Zodiac Exploration 20F/A 2012 Annual report (foreign) (amended) | SEC Filing

(a Development Stage Company)

Consolidated Financial Statements

Year Ended September 30, 2012

(expressed in Canadian dollars)

Management’s Responsibility For Financial Reporting

The accompanying financial statements of Zodiac Exploration Inc. (the “Company”) have been prepared by and are the responsibility of the management of the Company. The financial statements are prepared in accordance with US generally accepted accounting principles and reflect management’s best estimates and judgment based on currently available information.

The Audit Committee of the Board of Directors meets periodically with management and the independent auditors to review the scope and results of the annual audit, and to review the financial statements and related financial reporting matters prior to submitting the financial statements to the Board for approval.

The Company’s independent auditors, PricewaterhouseCoopers LLP, who are appointed by the shareholders, conducted an audit in accordance with United States generally accepted auditing standards. Their report outlines the scope of their audit and gives their opinion on the financial statements.

Management has developed and maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded, transactions are authorized and financial information is accurate and reliable.

(Signed) “Murray Rodgers”	(Signed) “Howard Blacker”
President and Chief Executive	Officer Chief Financial Officer

November 27, 2012

Calgary, Alberta

November 27, 2012

Independent Auditor’s Report

To the Shareholders of Zodiac Exploration Inc.

We have audited the accompanying consolidated financial statements of Zodiac Exploration Inc., which comprise the consolidated balance sheets as at September 30, 2012 and September 30, 2011 and the consolidated statements of loss and deficit, consolidated statement of shareholders’ equity and cash flows for the 12 month periods ended September 30, 2012 and September 30, 2011 and the nine month period ended September 30, 2010. We have also audited the statements of loss and deficit and cash flows for the period June 12, 2008 to September 30, 2011 and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. We are not engaged to perform an audit of the company’s internal control over financial reporting. Our audits 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 purposes 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 evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

PricewaterhouseCoopers LLP

111 5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3

T: 403 509 7369, F:403 781 1825, www.pwc.com/ca

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated balance sheets of Zodiac Exploration Inc. as at September 30, 2012 and September 30, 2011 and the results of its operations, equity and its cash flows for the years ended September 30, 2012 and September 30, 2011, the nine months ended September 30, 2010 and the results of its operations and cash flows for the period June 12, 2008 to September 30, 2012 in accordance with United States generally accepted accounting principles.

Chartered Accountants

Zodiac Exploration Inc.

(a Development Stage Company)

Consolidated Balance Sheet

As at September 30, 2012 and September 30, 2011

(Expressed in Canadian $000's)


	Note		September 30, 2012			September 30, 2011
Assets
Current Assets
Cash and cash equivalents			$	20,381		$	40,532
Accounts receivable				685			3,875
Prepaid expenditures				649			314
				21,715			44,721

Property, plant and equipment		4		54,465			64,477
			$	76,180		$	109,198

Liabilities
Current Liabilities
Accounts payable and accrued liabilities		5	$	1,295		$	6,990
				1,295			6,990

Asset retirement obligation		6		308			385
				1,603			7,375
Shareholders' Equity
Share capital		8		114,541			114,424
Warrants		8		2,833			2,833
Contributed surplus				3,215			2,947
Deficit				(46,012	)		(18,381	)
				74,577			101,823
			$	76,180		$	109,198
Nature of operations		1
Commitments		10
Subsequent events		11

The accompanying notes are an integral part of these financial statements.

Zodiac Exploration Inc.

(a Development Stage Company)

Consolidated Statement of Loss and Deficit

For the year ended September 30, 2012 and 2011, 9 months ended September 30, 2010,

and the period from inception (June 12, 2008) to September 30, 2012

(Expressed in Canadian $000's expect per share amounts)


	12 months			12 months			9 months			Inception
	ended			ended			ended			(June 12,
	September			September			September			2008) to
	30, 2012			30, 2011			30, 2010			September
	$			$			$			30, 2012
Income
Interest Income		194			215			42			605

Operating Expenses
General and administrative		3,629			3,824			1,876			11,361
Stock based compensation		499			1,546			814			3,043
Depreciation and accretion		340			45			33			447
Foreign exchange losses		195			64			(115	)		184
Impairment of oil and gas properties		23,162			8,472			-			31,634
Writedown of KOS investment		-			25			25			50
		27,825			13,976			2,633			46,719

Net Loss		(27,631	)		(13,761	)		(2,591	)		(46,114	)
Deficit, beginning of period		(18,381	)		(4,620	)		(2,029	)		-
Deficit, end of period		(46,012	)		(18,381	)		(4,620	)		(46,114	)

Basic and diluted loss per share:		(0.08	)		(0.04	)		(0.02	)
Weighted average shares outstanding during the period:		359,527,912			333,580,968			163,810,884

The accompanying notes are an integral part of these financial statements.

Zodiac Exploration Inc.

(a Development Stage Company)

Consolidated Statement of Shareholders' Equity

As at September 30, 2012

(Expressed in Canadian $000's expect per share amounts)

	Common Stock														Total
						Contributed						Acc.			Shareholders'
	Shares		Amount			Surplus			Warrants			Deficit			Equity
As at December 31, 2009		83,302,515		12,913			236			5,243			(2,029	)		16,363
Common shares issued through private placement		83,190,127		15,091			-			-			-			15,091
Warrants issued through private placement		-		-			-			1,296			-			1,296
Common shares issued on exercise of stock options		72,503		25			-			-			-			25
Contributed surplus effect on exercise of options		-		6			(6	)		-			-			-
Common shares issued		142,156,840		50,000			-			-			-			50,000
Share issue costs		-		(3,309	)		-			-			-			(3,309	)
Shares held by Peninsula shareholders pursuant to RTO		8,861,626		16			-			-			-			16
Warrants held by Peninsula shareholders pursuant to RTO		-		-			-			8			-			8
Stock-based compensation		-		-			871			-			-			871
Net loss		-		-			-			-			(2,591	)		(2,591	)
As at September 30, 2010		317,583,611		74,742			1,101			6,547			(4,620	)		77,769
Common shares issued on exercise of stock options		340,750		101			-			-			-			101
Contributed surplus effect on exercise of options		-		31			(31	)		-			-			-
Common shares issued on exercise of warrants		38,624,362		33,946			-			-			-			33,946
Original warrant valuation effect on exercise of warrants		-		3,714			-			(3,714	)		-			-
Common shares issued to acquire property		2,700,018		1,890			-			-			-			1,890
Stock-based compensation		-		-			1,877			-			-			1,877
Net loss		-		-			-			-			(13,761	)		(13,761	)
As at September 30, 2011		359,248,741		114,424			2,947			2,833			(18,381	)		101,823
Common shares issued on exercise of stock options		386,667		80			-			-			-			80
Contributed surplus effect on exercise of options		-		37			(37	)		-			-			-
Stock-based compensation		-		-			306			-			-			306
Net loss		-		-			-			-			(27,631	)		(27,631	)
As at September 30, 2012		359,635,408		114,541			3,216			2,833			(46,012	)		74,577

The accompanying notes are an integral part of these financial statements.

Zodiac Exploration Inc.

(a Development Stage Company)

Consolidated Statement of Cash Flows

For the twelve months ended September 30, 2012 and 2011, the nine months ended

September 30, 2010, and the period from inception (June 12, 2008 to September 30, 2012)

(Expressed in Canadian $000's expect per share amounts)

	12 months			12 months			9 months			Inception
	ended			ended			ended			(June 12,
	September			September			September			2008) to
	30, 2012			30, 2011			30, 2010			September
	$			$			$			30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to total cash used in operations:
Net loss for the period		(27,631	)		(13,761	)		(2,591	)		(46,111	)
Depreciation and accretion		340			45			33			447
Revision to asset retirement obligation		(82	)		-			-			(82	)
Stock based compensation		499			1,546			814			3,043
Impairment of assets		23,162			8,497			25			31,684
Foreign currency exchange gains (losses)		195			64			(115	)		176
Change in accounts receivable		(10	)		21			48			(52	)
Change in prepaid expenditures		(442	)		(35	)		(107	)		(505	)
Change in accounts payable and accrued liabilities		(63	)		(162	)		227			214
TOTAL CASH FLOW FROM OPERATING ACTIVITIES		(4,032	)		(3,785	)		(1,666	)		(11,186	)

CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(13,548	)		(46,402	)		(5,319	)		(81,017	)
Investment n KOS Energy Ltd.		-			-			-			(50	)
Change in accounts receivable		3,200			(3,833	)		17			(633	)
Change in prepaid expenditures		108			258			(369	)		(96	)
Change in accounts payable and accrued liabilities		(5,661	)		4,028			1,295			1,081
Reclamation of asset retirement obligation		(130	)		-			-			29
NET CASH USED BY INVESTING ACTIVITIES		(16,031	)		(45,949	)		(4,376	)		(80,686	)

CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		-			-			61,782			73,872
Proceeds from exercise of warrants		-			33,946			1,296			40,485
Proceeds from stock options exercised		80			101			25			206
NET CASH FROM BY FINANCING ACTIVITIES		80			34,047			63,103			114,563

OTHER ACTIVITIES:
Effect of exchange rate on cash and cash equivalents		(168	)		(2,226	)		115			(2,310	)

Net cash increase (decrease) in cash and cashequivalents		(20,151	)		(17,913	)		57,176			20,381
Cash and cash equivalents at beginning of period		40,532			58,445			1,269			-
Cash and cash equivalents at end of period		20,381			40,532			58,445			20,381

Supplemental data:
Interest received		194			215			42			605

The accompanying notes are an integral part of these financial statements.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

1.	Organization and Operations of the Company

Zodiac Exploration Inc. (“Zodiac” or “the Company”) was formed as a result of the Reverse Takeover (“RTO”) structured under the Plan of Arrangement completed on September 28, 2010, in which Peninsula Resources Ltd. (“Peninsula”) acquired all of the outstanding shares of Zodiac Exploration Corp. in a share for share exchange (the “Transaction”). The Transaction entailed the amalgamation of Zodiac Exploration Corp. with 1543081 Alberta Ltd. (subsequently named Zodiac Exploration Corp.), a wholly owned subsidiary of Peninsula. Upon completion of the Transaction, Peninsula changed its name to Zodiac Exploration Inc. For financial reporting purposes, the Transaction was accounted for as a RTO that did not constitute a business combination, with Zodiac Exploration Corp. identified as the RTO acquirer and Peninsula the reverse takeover acquiree. These consolidated financial statements are those of Zodiac with the RTO accounted for as a capital transaction. The comparative information presented, including all information presented prior to September 28, 2010, is that of Zodiac Exploration Corp. as it has been deemed the continuing entity post RTO. Zodiac is principally engaged in the acquisition, exploration and development of oil and gas properties in the San Joaquin Basin in California. To date, the Company has had only incidental oil and gas revenues included as an offset to capital expenditures and is still considered to be in the development stage as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915.

The Company has consolidated in its accounts the accounts of: Zodiac Exploration Corp.; Peninsula Resources (Barbados) Limited; and Zodiac USA Corp. (“Zodiac USA”), including Zodiac Kentucky LLC (“Zodiac Kentucky”) and Zodiac Energy LLC (“Zodiac Energy”). Peninsula Resources (Barbados) Limited was established by Peninsula Resources Ltd. prior to the RTO and is inactive. Zodiac Exploration Corp. (formerly 1543081 Alberta Ltd.) was the amalgamation vehicle for the RTO. Zodiac Kentucky and Zodiac Energy were established to carry on oil and gas exploration and development activities in the states of Kentucky and California, respectively. Both Zodiac Kentucky and Zodiac Energy are limited liability corporations, established under the laws of the state of Nevada and wholly owned by Zodiac USA. Zodiac Kentucky is inactive and no longer registered to operate in Kentucky.

At September 30, 2012, the Company has not yet achieved profitable operations, has accumulated a deficit of $46,012 (September 30, 2011 - $18,381) since its inception, and expects to incur further losses in the development of its business, which is typical of an oil and gas exploration company in the early stages of development. As at September 30, 2012, the Company’s cash balance was $20,381 (September 30, 2011 - $40,532) generated primarily from financings completed in the fiscal years ended September 30, 2011 and 2010.

The Company changed its fiscal year from December 31 to September 30, effective September 30, 2010. As a result, the figures in the consolidated statement of loss and deficit, and consolidated statement of cash flows are for the twelve months ended September 30, 2012 and 2011, and for the nine months ended September 30, 2010.

2. Significant Accounting Policies Basis of preparation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), are expressed in Canadian dollars and reflect the following significant accounting policies:

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

Principles of consolidation

The consolidated financial statements include the assets, liabilities and results of operations, after the elimination of intercompany transactions and balances, of the Company and its subsidiaries, all of which are wholly-owned.

Estimates by management

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expense during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of the Company’s financial statements.

The Company uses estimates to calculate depreciation and accretion expense, to assess impairments of long-lived assets, to estimate asset retirement obligations, to estimate fair market value of investments, to calculate the fair value of warrants and stock options, and to estimate current tax expense.

Measurement uncertainty

Numerous assumptions and judgments are required in the fair value calculation of the asset retirement obligation including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, and timing of settlement. To the extent future revisions to these assumptions impact the fair value of any existing asset retirement obligation (“ARO”) liability, a corresponding adjustment is made to the oil and gas property.

Impairment tests are carried out by the Company based upon the technical expertise of its personnel and are subject to measurement uncertainty. The assumptions underlying the impairment tests are subject to change as circumstances dictate and additional information becomes available.

The assumptions used in the determination of the fair value of warrants and stock options issued are based on the use of the Black-Scholes pricing model, which includes estimates of the future volatility of the Company’s stock price, expected lives of the warrants and stock options, expected dividends and risk-free rate.

By their nature, these estimates are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the financial statements of future periods could be material.

Cash and cash equivalents

Cash and cash equivalents include cash and highly liquid investments held in the form of bankers’ acceptances, money market investments and certificates of deposit with investment terms that are less than three months at the time of acquisition. These investments are stated at fair value, which approximates cost plus accrued interest.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

Foreign currency translation

The financial statements of foreign subsidiaries are translated to Canadian (“CAD”) dollars in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” (ASC Topic 830.10). The Company’s reporting currency is CAD dollars. Monetary assets and liabilities denominated in foreign currencies are translated into CAD dollars at exchange rates prevailing at the balance sheet date and non-monetary assets and liabilities are translated at rates in effect on the date of the transaction. Revenues and expenses are translated at the average rate of exchange in effect during the period other than depreciation which is translated at historical rates. Exchange gains or losses arising from translation are included in operating expenses.

Property, plant and equipment

i. Petroleum and natural gas properties

The Company follows the full cost method of accounting whereby all costs related to the acquisition are initially capitalized on a country by country cost centre basis. Costs capitalized include land acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling productive and non-productive wells, together with overhead and interest directly related to exploration and development activities, and lease and well equipment.

Gains or losses are not recognized upon disposition of petroleum and natural gas properties unless such a disposition would alter the rate of depletion and depreciation by more than 20%.

ii. Depletion

Costs capitalized are depleted and amortized on a cost centre basis using the unit-of-production method based on estimated proved petroleum and natural gas reserves before royalties as determined by independent engineers. For purposes of this calculation, petroleum and natural gas reserves before royalties are converted to a common unit of measure on the basis of their relative energy content where one barrel of oil or liquids equals six thousand cubic feet of gas.

In determining its depletion base, the Company includes estimated future capital costs to be incurred in developing proved reserves and excludes the cost of significant unproved properties until it is determined whether proved reserves are attributable to the unproved properties or impairment has occurred. Unproved properties are evaluated separately for impairment based on management’s assessment of future drilling.

During the period there has been no commercial production, and a depletion expense was not recognized.

iii. Ceiling test

Under the full cost method of accounting, a limit is placed on the carrying amount of petroleum and natural gas properties. A ceiling test is performed on a cost centre basis to recognize and measure impairment, if any.

Impairment is recognized if the carrying amount of petroleum and natural gas properties, less the cost of unproved properties not subject to depletion (the “adjusted carrying amount”), exceeds the estimated undiscounted future cash flows from the Company’s proved reserves. The future cash flows are based on forecast prices and costs, as provided by an independent third party. If recognized, the magnitude of the impairment is measured by comparing the adjusted carrying amount to the estimated discounted future cash flows of the Company’s proved plus probable reserves. Any recognized impairment is recorded as additional depletion and amortization expense.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

iv. Other assets

Other assets are carried at cost and amortized over the estimated useful lives of the assets at various rates per annum calculated on a declining balance basis.

Asset retirement obligation

The Company recognizes the fair value of an asset retirement obligation in the period in which a well or related asset is drilled, constructed or acquired and when a reasonable estimate of the fair value can be made. The fair value of the estimated ARO is recorded as a long-term liability, and equals the present value of estimated future cash flows, discounted using a risk-free interest rate adjusted for the Company’s credit standing. The liability accretes until the date of expected settlement of the retirement obligations or the asset is sold and is recorded as an accretion expense. The associated asset retirement costs are capitalized as part of the carrying value of the related assets. The capitalized amount is amortized to earnings on a basis consistent with depreciation and depletion of the underlying assets. Actual restoration expenditures are charged to the accumulated obligation as incurred. Any settlements are charged to income in the period of settlement.

Income taxes

Income taxes are accounted for using the liability method of income tax allocation. Under the liability method, future income tax assets and liabilities are recorded to recognize future income tax inflows and outflows arising from the settlement or recovery of assets and liabilities at their carrying values. Future income tax assets are also recognized for the benefits from tax losses and deductions that cannot be identified with particular assets or liabilities, provided those benefits are more likely than not to be realized. Future income tax assets and liabilities are determined based on the substantively enacted tax laws and rates that are anticipated to apply in the period of realization.

The Company evaluates such tax reporting methods on a periodic basis to determine if any uncertain tax positions exist that would require the establishment of a loss contingency. A loss contingency would be recognized if it were probable that a liability had been incurred as of the date of the financial statements and the amount of the loss could be reasonably estimated.

Amounts recognized are subject to estimate and judgment regarding the likely outcome of each uncertain tax position. The amount that is ultimately incurred for an individual tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. The Company has determined that no significant uncertain tax positions exist as of September 30, 2012 and September 30, 2011 as a full valuation allowance has been taken in the year then ended.

Financial instruments

The fair values of financial instruments, which include cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximate their carrying values due to the relatively short maturity of these instruments.

Concentration of risk

The Company maintains its cash accounts primarily with one commercial bank in Canada and one commercial bank in the United States. The Company’s cash accounts consist of deposits maintained in Canadian and U.S. dollars. Deposits in excess of insured amounts are an area of potential risk in that these entities may be

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

affected by changes in economic and other conditions that could impact the Company’s overall risk; to date, the Company has not incurred a loss in relation to this risk area.

Stock based compensation

Stock-based compensation cost for options is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the estimated requisite service period. The Black-Scholes model requires various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from that recorded in the current period.

3.	Recent Accounting Developments

The Company has reviewed recently issued, but not yet adopted, accounting standards in order to determine their impact, if any, on the consolidated financial position, results of operations, and cash flows of the Company. Based on its review, the Company does not believe that any of the proposed accounting standards will have a significant impact on its financial position, results of operations, or cash flows.

4.	Property, plant and equipment

Property, plant and equipment consist of the following:

	Oil and gas
	properties			Other			Total
Net book value, September 30, 2010	$	20,973		$	64		$	21,037
Additions		51,905			34			51,939
Impairment expense		(8,472	)		-			(8,472	)
Depreciation		-			(27	)		(27	)
Net book value, September 30, 2011	$	64,406		$	71		$	64,477
Additions		13,331			24			13,355
Impairment expense		(23,162	)		-			(23,162	)
Depreciation		(177	)		(28	)		(205	)
Net book value, September 30, 2012	$	54,398		$	67		$	54,465

On January 31, 2011, Zodiac acquired, through farm in, a 75% working interest in approximately 21,500 acres located in Kings and Kern Counties in California for total proceeds of US$8,422. The transaction included the payment of US$5,614 in cash, the issuance of 2,700,018 shares with a deemed value of US$1,871 and provision of a work credit in respect of future cash calls made by Zodiac of US$936. In addition, Zodiac is required to pay approximately 92% of the costs to drill two wells to evaluate the Monterey and Kreyenhagen formations within this area by January 1, 2013 and January 1, 2014, respectively.

During the twelve months ended September 30, 2012, the Company capitalized $107 (twelve months ended September 30, 2011 - $1,510, nine months ended September 30, 2010 - $738) of general and administrative expenditures and stock-based compensation costs attributable to employees and consultants directly engaged in exploration activities.

At September 30, 2012, the balance of the oil and gas properties related to unproven properties, and the Company has not commenced principal operations, accordingly there has been no depletion or depreciation recorded against the oil and gas properties.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Expressed in Canadian $000’s except per share amounts)

During the twelve months ended September 30, 2012, the Company recognized an impairment charge of $23,162 on its California assets. This impairment relates to an asset (land and drilling costs) whose lease was allowed to lapse as it was determined that it was not in the Company’s best interest to continue to explore and develop that specific area.

During the twelve months ended September 30, 2011, the Company recognized an impairment charge of $8,472 on its Nova Scotia assets. In determining the impairment charge for these assets, the Company considered (among others) the following factors: intent to drill by the operator of the Windsor Basin project; remaining lease term; geological and geophysical evaluations; and drilling results. The operator has since begun reclamation activities on the assets in question and the Company expects settlement of the liability within the year.

During the nine months ended September 30, 2010, the Company did not record an impairment charge.

5.	Accounts Payable and Accrued Liabilities

Accounts payable as at September 30, 2012 & 2011 consist of the following:


	September 30,			September 30,
	2012			2011
Trade accounts payable	$	1,078	$		6,490
Accrued liabilities		217			500
Total accounts payable and accrued liabilities		1,295			6,990

6.	Asset Retirement Obligation

As at September 30, 2012, the Company has estimated the net present value of its total Asset Retirement Obligation (“ARO”) to be $308 (September 30, 2011 - $385) based upon a total future undiscounted liability of $736 (September 30, 2011 - $1,080), where the liability settlement period has been estimated to occur over 1 to 25 years. During the three months ended March 31, 2012, the Company began incurring reclamation costs in the Windsor Basin in Nova Scotia. The Company calculated the net present value of ARO using a discount rate of 8% and an inflation rate of 2% to 3%.

	September 30,			September 30,
	2012			2011
Balance, beginning of period	$	385		$	206
Liabilities incurred		-			179
Accretion expense		135			16
Liabilities settled		(130	)		-
Revision to ARO inputs		(82	)		(16	)
Balance, end of period		308			385

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

7.	Future Income Taxes

	a) The significant components of the Company’s future tax assets and liabilities are as follows:

	September 30,			September 30,
	2012			2011
Property, plant and equipment	$	1,384		$	2,397
Non-capital loss carryforward		2,877			2,482
Share issuance costs		515			752
Asset retirement obligation		60			60
Valuation allowance		(4,836	)		(5,691	)
		-			-

b) The Company has estimated tax pools totaling $96,686 as follows:


				September 30,
				2012
	Rate of claim
U.S. tax pools		100	%	$	77,343
Canadian tax pools	Various				19,343
					96,686

c) FIT Rate Reconciliation


	Zodiac Exploration			Zodiac USA
	Corp			Corp			Total
Expected (income) loss		4,121			23,510			27,631
US Federal & State tax rate		-			43.4	%		-
Adjustment on consolidation		-			(43.4	%)		-
Consolidated tax rate		29	%		34	%		-
		1,195			7,993			9,188
Future tax differences		10,504			-			10,504
Non-deductible		(6,863	)		-			(6,863	)
Change in tax rates		-			-			-
Valuation		(4,836	)		(7,993	)		(12,829	)
		-			-			-

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

8.	Share Capital a) Authorized

Unlimited number of common shares with voting rights.

Unlimited number of preferred shares, issuable in series.

b) Issued

	Number of		Amount
	Common Shares
Outstanding, September 30, 2010		317,583,611	$	74,742
Common shares issued to acquire property (note 4)		2,700,018		1,890
Common shares issued upon exercise of options and warrants		38,965,112		34,047
Equity effect on exercise of options and warrants		-		3,745
Outstanding, September 30 2011		359,248,741		114,424
Common shares issued upon exercise of options		386,667		80
Equity effect on exercise of options		-		37
Outstanding, September 30, 2012		359,635,408		114,541

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

8.	Share Capital (Continued) c) Warrants

								Weighted
	Outstanding					Outstanding		Average		Deemed
	September 30,					September		Exercise Price		Value
	2011		Expired				30, 2012
Warrants issued on private placement		14,500,000		(14,500,000	)		-	$	1.034	$	1,665
Warrants issued on private placement (i)		24,445,706		-			24,445,706		0.414		1,168
Outstanding, end of period		38,945,706		(14,500,000	)		24,445,706		0.414		2,833

	(i)	The Company issued 27,095,068 common share purchase warrants in conjunction with an equity raise during the fiscal year ended September 30, 2010. As of September 30, 2012, there are 24,445,706 common share purchase warrants outstanding with an exercise price of $0.414 per share, of which 12,325,008 expire on March 17, 2015, 11,088,539 expire on April 1, 2015 and 1,032,159 expire on April 9, 2015.

		The fair values of the warrants issued were estimated as at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used in the calculations are noted below:

	2010
Risk-free interest rate		1.95%
Expected life	3.1 years
Expected volatility		71.3%
Fair value per whole warrant	$	0.048

The remaining fair value of the warrants issued is $1,168 at September 30, 2012 (September 30, 2011 - $1,168), which was allocated from the gross proceeds received on the private placement.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

8.	Share Capital (Continued) d) Performance warrants

						September 30,
						2012
	Number of			Weighted Average		Weighted Average
	Warrants			Exercise Price		Remaining
						Contractual Life
						(years)
Balance, beginning of period		10,150,000		$	0.207		3.52
Forfeited		(2,900,000	)		0.207		-
Balance, end of period		7,250,000			0.207		2.52

On April 6, 2010, the Company issued the equivalent of 10,150,000 performance warrants to officers of the Company. These performance warrants have an equivalent exercise price of $0.207 per share, a term of five years, are exercisable into one common share per performance warrant and vest in four equal increments with the initial increment occurring on a liquidity event for the Company. The RTO was the initial liquidity event for the performance warrants, and the initial liquidity price was equal to $0.352, the Zodiac Exploration Inc. equivalent price ($0.51 divided by 1.45) of the subscription receipt financing. The remaining warrants became exercisable in increments of 25% with each increase in the market price of the common shares of 33% from the original liquidity price, with 100% of the performance warrants being exercisable upon the achievement of a common share price equal to two times the initial liquidity price. All performance warrants vested in 2011. On July 29, 2012, 2,900,000 performance warrants held by a former officer were cancelled.

The fair value of the performance warrants issued was estimated as at the grant date using the Black-Scholes option pricing model. The compensation expense is recognized over the then expected vesting term. The estimate of this expense is adjusted for subsequent changes in the expected or actual outcome of the vesting requirements and any changes to this expense are recorded in the period of the change. The assumptions used in the calculation are noted below:

Risk-free interest rate		1.75%
Expected life		2.6 years
Expected volatility		75.4%
Fair value per whole warrant		$0.097

Compensation expense recognized for the twelve months ended September 30, 2012 was $73 (twelve months ended September 30, 2011 - $265). As a non-cash compensation expense, with an offsetting credit to contributed surplus. Since issuance, approximately 98% of the originally estimated fair value of the performance warrants has been recognized as compensation expense.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

8.	Share Capital (Continued) e) Stock options outstanding

Under the share option plan of the Company (the “Plan”), established on September 28, 2010, the number of common shares to be reserved and authorized for issuance pursuant to options granted under the Plan cannot exceed 10% of the total number of issued and outstanding shares of the Company. The 10% limit includes shares reserved for issuance upon the exercise of the performance warrants (Note 8 (d)). All currently issued options have terms of five years and vest over two to three years; the term, the vesting period and the price are determined at the discretion of the Board of Directors. However, the maximum option term shall not exceed five years.

The following table summarizes information about the Company’s stock options outstanding at September 30, 2012, and for changes that occurred during the nine month period then ended:

						September 30,
						2012
	Number of Options			Weighted Average		Weighted Average
				Exercise Price		Remaining
						Contractual Life
						(years)
Balance, beginning of period		14,717,250		$	0.534		3.74
Granted		1,780,000			0.244		4.12
Forfeited		(6,532,500	)		0.516		-
Exercised		(386,667	)		0.207		-
Balance, end of period		9,578,083			0.487		2.93

As at September 30, 2012, the Company had 2,720,417 options granted but not yet vested.

The following table summarizes information about the Company’s stock options outstanding at September 30, 2011, and for changes that occurred during the year then ended:


						September 30,
						2011
	Equivalent Number			Weighted Average		Weighted Average
	of Options			Exercise Price		Remaining
						Contractual Life
						(years)
Balance, beginning of year		9,748,834		$	0.273		3.19
Granted		6,410,000			0.861		4.52
Forfeited		(1,100,834	)		0.370		-
Exercised		(340,750	)		0.295		-
Balance, end of year		14,717,250			0.534		3.74

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

8. Share Capital (Continued)

f) Stock-based compensation

During the twelve months ended September 30, 2012, the Company granted 1,780,000 options to officers, directors, employees and consultants (twelve months ended September 30, 2011 6,410,000). The terms of the grant are consistent with the Plan and options are exercisable at an average price of $0.244 per option and expire five years after the grant date. The fair value of the options granted is estimated as at the grant date using the Black-Scholes option pricing model. The weighted average assumptions used in the calculation are noted below:

	2012	2011
Risk-free interest rate	1.12%	1.86%
Expected life	3.0 years	3.0 years
Expected volatility	71.11%	71.11%
Forfeiture rate	1.94%	1.94%
Fair value per option	$0.089	$0.412

Compensation expense recognized for the twelve months ended September 30, 2012 was $233 (twelve months ended September 30, 2011 - $1,612). Of the total compensation expense for the twelve months ended September 30, 2012, $426 (September 30, 2011 - $1,281) has been recorded as a stock-based compensation expense related to options issuances and $(193) (September 30, 2011 - $331) has been capitalized for options issued to employees and consultants directly involved in exploration activities. The total amount has been recorded with an offsetting credit to contributed surplus.

g) Per share data

Basic earnings per share are calculated based on the weighted average number of shares outstanding during the twelve months ended September 30, 2012 of 359,635,408 (September 30, 2011 333,580,968). The treasury stock method is used for the calculation of diluted loss per share. Under this method, it is assumed that proceeds from the exercise of dilutive securities are used by the Company to repurchase Company shares at the average price during the period. Application of this methodology was anti-dilutive for the period. The issued and outstanding warrants, performance warrants, and vested stock options of 24,445,706, 7,250,000 and 6,857,666, respectively, were not dilutive as the Company is in a loss position.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

9.	Financial Instruments a) Fair value measurement

ASC Topic 820.10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820.10 applies whenever other statements require or permit assets or liabilities to be measured at fair value. The Company’s financial assets and liabilities are measured at fair value on a recurring basis. The Company discloses its recognized non-financial assets and liabilities, such as asset retirement obligations and other property and equipment at fair value on a non-recurring basis. For non-financial assets and liabilities, the Company is required to disclose information that enables users of its financial statements to assess the inputs used to develop said measurements. The Company recognized an impairment in its California non-financial assets during the year ended September 30, 2012 and its Nova Scotia non-financial assets during the year ended September 30, 2011 (note 4).

ASC 820.10 requires that assets and liabilities carried at fair value be classified and disclosed based on the following hierarchy for fair value measurements:

Level 1	Quoted prices in active markets for identical assets or liabilities.

Level 2	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3	Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, based on the best information available.

The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The fair value of the investment is determined by the best available information including regard for market conditions and other factors that a market participant would consider for such investments.

b) Credit risk

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from joint venture partners.

The majority of the Company’s receivables are from its industry partners, where the receivables have not been collateralized. To date, the Company has not experienced any bad debts and maintains no allowance for doubtful accounts. The Company’s cash and cash equivalents are held by two financial institutions, one in Canada and the other in the US.

The carrying amount of trade accounts receivable, cash and cash equivalents represent the

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

Company’s maximum credit exposure.

10. Commitments

a) The Company holds an operating lease agreement for office space in Calgary, Alberta commencing on March 1, 2012 and ending on February 28, 2017. The annual average basic rent obligation is $110, payable in monthly instalments of $9. In addition to the basic rent, additional rent is payable monthly, and includes the Company’s proportionate share of all operating costs and taxes.

b) The Company held an operating lease agreement for the lease of office space in Bakersfield, California commencing July 1, 2010 and ending on September 30, 2012. The annual basic rent obligation is US$37 per annum, payable in monthly instalments of US$3. In addition to the basic rent, additional rent is payable monthly, and includes the Company’s proportionate share of all operating costs and taxes. During the year, the Company signed a new five year lease, beginning July 1, 2012, for the Bakersfield, California office space. The annual average basic rent obligation will be US$77 per annum, payable in average monthly instalments of USD$6. As with the prior lease, additional rent will be payable monthly, which will include the Company’s proportionate share of all operating costs and taxes.

11. Subsequent events

On October 23, 2012, the Company announced that it had signed a farmout agreement with Aera Energy LLC, whereby Aera has acquired the right to earn a 50% interest in approximately 19,600 net acres of Zodiac lands located in Kings Country, California.

Zodiac Exploration Inc.

(a Development Stage Company)

Notes to the Financial Statements

For the years ended September 30, 2012 and 2011 and the nine months ended September 30, 2010

(Unaudited - Expressed in Canadian $000’s except per share amounts)

12. Segmented information

The Company’s primary operations are limited to a single industry being the acquisition, exploration for, and development of petroleum and natural gas. Geographical segmentation is as follows:


	Twelve months ended September 30, 2012 ($)
		Corporate			United States			Total
Interest income			170			24			194
Depreciation and accretion			28			312			340
Net loss			(3,685	)		(23,946	)		(27,631	)
Property, plant and equipment			48			54,417			54,465
Total assets			37,681			38,499			76,180


	Twelve months ended September 30, 2011 ($)
		Canada			United States			Total
Interest income			215			-			215
Depreciation and accretion			43			2			45
Net loss			(12,084	)		(1,677	)		(13,761	)
Property, plant and equipment			63			64,414			64,477
Total assets			38,678			70,520			109,198

	Nine months ended September 30, 2010 ($)
		Canada			United States			Total
Interest income			42			-			42
Depreciation and accretion			32			1			33
Net loss			(2,462	)		(129	)		(2,591	)
Property, plant and equipment			9,918			11,120			21,038
Total assets			68,832			11,276			80,108

13. Comparative Figures

Certain of the comparative figures were reclassified from statements previously presented to conform to the current period presentation.

Zodiac Exploration Inactive 20-F/A2012 FY Annual report (foreign) (amended)