UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Amendment #1
x Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal period ended: September 30, 2008
o Transition Report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from ________ to _________
Commission File Number: 0 - 52280
SCOUT EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Nevada | 98-0504670 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
15707 Rockfield Boulevard, Suite 101, Irvine, California 92618 |
(Address of principal executive offices) |
(949) 265-7717 |
(Issuer’s telephone number) |
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB: o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No x
State issuer’s revenues for its most recent fiscal year: $117,893
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: $783,700 based on the last sale price of our common stock of $0.10 on December 31, 2008. The Issuer had 8,947,000 shares of Common Stock, par value $.001, outstanding as of December 31, 2008.
Transitional Small Business Disclosure format (Check one): Yes o No x
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PART I
Item 1. Description of Business
Business Development
We were incorporated in the State of Nevada on February 1, 1999 as “Virtual Curricula Corp.” On April 10, 2006, we changed our name to “Scout Exploration, Inc.” We were originally engaged in the business of developing interactive educational products for children, adults, business people and new language learners. On March 4, 2006, we abandoned that business to pursue the business of mineral exploration.
On March 4, 2006, we entered into a mineral property purchase agreement with Iscis Holdings Ltd., whereby they sold to us 100% right, title and interest in the mineral title “AAV 1-9 Claims” (also known as the “Wheaton River Property”) in the Whitehorse Mining District of the Yukon Territory. For the foreseeable future, we plan to defer any further exploration work programs on Wheaton River Property.
Our principal executive office is located at 15707 Rockfield Boulevard, Suite 101, Irvine, California 92618. Our phone number is (949) 265-7717. Our Internet address is http://www.scoutexploration.com. Information on our website is not, however, part of this report.
Purchase of Kerrisdale Resources Ltd.
On January 29, 2008, we entered into a letter of intent with Brian Mahood, the owner of Kerrisdale Resources Ltd., an Alberta corporation (“Kerrisdale”). We filed a current report on Form 8-K regarding this transaction with the SEC on February 11, 2008. Pursuant to the letter of intent and, as later amended by terms of a Share Purchase Agreement dated June 18, 2008 (the “Agreement”), and further amended on January 7, 2009, we acquired the right to purchase one hundred percent (100%) of the issued and outstanding shares of Kerrisdale, with the:
a) | Payment to Brian Mahood of $23,747 ($25,000 CDN) upon signing the letter of intent for an exclusive ninety (90) day due diligence period (which has been paid), AND, |
b) | Payment of $ 392,696 ($400,000 CDN) upon the closing of the purchase transaction (which has been paid) AND, |
c) | Assumption by Kerrisdale Resources Ltd. of the unpaid amount of $343,610 ($360,000 CDN) (the “Principal Amount”) pursuant to the provisions of a General Security Agreement, the effective date of which is January 1, 2008 (the “Security Agreement”). Pursuant to the provisions of the Security Agreement, Kerrisdale, to secure the payment of the Principal Amount, granted to Mr. Mahood a continuing security interest in and to all (i) personal property of Kerrisdale, including goods, chattel paper, securities, documents of title, instruments, money, intangibles; (ii) real property of Kerrisdale, including all changes on land or interests in land and petroleum and natural gas leases described in the Security Agreement; and (iii) parts, accessories, attachments, equipment, additions, accretions thereto and property thereof, together with any equipment or accessories placed upon repairs made to the foregoing during the term of the Security Agreement. Interest accrues on the Principal Amount at an annual rate of 6.75% during a period of three years. Interest is required to be paid quarterly, commencing on the effective date of January 1, 2008, until January 1, 2009 at which time interest is required to be paid monthly. The first interest payment is due on July 1, 2008, which payment shall consist of two payments (one on April 1, 2008, and the other on July 1, 2008). |
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Under the original terms of the agreement, effective on January 2, 2009, we were required to pay to Mr. Mahood (i) (A) $122,718 ($125,000 CDN) and (B) that amount of interest which has accrued for the quarter ending December 31, 2008, or (ii) (A) $343,610 ($350,000 CDN); (B) the amount of that interest which has accrued during the quarter ending December 31, 2008; and (C) an amount equal to the interest which would have accrued pursuant to the Agreement for those two quarters ending December 31, 2008. On January 7, 2009, we agreed with Mr. Mahood to modify the terms of the Agreement such that the payment required on January 2, 2009 in the amount $125,000 CDN is replaced by the following required payments: |
Date | Amount ($ CDN) | |||
January 14, 2009 | $ | 35,000 | ||
March 31, 2009 | 50,000 | |||
June 30, 2009 | 50,000 | |||
Total | $ | 135,000 |
On January 2, 2010, we are required to pay Mr. Mahood either (i) (A) a payment of $122,718 ($125,000 CDN) and (B) interest which shall have accrued during the quarter ending December 31, 2009, or (ii) (A) the remaining unpaid portion of the Principal Balance; (B) that interest which shall have accrued during that quarter ending December 31, 2009; (C) that interest which shall have accrued on that amount of the unpaid portion of the Principal Amount, if any; and (D) the amount equal to that interest that shall accrue on the Principal Amount for the quarter ending December 31, 2009. | |
d) | Effective January 1, 2008, the payment to Brian Mahood each month of approximately $985 ($1,000 CDN), depending on the exchange rate between the Canadian and United States Dollars, for a period of two years to consult with us in connection with the operations of Kerrisdale, including the consolidation of the remaining approximate 57% interest of certain operating gas fields. |
e) | Effective January 1, 2008, the payment to Kerrisdale Consulting Inc., a corporation owned by Mr. Mahood, each month of approximately $492 ($500 CDN) depending on the exchange rate between the Canadian and United States Dollars, as rent for office space for a period of two years, pursuant to a sublease with Kerrisdale Consulting Inc., which can be extended by us, at our sole discretion. |
Kerrisdale has mineral rights and gas production in the Hilda, Atlee Buffalo, Jenner and Viking-Kinsella areas of Southeast Alberta and Gross Overriding Oil Royalties in Southeast Saskatchewan. Kerrisdale has interests in 4480 gross acres and 1238 net acres with gross production of 280 mcfd, of which Kerrisdale owns approximately 48%, and 0.7 bopd (47 boepd gross). The lands include 13 undrilled gas spacing units.
Employees
We have no employees, other than our executive officers, as of the time of this report. We intend to retain geologists and consultants on a contract basis to conduct the work programs on our properties to carry out our plan of operations.
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Research and Development Expenditures
Since the time of our incorporation we have not incurred any research or development expenditures.
Business Strategy
We are focused on the identification and acquisition of producing, undervalued natural gas assets, located primarily in the Western Canada Sedimentary Basin. Our management philosophy is to focus on relatively inexpensive assets, such as when gas prices are at cyclical lows, and to consolidate small to medium sized producers into one larger, growth oriented corporation.
Competitive Business Conditions
We are a junior oil and gas exploration company. We compete with other companies for financing and for the acquisition of new oil and gas properties. Many of the oil and gas exploration companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to afford more geological expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having properties of greater quality and interest to prospective investors, who may finance additional exploration and development. This competition could have an adverse impact on our ability to achieve the financing necessary for us to conduct further exploration of our acquired properties.
We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse impact on our ability to raise additional capital in order to fund our exploration programs, if investors are of the view that investments in competitors are more attractive, based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors.
We also compete with other junior and senior oil and gas companies for available resources, including, but not limited to, professional geologists, camp staff, helicopter or float planes, mineral exploration supplies and drill rigs.
Patents and Trademarks
We do not own, either legally or beneficially, any patents or trademarks.
Governmental Regulations
Our oil and gas operations are subject to various federal, provincial and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties and taxation. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
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Reports to Security Holders
We file our quarterly and audited annual reports with the Securities and Exchange Commission (SEC), which the public may read and copy at the Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. SEC filings, including supplemental schedules and exhibits, can also be accessed free of charge through the SEC website at www.sec.gov.
Item 2. Description of Property
Our executive offices are located at 15707 Rockfield Boulevard, Suite 101, Irvine, California 92618. We also have 9 mineral claims in the Yukon Territory, as well as interests in oil and gas wells in Alberta and Saskatchewan.
Petroleum and Natural Gas Properties
Our petroleum and natural gas properties consist of 13 economic producing natural gas wells in the Atlee/Jenner and Hilda areas of southeastern Alberta, one natural gas well in the Viking Kinsella area of Alberta and override interests in 8 producing oil wells in the Ingoldsby and Morrisview areas of Saskatchewan. Our interests vary from a 1% override interest to a 100% working interest.
Production
The average sales price per unit of production for the year ended September 30, 2008 are as follows:
Petroleum, per barrel | $ | 54.98 | ||
Natural gas, per thousand cubic feet | $ | 9.70 |
Reserves reported to other Agencies
None
Drilling Activity
We have not completed any drilling activity during the period covered by this report.
Item 3. Legal Proceedings
We are not, and have not been during the period covered by this report, a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters were submitted to a vote of the Company’s security holders in the quarter ended September 30, 2008.
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PART II
Item 5. Market for Common Equity and related Stockholder Matters
Market Information
We are a reporting company with the SEC. We participate in the Over-the-Counter Bulletin Board Quotation Service maintained by the Financial Industry Regulatory Authority (“FINRA”) (“OTCBB”). The OTCBB is an electronic quotation medium for securities traded outside of the Nasdaq Stock Market, and prices for our common stock are published on the OTC Bulletin Board under the trading symbol “SCXN.OB.” The OTCBB market is extremely limited and the prices quoted are not a reliable indication of the value of our common stock.
The first trade of our common stock on the Bulletin Board occurred on December 6, 2006. The following table sets forth the quarterly high and low closing sale prices for our common stock for the periods indicated below, based upon quotations between dealers, without adjustments for stock splits, dividends, retail mark-ups, mark-downs or commissions and, therefore, may not represent actual transactions:
Date | High | Low | ||||||
December 6, 2006 to December 31, 2006 | $ | 0.25 | $ | 0.02 | ||||
January 1, 2007 to March 31, 2007 | $ | 0.91 | $ | 0.11 | ||||
April 1, 2007 to June 30, 2007 | $ | 0.72 | $ | 0.35 | ||||
July 1, 2007 to September 30, 2007 | $ | 0.58 | $ | 0.23 | ||||
October 1, 2007 to December 31, 2007 | $ | 0.51 | $ | 0.31 | ||||
January 1, 2008 to March 31, 2008 | $ | 0.60 | $ | 0.32 | ||||
April 1, 2008 to June 30, 2008 | $ | 0.59 | $ | 0.40 | ||||
July 1, 2008 to September 30, 2008 | $ | 0.58 | $ | 0.20 | ||||
October 1, 2008 to December 31, 2008 | $ | 0.20 | $ | 0.10 |
Holders of Our Common Stock
As of the date of this report, we have approximately 66 registered shareholders.
Dividends
There are no restrictions in our Articles of Incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends when, after giving effect to the distribution of the dividend:
· | We would not be able to pay our debts as they become due in the usual course of business; or |
· | Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. |
As of the date of this report, we have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.
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Securities Authorized for Issuance under Equity Compensation Plans
Our 2007 Stock Option and Incentive Plan was approved by the unanimous written consent of our Board of Directors and by the written consent of a majority of our shareholders on July 23, 2007. One million (1,000,000) shares of our common stock are reserved for issuance pursuant to that plan. No options have been issued under the plan as of the date of this report.
Recent Sales of Unregistered Securities
On April 1, 2008, our Board of Directors approved a private placement of up to 2,000,000 units, with each unit consisting of one share of our common stock at a purchase price of $0.40 per share and one warrant entitling the holder thereof the right to purchase one additional share of our common stock at a purchase price of $0.75 per share, at any time up to one year from the closing date of the private placement. During May 2008, we completed the sale of 1,349,500 units and raised net proceeds of $538,451.
We used most of the proceeds from the private placement offering to fund the acquisition of Kerrisdale with $392,696 ($400,000 CDN ) in cash, with an additional $343,610 ($350,000 CDN) evidenced by and secured by the Security Agreement. Pursuant to the provisions of the Security Agreement, the secured amount is due and payable in installments during the period January 2, 2009, through January 3, 2011. The amount secured by the Security Agreement accrues interest at 6.75% per annum, and interest is payable quarterly commencing June 30, 2008. All required interest payments are current. The balance of the proceeds from the private placement was used to fund ongoing general and administrative expenses and to supplement working capital.
Item 6. Management’s Discussion and Analysis or Plan of Operation
Cautionary Note Regarding Forward Looking Statements
This report contains forward-looking statements that involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the market price of precious and base metals, oil and gas, availability of funds, government regulations, operating costs, exploration costs, outcomes of exploration programs and other factors. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Our actual results may differ materially. In evaluating these statements, you should consider various factors. These factors may cause actual results to differ materially from any forward-looking statement. While these forward-looking statements are made in good faith and reflect our current judgment regarding our business plans, actual results from our operations will almost always vary, sometimes materially, from any future performance suggested herein.
General
The following discussion and analysis should be read in conjunction with our financial statements (and notes related thereto) appearing elsewhere in this report.
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Plan of Operations
Over the next year our plan of operations is to complete the following objectives, subject to our obtaining the necessary funding for the continued exploration and possible further development of our resource properties, both mineral and oil and gas:
· | For the foreseeable future, we plan to defer any further exploration work programs on the Wheaton River Property. |
· | We expect the acquisition of Kerrisdale to generate approximately $12,000 in monthly net income after taxes. |
· | We plan to evaluate the potential of completing in field drilling to hopefully expand our proven oil and gas reserves. Completion of any further drilling will be dependent on favorable engineering recommendations for the commencement of any in field drilling and our ability to raise additional funds. There is no assurance that we will be able to obtain such funds, nor is there any assurance that any in field drilling will, upon completion, result in any additional proven oil and gas reserves. |
· | We anticipate spending approximately $17,000 monthly in ongoing general and administrative expenses over the next year. These expenses will consist primarily of management remuneration, travel and promotion costs, professional fees for audit and legal work relating to our regulatory filings, transfer agent fees, annual mineral claim fees and general office expenses. |
· | We owe Iscis Holdings Ltd. an additional $20,000, which was due and payable on or before September 30, 2008, and has been deferred until September 30, 2009. |
As of September 30, 2008, we had cash on hand of $131,100 and negative working capital of $196,762, after including $122,000 principal payments which are due and payable to Brian Mahood within one year (of which $28,000 has been paid subsequent to September 30, 2008), pursuant to the Agreement, which is secured by the Security Agreement, entered into by and among Kerrisdale and Mr. Mahood, and which is discussed elsewhere in this report. Interest otherwise due on the principal balance secured by the Security Agreement has been fully paid as at December 31, 2008.
On April 1, 2008, our Board of Directors approved a private placement of up to 2,000,000 Units, with each Unit consisting of one share of our common stock at a purchase price of $0.40 per share and one warrant entitling the holder thereof the right to purchase one additional share of our common stock at a purchase price of $0.75 per share, at any time up to one year from the closing date of the private placement.. During May 2008, we completed the sale of 1,397,000 Units and raised aggregate proceeds of $558,800, of which $23,000 was receivable from subscribers as of September 30, 2008. In addition, we received $4,000 in subscriptions received in advance for 10,000 units which have not been issued as of September 30, 2008.
We used most of the proceeds from the private placement offering to fund the acquisition of Kerrisdale with $392,696 ($400,000 CDN) in cash, with an additional $343,610 ($350,000 CDN) evidenced by and secured by the General Security Agreement. Pursuant to the provisions of that General Security Agreement, the secured amount is due and payable in installments during the period January 2, 2009, through January 3, 2011. The amount secured by that General Security Agreement accrues interest at 6.75% per annum, and interest is payable quarterly commencing June 30, 2008. All required interest payments are current. The balance of the proceeds from the private placement was used to fund ongoing general and administrative expenses and to supplement working capital.
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We do not anticipate present oil and gas revenues will be sufficient to pay ongoing general and administrative expenses for the next year nor pay the $117,937 payable pursuant to the Agreement and Security Agreement. We will need to obtain additional financing in order to continue our plan of operations.
We believe that debt financing will not be a feasible alternative, as we do not have sufficient unencumbered tangible assets to secure any debt financing. We anticipate that additional financing will be from the sale of our common stock. However, we do not have any financing arranged, nor can we provide investors with any assurance that we will be able to raise sufficient funding from such potential equity financings. In the absence of such financing, we will not be able to continue exploration or development of our mineral claims and oil and gas property interests, and our business plan will then fail. Even if we are successful in obtaining equity financing to fund possible in field drilling of our oil and gas properties, as well as other operational costs and short term debt obligations, there is no assurance of success from such drilling activities. There is a significant risk any future in field drilling of our oil and gas properties may not be successful, and we may not be able to meet our other obligations. In the event we do not continue to obtain additional financing, we will be forced to abandon our mineral claims and may lose our oil and gas properties, should we default on the payment of the deferred portion of the purchase price for Kerrisdale.
Going Concern
We have not attained profitable operations and are dependant upon obtaining financing to pursue any extensive exploration activities or acquisitions. For these reasons, our auditors stated in their report that they are concerned that we will not be able to continue as a going concern.
Future Financing
We anticipate continuing to rely on sales of our common stock to finance our business operations. Issuances of additional shares of our common stock will result in dilution to our existing shareholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned exploration activities.
Results of operations
Petroleum and Natural Gas - Sales from petroleum and natural gas activities for the year ended September 30, 2008 were $117,893, as compared to $Nil for the year ended September 30, 2007.
Operating expenses related to petroleum and natural gas activities were $52,228 for the year ended September 30, 2008 as compared to $Nil for the year ended September 30, 2007.
Our sales of petroleum and natural gas commenced in June 2008, when we completed the acquisition of Kerrisdale.
Administrative Expenses – Administrative expenses were $427,043 for the year ended September 30, 2008 as compared to $131,869 for the year ended September 30, 2007. The increase is principally due to legal, accounting and auditing costs associated with the acquisition of Kerrisdale.
Liquidity and Capital Resources - At September 30, 2008, the balance of our cash and cash equivalents was $131,100, and our accounts receivable and other current assets totaled $64,483. Our current liabilities exceed our current assets by $196,762, whereas at September 30, 2007, our working capital was a positive $5,206.
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To fully carry out our business plans we need to raise additional capital. We can give no assurance that we will be able to raise such capital. We have limited financial resources until such time that we are able to generate such additional financing or cash flow from operations. Our ability to establish profitability and positive cash flow is dependent upon our ability to exploit our mineral holdings, generate revenue from our planned business operations and control our exploration costs. Should we be unable to raise adequate capital or to meet the other above objectives, it is likely that we would have to substantially curtail our business activity, and that our investors would incur substantial losses of their investment.
Off-Balance Sheet Arrangements. We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Item 7. Financial Statements
See Index to Financial Statements immediately following the signature page of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with our accountants since our formation required to be disclosed pursuant to Item 304(b) of Regulation S-B.
Item 8A. Controls and Procedures
It is the responsibility of John Roozendaal and Jason Walsh (who serve, respectively, as our Chief Executive Officer and Chief Financial Officer) to ensure that we maintain disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly results and an established system of internal controls.
As of September 30, 2008, management conducted an evaluation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934. Based upon that evaluation, management has concluded that our current disclosure controls and procedures are not effective as of September 30, 2008.
The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated. Our Company intends to remediate the material weaknesses as set out below.
Based on management’s evaluation, we concluded our internal control over financial reporting was not effective as at September 30, 2008 due to inadequate segregation of duties and effective risk assessment; and insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
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We plan to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this annual report, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management, and adopt sufficient written policies and procedures for accounting and financial reporting. These remediation efforts are largely dependent upon securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in internal control over financial reporting
During the period covered by this report and as discussed herein, we entered the petroleum and natural gas business with the acquisition of Kerrisdale Resources Ltd. This change in our business has resulted in an increase in the volume and the complexity of our financial reporting requirements. To deal with this change, we have employed the use of additional staff and consultants. As discussed above, we plan to take further additional steps to remediate existing weaknesses in our internal control over financial reporting.
Item 8B. Other Information
None.
PART III
Item 9. Directors, Executive Officers, promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
The following table sets forth certain information regarding our executive officers and directors as of December 31, 2008:
NAME OF DIRECTOR | AGE | TERM SERVED | POSITIONS WITH COMPANY |
John Roozendaal | 42 | Since December 13, 2007 | President and Director |
Jason Walsh | 36 | Since March 3, 2006 | Secretary, Treasurer and Director |
Shane Ivancoe | 53 | Since March 3, 2006 | Director |
On December 13, 2007, our Board of Directors increased the number of its members to three. On that same date, Kathleen Scalzo resigned as our President and Treasurer and as a director. Our remaining director, Shane Ivancoe, appointed Jason Walsh and John Roozendaal as directors to fill the vacancies on the Board of Directors and, also, appointed John Roozendaal as our President and Jason Walsh as our Treasurer.
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All our directors hold office until the next annual meeting of our stockholders or until their successors are elected and qualified. Executive officers hold offices until their successors are elected and qualified, subject to earlier removal by the Board of Directors.
Set forth below is a biographical description of each director and executive officer based upon information supplied by him:
Biographical Information
John Roozendaal has served as our President and as one of our directors since December 13, 2007. Mr. Roozendaal has been involved with the mineral exploration industry for over 15 years, focusing on precious, base and specialty metal exploration projects in North America. Mr. Roozendaal is the President and a director of VMS Ventures Inc. and Harvest Gold Corp., and a director of Thelon Ventures Ltd., which are all publicly traded companies on the TSX Venture exchange. Mr. Roozendaal helped found VMS Ventures in 1996, and Harvest Gold was spun off from VMS Ventures in 2005. He became a director of Thelon Ventures Ltd. in October 2005. Mr. Roozendaal holds a Bachelor of Science degree in Geology received from Brandon University in 1996.
Jason Walsh has served as our Secretary since March 3, 2006. He has served as our Treasurer and as one of our directors since December 13, 2007. Since April 15, 2003, he has also served as the President and a director of Thelon Ventures Ltd. (TSX Venture: THV). He has also served as an officer of International Ranger Corp. (Pink Sheets: IRNG) since February 19, 2006. From October 1997 to April 2003, he served as a registered representative with Global Securities in Vancouver, British Columbia.
Shane Ivancoe has served as one of our directors since March 3, 2006. For over the past five years, he has also served as a self-employed corporate consultant. From 1976 to 1995, he served as the president of Galway Holdings, a food importer and exporter based in Vancouver, British Columbia.
Significant Employees
We have no significant employees, other than the officers and directors described above.
Committees of the Board of Directors We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our Board of Directors, stock plan committee or any other committees.
Audit Committee Financial Expert We have no financial expert on our Board of Directors. We believe the cost related to retaining a financial expert at this time is prohibitive.
Section 16(a) Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. It appears that Kathleen Scalzo, Shane Ivancoe, Jason Walsh, Kassel Enterprises Inc. and Iscis Holdings Ltd. filed Form 3s during
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the year ended September 30, 2007, that were properly filed during the year ended September 30, 2006. It also appears that Shane Ivancoe, one of our directors, filed one Form 4 regarding one transaction on February 13, 2007, which was not timely filed.
The Company has not yet adopted a written Code of Ethics, but management intends to do so in the next year.
Item 10. Executive Compensation
We paid Jason Walsh, our Secretary and Treasurer and one of our directors, $12,000 in the year ended September 30, 2008, as a director’s fee. We also paid a company controlled by Jason Walsh office and administration fees of $58,894 in the in the year ended September 30, 2008. We paid Shane Ivancoe, one of our directors, $12,000 in the year ended September 30, 2008 as a director’s fee.
Stock Option Grants
We have not granted any stock options to our executive officers since our inception.
Consulting Agreements
We are a party to an agreement for services with Bua Group Holdings Ltd. dated October 1, 2006. Pursuant to this agreement, we are obligated to pay Bua Group Holdings Cdn$1,000 per month for services and Cdn$1,400 per month for expenses. The principals of Bua Group Holdings are Jason Walsh, our Secretary and Treasurer and one of our directors, and Ralf Hillebrand.
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding stock as of December 31, 2008, and by the officers and directors, individually or as a group. Except as otherwise indicated, all shares are owned directly.
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Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class |
$0.001 Par Value Common Stock | Shane Ivancoe Director c/o Scout Exploration, Inc. 15707 Rockfield Boulevard, Suite 101 Irvine, California 92618 | 900,000 | 10.1% |
$0.001 Par Value Common Stock | Jason Walsh Secretary, Treasurer and Director c/o Scout Exploration, Inc. 15707 Rockfield Boulevard, Suite 101 Irvine, California 92618 | 235,000 | 2.6% |
$0.001 Par Value Common Stock | John Roozendaal President and Director c/o Scout Exploration, Inc. 15707 Rockfield Boulevard, Suite 101 Irvine, California 92618 | 320,000 (1) | 3.6% |
$0.001 Par Value Common Stock | All officers and directors as a group | 1,455,000 | 16.3% |
$0.001 Par Value Common Stock | Iscis Holdings Ltd. 102-9323 Gallant Ave. North Vancouver, British Columbia Canada V7G 2C1 (2) | 500,000 | 5.6% |
1. These shares are held by 667981 BC Ltd., a company controlled by Mr. Roozendaal.
2. Iscis Holdings Ltd. is owned by Ivan Walsh, the brother of Jason Walsh, our Secretary and Treasurer and one of our directors.
The percentage of class is based upon 8,947,000 shares of our common stock and no shares of our preferred stock issued and outstanding as of the date of this report.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees. Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them.
14
Item 12. Certain Relationships and Related Transactions
Except as described below, none of the following parties has, in the last two years, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us:
· | Any of our directors or officers; |
· | Any person proposed as a nominee for election as a director; |
· | Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock; or |
· | Any member of the immediate family of any of the above person. |
Office Space Arrangement
We paid Jason Walsh, our Secretary and Treasurer and one of our directors, office and administration fees of $58,894 in the in the year ended September 30, 2008.
Agreement with Iscis Holdings Ltd.
On March 4, 2006, we entered into a mineral property purchase agreement with Iscis Holdings Ltd., whereby it sold to us 100% right, title and interest in the mineral title “AAV 1-9 Claims” in the Whitehorse Mining District of the Yukon Territory. Iscis Holdings Ltd. is owned by Ivan Walsh, who is one of our shareholders and the brother of Jason Walsh, our Secretary and Treasurer and one of our directors. Iscis Holdings Ltd. also beneficially owns over 10% of our common stock.
As a part of our purchase agreement with Iscis Holdings Ltd., we entered into a net smelter return royalty agreement. The terms of this agreement specify that Iscis Holdings Ltd. is entitled to a royalty payment equal to 3% of the net smelter returns.
Agreement with Bua Group Holdings Ltd.
We are a party to an agreement for services with Bua Group Holdings Ltd. dated October 1, 2006. Pursuant to this agreement, we are obligated to pay Bua Group Holdings Cdn$1,000 per month for services and Cdn$1,400 per month for expenses. The principals of Bua Group Holdings are Jason Walsh, our Secretary and Treasurer and one of our directors, and Ralf Hillebrand.
Private Placement Transaction
We completed an offering for 1,700,000 units in March 2006, to 8 shareholders. Each “unit” consisted of one share of our common stock and one warrant to purchase an additional share of our common stock for $0.15 prior to March 31, 2007. The units were issued at a price of $0.05per unit and the total amount received was $85,000.
Shane Ivancoe, one of our directors, purchased 400,000 units in this offering. During the year ended September 30, 2007, Mr. Ivancoe also exercised his warrants and purchased 400,000 shares of our common stock for $60,000.
15
Director Independence
We participate in the Over-the-Counter Bulletin Board Quotation Service maintained by FINRA. As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of our Board of Directors be independent.
Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accord with the NASDAQ Global Market’s requirements for independent directors (NASDAQ Marketplace Rule 4200). The NASDAQ independence definition includes a series of objective tests, such as that the director is not our and has not engaged in various types of business dealings with us.
Shane Ivancoe is considered an independent director under the above definition. We do not list that definition on our Internet website.
We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our Board of Directors, stock plan committee or any other committees.
Item 13. Exhibits
The following documents have been filed as a part of this annual report:
Exhibit No.
3.1 | * Articles of Incorporation (Charter Document) |
3.2 | * Certificate of Amendment |
3.3 | * Bylaws |
10.1 | * Iscis Holdings Ltd. Mineral Property Purchase Agreement |
10.2 | ** Contract for services with Bua Group Holdings Ltd. dated October 1, 2006. |
10.3 | *** Share Purchase Agreement with Brian Mahood and Kerrisdale Resources Ltd. |
10.4 | *** Management Agreement with Kerrisdale Consulting Inc. |
10.5 | *** General Security Agreement by and among Kerrisdale Resources Ltd. and Brian Mahood. |
31.2 | Rule 13A-14(A) Certification |
32.2 | Certification Pursuant to 18 U.S.C. SECTION 1350, as adopted pursuant to SECTION 906 of the Sarbanes-Oxley Act of 2002 |
* Previously filed with the Securities and Exchange Commission on August 10, 2006 as exhibits to our Registration Statement on Form SB-2.
** Previously filed with the Securities and Exchange Commission on February 13, 2007 as an exhibit to our Quarterly Report on Form 10-QSB.
*** Previously filed with the Securities and Exchange Commission on August 21, 2008 as an exhibit to our Quarterly Report on Form 10-Q.
16
Item 14. Principal Accountant Fees and Services
The following is a summary of the aggregate fees billed to us by our principal accountant, MacKay LLP, for professional services rendered for the fiscal years ended September 30, 2008 and 2007.
1. Audit Fees. Consists of fees billed for professional services rendered for the audits of our financial statements for the fiscal years ended September 30, 2008 and 2007, and for review of the financial statements included in our Quarterly Reports on Form 10-QSB for those fiscal years. Fees billed in 2007 were $5,521. Fees billed in 2008 are $24,039.
2. Audit-Related Fees. Consists of fees billed for services rendered to us for audit-related services, which generally include fees for audit and review services in connection with a proposed spin-off transaction, separate audits of employee benefit and pension plans, and ad hoc fees for consultation on financial accounting and reporting standards. Fees billed: None.
3. Tax Fees. Consists of fees billed for services rendered to us for tax services, which generally include fees for corporate tax planning, consultation and compliance. Fees billed in 2007 were $5,005. Fees billed in 2008 are $1,487.
4. All Other Fees. Consists of fees billed for all other services rendered to us, which generally include fees for consultation regarding computer system controls and human capital consultations. Fees Billed: None.
Pre-Approval of Services of Principal Accounting Firm
We do not have an audit committee, and the tasks generally undertaken by an audit committee are undertaken by our Board of Directors. Our board’s policy is to pre-approve all audit and permissible non-audit services provided by our principal accounting firm. These services may include audit services, audit-related services, tax services and other permissible non-audit services. Any service incorporated within the independent auditor's engagement letter, which is approved by our Board of Directors, is deemed pre-approved. Any service identified as to type and estimated fee in the independent auditor's written annual service plan, which is approved by our Board of Directors, is deemed pre-approved up to the dollar amount provided in such annual service plan.
During the year, the principal accounting firm may also provide additional accounting research and consultation services required by, and incident to, the audit of our financial statements and related reporting compliance. These additional audit-related services are pre-approved up to the amount approved in the annual service plan approved by our Board of Directors. Our Board of Directors may, also, pre-approve services on a case-by-case basis during the year.
The approval by our Board of Directors of proposed services and fees are noted in the meeting minutes of our Board of Directors and/or by signature of the appropriate members of our Board of Directors on the engagement letter. Our principal accounting firm and management are periodically requested to summarize the principal accounting firm services and fees paid to date, and management is required to report whether the principal accounting firm's services and fees have been pre-approved in accordance with the required pre-approval process of our Board of Directors.
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SCOUT EXPLORATION, INC.
Dated: May 8, 2009
By: /s/ John Roozendaal
Name: John Roozendaal
Title: President and Chief Executive Officer
By: /s/ Jason Walsh
Name: Jason Walsh
Treasurer and Principal Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the following person on behalf of the registrant and in the capacity and on the date indicated.
Dated: May 8, 2009
By: /s/ John Roozendaal
Name: John Roozendaal
Title: President and Chief Executive Officer
Director
By: /s/ Jason Walsh
Name: Jason Walsh
Title: Secretary, Treasurer and Principal Accounting Officer
Director
By: /s/ Shane Ivancoe
Name: Shane Ivancoe
Title: Director
18
Scout Exploration, Inc.
Consolidated Financial Statements
(presented in US dollars)
September 30, 2008 and 2007
19
INDEX
20
CHARTERED ACCOUNTANTS MacKay LLP | 1100 – 1177 West Hastings Street Vancouver, BC V6E 4T5 Tel: (604) 687-4511 Fax: (604) 687-5805 Toll Free: 1-800-351-0426 www.MacKayLLP.ca |
To the Shareholders of
Scout Exploration, Inc.
We have audited the balance sheets of Scout Exploration, Inc. as at September 30, 2008 and 2007, and the statement of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to financial statements, the Company is in the exploration stage, and has no permanently established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations. These factors, along with other matters as set forth in Note 1, raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
“MacKay LLP” | |
Vancouver, Canada. | |
January 09, 2009 | Chartered Accountants |
21
Scout Exploration, Inc. | ||||||||
(Presented in US Dollars) | ||||||||
As at September 30 | 2008 | 2007 | ||||||
Assets | ||||||||
Current | ||||||||
Cash | $ | 131,100 | $ | 45,649 | ||||
Receivables | 57,015 | - | ||||||
Prepaid expenses | 7,468 | 4,280 | ||||||
195,583 | 49,929 | |||||||
Resource properties (Note 4) | 932,900 | - | ||||||
Equipment (Note 5) | 15,959 | - | ||||||
$ | 1,144,442 | $ | 49,929 | |||||
Liabilities | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities | $ | 264,563 | $ | 44,723 | ||||
Debenture payable - current portion (Note 3) | 122,000 | - | ||||||
Income taxes payable | 5,782 | - | ||||||
392,345 | 44,723 | |||||||
Debenture payable (Note 3) | 208,225 | - | ||||||
Deferred income taxes (Note 13) | 211,797 | - | ||||||
Asset retirement obligations (Note 6) | 28,355 | - | ||||||
840,722 | 44,723 | |||||||
Stockholders' Equity | ||||||||
Preferred stock | ||||||||
Authorized: 1,000,000 shares with par value of $0.01 | ||||||||
Issued: Nil (2007 - Nil) | - | - | ||||||
Common stock (Note 8) | ||||||||
Authorized: 50,000,000 shares with par value of $0.001 | ||||||||
Issued: 8,847,000 (2007 - 7,300,000) | 8,847 | 7,300 | ||||||
Subscriptions received in advance | 4,100 | 100 | ||||||
Subscriptions receivable | (23,000 | ) | (75,000 | ) | ||||
Additional paid in capital | 981,953 | 349,700 | ||||||
Accumulated deficit | (645,722 | ) | (276,894 | ) | ||||
Accumulated other comprehensive loss | (22,458 | ) | - | |||||
303,720 | 5,206 | |||||||
$ | 1,144,442 | $ | 49,929 |
Going Concern (Note 1) | ||||
Commitments (Note 14) | ||||
Approved by the Directors: | ||||
____________________________ Director | ||||
____________________________ Director | ||||
The accompanying notes are an integral part of the consolidated financial statements. |
22
Scout Exploration, Inc. | ||||||||||||||||||||||||||||||||
(Presented in US Dollars) | ||||||||||||||||||||||||||||||||
For the Years Ended September 30, 2008 and 2007 | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Shares of | Additional | Subscriptions | other | Total | ||||||||||||||||||||||||||||
common | Capital | paid-in | received | Subscriptions | Accumulated | comprehensive | Stockholders' | |||||||||||||||||||||||||
stock | stock | capital | in advance | receivable | Deficit | loss | Equity | |||||||||||||||||||||||||
Balance September 30, 2006 | 5,900,000 | $ | 5,900 | $ | 141,100 | $ | 100 | $ | - | $ | (145,025 | ) | $ | - | $ | 2,075 | ||||||||||||||||
Issuance of common stock for cash | ||||||||||||||||||||||||||||||||
and subscription receivable | 1,400,000 | 1,400 | 208,600 | - | (75,000 | ) | - | - | 135,000 | |||||||||||||||||||||||
Net loss | - | - | - | - | - | (131,869 | ) | - | (131,869 | ) | ||||||||||||||||||||||
Balance September 30, 2007 | 7,300,000 | 7,300 | 349,700 | 100 | (75,000 | ) | (276,894 | ) | - | 5,206 | ||||||||||||||||||||||
Cash received for subscriptions | ||||||||||||||||||||||||||||||||
receivable | - | - | - | - | 75,000 | - | - | 75,000 | ||||||||||||||||||||||||
Issuance of common stock for | ||||||||||||||||||||||||||||||||
for consulting services | 150,000 | 150 | 74,850 | - | - | - | - | 75,000 | ||||||||||||||||||||||||
Issuance of common stock for cash | 1,397,000 | 1,397 | 557,403 | 4,000 | (23,000 | ) | - | - | 539,800 | |||||||||||||||||||||||
Net loss | - | - | - | �� | - | - | (368,828 | ) | - | (368,828 | ) | |||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | (22,458 | ) | (22,458 | ) | ||||||||||||||||||||||
Balance September 30, 2008 | 8,847,000 | $ | 8,847 | $ | 981,953 | $ | 4,100 | $ | (23,000 | ) | $ | (645,722 | ) | $ | (22,458 | ) | $ | 303,720 |
The accompanying notes are an integral part of the consolidated financial statements.
23
Scout Exploration, Inc. | ||||||||
(Presented in US Dollars) | ||||||||
For the Year Ended September 30 | 2008 | 2007 | ||||||
Revenues - petroleum and natural gas | $ | 117,893 | $ | - | ||||
Operating expenses | ||||||||
Lease and royalties | 23,854 | - | ||||||
Depletion and accretion | 26,405 | - | ||||||
Depreciation | 1,969 | - | ||||||
52,228 | - | |||||||
Operating margin | 65,665 | - | ||||||
Administrative expenses - schedule | 427,043 | 131,869 | ||||||
Loss before income taxes | (361,378 | ) | (131,869 | ) | ||||
Income taxes expense (benefit) | ||||||||
Current | 14,670 | - | ||||||
Deferred | (7,220 | ) | - | |||||
7,450 | - | |||||||
Net loss | $ | (368,828 | ) | $ | (131,869 | ) | ||
Basic and diluted loss per share | $ | (0.05 | ) | $ | (0.02 | ) | ||
Basic and diluted weighted average shares outstanding | 7,882,243 | 6,570,833 |
The accompanying notes are an integral part of the consolidated financial statements.
24
Scout Exploration, Inc. | ||||||||
(Presented in US Dollars) | ||||||||
For the Year Ended September 30 | 2008 | 2007 | ||||||
Accounting and audit | $ | 112,656 | $ | 25,671 | ||||
Bank charges and interest | 6,584 | 1,097 | ||||||
Consulting fees | 104,418 | - | ||||||
Directors’ fees | 24,000 | 20,000 | ||||||
Filing fees, dues and subscriptions | 4,151 | 3,001 | ||||||
Foreign exchange loss | 4,518 | - | ||||||
Legal | 50,857 | 26,961 | ||||||
Office and administration | 69,281 | 40,019 | ||||||
Promotion and travel | 45,443 | 12,345 | ||||||
Transfer agent | 5,135 | 2,775 | ||||||
$ | 427,043 | $ | 131,869 |
The accompanying notes are an integral part of the consolidated financial statements.
25
Scout Exploration, Inc. | ||||||||
(Presented in US Dollars) | ||||||||
For the Year Ended September 30 | 2008 | 2007 | ||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (368,828 | ) | $ | (131,869 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Consulting services settled by issuance of common stock | 75,000 | |||||||
Depletion and accretion | 26,405 | - | ||||||
Depreciation | 1,969 | - | ||||||
Deferred income taxes | (7,220 | ) | - | |||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 79,114 | - | ||||||
Prepaid expenses | - | (4,280 | ) | |||||
Accounts payable and accrued liabilities | 78,258 | 15,317 | ||||||
Income taxes payable | 8,625 | - | ||||||
(106,677 | ) | (120,832 | ) | |||||
Cash flows from investing activities | ||||||||
Acquisition of subsidiary, net of cash acquired (Note 3) | (415,948 | ) | - | |||||
Cash flows from financing activities | ||||||||
Proceeds from Issuance of common stock | 614,800 | 135,000 | ||||||
Effect of exchange rate changes on cash | (6,724 | ) | - | |||||
Net increase in cash | 85,451 | 14,168 | ||||||
Cash at beginning of the year | 45,649 | 31,481 | ||||||
Cash at end of the year | $ | 131,100 | $ | 45,649 | ||||
Supplemental disclosure with respect to cash flows (Note 10) |
The accompanying notes are an integral part of the consolidated financial statements.
26
Scout Exploration, Inc.
(Presented in US dollars)
September 30, 2008 and 2007
1. Nature of operations
Scout Exploration, Inc. (the “Company”) was incorporated in the State of Nevada on February 1, 1999. The Company was initially engaged in the business of designing, developing and marketing educational products for children, adults, business people, as well as new language learners. On April 10, 2006 the Company changed its name from Virtual Curricula Corp. to Scout Exploration, Inc. The Company is now in the business of the exploration, development and exploitation of mineral and oil and gas resources properties.
The Company’s continuing operations, as intended, are dependent on management’s ability to raise required funding through future equity issuances, asset sales or a combination thereof, which is not assured. These consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary, should the Company be unable to continue as a going concern.
2. Significant accounting policies
(a) | Principles of consolidation |
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary (see Note 3). Significant inter-company transactions were eliminated upon consolidation.
(b) | Management estimates |
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements; accordingly, actual results may differ from estimated amounts. Significant items subject to such estimates and assumptions include estimates of proved reserves, related present value estimates of future net revenue, the carrying value of oil and gas properties, asset retirement obligations, income taxes, and legal and environmental risks and exposure.
(c) | Cash and cash equivalents |
Cash is comprised of cash on hand and demand deposits. The Company considers highly liquid investments that are readily convertible to known amounts of cash on demand to be cash equivalents.
27
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
2. Significant accounting policies (continued)
(d) | Equipment |
Equipment is carried at cost less accumulated amortization. Amortization is provided using the declining balance method at an annual rate of 30%.
(e) | Mineral properties - exploration |
The Company expenses all costs related to investments in mineral property interests. Such costs include mineral property acquisition costs and exploration, development and related administrative expenditures, net of any recoveries.
From time to time, the Company may acquire or dispose of a mineral property interest pursuant to the terms of an option agreement. Where the options are exercisable entirely at the discretion of the Company or the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as property expenses or recoveries when the payments are made or received.
Although the Company has taken steps to verify the title to mineral properties in which it has an interest, in accordance with industry norms for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects.
(f) | Joint venture operations |
Substantially all of the Company’s petroleum and natural gas exploration and production activities are conducted jointly with others; accordingly, these financial statements reflect only the Company’s proportionate interest in such activities.
(g) | Concentration of Credit Risk |
Substantially all of the Company’s accounts receivable result from natural gas and crude oil sales or joint interest billings to third parties in the oil and gas industry, operating in Canada. This concentration of customers and joint interest owners may impact the Company’s overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors. Accounts receivable are generally not collateralized. Historically, the Company has not experienced credit losses on its accounts receivable. There is only one buyer for the purchase of oil or gas production.
(h) | Petroleum and natural gas properties |
The Company follows the full cost method of accounting for oil and gas properties. Under this method, all direct costs and certain indirect costs associated with acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves.
28
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
2. Significant accounting policies (continued)
(h) | Petroleum and natural gas properties (continued) |
The net book value of petroleum and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net revenues, discounted at 10% per annum, from proved petroleum and natural gas reserves plus the lower of cost or net realizable value of unproven properties not subject to depletion. Estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties. Such limitations are imposed and are tested quarterly. In calculating future net revenues, prices and costs used are those as of the end of the appropriate period. These prices are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including designated cash flow hedges in place. The Company had no such hedges outstanding at September 30, 2008.
Any excess of the net book value, less related deferred taxes, over the ceiling is included in depletion expense. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period.
Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil. Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.
Unproved properties are excluded from amortized capitalized costs until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment quarterly. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are transferred to amortizable costs over average holding periods ranging from three years for onshore properties to seven years for offshore properties.
No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves.
(i) | 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.
29
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
2. Significant accounting policies (continued)
(j) | Environmental |
Oil and gas activities are subject to extensive federal and provincial 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 an environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. To date, the Company’s recognized environmental obligations are not material as production has been insignificant.
(k) | Revenue recognition |
Revenue is recognized from oil sales when the oil is delivered to the buyer and from gas sales when the gas passes through the pipeline at the delivery point. Revenue from the sale of oil and gas is recognized based on volumes delivered to customers at contractual delivery points and rates.
(l) | Income taxes |
Income taxes are determined using the liability method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. 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 basis. 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 income in the period that includes that date of enactment. 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.
The Company accounts for uncertain income tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”, which requires that that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on examination by taxation authorities, based on the technical merits of the position. During the years ended September 30, 2008 and 2007 the Company did not incur interest and/ or penalties related to uncertain tax positions.
30
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
2. Significant accounting policies (continued)
(m) | Stock based compensation |
The Company records compensation expense in the financial statements for share based payments using the fair value method pursuant to the Financial Accounting Standards Board Statement SFAS No. 123R. The fair value of share-based compensation to employees will be determined using the Black-Scholes option valuation 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 and services received. Share-based compensation is expensed with a corresponding increase to share capital. Upon the exercise of the stock options, the consideration paid is recorded as an increase in share capital.
There were no options granted during the year ended September 30, 2008, nor since inception.
(n) | General and administrative expenses |
General and administrative expenses are reported net of amounts reimbursed by working interest partners of the petroleum and natural gas properties operated by the Company and net of amounts capitalized pursuant to the successful efforts method of accounting.
(o) | Foreign currency transactions |
The Company’s functional and reporting currency is the U.S. Dollar. All transaction initiated in foreign currencies are translated into U.S. dollars in accordance with SFAS No. 52, “Foreign Currency Translation” as follows:
i) | monetary assets and liabilities at the rate of exchange in effect at the balance sheet date; |
ii) | non-monetary assets and liabilities at historical rates; and |
iii) | revenue and expense items at the average rate of exchange prevailing during the period. |
The subsidiary’s functional and reporting currency is the Canadian dollar. The subsidiary is a self-sustaining operation in Canada and is therefore translated to the Company’s functional currency using the current rate method. Gains and losses on translation are included in other comprehensive income.
(p) | Loss per share |
Basic loss per share is computed by dividing the net loss by the weighted average number of shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.
Diluted loss per 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 the exercise of stock options and warrants, contingent stock, and conversion of debentures. The dilutive effect of potential common shares is not considered in the loss per share calculation as the impact is anti-dilutive.
31
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
2. Significant accounting policies (continued)
(q) | Recently issued accounting standards |
In September 2006 the Financial Account Standards Board (the “FASB”) issued its SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. SFAS No. 157 effective date is for fiscal years beginning after November 15, 2007. The Company does not expect adoption of this standard will have a material impact on its financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
3. Share purchase agreement
On June 18, 2008, the Company entered into a Share Purchase Agreement with Brian Mahood, defined therein as the “Vendor”, whereby the Vendor agreed to sell 100% of the issued and outstanding Class A Voting Shares of Kerrisdale Resources Ltd. (“KRL”), an Alberta corporation, to the Company (the “Agreement”). The effective date of the Agreement is January 1, 2008 and it had a Closing Date of June 18, 2008.
Operations of KRL are included from the closing date of June 18, 2008. Had the acquisition occurred October 1, 2006, pro forma operating revenues, net income (loss) and diluted net income (loss) per share would be $373,127, $(342,456), and $(0.04), respectively, for the year ended September 30, 2008 and $423,316, $22,850, and $0.00, respectively, for the year ended September 30, 2007. These pro forma results are intended for information purposes only and do not purport to represent what the combined companies’ results of operations or financial position would actually have been had the transaction in fact occurred at an earlier date or project the results for any future date or period.
The Purchase Price for the Shares was $760,849 ($775,000 CDN) (the “Purchase Price”) comprised of $24,543 ($25,000 CDN) paid in cash to the Vendor at the time of signing the January 28, 2008 Letter of Intent, $392,696 ($400,000 CDN) paid to the Vendor on Closing Date of June 18, 2008, and the issuance of a $343,610 ($350,000 CDN) debenture (“Debenture”) to the Vendor with a maturity date of December 31, 2010. The Debenture is secured by a first charge on all of KRL’s assets.
32
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
3. Share purchase agreement (continued)
The Purchase Price of $760,849 ($775,000 CDN) represents the fair value of the acquired oil and gas assets. The fair value of the net assets acquired is:
Current assets | $ | 144,816 | ||
Proved petroleum and natural gas properties | 997,964 | |||
Tangible production equipment | 18,618 | |||
Liabilities assumed | (400,549 | ) | ||
Net Assets Acquired | $ | 760,849 |
The Debenture bears interest at 6.75% per annum, effective from January 1, 2008. Under the original terms of the Agreement, interest was payable on July 1, 2008 (paid) for the period January 1, 2008 to June 30, 2008, on October 1, 2008 (paid) and January 1, 2009 (paid), and thereafter quarterly until the Debenture is fully paid; subsequently modified (see below) such that effective January 1, 2009 and thereafter accrued interest is payable monthly commencing on February 1, 2009 until the Debenture is fully paid.
The original terms of the Debenture required a principal payment on January 2, 2009, of either $125,000 CDN plus the quarterly interest otherwise due for the quarter ended December 31, 2008, or the prepayment of $350,000 CDN Debenture total plus the quarterly interest otherwise due for the quarter ended December 31, 2008 together with an additional interest payment calculated as the amount that accrued on the Debenture balance for the two (2) quarters ending December 31, 2008.
Subsequent to September 30, 2008 the Vendor and the Company agreed to modify the terms of the Debenture such that effective January 1, 2009, accrued interest is payable monthly as detailed above, and to replace the principal payment due on January 2, 2009 for $125,000 CDN with the following payments:
Date | Amount ($ CDN) | Amount ($US) | ||||||
January 14, 2009 (paid subsequent) | $ | 35,000 | $ | 28,000 | ||||
March 31, 2009 | 50,000 | 47,000 | ||||||
June 30, 2009 | 50,000 | 47,000 | ||||||
Current portion | 135,000 | 122,000 | ||||||
Remaining original payments | ||||||||
January 2, 2010 | 125,000 | 117,500 | ||||||
January 2, 2011 | 100,000 | 94,000 | ||||||
Total debenture payable | $ | 360,000 | $ | 333,500 |
In addition, terms of the Debenture require a principal payment on January 2, 2010, at the Company’s sole and exclusive option, of either $125,000 CDN plus the monthly interest otherwise due for the month of December 2009, or the prepayment of the then remaining principal balance plus the monthly interest otherwise due for the month of December 2009 together with an additional interest payment calculated as the amount that accrued on the Debenture balance for the six (6) months ending December 31, 2009.
33
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
3. Share purchase agreement (continued)
As security for the Principal Amount of the Debenture, KRL and the Vendor entered into a General Security Agreement, the effective date of which is January 1, 2008 (the “Security Agreement”). Pursuant to the provisions of the Security Agreement, KRL granted to the Vendor a continuing security interest in and to all (i) personal property of KRL including goods, chattel paper, securities, documents of title, instruments, money, intangibles; (ii) real property of KRL including all charges on KRL land or interests in land and petroleum and natural gas leases; and (iii) parts, accessories, attachments, equipment, additions, accretions thereto and property thereof, together with any equipment or accessories placed upon repairs made to the foregoing during the term of the Security Agreement.
4. Resource properties
Petroleum and Natural Gas Properties
Pursuant to the terms of the purchase agreement as more fully described in Note 3, the company has varying working interests, from 6% to 100%, in thirteen (13) oil and gas wells located in Alberta. The cost of these producing wells is recorded at the apportioned purchase price paid by the Company as more fully described in Note 3.
Mineral Property: AAV 1-9 Claims
On March 4, 2006 the Company signed a letter of agreement with a non-arms length private Canadian Corporation for a 100% interest in and to the Wheaton River AAV 1-9 Claims situated in the Whitehorse Mining District of the Yukon Territory, Canada. Terms of the purchase require a cash payment of $5,000 by March 31, 2006 (paid) and $20,000 on or before September 30, 2006 (subsequently deferred to September 30, 2009), and the issuance of 500,000 common shares of the Company (issued at fair value of $0.05 per common share). The Vendor will retain 3% net smelter royalty, up to 2% of which can be re-purchased for $2,000,000. All costs associated with Exploration Mineral projects are expensed when incurred.
5. Equipment
As at September 30, 2008 | ||||||||||||
Cost | Accumulated Amortization | Net Book Value | ||||||||||
Tangible production equipment | $ | 17,893 | $ | 1,934 | $ | 15,959 |
6. Asset retirement obligations
The total future asset retirement obligation was estimated based on the Company’s net ownership interest in all oil and gas properties, the estimated cost to abandon and reclaim the properties, and the estimated timing of the cost to be incurred in future periods. The total undiscounted amount of the estimated future cash flows required to settle the retirement obligation is approximately $56,799 which will be incurred during the years 2012 through 2034. A credit adjusted risk free rate of 6.5 percent was used to calculate the fair value of the asset retirement obligation.
34
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
7. Related party transactions
a) | During the year ended September 30, 2008, directors’ fees of $24,000 (2007 - $20,000) were paid or accrued to two Directors of the Company. |
b) | During the year ended September 30, 2008, office and administration fees and management fees of $96,687 (2007 - $25,986) were paid to corporations controlled by a Director of the Company. |
c) | At September 30, 2008, $36,771 (September 30, 2007 - $21,260) owed to a Director and corporations controlled by the Director of the Company was included in accounts payable. The balance is due on demand, has no specific terms of repayments, is non-interest bearing and is unsecured, and accordingly fair value cannot be reliably determined. |
The above transactions occurred in the normal course of operations and were measured at the exchange value which represented the consideration established and agreed to by the related parties.
8. Capital stock
a) | During the year ended September 30, 2007, the Company issued 1,400,000 common shares for exercise of warrants at a price of $0.15 per share for gross proceeds of $210,000, of which $75,000 was collected during the year ended September 30, 2008. |
b) | The Company entered into a consulting agreement on March 10, 2008, expiring on March 10, 2009. Pursuant to the agreement, the Company issued 150,000 shares on signing the agreement (issued during March 2008 at a fair value of $0.50 per share), and the additional 150,000 shares would be issued if the agreement was extended for an additional six months, and would also grant options to purchase 100,000 common shares at $0.40 per share expiring March 10, 2009, such options to be valued at the date of grant. In July 2008, the Company cancelled the March 2008 consulting agreement and resolved to rescind the 150,000 common shares issued at $0.50 for consulting services due to the non performance of such services by the contractors. The Company will not be issuing any additional common shares nor will any options be granted to the contractor. As of September 30, 2008 the 150,000 shares remain outstanding and the shares are expected to be returned to treasury and cancelled in January 2009. |
c) | On May 20, 2008, the Company issued 1,397,000 units of a private placement offering at $0.40 per unit, with each unit comprising one common share and one share purchase warrant, entitling the holder thereof to purchase, at any time prior to May 20, 2009, for each one warrant held, one common share of the Company at a price of $0.75 per common share. Aggregate proceeds of $558,800 were raised from the Unit Offering, of which $23,000 was receivable from subscribers as of September 30, 2008. In addition, the Company received $4,000 in subscriptions received in advance for 10,000 units which have not been issued as of September 30, 2008. |
35
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
9. Share purchase warrants
As of September 30, 2008, 1,397,000 (2007 – Nil) share purchase warrants are outstanding, with an exercise price of $0.75 per share and which expire on May 20, 2009.
10. Supplemental disclosure with respect to cash flows
Non-cash financing and investing activities for the year ended September 30, 2008 comprised the issuance of a debenture in the amount of $343,610 ($350,000 CDN) pursuant to the acquisition of KRL (Note 3).
Other supplemental cash flow information for the year ended September 30 is as follows:
2008 | 2007 | |||||||
Income taxes paid | $ | 6,086 | $ | - | ||||
Interest paid | $ | 17,141 | $ | - |
11. Segmented disclosure
The Company has two operating segments, both located in Canada: an inactive mineral exploration project in the Yukon Territory and recently acquired oil and gas production and development in Alberta. All plant and equipment assets of the Company are located in Canada.
12. Financial instruments and risk management
a) | Fair value |
The Company’s financial instruments include cash, receivables, accounts payable, accrued liabilities and debenture payable. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.
b) | Foreign exchange risk |
The Company expects to raise equity predominantly in United States dollars. The Company is conducting business in Canada where financial transactions are based on the Canadian dollar. As such, the Company is subject to risks due to fluctuations in the exchange rates for the U.S. and Canadian dollar. The Company does not enter into derivative financial instruments to mitigate its exposure to foreign currency risk.
At September 30, 2008 the Company had the following financial assets and liabilities:
CDN Dollars | ||||
Cash | $ | 105,500 | ||
Receivables | $ | 60,430 | ||
Accounts payable and accrued liabilities | $ | 137,562 | ||
Debenture payable | $ | 360,000 |
At September 30, 2008 CDN dollar amounts were converted at a rate of $0.9435 Canadian dollars to $1.00 US dollar.
36
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
13. Income taxes
A reconciliation of income taxes at statutory rates with the reported taxes is as follows:
Year Ended September 30 | 2008 | 2007 | ||||||
Income taxes at US federal statutory rate | $ | (126,482 | ) | $ | (46,154 | ) | ||
Effect of rate change on deferred taxes | (1,262 | ) | - | |||||
Effect of foreign income taxed at other than 35% | (1,624 | ) | - | |||||
Change in valuation allowance | 136,818 | 46,154 | ||||||
Total income tax expense | $ | 7,450 | $ | - |
The significant components of the Company’s deferred income tax liabilities and assets are as follows:
As at September 30 | 2008 | 2007 | ||||||
Deferred income tax liabilities | ||||||||
Petroleum and natural gas properties | $ | 215,453 | $ | - | ||||
Deferred income tax assets | ||||||||
Losses and tax credits available for future periods | 233,731 | 96,913 | ||||||
Plant and equipment | 3,656 | - | ||||||
Valuation allowance | (233,731 | ) | (96,913 | ) | ||||
Total deferred income tax assets | 3,656 | - | ||||||
Net deferred income tax liability | $ | 211,797 | $ | - |
The Company has available unclaimed start up costs of approximately $667,000 for US income tax purposes, which may be carried forward to reduce taxable income in future years. These losses expire as follows:
2019 | $ | 32,000 | ||
2020 | 4,000 | |||
2021 | 4,000 | |||
2022 | 3,000 | |||
2023 | 3,000 | |||
2024 | 3,000 | |||
2025 | 11,000 | |||
2026 | 85,000 | |||
2027 | 132,000 | |||
2028 | 390,000 | |||
$ | 667,000 |
Future tax benefits related to the start up costs have not been recorded due to uncertainty regarding their utilization.
37
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
14. Commitments
On June 18, 2008, and as amended subsequent to September 30, 2008, the Company entered into a Management Agreement with Kerrisdale Consulting Inc. (“KCI”) with an effective date of January 1, 2008 whereby KCI would provide ongoing senior and geological and management operations services to the Company for a monthly fee of $1,000 CDN per month, terminating on December 31, 2009.
In addition, pursuant to the provisions of the Agreement (see Note 3), the Company agreed to pay KCI $500 CDN per month for a period of two years commencing January 1, 2008, as rent pursuant to a sublease by the Company of office space located in Calgary, Alberta, Canada.
15. Supplemental Petroleum and Natural Gas Disclosures (Unaudited)
The accompanying table presents information concerning the Company’s crude petroleum and natural gas producing activities as required by Statement of Financial Accounting Standards No. 69, “Disclosures about Oil and Gas Producing Activities.” Capitalized costs relating to petroleum and natural gas producing activities from continuing operations are as follows:
As at September 30 | 2008 | 2007 | ||||||
Proved petroleum and natural gas properties | $ | 959,091 | $ | - | ||||
Unproved properties | - | - | ||||||
959,091 | - | |||||||
Less: Accumulated depletion | (26,191 | ) | - | |||||
Net capitalized costs | $ | 932,900 | $ | - |
Costs incurred in petroleum and natural gas property acquisitions and development activities related to continuing operations are as follows:
For the Year Ended September 30 | 2008 | 2007 | ||||||
Acquisition costs - proved properties | $ | 997,963 | $ | - |
The results of operations for petroleum and natural gas producing activities from continuing operations are as follows:
For the Year Ended September 30 | 2008 | 2007 | ||||||
Sales of petroleum and natural gas | $ | 117,893 | $ | - | ||||
Lease and royalties | 23,854 | - | ||||||
Depletion and accretion | 26,405 | - | ||||||
Depreciation | 1,969 | - | ||||||
Total petroleum and natural gas expenses | 52,228 | - | ||||||
Results of petroleum and natural gas operations (excluding corporate overhead and interest costs) | $ | 65,665 | $ | - |
38
Scout Exploration, Inc.
Notes to the Consolidated Financial Statements
(Presented in US dollars)
September 30, 2008 and 2007
15. Supplemental Petroleum and Natural Gas Disclosures (Unaudited) (continued)
The following table presents the Company’s estimate of its net proved crude petroleum and natural gas reserves related to continuing operations. The Company’s management emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates have been prepared by Guy Nowlin, P.Eng., an independent petroleum reserve engineer. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. All of the Company’s proved reserves are located in Canada.
Petroleum | Natural Gas | |||||||
(MBbls) | (MMCF) | |||||||
Proved developed reserves: | ||||||||
Balance, October 1, 2007 | - | - | ||||||
Purchase of minerals in place | 113.5 | 895.6 | ||||||
Production | (0.1 | ) | (11.8 | ) | ||||
Balance, September 30, 2008 | 113.4 | 883.8 |
The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent a year to reflect the estimated timing of the future cash flows.
2008 | 2007 | |||||||
(thousands) | ||||||||
Future cash inflows | $ | 1,830 | $ | - | ||||
Future operating costs | (989 | ) | - | |||||
Future income tax expense | (231 | ) | - | |||||
Future net cash flows | 610 | - | ||||||
Discount 10% | (208 | ) | - | |||||
Standardized measure of discounted future net cash flows relating to proved reserves | $ | 402 | $ | - |
No change in the standardized measure of discounted future net cash flows is presented for 2008 as the Company did not have any reserves in 2007.
39