations, with small private placements with accredited small investors in Canada and Europe, for the first 10 months. Then as the acquisitions presented opportunities, we found a bridge loan and a vendor take back to close the acquisitions.
Subsequently we reached an agreement with OreMore ( Cougar Oil and Gas Canada, Inc) who had previously bought the bridge loan (which had been guaranteed by both Cougar and Kodiak) – to merge Cougar Energy into OreMore in exchange for issuing shares of Oremore to Kodiak and cancelling the bridge loan debt.
The result was Cougar Oil and Gas Canada –and Kodiak retains a 64% of the outstanding shares at this time.
Kodiak in the agreements has the rights to retain a majority interest in Cougar Oil and Gas Canada going forward by participating in any financing and as Cougar shows success expected both short and long term, we believe that Kodiak will start to see that reflected in the Kodiak share price.
Canada
Through Kodiak’s majority interest in Cougar Oil and Gas Canada, the Company’s focus has developed into the definitive projects of:
|
·
|
Cougar Trout Properties, Alberta (Core Area) – farm-in and acquired lands in the Trout, Kidney and Equisetum fields;
|
|
·
|
CREEnergy Project, Alberta – mineral leases, exploration and development opportunities within the CREEnergy Agreement and several current and proposed Northern Alberta Treaty Land Entitlement Claims;
|
|
·
|
Lucy, British Columbia – Horn River Basin Muskwa shale gas project;
|
|
·
|
and Other Alberta properties.
|
The Company expects to finance its future capital expenditure programs and acquisitions with combinations of revenue from current operations, debt instruments, farm-outs, equity financings and divestiture, depending upon what vehicle is appropriate to the capital program/acquisition and the overall market economy. A 6 to 12 month payback will be used to benchmark all such capital programs for financing purposes.
A brief description of the Company’s properties and activities is described below. For a more detail description of the properties to better understands the planned operations –.
Cougar Trout Properties, Alberta (Core Area)
The following is a summary of the various properties plan of developments:
Farmin (June 2009)
. A 100% working interest in 28 sections of land in the area of the CREEnergy Project, northwest of Red Earth Creek, Alberta – pay 100% to earn 100% with a 3% gross overriding royalty (GOR) upon earning to the vendor.
Private Company Production and Property Acquisitions (Sept/Oct 2009)
. The existing infrastructure and initial production on the acquired properties enables the Company to realize higher netbacks and focus on deploying capital on development work. This is key to the development work planned. Additional details include:
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·
|
The existing area field personnel agreed to transfer to Cougar with their many years of hands-on field expertise thereby greatly reducing the risk of downtime due to lack of qualified field personnel.
|
|
·
|
The existing pipeline systems provides direct access to sales of oil products, which results in the access to sales being in the Company’s control and not third party pipeline operator dependent.
|
|
·
|
There are 2 batteries for the handling and treating of oil and the disposal of the produced water. The batteries are capable of handling an estimated 2,500 bbl/d with nominal refit costs.
|
|
·
|
Many of the wells are piped into the batteries to reduce the need for trucking, which is important for the higher water cut wells. These pipelines can be expanded to further lower operating costs.
|
|
·
|
There are 37 wells, which 13 were producing as of December 31, 2009. The 20 suspended wells are workover or recompletion candidates.
|
|
·
|
The produced water can be used for future water floods, which regularly have been shown to add substantial incremental production in the area.
|
Metrics for review of progress
As of June 30, 2010, the average production is 205 bbl/d net of light sweet crude oil at an average operating cost of CAD$20.00 to CAD$25.00/bbl.
As of June 30, our overall acquisition costs have dropped from 74K per flowing barrel to $23K per flowing barrel. Low risk development work is adding additional production at $10K to $15K per flowing barrel. Production has increase 17% over previous quarters, Revenue has increased 27% over previous quarters, Operating costs have lowered 37% over previous quarters and operating net backs have increased 120% over previous quarters.
Subsequent Maintenance and Development Programs
Prior to the production and property acquisitions, the Company conducted a detailed review of the properties in public domain petroleum records over last 5 to 7 years and with a comparison to other operators in the area. The Company’s operations and geological teams have determined a strong potential to increase production through normal maintenance activities. These activities include utilizing existing technologies that have proven success in similar maintenance programs in the area. Some of these normal maintenance activities include and are not limited to:
|
·
|
Acid wash of perforations –
|
|
·
|
Use of enhanced chemical treatment programs to improve inflow – ongoing on all wells
|
|
·
|
Setting of bridge plugs to seal off water –
|
|
·
|
Drill out plugs and open up previously unproduced zones –
|
|
·
|
Repairs to wells with separated rods –
|
|
·
|
Plug off water sources with no resulting loss of production – ongoing
|
|
·
|
Pump and well site equipment optimization – ongoing
|
|
·
|
Waterflood programs – future
|
|
·
|
Horizontal drilling – future
|
Continued Development of the Trout Area Through Systematic Operational Controls
As we develop our maintenance program through the Trout Area lands in north central Alberta, we will continue to utilize our economic model to drive efficiency and minimize costs. We will focus our maintenance program on industry best practices and continued technological enhancements to maximize our return on assets and capital deployed.
Consolidate the Trout Area
To further enhance our economies of scale, we intend to be aware of other acquisition opportunities in the area. Consistent with our strategy to improve our financial flexibility, we intend to make acquisitions utilizing either equity and/ or debt instruments. See subsequent notes re post June 30 developments
Develop Trout Area Assets
We intend to prudently develop this acreage position by redeploying cash flow generated from area operations. We are currently evaluating a series of developmental drilling locations in addition to several step out drilling locations on land we currently hold, with the goal of adding incremental reserves and cash flow. As we are focused on locations in areas with existing infrastructure, we expect our development plan to have a near-term material impact on our proved reserves and production. We believe investing in this area is the most expedient way for us to improve our financial flexibility and return on capital.
Acquire addition lands through the posting process (see subsequent event note) – as we do geological studies, additional targets within the overall seismic which we purchased covered areas is showing some opportunities – although higher risk, but higher rewards are possible and potentially to add production via the drill bit at $5k to $8K per flowing barrel.
On May 28, 2010, Cougar Energy, closed an asset acquisition with a public company to increase the production and reserve value of the core Trout properties.
The acquisition included additional working interest and a royalty interest in seven Cougar Energy operated wells and a royalty interest in one non-operated well. The acquisition added approximately 9 barrels of net oil production per day and approximately $450,000 of proved reserves (reserve value estimate based on Cougar Energy's Dec. 31, 2009 independent reserve report). The updated ownership and reserve value will be included in the Corporations next independent reserve evaluation.
The purchase price for the acquisition was Cdn $215,000 and was funded from cash flow and Cougar Energy's previously announced credit facilities. The existing revenue and the new revenue from planned work programs will result in an expected payback of less than 12 months.
CREEnergy Project
Current Status
Cougar continues to actively work with CREEnergy as they assist their First Nations communities to achieve the goal of independence though the Treaty Land Entitlement (TLE) claim with the Federal Government of Canada and the Province of Alberta. Although delayed several times due to regulatory processes, this process is nearing completion.
We endeavor to engage with CREEnergy on a weekly basis through conference calls, status email and other written communication, monthly in person status meetings, and a continual dialogue to foster open communication.
At this time Cougar Energy is under negotiations to vend part of their mineral leases located within the TLE claim to CREEnergy, to provide direct ownership and participation to the communities in the Oil and Gas mineral rights and associated operations. A formal offer has been tendered to CREEnergy and negotiations are ongoing.
This proposed transaction will continue to provide positive growth for the relationship going forward and will provide cash flow opportunities for CREEnergy and thus the communities.
Due to delays in the land claim process, and in order to move Cougar Energy forward in the interim, Cougar looked to other opportunities in the Red Earth area. .
Lucy, Northern British Columbia
Cougar Energy, Inc is the operator and 80% working interest owner of a 1,920 acre lease located in Northeastern British Columbia. The Company believes the lease is situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas prospect. Industry continues to show increased interest in this shale gas play with several comparisons of the Muskwa Shale gas potential as an analogue of the Barnett Shale gas potential.
The prospect is still in the early stages of delineation and no assurance can be given that its exploitation will be successful. Further appraisal work is required before these estimates can be finalized and commerciality assessed.
Depending upon commodity prices – the severe turn down in gas prices over the past year have made natural gas projects difficult to show returns on investment – especially high capital cost project such as the Horn River Basin – despite the very large reserves and recovery rates attributed to the Muskqua shales. The current $4-$5 gas prices limit the return this project in the short term and thus the financing availability.
The current intention is to perform the previously planned work programs for the license (as new information and financing becomes available, the plans may be revised). In lieu of obtaining our own financing, we are actively enlisting JV partners to move the project forward by way of divesting part of our interest.
Cougar Central Alberta Producing Properties
Private Company Production and Property Acquisition (completed October 1, 2009)
|
·
|
2 producing oil properties in the Crossfield and Alexander fields in Central Alberta.
|
|
·
|
100% working interest in the Crossfield property – 1 producing well with single well battery with approximately 5 barrels per day (bbl/d) net production – production continues to be stable with no capital commitment required.
|
|
·
|
55% working interest in the Alexander property – 1 shut in oil well with a single well battery, 1 suspended well. Expected production of approximately 10 bbl/d net production upon restarting shut in oil well after spring break up. – see subsequent event notes
|
In Summary
The Company plans to aggressively develop and explore its Cougar assets. A maintenance and development program were planned for and implemented during the winter work season of 2009/2010 and attained the expected goals on a well by well basis. Subsequent to that constraints due to pumping equipment was mitigated through moving pumpjacks and downhole equipment to better take advantage of the workover programs performed in February and March. Ongoing maintenance programs will be initiated as cash flow is reinvested. Drilling programs will be planned for the fourth quarter of 2010 where the seismic data supports the effort and expense and further drilling will be based on the results of the initial wells.
Little Chicago – Northwest Territories
The Company is the operator and largest working interest owner of the 201,160 acre Exploration License 413 (“EL 413”) in the Mackenzie River Valley centered along the planned Mackenzie Valley Pipeline.
Upon review of the overall status of all projects in the area, current commodity prices being much below levels required to justify development on this and other projects, continued delay of the Mackenzie Valley Pipeline Project, the risk that any discovered gas reserves would be indefinitely stranded without such development, the Company continues to seek partnership in the development; however, the deteriorating economic factors make this difficult. We will still retain the confidential proprietary seismic data for future assessment of the "Little Chicago Prospect" and the Company will determine the best way to monetize that asset through either divestiture and/or possibly renominating the prospect when conditions are more appropriate.
UNITED STATES
New Mexico
Through its acquisition of Thunder, the Company acquired a 100% interest in 55,000 acres of property located in northeast New Mexico. Additional land acquisitions have increased the Company’s land position to approximately 79,000 acres. These lands have potential for natural gas and CO2 and oil and helium resources at shallow depths.
Due to lower commodity prices for Permian Basin oil (the primary market for CO2) and CO2 contract prices (deliverable into the Denver City Hub), aggressive development is not financeable at this time. Aside from ongoing maintenance of leases and wells, the Company is focusing its efforts on updating engineering models, and business opportunities so that when prices recover and investment markets improve, we will have the opportunity to move this project forward. The leases are 10 year leases and no expiries are imminent. A budget of $500,000 CAD has been assigned to this project in order to further define the reserves and the potential deliverability of those reserves in order to add definition to the engineering and economical prospect.
We have been in discussions with various parties on farm in agreements where by additional exploration on the properties would be conducted for deeper hydrocarbon prospects. Kodiak would retain a working interest and overall management of the properties.
FINANCIAL INFORMATION
Operating Results
Revenue
Kodiak continues production on its developed assets which began in the fourth quarter of 2009. There are no operating revenue or expense comparables for the current quarter or six months year over year.
Net Loss attributable to Kodiak for the three months ended June 30, 2010 totaled $398,088 (June 30, 2009 - $16,379,553). Net Loss for the six months ended June 30, 2010 totaled $5,010,373(2009 - $16,880,088)The decrease in loss for the current periods is due to a major asset write down of a undeveloped CAD property in the second quarter of 2009 in the amount of $16,169,130.
General and administrative expense for the three months ended June 30, 2010 was $628,201 (June 30, 2009 - $356,428). General and Administrative expense for the six months ended June 30, 2010 totaled $1,280,721 (2009 - $849,889)The increases for the current periods are due to higher staffing levels, higher stock based compensation expense and reorganization costs dealing with a Kodiak subsidiary.
Interest expense for the three months ended June 30, 2010 was $86,093 (June 30, 2009 - $93). The increase is a result of the Company’s borrowing to purchase the Trout properties as well as interest on the operating line. Prior to this period the Company did not have the any operating lines of credit. Interest expense for the six months ended June 30, 2010 was $162,353 (June 30, 2009 - $304). The increase is due to the interest on the financing for the Trout property purchase and interest on the operating line, neither of which the Company had last year.
Depletion, depreciation and accretion including ceiling test impairment write-downs includes the cost of depletion and depreciation relating to production from producing properties in the quarter, ceiling test impairment write-downs and the cost of depreciation relating to office furniture and equipment. Depletion and depreciation charges of $370,954 (June,2009 - $16,034,536) was recorded and included in this quarter. The decrease is due to a ceiling test write down recorded in the quarter ended June 30, 2009 for $16,169,130. Depletion and depreciation charges for the six months ended June 30, 2010 of $4,781,263 (June 30, 2009 - $16,042,324) were recorded and included in the period. The decrease was due to a ceiling test write down of $16,169,130 in 2009 vs a ceiling test write down of $4,144,000 as well as Depletion costs of $590,218 in 2010. .
Financial Condition and Changes in Financial Condition:
The Company’s total assets have decreased to $30,096,554 as at June 30, 2010 from $31,657,559 as at December 31, 2009 and increased from $25,857,779 June 30, 2009. This decrease is primarily due to net recorded valuations in undeveloped properties due to a ceiling test write down for the quarter ended March 31, 2010 net with the purchase of the remaining non-controlling interest in one of the Company’s subsidiaries . Total assets consist of cash and other current assets of $815,524 (December 31, 2009 - $557,355).
The Company has included in oil and gas properties evaluated and unevaluated properties. Evaluated properties net of accumulated depreciation, depletion and amortization was $5,215,700 (December 31, 2009 - $4,657,403). Unevaluated properties decreased to $21,765,529 from $26,081,786 on December 31, 2009. The major difference write-down of undeveloped properties $4,410,309. There was a requirement for a ceiling test write down for the period ending March 31, 2010.
Other assets decreased marginally to $292,451 as of June 30, 2010 (December 31, 2009 - $296,153). The decrease is due to the decrease in deposit held by regulatory bodies for operational and environmental deposits.
Our total current liabilities increased $716,933 to $5,168,461 (December 31, 2008 - $4,451,528). The net increase is due to increases in operating line and current portions of long-term debt and a decrease in notes payable. Accounts payable and accrued liabilities increased to $2,829,055 (December 31, 2009 - $2,548,661). The increase is due to increased work activity during the quarter and capital spending. . Our current debt increased to $2,339,406 (December 31, 2009 - $1,902,866) The increase is caused by an increase in our operating line and current portions of long term debt offset by the elimination of notes payable.
We had long term liabilities of $2,975.230 (December 31, 2009 - $3,400,489). This decrease is due to the nature of payment term on the company’s debt and the classification between current and long-term debt. Asset retirement obligations increased $65,255 for the year to $1,350,869 (December 31, 2009 - $1,285,614). The increase is a result of accretion expense of $45,377 (June 30, 2009 – $6,505) and asset retirement obligation additions of $19,878.(June 30,2009 – nil)
Liquidity and Capital Resources
The Company is in the process of raising additional financing in its Cougar Oil and Gas Canada Inc. subsidiary that will provide financing to carry out its business plan through 2010. See Subsequent Event Note 21 to the consolidated financial statements. Such additional financing will be required for the company’s 2010 planned activities. In the event that additional capital is raised at some time in the future, existing shareholders will experience dilution of their interest in the Company, or the Company’s interest in the subsidiary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes petroleum and natural gas and related hydrocarbon prices, foreign currency exchange rates and interest rates.
PETROLEUM AND NATURAL GAS AND RELATED HYDROCARBON PRICES
The Company’s revenues are derived from the sale of its crude oil and natural gas production. The prices for oil and gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. From time to time, the Company may enter into derivative financial instruments to manage oil and gas price risk.
The Company may utilize fixed price “swaps,” which reduce the Company’s exposure to decreases in commodity prices and limit the benefit the Company might otherwise have received from any increases in commodity prices.
The Company may utilize price “collars” to reduce the risk of changes in oil and gas prices. Under these arrangements, no payments are due by either party as long as the market price is above the floor price and below the ceiling price set in the collar. If the price falls below the floor, the counter-party to the collar pays the difference to the Company, and if the price rises above the ceiling, the counter-party receives the difference from the Company.
Kodiak may purchase “puts” which reduce the Company’s exposure to decreases in oil and gas prices while allowing realization of the full benefit from any increases in oil and gas prices. If the price falls below the floor, the counter-party pays the difference to the Company.
The Company may enter into various agreements from time to time to reduce the effects of volatile oil and gas prices and does not enter into derivative transactions for speculative purposes. However, under certain circumstances some of the Company’s derivative positions may not be designated as hedges for accounting purposes The Company’s oil and gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future. By definition, proved reserves are based on current oil and gas prices. Declines in oil and gas prices reduce the estimated quantity of proved reserves and increase annual amortization expense (which is based on proved reserves). Declines in oil and gas prices can reduce the value of our oil and gas properties and increase impairment expense, as occurred in 2009.
We expect oil and gas price volatility to continue. We do not currently utilize hedging contracts to protect against commodity price risk. As our oil and gas production grows, we may manage our exposure to oil and natural gas price declines by entering into oil and natural gas price hedging arrangements to secure a price for a portion of our expected future oil and natural gas production.
FOREIGN CURRENCY EXCHANGE RATES
The Company, operating in both the United States and Canada, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could materially impact the Company’s financial results in the future. To the extent revenues and expenditures denominated in other currencies vary from their U. S. dollar equivalents, the Company is exposed to exchange rate risk. The Company can also be exposed to the extent revenues in one currency do not equal expenditures in the same currency. The Company is not currently using exchange rate derivatives to manage exchange rate risks.
INTEREST RATES
The Company’s interest income and interest expense, in part, is sensitive to the general level of interest rates in North America. The Company is not currently using interest rate derivatives to manage interest rate risks.
ITEM 4T. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report. They concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not adequate and effective in ensuring that material information relating to the Company would be made known to them by others within those entities, particularly during the period in which this report was being prepared.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)). Under the supervision and with the participation of our management, including our principal executive officer (CEO) and principal financial officer (CFO), we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Management identified the following material weaknesses during its assessment of our internal control over financial reporting as at December 31, 2008 and December 31, 2007.
SEGREGATION OF DUTIES AND ACCESS TO CRITICAL ACCOUNTING SYSTEMS
As at December 31, 2009, December 31, 2008 and December 31, 2007, management believes the Company’s Internal Control over Financial Reporting did not meet the definition of adequate control, based on criteria established by Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management identified a material weakness relating the segregation of duties among certain personnel who had incompatible responsibilities within all significant processes affecting financial reporting. We also had a material weakness resulting from our failure to implement controls to restrict access to financially significant systems or to monitor access to those systems, which resulted in conflicting access and/or inappropriate segregation of duties. These material weaknesses affect all significant accounts. In addition, the 2007 restatement issues discussed below demonstrated a need to engage additional personnel or outside consulting assistance to ensure the proper accounting for non-routine accounting transactions and adherence to US GAAP, to assist in income tax planning and compliance and a review of our Canadian and U. S. income tax provisions. As a result of these material weaknesses, management has concluded that internal control over financial reporting was not effective as at June 30, 2010.
REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROL
During December, 2006 and the first half of 2007, the Company hired a Controller, a new CFO, a Vice-President, Operations and additional qualified personnel. The new staff and existing management have implemented new procedures and controls for many areas of the Company’s activities. During 2007, the Company initiated a review of its corporate policies and procedures with the assistance of an outside consulting firm, with a goal of having the Company become fully SOX compliant by year end 2007. Additional policies and procedures have been implemented and others strengthened. Testing of such policies and procedures was completed in late 2007 and early 2008. In addition, the Company will endeavor to engage outside consulting assistance to ensure the proper accounting for non-routine accounting transactions and adherence to US GAAP. Beginning in 2008, the Company engaged an outside consulting firm to assist in income tax planning and compliance and beginning with our fiscal year ended December 31, 2008, to review our Canadian and U.S. income tax provisions.
As at December 31, 2009, the Company continues to have a material weakness relating to the segregation of duties among certain personnel and, as of that date, management believes that without engaging additional personnel estimated to cost a minimum of approximately $150,000 per annum, we cannot remedy such material weakness. Management believes such expenditures cannot be justified at this time when the Company is still in the early stage of operations and has just acquired proved reserves, production and cash flow. When sufficient cash flow is being generated, management will review its position. Management believes its controls and procedures related to its financial and corporate information systems are appropriate for a company of its size and mandate and, due to its internal expertise, is not dependent upon the inherent risks in external third party management of such systems. Our CFO retired on December 31, 2009, has joined the Board of Directors and continues to consult to the Company in a financial capacity and alleviate some of the segregation of duties and related weaknesses. The VP of Finance assumed the role of CFO ensuring a smooth transition.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting during the second quarter ended June 30, 2010 that 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, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as described below, we are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
I
TEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Removed and reserved
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBITS
31.1 - Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 - Certification of Chief Financial Officer to Section 302 of the Sarbane-Oxley Act of 2002
32.1 - Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
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KODIAK ENERGY, INC.
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(Registrant)
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Dated: August 13, 2010
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By: /s/ William S. Tighe
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William S. Tighe
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Chief Executive Officer
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Kodiak Energy (CE) (USOTC:KDKN)
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