Delaware	65-0967706
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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September 30, 2007 Consolidated Financial Statements and Notes

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Management Discussion and Analysis

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Controls and Procedures

 

KODIAK ENERGY, INC.

Unaudited Consolidated Statements of Shareholders’ Equity

For the Nine Months Ended September 30, 2007

(Exploration Stage Company Going Concern Uncertainty – Note 1)

 

		Number of Common Shares				Amount				Additional Paid in Capital (Restated – Note 2)				Deficit Accumulated During the Development Stage				Accumulated Other Comprehensive Loss				Shares Issuable				Total Shareholder’s Equity (Restated – Note 2)
Balance at Dec. 31, 2006		89,946,468				$	89,946			$	5,212,777			$	(4,063,776	)		$	(20,214	)		$	538,328			1,757,061
Net loss			-				-				-				(1,787,039	)			-								(1,787,039	)
Foreign currency translation			-				-				-				-				(191,951	)							(191,951	)
Total comprehensive loss															(1,787,039	)			(191,951	)							(1,978,990	)
Issuance of common stock			14,961,030				14,961				31,718,162				-				-				(538,328	)			31,194,795
Stock-based compensation			-				-				469,322				-				-								469,322
Balance at Sept. 30, 2007			104,907,498			$	104,907			$	37,400,261			$	(5,850,815	)		$	(212,165	)			-			$	31,442,188

 

(See accompanying notes to the consolidated financial statements)

 

KODIAK ENERGY, INC.

Unaudited Consolidated Statements of Cash Flows

(Exploration Stage Company Going Concern Uncertainty – Note 1)

		Three Months Ended September 30, 2007				Three Months Ended September 30, 2006				Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006				Cumulative Since Inception April 7, 2004 to September 30, 2007
OPERATING ACTIVITIES
NET LOSS		$	(825,945	)		$	(707,893	)		$	(1,787,039	)		$	(1,484,574	)		$	(5,850,815	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion, Depreciation and Accretion			12,900				446,337				35,043				451,485				1,543,299
Interest Expense			(18,818	)			-				-				-				808,811
Stock-Based Investor Relations Expense			-				-				-				337,500				337,500
Stock-Based Compensation			190,239				-				469,322				-				538,491
Provision for Deferred Income Taxes			(55,480	)			-				-				-				-
Contributions to Capital			-				-				-				-				900
Changes in Non-Cash Working Capital (Note 18)			(15,335	)			(293,614	)			(94,523	)			(289,314	)			36,255
Net Cash Used In Operating Activities			(712,439	)			(555,170	)			(1,377,197	)			(984,903	)			(2,585,559	)
Investment Activities:
Additions To Capital Assets			(2,176,090	)			(1,011,208	)			(7,071,453	)			(1,852,370	)			(9,922,900	)
Additions To Other Assets			(61,740	)			(305	)			(66,960	)			(405	)			(116,820	)
Net Cash Used In Investment Activities			(2,237,830	)			(1,011,513	)			(7,138,413	)			(1,852,775	)			(10,039,720	)
Financing Activities:
Shares Issued and Issuable			8,926,576				90,000				12,372,602				3,133,941				16,950,832
Proceeds of Notes Payable			300,000				-				3,300,000				-				3,300,000
Net Cash Provided By Financing Activities			9,226,576				90,000				15,672,602				3,133,941				20,250,832
Foreign Currency Translation			(126,358)				(3,825	)			(191,951	)			(733	)			(212,165	)
Net Cash Increase (Decrease)			6,149,949				(1,480,507	)			6,965,041				291,530				7,413,387
Cash beginning of period			1,263,438				1,962,688				448,346				190,651				-
Cash end of period		$	7,413,387			$	482,181			$	7,413,387			$	482,181			$	7,413,387

 

(See accompanying notes to the consolidated financial statements)

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2007 and 2006

Stated in US dollars

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”) as at September 30, 2007  and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006 and for the cumulative period from April 7, 2004 (inception)until September 30, 2007, and are presented in accordance with generally accepted accounting principles in the United States of America (“U. S. GAAP”).

The Company was incorporated under the laws of the state of Delaware on December 15, 1999 under the name “Island Critical Care, Corp.” with authorized common stock of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name was changed to “Kodiak Energy, Inc.” and the authorized common stock was increased to 100,000,000 shares with the same par value. On January 17, 2005 the Company affected a reverse split of 100 outstanding shares for one share. These consolidated financial statements have been prepared showing post split shares from inception. The Company was engaged in the development of the manufacture and distribution of medical instrumentation and it became inactive after the bankruptcy outlined below.

The Company is in the exploration stage and its efforts have been principally devoted to the raising of capital, organizational infrastructure development and the acquisition of oil and gas properties for the purpose of future extraction of resources.

Bankruptcy

On February 5, 2003 the Company filed a petition for bankruptcy in the District of Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713, Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004 with no remaining assets or liabilities and adopted Fresh Start Accounting.

The terms of the bankruptcy settlement included the authorization for the issuance of 150,000 post split restricted common shares in exchange for $25,000, which was paid into the bankruptcy court by the recipient of the shares.

The Company emerged from bankruptcy as an exploration company.

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 recent financing described in Note 9 will provide sufficient working capital to fund the Company’s operations until mid 2008 when additional financing will be required unless sufficient cash flow is being obtained from the Company’s properties that comprise its near term capital programs. 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. RESTATEMENT

In March, 2009, we determined that it was necessary to restate our unaudited financial statements as at September 30, 2007. The purpose of the restatements is to correct an error in measurement and an error in the application of US GAAP in the course of recording the following September, 2007 transactions:

 

Issue of common shares of the Company in consideration for the acquisition of properties.

 

On September 28, 2007, the Company issued to Thunder River Energy, Inc. (“Thunder”) 7,000,000 common shares of the Company as partial consideration for the acquisition of certain unproved properties. The shares issued were recorded at a price per share of US$2.00 or $14,000,000 which was the negotiated valuation. In the course of a review by the Securities and Exchange Commission (“SEC”) of the Company’s Form 10-Q for the Fiscal Quarter Ended September 30, 2007 and Form 10-K for the Fiscal Year Ended December 31, 2007, the SEC questioned the measurement date and consequently the $2.00 per share value at which the transaction was recorded. Following an exchange of correspondence and discussions between the Company and the SEC during 2008 and 2009 regarding this issue, the Company has determined that the acquisition should have been recorded at a value per share of $2.50 or $17,500,000, which represents the fair value of exactly comparable common shares issued at the same $2.50 price per share as a private placement financing for 2,756,000 common shares which closed on September 28, 2007, the same date that the Thunder transaction closed. Management believes that the $2.50 Kodiak share price to be the most reliable measurement for the fair value of the shares issued and that September 28, 2008 to be the appropriate measurement date because that was the date when the parties’ closing conditions were satisfied and Thunder’s (the counterparty’s) performance was complete. The result of the restatement adjustment would be an increase of $3,500,000 in the recorded acquisition cost and related issuance of common shares.

 

Issue of flow-through common shares of the Company at a premium.

 

On September 28, 2007, the Company issued on a Canadian flow-through share basis 1,866,670 common shares of the Company at US$3.00 per share or $5,600,010, which amount represented a premium of $.50 per share or $933,335 when compared to other non-flow through shares issued at the same time at $2.50 per share. At the time of the transactions, the issue of the flow through common shares was recorded as appropriate credits to par value of common shares and additional paid in capital. Following recent discussions with the Company’s tax consultant, the Company has determined that the $933,335 premium on flow-through common shares issued should have, in accordance with US GAAP, been recorded as a liability at the time the shares were issued rather than as additional paid in capital. The premium liability was discharged during the period October, 2007 to August, 2008 and recognized as reduction of deferred tax expense, when the flow-through eligible expenditures were incurred by the Company.

Effects of the restatement by line item follow:

Unaudited Consolidated Balance Sheets

		September								September
			30, 2007							30, 2007
		As Previously Reported				Impact of Change					Restated
Cash and Short Term Deposits		$	7,413,387				-			$	7,413,387
Accounts Receivable			1,310,049				-				1,310,049
Prepaid Expenses and Deposits			73,993				-				73,993
Total current assets			8,797,429				-				8,797,429
Other Assets			116,820				-				116,820
Unproved Oil and Gas Properties			22,496,312				3,500,000				25,996,312
Furniture and Fixtures			79,024				-				79,024
Total Property, Plant and Equipment			22,575,336				3,500,000				26,075,336
Total Assets		$	31,489,585				3,500,000				34,989,585
Accounts Payable		$	1,363,251				-				1,363,251
Accrued Liabilities			409,500				-				409,500
Notes Payable			732,500				-				732,500
Premium on Flow-through Shares Issued			-				933,335				933,335
Total current liabilities			2,505,251				933,335				3,438,586
Asset Retirement Obligations			108,811				-				108,811
Deferred Income Taxes			52,012				(52,012	)			-
			2,666,074				881,323				3,547,397
Share Capital			104,907				-				104,907
Additional Paid in Capital			34,833,596				2,566,665				37,400,261
Other Comprehensive Loss			(212,165	)			-				(212,165	)
Deficit Accumulated during the Exploration Stage			(5,902,827	)			52,012				(5,850,815	)
Total Shareholders’ Equity			28,823,511				2,618,677				31,442,188
Total Liabilities and Shareholders’ Equity		$	31,489,585				3,500,000				34,989,585

There was no impact on the Unaudited Consolidated Statements of Operations or the Unaudited Consolidated Statement of Cash Flows.

 

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Shares to be Issued

		2007								2006
		Number				Value				Number				Value
Opening Balance			470,000			$	538,328				16,000,000			$	773,637
Issued during the period			(470,000	)			(538,328	)			(16,000,000	)			(773,637	)
Private Placement, net of costs (h)			-				-				30,000				38,768
Private Placement, net of costs (i)			-				-				440,000				499,560
Closing Balance			-			$	-				470,000			$	538,328

 

 

(a)

On January 13, 2006, 16,000,000 shares of common stock were issued pursuant to two private placements that closed December 22, 2005 (13,650,000 shares for gross proceeds of $300,000) and December 30, 2005 (910,000 shares, for gross proceeds of $500,000) respectively, recorded as “Shares Issuable” at December 31, 2005 in the amount of $773,637 (net of share issue costs of $26,363) as the share certificates were not issued until January 13, 2006.

(b)

In January, 2006, the Company closed a private placement for 933,324 common shares at a price of $1.50 per share for gross proceeds of $1,400,000. Share issue costs associated with this private placement totaled $140,000.

(c)

In January, 2006, the Company issued 1,000,000 shares to settle debt of $41,189 pursuant to the stock for services compensation plan. A beneficial conversion feature of $808,811 was calculated on the debt for the year ended December 31, 2005 representing the difference between the conversion price and the fair value of the common stock at the commitment date. This amount was recorded as interest expense and an increase in additional paid in capital for the year ended December 31, 2005.

(d)

On February 20, 2006 the Company’s stock split forward by paying a stock dividend to our existing shareholders. All shareholders of record on February 14, 2006 received 1 dividend share for every share they owned amounting to 18,407,362 shares of common stock issued.

(e)

During 2006, the Company issued 7,500,000 common shares, pursuant to an S8 registration, for services provided to the Company that have been recorded under the provisions of SFAS No. 123R relating to transactions with non-employees where the fair value of the investor relations services rendered has been recorded as General & Administrative Expense and an increase in Additional Paid In Capital (less share issue costs of $15,526. The recorded value of the transaction was $337,500 and was based on the value of the invoices rendered for the services provided and an allowance for the lack of liquidity in the market for the Company’s common shares. These transactions were in the normal course of business and agreed to by the non-employees and the Company based on negotiation and accordingly had been measured at the exchange amounts.

(f)

On May 1, 2006 the Company’s stock split forward by paying a stock dividend to our existing shareholders. All shareholders of record on April 28, 2006 received 1 dividend share for every share they owned amounting to 44,314,714 shares of common stock issued.

(g)

In June 2006 the Company closed a private placement for 1,130,000 units at a price of $1.70 per unit for gross proceeds of $1,921,000. Each unit entitled the subscriber to one common share of the Company and one warrant. Share issue costs associated with this private placement totaled $153,740. Each warrant entitles the warrant holder to exchange one warrant for one common share at a price of $2.70 until June 30, 2008 and for $3.50 until June 30, 2009.

(h)

In December 2006, the Company closed private placements for 54,375 units (217,050 common shares) at a price per unit of $6.40 Cdn. ($1.60 Cdn. per share) for aggregate proceeds of $348,000. Each unit entitles the subscriber to three flow-through common shares and one common share. The flow-through shares entitle the holder to a Canadian Exploration Expense deduction under the Canada Income Tax Act. Of these shares, 30,000 were classified, net of share issue costs of $38,328, as Shares To Be Issued as at December 31, 2006 as the share certificates were not issued until February, 2007.

(i)

On December 22, 2006, the Company received proceeds for a private placement of 440,000 units at a price of $1.25 per unit that closed on February 20, 2007 for gross proceeds of $550,000. Each unit entitled the subscriber to one common share of the Company and one warrant. These common shares were classified, net of share issue costs of $50,000, as Shares To Be Issued as at December 31, 2006 as the share certificates were not issued until January, 2007. Each warrant entitles the warrant holder to exchange one warrant for one common share at a price at a price of $1.50 until December 22, 2008.

 

 

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(j)

On February 20, 2007, the Company closed a private placement for 420,000 units at a price of $1.25 per unit for gross proceeds of $525,000. Each unit entitled the subscriber to one common share of the Company and one warrant. Each warrant entitles the warrant holder to exchange one warrant for one common share at a price at a price of $1.50 until February 20, 2009. Share issue costs associated with this private placement totaled $50,000.

(k)

On May 10, 2007, the Company closed a private placement for 2,447,900 units at a price of $1.25 per unit for gross proceeds of $3,059,875. Each unit entitled the subscriber to one common share of the Company and one warrant. Each warrant entitles the warrant holder to exchange one warrant for one common share at a price at a price of $1.50 until May 10, 2009. Share issue costs associated with this private placement totaled $280,000.

(l)

On September 28, 2007, the Company closed a brokered private placement offering for an aggregate of 4,622,670 common shares for aggregate gross proceeds of $12,490,010. Of the total number of shares, 2,756,000 were sold at a purchase price of $2.50 per share for gross proceeds of $6,890,000 and 1,866,670 were sold at a purchase price of $3.00 for gross proceeds of $5,600,010. Share issue costs associated with this offering totaled $1,116,755. The shares sold at $3.00 were sold on the basis that the Company would provide the purchaser a Canadian tax flow through advantage. The $.50 per share premium received from subscribers on the sale of such flow-through common shares amounting to $933,335 was recorded as a current liability. In connection with the offering, the broker was granted warrants to purchase, until March 28, 2009, (i) 220,480 common shares of the Company at a price of $2.50 per share and (ii) 149,334 common shares of the Company at a price of $3.00 per share. The broker was also was also granted a right of first refusal for future securities offerings in Canada and investment banking and advisory rights for a period of 18 months. The Company will seek a listing on the Toronto Venture Stock Exchange for its common shares. If the Company does not have such listing in place by December 28, 2007, then it will pay in cash to the September 28, 2007 private placement investors a penalty amount of 2% per month until such listing is achieved. The penalty provision is not limited as to time or amount.

(m)

On September 28, 2007, the Company issued 7,000,000 common shares valued at $14,000,000 ($2.00 per share) as partial consideration for the acquisition of certain undeveloped oil and gas properties in Canada and the United States. The Company also committed to issue up to an additional 11,000,000 common shares of the Company upon the achievement of certain milestones in connection with the acquired properties as set out in Note 7. For accounting purposes, the 7 million common shares issued to Thunder were recorded at a value of $17,500,000 or $2.50 per common share, being the same price per share at which the September 28, 2007 private placement financing of 2,756,000 (l) non-flow-through common shares were issued (Note 2).

At September 30, 2007, the following common shares were reserved for issuance:

	Expiry		Number of Option				Weighted Average Exercise
	Date		Shares				Price
Balance December 31, 2005				-				-
Options Granted October 23, 2006	Oct 23/11			1,280,000			$	1.50
Options Cancelled				(280,000	)		$	1.50
Options Granted December 1, 2006	Dec 1/11			125,000			$	1.28
Balance December 31, 2006				1,125,000			$	1.48
Options Granted January 3, 2007	Jan 3/12			280,000			$	1.29
Options Granted February 1, 2007	Feb 1/12			100,000			$	1.35
Options Granted April 2, 2007	Apr 2/12			300,000			$	1.75
Options Granted August 1, 2007	Aug 1/12			230,000			$	2.74
Balance September 30, 2007				2,035,000			$	1.63

 

		Three Months Ended Sept. 30,				Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,				Nine Months Ended Sept. 30,				Cumulative Since Inception April 7, 2004 to Sept. 30,
		2007				2006				2007				2006				2007
Operating Activities:
Accounts Receivable		$	(18,973	)			(74,879	)			(42,256	)			(177,074	)			(75,092	)
Prepaid Expenses			(7,004	)			7,344				(30,272	)			33,733				(78,167	)
Accounts Payable			1,749				(27,319	)			8,899				(17,180	)			122,304
Accrued Liabilities			8,893				(198,760	)			(30,894	)			(87,604	)			42,210
Convertible Debt			-				-				-				(41,189	)			-
Other			-				-				-				-				25,000
Total		$	(15,335	)			(293,614	)			(94,523	)			(289,314	)			36,255

Investing Activities:

The changes in investing activities non-cash working capital accounts as detailed below pertain to capital asset additions and have been included in that caption in the Statement of Cash Flow:

Accounts Receivable		$	(797,192	)			(342,958	)			(579,697	)			(357,433	)			(1,232,836	)
Prepaid Expenses			186,748				-				153,117				-				14,174
Accounts Payable			(167,937	)			(73,489	)			786,913				52,788				1,228,691
Accrued Liabilities			(365,693	)			106,492				(184,181	)			62,132				16,565
Total		$	(1,144,074	)			(309,955	)			176,152				(242,513	)			26,594

 

Financing Activities:

The changes in financing activities non-cash working capital accounts as detailed below pertain to shares issued and issuable and have been included in that caption in the Statement of Cash Flow:

Accounts Receivable		$	(2,121	)			-				(2,121	)			-				(2,121	)
Prepaid Expenses			-				-				-				10,000				(10,000	)
Accounts Payable			11,034				-				(17,815	)			-				12,257
Accrued Liabilities			111,908				-				331,908				-				331,908
Flow-through Share Premium			933,335				-				933,335				-				933,335
Total		$	1,054,156				-				1,245,307				10,000				1,265,379

19. NEW ACCOUNTING STANDARDS

FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income taxes – an interpretation of FASB Statement No. 109 (FIN 48). In July 2006, the FASB issued FIN 48, which provides guidance on accounting for income tax positions about which the Company has concluded there is a level of uncertainty with respect to the recognition of a tax benefit in the Company’s financial statements. FIN 48 describes the minimum recognition threshold a tax position is required to meet. Tax positions are defined very broadly and include not only tax deductions and credits but also decisions not to file in a particular jurisdiction, as well as the taxability of certain transactions. The Company adopted FIN 48 effective January 1, 2007. See note 10 for additional information.

The following new accounting standards have been issued, but have not yet been adopted by the Company as at September 30, 2007:

Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157). In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No 157 does not require any new fair value measurements. However, in some cases, the application of SFAS No. 157 may change the Company’s current practice for measuring and disclosing fair values under other accounting pronouncements that require or permit fair value measurements. For the Company, SFAS No. 157 will be effective as of January 1, 2008 and must be applied prospectively except in certain cases. The Company is currently evaluating the impact of adopting SFAS NO. 157, and cannot currently estimate the impact of SFAS No. 157 on its consolidated results of operations, cash flows or financial position.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). In February 2007, the FSAB issued SFAS No. 159, which permits entities to choose to measure many new financial instruments and certain other items at fair value. For the Company, SFAS No. 159 will be effective as of January 1, 2008 and will have no impact on amounts presented for periods prior to the effective date. The Company cannot currently estimate the impact of SFAS No. 159 on its consolidated results of operations, cash flows or financial position and has not yet determined whether or not it will choose to measure items subject to SFAS No. 159 at fair value.

 

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20. SUBSEQUENT EVENTS

Private Placement Financings

On October 3, 2007, the Company closed a second portion of the brokered private placement (“the Offering”) of common shares and flow through common shares that closed on September 28, 2007. Pursuant to the Offering, the Company issued an additional 335,000 flow through common shares at a purchase price of $3.00 per share for total gross proceeds of $1,005,000 and granted a warrant to the broker to purchase, until April 3, 2009, 26,800 common shares at a purchase price of $3.00 per share. Share issue costs associated with this portion of the Offering amounted to approximately $83,400.

On October 30, 2007 and November 1, 2007, the Company closed additional brokered private placement financings aggregating 1,450,000 common shares and flow through common shares for aggregate gross proceeds of $3,650,000. Pursuant to those private placements, the Company issued 1,400,000 common shares at a purchase price of $2.50 per common share for proceeds of $3,500,000 and 50,000 flow through common shares at a purchase price of $3.00 per share for proceeds of $150,000 and granted warrants to the broker to purchase, until April 30, 2009, 80,000 common shares at a purchase price of $2.50 per share and 4,000 common shares at a purchase price of $3.00 per share and, until May 1, 2009, 32,000 common share at a purchase price of $2.50 per share. Share issue costs associated with this private placement amounted to approximately $299,900.

Canada

 

Northwest Territories – Little Chicago

 

The Company is the operator of the Little Chicago prospect in the Northwest Territories of Canada under an original farm-out agreement with the two 50% working interest owners of a 200,000 acre exploration license (EL 413). The prospect is located in the Mackenzie River Valley, centered along the planned Mackenzie Valley Pipeline. Under the farm-out agreement, as of September 30, 2007, the company had spent approximately $6,800,000 to acquire 2D seismic data, thus earning a 12.5% working interest in the prospect as of April 2007.  The Company acquired an additional 43.75% working interest on September 28, 2007, from Thunder River Energy, Inc., in an asset transaction in respect of the prospect and other assets of Thunder. Currently, Kodiak has a 56.25% working interest in the prospect. Kodiak has the further right to earn additional working interests in the prospect upon drilling wells and is negotiating additional earnings for obtaining seismic data. The completed seismic program consisted of 84 Km high resolution data.  The company also has obtained an engineering prospective report with respect to the property.  There are 13 shallow drill targets defined with the potential for shallow depth petroleum and some potential for medium depth petroleum.  There may be gas in the area, but development of any natural gas will be deferred until there is a pipeline in the area. The Company is planning on completing a further seismic program by the end of the second quarter of 2008 which is expected to cost approximately $5,500,000. After evaluating the seismic program the Company will use the results of this and the previous year’s program to identify 2 to 3 drilling sites. The C ompany plans to drill those locations during the winter of 2008/2009. Due to the high costs of the project, the Company expects to source additional partners for the drilling programs.

 

This prospect is subject to a 1% gross over-riding royalty to Time Stratagraphic, a 12.5% Canadian federal royalty on production and annual rental payments to the Department of Northern and Indian Affairs, Canada, and an Area of Mutual Interest (AMI) with partners on a 12 km radius of the prospect boundary.

 

Northern British Columbia – Lucy

 

The Company has a 7% working interest in a natural gas well in Northern British Columbia located forty miles northeast of Fort Nelson. The prospect consists of approximately three square miles located in the North Yoyo Otter Park shale basin. Seismic reports covering the Lucy prospect indicate a possible lower level reef build up equivalent in age to the nearby Mel, Yoyo and Sierra reefs. In the vicinity of the Lucy prospect there are active gas operations. The first well was drilled in December 2006. After some difficult drilling conditions, the lower zones have been abandoned. The company is responsible for paying 10% of any abandonment costs in excess of the existing costs which the company has paid fully to date. The Company is planning to initiate an independent operator drilling program on this property. By initiating independent operators, The Company expects to earn a working interest of between 40 to 50 percent.   The Company anticipates the well will be drilled during late 2007.  Testing will be initiated immediately, and based on the testing results , the well will be tied in as soon as possible.  The possibility of additional wells will be reviewed during the following season. The estimated cost of this program is planned to be $1,500,000. To date, the company has expended approximately $270,000 in connection with this property.

 

Northern Alberta – Fort McMurray

 

In January 2007, the Company, jointly with two partners (one which has let its interest expire), acquired two blocks of petroleum and natural gas licenses over sixty-four sections of land near Fort McMurray in northeastern Alberta.  The licenses are for all the petroleum and natural gas rights from the base of the Woodbend formation to fifteen meters into the top of the Precambrian section subject to a 2.5% gross overriding royalty reserved for he seller in the prospects. The Company’s initial working interest is 50%. The Company plans to initiate a seismic program on this property during the winter of 2007/08 which is estimated to cost approximately $300,000. Based on the results of the seismic program, a drilling program of 6 to 12 wells is expected to follow which would cost approximately $1,500,000. The prospect requires a payment of $28,672 in annual rentals.

 

Southeastern Alberta – Province/Granlea

 

The Company, jointly with a partner, purchased two sections, approximately 1,280 acres gross, 640 acres net, of petroleum and natural gas rights at a provincial land sale on September 22, 2005. The Company has a 50% working interest in this property. A 2D seismic program was completed on the property in the fourth quarter of 2005, and a well was drilled and completed and production commenced in September 2006. Various surface facilities were installed and a pipeline tie-in was completed. Although the initial drilling showed good pressure and some water, in October 2006, there was a substantial increase in water rates. Finally, because of the water rates, the well was shut-in during July 2007.  The well bore has been evaluated and has been abandoned due to having no present economic production potential. The company intends to sell the surface facilities. The Company expended approximately $550,000 in connection with this property.  The company will consider additional internal geological reviews of the prospect to evaluate whether or not the land offers any future drilling potential.

 

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