UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [X]     
 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For the quarterly period ended September 30,
2009
 
 OR
 
 [ 
]        TRANSITION REPORT UNDER SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ____________
to_____________
 
 
 Commission
file number 333 - 38558
 
 KODIAK
ENERGY, INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Delaware
              65-0967706(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 Suite 405, 505 8th Avenue
S.W. Calgary, AB T2P 1G2
 (Address
of principal executive offices - Zip code)
 
 (403)
262-8044
 (Registrant's
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.        Yes  X   No
 
 Indicate
by check mark whether the registrant is a large accelerated filer,
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
 Exchange
Act. (Check one):
 
 Large
      Accelerated Filer   o
              Accelerated
      Filer   xNon-Accelerated
      Filer    o
                (Do
      not check if a smaller reporting
      company)
              Smaller
      Reporting Company     o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of The Exchange Act) Yes     No X
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
 
 Check
whether the registrant filed all documents and reports required to be filed by
Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.       Yes  X   No
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 
 State the
number of shares outstanding of each of the registrant's classes of common
equity, as of the latest practicable date: 110,407,186 common shares, $.001
par value, as at November 6, 2009
  
 
 KODIAK
ENERGY, INC.
 INDEX
 
 PART
      I.
              FINANCIAL
      INFORMATION
              3ITEM
      1.
              FINANCIAL
      STATEMENTS
              3Consolidated
      Balance Sheets
              3Consolidated
      Statement of Shareholders’ Equity (unaudited)
              4Consolidated
      Statements of Operations (unaudited)
              5Consolidated
      Statements of Cash Flows (unaudited)
              6Notes
      to Consolidated Financial Statements (unaudited)
              7ITEM 2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              39ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              54ITEM 4.
              CONTROLS
      AND PROCEDURES
              55PART
      II.
              OTHER
      INFORMATION
              57ITEM
      1.
              LEGAL
      PROCEEDINGS
              57ITEM 1A.
              RISK
      FACTORS
              57ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              62ITEM 3.
              DEFAULTS
      UPON SENIOR SECURITIES
              62ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              62ITEM
      5.
              OTHER
      INFORMATION
              62ITEM 6.
              EXHIBITS
      AND REPORTS ON FORM 8-K
              64
 
 
 
 
 PART I. FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 KODIAK ENERGY, INC.Consolidated
      Balance Sheets(Exploration
      Stage Company Going Concern Uncertainty – Note 1)September
              
              
              December30,
      2009
              
              
              31,
      2008(Unaudited)
              
              
              (Audited)AssetsCurrent
      Assets:Cash
      and Short Term Deposits
              
              $
              5,878
              
              
              $
              75,175Accounts
      Receivable (Note 5)
              
              
              408,856
              
              
              
              64,325Prepaid
      Expenses and Deposits
              
              
              131,510
              
              
              
              106,062546,244
              
              
              
              245,562Other
      Assets (Note 6)
              
              
              290,197
              
              
              
              290,903Capital
      Assets (Note 7):Oil
      and gas properties - Based on Full Cost Accounting
              
              
              32,745,658
              
              
              
              36,559,367Property
      & Equipment
              
              
              68,471
              
              
              
              75,56532,814,129
              
              
              
              36,634,932Total
      Assets
              
              $
              33,650,570
              
              
              $
              37,171,397Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      Payable
              
              $
              1,485,373
              
              
              
              984,590Accrued
      Liabilities
              
              
              67,268
              
              
              
              122,842Loan
      Payable (Note 8)
              
              
              1,260,857
              
              
              
              -Current
      Portion of Long-term Debt (Note 11)
              
              
              803,213
              
              
              
              -Note
      Payable to Related Party (Note 9)
              
              
              -
              
              
              
              32,841Advances
      (Note 10)
              
              
              1,030,819
              
              
              
              -4,647,530
              
              
              
              1,140,273Long-term
      Liabilities (Note 11)
              
              
              3,911,293
              
              
              
              39,262Asset
      Retirement Obligations (Note 12)
              
              
              1,020,772
              
              
              
              199,5749,579,595
              
              
              
              1,379,109Commitments
      and Contingencies (Note 17)Subsequent
      events (Note 22)Shareholders'
      EquityShare
      Capital (Note 14):Preferred
      Shares - 10,000,000 authorized;nil issued and outstanding
                Common
      Shares - 300,000,000 authorized;110,407,186 issued and outstanding atSeptember 30,2009 and 110,023,998 atDecember 31, 2008
              
              
              110,407
              
              
              
              110,024Additional
      Paid in Capital
              
              
              49,939,374
              
              
              
              49,296,114Other
      Comprehensive Gain (Loss)
              
              
              237,624
              
              
              
              (4,903,762
              )Deficit
      Accumulated during the
      Exploration     Stage
              
              
              (26,585,756
              )
              
              
              (8,710,088
              )23,701,649
              
              
              
              35,792,288Non
      Controlling Interest Equity (Note 14)
              
              
              369,326
              
              
              
              -Total
      Shareholders’ Equity
              
              
              24,070,975
              
              
              
              35,792,288Total
      Liabilities and Shareholders’ Equity
              
              $
              33,650,570
              
              
              
              37,171,397
 
 (See
accompanying notes to the consolidated financial statements)
  3
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Shareholders’ Equity
 Nine
Months Ended September 30, 2009
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 
 Number
      of
                Common
                Shares
              
              
              Amount
              
              
              Additional
                Paid
      in
                Capital
              
              
              Deficit
                Accumulated
                During
      the
                Exploration
                Stage
              
              
              Accumulated
                Other
                Comprehensive
                Loss
              
              
              Non
                Controlling
                Interest
              
              
              Total
                Shareholders’
                EquityBalance
      at December 31, 2008
              
              
              110,023,998
              
              
              $
              110,024
              
              
              $
              49,296,114
              
              
              $
              (8,710,088
              )
              
              $
              (4,903,762
              )
              
              $
              -
              
              
              $
              35,792,288Contributions
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              416,192
              
              
              
              416,192Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (17,875,668
              )
              
              
              -
              
              
              
              (46,866
              )
              
              
              (17,922,534
              )Foreign
      currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,141,386
              
              
              
              
              
              
              
              5,141,386Comprehensive
      gain (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (17,875,668
              )
              
              
              5,141,386
              
              
              
              (46,866
              )
              
              
              (12,781,148
              )Common
      shares issued
              
              
              383,188
              
              
              
              383
              
              
              
              154,574
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              154,957Stock-based
      Compensation
              
              
              -
              
              
              
              -
              
              
              
              488,686
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              488,686Balance
      at September30,
      2009
              
              
              110,407,186
              
              
              $
              110,407
              
              
              $
              49,939,374
              
              
              $
              (26,585,756
              )
              
              $
              237,624
              
              
              $
              369,326
              
              
              $
              24,070,975
 
 (See
accompanying notes to the consolidated financial statements)
  4
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Operations
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
  CumulativeThree
      Months Ended
              
              
              Three
      Months Ended
              
              
              Nine
      Months Ended
              
              
              Nine
      Months Ended
              
              
              Since
      InceptionSeptember
      30, 2009
              
              
              September30,
      2008
              
              
              September
      30, 2009
              
              
              September30,
      2008
              
              
              Apr.
      7, 2004 to(Restated
      – Note 2)
              
              
              
              
              
              (Restated
      – Note 2)
              
              
              September
      30, 2009INCOME
      DURING THE EVALUATION PERIOD
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              46
              
              
              $
              28,424EXPENSESOperating
              
              
              4,621
              
              
              
              3,590
              
              
              
              6,793
              
              
              
              8,863
              
              
              
              50,554General
      and Administrative
              
              
              658,871
              
              
              
              550,822
              
              
              
              1,506,760
              
              
              
              1,620,905
              
              
              
              7,586,350Stock-based
      Investor Relations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              337,500Depletion,
      Depreciation and Accretion Including Ceiling Test Impairment
      Write-downs
              
              
              363,156
              
              
              
              16,441
              
              
              
              16,405,480
              
              
              
              41,718
              
              
              
              19,055,674Interest
              
              
              -
              
              
              
              -
              
              
              
              304
              
              
              
              1,257
              
              
              
              904,6151,026,648
              
              
              
              570,853
              
              
              
              17,921,337
              
              
              
              1,672,743
              
              
              
              27,934,693Loss
      Before Other Expenses
              
              
              (1,026,648
              )
              
              
              (570,853
              )
              
              
              (17,921,337
              )
              
              
              (1,672,697
              )
              
              
              (27,906,269
              )Other
      Expenses (Income)Loss
      from valuation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (25,000
              )Loss
      on disposition of assets
              
              
              -
              
              
              
              -
              
              
              
              (2,164
              )
              
              
              -
              
              
              
              (6,309
              )Interest Income
              
              
              44
              
              
              
              12,239
              
              
              
              967
              
              
              
              73,739
              
              
              
              179,12144
              
              
              
              (12,239
              )
              
              
              (1,197
              )
              
              
              (73,749
              )
              
              
              147,812Net
      Loss before taxes
              
              
              (1,026,604
              )
              
              
              (558,614
              )
              
              
              (17,922,534
              )
              
              
              (1,598,958
              )
              
              
              (27,758,457
              )Deferred
      Income Taxes (Recovery)
              
              
              -
              
              
              
              (28,835
              )
              
              
              -
              
              
              
              (978,835
              )
              
              
              (1,125,835
              )Net
      Loss before Non Controlling Interest
              
              
              (1,026,604
              )
              
              
              (587,449
              )
              
              
              (17,922,534
              )
              
              
              (620,123
              )
              
              
              (26,632,622
              )Non
      Controlling Interest
              
              
              31,024
              
              
              
              -
              
              
              
              46,866
              
              
              
              -
              
              
              
              46,866NET LOSS
              
              $
              (995,580
              )
              
              $
              (587,449
              )
              
              $
              (17,875,668
              )
              
              $
              (620,123
              )
              
              $
              (26,585,756
              )
 
 (See
accompanying notes to the consolidated financial statements)
 Loss per
share data (Note 16)
  5
 
 KODIAK
ENERGY, INC.
 Unaudited
Consolidated Statements of Cash Flows
 (Exploration
Stage Company Going Concern Uncertainty – Note 1)
 Three
      MonthsEnded
                  September30,
      2009
                
                
                Three
      Months Ended
                  September
      30, 2008
                  (Restated
      – Note 2)
                
                
                Nine
      Months Ended
                  September30,
      2009
                
                
                Nine
      Months Ended
                  September30,
      2008
                  (Restated
      – Note 2)
                
                
                Cumulative
                  Since
      Inception
                  April
      7, 2004 to
                  September30,
      2009Operating
      Activities:Net Loss
                
                $
                (995,580
                )
                
                $
                (587,449
                )
                
                $
                (17,875,668
                )
                
                
                (620,123
                )
                
                
                (26,585,756
                )Adjustments
      to reconcile net loss to net
      cash used in operating activities:Non
      Controlling Interest
                
                
                (31,024
                )
                
                
                -
                
                
                
                (46,866
                )
                
                
                -
                
                
                
                (46,866
                )Depletion,
      Depreciation and Accretion Including Ceiling Test Impairment
      Write-downs
                
                
                363,156
                
                
                
                16,441
                
                
                
                16,405,480
                
                
                
                41,718
                
                
                
                19,055,674Non-cash
      Interest Expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                808,811Stock-Based
      Investor Relations Expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                337,500Stock-Based
      Compensation
                
                
                193,967
                
                
                
                152,185
                
                
                
                488,686
                
                
                
                507,790
                
                
                
                1,876,015Deferred
      Income Taxes (Recovery)
                
                
                -
                
                
                
                (28,835
                )
                
                
                -
                
                
                
                (978,835
                )
                
                
                (1,125,835
                )Loss
      on disposition of fixed assets
                
                
                -
                
                
                
                -
                
                
                
                2,164
                
                
                
                -
                
                
                
                2,164Bad
      Debts Written Off
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,908Contributions
      to Capital
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                900Non-Cash
      Working Capital Changes (Note 21)
                
                
                (7,060
                )
                
                
                219,897
                
                
                
                196,015
                
                
                
                836,234
                
                
                
                438,729Net
      Cash Used In Operating Activities
                
                
                (476,541
                )
                
                
                (170,091
                )
                
                
                (830,189
                )
                
                
                (213,216
                )
                
                
                (5,226,756
                )Investment
      Activities:Additions
      To Capital Assets
                
                
                (1,190,292
                )
                
                
                (420,613
                )
                
                
                (1,584,478
                )
                
                
                (11,277,874
                )
                
                
                (22,476,169
                )Dispositions
      (Additions) Of Other Assets
                
                
                14,999
                
                
                
                13,878
                
                
                
                706
                
                
                
                26,928
                
                
                
                (290,197
                )Net
      Cash Used In Investment Activities
                
                
                (1,175,293
                )
                
                
                (406,735
                )
                
                
                (1,583,772
                )
                
                
                (11,250,946
                )
                
                
                (22,766,366
                )Financing
      Activities:Shares
      Issued and Issuable
                
                
                (90,109
                )
                
                
                (78,726
                )
                
                
                (188,757
                )
                
                
                2,695,396
                
                
                
                23,658,555Proceeds
      from Note Payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,300,000Repayment
      of Note Payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (732,500
                )Advances
      Received on Financing
                
                
                557,929
                
                
                
                -
                
                
                
                1,030,819
                
                
                
                -
                
                
                
                1,030,819Loan
      Payable
                
                
                1,260,857
                
                
                
                -
                
                
                
                1,260,857
                
                
                
                -
                
                
                
                1,260,857Non
      Controlling Interest Contribution
                
                
                (147
                )
                
                
                -
                
                
                
                416,192
                
                
                
                -
                
                
                
                416,192Long
      term liabilities
                
                
                3,528
                
                
                
                (1,961
                )
                
                
                5,402
                
                
                
                (66,018
                )
                
                
                44,664Net
      Cash Provided By (Used in) Financing  Activities
                
                
                1,732,058
                
                
                
                (80,687
                )
                
                
                2,524,513
                
                
                
                2,629,378
                
                
                
                28,978,587Foreign
      Currency Translation
                
                
                (137,604
                )
                
                
                25,229
                
                
                
                (179,849
                )
                
                
                (94,041
                )
                
                
                (979,586
                )Net
      Cash Increase (Decrease)
                
                
                446
                
                
                
                (682,742
                )
                
                
                (69,297
                )
                
                
                (8,928,825
                )
                
                
                5,878Cash
      beginning of period
                
                
                5,432
                
                
                
                737,599
                
                
                
                75,175
                
                
                
                8,983,682
                
                
                
                -Cash
      end of period
                
                $
                5,878
                
                
                $
                54,857
                
                
                $
                5,878
                
                
                $
                54,857
                
                
                $
                5,878Interest
      Paid
                
                $
                -
                
                
                $
                -
                
                
                $
                304
                
                
                $
                1,257
                
                
                $
                95,340Taxes
      Paid
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Cash
      is comprised of:Balances
      with banks
                
                $
                5,878
                
                
                $
                54,857
                
                
                $
                5,878
                
                
                $
                54,857
                
                
                $
                5,878
  (See
accompanying notes to the consolidated financial
statements)
  6
 
 KODIAK
ENERGY, INC.
 NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 For the
Nine Months Ended September 30, 2009 and 2008
 
 
 1.   ORGANIZATION,
BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY
 
 The
accompanying consolidated financial statements include the accounts of Kodiak
Energy, Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us”
or “our”) as at September 30, 2009  and December 31, 2008 and for the
three and nine month periods ended September 30, 2009 and 2008 and for the
cumulative period from April 7, 2004 (inception) until September 30, 2009, and
are presented in accordance with generally accepted accounting principles in the
United States of America (“U. S. GAAP”).
 
 The
Company was incorporated under the laws of the state of Delaware on December 15,
1999 under the name “Island Critical Care, Corp.” with authorized common stock
of 50,000,000 shares with a par value of $0.001. On December 30, 2004 the name
was changed to “Kodiak Energy, Inc.” and the authorized common stock was
increased to 100,000,000 shares with the same par value. On January 17, 2005 the
Company affected a reverse split of 100 outstanding shares for one share. These
consolidated financial statements have been prepared showing post split shares
from inception. The Company was engaged in the development, manufacture and
distribution of medical instrumentation and became inactive after the bankruptcy
outlined below. During 2006, the Company increased its authorized capital to
300,000,000 common shares and in December, 2008 increased its authorized capital
to include 10,000,000 preferred shares.
 
 Bankruptcy
 
 On
February 5, 2003 the Company filed a petition for bankruptcy in the District of
Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713,
Estate No. 51-104460, titled “Island Critical Care Corp.”. The Company emerged
from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004
with no remaining assets or liabilities and adopted Fresh Start
Accounting.
 
 The terms
of the bankruptcy settlement included the authorization for the issuance of
150,000 post split restricted common shares in exchange for $25,000, which was
paid into the bankruptcy court by the recipient of the shares.
 
 Since the
Company emerged from bankruptcy, it has been an exploration stage company and
its efforts have been principally devoted to the raising of capital,
organizational infrastructure development, the acquisition of oil and gas
properties and the initial stages of exploration to establish reserves for the
purpose of future extraction of resources.
 
 With the
commencement of production from the properties acquired September 30, 2009 and
October, 2009, the Company will no longer be an exploration stage company and
will begin recognizing revenue and results of operations effective October,
2009.
  The
information in these consolidated financial statements should be read in
conjunction with the December 31, 2008 consolidated financial
statements.
  7
 
 Going Concern
Uncertainty
 
 These
consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. From inception to September 30, 2009, the Company has incurred operating
losses and has not generated any positive cash flow. The Company has a current
working capital deficiency and will need additional working capital for future
development and exploration and to enable it to repay its debt. The Company is
currently in the process of arranging certain equity and longer term financing
that will reduce its working capital deficiency and provide additional funding
of near term development programs that are planned to significantly increase
production, revenue and cash flow over the next nine months. It is contemplated
that these transactions will completed before yearend. These conditions raise
doubt about the Company’s ability to continue as a going concern. Continuation
of the Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. If successful, management's plans,
including additional equity and/or debt financing, will address this
uncertainty; however, there are no assurances that any such financing can be
obtained on favorable terms, if at all, or that the Company will generate
positive cash flow. These financial statements do not reflect the adjustments or
reclassification of assets and liabilities that would be necessary if the
Company were unable to continue its operations.
 
 2.
RESTATEMENT
 
 In March,
2009, we determined that it was necessary to restate our financial statements as
at December 31, 2007. The purpose of the restatement was to correct an error in
measurement and an error in the application of US GAAP in the course of
recording the following 2007 transactions:
  Issue of common shares of
the Company in consideration for the acquisition of
properties.
 On
September 28, 2007, the Company issued to Thunder River Energy, Inc. (“Thunder”)
7,000,000 common shares of the Company as partial consideration for the
acquisition of properties. The shares issued were recorded at a negotiated price
per share of $2.00 or $14,000,000. In the course of a review by the Securities
and Exchange Commission (“SEC”) of the Company’s Form 10-Q for the Fiscal
Quarter Ended September 30, 2007 and Form 10-K for the Fiscal Year Ended
December 31, 2007, the SEC questioned the measurement date and the $2.00 per
share value at which the transaction was recorded. Following an exchange of
correspondence and discussions between the Company and the SEC during 2008 and
2009 regarding this issue, the Company has determined that the acquisition
should have been recorded at a value per share of $2.50 or $17,500,000, which
represents the fair value of exactly comparable common shares issued at the same
$2.50 price per share as a private placement financing for 2,756,000 common
shares which closed on September 28, 2007, the same date that the Thunder
transaction closed. Management believes that the $2.50 Kodiak share price to be
the most reliable measurement for the fair value of the shares issued and that
September 28, 2007 to be the appropriate measurement date because that was the
date when the parties’ closing conditions were satisfied and Thunder’s (the
counterparty’s) performance was complete. The result of the restatement
adjustment was an increase of $3,500,000 in the recorded acquisition cost and
related issuance of common shares.
  8
  Issue of flow-through common
shares of the Company at a premium.
  On
September 28, 2007, October 3, 2007 and October 30, 2007, the Company issued on
a Canadian flow-through share basis 2,251,670 common shares of the Company at
$3.00 per share or $6,755,010, which amount represented a premium of $.50 per
share or $1,125,835 when compared to other non-flow through shares issued at the
same time at $2.50 per share. At the time of the transactions, the issues of the
flow through common shares were recorded as appropriate credits to par value of
common shares and additional paid in capital. Following recent discussions with
the Company’s tax consultant, the Company has determined that the $1,125,835
premium on flow-through common shares issued should have, in accordance with US
GAAP, been recorded as a liability at the time the shares were issued rather
than as additional paid in capital. A $147,000 portion of the premium liability
discharged during the period October 1, 2007 to December 31, 2007, when
flow-through eligible expenditures amounting to $879,922 were incurred by the
Company, was recognized as a reduction of deferred tax expense.
 
 Effects
of the restatement by line item follow:
 
 Consolidated  December
31, 2007 Balance Sheet
 
 As
      Previously
              
              
              ImpactReported
              
              
              of Errors
              
              
              RestatedCash
      and Short Term Deposits
              
              $
              8,983,682
              
              
              
              -
              
              
              $
              8,983,682Accounts
      Receivable
              
              
              1,214,253
              
              
              
              -
              
              
              
              1,214,253Prepaid
      Expenses and Deposits
              
              
              90,475
              
              
              
              -
              
              
              
              90,475Total
      current assets
              
              
              10,288,410
              
              
              
              -
              
              
              
              10,288,410Other
      Assets
              
              
              359,353
              
              
              
              -
              
              
              
              359,353Unproved
      Oil and Gas Properties
              
              
              23,967,351
              
              
              $
              3,500,000
              
              
              
              27,467,351Furniture
      and Fixtures
              
              
              75,654
              
              
              
              -
              
              
              
              75,654Total
      Property, Plant and Equipment
              
              
              24,043,005
              
              
              
              3,500,000
              
              
              
              27,543,005Total
      Assets
              
              $
              34,690,768
              
              
              $
              3,500,000
              
              
              $
              38,190,768Accounts
      Payable
              
              $
              1,547,273
              
              
              
              -
              
              
              $
              1,547,273Accrued
      Liabilities
              
              
              755,282
              
              
              
              -
              
              
              
              755,282Premium
      on Flow-throughShares
      Issued
              
              
              -
              
              
              
              978,835
              
              
              
              978,835Total
      current liabilities
              
              
              2,302,555
              
              
              
              978,835
              
              
              
              3,281,390Long
      Term Liabilities
              
              
              110,955
              
              
              
              -
              
              
              
              110,955Asset
      Retirement Obligations
              
              
              151,814
              
              
              
              -
              
              
              
              151,814Deferred
      Income Taxes
              
              
              57,000
              
              
              
              (57,000
              )
              
              
              -Share
      Capital
              
              
              106,692
              
              
              
              -
              
              
              
              106,692Additional
      Paid in Capital
              
              
              39,143,392
              
              
              
              2,374,165
              
              
              
              41,517,557Other
      Comprehensive Loss
              
              
              (342,201
              )
              
              
              -
              
              
              
              (342,201
              )Deficit
      Accumulated during theExploration
      Stage
              
              
              (6,839,439
              )
              
              
              204,000
              
              
              
              (6,635,439
              )Total
      Shareholders’ Equity
              
              
              32,068,444
              
              
              
              2,578,165
              
              
              
              34,646,609Total
      Liabilities and Shareholders’ Equity
              
              $
              34,690,768
              
              
              $
              3,500,000
              
              
              $
              38,190,768
  9
  Consolidated Statement of
Operations – Year Ended December 31, 2007
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedIncome
      During the Evaluation Period
              
              $
              225
              
              
              $
              -
              
              
              $
              225Expenses:Operating
              
              
              20,543
              
              
              
              -
              
              
              
              20,543General
      and Administrative
              
              
              2,470,230
              
              
              
              -
              
              
              
              2,470,230Stock-based
      Investor Relations
              
              
              -
              
              
              
              
              
              
              
              -Depletion,
      Depreciation and Accretionincluding Ceiling Test ImpairmentWritedowns
              
              
              218,841
              
              
              
              -
              
              
              
              218,841Interest
              
              
              94,083
              
              
              
              -
              
              
              
              94,0832,803,697
              
              
              
              -
              
              
              
              2,803,697Loss
      Before Other Income
              
              
              2,803,472
              
              
              
              -
              
              
              
              2,803,472Interest
      Income
              
              
              (84,809
              )
              
              
              -
              
              
              
              (84,809
              )Loss
      before Income Taxes
              
              
              (2,718,663
              )
              
              
              -
              
              
              
              (2,718,663
              )Provision
      (Recovery) of Deferred Taxes
              
              
              57,000
              
              
              
              (204,000
              )
              
              
              (147,000
              )Net
      Loss
              
              $
              (2,775,663
              )
              
              $
              (204,000
              )
              
              $
              (2,571,663
              )Basic
      and Diluted Loss per Share
              
              $
              (0.03
              )
              
              
              -
              
              
              $
              (0.03
              )
 
 
 Consolidated Statement of
Shareholders' Equity Period April 7, 2004 (Date of Inception) to December 31,
2007
  
 Par
                Value
              
              
              Additional
                Paid
      in
                Capital
              
              
              Deficit
                Accumulated
                during
      the
                Development
                Stage
              
              
              Accumulated
                Other
                Comprehensive
                Loss
              
              
              Total
                Shareholders'
                EquityBalance
      December 31, 2007 as Previously Reported
              
              
              106,692
              
              
              $
              39,143,392
              
              
              $
              (6,839,439
              )
              
              $
              (342,201
              )
              
              $
              32,068,444Impact
      of Errors
              
              
              -
              
              
              
              2,374,165
              
              
              
              204,000
              
              
              
              -
              
              
              
              2,578,165Balance
      December 31, 2007 as Restated
              
              
              106,692
              
              
              $
              41,517,560
              
              
              $
              (6,635,439
              )
              
              $
              (342,201
              )
              
              $
              34,646,609
  10
 
 Consolidated Statement of
Cash Flow – Year Ended December 31, 2007
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedOperating
      ActivitiesNet
      Loss
              
              $
              (2,775,663
              )
              
              $
              204,000
              
              
              $
              (2,571,663
              )Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Write-downs
              
              
              218,841
              
              
              
              -
              
              
              
              218,841Stock-Based
      Compensation
              
              
              643,994
              
              
              
              -
              
              
              
              643,994Provision
      for Deferred Income Taxes
              
              
              57,000
              
              
              
              (204,000
              )
              
              
              (147,000
              )Bad
      Debts Written Off
              
              
              11,908
              
              
              
              -
              
              
              
              -Non-Cash
      Working Capital Changes
              
              
              (660,101
              )
              
              
              -
              
              
              
              (660,101
              )Net
      Cash Used in Operating Activities
              
              
              (2,504,081
              )
              
              
              -
              
              
              
              (2,504,081
              )Investing
      ActivitiesAdditions
      to Capital Assets
              
              
              (7,508,553
              )
              
              
              -
              
              
              
              (7,508,553
              )Additions
      to Other Assets
              
              
              (309,493
              )
              
              
              -
              
              
              
              (309,493
              )Cash
      Used in Investing Activities
              
              
              (7,818,046
              )
              
              
              -
              
              
              
              (7,818,046
              )Financing
      ActivitiesShares
      Issued and Issuable
              
              
              19,068,495
              
              
              
              -
              
              
              
              19,068,495Long
      Term Liabilities
              
              
              110,955
              
              
              
              -
              
              
              
              110,955Cash
      Provided by Financing Activities
              
              
              19,179,450
              
              
              
              -
              
              
              
              19,179,450Foreign
      Currency Translation
              
              
              (321,987
              )
              
              
              
              
              
              
              (321,987
              )Net
      Cash Increase
              
              
              8,535,336
              
              
              
              
              
              
              
              8,535,336Cash
      Beginning of Year
              
              
              448,346
              
              
              
              
              
              
              
              448,346Cash
      End of Year
              
              $
              8,983,
      682
              
              
              $
              -
              
              
              $
              8,983,682
  11
 
 Following
are the effects by line item that the 2007 restatement had on the September 30,
2008 Balance Sheet and results of operations and cash flow for the Three and
Nine Months Ended September 30, 2008:
 
 Consolidated  September
30, 2008 Balance Sheet
 
 As
      Previously
              
              
              ImpactReported
              
              
              of Errors
              
              
              RestatedCash
      and Short Term Deposits
              
              $
              54,857
              
              
              
              -
              
              
              $
              54,857Accounts
      Receivable
              
              
              1,010,428 -
              
              
              
              1,010,428Prepaid
      Expenses and Deposits
              
              
              91,897
              
              
              
              -
              
              
              
              91,897Total
      current assets
              
              
              1,157,182
              
              
              
              -
              
              
              
              1,157,182Other
      Assets
              
              
              332,425
              
              
              
              -
              
              
              
              332,425Unproved
      Oil and Gas Properties
              
              
              38,267,882
              
              
              $
              3,500,000
              
              
              
              41,767,882Furniture
      and Fixtures
              
              
              80,392
              
              
              
              -
              
              
              
              80,392Total
      Property, Plant and Equipment
              
              
              38,348,274
              
              
              
              3,500,000
              
              
              
              41,848,274Total
      Assets
              
              $
              39,837,881
              
              
              $
              3,500,000
              
              
              $
              43,337,881Accounts
      Payable
              
              $
              1,391,054
              
              
              
              -
              
              
              $
              1,391,054Accrued
      Liabilities
              
              
              142,027
              
              
              
              -
              
              
              
              142,027Total
      current liabilities
              
              
              1,533,081
              
              
              
              -
              
              
              
              1,533,081Long
      Term Liabilities
              
              
              44,397
              
              
              
              -
              
              
              
              44,397Asset
      Retirement Obligations
              
              
              210,764
              
              
              
              -
              
              
              
              210,764Deferred
      Income Taxes
              
              
              52,000
              
              
              $
              (52,000
              )
              
              
              -1,840,782
              
              
              
              (52,000
              )
              
              
              1,788,782Share
      Capital
              
              
              110,024
              
              
              
              -
              
              
              
              110,024Additional
      Paid in Capital
              
              
              46,756,714
              
              
              
              2,374,165
              
              
              
              49,130,879Other
      Comprehensive Loss
              
              
              (436,242
              )
              
              
              -
              
              
              
              (436,242
              )Deficit
      Accumulated during theExploration Stage
              
              
              (8,433,397
              )
              
              
              1,177,835
              
              
              
              (7,255,562
              )Total
      Shareholders’ Equity
              
              
              37,997,099
              
              
              
              3,552,000
              
              
              
              41,549,099Total
      Liabilities and Shareholders’ Equity
              
              $
              39,837,881
              
              
              $
              3,500,000
              
              
              $
              43,337,881
  12
 
 Consolidated Statement of
Shareholders' Equity Period April 7, 2004 (Date of Inception) to September 30,
2008
  
 Par

                Value
              
              
              Additional

                Paid
      in
                Capital
              
              
              DeficitAccumulated
                during
      the
                Development
                Stage
              
              
              Accumulated
                Other
                Comprehensive
                Loss
              
              
              Total

                Shareholders'
                EquityBalance
      September 30, 2008 as Previously Reported
              
              
              110,024
              
              
              $
              46,756,714
              
              
              $
              (8,433,397
              )
              
              $
              (436,242
              )
              
              $
              37,997,099Impact
      of Errors
              
              
              -
              
              
              
              2,374,165
              
              
              
              1,177,835
              
              
              
              -
              
              
              
              3,552,000Balance
      June 30, 2008 as Restated
              
              
              110,024
              
              
              $
              49,130,879
              
              
              $
              (7,255,562
              )
              
              $
              (436,242
              )
              
              $
              41,549,099
 
 Consolidated Statement of
Operations – Three Months Ended September 30, 2008
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedIncome
      During the Evaluation Period
              
              
              -
              
              
              
              -
              
              
              
              -Expenses:Operating
              
              $
              3,590
              
              
              
              -
              
              
              $
              3,590General
      and Administrative
              
              
              550,822
              
              
              
              -
              
              
              
              550,822Depletion,
      Depreciation and Accretion
              
              
              16,441
              
              
              
              -
              
              
              
              16,441Interest
              
              
              -
              
              
              
              -
              
              
              
              -570,853
              
              
              
              -
              
              
              
              570,853Loss
      Before Other Income
              
              
              (570,853
              )
              
              
              -
              
              
              
              (570,853
              )Interest
      Income
              
              
              (12,239
              )
              
              
              -
              
              
              
              (12,239
              )Loss
      before Taxes
              
              
              (558,614
              )
              
              
              -
              
              
              
              (558,614
              )Recovery
      of Deferred Taxes
              
              
              -
              
              
              $
              (28,835
              )
              
              
              (28,835
              )Net
      Income (Loss)
              
              $
              (558,614
              )
              
              $
              (28,835
              )
              
              $
              (587,449
              )Basic
      & Diluted Loss per Share
              
              $
              (0.01
              )
              
              $
              -
              
              
              $
              (0.01
              )
  13
  Consolidated Statement of
Cash Flow – Three Months Ended September 30, 2008
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedOperating
      ActivitiesNet
      Loss
              
              $
              (558,614
              )
              
              $
              (28,835
              )
              
              $
              (587,449
              )Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Write-downs
              
              
              16,441
              
              
              
              -
              
              
              
              16,441Stock-Based
      Compensation
              
              
              152,185
              
              
              
              -
              
              
              
              152,185Deferred
      Income Tax Recovery
              
              
              -
              
              
              
              28,835
              
              
              
              28,835Non-Cash
      Working Capital Changes
              
              
              219,897
              
              
              
              -
              
              
              
              219,897Net
      Cash Used in Operating Activities
              
              
              (170,091
              )
              
              
              -
              
              
              
              (170,091
              )Investing
      ActivitiesAdditions
      to Capital Assets
              
              
              (420,613
              )
              
              
              -
              
              
              
              (420,613
              )(Increase)
      Decrease in Other Assets
              
              
              13,878
              
              
              
              -
              
              
              
              13,878Cash
      Used in Investing Activities
              
              
              (406,735
              )
              
              
              -
              
              
              
              (406,735
              )Financing
      ActivitiesShares
      Issued and Issuable
              
              
              (78,726
              )
              
              
              -
              
              
              
              (78,726
              )Long
      Term Liabilities
              
              
              (1,961
              )
              
              
              -
              
              
              
              (1,961
              )Cash
      Provided by Financing Activities
              
              
              (80,687
              )
              
              
              -
              
              
              
              (80,687
              )Foreign
      Currency Translation
              
              
              25,229
              
              
              
              -
              
              
              
              25,229Net
      Cash Increase
              
              
              (682,742
              )
              
              
              -
              
              
              
              (682,742
              )Cash
      Beginning of Period
              
              
              737,599
              
              
              
              -
              
              
              
              737,599Cash
      End of Period
              
              $
              54,857
              
              
              $
              -
              
              
              $
              54,857
 
 Consolidated Statement of
Operations – Nine Months Ended September 30, 2008
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedIncome
      During the Evaluation Period
              
              $
              46
              
              
              
              -
              
              
              $
              46Expenses:Operating
              
              
              8,863
              
              
              
              -
              
              
              
              8,863General
      and Administrative
              
              
              1,620,905
              
              
              
              -
              
              
              
              1,620,905Depletion,
      Depreciation and Accretion
              
              
              41,718
              
              
              
              -
              
              
              
              41,718Interest
              
              
              1,257
              
              
              
              -
              
              
              
              1,2571,672,743
              
              
              
              -
              
              
              
              1,672,743Loss
      Before Other Income
              
              
              (1,672,697
              )
              
              
              -
              
              
              
              (1,672,697
              )Interest
      Income
              
              
              73,739
              
              
              
              -
              
              
              
              (73,739
              )Loss
      before Taxes
              
              
              (1,598,958
              )
              
              
              -
              
              
              
              (1,598,958
              )Recovery
      of Deferred Taxes
              
              
              (5,000
              )
              
              $
              (973,835
              )
              
              
              (978,835
              )Net
      Income (Loss)
              
              $
              (1,593,958
              )
              
              $
              (973,835
              )
              
              $
              (620,123
              )Basic
      & Diluted Loss per Share
              
              $
              (0.01
              )
              
              $
              -
              
              
              $
              (0.00
              )
  14
 
 Consolidated Statement of
Cash Flow – Nine Months Ended September 30, 2008
 
 As
      Previously
                Reported
              
              
              Impact
                of
      Errors
              
              
              As
      RestatedOperating
      ActivitiesNet
      Loss
              
              $
              (1,593,958
              )
              
              $
              973,835
              
              
              $
              (620,123
              )Depletion,
      Depreciation and Accretion including Ceiling Test Impairment
      Write-downs
              
              
              41,718
              
              
              
              -
              
              
              
              41,718Stock-Based
      Compensation
              
              
              507,790
              
              
              
              -
              
              
              
              507,790Deferred
      Income Tax Recovery
              
              
              (5,000
              )
              
              
              (973,835
              )
              
              
              (978,835
              )Non-Cash
      Working Capital Changes
              
              
              836,234
              
              
              
              -
              
              
              
              836,234Net
      Cash Used in Operating Activities
              
              
              (213,216
              )
              
              
              -
              
              
              
              (213,216
              )Investing
      ActivitiesAdditions
      to Capital Assets
              
              
              (11,277,874
              )
              
              
              -
              
              
              
              (11,277,874
              )Decrease
      in Other Assets
              
              
              26,928
              
              
              
              -
              
              
              
              26,928Cash
      Used in Investing Activities
              
              
              (11,250,946
              )
              
              
              -
              
              
              
              (11,250,946
              )Financing
      ActivitiesShares
      Issued and Issuable
              
              
              2,695,396
              
              
              
              -
              
              
              
              2,695,396Long
      Term Liabilities
              
              
              (66,018
              )
              
              
              -
              
              
              
              (66,018
              )Cash
      Provided by Financing Activities
              
              
              2,629,378
              
              
              
              -
              
              
              
              2,629,378Foreign
      Currency Translation
              
              
              (94,041
              )
              
              
              
              
              
              
              (94,041
              )Net
      Cash Increase
              
              
              (8,928,825
              )
              
              
              
              
              
              
              (8,928,825
              )Cash
      Beginning of Period
              
              
              8,983,682
              
              
              
              
              
              
              
              8,983,682Cash
      End of Period
              
              $
              54,857
              
              
              $
              -
              
              
              $
              54,857
  15
 
 3.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Kodiak Petroleum ULC, Kodiak Petroleum (Montana),
Inc., Kodiak Petroleum (Utah), Inc. and its 93.6% owned subsidiary Cougar
Energy, Inc. (formerly 1438821 Alberta Ltd.). In British Columbia, Canada, the
Company operates under the assumed name of Kodiak Bear Energy, Inc. All
intercompany accounts and transactions have been eliminated.
 
 Use of Estimates in the
Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with US GAAP requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on the knowledge of current events and actions the Company
may undertake in the future, they may ultimately differ from actual results.
Included in these estimates are assumptions about allowances for valuation of
deferred tax assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as management’s impairment assessment on its oil and gas
properties and other long lived assets are based on estimates and by their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in these estimates, in future periods, could
be significant. These estimates and assumptions are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the periods in
which they become known. The current economic environment has increased the
degree of uncertainty in these estimates and assumptions.
 
 Joint Venture
Operations
 
 In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.
 
 Cash and Short Term
Deposits
 
 Cash and
short term deposits consists of balances with financial institutions and
investments in money market instruments, which have terms to maturity of three
months or less at time of purchase.
  16
 
 Oil and Gas
Properties
 
 Under the
full cost method of accounting for oil and gas operations, all costs associated
with the exploration for and development of oil and gas reserves are capitalized
on a country-by-country basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells,
production equipment and overhead charges directly related to acquisition,
exploration and development activities. Proceeds from the sale of oil and gas
properties are applied against capitalized costs with no gain or loss
recognized, unless such a sale would significantly alter the rate of depletion
and depreciation in a particular country, in which case a gain or loss on
disposal is recorded.
 
 Capitalized
costs within each country are depleted and depreciated on the unit-of-production
method based on the estimated gross proved reserves as determined by independent
petroleum engineers. Oil and gas reserves and production are converted into
equivalent units on the basis of 6,000 cubic feet of natural gas to one barrel
of oil. Depletion and depreciation is calculated using the capitalized costs,
including estimated asset retirement costs, plus the estimated future costs to
be incurred in developing proved reserves, net of estimated salvage
value.
 
 An
impairment loss is recognized in net earnings if the carrying amount of a cost
center exceeds the “cost center ceiling”. The carrying amount of the cost center
includes the capitalized costs of proved oil and natural gas properties, net of
accumulated depletion and deferred income taxes. The cost center ceiling is the
present value of the estimated future net cash flows from proved oil and natural
gas reserves discounted at ten percent (net of related tax effects) plus the
lower of cost or fair value of unproved properties included in the costs being
amortized (and/or the costs of unproved properties that have been subject to a
separate impairment test and contain no probable reserves).
 
 Costs of
acquiring and evaluating unproved properties and major development projects are
initially excluded from the depletion and depreciation calculation until it is
determined whether or not proved reserves can be assigned to such properties.
Costs of unproved properties and major development projects are transferred to
depletable costs based on the percentage of reserves assigned to each project
over the expected total reserves when the project was initiated. These costs are
assessed periodically using a separate test to ascertain whether impairment has
occurred.
 
 Property and
Equipment
 
 Property
and equipment is recorded at cost. Depreciation of assets is provided by use of
a declining balance method over the estimated useful lives of the related
assets. Expenditures for replacements, renewals, and betterments are
capitalized. Maintenance and repairs are charged to operations as
incurred.
  17
  Asset Retirement
Obligations
 
 The
Company recognizes a liability for asset retirement obligations in the period in
which they are incurred and in which a reasonable estimate of such costs can be
made. Asset retirement obligations include those legal obligations where the
Company will be required to retire tangible long-lived assets such as producing
well sites. The asset retirement obligation is measured at fair value and
recorded as a liability and capitalized as part of the cost of the related
long-lived asset as an asset retirement cost. The asset retirement obligation
accretes until the time the asset retirement obligation is expected to settle
while the asset retirement costs included in oil and gas properties are
amortized using the unit-of-production method.
 
 Amortization
of asset retirement costs and accretion of the asset retirement obligation are
included in depletion, depreciation and accretion. Actual asset retirement costs
are recorded against the obligation when incurred. Any difference between the
recorded asset retirement obligations and the actual retirement costs incurred
is recorded in depletion, depreciation and accretion.
 
 Environmental
 
 Oil and
gas activities are subject to extensive federal, provincial, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.
 
 Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated. To date, the Company has not recognized any environmental obligations
as production has been insignificant and we have not actively produced since
October 2006.
 
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 740 "Income
Taxes". Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.
  18
 
 Per FASB
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”,
under the asset and liability method, it is the Company’s policy to provide for
uncertain tax positions and the related interest and penalties based upon
management’s assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. At September 30, 2009, the
Company believes it has appropriately accounted for any unrecognized tax
benefits. To the extent the Company prevails in matters for which a liability
for an unrecognized benefit is established or is required to pay amounts in
excess of the liability, the Company’s effective tax rate in a given financial
statement period may be affected. Interest and penalties associated with the
Company’s tax positions are recorded as Interest Expense.
 
 Flow-through
Shares
 
 The
Company finances a portion of its Canadian exploration programs with
flow-through common shares issued pursuant to certain provisions of the Income
Tax Act (Canada) (the “Act”). Under the Act, where the proceeds are used for
eligible expenditures, the related income tax deductions may be renounced to
subscribers. Accordingly, the tax credits associated with the renunciation of
such expenditures are recorded as an increase to deferred income tax
liabilities. Any premium received from subscribers on the sale of such
flow-through common shares is recorded initially as a current liability and then
discharged and recognized as a reduction of deferred income taxes when the
flow-through eligible expenditures relating to the flow-through premium are
incurred by the Company.
 
 Stock-Based
Compensation
 
 The
Company records compensation expense in the consolidated financial statements
for share based payments using the fair value method pursuant to FASB ASC 718
"Stock Compensation". The fair value of share-based compensation to employees
and other personnel will be determined using an option pricing model at the time
of grant. Fair value for common shares issued for goods or services rendered by
non-employees are measured based on the fair value of the goods or services
received. Stock-based compensation expense is included in general and
administrative expense with a corresponding increase to Additional Paid in
Capital. Upon the exercise of the stock options, consideration paid together
with the previously recognized Additional Paid in Capital is recorded as an
increase in share capital.
 
 Foreign Currency
Translation
 
 The
functional currency for the Company’s foreign operations is the Canadian dollar.
The translation from the applicable foreign currencies to U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date, while income, expenses and cash flows are translated at
the average exchange rates for the period. The resulting translation adjustments
are recorded as a component of other comprehensive income. Gains or losses
resulting from foreign currency transactions are included in other
income/expenses.
  19
 
 Revenue
Recognition
 
 Revenues
from the sale of petroleum and natural gas are recorded when deliverability
occurs and title passes from the Company to its petroleum and/or natural gas
purchaser under documented business arrangements at fixed or determinable prices
and collectability is reasonably assured. The Company acquired proved reserves
as of September 30, 2009 and will begin recognizing revenues from those
properties as at October 1, 2009.
 
 Loss Per Common
Share
 
 Basic
loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted loss per common
share is computed after giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental shares issuable upon exercise of stock options and
warrants, contingent stock, conversion of debentures and preferred stock
outstanding. The dilutive effect of potential common shares is not considered in
the EPS calculations for these periods if the impact would have been
anti-dilutive.
 
 
 4.  RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (SFAS 160). This
statement requires the recognition of a  noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. Changes in a parent’s ownership interest that result in
deconsolidation of a subsidiary will result in the
 recognition
of a gain or loss in net income when the subsidiary is deconsolidated. SFAS 160
also includes expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interests. For the Company, SFAS No. 160 was
effective January 1, 2009. The Company has adopted the presentation and
disclosure requirements as recommended.
 
 In
September 2008, the EITF reached a consensus for exposure on Issue No. 08-6,
“Equity Method Investment Accounting Considerations”. This issue addresses the
accounting for equity method investments as a result of the accounting changes
prescribed by SFAS 141(R) and SFAS 160. The issue includes clarification on the
following: (a) transaction costs should be included in the initial carrying
value of the equity method investment, (b) an impairment assessment of an
underlying indefinite-life intangible asset of an equity method investment need
only be performed as part of any other-than-temporary impairment evaluation of
the equity method investment as a whole and does not need to be performed
annually, (c) the equity method investee’s issuance of shares should be
accounted for as the sale of a proportionate share of the investment, which may
result in a gain or loss in income, and (d) a gain or loss should not be
recognized when changing the method of accounting for an investment from the
equity method to the cost method. For the Company, this issue was effective
January 1, 2009. The impact of this issue did not have a material effect on our
consolidated financial statements.
  20
 
 In May
2009, the FASB issued SFAS 165, Subsequent Events. This
standard establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before financial statements
are issued or available to be issued. Specifically, this standard codifies in
authoritative GAAP standards the subsequent event guidance that was previously
located in auditing standards. SFAS 165 is effective for fiscal years and
interim periods ended after June 15, 2009 and is applied prospectively. We have
adopted SFAS 165 in the fiscal quarter ending June 30, 2009. The adoption of
SFAS 165 did not have a material impact on our financial position, results of
operation or cash flows.
 
 The
following new accounting standards have been issued, but have not yet been
adopted by the Company:
 
 On
December 31, 2008, the SEC adopted a final rule that amends its oil and gas
reporting requirements. The revised rules change the way oil and gas companies
report their reserves in the financial statements. The rules are intended to
reflect changes in the oil and gas industry since the original disclosures were
adopted in 1978. Definitions were updated to be consistent with Petroleum
Resource Management System (PRMS). Other key revisions include a change in
pricing used to prepare reserve estimates, the inclusion of non-traditional
resources in reserves, the allowance for use of new technologies in determining
reserves, optional disclosure of probable and possible reserves and significant
new disclosures. The revised rules will be effective for our annual report on
Form 10-K for the fiscal year ending December 31, 2009. The SEC is precluding
application of the new rules in quarterly reports prior to the first annual
report in which the revised disclosures are required and early adoption is not
permitted. We are currently evaluating the effect the new rules will have on our
financial reporting and anticipate that the following rule changes could have a
significant impact on our results of operations as follows:
 
 •The price used in
calculating reserves will change from a single-day closing price measured on the
last day of the Company’s fiscal year to a 12-month average price, and will
affect our ceiling test calculations.
 
 •Several reserve definitions
have changed that could revise the types of reserves that will be included in
our year-end reserve report.
 
 •Many of our financial
reporting disclosures could change as a result of the new
rules.
  21
 
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (“SFAS No. 168”), to establish the codification as the
source of authoritative accounting principles in the preparation of financial
statements in conformity with GAAP. All guidance contained in the codification
carries an equal level of authority. SFAS No. 168 is effective for financial
statements issued for interim and annual periods ending after September 15, 2009
and will not have an effect on the Company’s consolidated financial
statements.
 
 In June
2009, the FASB issued SFAS 167, Amendments to FASB Interpretation
No. 46(R). This standard changes the consolidation analysis for variable
interest entities. SFAS 167 is effective for fiscal years ending after November
15, 2009. We are currently assessing the impact, if any, that the adoption of
SFAS 167 will have on our financial position, results of operations or cash
flows.
 
 
 5.  ACCOUNTS
RECEIVABLE
 
 Accounts
receivable consist of the following:
 September
              
              
              December30,
      2009
              
              
              31,
      2008Non-operating
      partner joint venture accounts
              
              $
              4,113
              
              
              $
              1,193Government
      of Canada Goods and Services Tax Claims
              
              
              55,052
              
              
              
              16,733Administrative
      Recoveries Receivable
              
              
              79,870
              
              
              
              46,399Amount
      due from Ionic Capital Corp. (Notes 8 and 22)
              
              
              269,821
              
              
              
              -$
              408,856
              
              
              $
              64,325
 
 
 6.  OTHER
ASSETS
 
 Other
assets represent long term deposits required by regulatory authorities for
environmental obligations relating to well abandonment and site restoration
activities.
 
 September
              
              
              December30,
      2009
              
              
              
              31,
      2008Alberta
      Energy and Utility Board Drilling Deposit
              
              $
              42,893
              
              
              $
              73,507British
      Columbia Oil and Gas Commission Deposit
              
              
              247,304
              
              
              
              217,396$
              290,197
              
              
              $
              290,903
 
  22
 
 7.  CAPITAL
ASSETS
  Cost
              
              
              Accumulated
                Depreciation
                and
      Depletion
              
              
              Net
      Book Value
                September
      30, 2009Oil
      and Gas Properties:Canada
              
              $
              38,853,964
              
              
              $
              17,381,713
              
              
              $
              21,472,251United
      States
              
              
              11,772,274
              
              
              
              498,867
              
              
              
              11,273,407Sub-total
              
              
              50,626,238
              
              
              
              17,880,580
              
              
              
              32,745,658Furniture
      and Fixtures
              
              
              164,409
              
              
              
              95,938
              
              
              
              68,471Total
              
              $
              50,790,647
              
              
              $
              17,976,518
              
              
              $
              32,814,129Cost
              
              
              Accumulated
                Depreciation
                and
      Depletion
              
              
              Net
      Book Value
                December
      31, 2008Oil
      and gas Properties:Canada
              
              $
              27,244,206
              
              
              $
              1,935,428
              
              
              $
              25,308,778United
      States
              
              
              11,749,456
              
              
              
              498,867
              
              
              
              11,250,589Sub-total
              
              
              38,993,662
              
              
              
              2,434,295
              
              
              
              36,559,367Furniture
      and Fixtures
              
              
              148,025
              
              
              
              72,460
              
              
              
              75,565Total
              
              $
              39,141,687
              
              
              $
              2,506,755
              
              
              $
              36,634,932
 
 During
the nine months ended September 30, 2009, the Company has capitalized $144,841
(September 30, 2008 - $ 267,030) of general and administrative personnel costs
attributable to acquisition, exploration and development
activities.
 
 Property
Acquisition
 
 On
September 30, 2009, Cougar acquired from an unrelated private company certain
wells, facilities and producing operations in and adjacent to the CREEnergy
Project in Alberta, Canada. The purchase price of the acquisition was $5,604,000
of which $934,000 was paid at closing. The non-interest bearing balance of
$4,670,000 is payable in accordance with the terms set out in Note 11 Long-term
Liabilities.
 
 The cost
of the acquisition is comprised of the following:
 
 Land
      and producing properties
              
              $
              4,483,200Geophysical
      seismic data
              
              
              233,500Tangible
      Facilities
              
              
              887,3005,604,000Asset
      retirement obligations acquired
              
              
              798,077$
              4,805,923
  23
  Full Cost Accounting Ceiling
Test on Canadian Proved Oil and Gas Properties
 
 At
September 30, 2009, a ceiling test was performed on the company's newly acquired
Canadian cost center properties subject to depletion in which the net present
value of future cash flows from the properties discounted at 10% and using
period end pricing was compared to the carrying cost of the properties. Costs of
unproved properties aggregating $14,492,857 has been excluded from costs subject
to depletion. This test disclosed that the carrying costs of the Company's
depletable Canadian properties exceeded their net present value by $354,286 and
consequently a ceiling test write-down of that amount has been recorded in the
third quarter. This shortfall resulted from the inclusion in the recognized cost
of the acquired properties of $711,290 attributable to a premium paid for the
properties in consideration for the vendor carrying $4,669,842 as non-interest
bearing debt repayable as set out in Note 11.
 
 Unproved
Properties
 
 Included
in oil and gas properties are the following costs related to Canadian and United
States unproved properties, valued at cost, that have been excluded from costs
subject to depletion.
 
 September
              
              
              December30,
      2009
              
              
              31,
      2008CanadaLand
      acquisition and retention
              
              $
              1,351,563
              
              
              $
              16,046,580Geological
      and geophysical costs
              
              
              10,531,403
              
              
              
              10,580,753Exploratory
      drilling
              
              
              2,292,111
              
              
              
              2,906,031Tangible
      equipment and facilities
              
              
              53,970
              
              
              
              219,914Other
              
              
              98,755
              
              
              
              34,784Currency
      revaluation
              
              
              165,055
              
              
              
              (4,479,284
              )$
              14,492,857
              
              
              $
              25,308,778United
      StatesLand
      acquisition and retention
              
              $
              8,168,134
              
              
              $
              8,158,899Geological
      and geophysical costs
              
              
              937,924
              
              
              
              941,836Exploratory
      drilling
              
              
              1,991,841
              
              
              
              1,974,346Tangible
      equipment and facilities
              
              
              95,699
              
              
              
              95,699Other
              
              
              79,809
              
              
              
              79,809$
              11,273,407
              
              
              $
              11,250,589$
              25,766,264
              
              
              $
              36,559,367
 
 In
Canada, a stimulation and horizontal drilling program is planned for our British
Columbia property during the next year. In the United States, an initial seismic
and drilling program has been conducted on our New Mexico property with
additional drilling to follow. These planned activities, when completed, will
enable the Company to evaluate the economic viability of these
properties.
  24
 
 Unproved Properties
Impairment Test
 
 The
Company has performed impairment tests for its unproved properties in its
Canadian and United States geographical cost centers as at September 30,
2009.  No impairment existed in its cost centers as at that date. In
the second quarter of 2009, it was determined that, due to poor current economic
factors regarding exploration and development in that part of Canada, an
allowance for impairment was required for its Canadian cost center with respect
to the Company's Little Chicago EL413 Exploration License in the N.W.T. of
Canada. Consequently an allowance for impairment amounting to $16,035,774 was
recorded in the second quarter of 2009 relating to the Company's cumulative
capitalized land costs for the EL 413.
 
 As at
December 31, 2008, the carrying value of the Company’s unproved properties in
its Canadian and United States cost centers were assessed by management and
costs attributable to certain unproved properties were determined to be
unsupportable. Consequently, impairment write-down as of December 31, 2008 of
$284,391 and $498,867 for the Canadian and U.S cost centers, respectively, were
recorded and included in depletion, depreciation and accretion for
2008.
 
 
 8. LOAN
PAYABLE
 
 On
September 30, 2009, the Company entered into a loan agreement with Ionic Capital
Corp. ("Ionic"), under the terms of which Ionic loaned $1,260,857 to the Company
to enable it to close the property acquisition described in Note 7. As at
September 30, 2009, $991,036 had been received and the remaining $269,821 was
recorded in accounts receivable (See Note 5). The Ionic indebtedness bears
interest at the rate of 12% per annum payable monthly in arrears and is
repayable at any time up to but no later than June 30, 2010. As additional
financing consideration for the loan, the Company agreed to issue common shares
of the Company based on the 10% discount to the closing trading price on
September 27, 2009 that equated to 12% of the principal amount of the financing
or $151,303. The 383,188 common shares of the Company that were issued to
satisfy that obligation were recorded at a value of $187,762 based on the
closing market price of the Company’s common shares on September 30, 2009. ((See
Note 14 (b)).
 
 
 9. NOTE
PAYABLE TO RELATED PARTY
 
 On
November 24, 2008 the Company borrowed Cdn. $37,915 from Sicamous Oil & Gas
Consultants Ltd., a company controlled by William S. Tighe, CEO, President and
COO of the Company, under the terms of a demand note bearing interest at the
Royal Bank of Canada prime rate plus 1% per annum. Following is a summary of
transactions regarding this related party indebtedness:
 
 Advance
      received November, 2008
              
              $
              37,915Currency
      revaluation adjustment December 31, 2008
              
              
              (5,074
              )Balance
      December 31, 2008
              
              
              32,841Repayment
      January, 2009
              
              
              (15,857
              )Advance
      March, 2009
              
              
              2,378Repayment
      June, 2009
              
              
              (19,362
              )Balance
      at September 30, 2009
              
              $
      Nil
 
 25
 
 10.
ADVANCES
 
 On June
17, 2009, the Company announced that Cougar had concluded strategic long term
financing arrangements with a Swiss Private Equity Fund  ("the Fund")
focused on the Energy Sector to develop its CREEnergy Joint Venture and
other properties located in Western Canada. Key components of the Cougar
financing package include:
 
 1.
      Cdn. $1,400,000 in equity financing via a private placement of Cougar
      common shares at a price of $1.21 per common
  share;
 
 2.
      Arrangement by the fund of a non-dilutive $4,670,000 development debt
      financing;
 
 3.
      A $700,000 payment by the fund to Cougar to acquire the heavy oil rights
      on an equal basis with Cougar plus a 10% working interest in the
      conventional oil and gas opportunities when Cougar completes the
      nomination and leasing of the CREEnergy properties.  The Fund will be
      responsible for its share of all exploration and development costs
      following closing.
 
 Negotiations
are still being conducted to finalize these financing arrangements and it is
anticipated that final agreement will be reached during the fourth quarter of
2009. If the proposed financing is fully drawn, Kodiak’s current 93.6% interest
in Cougar will be reduced to approximately 81%.
 
 During
the nine months ended September 30, 2009, the Company received $1,030,819 from
the Fund as advances toward their obligations under these arrangements. (See
Note 22).
  26
 
 11.  LONG
TERM LIABILITIES
 
 The
Company has the following long-term liabilities:
 September
              
              
              December30, 2009
              
              
              
              31, 2008Amount
      due to vendor of acquired properties (See Note 7)Present
      Value of Total Amount Due
              
              $
              3,958,552
              
              
              
              -Amount
      of Discount to be accreted in the future (at 7.5% annually - .0625% per
      month)
              
              
              711,290
              
              
              
              -Total
      Amount Due
              
              $
              4,669,842
              
              
              
              -Current
      portion
              
              
              803,213
              
              
              
              -Long-term
      portion
              
              
              3,866,629
              
              
              
              -Funds
      advanced by partners for their share of a drilling deposit required to be
      lodged by the Company with the British Columbia Oil and Gas Commission
      (See Note 6) as security for future well abandonment and site restoration
      activities
              
              
              44,664
              
              
              
              39,262Total
              
              $
              3,911,293
              
              
              
              39,262
 
 The total
amount due to the vendor of the acquired properties is payable in accordance
with the following schedule:
 
 Due
      January 1, 2010
              
              $
              280,200Due
      in 2010 in 11 monthly instalments
              
              
              719,180Due
      in 2011 in 12 monthly instalments
              
              
              952,680Due
      in 2012 in 12 monthly instalments
              
              
              1,120,800Due
      in 2013 in 12 monthly instalments
              
              
              1,288,920Due
      in 2014 in 2 monthly instalments
              
              
              242,840Due
      March 1, 2014
              
              
              65,222$
              4,669,842
 
 Cougar
has the right to prepay the outstanding indebtedness in full, without penalty,
semi-annually commencing March 31, 2010 at a proportionate discount to the
original purchase price. The indebtedness is secured by a debenture covering a
fixed and floating charge over Cougar's interest in the acquired properties.
Kodiak has guaranteed Cougar's performance under the indebtedness
agreements.
  27
 
 12. ASSET
RETIREMENT OBLIGATIONS
 
 Changes
in the carrying amounts of the asset retirement obligations associated with the
Company’s oil and natural gas properties are as follows:
 
 Asset
      Retirement Obligations, December 31, 2008
              
              $
              199,574Currency
      Translation Adjustment
              
              
              15,527Obligations
      acquired (Note 7)
              
              
              798,077Obligations
      settled
              
              
              (2,372
              )Accretion
              
              
              9,966Asset
      retirement obligations, September 30, 2009
              
              $
              1,020,772
 
 At
September 30, 2009, the estimated total undiscounted amount required to settle
the asset retirement obligations was $ 2,386,969 (December 31, 2008 - $302,273).
These obligations will be settled at the end of the useful lives of the
underlying assets, which currently extends up to 8 years into the future. This
amount has been discounted using a credit adjusted risk-free interest rate of
7.5% and a rate of inflation of 2.5%.
 
 
 13.
DEFERRED INCOME TAXES
 
 At
September 30, 2009, the Company's deferred tax asset attributable to its net
operating loss carry forward is approximately $3,357,000 (December 31, 2008 -
$2,802,000) and will expire if not utilized in the years 2024 to 2029. As
reflected below, this benefit has been fully offset by a valuation allowance
based on management's determination that it is not more likely than not that
some or all of this benefit will be realized.
 
 For the
nine month periods ended September 30, 2009 and 2008 and for the cumulative
period April 7, 2004 (Date of Inception) to September 30, 2009, a reconciliation
of income tax benefit at the U.S. federal statutory rate to income tax benefit
at the Company's effective tax rates is as follows:
 
 2009
              
              
              2008
                (Restated
      – Note 2)
              
              
              CumulativeIncome
      tax benefit at statutory rate
              
              $
              (6,768,000
              )
              
              $
              534,000
              
              
              $
              (2,861,000
              )Permanent
      Differences
              
              
              -
              
              
              
              -
              
              
              
              (414,000
              )State
      tax benefit, net of federal taxes
              
              
              -
              
              
              
              217,000
              
              
              
              60,000Foreign
      taxes, net of federal benefit
              
              
              -
              
              
              
              -
              
              
              
              (2,532,000
              )Revision
      to tax account estimates
              
              
              -
              
              
              
              -
              
              
              
              (177,000
              )Other
              
              
              (5,000
              )
              
              
              -
              
              
              
              (7,000
              )Change
      in valuation allowance
              
              
              6,773,000
              
              
              
              (751,000
              )
              
              
              5,931,000Deferred
      tax asset before the following
              
              
              -
              
              
              
              -
              
              
              
              -Deferred
      tax credit arising from flow-through share premiums
              
              
              -
              
              
              
              (973,835
              )
              
              
              (1,125,835
              )Deferred
      tax benefit at effective rate
              
              $
              -
              
              
              
              (973,835
              )
              
              $
              (1,125,835
              )
  28
 
 Deferred
tax assets (liabilities) at September 30, 2009 and December 31, 2008 are
comprised of the following:
 
 2009
              
              
              2008Deferred
      tax assetsCapital
      assets
              
              $
              3,547,000
              
              
              $
              -Net operating loss carryover
              
              
              3,357,000
              
              
              
              2,802,000Other
              
              
              386,000
              
              
              
              75,000Total deferred tax asset
              
              
              7,290,000
              
              
              
              2,877,000Deferred
      tax liabilitiesExcess of U.S. tax deductions over book amounts written
off
              
              
              -
              
              
              
              345,000Net
      deferred tax asset before valuation allowance
              
              
              7,290,000
              
              
              
              2,532,000Less
      valuation allowance for net deferred tax asset
              
              
              (7,290,000
              )
              
              
              (2,532,000
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -
 
 The
change in the valuation allowance of $4,758,000 is net of $2,015,000 relating to
currency revaluation adjustments that are included in the Comprehensive Loss in
Shareholders' Equity.
 
 Per FASB
Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”,
under the asset and liability method, it is the Company’s policy to provide for
uncertain tax positions and the related interest and penalties based upon
management’s assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. At September 30, 2009, the
Company believes it has appropriately accounted for any unrecognized tax
benefits. To the extent the Company prevails in matters for which a liability
for an unrecognized benefit is established or is required to pay amounts in
excess of the liability, the Company’s effective tax rate in a given financial
statement period may be affected. Interest and penalties associated with the
Company’s tax positions are recorded as Interest Expense.
  29
 
 14.  SHARE
CAPITAL AND ADDITIONAL PAID IN CAPITAL
 
 Authorized:
 September
30, 2009 and December 31, 2008 – 300,000,000 common shares at $0.001 par value
and 10,000,000 preferred shares with no par value.
 
 The
following share capital transactions occurred during the periods:
 
 Issued
              
              Number
              
              
              Par
      Value
              
              
              Additional
      Paid in CapitalBalance
      December 31, 2008
              
              
              110,023,998
              
              
              $
              110,024
              
              
              $
              49,296,114Share
      Issue Costs (a)
              
              
              -
              
              
              
              -
              
              
              
              (32,805
              )Shares
      Issued September 30, 2009 (b)
              
              
              383,188
              
              
              
              383
              
              
              
              187,379Stock-based
      compensation (Note 15)
              
              
              -
              
              
              
              -
              
              
              
              488,686Balance
      September 30, 2009
              
              
              110,407,186
              
              
              $
              110,407
              
              
              $
              49,939,374
 
 (a)
              During
      the nine months ended September 30, 2009, $32,805 in costs were incurred
      in connection with the issue of 575,317 common shares of Cougar pursuant
      to private placement subscriptions for shares.(b)
              As
      additional financing consideration for the loan payable described in Note
      8, the Company agreed to issue common shares of the Company based on the
      10% discount to the closing trading price on September 27, 2009 that
      equated to 12% of the principal amount of the financing or $151,303. The
      383,188 common shares of the Company that were issued to satisfy that
      obligation were recorded at a value of $187,762 based on the closing
      market price of the Company’s common shares on September 30,
      2009.
  The
following common shares were reserved for issuance:
  Exercise
      Price
                ($)
              
              
              Equivalent
                Shares
                Outstanding
              
              
              Weighted
                Average
                Years
      to Expiry
              
              
              Option
                Shares
                VestedStock
      Options (see below)
              
              
              0.28-2.58
              
              
              
              5,960,000
              
              
              
              4.06
              
              
              
              4,864,996Warrants
      (see below)
              
              
              3.50
              
              
              
              2,430,000
              
              
              
              1.19
              
              
              
              -Total Shares Reserved
              
              
              
              
              
              
              8,390,000
              
              
              
              
              
              
              
              -
  30
 
 Stock Option
Plan
 
 The
Company has a stock option plan under which it may grant options to its
directors, officers, employees and consultants for up to a maximum of 10% of its
issued and outstanding common shares at market price at the date of grant for up
to a maximum term of five years. Options are exercisable equally over the first
three years of the term of the option.
 
 A summary
of options granted and outstanding under the plan is as follows:
 Expiry
      Date
              
              Number
      of
                Option
                Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Total
                ValueGranted
      to five directors and one officer Oct. 23, 2006
              Oct.
      23/11
              
              
              1,280,000
              
              
              $
              1.50
              
              
              $
              1,920,000Cancellation
      of one officer’s option
              
              
              
              (280,000
              )
              
              $
              1.50
              
              
              
              (420,000
              )Granted
      to an employee Dec. 1, 2006
              Dec.
      1/11
              
              
              125,000
              
              
              $
              1.28
              
              
              
              160,000Granted
      to an officer Jan. 3, 2007
              Jan.
      3/12
              
              
              280,000
              
              
              $
              1.29
              
              
              
              361,200Granted
      to a consultant Dec. 1, 2007
              Dec.
      1/12
              
              
              100,000
              
              
              $
              2.58
              
              
              
              258,000Granted
      to an employee Mar. 24, 2008
              Mar.
      24/13
              
              
              25,000
              
              
              $
              1.86
              
              
              
              46,500Granted
      to two consultants and two employees Oct. 16, 2008
              
              
              
              100,000
              
              
              $
              0.69
              
              
              
              69,000Granted
      to three directors, two directors/officers, two officers, two employees
      and two consultants June 24, 2009
              Mar
      24/14
              
              
              4,330,000
              
              
              $
              0.28
              
              
              
              1,212,400Balance
      September 30, 2009
              
              
              
              5,960,000
              
              
              $
              0.61
              
              
              $
              3,607,100
 
 Warrants
 
 During
2006, 2007 and 2008, the Company, as part of certain private placement
financings, issued warrants that are exercisable in common shares of the
Company. A summary of such outstanding warrants follows:
  Exercise
                Price
                ($)
              
              
              Expiry
      Date
              
              Equivalent
                Shares
                Outstanding
              
              
              Weighted
                Average
                Years
      to
                ExpiryIssued
      June 30, 2006
              
              
              3.50
              
              
              Jun.
      30/11
              
              
              1,130,000
              
              
              
              1.75Issued
      June 18, 2008
              
              
              3.50
              
              
              Jun.
      18/10
              
              
              1,300,000
              
              
              
              0.70Balance
      September 30, 2009
              
              
              
              
              
              
              
              
              2,430,000
              
              
              
              1.19
 
 During
the nine months ended September 30, 2009, warrants exercisable into 3,693,014
common shares of the Company expired unexercised.
  31
  Non Controlling
Interest
 
 Following
is a summary of the interest of the non controlling shareholders of
Cougar:
 
 Private
      placement investments made by non controlling shareholders of Cougar
      during the nine  months ended  September 30,
      2009
              
              $
              416,192Non
      controlling interest shareholders' share of loss for nine months ended
      September 30, 2009
              
              
              (46,866
              )Due
      to non controlling interests as at September 30, 2009
              
              $
              369,326
 
 Cougar Stock Option
Plan
 
 Cougar
has a stock option plan under which it may grant options to its directors,
officers, employees and consultants for up to a maximum of 10% of its issued and
outstanding common shares at market price at the date of grant for up to a
maximum term of five years. Options are exercisable equally over the first three
years of the term of the option.
 
 A summary
of options granted and outstanding under the plan is as follows:
 Expiry
      Date
              
              Number
      of
                Option
                Shares
              
              
              Weighted
                Average
                Exercise
                Price
      ($Cdn.)
              
              
              Total
                Value
                ($Cdn.)Granted
      to three directors and two officers January 14, 2009
              Jan.
      14/14
              
              
              675,000
              
              
              $
              0.65
              
              
              $
              438,750Granted
      to two consultants
              Jan. 14/14
              
              
              50,000
              
              
              $
              0.65
              
              
              
              32,500Granted
      to one consultant
              Jan.
      14/12
              
              
              25,000
              
              
              $
              0.65
              
              
              
              16,250Balance
      September 30, 2009
              
              
              
              750,000
              
              
              $
              0.65
              
              
              $
              487,500
  32
 
 15.           STOCK-BASED
COMPENSATION
 
 In
accordance with FASB ASC 718, the Company uses the Black-Scholes option pricing
method to determine the fair value of each stock option granted and the amount
is recognized as additional expense in the statement of earnings over the
vesting period of the option. The fair value of each option granted has been
estimated using the following average assumptions:
 2009
              
              2008Risk
      free interest rate
              1.89-2.57%
              
              2.96-3.05%Expected
      holding period
              3
      years
              
              3
      yearsShare
      price volatility
              100%
              
              75%Estimated
      annual common share dividend
              -
              
              -
 
 A summary
of the consolidated unvested value of options granted and outstanding under the
plans is as follows:
 Nine
      Months Ended
                  Sept.
      30,2009
                
                
                Nine
      Months Ended
                  Sep.
      30 2008Value
      of unvested options beginning of the period
                
                $
                574,203
                
                
                $
                1,536,957Value
      of options granted
                
                $
                1,021,980
                
                
                $
                23,750Value
      of options expensed
                
                $
                (488,686
                )
                
                $
                (507,790
                )Value
      of options expired
                
                $
                (44,974
                )
                
                $
                (359,534
                )Value
      of unvested options end of period
                
                $
                1,062,523
                
                
                $
                693,363
 
 
 16.           NET
LOSS PER SHARE
 
 A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows:
 
 Three
      Months Ended
                September 30,
      2009
              
              
              Three
      Months Ended
                September
      30, 2008
                (Restated
      – Note 2)
              
              
              Nine
      Months Ended
                September 30,
      2009
              
              
              Nine
      Months Ended
                September
      30, 2008
                (Restated
      – Note 2)Numerator:Numerator for basic and diluted loss per shareNet
      Loss
              
              $
              (995,580
              )
              
              $
              (587,449
              )
              
              $
              (17,875,668
              )
              
              $
              (620,123
              )Denominator:Denominator
      for basic loss per shareWeighted
      average shares outstanding
              
              
              110,028,163
              
              
              
              109,632,694
              
              
              
              110,025,402
              
              
              
              107,734,253In
      the money stock options
              
              
              2,122,365
              
              
              
              213,851
              
              
              
              533,283
              
              
              
              523,472In
      the money warrants
              
              
              -
              
              
              
              368,953
              
              
              
              -
              
              
              
              1,018,356Contingent
      Thunder shares
              
              
              -
              
              
              
              2,500,000
              
              
              
              -
              
              
              
              2,500,000Denominator
      for diluted loss per shareWeighted
      average shares outstanding
              
              
              112,150,528
              
              
              
              112,715,498
              
              
              
              110,558,684
              
              
              
              111,776,081Basic
      and diluted loss per share
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.16
              )
              
              $
              (0.01
              )
 
 The
contingent shares issuable related to the 2007 property acquisition described in
note 16  have been reduced to nil due to the unlikelihood that the
Company will complete a drilling program on the property prior to the NWT EL 413
Exploration License expiry on September 17, 2010.
  33
  17.
COMMITMENTS AND CONTINGENCIES
 
 Thunder Acquisition
Commitments
 
 On
September 28, 2007 the Company purchased from Thunder River Energy, Inc.
(“Thunder”) certain properties in Canada (Exploration License 413 – “EL 413”)
and the United States in consideration for cash and common shares of the
Company. As part of the transaction, the Company committed to issue up to 11
million additional common shares of the Company upon the achievement of certain
milestones in connection with the acquired properties, including 6 million
shares to be issued as follows: 2 million shares upon completion of a 2007/08
seismic program for which such shares were issued in July, 2008; 1 million
shares upon the spudding of a shallow depth well (1,500 meters TD) by March 31,
2009; 1.5 million shares upon the spudding of a medium depth well (2,500 meters
TD) before license expiry in 2009 and 1.5 million shares upon conversion of any
part of EL 413 to a Significant Discovery Lease. During the third quarter of
2009, a right to extend the license term one year from September 17, 2009 upon
the payment of license rentals was obtained. Due to the decline in the economic
prospects for the area due to ongoing pipeline delays, commodity prices being
significantly below levels required to justify commercial development of proved
reserves and the inability to carry out a drilling program prior to expiry of
the current extended license on September 17, 2010, the obligation to issue any
additional contingent shares has terminated.
 
 Vehicle Lease
Commitments
 
 As of
September 30, 2009 and December 31, 2008, the Company had the following vehicle
lease commitments as follows:
 September
      30,
              
              
              December
      31,2009
              
              
              2008Amounts
      payable in:2009
              
              $
              7,423
              
              
              $
              26,0992010
              
              
              27,139
              
              
              
              23,8562011
              
              
              3,608
              
              
              
              3,172
 
 
 18.           FINANCIAL
INSTRUMENTS
 
 The
Company, as part of its operations, carries a number of financial instruments.
It is management’s opinion that the Company is not exposed to significant
interest, credit or currency risks arising from these financial instruments
except as otherwise disclosed.
 
 The
Company’s financial instruments, including cash, accounts receivable, accounts
payable, accrued liabilities and long term debt are carried at values that
approximate their fair values due to their relatively short maturity
periods.
  34
 
 19.           RELATED
PARTY TRANSACTIONS
 
 For the
nine months ended September 30, 2009, the Company paid $45,014 (2008 - $Nil) to
Sicamous Oil & Gas Consultants Ltd. (“Sicamous”), a company controlled by
William S. Tighe, CEO, President and COO of the Company for consulting services
rendered by him. Of this amount, $18,509 was payable as at September 30, 2009
(2008 - $ Nil). These amounts were charged to General and Administrative
Expense.
 
 During
the nine months ended September 30, 2009, the Company received loans from
Sicamous aggregating $36,066 for which repayments were made
$17,831in  March 2009 and the balance of $18,235 in June 2009. (See
Note 8.)
 
 For the
nine months ended September 30, 2009, the Company paid $24,107 (2008 – $88,435),
to Harbour Oilfield Consulting Ltd., a company owned by the Vice-President
Operations of the Company for consulting services. Of this amount, $15,967 was
payable as at September 30, 2009 (2008 – $ Nil) and of this amount, $6,910 (2008
- $ 39,394) was capitalized to Unproved Oil and Gas Properties and $17,197 (2008
- $49,041) was charged to General and Administrative Expense.
 For the
nine months ended September 30, 2009, the Company paid $92,106 (2008 - $143,426)
to the Chief Financial Officer. Of this amount, $23,588 was payable as at
September 30, 2009 (2008 - $6,043). These amounts were charged to General and
Administrative Expense.
 
 As at
September 30, 2009 and December 31, 2008, included in accounts payable was an
amount owing to Segment Engineering Inc., a company controlled by Greg Juneau, a
director of the Company in the amount of $53,630 for rent and other
administrative services provided in 2008.
 
 These
related party transactions were arm's length transactions in the normal course
of business and agreed to by the related parties and the Company based on
negotiations and Board approval and accordingly had been measured at the
exchange amounts.
 
 As at
September 30, 2009 and December 31, 2008, no other amounts were owing to any
related parties.
  35
 
 20.           SEGMENTED
INFORMATION
 
 The
Company’s geographical segmented information is as follows:
  
 Three Months Ended September 30,
      2009
              
              
              Nine Months Ended September 30,
      2009U.
      S.
              
              
              Canada
              
              
              Total
              
              
              U.
      S.
              
              
              Canada
              
              
              TotalIncome
      during the Evaluation Period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              $
              (10,015
              )
              
              $
              (985,565
              )
              
              $
              (995,580
              )
              
              $
              (31,091
              )
              
              $
              (17,844,577
              )
              
              $
              (17,875,668
              )Capital
      Assets
              
              
              11,273,407
              
              
              
              21,472,251
              
              
              
              32,814,129
              
              
              
              11,273,407
              
              
              
              21,472,251
              
              
              
              32,814,129Total
      Assets
              
              
              11,275,783
              
              
              
              22,374,787
              
              
              
              33,650,570
              
              
              
              11,275,783
              
              
              
              22,374,787
              
              
              
              33,650,570Capital
      Expenditures
              
              
              (3,912
              )
              
              
              6,520,148
              
              
              
              6,516,236
              
              
              
              22,818
              
              
              
              7,235,959
              
              
              
              7,258,777
 
 
 Three Months Ended September 30,
      2008
              
              
              Nine Months Ended September 30,
      2008U.
      S.
              
              
              Canada
              
              
              Total
              
              
              U.
      S.
              
              
              Canada
              
              
              TotalIncome
      during the Evaluation Period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              46
              
              
              $
              46Net
      Income (Loss)
              
              $
              (6,300
              )
              
              $
              (581,149
              )
              
              $
              (587,449
              )
              
              $
              14,540
              
              
              
              (634,663
              )
              
              
              (620,123
              )Capital
      Assets
              
              
              11,740,716
              
              
              
              40,107,558
              
              
              
              41,848,274
              
              
              
              11,740,716
              
              
              
              40,107,558
              
              
              
              41,848,274Total
      Assets
              
              
              11,746,538
              
              
              
              31,591,343
              
              
              
              43,337,881
              
              
              
              11,746,538
              
              
              
              31,591,343
              
              
              
              43,337,881Capital
      Expenditures
              
              
              1,494,722
              
              
              
              6,752,371
              
              
              
              8,247,093
              
              
              
              4,661,471
              
              
              
              13,122,796
              
              
              
              17,784,267
  36
 
 21.
CHANGES IN NON-CASH WORKING CAPITAL
 
 Three
      Months Ended
                  September
      30, 2009
                
                
                Three
      Months Ended
                  September
      30, 2008
                  (Restated
      - Note 2)
                
                
                Nine
      Months Ended
                  September
      30, 2009
                
                
                Nine
      Months Ended
                  September
      30, 2008
                  (Restated
      - Note 2)
                
                
                Cumulative
                  Since
      Inception
                  April
      7, 2004 to
                  September
      30, 2009Operating
      Activities:Accounts
      Receivable
                
                $
                (12,536
                )
                
                $
                (5,314
                )
                
                $
                (19,542
                )
                
                $
                623,448
                
                
                $
                (82,674
                )Prepaid
      Expenses and Deposits
                
                
                (21,808
                )
                
                
                18,426
                
                
                
                (15,912)
                
                
                
                2,573
                
                
                
                (130,671
                )Accounts
      Payable
                
                
                1,722
                
                
                
                209,446
                
                
                
                310,392
                
                
                
                263,807
                
                
                
                583,154Accrued
      Liabilities
                
                
                25,562
                
                
                
                (2,661
                )
                
                
                (78,923
                )
                
                
                (53,594
                )
                
                
                43,920Other
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,000Total
                
                $
                (7,060
                )
                
                $
                219,897
                
                
                $
                196,015
                
                
                $
                836,234
                
                
                $
                438,729
  Investing
      Activities:
 The
      total changes in investing activities non-cash working capital accounts
      detailed below pertains to capital asset additions and has been included
      in that caption in the Statement of Cash
Flow:
 
 Accounts
      Receivable
              
              $
              (48,874
              )
              
              
              174,504
              
              
              
              (55,167
              )
              
              
              (419,623
              )
              
              
              (56,360
              )Prepaid
      Expenses and Deposits
              
              
              (10,880
              )
              
              
              12,818
              
              
              
              (9,536
              )
              
              
              (3,995
              )
              
              
              9,161Accounts
      Payable
              
              
              250,464
              
              
              
              114,525
              
              
              
              231,442
              
              
              
              (306,558
              )
              
              
              902,220Accrued
      Liabilities
              
              
              23,349
              
              
              
              (51,615
              )
              
              
              23,349
              
              
              
              (339,661
              )
              
              
              23,349Total
              
              $
              214,059
              
              
              
              250,232
              
              
              
              190,088
              
              
              
              (1,069,837
              )
              
              
              878,370Financing
      Activities:The
      total changes in financing activities non-cash working capital accounts
      detailed below pertains to shares issued and issuable and has been
      included in that caption in the Statement of Cash
  Flow:
 
 Accounts
      Receivable
              
              $
              (269,185
              )
              
              
              180,000
              
              
              
              (269,822
              )
              
              
              -
              
              
              
              (269,822
              )Due
      to Related Parties
              
              
              (18,235
              )
              
              
              -
              
              
              
              (32,841
              )
              
              
              -
              
              
              
              -Prepaid
      Expenses and Deposits
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,000
              )Accounts
      Payable
              
              
              (7,536
              )
              
              
              -
              
              
              
              (41,051
              )
              
              
              (113,468
              )
              
              
              -Flow
      Through Share Premium Liability
              
              
              -
              
              
              
              (28,835
              )
              
              
              -
              
              
              
              28,835
              
              
              
              -Accrued
      Liabilities
              
              
              (5,946
              )
              
              
              (250,000
              )
              
              
              -
              
              
              
              (220,000
              )
              
              
              -Total
              
              $
              (300,902
              )
              
              
              (98,835
              )
              
              
              (343,714
              )
              
              
              (304,633
              )
              
              
              (279,822
  37
 
 22.           SUBSEQUENT
EVENTS
 
 Ionic Loan
Payable
 
 On
October 1, 2009, the Company received the balance of $269,821 proceeds of the
Ionic loan and paid additional closing costs due to the vendor of the acquired
properties as described in Note 7.
 
 Additional Property
Acquisition
 
 In
October, 2009, Cougar completed the acquisition from an unrelated company of
certain wells, facilities and producing properties in and adjacent to the
CREEnergy project. This acquisition is in addition to the one described in Note
7. The acquisition costs was comprised as follows:
 $
      U. S.
              
              
              $
      CdnCash
              
              $
              93,400
              
              
              $
              100,000Common
      shares of Cougar – 155,000 shares at $1.21 per share
              
              
              186,800
              
              
              
              200,000Total
      cost
              
              $
              280,200
              
              
              $
              300,000
 
 Lucy
Farmout
 
 In
August, 2009, it was determined that Cougar’s working interest partner in the
Lucy, B.C. project was unable to complete the financing as required in the
farmout agreement and as a result, in October after due diligence and
environmental reviews, Cougar has accepted the transfer of the partner’s
Alexander and Crossfield, Alberta properties as a penalty payment. The
properties received are valued at approximately $500,000 (NPV 10%). Cougar has
assumed asset retirement obligations in connection with the properties estimated
at $50,000.
 
 Swiss Fund
Financing
 
 In
connection with financing arrangements and advances described in Note 10,
subsequent to September 30, 2009, Cougar received an
additional  $121,420 in advances.
 
 Voluntary
Delisting
 On
November 4, 2009, the Company voluntary requested the TSX Venture Exchange
("TSX-V") in Canada, to delist Kodiak's common shares from trading on the
TSX-V.
  38
 
 ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION UPDATE
 
 Forward Looking Statements
 
 From time
to time, we or our representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but not limited to, press releases, oral statements made with the
approval of an authorized executive officer or in various filings made by us
with the Securities and Exchange Commission. Words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project or projected", or similar expressions are intended to identify
"forward-looking statements". Such statements are qualified in their entirety by
reference to and are accompanied by the above discussion of certain important
factors that could cause actual results to differ materially from such
forward-looking statements.
 
 Management
is currently unaware of any trends or conditions other than those previously
mentioned in this management's discussion and analysis that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity. However, investors should also be aware of
factors that could have a negative impact on the Company's prospects and the
consistency of progress in the areas of revenue generation, liquidity, and
generation of capital resources. These include: (i) variations in revenue, (ii)
possible inability to attract investors for its equity securities or otherwise
raise adequate funds from any source should the Company seek to do so, (iii)
increased governmental regulation, (iv) increased competition, (v) unfavorable
outcomes to litigation involving the Company or to which the Company may become
a party in the future and, (vi) a very competitive and rapidly changing
operating environment. The risks identified here are not all inclusive. New risk
factors emerge from time to time and it is not possible for management to
predict all of such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
contained in any forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual
results.
 
 The
financial information set forth in the following discussion should be read in
conjunction with management’s discussion and analysis contained in our 2008
Annual Report on Form 10-K as well as the consolidated financial statements and
notes thereto included elsewhere herein.
  39
  Plan of
Operation
 
 During
the third quarter of 2009, the Company completed an acquisition of properties
that represents its first significant producing resource property. On September
30, 2009, Cougar Energy, Inc., the Company’s majority-controlled Canadian
subsidiary, acquired from an unrelated private company certain wells, facilities
and producing operations in and adjacent to the CREEnergy project in Alberta,
Canada. The acquisition includes 11 producing wells, 21 suspended wells and
associated production, water disposal and pipeline facilities in the Trout
field. Gross current production is approximately 170 barrels of oil per day.
Cougar will be actively working this fall and winter to maximize production and
revenue and will also be assessing other opportunities in the area to supplement
this initial asset base.
 
 The Company expects to finance its future capital expenditure
programs with combinations of debt, farm-outs, equity financings and some
divestitures. A description of the Company’s recent and planned activities for
its core properties is included below.
 
 Kodiak
Energy, Inc. is a petroleum and natural gas exploration and development company
whose primary objective is to identify, acquire and develop working interests in
undeveloped or underdeveloped petroleum and natural gas prospects. We are
focused on prospects located in Canada and the United States. The prospects we
hold are generally under leases and include partial and full working interests.
In all of our core properties, Kodiak is the operator and majority interest
owner. In two properties, we have the option to perform certain exploratory
drilling to earn additional interests. The prospects are subject to varying
royalties due to the state, province or federal governments and, in some
instances, to other royalty owners in the prospect.
 
 The
Company plans to aggressively develop and explore its newly acquired Cougar
assets. An oil maintenance and development program is planned for the next nine
months which is expected to result in increased production of approximately 300
barrels of oil per day (net). Drilling programs will be planned for the fourth
quarter of 2010 where the seismic data supports the effort and expense and
further drilling will be based on the results of the initial wells.
 
 Production
from the Company’s new proved reserves commenced on October 1, 2009 and
recognition of the associated revenue and cash flow began on that
date.
 
 Core
Properties
 
 Canada
 
 Trout -
Alberta
 
 Cougar
has CREEnergy’s active cooperation and sponsorship to identify various operators
working in the adjacent lands to the CREEnergy Project.  Over the last
six  months, we negotiated commercial terms for area properties that
have the greatest upside through normal maintenance and enhanced recovery
programs as well as future potential with additional drilling.
 
 These
negotiations culminated at the end of September and beginning of October, 2009
with Cougar successfully acquiring producing the Trout Area properties from two
private oil and gas companies.  The Cougar operations, land and
geological team have already high graded many of the properties within these
acquisitions and foresee considerable potential to increase existing production
in this first round of development.  We anticipate operations to
commence on these properties during the winter of 2009/10 consisting of a
maintenance and work over program.  Un updated independent reserves
evaluation report is in process of being completed and will be filed and posted
on the corporate website in the near future.
 
 The
following represents a summary of the producing and non-producing acquisitions
completed over the previous six months:
  40
 
 A.
              Farmin (completed June
      9, 2009)
 
 1.
              28
      sections of land in the area of the CREEnergy Project, northwest of Red
      Earth Creek, Alberta
  2.
              Cougar
      has 100% working interest
  3.
              The
      mineral rights within the farmin agreement are currently held under
      several Alberta Crown 4-year initial term P&NG licenses expiring in
      September 2010 – the rights can be grouped and validated with a drilling
      program and subsequently continued under a 5 year intermediate term
      license
  4.
              Close
      to infrastructure – existing pipelines with capacity and all weather
      roads
  5.
              The
      wells would have a maximum depth of approximately 1,700 meters (5,577
      feet) and potentially target the Gilwood, Slave Point, Wabamun, Gething,
      and Bluesky formations
  6.
              There
      is existing regional natural gas infrastructure and the target formations
      should contain sweet natural gas, which would reduce production and
      processing charges.
  A
drilling program has been prepared for one initial well and two subsequent
wells.  Contingent upon financing this program will be evaluated and
funds allocated to the best net back between this gas project and the other oil
developments.  An 18 month payback criteria will be used prior to
assigning capital to this project.
 
 
 B.
              Private Company Production and
      Property Acquisition (completed October 1,
  2009)
 
 1.
              2560
      gross acres of land within and adjacent to  the CREEnergy
      Project area lands
  2.
              65%
      working interest in six wells – 2 producing wells and 4 suspended
      wells
  3.
              Approximately
      12 barrels per day (bbl/d) net production (20 bbl/d gross) of light
      oil
  4.
              Existing
      wells and reserves are located in the Kidney and Equisetum
      fields
  5.
              Production
      facilities
  Cougar
negotiated a purchase agreement with the private company consisting of cash for
the P1 reserves and Cougar shares for the P2 reserves.  These
properties are located within or adjacent to the CREEnergy Project
lands.  This acquisition was important for us to solidify our position
with CREEnergy.
  41
  
 C.
              Private Company Production and
      Property Acquisition(completed September 30,
  2009)
 
 1.
              7,100
      gross acres of mineral rights with an average 85% working interest (all
      continued through production, no
expiries)
  2.
              Approximately
      125 barrels per day (bbl/d) net production (170 bbl/d
    gross)
  3.
              11
      pumping wellbores
  4.
              8
      single well batteries
  5.
              3
      water disposal wellbores with associated
  facilities
  6.
              1
      observation wellbore
  7.
              21
      suspended wellbores
  8.
              2
      multi well batteries with existing fluid handling capacity in excess of
      2500bbl/day (oil, gas and water handling and treating
      capability)
  9.
              Approximately
      38.7 km of pipelines (oil and produced
water)
  10.
              Approximately
      13 km2
      of 3D seismic over the properties
  11.
              Approximately
      84 km of 2D seismic over the properties and adjacent
  lands
  The
agreed purchase price was CAD$6,000,000 with an initial payment of CAD$1,000,000
at closing.   The purchase price was negotiated at $52.50 per
barrel (bbl) when oil is currently selling at $75+/bbl.
 
 After
operating costs, there is an average of CAD$50.00 net back per barrel at current
commodity prices.  The cash portion of the acquisition cost was
provided by Kodiak.
 
 This was
a critical mass property acquisition as there is substantial infrastructure,
resulting in lower overall operating costs, lower development costs and giving
our schedule an enormous leap forward to achieve our goals
 
 Without
this kind of infrastructure, the initial production would have lower net backs
due to higher trucking costs and regular non-producing periods due to
weather.  In lieu of this acquisition, a large amount of capital would
have to be spent to bring facilities to this baseline, which we now
have.
 
 At
current costs, the infrastructure replacement value would be substantially in
excess of CAD$6,000,000.   This capital will now be able to be
spent on the drill bit and development work – allowing for a more aggressive
growth plan.
  42
  Additional
details include:
 
 ·
              The
      existing pipeline systems provides direct access to sales of oil products,
      which results in the access to sales being in our control and not third
      party pipeline operator dependent.
  ·
              There
      are 2 batteries for the handling and treating of oil and the disposal of
      the produced water. The batteries are capable of handling an estimated
      2,500 bbl/d with nominal refit
costs.
  ·
              Many
      of the wells are piped into the batteries to lower the need for trucking
      which is especially important for the higher water cut wells – these
      pipelines can be expanded to further lower operating
  costs.
  ·
              The
      produced water can be used for future water floods – which regularly have
      been shown in the area to add substantial incremental
      production.
  ·
              There
      are 37 wells, which 11 are currently producing – the 22 suspended wells
      have potential upside, as discussed
below.
  ·
              The
      existing area field personnel willingly transferred to Cougar and their
      many years of hands-on field expertise has already added
      value.
 
 This
acquisition, combined with the smaller acquisition, provides a solid foundation
for us to further enhance the Trout area properties, along with the existing
operating and facilities to give substantial momentum to our
plans.  We believe this justifies the acquisition on that basis
alone.  There is great potential upside we see on these properties,
with additional capital commitments this winter 2009/10 on maintenance programs
discussed next.
 
 Upside
in Maintenance Programs
 
 We
conducted a detailed review of the of the acquired properties public domain
petroleum records over last 5 to 7 years with a comparison to other operators in
the area.  Our operations and geological teams foresee a considerable
potential to increase production through normal maintenance
activities.  Some of these normal maintenance activities include and
are not limited to:
 
 ·
              Acid
      wash of perforations
  ·
              Setting
      of bridge plugs to seal off water
  ·
              Waterflood
      programs
  ·
              Cleanouts
  ·
              Reperforating
  ·
              Repairs
      to wells with separated rods
  ·
              Pump
      optimization,
  ·
              Plug
      off water sources
  ·
              Horizontal
      drilling
  ·
              Use
      of Low damage drilling fluids
 
 Since
these existing technologies have proven to be successful in other similar
maintenance programs in the area, we see a high potential to enhance the current
production levels within this property.
  43
 
 CREEnergy Lands,
Alberta
 
 History
 
 Kodiak
has a well developed relationship and track record with Aboriginal communities
in northern Canada.  This comes from a strong commitment by Kodiak
management and personnel for open and honest communications and negotiations
with the Aboriginal community leaders – a demonstrated respect for their
culture, land and residents.   Kodiak's reputation has also been
recognized through negotiations with regulatory agencies, resulting in several
of those agreements being used as templates with other companies and
projects.  As a result, our reputation has become known outside the
far north of Canada.
 
 CREEnergy
Oil and Gas Inc. (CREEnergy) is the authorized agent for multiple First Nations
communities.  Some of these new First Nations communities are in
various stages of ratification from the Federal Government of Canada to satisfy
outstanding Treaty Land Entitlement (TLE) claims.  Within these new
First Nations are approximately 15 townships or 540 sections of mineral rights
for development in Alberta.
 
 In order
to advance economic sustainability for First Nations communities that CREEnergy
represents, CREEnergy searched for an oil and gas partner to develop certain oil
and gas projects.  Kodiak was one of the industry companies
shortlisted in the search.  Through discussions, meetings and
negotiations since May 2008, CREEnergy selected Kodiak as their joint venture
partner to develop those resource projects.  The joint venture
agreement between CREEnergy and Kodiak is the result of the
negotiations.
 
 To
develop and strengthen the relationship with CREEnergy, Kodiak formed a
subsidiary company, Cougar Energy, Inc.  As a result, Cougar is the
operating entity for Kodiak in Western Canada.
 
 Joint
Venture Information and Summary
 
 In
December 2008, a new working relationship and joint venture agreement was
established between CREEnergy Oil and Gas Inc. (CREEnergy) and Kodiak Energy,
Inc. (Kodiak).  The Agreement was built on the foundation of respect
for the First Nations communities, their Heritage, their Lands and the
Environment.  This is a strategic alliance.  CREEnergy has
agreed to work with Kodiak to develop oil and gas reserves within their lands
for the benefit of both CREEnergy and Kodiak.
 
 Joint
Venture Agreement
 
 Key prioritieswere
established from the discussions between CREEnergy and Kodiak:
 
 ·
              Use
      the royalties from the oil and gas production and work programs to develop
      a revenue stream.  The long term purpose of the revenue is to
      support education, employment and development opportunities for the First
      Nations communities that Cougar is working
with.
  ·
              Open
      communication at all stages of the oil and gas
    developments.
  ·
              Staged
      and managed growth, with regard to the interests of the communities during
      each step.
  ·
              Identify
      and source other development opportunities, using a similar model, either
      as a value add or on a joint venture
basis.
   44
  Current
Status
 
 Cougar
continues to actively work with CREEnergy as they assist their First Nations
communities to achieve the goal of independence though the Treaty Land
Entitlement (TLE) claim with the Federal Government of Canada and the Province
of Alberta.  This process is nearing completion.  We engage
with CREEnergy on a weekly basis through conference calls, monthly in person
status meetings, and a continual dialogue to foster open
communication.
 
 Lucy –
Northern British Columbia
 
 The
Corporation is the operator and 80% working interest owner of a 1,920 acre lease
located in northeastern British Columbia. The Corporation believes the lease is
situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas
prospect. Industry continues to show increased interest in this shale gas play
with several comparisons of the Muskwa Shale gas potential as an analogue of the
Barnett Shale gas potential.
 
 The
Corporation has been involved in two previous drilling operations on the lease.
In the fourth quarter of 2006, Kodiak farmed in as a non-operated partner,
paying 10% to earn 7.5%, on a drilling operation in the Lucy (Gunnell) area.
This first drilling operation, designed to target a Middle Devonian reef
prospect, had several operational problems and was unsuccessful.
 
 After performing an internal review of seismic and drilling data,
it was determined there was a seismic anomaly on the southern half of the lease.
This anomaly was identified on several different seismic lines and a decision
was made to drill a well on that part of the lease to evaluate both the anomaly
as the primary target and the Muskwa Shale, seen in the first well but not
evaluated by the operator at that time.
 In the
third quarter of 2007, the Corporation served partners with an independent
operations notice which resulted in the Corporation increasing its working
interest in the lease to 80%. In the first quarter of 2008, a second drilling
operation was completed and a vertical well was cased. It was determined that
the Middle Devonian seismic anomaly was not a reef buildup and the wellbore was
cased due to encountering significant gas shows in the previously identified
Muskwa Shale with a formation thickness of approximately sixty
meters.
 
 The
Corporation submitted an application to the British Columbia Oil & Gas
Commission (“OGC”) for an experimental scheme to test the Muskwa Shale gas
potential. On August 12, 2008, Kodiak received the final approval of the Lucy
experimental scheme application. The Corporation has prepared a multi-phase work
program designed to test the deliverability of the Muskwa Shale gas formation
using vertical and horizontal drilling and completion techniques. Kodiak’s
proposed work program would allow for early production into a pipeline in order
to monitor long-term deliverability rates and pressures of horizontal and
vertical test wells on the periphery of the Horn River Basin.
  45
 
 These
results would be some of the first commercial production results for a Horn
River Basin shale gas project and would provide information that would help
define the effective exploration area of the Basin and assist in the validation
of adjoining properties in a divestiture process, should that
occur.
 
 Kodiak
contracted an industry-recognized shale gas assessment laboratory to prepare and
analyze the drill cuttings from the 2008 well in order to evaluate the Muskwa
Shale interval for gas potential. The shale gas assessment is conducted by
performing various tests on the rock cuttings that were obtained while drilling
the well in order to determine the type, quality and amount of both adsorbed and
free gas.
 
 The most
important conclusion from the drill cutting analysis is that the information
received continues to support the evaluation of Kodiak’s Muskwa (Evie) Shale gas
prospect. The laboratory data is consistent with other public industry and
government data on the Muskwa Shale. It should also be noted that the numbers
obtained on the laboratory analysis of drill cuttings may be conservative due to
the nature of sampling drill cuttings on a drilling rig. Another significant
point is that all three wells on the Kodiak lease, drilled deep enough to
penetrate the Muskwa Shale, had elevated gas detector readings while penetrating
the shales.
 
 The prospect is still in the early stages of delineation and no
assurance can be given that its exploitation will be successful. However, based
on well cuttings and drilling data, Kodiak’s internal technical analysis has
projected similar volumetrics as many of the other majors in the area are
projecting. In this analysis, the Corporation used all of the laboratory
analysis findings and wellbore information obtained during the drilling
operation. Further appraisal work is required before estimates can be finalized
and commerciality assessed.
 
 In April,
2009, Kodiak, through its private subsidiary, Cougar, entered into a standard
farmout and participation agreement with one of its partners. The partner would
provide 90% of the funding for the first phase of the “Lucy” Horn River work
program. Upon completion of the funding, the partner will have earned an
additional 30% working interest in the wells and property. Cougar will maintain
operator status and majority ownership of the project with the management of
Kodiak/Cougar overseeing the execution of the work program. Upon fulfillment of
the funding provisions of the farmout and participation agreement, Cougar’s
working interest in the “Lucy” Horn River Basin project would be
50%.
 
 Our
partner did not complete its financing commitment and this farmout and
participation agreement expired on August 15, 2009. After due diligence was
completed in October, 2009, the partner transferred its interest in its
Alexander and Crossfield, Alberta wells to the Company as a penalty for
non-completion.
  46
 
 Little Chicago – Northwest
Territories
 
 The
Company is the operator and largest working interest owner of the 201,160 acre
Exploration Licen s e 413 (“EL 413”) in the Mackenzie River Valley centered
along the planned Mackenzie Valley Pipeline.
 
 In 2006,
the Company signed an exploration farm-in agreement with the two 50% working
interest owners of EL 413.   The company reprocessed 50 km of existing
seismic data in Q4 of 2006 and during the 2006-07 winter work season, the
Company shot and acquired 84 km of high resolution proprietary 2D seismic and
gravity survey data on the farm-out lands, thus earning a 12.5% working interest
in the property. In September, 2007, the Company acquired Thunder River Energy,
Inc.’s (“Thunder”) remaining 43.75% in the property giving the Company a 56.25%
interest in EL 413. A letter of intent signed earlier in 2008 with the Company’s
remaining partner in the project, which would have allowed Kodiak to acquire the
balance of the working interest in EL 413 and become a 100% working interest
owner, recently expired.
 
 A 2007-08
43 km 2D high resolution proprietary seismic program and gravity survey was
completed on the property and the results were processed and interpreted and
used to support the Corporations planned drilling program. This project was
completed on budget and schedule. The seismic and gravity data from the two
projects show substantial structural closure and formation character and support
the planning for a future multiple well drilling program. That data was included
in an updated Chapman Prospective Resource report published in May,
2008.
 
 The
decision to acquire additional seismic and gravity data in the winter of 2007-08
was made to improve the potential to drill both the Devonian Bear Rock and the
Basal Cambrian Sand targets f rom a common drilling site. This would
substantially lower drilling costs on a per well basis and reduce the overall
project risk.
 
 Kodiak has analyzed the 2007-08 seismic data and the various
reservoir indicators/lands and identified 11 drill locations . These drill
locations have been selected to evaluate three primary target formations on EL
413 including the Devonian Bear Rock Oil Prospect, the Basal Cambrian Sand /Top
Precambrian Oil and Gas Prospect and the Canol Oil Prospect . These locations
have been further high graded into a two phase drilling program consisting of
two wells with a planned total depth of 2400 meters each targeting both the
Basal Cambrian/Precambrian and the Bear Rock prospects and a m ulti-well shallow
drilling program with a planned total depth of 400m each targeting the Canol
prospect. A scouting trip was completed in the third quarter of 2008 which
allowed the Corporation to review potential access routes, well sites and camp
locations.
 
 The
Devonian Bear Rock Prospect (“ Bear Rock” ) is the first described target and is
located at a shallow depth of approximately 700 meters (2,300 ft.). This
reservoir was previously identified and preliminarily evaluated in the initial
Chapman Report prepared in 2005. The expected product from the reservoir is
light and medium oil, with no consideration to solution gas.
  47
 
 The
combined seismic obtained during 2007 and 2008 acknowledged a series of pools
distributed throughout the project. The Chapman Report identified fifteen Bear
Rock leads located along the seismic lines with five of them being selected as
well defined high grade Bear Rock leads. This is an increase of 5 additional
leads from the initial 2007 work program. Indicators of these potentially
prolific reservoirs are present along several seismic lines that may imply these
Bear Rock occurrences to be present throughout EL 413.
 
 The
additional 2008 seismic further defined a hydrocarbon trap in the Basal Cambrian
Sand sitting on the top of the Precambrian. This interval, found at a depth of
approximately 2,300 meters (7,545 feet), has never been regionally penetrated
and tested; however, it has been proven as a productive reservoir in the
Colville Hills area approximately 125 kilometers (77 miles) east of EL
413.  With this additional data, the Chapman Report identified five
drilling locations that will allow the Basal Cambrian Sand and the top of the
Precambrian to be drilled and tested.
 
 Physical
evidence of hydrocarbons is present with a natural surface oil seep on the
northern edge of the license area on the banks of the Mackenzie River. This
natural occurrence is suggestive of a shallow oil pool, possibly in the Canol
formation, and warrants further investigation. While reviewing core samples and
well logs from previous regional drilling activity. Kodiak was able to map out
the Canol/Imperial formation and determine that it is the likely source of the
natural surface seeps. This prospect will be found on the Northwest quarter of
EL 413 and is at a very shallow depth of approximately 350 meters (1,148 feet).
The Corporation has identified five drilling locations which could be evaluated
during a planned future project drilling program.
 
 In addition, Kodiak had made application with regulators to
extend the EL 413 license and has received written notification from Indian and
Northern Affairs Canada that a one year extension is available. The one year
license extension, which is subject to certain terms and conditions, was provide
just prior to expiry and provides for one additional year.
 
 Upon
review of the overall status of all projects in the area, current commodity
prices being much below levels required to justify development on this and other
projects, continued delay of the Mackenzie Valley Pipeline Project, the risk
that any discovered gas reserves would be indefinitely stranded without such
development, the Company continues to seek partnership in the development;
however, the deteriorating economic facors make this difficult. We will still
retain the confidential proprietary seismic data for future assessment of the
"Little Chicago Prospect" and the Company will determine the best way to
monetarize that asset through either divestiture and/or possibly
renominating  the prospect when  conditions are more
appropriate.
  48
 
 Province/Granlea – Southeast
Alberta
 
 The
Corporation purchased a 50% working interest in two sections (1280 acres gross -
640 net) of P&NG rights at a provincial land sale on September 22, 2005. In
2005, a 2D seismic program was completed on the property and in 2006, a well was
drilled and completed; surface facilities were installed and a pipeline tie-in
was completed. Production commenced in September, 2006. The well produced for a
short period until excess water rates occurred and in October, 2006 the well was
shut in. After the well bore was evaluated as having n o current economic
production potential, the well was abandoned. An internal geological review of
the prospect will be done to determine if any further drilling is
warranted.
 
 United
States
 
 New
Mexico
 
 Through
its acquisition of Thunder, the Corporation acquired a 100% interest in 55,000
acres of property located in northeast New Mexico. Additional land acquisitions
have increased the Corporation’s land position to approximately 79 ,000 acres.
These lands have potential for natural gas and CO2 and oil and helium resources
at shallow depths. In 2008, the Corporation purchased 19,000 stations of gravity
data and 37 miles of trade seismic data, completed a 35 mile 2D high resolution
proprietary seismic program and a three well drilling program.
 
 The three
wells were drilled with air to reduce formation damage and they were cased to
the base of the Yeso formation. Based on gas detector results, drill cutting
samples and open hole logs, all wells showed three potential shallow porous
sandstone formations capable of CO2 production with up to 200 feet of identified
net pay thickness. The Yeso, Glorieta and Santa Rosa formations were perforated
and flow tested to determine deliverability and pressure. There were multiple
gas samples analyzed at specialized independent laboratories from two separate
extended flow tests that identified CO2 concentration quality from 98.4% to
99.5%. Two of the wells were stimulated with a nitrified acid squeeze and were
able to sustain an extended flow rate of approximately 375mcf/d. The shallow
sands have been mapped using offset well control and the newly acquired seismic
data and the Corporation has determined there is a very high likelihood of
encountering the target formations throughout the leased project area; provided,
however, that no assurance can be given that this will be the case.
 
 The 35 mile 2D high resolution seismic program was completed on
schedule and on budget and after reviewing the seismic data, the Company was
able to effectively map out a probable long term development area which would
result in CO2 production from the previously identified formations. The seismic
is currently being evaluated to identify possible conventional oil and gas
prospects on the leased project area.
  49
 
 A
preliminary project feasibility study was commissioned to identify capital
development costs and timelines as well as projected operating costs in order to
provide information to support a large scale long-term plan of
development.  This information will enable the definitions for pipeline
access planning and negotiation, transportation agreements, sales contracts for
the CO2, additional land acquisition terms and conditions, facility engineering
and construction and ultimately the parameters for financing the project
development.
 
 Several
companies have expressed interest in participating in the New Mexico properties
at several levels of involvement.  Discussions are still ongoing with
several firms regarding potential opportunities for the project, including
integration of the CO2 production into Permian Basin enhanced oil recovery
projects and the Company has also entered into farmout negotiations with several
companies interested in exploring deeper oil and natural gas prospects on the
properties.
 
 Due to
lower commodity prices for Permian Basin oil  (the primary market for
CO2) and CO2 contract prices (deliverable into the Denver City Hub), aggressive
development is not financeable at this time. Aside from ongoing maintenance of
leases and wells, the company is focusing its efforts on updating engineering
models, and business opportunities so that when prices recover and investment
markets improve, we will have the opportunity to move this project forward. The
leases are 10 year leases and no expiries are imminent.
 
 Montana
 
 During
2006, the Company, under a joint venture farmout agreement, participated in a
seismic acquisition program and a two well drilling program to earn a 50%
non-operating working interest in the wells and well spacing. This joint venture
project provides the company with the right to participate on a 50% basis going
forward on this prospect in the Hill County area of Montana. The Operator of the
project had 60,000 contiguous undeveloped acres of P&NG rights in the area,
as well as some excess capacity in facilities and pipelines. Two wells were
drilled in the third quarter of 2006; one is cased for subsequent evaluation of
the multiple zones found and one was abandoned. In order to facilitate the
efficient exploration of this prospect area, the company has acquired from the
original operator a 100% working interest of 12,000 acres of P&NG rights
while retaining the right to participate and initiate operations on the
remaining approximate 48,000 acres of prospect leases. After an internal
geological review of this prospect, and in light of current commodity prices,
the Company, in the fourth quarter of 2008, wrote off its costs relative to this
project and subsequently, in 2009, the Company has allowed the acreage to
expire.
  50
 
 Financial Condition and
Changes in Financial Condition
 (All
dollar values are expressed in United States dollars unless otherwise
stated)
 
 The
Company’s ability to raise funds has been severely impacted by the global
collapse of credit and equity markets; however, the Company has been able,
during these difficult times, to complete a property acquisition on favourable
credit terms that will provide the basis for continuing exploration and
development programs and ultimately lead the Company during the next few years
to a promising future as a junior oil and gas producer.  The Company
is confident that it will be able to obtain financing that will enable it to
carry out its planned programs for the balance of 2009 and for
2010.
  The
Company’s total assets of $33,650,570 as at September 30, 2009 represent a
reduction of $3,520,827 from $37,171,397 as at December 31, 2008. This reduction
is mainly comprised of a $16,036,000 impairment allowance recorded in the second
quarter of 2009 in connection with the Company's Little Chicago Exploration
License 413 in N.W.T, Canada offset by capital asset additions of $7,259,000 and
a foreign currency translation gain of $5,141,000 related to its net Canadian
assets. Our total assets consist of cash and other current assets of $546,244
(December 31, 2008 - $245,562); Oil and gas properties and equipment of
$32,814,129 (December 31, 2008 - $36,634,932); and other assets of $290,197
(December 31, 2008 - $290,903). Our total current liabilities were $4,647,530
(December 31, 2008 - $1,140,273) and consisted of accounts payable and accrued
liabilities of $1,552,641 (December 31, 2008 - $1,107,432); loan payable of
$1,260,857 (December 31, 2008 - $ Nil); current portion of long-term debt of
$803,213 (December 31, 2008 - $ Nil) and 1,030,819 (December 31, 2008 - $ Nil)
in advances received from a European investment fund in anticipation of certain
financing and asset disposition transactions. We had long-term liabilities of
$3,911,293 (December 31, 2008 - $39,262) and asset retirement obligations of
$1,020,772 (December 31, 2008 - $199,574). The new loan payable, long-term debt
and asset retirement obligations resulted from the financing and acquisition
that closed September 30, 2009. Shareholders’ equity amounted to $24,070,975
(December 31, 2008 - $35,792,288), net of an accumulated deficit of $26,585,756
(December 31, 2008 - $8,710,088) and other comprehensive gain consisting mainly
of a net foreign currency translation gain of $237,624 (December 31, 2008 –
$4,903,762 loss), and non controlling interest equity of $369,326 (December 31,
2008 - $ nil) relating to the 6.4% interest held by non controlling shareholders
of Cougar.
 
 Overall Operating
Results
 
 In the
nine months ended September 30, 2009, the Company had no income (2008 - $46) and
operating costs of $6,793 (2008 - $8,863) relating to its Granlea, Alberta
property which well watered out in late 2006 and was deemed uneconomic. Except
for that incidental production, the Company remained in the exploratory and
development stage up to September 30, 2009. Effective October 1, 2009, the
company will begin having production and receiving revenue from the producing
properties it acquired September 30, 2009 as described elsewhere in this
report.
  51
 
 Net Loss
for the nine months ended September 30, 2009 totalled $17,875,668 (2008 -
$620,123 as restated). In addition to the operating results noted above, these
losses consist of general and administrative expenses of $1,506,760 (2008 -
$1,620,905), including stock-based compensation expense amounting to $488,686
(2008 - $507,790); depletion, depreciation and accretion of $16,405,480 (2008 -
$41,718) and interest of $304 (2008 $1,257).
 
 General
and administrative expenses include the cost of employed and consulting
personnel and others who provided investor relations services, public company
costs for SEC reporting compliance, accounting, audit and legal fees and other
general and administrative office expenses. General and administrative expense
also includes stock-based compensation relating to the cost of stock options
granted to directors, officers, employees and other personnel. General and
administrative costs are being minimized during periods of low activity but are
expected to increase in the future as the scope of the company’s activities
increases.
 
 Depletion,
depreciation and accretion for 2009 includes a $16,035,774 provision for
impairment in connection with the Company's Little Chicago Exploration License
413 in N.W.T, Canada and a $354,286 ceiling test write-down in connection with
its Canadian depletable properties. Other unproved property costs as at
September 30, 2009 of $25,766,264 (December 31, 2008 - $36,559,367) have been
excluded from depletable cost pools for ceiling test purposes. See note 7 to the
consolidated financial statements.
 
 Interest
income of $967 in the nine months ended September 30, 2009 (2008 - $73,739) was
earned. The 2008 interest was derived from the investment of excess cash
balances on a short-term basis. Deferred income tax recovery of $978,835 in the
2008 period represents a deferred tax credit arising from the expenditure of
funds during that year relating to the premium received on the issue of Canadian
flow-through shares in 2007. The non controlling interest credit of $46,866
represents the Cougar non controlling shareholders’ share of the net loss for
the 2009 period during the portion of the year that the minority interests
shareholdings were outstanding (6.4% as at September 30, 2009).
  52
 
 Capital
Expenditures:
 
 Capital
Expenditures incurred by the Company during the nine months ended September 30,
2009 and 2008 are set out below.
 
 2009
              
              
              2008Land
      acquisition and carrying costs
              
              $
              6,075,685
              
              
              $
              8,932,404Geological
      and geophysical
              
              
              256,264
              
              
              
              4,827,544Intangible
      drilling and completion
              
              
              33,412
              
              
              
              3,862,901Tangible
      completion and facilities
              
              
              893,416
              
              
              
              161,418Total
      Capital Costs Incurred
              
              $
              7,258,777
              
              
              $
              17,784,267
 
 Land
acquisition and carrying costs for the 2009 period include the cost of the
September 30, 2009 acquired properties and exclusivity rights payments in
connection with our Cree Energy agreement and other land retention costs while
the 2008 period costs include New Mexico land acquisitions and other land
retention costs.
 
 Geological
and geophysical costs include the cost of the September 30, 2009 acquired
seismic data and costs of the seismic programs carried out on the EL 413 Little
Chicago, North West Territory and New Mexico projects in 2008.
 
 Intangible
drilling and completion costs for 2008 include the Company’s 57% share of the
drilling of the second Lucy well in British Columbia and 100% of the three well
New Mexico program.
 
 Liquidity and Capital
Resources:
 
 Since
inception to September 30, 2009, the company’s operations have been financed
from the sale of securities and loans from shareholders. The working capital
deficiency at September 30, 2009 amounted to $4,101,286 (December 31, 2008 -
$894,711). The increase in the deficiency results from the debt incurred related
to the September 30, 2009 property acquisition. The Company is currently in the
process of arranging certain equity and longer term financing that will reduce
the working capital deficiency to a manageable amount and provide additional
funding of near term development programs that are planned to significantly
increase production, revenue and cash flow over the next nine months. It is
contemplated that these transactions will completed before
yearend.
  53
 
 In
addition, we may require funds for additional acquisitions. In the event that
additional capital is raised at some time in the future, existing shareholders
will experience dilution of their interest in the Corporation.
 
 There is uncertainty that the Company
will continue as a going concern, which presumes the realization of assets and
discharge of liabilities in the normal course of business for the foreseeable
future. The Company has not generated positive cash flow from
operations since inception and has incurred operating losses and will need
additional working capital for its future planned activities and to enable it to
repay its debt. Although the recent property acquisitions will provide
production, revenue and cash flow, the Company's September 30, 2009 financial
condition still raises doubt about the Company’s ability to continue as a going
concern. Continuation of the Company as a going concern is dependent upon
obtaining sufficient working capital to finance ongoing operations. The
Company’s strategy to address this uncertainty, includes additional equity and
debt financing; however, there are no assurances that any such financings can be
obtained on favorable terms, if at all. These consolidated financial statements
do not reflect the adjustments or reclassification of assets and liabilities
that would be necessary if the Company were unable to continue its
operations.
 
 Voluntary Delisting of
Company's Shares From TSX Venture Exchange in Canada
 
 On
November 4, 2009, The Company voluntarily requested the TSX Venture
Exchange ("TSX-V") in Canada to delist its common shares from trading on the
TSX-V. See "PART II Item 5. Other Information" in this Form 10-Q for further
information on the delisting.
 
 ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 The
Company is exposed to market risk from changes in petroleum and natural gas and
related hydrocarbon prices, foreign currency exchange rates and interest
rates.
 
 Petroleum
and Natural gas and Related Hydrocarbon Prices
 
 The
Company currently has no petroleum and natural gas and related hydrocarbon
reserves or production so the Company therefore has no current exposure related
to the instability of prices of such commodities. However; the prices of these
commodities are unstable and are subject to fluctuation, due to factors outside
of the Company’s control, including war, weather, the availability of alternate
fuel and transportation interruption and any material decline in these commodity
prices could have an adverse impact on the economic viability of the Company’s
exploration projects.
  54
 
 Foreign
Currency Exchange Rates
 
 The
Company, operating in both the United States and Canada, faces exposure to
adverse movements in foreign currency exchange rates. These exposures may change
over time as business practices evolve and could materially impact the Company’s
financial results in the future. To the extent revenues and expenditures
denominated in other currencies vary from their U. S. dollar equivalents, the
Company is exposed to exchange rate risk. The Company can also be exposed to the
extent revenues in one currency do not equal expenditures in the same currency.
The Company is not currently using exchange rate derivatives to manage exchange
rate risks.
 
 Interest
Rates
 
 The
Company’s interest income and interest expense, in part, is sensitive to the
general level of interest rates in North America. The Company is not currently
using interest rate derivatives to manage interest rate risks.
 
 
 ITEM 4.
CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report.
They concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are designed , and are effective, to give
reasonable assurance that the information required to be disclosed by the
Company in reports that it files under the exchange act is recorded , processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC and also effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure. They also concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were adequate and
effective in ensuring that material information relating to the Company would be
made known to them by others within those entities, particularly during the
period in which this report was being prepared. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and in
reaching a reasonable level of assurance, management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
 Our
management believes that our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives and our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures are effective at that reasonable assurance
level. As noted below, the Company continues to have a material weakness in
internal control over financial reporting but believes that such weakness does
not extend into our disclosure controls and procedures.
  55
  
 2007 Restatement
 
 During
the process of preparing the Company’s Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 2008, it was determined that it may be necessary to
restate our consolidated financial statements for the Fiscal Quarter Ended
September 30, 2007 and the Fiscal Year Ended December 31, 2007. The restatements
would be required to correct for an error in measurement and an error in the
application of U.S. generally accepted accounting principles (“US GAAP”) in
recording two September, 2007 transactions as described in Note 2 to our
unaudited consolidated financial statements.
 
 After
discussing these matters with other management, the CFO recommended to the Audit
Committee that previously reported financial results be restated to reflect
correction of these errors. The Audit Committee agreed with this recommendation.
Pursuant to the recommendation of the Audit Committee, the Board of Directors
determined at its meeting on March 13, 2009, that previously reported results
for the Company be restated. On March 27, 2009, amended consolidated financial
statements for the above noted periods were filed.
 
 Both of
these errors resulted from the Company not seeking appropriate external advice
regarding the accounting of certain transactions that were complex and not
subject to routine accounting principles. One error was in measuring the
appropriate date at which common shares of the Company were issued in
consideration for the acquisition of unproved oil and gas properties, an arm’s
length transaction that was negotiated over a period of several months during
2007 but not finally closed until September 28, 2007, at which date the common
shares were issued. The second error was in the application of US GAAP in the
accounting for the complexities involved relating to premium proceeds received
on the issue of Canadian flow-through shares, a Canadian income tax concept not
in practice in the United States. These errors demonstrated a material weakness
relating to the segregation of duties among financial and accounting personnel
and a need to engage additional personnel or seek outside advice where
appropriate to strengthen internal control over financial
reporting.
 
 Remediation
of Weakness in Internal Control Over Financial Reporting
 
 The Company will endeavor to engage outside
consulting assistance to ensure the proper accounting for non-routine accounting
transactions and compliance with US GAAP. Since 2008, the Company has engaged an
outside consulting firm to assist in income tax planning and compliance and
beginning with our fiscal year ended December 31, 2008, to review our yearend
and quarterly Canadian and U.S. income tax provisions.
 
 As at
September 30, 2009 and December 31, 2008, the Company continues to have a
material weakness in internal control over financial reporting, relating to the
segregation of duties among certain personnel. Management believes that without
engaging additional personnel, estimated to cost a minimum of approximately
$150,000 per annum, we cannot remedy such material weakness. Management believes
such expenditures will be justifiable in the near future now that the Company
has acquired producing properties and commencing with the fourth quarter of 2009
will have production, revenue and cash from operations. The Company has also
hired a Vice-President of Finance, effective November 2, 2009, which we believe
will help to alleviate our segregation of duties weakness. Management believes
its controls and procedures related to its financial and corporate information
systems are appropriate for a company of its size and mandate and due to its
internal expertise, it is not dependent upon the inherent risks in external
third party management of such systems.
  56
 
 PART II -
OTHER INFORMATION
   ITEM 1.
LEGAL PROCEEDINGS
 
 The
Company is not presently a party to any litigation.
 
 
 ITEM 1A.
RISK FACTORS
 
 Going Concern
Uncertainty
 
 There is
uncertainty that the Company will continue as a going concern, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future. The Company has not generated positive cash
flow since inception and has incurred operating losses and will need additional
working capital for its future planned activities. These conditions raise doubt
about the Company’s ability to continue as a going concern. Continuation of the
Company as a going concern is dependent upon obtaining sufficient working
capital to finance ongoing operations. The Company’s strategy to address this
uncertainty, includes additional equity and debt financing; however, there are
no assurances that any such financings can be obtained on favorable terms, if at
all, or that the Company will generate positive cash flow. These financial
statements do not reflect the adjustments or reclassification of assets and
liabilities that would be necessary if the Company were unable to continue its
operations.
 
 Financial Markets
Instability and Uncertainty
 
 The
2008-09 worldwide financial and credit crisis reduced the availability of
capital and credit to fund the continuation and expansion of industrial business
operations worldwide. The shortage of capital and credit combined with
substantial losses in worldwide equity markets led to a worldwide economic
recession. The slowdown in economic activity caused by this recession reduced
worldwide demand for energy and resulted in lower oil and natural gas and other
commodity prices. A prolonged reduction in oil and natural gas prices will
depress the immediate levels of exploration, development and production
activity. Although there are some signs that a slow economic recovery may be
underway, the Company’s ability to raise capital to finance ongoing capital
projects remains a very difficult challenge. Until the financial market
conditions improve significantly, we will face challenges in meeting our ongoing
financial obligations. The Company may be required to consider divestiture of
some properties or working interests to raise funds. The continuing financial
crisis may have impacts on our business and financial condition that we
currently cannot predict.
  57
 
 The Oil and Gas Industry Is
Highly Competitive
 
 The oil
& gas industry is highly competitive. We compete with oil and natural gas
companies and other individual producers and operators, many of which have
longer operating histories and substantially greater financial and other
resources than we do. We compete with companies in other industries supplying
energy, fuel and other needs to consumers. Many of these companies not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on a worldwide basis. Our
larger competitors, by reason of their size and relative financial strength, can
more easily access capital markets than we can and may enjoy a competitive
advantage in the recruitment of qualified personnel. They may be able to absorb
the burden of any changes in laws and regulation in the jurisdictions in which
we do business and handle longer periods of reduced prices of gas and oil more
easily than we can. Our competitors may be able to pay more for productive oil
and natural gas properties and may be able to define, evaluate, bid for and
purchase a greater number of properties and prospects than we can. Our ability
to acquire additional properties in the future will depend upon our ability to
conduct efficient operations, evaluate and select suitable properties, implement
advanced technologies and consummate transactions in a highly competitive
environment.
 
 Government and Environmental
Regulation
 
 Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and maintenance of
our facilities, the discharge of materials into the environment and other
environmental protection issues. The laws and regulations may, among other
potential consequences, require that we acquire permits before commencing
drilling, restrict the substances that can be released into the environment with
drilling and production activities, limit or prohibit drilling activities on
protected areas such as wetlands or wilderness areas, require that reclamation
measures be taken to prevent pollution from former operations, require remedial
measures to mitigate pollution from former operations, such as plugging
abandoned wells and remediation of contaminated soil and groundwater, and
require remedial measures to be taken with respect to property designated as a
contaminated site.
 
 Under
these laws and regulations, we could be liable for personal injury, clean-up
costs and other environmental and property damages, as well as administrative,
civil and criminal penalties. We maintain limited insurance coverage for sudden
and accidental environmental damages as well as environmental damage that occurs
over time. However, we do not believe that insurance coverage for the full
potential liability of environmental damages is available at a reasonable cost.
Accordingly, we could be liable, or could be required to cease production on
properties, if environmental damage occurs.
 
 The costs
of complying with environmental laws and regulations in the future may harm our
business. Furthermore, future changes in environmental laws and regulations
could occur that may result in stricter standards and enforcement, larger fines
and liability, and increased capital expenditures and operating costs, any of
which could have a material adverse effect on our financial condition or results
of operations.
  58
 
 The Successful
Implementation Of Our Business Plan Is Subject To Risks Inherent In The Oil
& Gas Business.
 Our oil
and gas operations are subject to the economic risks typically associated with
exploration, development and production activities, including the necessity of
significant expenditures to locate and acquire properties and to drill
exploratory wells. In addition, the cost and timing of drilling, completing and
operating wells is often uncertain. In conducting exploration and development
activities, the presence of unanticipated pressure or irregularities in
formations, miscalculations or accidents may cause our exploration, development
and production activities to be unsuccessful. This could result in a total loss
of our investment in a particular property. If exploration efforts are
unsuccessful in establishing proved reserves and exploration activities cease,
the amounts accumulated as unproved costs will be charged against earnings as
impairments.
 
 We Expect Our Operating
Expenses To Increase Substantially In The Future And May Need To Raise
Additional Funds.
 
 We have a
history of net losses and expect that our operating expenses will continue to
increase over the next 12 months as we continue to implement our business plan.
In addition, we may experience a material decrease in liquidity due to
unforeseen expenses or other events and uncertainties. As a result, we may need
to raise additional funds, and such funds may not be available on favorable
terms, if at all. If we cannot raise funds on acceptable terms, we may not be
able to execute on our business plan, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. This may
seriously harm our business, financial condition and results of
operations.
 
 We Are An Exploration Stage
Company Implementing A New Business Plan.
 
 Prior to
the fourth quarter of 2009, we have been an exploration stage company with only
a limited operating history upon which to base an evaluation of our current
business and future prospects, and we have just begun to implement our business
plan. Since our inception, we have suffered recurring losses from operations and
have been dependent on new investment to sustain our operations. During the nine
months ended September 30, 2009 and the years ended December 31, 2008, 2007,
2006 and 2005, we reported losses of $17,543,936, $2,074,649, $2,571,663
(restated), $2,867,374 and $1,133,790 respectively. Commencing in October, 2009
and effective with the acquisition of our first producing properties as
described under "Property Acquisition” in Note 7 to our consolidated financial
statements, we will become a producing company and will no longer be an
exploration stage company. Our consolidated financial statements for the nine
months ended September 30, 2009 and the years ended December 31, 2008, 2007,
2006 and 2005 contained a going concern qualification and we cannot give any
assurances that we can yet achieve profits from operations.
  59
 
 Our Ability To Produce
Sufficient Quantities Of Oil & Gas From Our Properties May Be Adversely
Affected By A Number Of Factors Outside Of Our Control.
 
 The
business of exploring for and producing oil and gas involves a substantial risk
of investment loss. Drilling oil wells involves the risk that the wells may be
unproductive or that, although productive, that the wells may not produce oil or
gas in economic quantities. Other hazards, such as unusual or unexpected
geological formations, pressures, fires, blowouts, loss of circulation of
drilling fluids or other conditions may substantially delay or prevent
completion of any well. Adverse weather conditions can also hinder drilling
operations. A productive well may become uneconomic due to pressure depletion,
water encroachment, mechanical difficulties, etc, which impair or prevent the
production of oil and/or gas from the well.
 
 There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. In addition, the marketability of any oil and gas that we
acquire or discover may be influenced by numerous factors beyond our control.
These factors include the proximity and capacity of oil and gas pipelines and
processing equipment, market fluctuations of prices, taxes, royalties, land
tenure, allowable production and environmental protection. We cannot predict how
these factors may affect our business.
 
 In
addition, the success of our business is dependent upon the efforts of various
third parties that we do not control. We rely upon various companies to assist
us in identifying desirable oil and gas prospects to acquire and to provide us
with technical assistance and services. We also rely upon the services of
geologists, geophysicists, chemists, engineers and other scientists to explore
and analyze oil prospects to determine a method in which the oil prospects may
be developed in a cost-effective manner. In addition, we rely upon the owners
and operators of oil drilling equipment to drill and develop our prospects to
production. Although we have developed relationships with a number of
third-party service providers, we cannot assure that we will be able to continue
to rely on such persons. If any of these relationships with third-party service
providers are terminated or are unavailable on commercially acceptable terms, we
may not be able to execute our business plan.
 
 Market Fluctuations In The
Prices Of Oil And Gas Could Adversely Affect Our Business.
 
 Prices
for oil and natural gas tend to fluctuate significantly in response to factors
beyond our control. These factors include, but are not limited to actions of the
Organization of Petroleum Exporting Countries and its maintenance of production
constraints, the U.S. economic environment, weather conditions, the availability
of alternate fuel sources, transportation interruption, the impact of drilling
levels on crude oil and natural gas supply, and the environmental and access
issues such as changes in government regulation that could limit or expand
future drilling activities for the industry.
 
 Changes
in commodity prices may significantly affect our capital resources, liquidity
and expected operating results. Price changes directly affect revenues and can
indirectly impact expected production by changing the amount of funds available
to reinvest in exploration and development activities. Reductions in oil and gas
prices not only reduce revenues and profits, but could also reduce the
quantities of reserves that are commercially recoverable. Significant declines
in prices could result in charges to earnings due to impairment.
 
 Changes
in commodity prices may also significantly affect our ability to estimate the
value of producing properties for acquisition and divestiture and often cause
disruption in the market for oil producing properties, as buyers and sellers
have difficulty agreeing on the value of the properties. Price volatility also
makes it difficult to budget for and project the return on acquisitions and
development and exploitation of projects. We expect that commodity prices will
continue to fluctuate significantly in the future.
  60
 
 Risks Of Penny Stock
Investing
 
 The
Company's common stock is considered to be a "penny stock" because it meets one
or more of the definitions in the Exchange Act Rule 3a51-1, a Rule made
effective on July 15, 1992. These include but are not limited to the
following:(i) the stock trades at a price less than five dollars ($5.00) per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is
NOT quoted on an automated quotation system sponsored by a national securities
association (NASDAQ), or even if so, has a price less than five dollars ($5.00)
per share; OR (iv) is issued by a company with net tangible assets less than
$2,000,000, if in business more than three years continuously, or $5,000,000, if
in business less than a continuous three years, or with average revenues of less
than $6,000,000 for the past three years. The principal result or effect of
being designated a "penny stock" is that securities broker-dealers cannot
recommend the stock but must trade in it on an unsolicited basis.
 
 Risks Related To
Broker-Dealer Requirements Involving Penny Stocks / Risks Affecting Trading And
Liquidity
 
 Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the Commission require broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account. These rules may have the effect of reducing the level of trading
activity in the secondary market, if and when one develops.
 
 Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Commission Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Pursuant to the
Penny Stock Reform Act of 1990, broker-dealers are further obligated to provide
customers with monthly account statements. Compliance with the foregoing
requirements may make it more difficult for investors in the Company's stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
  61
 
 ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None
 
 
 ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 
 Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 
 Item 5.
OTHER INFORMATION
 
 Voluntary Delisting of
Company's Shares From TSX Venture Exchange in Canada
 
 On
November 4, 2009, The Company voluntarily requested the TSX Venture
Exchange ("TSX-V") in Canada to delist its common shares from trading on the
TSX-V. The TSX-V’s policies allow for a period of ten days before delisting to
facilitate settlement of trades and to allow shareholders to sell to willing
purchasers. The TSX-V will issue an Exchange Bulletin ten days prior to the
voluntary delisting. This voluntary delisting is not pursuant to any order or
communication from the TSX-V.
 
 Kodiak's
common shares are currently quoted for trading on the OTC Bulletin Board (OTCBB)
in the United States under the symbol KDKN and it will continue to maintain
this quotation status and Canadian shareholders will be able to continue to
trade through their brokers on that market.
 
 The
Corporation’s board of directors approved the voluntary delisting from the TSX
Venture Exchange after weighing the required expenses and multi-jurisdictional
filings to maintain a dual listing of the company's securities against the
perceived shareholder benefit accrued from trading on different
platforms.  The Corporation does not expect the anticipated voluntary
delisting from the TSX-V will have any impact on the day-to-day operations of
the company.
  62
 
 The
primary reasons for the voluntary delisting request are:
 
 1.
              Since
      the Corporation’s TSX-V listing effective December 24, 2007 to market
      close on October 30, 2009, liquidity analysis revealed an average
      daily trading volume of 270,413 shares on the OTCBB and 14,022 on the
      TSX-V for the period – a difference in trading volume and liquidity of
      over 19 times.
 
 2.
              Following
      the initial Canadian based financing associated with the TSX-V listing,
      the Corporation has repeatedly experienced little to no investment
      interest or support from the Canadian financial community consisting of
      investment banks, capital markets and retail brokerage firms, and private
      equity firms.  The primary source of equity financing has been
      from Europe over the last 18 months, and we do not expect that to change
      in the foreseeable future. Our European investors have a stated preference
      for the OTCBB listing versus the TSX-V, of which the latter listing they
      do not follow.
 3.
              The
      Corporation’s Board of Directors believes that voluntarily delisting from
      the TSX-V and focusing on U.S. and European markets is in the best
      interests of our shareholders.  This will eliminate the
      substantial cross-border financing and reporting
  issues.
 
 4.
              As
      of October 31, 2009, the Corporation’s transfer agent, Computershare,
      revealed the shareholder geographic position of all foreign based
      shareholders at 61.54% and Canadian based shareholders at 38.46%, of which
      the vast majority of the latter is founder shareholdings and only a
      nominal amount in the Canadian float.  As a result, the OTCBB
      quotation system serves shareholders of the majority of Kodiak’s shares,
      where the Corporation’s stock has been trading since December 27,
      2004.
 
 5.
              The
      internal and external compliance costs to maintain the listing of the
      Corporation’s shares on the TSX-V are relatively significant to a company
      of this size, which has not resulted in an additional benefit for
      shareholders in view of the low trading volume on the
    TSX-V.
 
 6.
              The
      Financial Industry Regulatory Authority (FINRA) is the largest independent
      regulator for securities firms in the United States and is responsible for
      establishing rules governing its broker/dealer members, including OTCBB
      subscribing members, on conduct, qualification standards, examinations,
      investigations, violations, and investor and member inquiries – thus there
      is a previous and demonstrated, current market for Kodiak
      shareholders.
  63
  Other
factors:
 
 7.
              To
      maintain quotation eligibility on the OTCBB, Kodiak Energy, Inc. is
      required to file periodic financial information with the U.S. Securities
      and Exchange Commission (SEC).  All the Corporation’s filings
      are located under the “Kodiak Energy, Inc.” profile on the Electronic Data
      Gathering, Analysis, and Retrieval (EDGAR) system through the U.S. SEC
      website at http://www.sec.gov.
 
 8.
              Kodiak
      intends on maintaining its “foreign reporting issuer status” with the
      Alberta Securities Commission.
 
 9.
              Kodiak
      is Sarbanes Oxley (SOX) compliant, is a fully reporting accelerated filer,
      and adheres to the security laws, rules, regulations and filing
      requirements of the U.S. SEC.
 
 
 ITEM 6. EXHIBITS
 
 EXHIBITS
 
 31.1
- Certification of President and Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
 
 31.2
- Certification of Chief Financial Officer to Section 302 of the Sarbane-Oxley
Act of 2002
 
 32.1
- Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 KODIAK
      ENERGY, INC.(Registrant)Dated:
      November 9, 2009
              
              By: /s/  William S.
      TigheWilliam
      S. TigheChief
      Executive Officer
   64