10QSB/A 1 kodiak10qsba093006.txt KODIAK ENERGY, INC. FORM 10-QSB/A SEPTEMBER 30, 2006 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to_____________ Commission file number 0 - 24012 KODIAK ENERGY INC. ------------------------------------- (Exact name of registrant as specified in its charter) Delaware 65-0967706 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 734 7th Ave S.W. Suite 460, Calgary, AB, T2P 3P8, Canada -------------------------------------------------------- (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 No X --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- As of September 30, 2006, the Registrant had approximately 89,759,428 shares of Common Stock, $.001 par value per share outstanding. KODIAK ENGERY INC. INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and September 30, 2005 3 Condensed Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows (unaudited) for the three months and nine months ended September 30, 2006 and 2005 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10 ITEM 3. CONTROLS AND PROCEDURES 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 13 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 5. OTHER INFORMATION 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 2 KODIAK ENERGY, INC. Consolidated Balance Sheets (Development Stage Company Going Concern Uncertainty - Note 1) -------------------------------------------------------------------------------- December 31, 2005 September 30, (Audited) 2006 (Restated- (Unaudited) Note 2) -------------------------------------------------------------------------------- Assets Current Assets Cash $ 482,181 $ 190,651 Other Receivables 547,183 12,676 Prepaid Expenses 24,117 67,850 --------------------------------------------------------------------------- 1,053,481 271,177 Other Assets (Note 3) 24,654 20,249 -------------------------------------------------------------------------------- 1,078,135 295,426 -------------------------------------------------------------------------------- Property, Plant & Equipment Oil & Gas Properties (Note 4) 1,476,076 250,318 ($1,379,441 unproven properties excluded from costs amortized; Dec 31, 2005 - $250,318) Property & Equipment (Note 4) 51,104 15,821 Accumulated Amortization (Note 4) (38,696) (1,235) --------------------------------------------------------------------------- 1,488,484 264,904 -------------------------------------------------------------------------------- 2,566,619 556,330 ================================================================================ Liabilities and Shareholders' Equity Current Liabilities Accounts Payable 64,161 28,553 Accrued Liabilities 128,387 153,859 Convertible Debt (Note 5) - 41,189 --------------------------------------------------------------------------- 192,548 223,601 Asset Retirement Obligations (Note 6) 65,208 - -------------------------------------------------------------------------------- 257,756 223,601 -------------------------------------------------------------------------------- Shareholders' Equity Share Capital 300,000,000 Authorized: (2005 100,000,000) Common Shares Par Value .001 Each Issued & Outstanding 89,759,428 (2005 - 474,028)(Note 7) 89,759 474 Shares to be Issued (Note 7) - 773,637 Share Subscription Receivable - (72,000) Additional Paid in Capital (Note 7) 4,908,354 834,561 Deficit Accumulated during the Development Stage (2,680,977) (1,196,403) Accumulated Other Comprehensive Loss (8,273) (7,540) --------------------------------------------------------------------------- 2,308,863 332,729 -------------------------------------------------------------------------------- $ 2,566,619 $ 556,330 ================================================================================ (See accompanying notes to the unaudited consolidated financial statements) 3
KODIAK ENERGY, INC. Consolidated Statements of Operations - Unaudited (Development Stage Company Going Concern Uncertainty - Note 1) Cumulative Since Three Three Nine Nine Inception Months Months Months Months Apr 7, 2004 Sept 30, Sept 30, Sept 30, Sept 30, to Sept 30, 2006 2005 2006 2005 2006 REVENUES, NET OF ROYALTIES $ 10,331 $ - $ 10,331 $ - $ 10,331 ------------------------------------------------------------------------- EXPENSES Operating Costs 5,010 - 5,010 - 5,010 Administrative 266,867 2,744 700,910 11,231 1,062,267 Compensation Expense (Note 8) - - 337,500 - 337,500 Interest Expense - - - - 808,811 ------------------------------------------------------------------------- Loss Before Other Expenses (261,555) (2,744) (1,033,089) (11,231) (2,203,257) Other Expenses Depletion, Depreciation and Accretion (35,224) - (40,372) - (41,607) Writedown of Oil and Gas Properties (411,113) - (411,113) - (411,113) Loss from valuation adjustment - - - - (25,000) ------------------------------------------------------------------------- (446,337) - (451,485) - (477,780) ------------------------------------------------------------------------- NET LOSS $ (707,893) $ (2,744) $(1,484,574) $(11,231) $ (2,680,977) BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.01) $ (0.00) $ (0.02) $ (0.02) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 89,759,428 474,028 62,327,073 473,558
(See accompanying notes to the unaudited consolidated financial statements) 4
KODIAK ENERGY, INC. Consolidated Statements of Cash Flows - Unaudited (Development Stage Company Going Concern Uncertainty - Note 1) Cumulative Since Three Three Nine Nine Inception Months Months Months Months Apr 7, 2004 Sept 30, Sept 30, Sept 30, Sept 30, to Sept 30, 2006 2005 2006 2005 2006 OPERATING ACTIVITIES Net Loss $ (707,893) $(2,744) $(1,484,574) $(11,231) $(2,680,977) Adjustments to reconcile net loss to net cash used in operating activities: Depletion, Depreciation and Accretion 35,224 - 40,372 - 41,607 Contributions To Capital - 900 - 900 900 Foreign Currency Translation (3,825) - (733) - (7,949) Compensation Expense - - 337,500 - 337,500 Interest Expense - - - - 808,811 Writedown of Oil and Gas Properties 411,113 - 411,113 - 411,113 Loss From Valuation Adjustment - - - - 25,000 Changes in Non-Cash Working Capital Components: Change In Other Receivables (74,879) - (177,074) - (189,750) Change In Prepaid Expenses 7,344 - 33,733 - (24,117) Change In Accounts Payable (27,319) - (17,180) - 4,373 Change In Accrued Liabilities (198,760) 1,844 (87,604) 10,331 21,895 Change In Convertible Debt - - (41,189) - - ------------------------------------------------------------------------ Net Cash Used in Operating Activities (558,994) - (985,636) - (1,251,594) Investment Activities Additions to Property, Plant & Equip (701,253) - (1,609,857) - (1,875,995) Additions to Other Assets (305) - (405) - (24,654) Change In Other Receivables (342,958) - (357,433) - (357,433) Change In Accounts Payable (73,489) - 52,788 - 59,787 Change In Accrued Liabilities 106,492 - 62,132 - 106,492 ------------------------------------------------------------------------ Net Cash Used in Investing Activities (1,011,513) - (1,856,775) - (2,091,803) Financing Activities Shares issued - - 3,825,578 - 3,825,578 Share Subscription Receivables 90,000 - 72,000 - - Change In Prepaid Expenses - - 10,000 - - Shares to be Issued - - (773,637) - - ------------------------------------------------------------------------ Net Cash Provided by Financing Activities 90,000 - 3,133,941 - 3,825,578 Net Cash Increase (Decrease) (1,480,507) - 291,530 - 482,181 Cash beginning of Period 1,962,688 - 190,651 - - ------------------------------------------------------------------------ Cash end of Period $ 482,181 - $ 482,181 $ 482,181 ------------------------------------------------------------------------
(See accompanying notes to the unaudited consolidated financial statements) 5 KODIAK ENERGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Three and Nine Month Period Ended September 30, 2006 Stated in U.S. dollars 1. ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY The interim consolidated financial statements include the accounts of Kodiak Energy Inc. and subsidiaries (collectively "Kodiak", the "Company", "we", "us" or "our") as at September 30, 2006 and December 31, 2005 and for the periods ended September 30, 2006, September 30, 2005 and the period from April 7, 2004 (inception) until September 30, 2006, presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") on the same basis as the audited consolidated financial statement as at and for the period ended December 31, 2005, except as outlined in Note 2. These interim consolidated financial statements should be read in conjunction with December 31, 2005 audited consolidated financial statements and the notes thereto. Interim results are not necessarily indicative of results expected for the fiscal year. These interim consolidated financial statements have not been audited. 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 $.001. On December 30, 2004 the name was changed to "Kodiak Energy, Inc." and the authorized common stock was increased to 100,000,000 shares with the same par value. On January 17, 2005 the Company affected a reverse split of 100 outstanding shares for one share. These consolidated financial statements have been prepared showing post split shares from inception. The Company was engaged in the development of the manufacture and distribution of medical instrumentation and it became inactive after the bankruptcy outlined below. The Company is in the development stage and its efforts have been principally devoted to capital raising, organizational infrastructure development, and acquisitions of oil and gas properties for the purposes of future extraction of the resources. Bankruptcy ---------- On February 5, 2003 the Company filed a petition for bankruptcy in the District of Prince Edward Island, Division No. 01-Prince Edward Island Court No. 1713, Estate No. 51-104460, titled "Island Critical Care Corp.". The Company emerged from bankruptcy pursuant to a Bankruptcy Court Order entered on April 7, 2004 with no remaining assets or liabilities and adopted Fresh Start Accounting. The terms of the bankruptcy settlement included the authorization for the issuance of 150,000 post split restricted common shares in exchange for $25,000, which was paid into the bankruptcy court by the recipient of the shares. The Company emerged from bankruptcy as a development stage company. Going Concern Uncertainty ------------------------- These consolidated financial statements have been prepared assuming the Company will continue as a going concern, which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company has not generated positive cash flow since inception and has incurred recurring operating losses and will need working capital for its future planned activities. These conditions raise substantial 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 management of the Company has developed a strategy to address this uncertainty, including additional loans from officers, and equity funding, however there are no assurances that any such financing could be obtained on favorable terms, if at all. 6 2. RESTATEMENT In November 2006, we determined that it was necessary to restate our financial results for the year ending December 31, 2005 and for the periods ending March 31, 2006 and June 30, 2006. The purpose of the restatements is to correct errors found in accounting for transactions resulting from a lack of adequate procedures necessary to ensure that records were maintained in reasonable detail to fairly reflect the transactions of the Company in the start up phase of operations. For the impact of the errors on the December 31, 2005 financial statements sheet refer to the Amended Form 10-KSB/A for the year ended December 31, 2005. 3. OTHER ASSETS Other Assets in the amount of $24,117 represents a long term deposit required by regulatory authorities for environmental obligations for well abandonment and restoration in Alberta. 4. PROPERTY, PLANT & EQUIPMENT Net Book Net Book Accumulated Value Value depreciation Sept 30, December 31, Cost and depletion 2006 2005 (As Restated- Note 2) Canada: Oil and gas properties $ 1,227,205 $ 30,634 $ 1,196,571 $ 118,318 United States: Oil and gas properties 248,871 -- 248,871 132,000 -------------------------------------------------------- Sub-Total 1,476,076 30,634 1,445,442 250,318 -------------------------------------------------------- Furniture & fixtures 51,104 8,062 43,042 14,586 -------------------------------------------------------- Total 1,527,180 $ 38,696 $ 1,488,484 $ 264,904 The aggregate amount of capitalized costs of unproved properties and major development projects excluded from the costs amortized at September 30, 2006 is $1,379,441. The Company recognized an impairment loss of $411,113 expense for the period ended September 30, 2006. The Company capitalized $14,957 (2005 - nil) of Asset Retirement Obligations during the three month period ending September 30, 2006 and for the nine month period ending September 30, 2006 $62,296 (2005 - Nil) was capitalized. 5. CONVERTIBLE DEBT Debt of $41,189 at December 31, 2005 was non-interest bearing and convertible to common shares of the Company pursuant to the stock for services compensation plan. A beneficial conversion feature of $808,811 was calculated on the debt for the year ended December 31, 2005 representing the difference between the conversion price and the fair value of the common stock at the commitment date. This amount is recorded as interest expense and an increase in additional paid in capital. The Company issued 1,000,000 shares in January, 2006 to settle this debt pursuant to the stock for services compensation plan. Debt was reduced by $41,189 and Shares Issued increased by $1,000 and Additional Paid in Capital increased by $40,189. 7 6. 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: ---------------------------------------------------------------------------- 2006 ---------------------------------------------------------------------------- Asset retirement obligations, December 31, 2005 - ---------------------------------------------------------------------------- Obligations incurred during period 62,296 ---------------------------------------------------------------------------- Accretion 2,912 ---------------------------------------------------------------------------- Asset retirement obligations, September 30, 2006 65,208 ---------------------------------------------------------------------------- At September 30, 2006 the estimated total undiscounted amount required to settle the asset retirement obligations was $ 102,285. 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%. 7. SHARE CAPITAL Authorized: 300,000,000 (2005 - 100,000,000) common shares at $0.001 par value -------------------------------------------------------------------------------- Additional Paid Number Value in Capital -------------------------------------------------------------------------------- Balance at September 30, 2005 and December 31, 2005 474,028 $ 474 $ 834,561 -------------------------------------------------------------------------------- Private Placement, net of issue costs (26,363) 16,000,000 16,000 756,656 -------------------------------------------------------------------------------- Private Placement, net of issue costs (140,000) 933,324 933 1,259,067 -------------------------------------------------------------------------------- Shares issued for service 1,000,000 1,000 40,189 -------------------------------------------------------------------------------- 2:1 Stock split 18,407,362 18,408 (18,408) -------------------------------------------------------------------------------- Shares issued for service, net issue of costs (15,526) 7,500,000 7,500 314,973 -------------------------------------------------------------------------------- 2:1 Stock split 44,315,184 44,314 (44,314) -------------------------------------------------------------------------------- Private Placement, net of issue costs (153,740) 1,130,000 1,130 1,766,130 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Balance September 30, 2006 89,759,428 $ 89,759 $ 4,908,354 -------------------------------------------------------------------------------- At the annual general meeting held on July 18, 2006, the shareholders of the Company voted in favor of increasing the authorized common shares to 300,000,000. On January 13, 2006 16,000,000 shares were issued pursuant to two private placements for which a portion closed December 22, 2005 (13,650,000 shares for gross proceeds of $300,000 - Note 9) and December 30, 2005 (910,000 shares, $500,000) respectively reported as "Shares to be Issued" at December 31, 2005 in the amount of $773,637 (net of share issue costs of $26,363) as the share certificates were not issued until January 13, 2006. The Company closed a private placement in January for 933,324 common shares at a price of $1.50 per share for gross proceeds of $1,400,000. The Company issued 1,000,000 common shares to settle debt of $41,189 (Note 5) pursuant to the stock for services compensation plan. A beneficial conversion feature of $808,811 was calculated on the debt for the year ended December 31, 2005 representing the difference between the conversion price and the fair value of the common stock at the commitment date. This amount is recorded as interest expense and an increase in additional paid in capital for the year ended December 31, 2005. 8 On February 20, 2006 the Company's stock split forward by paying a stock dividend to our existing shareholders. All shareholders of record on February 14, 2006 received 1 dividend share for every share they owned amounting to 18,407,362 shares of common stock issued. During 2006, the Company issued 7,500,000 common shares, pursuant to an S8 registration, for services provided to the Company for corporate development that have been recorded under the provisions of SFAS No. 123R relating to transactions with non-employees where the fair value of the shares issued ($337,500 - Note 8) has been recorded as a Compensation Expense and an increase in Additional Paid In Capital (less share issue costs of $15,526. On May 1, 2006 the Company's stock split forward by paying a stock dividend to our existing shareholders. All shareholders of record on April 28, 2006 received 1 dividend share for every share they owned amounting to 44,315,184 shares of common stock issued. The Company closed a private placement in June for 1,130,000 units at a price of $1.70 per unit for gross proceeds of $1,921,000. Each unit entitled the subscriber to one common share of the Company and one warrant. Warrants Pursuant to a private placement in June, 2006 the Company has 1,130,000 warrants outstanding as of September 30, 2006. Each warrant entitles the warrant holder to exchange one warrant for one common share at a price of $2.50 until June 30, 2008 and $3.50 from July 1, 2008 to June 30, 2011. 8. RELATED PARTY TRANSACTIONS An officer-director acquired 150,000 shares, post split, of the common capital stock issued at the emergence from bankruptcy on April 7, 2004, for $25,000. Officers and directors of the Company purchased 10,200,000 shares of the common capital stock of the Company on December 22, 2005 at $0.02 per share for $204,000. These shares were not issued by the Transfer Agent until January 13, 2006 and were reflected in shareholders' equity as part of the caption "Shares to be Issued" at December 31, 2005. For the nine months ended September 30, 2006, the Company paid Sicamous Oil & Gas Consultants $62,191 (September 30, 2005 -$40,744) for consulting services rendered by the COO. Sicamous Oil & Gas Consultants is a company owned by our Chief Operating Officer, Mr. William Tighe. For the nine months ended September 30, 2006, the Company paid MHC Corporation $40,080 (September 30, 2005-$27,897) for consulting services rendered by the CEO. MHC Corporation is a company owned by our Chief Executive Officer, Mark Hlady. During the nine months ended September 30, 2006 the Company paid $61,087 (September 30, 2005 -$131,156) to companies which beneficially own 8.1% of the Company for investor relations services. Investor relations services in the amount of $46,087 are included in Administrative Expenses and Prepaid Expenses in the amount of $15,000(September 30, 2005 $54,793 are included in Administrative Expense and $26,363 were commissions on a private placement included in Additional Paid in Capital and a retainer in the amount of $50,000 in Prepaid Expenses). During the nine months ended September 30, 2006 the Company paid 2,000,000 shares for service to an individual whom beneficially owns 8.1% of the Company for corporate development services. The shares were valued at market price of $90,000 and were recorded as Compensation Expense and an addition to Additional Paid in Capital. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION All statements contained herein that are not historical facts, including, but not limited to, statements regarding the Company's current business strategy, the Company's projected sources and uses of cash, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; competitive factors; changes in labor, equipment and capital costs; changes in regulations affecting the Company's business; future acquisitions or strategic partnerships; general business and economic conditions; and factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995 and, as a result, are pertinent only as of the date made. PLAN OF OPERATION The Company commenced production in the third quarter ended September 30, 2006 from a gas well at GranLea which was drilled in the same quarter. In the next twelve months Kodiak plans to progressively and methodically develop its asset base. Canada Manyberries - Alberta Kodiak drilled two wells in March of 2006 on the Manyberries property. The Company will earn 100% of the project after drilling three shallow gas wells. To date, two wells have been drilled and one recompleted and a substantial amount of seismic information purchased and processed. We expect to drill the third well in the fourth quarter of 2006. In the next twelve months we plan to drill more shallow gas wells and complete a 3D seismic program to prove the existence of deeper oil plays. Upon confirmation of sufficient reserves, pipelines will be constructed to tie the wells into existing gas facilities. Granlea -Alberta A 2D seismic program was completed on the Granlea property, a well drilled/completed to the Sawtooth formation, surface facilities installed, and a pipeline completed. Production was started in late Q3. Based on production results, additional drilling and land acquisitions in the area will be considered. Lucy Area - northern BC Kodiak, has a 10% working interest in a well in Northern British Columbia, located 40 miles northeast of Fort Nelson, targeting natural gas. The well is expected to spud in the fourth quarter of 2006. Little Chicago NWT Kodiak Energy has signed a farmin agreement to earn up to a 56.25% working interest on the 200,000 acre Exploration License 413 ("EL 413") in the Mackenzie River Valley and centered along the planned Mackenzie Valley Pipeline. Kodiak Petroleum ULC will be the initial Operator under the joint operating procedure and will spend five million dollars ($5,000,000.00) prior to June 30, 2007, to acquire 2D seismic data on the Farmout Lands, thus earning a 12.5% working interest in the properties. Kodiak will drill two test wells the following winter on the Farmout Lands to earn an undivided 50% of the balance of the Farmor's interest in two 20,000 acre test well blocks. The Company will have a continuing rolling option to drill additional Option Well(s) on the remaining unearned "20,000 acre test well block(s)". Subsequent to this farmout - Kodiak has signed a participation agreement with Source Energy Ltd of Calgary to share the initial development costs. By funding 55% of the seismic costs, Source will earn an undivided 5.25% of the EL413 working interest. By funding 35% of the drilling costs, Source will earn 15% of the test blocks. Kodiak shall remain as the operator with an overall working interest of 36% on the first two blocks and 40% on all subsequent blocks. 10 Montana Two wells were drilled in the third quarter, one is cased for subsequent evaluation of the multiple zones found and one was abandoned. A third well is licensed and will be drilled depending upon the results of testing on the first well. Subsequent to the drilling, any successful wells will be tied into existing facilities in 2007. We have allocated approximately $400,000 for this project for the 1st quarter of 2007. New Mexico Kodiak Energy, Inc. has entered into a joint venture agreement on 50,000 acres of property located in Northeast New Mexico. Once Kodiak acquires seismic the Company will earn an undivided 12.5% working interest in all the existing leases. In consideration for drilling and casing, or abandonment, of each of the three test wells and the re-entry of an existing borehole, Kodiak shall earn a 100% working interest in each well, on a well by well basis, (being an 84% net interest) before payout for that well and a 50% working interest after payout. Prior to payout Thunder will retain a standard sliding scale (5% to 15%) royalty on oil and 15% on natural gas and after payout the royalty shall convert to a 50% Working Interest on a well by well basis. In further consideration of drilling and casing, or abandonment, of each of the three test wells and the re-entry of the existing borehole, Kodiak shall earn a sliding scale working interest of up to 3,200 acres. For fulfilling its obligation to drill the wells described above, Kodiak will earn an option to continue to drill additional wells and to earn an undivided 50% working interest in the petroleum and natural gas rights for the applicable after earned acreage amounts. The exact timing of such rolling options is to be mutually determined by Kodiak and Thunder River. Unless otherwise agreed by all parties, Kodiak shall be the sole operator of all wells drilled pursuant to this letter and Thunder River shall act as an advisor. In the event of a commercial discovery, Thunder River will participate in any follow-up drilling and development of these prospects. Kodiak will also have the right to participate with Thunder River in the acquisition of surrounding leases covering the initial prospects, and in addition, Kodiak will have the right to participate in future Thunder River New Mexico prospect lease acquisitions. Utah Kodiak had signed a letter of intent for 22% of a heavy oil project in Utah. Upon completion of due diligence the Company will not be proceeding with this project as there were land schedule deficiencies. Financial Condition and Changes in Financial Condition The Company had revenue net of royalty of $10,331 for the quarter ended September 30, 2006 from a gas well at Granlea with an average gas price of $3.54/mcf. The well produced 3,305 mcf in the month of September (averaged 110 mcf/d in the month). 11 Operating costs were $5,010 or $1.52/mcf and royalties averaged 15% of gas sales. Net Loss for the quarter ended September 30, 2006 totaled $708,268. The majority of the net loss relates to $411,113 of depletion, depreciation and accretion expense as an impairment loss on the Granlea property. Administrative expenses of $267,192 relate to consulting, public company expenses, audit fees, general and administration and legal costs. Net loss for the quarter ended September 30, 2005 totaled $2,744. The expenses relate to general and administrative costs. Liquidity and Capital Resources: Since inception to September 30, 2006, we have funded our operations from the sale of securities and loans from shareholders. As of September 30, 2006, our assets totaled $2,566,619, which consisted primarily of oil and gas mineral rights and land in Canada and Montana. Our total liabilities were $192,548, which were primarily accounts payable for audit fees and administrative expenses. We had stockholders' equity of $2,308,863. On January 20, 2006 Kodiak Energy raised gross proceeds of $1,400,000 through the sale of 933,324 common shares at a price of $1.50 per share. Kodiak Energy used the funds for drilling two wells at the Manyberries property, and general corporate purposes. On June 30 Kodiak Energy raised gross proceeds of $1,921,000 through the sale of 1,130,000 units at a price of $1.70 per share. The units consisted of one common share and one warrant to purchase a share for $2.50 until June 30, 2008 and $3.50 from July 1, 2008 until June 30, 2011. The funds were used to drill two wells in Montana and general corporate purposes. As at September 30, 2006 the working capital was $885,587. RAISING CAPITAL The Company currently lacks the capital resources to fully implement and carry out its business plan as described herein. At some point in the future we expect to raise additional capital, either through debt, equity or any combination thereof. In the event that additional capital is raised at some time in the future, existing shareholders will experience dilution of their interest in the Company. ITEM 3. CONTROLS AND PROCEDURES Restatement During the process of preparing for the Company's third quarter financial report the CFO identified errors in the accounting records that originated in the fourth quarter of 2005, the first quarter ended March 31, 2006 and the second quarter ended June 30, 2006. The errors arose as a result of a lack of adequate procedures and documentation necessary to ensure that records were maintained in reasonable detail to fairly reflect the transactions of the Company in the start up phase of operations. After discussing these matters with 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 November 3, 2006, that previously reported results for the Company be restated to correct these errors and, in light of the restatement, that the financial statements and other information referred to above should no longer be relied upon. Evaluation of Disclosure Controls and Procedures The CFO evaluated the disclosure controls and procedures and identified a lack of sufficient procedures, documentation and qualified personnel to ensure the records fairly reflected the transactions of the Company resulting in a material weakness in the Company's internal control over financial reporting. Solely as a result of the material weakness, management concluded that the disclosure controls and procedures were not effective as of December 31, 2005, March 31, 2006 or June 30, 2006. 12 Remediation of Material Weakness in Internal Control As of the date of this filing the CFO is in the process of designing disclosure controls and procedures to be implemented to ensure the records fairly reflect the transactions of the Company. The remedial actions include: * Designing adequate disclosure controls and procedures for the Company * Implementing the disclosure controls and procedures * Testing the effectiveness of the implemented disclosure controls and procedures * Reporting the results of the tests of effectiveness to management, Audit Committee and Board of Directors In connection with the amended Form 10-K, under the direction of the Chief Executive Officer and Chief Financial Officer, we have evaluated our disclosure controls and procedures as currently in effect, including the remedial actions discussed above, and we have concluded that, as of this date, our disclosure controls and procedures are not effective. As previously reported, there was no change in our internal control over financial reporting during the quarter year ended December 31, 2005, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, subsequent to June 30, 2006, we are taking the remedial actions described above. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 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 None. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 31.1 - Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 - Certification of Chief Financial Officer to Section 302 of the Sarbanes-Oxley Act of 2002 32 - Certification of President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 REPORTS ON FORM 8-K On August 25, 2006 we filed an 8K under item 5.02 Election of Directors and Appointment of Principal Officers. On Auust 28, 2006 we filed an 8K under item 1.01 Entry into a Material Definitive Agreement 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: December 13, 2006 By: /s/ Mark Hlady --------------------------------- Mark Hlady CEO, CFO and Chairman 14 --------------------------------------------------------------------------------