**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

** **

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended September 30, 2007**

**CommissionFile No. 001-32920**

 

**KodiakOil & Gas Corp.**

(Exactname of registrant as specified in its charter)

 

| **Yukon Territory**              | ** ** | **N/A**              |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**1625Broadway, Suite 250**

**Denver,Colorado 80202**

(Addressof principal executive offices, including zip code)

 

**303-592-8075**

(Registrant’stelephone number, including area code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes x    No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 
|   | Large  accelerated filer o | Accelerated  filer o |   | Non-accelerated  filer x |
|--------|----------------------------|----------------------|--------|--------------------------|

 

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

 

87,931,926shares of no par value of the Registrant’s Common Stock were issued andoutstanding as of October 31, 2007.

 

 

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**KODIAKOIL & GAS CORP.**

** **

**INDEX**

** **
| PART 1     | FINANCIAL INFORMATION                                                                                              | 3      |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                               |   |
| ITEM 1.    | FINANCIAL STATEMENTS                                                                                               | 3      |
|       |                                                                                                               |   |
|       | Condensed  Consolidated Balance Sheets as of September 30, 2007 & December 31, 2006                            | 3      |
|       | Condensed  Consolidated Statement of Operations for the Three and Nine Months Ended  September 30, 2007 & 2006 | 4      |
|       | Statement  of Stockholders’ Equity as of September 30, 2007 & December 31, 2006                           | 5      |
|       | Condensed  Consolidated Statement of Cash Flows for the Nine Months Ended September 30,  2007 & 2006           | 6      |
|       | Notes  to Condensed Consolidated Financial Statements                                                              | 7      |
|       |                                                                                                               |   |
| ITEM  2.   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 16     |
|       |                                                                                                               |   |
| ITEM  3.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                        | 27     |
|       |                                                                                                               |   |
| ITEM  4.   | CONTROLS AND PROCEDURES                                                                                            | 27     |
|       |                                                                                                               |   |
| ITEM  1.   | LEGAL PROCEEDINGS                                                                                                  | 27     |
|       |                                                                                                               |   |
| ITEM  1A.  | RISK FACTORS                                                                                                       | 28     |
|       |                                                                                                               |   |
| 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                                                                                                           | 29     |
|       |                                                                                                               |   |
| SIGNATURES | 31                                                                                                                 |

 

 

2

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# **PART 1 - FINANCIALINFORMATION**

# ** **

# **ITEM 1. FINANCIALSTATEMENTS**

# ** **

**KODIAKOIL & GAS CORP.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                              | ** ** | **(UNAUDITED)**        | ** ** | **(AUDITED)**         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                              |       |                   |       |                  |       |
| Current  Assets:                                                                                                        |       |                   |       |                  |       |
| Cash  and cash equivalents                                                                                              |       | $                      | 19,364,686 |                  | $          | 58,469,263 |   |
| Accounts  receivable                                                                                                    |       |                   |       |                  |       |
| Trade                                                                                                                   |       | 1,904,740              |       | 1,877,185             |       |
| Accrued  sales revenues                                                                                                 |       | 756,606                |       | 666,990               |       |
| Prepaid  expenses and other                                                                                             |       | 163,343                |       | 103,707               |       |
| Total  Current Assets                                                                                                   |       | 22,189,375             |       | 61,117,145            |       |
|                                                                                                                    |       |                   |       |                  |       |
| Property  and equipment (full cost method), at cost:                                                                    |       |                   |       |                  |       |
| Proved  oil and gas properties                                                                                          |       | 63,750,176             |       | 27,167,338            |       |
| Unproved  oil and gas properties                                                                                        |       | 20,132,339             |       | 19,607,474            |       |
| Wells  in progress                                                                                                      |       | 6,318,482              |       | 7,700,415             |       |
| Less-accumulated  depletion, depreciation, amortization, accretion and asset impairment                                 |       | (40,193,045            | )          | (2,224,962            | )          |
| Net  oil and gas properties                                                                                             |       | 50,007,952             |       | 52,250,265            |       |
| Other  property and equipment, net of accumulated depreciation of $153,622 in 2007  of $102,231 in 2006                 |       | 324,463                |       | 181,752               |       |
| Restricted  Investments                                                                                                 |       | 253,339                |       | 224,452               |       |
|                                                                                                                    |       |                   |       |                  |       |
| **Total Assets**                                                                                                        |       | $                      | 72,775,129 |                  | $          | 113,773,614 |   |
|                                                                                                                    |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  Liabilities:                                                                                                   |       |                   |       |                  |       |
| Accounts  payable and accrued liabilities                                                                               |       | $                      | 3,579,461  |                  | $          | 9,879,104 |   |
|                                                                                                                    |       |                   |       |                  |       |
| Noncurrent  Liabilities:                                                                                                |       |                   |       |                  |       |
| Asset  retirement obligation                                                                                            |       | 368,280                |       | 249,695               |       |
| Total  Liabilities                                                                                                      |       | 3,947,741              |       | 10,128,799            |       |
|                                                                                                                    |       |                   |       |                  |       |
| Commitments  and Contingenicies - Note 4                                                                                |       |                   |       |                  |       |
| Stockholders’  Equity:                                                                                             |       |                   |       |                  |       |
| Common  stock, $0.01 par value: authorized-100,000,000 Issued: 87,931,926 shares in 2007  and 87,548,426 shares in 2006 |       | 879,319                |       | 875,484               |       |
| Additional  paid-in capital                                                                                             |       | 113,452,690            |       | 111,384,998           |       |
| Accumulated  deficit                                                                                                    |       | (45,504,621            | )          | (8,615,667            | )          |
| Total  Stockholders’ Equity                                                                                        |       | 68,827,388             |       | 103,644,815           |       |
| **Total Liabilities and Stockholders’ Equity**                                                                     |       | $                      | 72,775,129 |                  | $          | 113,773,614 |   |

** **

SEE ACCOMPANYING NOTES

** **

3

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**KODIAKOIL & GAS CORP.**

**CONDENDSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

** **
| ** **                                                      | ** ** | **Three months ended September 30,** | ** **  | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                                 | ** **  | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                                                     |        |                                                    |       |   |   |   |   |
| Revenues:                                                       |       |                                                     |        |                                                    |       |   |   |   |   |
| Gas  production                                                 |       | $                                                        | 226,116     |                                                    | $          | 143,504 |   | $ | 750,591 |   | $ | 558,768 |   |
| Oil  production                                                 |       | 1,974,133                                                |        | 897,085                                                 |       | 4,896,077 |   | 2,252,499 |   |
| Interest                                                        |       | 305,749                                                  |        | 232,446                                                 |       | 1,323,987 |   | 599,285 |   |
| Total  revenue                                                  |       | 2,505,998                                                |        | 1,273,035                                               |       | 6,970,655 |   | 3,410,552 |   |
|                                                            |       |                                                     |        |                                                    |       |   |   |   |   |
| Cost  and expenses:                                             |       |                                                     |        |                                                    |       |   |   |   |   |
| Oil  and gas production                                         |       | 460,867                                                  |        | 194,021                                                 |       | 1,197,639 |   | 543,681 |   |
| Depletion,  depreciation, amortization and accretion            |       | 2,036,384                                                |        | 494,829                                                 |       | 4,062,397 |   | 1,374,019 |   |
| Asset  impairment                                               |       | 20,000,000                                               |        | —                                                  |       | 34,000,000 |   | — |   |
| General  and administrative                                     |       | 2,091,145                                                |        | 980,100                                                 |       | 5,380,549 |   | 3,270,534 |   |
| (Gain)  on currency exchange                                    |       | (97,523                                                  | )           | (6,627                                                  | )          | (780,976 | ) | (374,770 | ) |
| Total  costs and expenses                                       |       | 24,490,873                                               |        | 1,662,323                                               |       | 43,859,609 |   | 4,813,464 |   |
|                                                            |       |                                                     |        |                                                    |       |   |   |   |   |
| Net  loss                                                       |       | $                                                        | (21,984,875 | )                                                       | $          | (389,288 | ) | $ | (36,888,954 | ) | $ | (1,402,912 | ) |
|                                                            |       |                                                     |        |                                                    |       |   |   |   |   |
| Basic  & diluted weighted-average common shares outstanding |       | 87,799,774                                               |        | 74,939,654                                              |       | 87,658,770 |   | 69,706,082 |   |
|                                                            |       |                                                     |        |                                                    |       |   |   |   |   |
| Basic  & diluted net loss per common share                  |       | $                                                        | (0.250      | )                                                       | $          | (0.005 | ) | $ | (0.421 | ) | $ | (0.020 | ) |

 

SEE ACCOMPANYING NOTES

 

4

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**KODIAKOIL & GAS CORP.**

**STATEMENT OF STOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

** **
| ** **                                                      | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**   | ** **  |
|-----------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|------------------------|------------|-------------|-------------|
| ** **                                                      | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                      | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Equity**  | ** **  |
| ** **                                                      | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **             | ** ** | ** **  | ** **  |
| **Balance December 31, 2006:**                                  |       | 87,548,426            |       | 875,484          |       | 111,384,998     |       | (8,615,667             | )          | 103,644,815 |        |
|                                                            |       |                  |       |             |       |            |       |                   |       |        |        |
| Issuance  of stocks for cash:  -pursuant to exercise of options |       | 363,500               |       | 3,635            |       | 378,515         |       |                   |       | 382,150     |        |
| Employee  stock grants                                          |       | 20,000                |       | 200              |       | 125,000         |       |                   |       | 125,200     |        |
| Stock-based  compensation                                       |       |                  |       |             |       | 1,564,177       |       |                   |       | 1,564,177   |        |
| Net  loss                                                       |       |                  |       |             |       |            |       | (36,888,954            | )          | (36,888,954 | )           |
|                                                            |       |                  |       |             |       |            |       |                   |       |        |        |
| **Balance September 30, 2007:**                                 |       | 87,931,926            |       | $                | 879,319    |            | $          | 113,452,690            |       | $           | (45,504,621 | ) | $ | 68,827,388 |   |
|                                                                 |            |                       |            |                  |            |                 |            |                        |            |             |             |  |  |  |  |

 

SEE ACCOMPANYING NOTES

 

5

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**KODIAKOIL & GAS CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

** **
| ** **                                                                          | ** ** | **Nine Months Ended September 30,** | ** **  |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                          | ** ** | **2007**                                                | ** **  | **2006** | ** ** |
|                                                                                |       |                                                    |        |   |   |
| **Cash flows from operating activities:**                                           |       |                                                    |        |   |   |
| Net  loss                                                                           |       | $                                                       | (36,888,954 | ) | $ | (1,402,912 | ) |
| Reconciliation  of net loss to net cash provided by (used in) operating activities: |       |                                                    |        |   |   |
| Depletion,  depreciation, amortization and accretion                                |       | 4,062,397                                               |        | 1,374,019 |   |
| Asset  impairment                                                                   |       | 34,000,000                                              |        | — |   |
| Stock  based compensation                                                           |       | 1,689,377                                               |        | 1,372,152 |   |
| Changes  in currrent assets and liabilites:                                         |       |                                                    |        |   |   |
| Accounts  receivable-trade                                                          |       | (27,555                                                 | )           | (678,549 | ) |
| Accounts  receivable-accrued revenue                                                |       | (89,616                                                 | )           | (204,253 | ) |
| Prepaid  expenses and other                                                         |       | (59,636                                                 | )           | (107,462 | ) |
| Accounts  payable and accrued liabilities                                           |       | (2,069,346                                              | )           | (728,440 | ) |
|                                                                                |       |                                                    |        |   |   |
| **Net cash provided by (used in) operating activities**                             |       | 616,667                                                 |        | (375,445 | ) |
|                                                                                |       |                                                    |        |   |   |
| Cash  flows from investing activities:                                              |       |                                                    |        |   |   |
| Oil  and gas properties                                                             |       | (39,855,687                                             | )           | (22,111,417 | ) |
| Equipment                                                                           |       | (218,820                                                | )           | (23,457 | ) |
| Restricted  investment                                                              |       | (28,887                                                 | )           | (64,400 | ) |
|                                                                                |       |                                                    |        |   |   |
| **Net cash (used in) investing activities**                                         |       | (40,103,394                                             | )           | (22,199,274 | ) |
|                                                                                |       |                                                    |        |   |   |
| Cash  flows from financing activity:                                                |       |                                                    |        |   |   |
| Proceeds  from the issuance of shares                                               |       | 382,150                                                 |        | 39,631,330 |   |
| Stock  issuance costs                                                               |       | —                                                  |        | (2,909,299 | ) |
| **Net cash provided by financing activities**                                       |       | 382,150                                                 |        | 36,722,031 |   |
|                                                                                |       |                                                    |        |   |   |
| Net  change in cash and cash equivalents                                            |       | (39,104,577                                             | )           | 14,147,312 |   |
|                                                                                |       |                                                    |        |   |   |
| Cash  and cash equivalents at beginning of the period                               |       | 58,469,263                                              |        | 7,285,548 |   |
|                                                                                |       |                                                    |        |   |   |
| **Cash and cash equivalents at end of the period**                                  |       | $                                                       | 19,364,686  |   | $ | 21,432,860 |   |
|                                                                                |       |                                                    |        |   |   |
| **Supplemental cash flow information**                                              |       |                                                    |        |   |   |
| Oil  & gas property accrual included in                                         |       |                                                    |        |   |   |
| Accounts  payable and accrued liabilities                                           |       | $                                                       | 375,100     |   | $ | 1,726,890 |   |
|                                                                                |       |                                                    |        |   |   |
| Asset  retirement obligation                                                        |       | $                                                       | 100,379     |   | $ | 85,725 |   |

 

SEE ACCOMPANYING NOTES

 

6

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**KODIAK OIL & GAS CORP.**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

**Note 1 - Organization**

** **

*Description of Operations*

* *

Kodiak Oil & Gas Corp. and its subsidiary (“Kodiak” or the “Company”)is a public company listed for trading on the American Stock Exchange (AMEX)whose corporate headquarters are located in Denver, Colorado, USA.  The Company is an independent energy companyengaged in the exploration, exploitation, development, acquisition andproduction of natural gas and crude oil entirely in the western United States. 

 

The Company was incorporated (continued) in the Yukon Territory onSeptember 28, 2001. 

 

**Note 2 – Basis ofPresentation and Significant Accounting Policies**

** **

*Basis of Presentation*

* *

The condensed consolidated financial statements include the accounts ofthe Company and its wholly-owned subsidiary, Kodiak Oil & Gas (USA)Inc.  All significant inter-companybalances and transactions have been eliminated. Substantially all of theCompany’s business is transacted in U.S. dollars and, accordingly, thefinancial statements are expressed in U.S. dollars.****The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with U. S. generallyaccepted accounting principles for interim financial information. Accordingly,they do not include all of the information and footnotes required by U. S.generally accepted accounting principles for complete financial statements. Inthe opinion of management, the condensed consolidated financial statements contain alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation of the Company’s results for the periods presented.These unaudited condensedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements included in the AnnualReport on Form 10-K for the fiscal year ended December 31, 2006. Operatingresults for the periods presented are not necessarily indicative of the resultsthat may be expected for the full year.

 

Certain amounts in the 2006 unaudited condensed consolidatedfinancial statements have been reclassified to conform to the 2007 unauditedconsolidated financial statement presentation; such reclassifications had noeffect on the 2006 net loss.

** **

*Use of Estimates in thePreparation of Financial Statements*

* *

The preparation of the financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of oil and gas reserves,assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period.  The Company bases its estimates on historicalexperience and on various other assumptions it believes to be reasonable underthe circumstances. Although

 

7

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actual results may differ from theseestimates under different assumptions or conditions, the Company believes thatits estimates are reasonable.

 

*Cashand Cash Equivalents*

* *

Cash and cash equivalents consist of all highly liquid investments thatare readily convertible to cash and have maturities of three months or lesswhen purchased.  The carrying value ofcash and cash equivalents approximates fair value due to the short-term natureof these instruments.

 

*RestrictedInvestment*

* *

The restricted investment balance as of September 30, 2007 is comprisedof: (a) $183,542 certificate of deposit to collateralize a surety bond toprovide for state bonding requirements for plugging and abandonmentliabilities; and (b) a $69,797 certificate of deposit to collateralize thecosts of the new office floor improvements that will be released over fouryears at $17,449 per year.  Therestricted investment balance as of December 31, 2006 is comprised of: (a)$182,052 certificate of deposit to collateralize a surety bond to provide forstate bonding requirements for plugging and abandonment liabilities; and (b)$42,400 certificate of deposit to collateralize the costs of officeimprovements.

 

*Concentrationof Credit Risk*

* *

The Company’s cash equivalents and short-terminvestments are exposed to concentrations of credit risk.  The Company manages and controls this risk byinvesting these funds with major financial institutions.

 

The Company’s receivables are comprised of oil and gas revenuereceivables and joint interest billings receivable.  The amounts are due from a limited number ofentities.  Therefore, the collectabilityis dependent upon the general economic conditions of the few purchasers andjoint interest owners.   To date theCompany has had minimal bad debts. The receivables are not collateralized.

 

*Oiland Gas Producing Activities*

* *

The Company follows the full cost method of accounting for oil and gasoperations whereby all costs related to the exploration and development of oiland gas properties are initially capitalized into a single cost center (“fullcost pool”).  Such costs include landacquisition costs, geologic and geophysical expenses, carrying charges onnon-producing properties, and costs of drilling directly related to acquisitionand exploration activities. Proceeds from property sales are generally creditedto the full cost pool, with no gain or loss recognized, unless such a salewould significantly alter the relationship between capitalized costs and theproved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or moreof the proved reserves related to a single full cost pool.  The Company had no property sales for thethree and nine month periods ended September 30, 2007.

 

Capitalized costs, together with the costs of production equipment, aredepleted and amortized on the unit-of-production method based on estimatedgross proved reserves.  Relative volumesof oil and gas production and reserves are converted at the energy equivalentrate of six thousand cubic feet of natural gas to one barrel of crude oil.  Gross proved reserves are estimated

 

8

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annually by independent petroleum engineers and updated throughout theyear by the Company as new wells are drilled and as more current information isobtained.  When proved reserves areassigned or the property is considered to be impaired, the cost of the propertyor the amount of the impairment is added to costs subject to depletioncalculations.  Costs of unprovedproperties are withheld from the depletion base until they are developed,abandoned, or impaired.

 

Under the full cost method of accounting, capitalized oil and gasproperty costs less accumulated depletion and net of deferred income taxes maynot exceed an amount equal to the present value, discounted at 10%, ofestimated future net revenues from proved oil and gas reserves plus the cost,or estimated fair value, if lower of unproved properties.  Should capitalized costs exceed this ceiling,an impairment is recognized.  The presentvalue of estimated future net revenues is computed by applying current pricesof oil and gas to estimated future production of proved oil and gas reserves asof period-end, less estimated future expenditures to be incurred in developingand producing the proved reserves assuming the continuation of existingeconomic conditions.

 

Estimated reserve quantities and future net cash flows have the mostsignificant impact on the Company because these reserve estimates are used inproviding a measure of the Company’s overall value.  These estimates are also used in thequarterly calculations of depletion, depreciation and impairment of the Company’sproved properties.

 

Estimating accumulations of gas and oil is complex and is not exactbecause of the numerous uncertainties inherent in the process.  The process relies on interpretations ofavailable geological, geophysical, engineering and production data. The extent,quality and reliability of this technical data can vary. The process alsorequires certain economic assumptions, some of which are mandated by theSecurities and Exchange Commission (the “SEC”), such as gas and oil prices,drilling and operating expenses, capital expenditures, taxes and availabilityof funds. The accuracy of a reserve estimate is a function of the quality andquantity of available data; the interpretation of that data; the accuracy ofvarious mandated economic assumptions; and the judgment of the personspreparing the estimate.

 

The optimal method of determining proved reserve estimates is basedupon a decline analysis method, which consists of extrapolating futurereservoir pressure and production from historical pressure decline andproduction data. The accuracy of the decline analysis method generallyincreases with the length of the production history. Most of the Company’swells have been producing less than six years and for some, less than ayear.  Because of this short productionhistory, other generally less accurate methods such as volumetric analysis andanalogy to the production history of wells of ours and other operators in thesame reservoir were used in conjunction with the decline analysis method todetermine the Company’s estimates of proved reserves including developed  producing, developed non-producing andundeveloped. As the Company’s wells are produced over time and more data isavailable, the estimated proved reserves will be re-determined at least on anannual basis and may be adjusted based on that data.  As noted below, because of significantexploration activity and additional well data, the Company updated its reservesas of September 2007.

 

Actual future production, gas and oil prices, revenues, taxes, developmentexpenditures, operating expenses and quantities of recoverable gas and oilreserves most likely will vary from the Company’s estimates.  Any significant variance could materiallyaffect the quantities and present value of the Company’s reserves. For example,a decrease in price of $0.10 per Mcf for natural gas and $1.00 per barrel ofoil would result in a decrease in the

 

9

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Company’s December 31, 2006 present value of future net cash flows of approximately$763,000. In addition, the Company may adjust estimates of proved reserves toreflect production history, acquisitions, divestitures, ownership interestrevisions, results of exploration and development and prevailing gas and oilprices.  The Company’s reserves may alsobe susceptible to drainage by operators on adjacent properties.

 

Because ofsignificant exploration activity during late 2006 and 2007 and the shortproduction history on many existing wells at the time of the preparation of theDecember 31, 2006 reserve report, the Company updated its reserves as ofSeptember 30, 2007. Commodity prices used in this analysis include the PlainsMarketing West Texas Intermediate crude oil posted price of $78.25 per barrel,the Platts Gas Daily Northern, Ventura midpoint price of $5.63 per MMBtu, andthe Platts Gas Daily Questar Rocky Mountain midpoint price of $0.98 per MMBtu.  All prices are as of September 30, 2007, andare further adjusted for transportation and quality differentials.  The resulting weighted average realized oiland gas prices for the production of proved reserves at September 30, 2007, was$71.59 per barrel of crude oil and $3.96 per Mcf of natural gas.  Wells with gas sold based on the QuestarRocky Mountain price are largely uneconomic and therefore have little effect onthe weighted average sales price.  Basedon this analysis, the Company’s full cost pool exceeded the ceiling limitationby approximately $20.0 million and an impairment expense was recorded for thisamount during the quarter ended September 30, 2007.

 

As of December31, 2006, based on realized oil and gas prices of $50.37 per barrel and $4.53per Mcf, the full cost pool exceeded the ceiling by approximately $5.2 million.However, in early 2007, oil and gas prices increased and the Company completeda well with additional reserves.  Usingthe price on the subsequent remeasurement date, the Company’s full cost pooldid not exceed the ceiling limitation and therefore, the Company did not recordan impairment of its oil and gas properties at December 31, 2006.  As of March 31, 2007, the Company’s full costpool exceeded the ceiling limitation based on oil and gas prices at March 31,2007 of $55.12 per barrel and $4.47 per Mcf and an impairment expense of $14.0million was recorded during the quarter ended March 31, 2007.

 

Theyear-to-date impairment of $34,000,000 is primarily the result of the Company’sinability to establish production and qualified reserves in its deep VermillionBasin project, continued low natural gas prices in Wyoming, and the impairmentof certain undeveloped properties in Wyoming and North Dakota.

 

As with manyresource plays in the early stages of development, significant expenditureshave been and will continue to be required to understand the parameters of thedeep Vermillion Basin play.  As ofSeptember 30, 2007, Kodiak has drilled four exploratory wells in the Baxter,Frontier, and Dakota Formations to better understand the resourcepotential.  In the second half of 2007,Kodiak has focused on acquiring additional geologic and geophysical data fromthese wells and the acquisition and interpretation of an extensive seismicstudy over the northern portion of its acreage. While the Company is optimistic about the long-term potential of thisprospect Kodiak has not established significant proved reserves for the deepVermillion Basin.  As a result, the valueof the development to date calculated under SEC guidelines does not offset thecost of the wells and related acreage in the full cost pool.  For further detail of activities in this areasee management’s discussion in Item 2 of this filing.

 

Kodiak hasdrilled three non-commercial wells on its Great Bear prospect in northern NorthDakota since late 2005.  As a result andbecause of Management’s reduced drilling plans

 

10

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in thesouthern portion of this acreage, the Company has impaired approximately halfof this acreage in the third quarter 2007. The Company has also impaired certain acreage in Wyoming unrelated toits Vermillion play due to reduced expectations.

 

*OtherProperty and Equipment*

* *

Other property and equipment such as office furniture and equipment,vehicles, and computer hardware and software are recorded at cost.  Costs of renewals and improvements thatsubstantially extend the useful lives of the assets are capitalized.  Maintenance and repair costs are expensedwhen incurred.  Depreciation is recordedusing the straight-line method over the estimated useful lives of three yearsfor computer equipment, and five years for office equipment and vehicles.  When other property and equipment is sold orretired, the capitalized costs and related accumulated depreciation are removedfrom the accounts.

 

*FairValue of Financial Instruments*

* *

The Company’s financial instruments, including cash and cashequivalents, accounts receivable and accounts payable, are carried at cost,which approximates fair value due to the short-term maturity of theseinstruments.

 

*Stock-BasedCompensation*

* *

The Company historically accounted for stock-based compensation underthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation.” SFAS No. 123 required us to recordan expense associated with the fair value of stock-based compensation.

 

On January 1, 2006, we adopted SFAS No. 123(R), “Accountingfor Stock-Based Compensation,” using the modified prospective method. Under themodified prospective method, the adoption of SFAS No. 123(R) applies to newawards and to awards modified, repurchased, or cancelled afterDecember 31, 2005, as well as to the unvested portion of awardsoutstanding as of January 1, 2006. In accordance with the modifiedprospective method, Kodiak has not adjusted the financial statements forperiods ended prior to January 1, 2006. The Company did not recognize anyone-time effects of the adoption and continued to use similar option valuationmodels and assumptions as were used prior to January 1, 2006. There is nofair-value-based compensation expense associated with prior awards that werenot vested on the date of the adoption of SFAS No. 123(R). 

 

Kodiak currently use the Black-Scholes option valuation model tocalculate stock-based compensation at the date of grant.  Option pricing models require the input ofhighly subjective assumptions, including the expected price volatility.  Changes in these assumptions can materiallyaffect the fair value estimate.

 

*AssetRetirement Obligation*

*** ***

The Company follows SFAS No. 143, “Accounting for Asset RetirementObligations,” which requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it was incurred if a reasonableestimate of fair value can be made. The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset. Theincrease in carrying value of a property associated with the capitalization ofan asset

 

11

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retirement cost is included in proved oil and gas properties in thecondensed consolidated balance sheets. The Company depletes the amount added to proved oil and gas propertycosts.  The future cash outflowsassociated with settling the asset retirement obligations that have beenaccrued in the accompanying balance sheets are excluded from the ceiling testcalculations.  The Company also depletesthe estimated dismantlement and abandonment costs, net of salvage values,associated with future development activities that have not yet beencapitalized as asset retirement obligations. These costs are also included in the ceiling test calculation.  The asset retirement liability will be allocatedto operating expense by using a systematic and rational method.  A reconciliation of our asset retirementliability for the nine months ended September 30, 2007 and 2006 is asfollows:

 
| ** **                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                               |       |                                                    |       |   |   |
| Balance  beginning of period       |       | $                                                       | 249,695    |   | $ | 69,073 |   |
| Liabilities  incurred              |       | 100,379                                                 |       | 84,085 |   |
| Liabilities  settled               |       | —                                                  |       | — |   |
| Revisions  in estimated cash flows |       | —                                                  |       | — |   |
| Accretion  expense                 |       | 18,206                                                  |       | 5,907 |   |
|                               |       |                                                    |       |   |   |
| Balance  end of period             |       | $                                                       | 368,280    |   | $ | 159,065 |   |

 

*RecentlyIssued Accounting Pronouncements:*

* *

The Company adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007.  FIN 48 provides detailed guidance for thefinancial statement recognition, measurement and disclosure of uncertain taxpositions recognized in the financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes”.   Tax positions must meet a “more-likely-than-not”recognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. The adoption of FIN 48 had an immaterialimpact on the Company’s consolidated financial position and did not result inunrecognized tax liabilities or benefits being recorded. Accordingly, nocorresponding interest and penalties have been accrued. The Company filesreturns in Canada, in which the Company has net operating loss positions.  The Company also files income tax returns inthe U.S. federal jurisdiction and various states. There are currently nofederal or state income tax examinations underway for these jurisdictions.Furthermore, the Company is no longer subject to U.S. federal income taxexaminations by the Internal Revenue service for tax years before 2003 and forstate and local tax authorities for years before 2002. The Company does,however, have prior year net operating losses which remain open forexamination.

 

On February 15, 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.”  This Statement establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company’s financial statements issued in 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 159 might have on its financial position or results of operations.

 

12

 

**Note3 – Compensation Plan**

 

Stock-based Compensation Plan

 

Under the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), whichreplaced the Company’s Incentive Share Option Plan (the “Pre-existing Plan”),stock options, stock appreciation rights (SARs), restricted stock andrestricted stock units, performance awards, stock or property, stock awards andother stock-based awards may be granted to any employee, consultant,independent contractor, director or officer of the Company. A total of8,000,000 shares of common stock may be issued under the 2007 Plan, whichincludes shares issuable under the Pre-existing Plan pursuant to optionsoutstanding as of the effective date of the 2007 Plan. No more than 8,000,000shares may be used for stock issued pursuant to incentive stock options and thenumber of shares available for granting restricted stock and restricted stockunits shall not exceed 1,000,000, subject to adjustment as defined in the 2007Plan. The Company granted 1,930,000 stock options and 81,000 shares ofrestricted stock in the nine-month period ended September 30, 2007.

 

Compensation expense charged against income for all stock-based awardsduring the nine months ended September 30, 2007 and September 30, 2006 was $1.7million and $1.4 million, pre-tax, respectively, which is included in generaland administrative expense in the Consolidated Statements of Operations.

 

The following assumptions were used for the Black-Scholes model tovalue options granted in the periods presented:

 
| ** **                                                                                      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                            |       |                         |       |                        |       |
| Risk  free rates                                                                                |       | 4.80 - 5.89                  | %          | 4.56 - 5.25                 | %          |
| Dividend  yield                                                                                 |       | 0                            | %          | 0                           | %          |
| Expected  volatility                                                                            |       | 53.72 -  56.26               | %          | 62.79 -  64.92              | %          |
| Weighted  average expected stock option life                                                    |       | 5.85 years                   |       | 3.36 years                  |       |
|                                                                                            |       |                         |       |                        |       |
| The  weighted average fair value at the date of grant for stock options granted is  as follows: |       |                         |       |                        |       |
|                                                                                            |       |                         |       |                        |       |
| Weighted  average fair value per share                                                          |       | $                            | 3.42       |                        | $          | 1.58 |   |
| Total  options granted                                                                          |       | 1,930,000                    |       | 2,110,000                   |       |
|                                                                                            |       |                         |       |                        |       |
| Total  weighted average fair value of options granted                                           |       | $                            | 6,608,423  |                        | $          | 3,339,312 |   |

 

A summary of the stock options outstanding as of September 30, 2007 isas follows:

 

13

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| ** **                                 | ** ** | ** **          | ** ** | **Weighted** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------|------------|
| ** **                                 | ** ** | ** **          | ** ** | **Average**  | ** ** |
| ** **                                 | ** ** | **Number**          | ** ** | **Exercise** | ** ** |
| ** **                                 | ** ** | **of Options** | ** ** | **Price**    | ** ** |
| Balance  outstanding at December 31, 2006  |       | 4,636,500           |       | $            | 1.96       |   |
|                                       |       |                |       |         |       |
| Granted                                    |       | 1,930,000           |       | $            | 5.99       |   |
| Canceled                                   |       | (205,000            | )          | $            | 3.81       |   |
| Exercised                                  |       | (363,500            | )          | $            | 1.15       |   |
|                                       |       |                |       |         |       |
| Balance  outstanding at September 30, 2007 |       | 5,998,000           |       | $            | 3.25       |   |
|                                       |       |                |       |         |       |
| Options  exercisable at September 30, 2007 |       | 3,663,000           |       | $            | 1.94       |   |

 

At September 30, 2007, stockoptions outstanding are as follows:

 
| ** **              | ** ** | **Number of** | ** ** | ** **           | ** **        |
|-------------------------|------------|--------------------|------------|----------------------|-------------------|
| **Exercise Price** | ** ** | **Shares**         | ** ** | **Expiry Date** | ** **        |
| $                       | 0.45       |               | 925,000    |                 | March 1,  2009    |   |
| $                       | 0.90       |               | 338,000    |                 | August 23,  2009  |   |
| $                       | 1.08       |               | 800,000    |                 | October 16,  2010 |   |
| $                       | 2.11       |               | 50,000     |                 | March 12,  2011   |   |
| $                       | 3.17       |               | 1,200,000  |                 | April 14,  2011   |   |
| $                       | 4.03       |               | 285,000    |                 | June 28,  2011    |   |
| $                       | 3.81       |               | 220,000    |                 | October 31,  2011 |   |
| $                       | 6.26       |               | 1,150,000  |                 | June 30,  2012    |   |
| $                       | 0.45       |               | 75,000     |                 | March 2,  2014    |   |
| $                       | 1.08       |               | 75,000     |                 | October 17,  2015 |   |
| $                       | 3.17       |               | 100,000    |                 | June 30,  2017    |   |
| $                       | 6.26       |               | 570,000    |                 | May 24, 2017      |   |
| $                       | 3.81       |               | 210,000    |                 | August 15,  2017  |   |
|                    |       | 5,998,000          |       |                 |              |

 

The aggregate intrinsicvalue of outstanding and vested options as of September 30, 2007 was $5,823,055and $5,784,618, respectively, based on the Company’s September 30, 2007 closingcommon stock price of $3.30. This amount would have been received by the optionholders had all option holders exercised their options as of that date.

 

The total grant date fairvalue of the shares vested during the three and nine months ended September 30,2007 was $624,600 and $1,519,200, respectively. As of September 30, 2007, therewas $5,824,085 of total unrecognized compensation cost related to unamortizedoptions. That cost is expected to be recognized over a period of three years.

 

The Company granted 81,000restricted stock awards in the nine months ended September 30, 2007. Of theseawards, 60,000 vest on a graded-vesting basis of one-third immediately andone-third at each anniversary date over a two year service period and 20,000

 

14

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vest on a graded-vestingbasis of one-third at each anniversary date over a three year service period. TheCompany recognizes compensation cost over the requisite service period for theentire award with the expense recognized upon vesting. The fair value ofrestricted stock grants is based on the stock price on the grant date and theCompany assumed no annual forfeiture rate. As of September 30, 2007, there were61,000 unvested shares with a weighted-average grant date fair value of $4.91per share and $299,680 of total unrecognized compensation cost related tonon-vested restricted stock which is expected to be recognized over athree-year period.

 

**Note4 - Commitments and Contingencies**

 

The Companyleases office facilities under an operating lease agreement that expires onJune 30, 2012. Rent expense was $102,314 and $47,546 for the nine month periodsended September 30, 2007 and 2006, respectively.

 

The followingtable shows the annual rentals per year for the life of the lease as ofSeptember 30, 2007:

 

 

 
| 2007  |   | $       | 50,100    |   |
|-------|--------|---------|-----------|--------|
| 2008  |   | 208,400 |      |
| 2009  |   | 218,500 |      |
| 2010  |   | 232,300 |      |
| 2011  |   | 247,700 |      |
| 2012  |   | 128,400 |      |
| Total |   | $       | 1,085,400 |   |

 

The Company has no other capital leases and no other operating leasecommitments.

 

As is customary in the oil and gas industry, the Company may at timeshave commitments in place to reserve or earn certain acreage positions orwells. If the Company does not pay such commitments, the acreage positions orwells may be lost.

 

**Note5 - Differences between Canadian and United States Accounting Principles**

 

These financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America whichdiffer in certain respects with those principles and practices that the Companywould have followed had its financial statements been prepared in accordancewith accounting principles and practices generally accepted in Canada. Managementdoes not believe that the financial statements would vary materially had theybeen prepared in accordance with Canadian GAAP and that any recently issued,not yet effective, Canadian accounting standards, if currently adopted, wouldnot have a material effect on the accompanying financial statements.

 

15

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

# ** **

**Forward-LookingStatements**

 

This Quarterly Report includes certain statements that may bedeemed to be “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements included in this QuarterlyReport, other than statements of historical facts, address matters that theCompany reasonably expects, believes or anticipates will or may occur in thefuture. Forward-looking statements may relate to, among other things:

 

•                  theCompany’s future financial position, including working capital and anticipatedcash flow;

 

•                  therisks of the oil and gas industry, such as operational risks in exploring for,developing and producing crude oil and natural gas;

 

•                  marketdemand;

 

•                  risksand uncertainties involving geology of oil and gas deposits;

 

•                  theuncertainty of reserve estimates and reserves life;

 

•                  theuncertainty of estimates and projections relating to production, costs andexpenses;

 

•                  potentialdelays or changes in plans with respect to exploration or development projectsor capital expenditures;

 

•                  fluctuationsin oil and gas prices, foreign currency exchange rates and interest rates;

 

•                  health,safety and environmental risks;

 

•                  uncertaintiesas to the availability and cost of financing; and

 

•                  thepossibility that government policies or laws may change or governmentalapprovals may be delayed or withheld.

 

Other sections of the Quarterly Report may include additional factorsthat could adversely affect our business and financial performance. Moreover,we operate in a very competitive and rapidly changing environment. New riskfactors emerge from time to time, and it is not possible for our management topredict all risk factors, nor can we assess the impact of all factors on ourbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.

 

Our forward-looking statements contained in this Quarterly Report aremade as of the respective dates set forth in this Quarterly Report. Suchforward-looking statements are based on the beliefs, expectations and opinionsof management as of the date the statements are made. We do not intend toupdate these forward-looking statements, except as otherwise required by law.

 

16

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For the reasons set forth above, investors should not place unduereliance on forward-looking statements.

 

**OverallPerformance**

 

Kodiak Oil & Gas Corp. is a public company listed on the AmericanStock Exchange (AMEX), under the trading symbol “KOG”, and is engaged in thebusiness of exploration and development of oil and gas properties. The Company’sprincipal focus is on the exploration and development of oil and gas propertieswithin two producing basins in the Rocky Mountain Region. The Company isexploring for and developing natural gas in the Green River Basin insouthwestern Wyoming and oil in the Williston Basin in Montana and NorthDakota.

 

Kodiak’s results of operations and financial condition aresignificantly affected by the success of its exploration activity, theresulting production, oil and natural gas commodity prices, and the costsrelated to operating its properties. As is common with companies engaged in theexploration of early resource plays, Kodiak’s financial position and results ofoperations change significantly from period to period. During the nine monthperiod ended September 30, 2007, we incurred capital expenditures ofapproximately $40 million largely related to our oil and gas drillingoperations.  Except for wells currently in progress, these expendituresincreased the Company’s full cost pool, but did not add significantly to ourreserves. As of September 30, 2007, the value of Kodiak’s proved reserves ascalculated under SEC guidelines, did not support the costs included in the fullcost pool, based on oil and gas prices of $71.59 per barrel of crude oil and$3.96 per Mcf of natural gas.  Consequently the Company recorded acumulative asset impairment of $34 million during the nine month period endedSeptember 30, 2007.

 

Our working capital of $18.6 million as of September 30, 2007 may notbe sufficient to support all of our potential exploration opportunities in2008, depending on the nature and extent of our final capital expenditurebudget and the terms of potential joint venture arrangements into which thecompany may enter. As our anticipated funds from operations are expected toprovide only a limited amount of additional working capital, it is likely thatwe will need to obtain alternative sources of capital tofund our growth and development. We anticipate that we would seek toobtain additional funding either by means of debt or equity financings orby entering into additional joint venture agreements with other companies, theavailability of which there can be no assurance.

 

**ExploratoryActivity**

 

**WillistonBasin**

 

***Mission Canyon/Red River Formations—SheridanCounty, Montana and Divide County, North Dakota***

 

The primary producing objectives in this prospect area are the MissionCanyon and the Red River formations at approximate depths of 8,000 feet and11,000 feet, respectively. In the third quarter of 2007, the Company completedone well in the Mission Canyon Formation. The well was put on production at theend of September and a pumping unit is currently being installed. During thenine-month period ended September 30, 2007, Kodiak has participated in thedrilling of five geologic prospects that were defined by 3-D seismic. TheCompany has completed two of these wells and three were dry holes. Kodiak willmonitor the production from the recently drilled wells before further stepoutsare drilled. The Company has identified

 

17

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several additional prospects within its acreage that may be drilledduring 2008 subject to the results of seismic evaluation. Kodiak is currentlypermitting an approximate 18 square mile 3-D seismic program over some of itsacreage.

 

***Bakken Formation—McKenzie and Dunn Counties, NorthDakota***

 

Kodiak has three wells in McKenzie County producing from the BakkenFormation near the North Dakota and Montana state line. The three wells wereput on production in late 2006 and early 2007 and have produced 35,605 barrelsof oil through September 30, 2007. One of the three wells has never beenfracture stimulated and we would expect such procedure to be completed in early2008. The Company has at least two undeveloped locations offsetting these wellswhich could be drilled in 2008.

 

The Company has continued its ongoing acreage acquisition program inDunn County, North Dakota where the primary objective is the Bakken shale.  Kodiak has acquired leasehold acreage in atrend bordered by producing wells drilled by, among others, EOG Resources, Inc.and Whiting Petroleum Corp. to the north and Marathon Oil Corp. andConocoPhillips to the west and south. The Company is presently awaitingapproval of a permit to drill from the Bureau of Land Management and the Bureauof Indian Affairs on its most southern block of acreage in the area thatencompasses approximately 9,000 gross acres. Subject to obtaining a permit todrill from the Bureau of Land Management and the Bureau of Indian Affairs,drilling activity should commence in early 2008.

 

In the third quarter of 2007, the Company entered into a letter ofintent with a private, independent exploration and production company tojointly lease and develop certain prospective lands north and northwest of ouroriginal acreage block noted above. Under this letter of intent and subsequentparticipating agreement, the Company and its partner each will have anundivided 50% working interest in the properties. Under the participatingagreement, the Company has committed to participate in the drilling of twohorizontal wells that will evaluate the Bakken formation at an approximatevertical depth of 10,000 feet. We expect the permitting procedures will beginin the fourth quarter of 2007 with drilling scheduled for the first half of2008. The two companies will share operations with each entity operatingcertain properties.

 

**GreenRiver Basin - Vermillion Basin, Sweetwater County, Wyoming**

 

***Vermillion Basin Deep – Baxter Shale and Frontierand Dakota Sandstone***

 

The primary deeper natural gas targets of the Vermillion Basin area arethe over-pressured Baxter Shale and Frontier sands at depths to approximately15,000 feet. In the first half of 2007, the Company horizontally drilled thefirst gaseous interval in the Baxter Formation, at an approximate verticaldepth of 11,700 feet, on its NT Federal #4-35H well (100% working interest (“WI”),82.5% net revenue interest (“NRI”), Kodiak operated). While the wellencountered gas shows in several fractures that were intercepted by the 1,655feet of horizontal lateral in one of the targets within the Baxter shale, theproduction results were not commercial and this lateral has been abandoned. TheCompany re-entered the NT Federal #4-35H well bore during the third quarter of2007, sidetracked and vertically drilled the Baxter, Frontier and DakotaFormations to a total depth of 14,434 feet. The Company obtained full coresover five sixty-foot intervals throughout the Baxter Formation. These cores arecurrently being evaluated

 

18

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for a number of factors including gas in place, rock properties andmechanics and fracture orientation. This process should be completed during thefourth quarter of 2007. Completion work on this well will continue during thefourth quarter with the fracture stimulation of the Frontier and Dakota Sandsand the Baxter Shale. Stimulation of the Frontier and Dakota sands has beencompleted with the Baxter Shale to be stimulated in late November 2007.

 

Kodiak completed drilling operations on its HB #5-3well (80% WI, 68% NRI, Kodiak operated) located on the western edge of theprospective producing area. The well was drilled vertically to a depth of13,534 feet to evaluate the potential of the Mesaverde formations, the Baxtershale and the Frontier sandstone. Completion procedures are underway and areexpected to be completed in early November 2007.

 

During the third quarter, the Company completed the acquisition ofapproximately 43-square-mile 3-D seismic program on the northern block of itsacreage which includes portions of its Chicken Springs and Chicken RanchFederal Units, as well as land currently not included in federal units. Processingand interpretation should be completed in the fourth quarter of 2007 which willassist the Company as it begins to outline its 2008 drilling program in theVermillion Basin.

 

Kodiak’s operated wells in the Vermillion Basin were shut in during the2007 summer and fall months due to adverse gas prices. The Company expects tocommence production on these wells in December 2007 as stronger gas prices areanticipated during the winter months. Additionally, the completion of theRockies Express Pipeline is scheduled to go into service during the firstquarter of 2008 which is expected to improve natural gas prices in the Rockiesproduction area.

 

**ProductPrices and Production**

 

Kodiak’s results of operations and financial condition aresignificantly affected by oil and natural gas commodity prices, which canfluctuate dramatically. The commodity prices are beyond the Company’s controland are difficult to predict. Market prices reflect worldwide concerns aboutproducer ability to ensure sufficient supply to meet increasing demand amid ahost of uncertainties caused by political instability, a weaker U.S. dollar andcrude oil refining constraint. We receive lower prices for our oil and gas thanwhat is posted on the New York Mercantile Exchange (NYMEX). The pricedifferentials received for our products vary from month to month and theCompany does not currently have hedges of its commodity sales in place.

 

The Company’s production volumes are a direct result of the success ofits exploratory and acquisition activities. Production volumes may vary monthlyas various wells are completed or maintained to provide optimal flows.

 

Oil and gas sales volume and price realization comparisons for theindicated periods are set forth below:

 

19

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| ** **  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|        |       |                                                     |       |                                                    |       |   |   |   |   |
| Volume:     |       |                                                     |       |                                                    |       |   |   |   |   |
| Gas  (Mcf)  |       | 52,877                                                   |       | 29,783                                                  |       | 150,977 |   | 93,721 |   |
| Oil  (Bbls) |       | 27,553                                                   |       | 14,316                                                  |       | 79,689 |   | 38,223 |   |
|        |       |                                                     |       |                                                    |       |   |   |   |   |
| Price:      |       |                                                     |       |                                                    |       |   |   |   |   |
| Gas  (Mcf)  |       | $                                                        | 4.28       |                                                    | $          | 4.82 |   | $ | 4.97 |   | $ | 5.96 |   |
| Oil  (Bbls) |       | $                                                        | 71.65      |                                                    | $          | 62.66 |   | $ | 61.44 |   | $ | 58.93 |   |

 

**Resultsof Operations - Three Months Ended September 30, 2007 and 2006**

 
| ** **                                      | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
|                                            |       |                                                     |       |   |   |
| Financial  Results                              |       |                                                     |       |   |   |
| Total  revenue                                  |       | $                                                        | 2,505,998  |   | $ | 1,273,035 |   |
| Total  costs and expenses                       |       | 24,490,873                                               |       | 1,662,323 |   |
| Net loss                                        |       | (21,984,875                                              | )          | (389,288 | ) |
| Diluted  net loss per common share              |       | $                                                        | (0.250     | ) | $ | (0.005 | ) |
|                                            |       |                                                     |       |   |   |
| Operating  Results                              |       |                                                     |       |   |   |
| Production  volumes (BOE)                       |       | 36,366                                                   |       | 19,280 |   |
|                                            |       |                                                     |       |   |   |
| Capital  Resources and Liquidity                |       |                                                     |       |   |   |
| Cash  and cash equivalents at end of the period |       | $                                                        | 19,364,686 |   | $ | 21,432,860 |   |
|                                            |       |                                                     |       |   |   |
| Net  cash provided by operating activities      |       | (180,329                                                 | )          | (2,057,287 | ) |
| Capital  expenditures - oil and gas properties  |       | 11,501,353                                               |       | 4,082,247 |   |
| Adjusted  EBITDA (see below discussion)         |       | 815,569                                                  |       | 349,973 |   |

 

The Company reported a net loss for the three months ended September30, 2007 of $21,984,875 compared with a net loss of $389,288 for the sameperiod in 2006. The increased loss was largely due to the $20 millionimpairment related to the full-cost ceiling test; increased depletion,depreciation, amortization expense related to additional wells drilled andimpairment of acreage; and general and administrative costs as the result ofhigher stock based compensation expense. Increased revenues from higherproduction volumes and prices were more than offset by the increase in thesenon-cash expenses.

 

20

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In evaluating its business, Kodiak considers earnings before interest,taxes, depreciation, depletion, amortization, gain on foreign currency andstock-based compensation (“Adjusted EBITDA”) as a key indicator of financialoperating performance and as a measure of the ability to generate cash foroperational activities and future capital expenditures. The Company’s “AdjustedEBITDA” increased 133% to $815,569 for the three months ended September 30,2007 from the same period in 2006. The increase in Adjusted EBITDA was largelythe result of increased production from additional drilling and highercommodity prices offset to a lesser extent by increased oil and gas productionexpense. Adjusted EBITDA is not a Generally Accepted Accounting Principle (“GAAP”)measure of performance. The Company uses this non-GAAP measure primarily tocompare its performance with other companies in the industry that make asimilar disclosure and as a measure of its current liquidity. The Companybelieves that this measure may also be useful to investors for the same purposeand for an indication of the Company’s ability to generate cash flow at a levelthat can sustain or support our operations and capital investment program. Investorsshould not consider this measure in isolation or as a substitute for operatingincome or loss, cash flow from operations determined under GAAP, or any othermeasure for determining the Company’s operating performance that is calculatedin accordance with GAAP. In addition, because EBITDA is not a GAAP measure, itmay not necessarily be comparable to similarly titled measures employed byother companies. Reconciliation between EBITDA and net income for the threemonths ended September 30, 2007 is provided in the table below:

 
| ** **                                           | ** ** | **Three Months ending September 30,** | ** **  |
|------------------------------------------------------|------------|---------------------------------------|-------------|
| **Reconciliation of adjusted EBITDA:**               | ** ** | **2007**                              | ** **  | **2006** | ** ** |
| ** **                                           |       |                                  |        |   |   |
| Net  Loss                                            |       | $                                     | (21,984,875 | ) | $ | (389,288 | ) |
| Add  back:                                           |       |                                  |        |   |   |
| Depreciation,  depletion, amortization and accretion |       | 2,036,384                             |        | 494,829 |   |
| Asset  impairment                                    |       | 20,000,000                            |        | — |   |
| (Gain)  on foreign currency exchange                 |       | (97,523                               | )           | (6,627 | ) |
| Stock  based compensation expense                    |       | 861,583                               |        | 251,059 |   |
|                                                 |       |                                  |        |   |   |
| Adjusted  EBITDA                                     |       | $                                     | 815,569     |   | $ | 349,973 |   |

 

Natural gas production volumes increased 78% and oil production volumesincreased 93% for the three month periods ended September 30, 2007 compared tothe same period in 2006. Total gas price realizations decreased 11.2% to $4.28per Mcf for the three month period ended September 30, 2007 compared to thesame period in 2006. Oil price realizations were $71.65 per barrel for thethree month period ended September 30, 2007 compared to $62.66 for the sameperiod in 2006. The net effect of the pricing and volume changes resulted in anincrease of oil and gas revenues of $1,159,660 to $2,200,249 for the threemonth periods ended September 30, 2007 compared to the same period in 2006.

 

The Company recorded lease operating and production tax expense of$460,867 during the three month period ended September 30, 2007, as compared to$194,021 during the same period in 2006. Depreciation, depletion, amortizationand abandonment liability accretion, or DD&A, was $2,036,384 for the threemonth period ended September 30, 2007 compared to $494,829 for the same periodin 2006. The changes in these expenses reflect the Company’s

 

21

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growing production base, number of producing wells and, because ofrevenue-based production taxes, the increase in sales revenues. DD&Aexpense also increased during the quarter due to the impairment of certainundeveloped properties and reclassification of three wells whose costs werepreviously classified as wells in progress thus increasing the amortizationpool and the DD&A rate. DD&A is expected to decline to similar of thatrecorded in previous quarters of 2007 subsequent to the recording of the impairmentin the third quarter of 2007.

 

The Company’s general and administrative costs of $2,091,145 during thethree months ended September 30, 2007 compares to $980,100 for the same periodin 2006. Included in the general and administrative expense for this period isa stock-based compensation charge of $861,583 and $251,059 for 2007 and 2006,respectively, for options and restricted stock issued to officers, directorsand employees. The overall increase in general and administrative expenses is aresult of the Company’s increased staffing requirements and level of activity. TheCompany currently has sixteen full time and three contract employees comparedto nine full time employees in September 2006.

 

Based on theCompany’s evaluation of its oil and gas reserves at September 30, 2007, usingweighted average realized oil and gas prices of $71.59 per barrel of crude oiland $3.96 per Mcf of natural gas, the Company’s full cost pool exceeded theceiling limitation by approximately $20.0 million and an impairment expense wasrecorded for this amount during the quarter ended September 30, 2007.

 

**Resultsof Operations - Nine Months Ended September 30, 2007 and 2006**

 
| ** **                                      | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                            |       |                                                    |       |   |   |
| Financial  Results                              |       |                                                    |       |   |   |
| Total  revenue                                  |       | $                                                       | 6,970,655  |   | $ | 3,410,552 |   |
| Total  costs and expenses                       |       | 43,859,609                                              |       | 4,813,464 |   |
| Net  loss                                       |       | (36,888,954                                             | )          | (1,402,912 | ) |
| Diluted  net loss per common share              |       | $                                                       | (0.421     | ) | $ | (0.020 | ) |
|                                            |       |                                                    |       |   |   |
| Operating  Results                              |       |                                                    |       |   |   |
| Production  volumes (BOE)                       |       | 104,852                                                 |       | 53,236 |   |
|                                            |       |                                                    |       |   |   |
| Capital  Resources and Liquidity                |       |                                                    |       |   |   |
| Cash  and cash equivalents at end of the period |       | $                                                       | 19,364,686 |   | $ | 21,432,860 |   |
|                                            |       |                                                    |       |   |   |
| Net  cash provided by operating activities      |       | 616,667                                                 |       | (375,445 | ) |
| Capital  expenditures - oil and gas properties  |       | 39,855,687                                              |       | 22,111,417 |   |
| Adjusted  EBITDA (see below discussion)         |       | 2,081,844                                               |       | 968,489 |   |

 

22

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The Company reported a net loss for the nine months ended September 30,2007 of $36,888,954 compared with a net loss of $1,402,912 for the same periodin 2006. Included in the 2007 loss is $34,000,000 attributable to the full costpool write-down during the first and third quarters of 2007. Excluding theimpairment, the net loss increased by $1,486,042 to $2,888,954 due to higherDD&A expense and general and administrative costs that more than offsetincreased revenues. The Company’s Adjusted EBITDA increased to $2,081,844 forthe nine months ended September 30, 2007 compared to $968,489 for the sameperiod in 2006. Reconciliation between EBITDA and net loss for the nine monthsended September 30, 2007 is provided in the table below:

 

 

 
| ** **                                           | ** ** | **Nine Months ending September 30,** | ** **  |
|------------------------------------------------------|------------|--------------------------------------|-------------|
| **Reconciliation of adjusted EBITDA:**               | ** ** | **2007**                             | ** **  | **2006** | ** ** |
|                                                 |       |                                 |        |   |   |
| Net  Loss                                            |       | $                                    | (36,888,954 | ) | $ | (1,402,912 | ) |
| Add  back:                                           |       |                                 |        |   |   |
| Depreciation,  depletion, amortization and accretion |       | 4,062,397                            |        | 1,374,019 |   |
| Asset  impairment                                    |       | 34,000,000                           |        | — |   |
| (Gain)  on foreign currency exchange                 |       | (780,976                             | )           | (374,770 | ) |
| Stock  based compensation expense                    |       | 1,689,377                            |        | 1,372,152 |   |
|                                                 |       |                                 |        |   |   |
| Adjusted  EBITDA                                     |       | $                                    | 2,081,844   |   | $ | 968,489 |   |

 

Gas production volumes were 150,977 and 93,721 Mcf and oil productionvolumes were 79,689 and 38,223 barrels for the nine month periods endedSeptember 30, 2007 and 2006, respectively. Total gas price realizationsdecreased 17% to $4.97 per Mcf for the nine month period ended September 30,2007 compared to the same period in 2006. Oil price realizations were $61.44per barrel for the nine month period ended September 30, 2007 compared to$58.93 for the same period in 2006. The net effect of the pricing and volumechanges resulted in an increase of oil and gas revenues of $2,835,401 to$5,646,668 for the nine month period ended September 30, 2007 compared to thesame period in 2006. The increase in production and revenues is largely theresult of the Company’s activities in the Williston Basin. Many of the wells inthis area began producing in late 2006 and did not contribute to that year’sproduction volumes or revenue.

 

The Company recorded lease operating and production tax expense of$1,197,640 during the nine month period ended September 30, 2007, as comparedto $543,682 during the same period in 2006. DD&A expense was $4,062,397 forthe nine month period ended September 30, 2007 compared to $1,374,019 for thesame period in 2006. As with the three-month period comparison above, thechanges in these expenses reflect the Company’s growing production base, numberof producing wells and, because of revenue-based production taxes, the increasein sales revenues. DD&A expense was also impacted by the impairment ofcertain acreage and the reclassification of three wells from wells-in-progressto the amortization pool which increases the DD&A rate.

 

23

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The Company’s general and administrative costs of $5,380,549 during thenine months ended September 30, 2007 compares to $3,270,534 for the same periodin 2006. Included in the general and administrative expense is stock-basedcompensation expense of $1,689,377 and $1,372,152 for the nine month periodsending September 30, 2007 and 2006, respectively, for options and restrictedstock issued to officers, directors and employees. The overall increase ingeneral and administrative expenses is a result of the Company’s increasedstaffing requirements and level of activity. The Company currently has sixteenfull time employees, an increase of five from the same period in 2006.

 

As of March 31, 2007, based on current oil and gas prices of $55.12 perbarrel and $4.47 per Mcf, the Company’s full cost pool exceeded the presentvalue of the Company’s estimated future net revenue discounted at 10%. Therefore,impairment expense of $14,000,000 was recorded during the quarter ended March31, 2007. Based on the Company’s evaluation of oil andgas reserves at September 30, 2007, using weighted average realized oil and gasprices of $71.59 per barrel of crude oil and $3.96 per Mcf of natural gas, theCompany’s full cost pool exceeded the ceiling limitation by approximately $20.0million and an impairment expense was recorded for this amount during thequarter ended September 30, 2007.

 

Theyear-to-date impairment of $34,000,000 is primarily the result of the Company’sinability to establish production and qualified reserves in its deep VermillionBasin project, continued uneconomic natural gas prices in Wyoming, and theimpairment of certain undeveloped properties in Wyoming and North Dakota.

 

As with mostresource plays in the early stages of development, significant expenditureshave been and continue to be required to understand the parameters of the deepVermillion Basin play. As of September 30, 2007, Kodiak has drilled fourexploratory wells in the Baxter, Frontier, and Dakota Formations to betterunderstand the resource potential. In the second half of 2007, Kodiak hasfocused on acquiring additional geologic and geophysical data from these wellsand the acquisition and interpretation of an extensive seismic study over thenorthern portion of its acreage. Kodiak believes the long-term potential ofthis play is substantial and will ultimately prove profitable but at September30, 2007, the Company is unable to substantiate proved reserves for this play. Withoutproved reserves in the play, the value of the development to date calculated underSEC guidelines does not offset the cost of the wells and related acreage in thefull cost pool.

 

Kodiak hasdrilled three non-commercial wells on its Great Bear prospect in northern NorthDakota since late 2005. As a result and because of Management’s reduceddrilling plans in the southern portion of this acreage, the Company hasimpaired approximately half of this acreage in the third quarter 2007. TheCompany has also impaired certain acreage in Wyoming unrelated to itsVermillion play due to reduced expectations.

 

**Liquidity and Capital Resources**

 

As of September 30, 2007, the Company had cash and cash equivalents ofapproximately $19.4 million, working capital of $18.6 million and no long termdebt. During the nine month periods ended September 30, 2007 and 2006, theCompany’s share of exploration and development costs was $39.9 million and$22.1 million, respectively.

 

The Company has budgeted total capital expendituresin the Vermillion Basin of approximately $4.0 million for the fourth quarter of2007 for well completions and geological

 

24

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andgeophysical activities. The Company has allocated another $3.0 million toadditional completion work and acreage acquisition in the Williston Basinthrough year end 2007. Based upon these anticipated expenditures through 2007,the Company anticipates approximately $12.0 million in working capital at yearend. Kodiak expects that such capital will be sufficient to commence our 2008drilling program in the Williston Basin, where the Company’s expected share ofeach drilled and completed Bakken well is expected to be approximately $2.5million to $3.0 million. In the Vermillion Basin, our exploration activity willbe based upon the completion results of the two wells being completed, ourseismic processing and interpretation work, and our core analysis work that weanticipate will be completed before year end. The actual amount, timing andallocation of the Company’s capital expenditures are dependant on the results ofthe Company’s ongoing exploration and drilling programs, the Company’sevaluation of the technical and geological data obtained in the course of itsoperations and certain other factors, such as the market price for oil and gasand the availability and cost of oil field services. The Company adjusted andreallocated its exploration program during the third quarter due to commodityprices and exploration results. Management will continue to closely monitorexpenditures through the fourth quarter of 2007 and into 2008.

 

Our working capital of $18.6 million as of September30, 2007 may not be sufficient to support all of our potential explorationopportunities in 2008, depending on the nature and extent of our final capitalexpenditure budget and the terms of potential joint venture arrangements intowhich the company may enter. As our anticipated funds from operations areexpected to provide only a limited amount of additional working capital, it islikely that we will need to obtain alternative sources of capital tofund our growth and development. We anticipate that we would seek toobtain additional funding either by means of debt or equity financings orby entering into additional joint venture agreements with other companies, theavailability of which there can be no assurance. In a majority of our operatingareas, we have maintained high working interests in our properties therebyproviding us with the opportunity to enter such agreements withindustry partners for participation in drilling activities. During thequarter ended September 30, 2007, we entered into an agreement with a private,independent exploration and production company to jointly lease and developcertain prospective lands in North Dakota, whereby we retained an undivided 50%working interest in the properties. This agreement allows the Company to sharethe exploratory risk with an industry partner while retaining a significantworking interest in the properties. In our Vermillion Basin prospect inWyoming, we are currently engaged in ongoing discussions to enter into a jointventure agreement with an exploration and production company to develop thepotential gas resource. The Company will continue to evaluate additional jointventure and partnership opportunities as a means to provide potentialalternative sources of funding.

 

The Company currently has no lines of credit or other bank financingarrangements. The Company has no defined benefit plan and no obligation forpost retirement employee benefits.

 

**FinancialInstruments and Other Instruments**

 

As of September 30, 2007 the Company had cash, accounts receivable,accounts payable and accrued liabilities which are carried at approximate fairvalue because of the short maturity date of those instruments. Unless otherwisenoted, it is management’s opinion that the Company is not exposed tosignificant interest, currency or credit risks arising from these financialinstruments.

 

25

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**CriticalAccounting Policies and Estimates**

 

Please refer to the corresponding section in Part I, Item 5 of ourAnnual Report on Form 10-K for the year ended December 31, 2006.

 

Recently Issued Accounting Pronouncements:

 

In June 2006, the FASB issued FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes. The interpretation clarifies the accountingfor uncertainty in income taxes recognized in a company’s financial statementsin accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes. Specifically, the pronouncement prescribes arecognition threshold and a measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The interpretation also provides guidance on the relatedderecognition, classification, interest and penalties, accounting for interimperiods, disclosure and transition of uncertain tax positions. Theinterpretation is effective for fiscal years beginning after December 15, 2006.The adoption of FIN 48 did not have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

The Company adopted the provisions of FIN 48 on January 1, 2007.FIN 48 provides detailed guidance for the financial statement recognition,measurement and disclosure of uncertain tax positions recognized in thefinancial statements in accordance with SFAS 109. Tax positions must meet a “more-likely-than-not”recognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. The adoption of FIN 48 had an immaterialimpact on the Company’s consolidated financial position and did not result inunrecognized tax liabilities or benefits being recorded. Accordingly, nocorresponding interest and penalties have been accrued. The Company filesreturns in Canada, in which the Company has net operating loss positions. TheCompany also files income tax returns in the U.S. federal jurisdiction andvarious states. There are currently no federal or state income tax examinationsunderway for these jurisdictions. Furthermore, the Company is no longer subjectto U.S. federal income tax examinations by the Internal Revenue service for taxyears before 2003 and for state and local tax authorities for years before2002. The Company does, however, have prior year net operating losses thatremain open for examination.

 

On February 15, 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.”  This Statement establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company’s financial statements issued in 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 159 might have on its financial position or results of operations.

 

**Off-BalanceSheet Arrangements**

 

Kodiak did not have any off-balance sheetfinancing arrangements at September 30, 2007.

 

26

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| **ITEM 3.** | ** ** | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|-------------|------------|-----------------------------------------------------------------|

# ** **

**Oiland Gas Price Fluctuations**

 

The Company’s primary market risk is market changes in oil and naturalgas prices.  Prospective revenues from the sale of products or propertieswill be impacted by oil and natural gas prices.  A $1.00 per Mcf change inthe market price of natural gas will result in approximately $135,500 change inthe annual gross gas production revenue.  A $1.00 per barrel change in themarket price of oil will result in approximately $79,700 change in our annualgross oil production revenue. The impact on any potential sale of propertycannot be readily determined.

 

**InterestRate Fluctuations**

 

Kodiak currently maintains some of its available cash in redeemableshort-term investments, classified as cash equivalents, and the reportedinterest income from these short-term investments could be adversely affectedby any material changes in U.S. dollar interest rates.  A 1% change in theinterest rate would have approximately $410,400 annual impact if all of theCompany’s cash was invested in interest-bearing notes.

 
| **ITEM 4.** | ** ** | **CONTROLS AND PROCEDURES** |
|-------------|------------|-----------------------------|

# ** **

We carried out an evaluation required by the Securities and ExchangeAct of 1934 (the “1934 Act”), under the supervision and with the participationof our principal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rule 13a-15(e) of the 1934 Act, as of the end of theperiod covered by this report. Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the 1934 Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and to providereasonable assurance that such information is accumulated and communicated toour management, including our principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

There were nochanges in our internal control over financial reporting during the quarterended September 30, 2007 that have materially affected or are reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 
| **ITEM 1.** | ** ** | **LEGAL PROCEEDINGS** |
|-------------|------------|-----------------------|

# ** **

** **                                             None.

 

27

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| **ITEM  1A.** | ** ** | **RISK FACTORS** |
|---------------|------------|------------------|

# ** **

Other than the following updates, therehave been no material changes to the risk factors set forth in our AnnualReport on Form 10-K for the year ended December 31, 2006, as filed with the SECon March 27, 2007.

 

**Risks Relating to the Company**

 

***We havehistorically incurred losses and expect to incur additional losses in thefuture. It is difficult for us to forecast when we will achieve profitability,if ever.***

** **

Historically,we have incurred losses from operations during our limited history in the oiland natural gas business. We had a cumulative deficit of $8.6 million as atDecember 31, 2006 and a cumulative deficit of $45.6 million as at September 30,2007. While we have developed some of our properties, most of our propertiesare in the exploration stage and to date we have established a limited volumeof proved reserves on our properties. To become profitable, we would need to besuccessful in our acquisition, exploration, development and productionactivities, all of which are subject to many risks beyond our control. Wecannot assure you that we will successfully implement our business plan or thatwe will achieve commercial profitability in the future. Even if we becomeprofitable, we cannot assure you that our profitability will be sustainable orincrease on a periodic basis. In addition, should we be unable to continue as agoing concern, realization of assets and settlement of liabilities in otherthan the normal course of business may be at amounts significantly differentfrom those in the financial statements included in this Form 10-Q. Finally, dueto our limited history in the oil and natural gas business, we have limitedhistorical financial and operating information available to help you evaluateour performance or an investment in our common stock.

 

***We will require significant additional working capital, which may notbe available to us on favorable terms, or at all.***

 

Our workingcapital decreased from $53.2 million as of December 31, 2006 to $18.6 millionas of September 30, 2007. Future acquisitions and future exploration,development and production activities will require a substantial amount ofadditional working capital and cash flow. We expect that our current cashbalances and cash flow from operations will be sufficient only to provide alimited amount of working capital, and the revenues generated from ourproperties will not alone be sufficient to fund our operations or plannedgrowth. These conditions will require us to seek alternative sources of capitalby means of entering into joint ventures with other exploration and productioncompanies or by undertaking financing activities. However, future financing maynot be available in amounts or on terms acceptable to us, if at all. If weborrow additional funds, we will likely be obligated to make periodic interestor other debt service payments and may be subject to additional restrictivecovenants. Should we elect to raise additional capital through the issuance andsale of equity securities, the sales may be at prices below the market price ofour stock, and our shareholders may suffer significant dilution. Our failure toobtain financing on a timely basis or on favorable terms could result in theloss or substantial dilution of our interests in our properties.

 

28

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***PipelineCapacity in the Rocky Mountain region may be inadequate, and consequently, aprice decrease may more adversely affect the price received for our RockyMountain production than production in other U.S. regions.***

** **

                                                Natural gas prices arecritical to our business, and the marketability of our production will dependon the capacity of oil and natural gas gathering systems and pipelines.Oftentimes, the market price for natural gas in the Rocky Mountain regiondiffers from the market indices for natural gas in other regions of the UnitedStates. Management believes the current differential is due, in large part, toinsufficient pipeline capacity in the Rocky Mountain region. Therefore, a pricedecrease may more adversely affect the price received for our Rocky Mountainproduction than production in the other U.S. regions. From time to time, newpipeline projects have been announced, including the Rockies Express Pipeline,to transport natural gas production from the Rocky Mountain region to othermarkets. However, there can be no assurance that such infrastructures will bebuilt, or that if built, they would prevent large basis differentials fromoccurring in the future.  Theunavailability or insufficient capacity of pipeline facilities could force usto shut-in producing wells, delay the commencement of production, ordiscontinue development plans for some of our properties, which would adverselyaffect our financial condition and performance.

 
| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS** |
|-------------|------------|------------------------------------------------------------------|

# ** **

In December2006, we raised net proceeds of $46,672,213 in a public offering of 12,075,000shares of common stock, all of which shares were sold. The registrationstatements to register the shares became effective on December 15, 2006(commission file number 333-138932) and December 18, 2006 (commission filenumber 333-139441). We have used approximately $40,000,000 of the net proceedsfrom the offering for exploration and drilling activities. We expect to use theremainder of our net proceeds to fund a portion of our 2007 and 2008exploration and drilling programs and for working capital and general corporatepurposes.

 
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES** |
|-------------|------------|-------------------------------------|

# ** **

None.

 
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|------------|---------------------------------------------------------|

# ** **

# **None.**

# ** **

| **ITEM 5.** | ** ** | **OTHER INFORMATION** |
|-------------|------------|-----------------------|

# ** **

                                              None.

 

Additional information relating to the Company is available on the U.S.Securities & Exchange Commission website at www.sec.gov.

 
| **ITEM 6.** | ** ** | **EXHIBITS** |
|-------------|------------|--------------|

# ** **

|   | (a) | Exhibits |   |
|--------|-----|----------|--------|

 
|   | 31.1 | Certification of the Principal Executive Officer pursuant to §302 of  the Sarbanes-Oxley Act of 2002 |
|--------|------|-----------------------------------------------------------------------------------------------------------|

 

29

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|   | 31.2   | Certification of the Principal Financial Officer pursuant to §302 of  the Sarbanes- |
|--------|--------|------------------------------------------------------------------------------------------|
|   |   | Oxley Act of 2002                                                                        |   |
|   |   |                                                                                     |   |
|   | 32.1   | Certification of the Principal Executive Officer pursuant to 18  U.S.C. Section          |
|   |   | 1350                                                                                     |   |
|   |   |                                                                                     |   |
|   | 32.2   | Certification of the Principal Financial Officer Pursuant to 18  U.S.C. Section          |
|   |   | 1350                                                                                     |   |

 

30

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# **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 theundersigned thereunto duly authorized.

 

 
|              | **KODIAK OIL & GAS CORP.**              |
|-------------------|---------------------------------------------|
|              | ** **                                  | ** ** |
|              |                                        |   |
| November 8,  2007 | /s/ Lynn A.  Peterson                       |   |
|              | Lynn A.  Peterson                           |   |
|              | President  and Chief Executive Officer      |   |
|              | (principal  executive officer)              |   |
|              |                                        |   |
|              |                                        |   |
| November 8,  2007 | /s/ James P.  Henderson                     |   |
|              | James P.  Henderson                         |   |
|              | Vice-President  and Chief Financial Officer |   |
|              | (principal  financial officer)              |   |

 

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