TITAN OIL & GAS, INC.
(An Exploration Stage Company)
-:-
INDEPENDENT AUDITOR’S REPORT
August 31, 2011 and 2010
Contents
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Page
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Report of Independent Registered Public Accountants
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7
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Balance Sheets
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August 31, 2011 and 2010
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8
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Statements of Operations for the
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Years Ended August 31, 2011 and 2010 and the Cumulative Period
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from June 5, 2008 (inception) to August 31, 2011
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9
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Statement of Stockholders’ Equity
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Since June 5, 2008 (inception) to August 31, 2011
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10
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Statements of Cash Flows for the
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Years Ended August 31, 2011 and 2010 and the Cumulative Period
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from June 5, 2008 (inception) to August 31, 2011
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11
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Notes to Financial Statements
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13
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ROBISON, HILL & CO.
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Certified Public Accountants
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A PROFESSIONAL CORPORATION
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BRENT M. DAVIES, CPA
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DAVID O. SEAL, CPA
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W. DALE WESTENSKOW, CPA
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BARRY D. LOVELESS, CPA
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STEPHEN M. HALLEY, CPA
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Titan Oil & Gas, Inc.
(An Exploration Stage Company)
We have audited the accompanying balance sheets of Titan Oil & Gas, Inc. (an exploration stage company) as of August 31, 2011 and 2010 , and the related statements of operations, and cash flows for the year ended August 31, 2011 and 2010 , and the cumulative since June 5, 2008 (inception) to August 31, 2011, and the statement of stockholder’s equity since June 5, 2008 (inception) to August 31, 2011. 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 audit.
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 the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company 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, the financial statements referred to above present fairly, in all material respects, the financial position of Titan Oil & Gas, Inc. (an exploration stage company) as of August 31, 2011 and 2010 , and the results of its operations and its cash flows for the year ended August 31, 2011 and 2010, and the cumulative since June 5, 2008 (inception) to August 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred net losses of approximately $215,196, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
_/s/ Robison, Hill & Co.____
Certified Public Accountants
Salt Lake City, Utah
November 29, 2011
TITAN OIL & GAS, INC.
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
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August 31,
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August 31,
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2011
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2010
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ASSETS
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Current Assets
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Cash
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$ |
195,619 |
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$ |
85,701 |
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Accounts Receivable
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31,235 |
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- |
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Prepaid expenses
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8,054 |
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1,319 |
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Total Current Assets
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234,908 |
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87,020 |
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Oil and Gas Property Interests, Net (Note 4)
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417,280 |
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56,914 |
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Total Assets
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$ |
652,188 |
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$ |
143,934 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities
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Accounts Payable and Accrued Liabilities
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$ |
38,369 |
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$ |
46,230 |
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Total Current Liabilities
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38,369 |
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46,230 |
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Long Term Liabilities
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Asset Retirement Obligations (Note 5)
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2,796 |
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- |
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Total Long Term Liabilities
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2,796 |
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- |
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Total Liabilities
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41,165 |
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46,230 |
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STOCKHOLDERS’ EQUITY
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Common Stock, Par Value $.001
Authorized 100,000,000 shares,
Issued 54,227,000 shares at
August 31, 2011 (August 31, 2010 – 53,760,000)
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54,227 |
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53,760 |
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Paid-In Capital
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771,992 |
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119,496 |
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Deficit Accumulated Since Inception of Exploration Stage
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(215,196 |
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(75,552 |
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Total Stockholders’ Equity
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611,023 |
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97,704 |
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Total Liabilities and Stockholders’ Equity
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$ |
652,188 |
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$ |
143,934 |
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The accompanying notes are an integral part of these financial statements.
TITAN OIL & GAS, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
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Cumulative
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Since
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June 5, 2008
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For the Year Ended
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(Inception) to
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August 31,
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August 31,
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2011
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2010
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2011
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Revenues
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Oil and Gas Revenue
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$ |
34,593 |
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$ |
- |
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$ |
34,593 |
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Expenses
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Operating Expenses
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25,414 |
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- |
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25,414 |
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Depletion and Accretion
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8,429 |
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- |
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8,429 |
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Professional Expenses
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27,905 |
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34,625 |
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71,555 |
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General and Administrative
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28,686 |
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19,663 |
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57,588 |
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Management Fees
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15,000 |
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- |
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15,000 |
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Stock-based compensation
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61,375 |
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- |
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61,375 |
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Directors’ Fees
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12,000 |
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3,000 |
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15,000 |
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Total Expenses
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178,809 |
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57,288 |
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254,361 |
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Net Loss from Operations
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(144,216 |
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(57,288 |
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(219,768 |
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Other Income (Expenses)
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Gain on Sales of Assets (Note 4)
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4,572 |
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- |
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4,572 |
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Net Other Income (Expense)
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4,572 |
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- |
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4,572 |
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Net Loss
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$ |
(139,644 |
) |
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$ |
(57,288 |
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$ |
(215,196 |
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Basic and Diluted loss per Share
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$ |
(0.00 |
) |
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$ |
(0.00 |
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Weighted Average Shares Outstanding (1)
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54,126,247 |
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72,597,479 |
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(1) Share amounts have been adjusted to reflect the 8:1 forward stock split completed on July 23, 2010.
The accompanying notes are an integral part of these financial statements.
TITAN OIL & GAS, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
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Deficit
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Accumulated
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During
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Common Stock
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Paid-In
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Exploration
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Shares(1)
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Par Value
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Capital
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Stage
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Total
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Balance at June 5, 2008 (inception)
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— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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Common Stock Issued to Founder at $0.000125 per share, August 13, 2008
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72,000,000 |
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72,000 |
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(63,000 |
) |
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— |
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9,000 |
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Net Loss
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— |
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— |
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— |
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(120 |
) |
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(120 |
) |
Balance at August 31, 2008
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72,000,000 |
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72,000 |
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(63,000 |
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(120 |
) |
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8,880 |
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Common Stock Issued for Cash at $0.00125 per share, February 27, 2009
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15,600,000 |
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15,600 |
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3,900 |
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— |
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19,500 |
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Net Loss
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— |
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— |
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— |
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(18,144 |
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(18,144 |
) |
Balance at August 31, 2009
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87,600,000 |
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87,600 |
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(59,100 |
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(18,264 |
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10,236 |
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Share Cancellation on March 24, 2010
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(36,000,000 |
) |
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(36,000 |
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36,000 |
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— |
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— |
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Common Stock Issued at $0.025 per share, April 12, 2010
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2,000,000 |
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2,000 |
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48,000 |
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— |
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50,000 |
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Common Stock Issued at $0.50 per share, August 18, 2010
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160,000 |
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160 |
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79,840 |
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— |
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80,000 |
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August 2010, Compensation from the Issuance of Stock Options at Fair Market Value
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— |
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— |
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14,756 |
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— |
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14,756 |
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Net Loss
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— |
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— |
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— |
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(57,288 |
) |
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(57,288 |
) |
Balance August 31, 2010 (Balance Carried Forward)
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53,760,000 |
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53,760 |
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119,496 |
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(75,552 |
) |
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$ |
97,704 |
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Common Stock Issued at $0.025 per share, September 10, 2010
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200,000 |
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200 |
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49,800 |
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— |
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50,000 |
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Common Stock Issued at $1.50 per share, January 31, 2011
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67,000 |
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67 |
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100,433 |
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— |
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100,500 |
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Common stock issued at $2.00 per Share, January 10, 2011
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200,000 |
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200 |
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399,800 |
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— |
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400,000 |
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August 2011, Compensation from the Issuance of Stock Options at Fair Market Value
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— |
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— |
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|
102,463 |
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— |
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|
102,463 |
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Net Loss
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— |
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— |
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— |
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(139,644 |
) |
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(139,644 |
) |
Balance August 31, 2011
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54,227,000 |
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$ |
54,227 |
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$ |
771,992 |
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$ |
(215,196 |
) |
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$ |
611,023 |
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(1) Reflects the 8:1 forward stock split completed on July 23, 2010. See Note 7.
The accompanying notes are an integral part of these financial statements.
TITAN OIL & GAS, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Cumulative
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Since
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June 5, 2008
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For the Year Ended
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(Inception) to
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August 31,
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August 31,
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August 31,
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2011
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2010
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2011
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net Loss
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$
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(139,644
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)
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$
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(57,288
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)
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$
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(215,196
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)
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Adjustments to Reconcile Net Loss to Net
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Cash Used in Operating Activities
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|
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|
|
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|
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Depletion and Accretion Expense
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|
8,429
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|
|
|
—
|
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|
|
8,429
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|
Compensation Expense of Stock Options
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|
61,375
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|
|
|
—
|
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|
61,375
|
|
Gain on Sale of Assets
|
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|
(4,572
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)
|
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|
—
|
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|
(4,572
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)
|
Change in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
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(Increase) Decrease in Accounts Receivable
|
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|
(31,235
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)
|
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|
|
|
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|
(31,235
|
)
|
(Increase) Decrease in Prepaid Expenses
|
|
|
(6,735)
|
|
|
|
(1,319
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)
|
|
|
(8,054
|
)
|
Increase (Decrease) in Accounts Payable and Accrued Liabilities
|
|
|
(1,230
|
)
|
|
|
15,418
|
|
|
|
15,941
|
|
Net Cash Used in Operating Activities
|
|
|
(113,612
|
)
|
|
|
(43,189)
|
|
|
|
(173,312
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)
|
|
|
|
|
|
|
|
|
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|
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CASH FLOWS FROM INVESTING ACTIVITIES
|
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|
|
|
|
|
|
|
|
|
|
|
Acquisition of Oil and Gas Property Interests
|
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|
(341,970
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)
|
|
|
(13,099
|
)
|
|
|
(355,069
|
)
|
Proceeds from Disposal of Oil and Gas Interest
|
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|
15,000
|
|
|
|
—
|
|
|
|
15,000
|
|
Net Cash Used in Investing Activities
|
|
|
(326,970
|
)
|
|
|
(13,099
|
)
|
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|
(340,069
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)
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CASH FLOWS FROM FINANCING ACTIVITIES
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|
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Proceeds from Sale of Common Stock
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|
550,500
|
|
|
|
130,000
|
|
|
|
709,000
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|
Net Cash Provided by Financing Activities
|
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|
550,500
|
|
|
|
130,000
|
|
|
|
709,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
|
|
109,918
|
|
|
|
73,712
|
|
|
|
195,619
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
|
85,701
|
|
|
|
11,989
|
|
|
|
—
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
195,619
|
|
|
$
|
85,701
|
|
|
$
|
195,619
|
|
The accompanying notes are an integral part of these financial statements.
TITAN OIL & GAS, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Since
|
|
|
|
|
|
|
June 5, 2008
|
|
|
|
For the Year Ended
|
|
|
(Inception) to
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|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable related to oil and gas property interests
|
|
$ |
22,428 |
|
|
$ |
29,059 |
|
|
$ |
22,428 |
|
Long Term Liabilities-Asset Retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
|
|
$ |
2,684 |
|
|
$ |
- |
|
|
$ |
2,684 |
|
The Company has granted stock options under its stock option plan. A portion of the stock options granted relates to geological consulting and as a result a portion of the expense has been capitalized to oil and gas property interests. For the year ended August 31, 2010, all of the stock-based compensation expense of $14,756 was capitalized. The vesting period for some of these options is up to three years. As a result, the unvested portion of the options has been revalued at August 31, 2011 resulting in an additional stock-based compensation expense of $41,088 being capitalized to oil and gas property interests and $61,375 being expensed.
The accompanying notes are an integral part of these financial statements.
NOTE 1 – NATURE OF BUSINESS AND OPERATIONS AND BASIS OF PRESENTATION
Titan Oil & Gas, Inc. (an exploration stage company) was incorporated in the state of Florida on June 5, 2008 under the laws of the State of Florida to market and sell an electronic safe system, through wholesale distribution channels and directly to institutional buyers such as hospitals, colleges, universities, and assisted living facilities throughout the United States.
On February 25, 2010 the Company’s principal shareholder entered into a stock purchase agreement which provided for the sale of 72,000,000 shares of common stock of the Company to David Grewal. Effective as of February 25, 2010 in connection with the share acquisition, Mr. Grewal was appointed President, Chief Executive Officer, Chief Financial Officer, Treasurer, Director, and Chairman of the Company.
On March 24, 2010, Mr. Grewal, the owner of 72,000,000 shares of common stock of the Company returned 36,000,000 common shares to the Company for cancellation. Mr. Grewal returned the shares for cancellation in order to reduce the number of shares issued and outstanding. Subsequent to the cancellation, the Company had 51,600,000 shares issued and outstanding, a number that Mr. Grewal, who was also a director of the Company, considered more in line with the Company’s business plans at that time.
On April 19, 2010, Mr. Grewal, as the holder of 36,000,000 (at the time representing 67%) of the issued and outstanding shares of the Company’s common stock, provided the Company with written consent in lieu of a meeting of stockholders authorizing the Company to amend the Company’s Articles of Incorporation for the purpose of changing the name of the Company from “Xtrasafe, Inc.” to “Titan Oil & Gas, Inc.” and to change its domicile from Florida to Nevada. In order to undertake the name and domicile change, the Company incorporated a wholly-owned subsidiary in Nevada named Titan Oil & Gas, Inc. and merged Xtrasafe, Inc. with the new
subsidiary. Subsequent to the merger, the Company continued as a Nevada company named Titan Oil & Gas, Inc.
In connection with the change of the Company’s name to Titan Oil & Gas, Inc. the Company’s business was changed to oil and gas exploration. The change in name, business, and domicile received its final approval by the regulatory authorities on June 30, 2010.
On June 20, 2011 the Company incorporated a wholly-owned subsidiary in the province of Alberta Canada named TNGS Oil & Gas, Inc. (“TNGS”). The accompanying consolidated financial statements include the balances of TNGS.
Nature of Operations
The Company currently has a 6% working interest in four producing oil wells located in Alberta, Canada. The remaining of the Company’s oil and gas assets are not in production and do not contain any assigned resources or reserves. The Company was established to market and sell an electronic safe system, through wholesale distribution channels and directly to institutional buyers such as hospitals, colleges, universities, and assisted living facilities throughout the United States. On June 30, 2010 the Company received final approval to change its name to Titan Oil & Gas, Inc. and to change its business to oil and gas exploration. In Alberta, Canada the Company
has acquired the petroleum and natural gas rights to a total of approximately 2,816 hectares of land and has acquired a 2.51255% working interest in a non-producing oil well. In addition, the Company has acquired a 6% working interest in four producing oil wells as of August 31, 2011.
NOTE 2 – ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared in US dollars and in accordance with accounting principles generally accepted in the United States (GAAP) on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company acquired its first producing assets in April 2011. Previously, the Company had not realized any revenue from its oil and gas operations. During the year ended August 31, 2011, the Company incurred a net loss of $139,644. Since inception on June 5, 2008 the Company has an accumulated deficit of $215,196 to August 31, 2011. These
conditions raise substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent on its ability to develop its oil and gas properties and ultimately achieve profitable operations and to generate sufficient cash flow from financing and operations to meet its obligations as they become payable. Even with production form its Leaman assets it is expected that losses will continue in the future until additional producing assets can either be developed or acquired by the Company. The Company expects that it will need approximately $100,000 to fund its operations during the next twelve months which will include minimum annual property lease payments as well as the costs associated with maintaining an office.
Current cash available is sufficient to fund the Company’s operations for the next twelve months. However, management has plans to seek additional capital through a private placement and public offering of its common stock. Although there are no assurances that management’s plans will be realized, management believes that the Company will be able to continue operations in the future. Accordingly, no adjustment relating to the recoverability and classification of recorded asset amounts and the classification of liabilities has been made to the accompanying financial statements in anticipation of the Company not being able to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management’s Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and notes. Significant areas requiring the use of estimates relate to accrued liabilities, stock-based compensation, asset retirement obligations, and the impairment of long-lived assets. Management believes the estimates utilized in preparing these financial statements are reasonable and prudent and are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made in the financial statements for the year ended August 31, 2010 to conform to accounting and financial statement presentation for the year ended August 31, 2011.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. At August 31, 2011, $3,751 (2010 - $35,711) of cash was held in trust with the Company’s land broker for the purpose of future oil and gas lease rental payments. This cash can be returned to the Company upon request without penalty and as a result the full balance has been included in cash at August 31, 2011.
Foreign Currency
The Company has oil and gas property interests in Canada and as a result incurs some transactions in Canadian dollars. The Company translates its Canadian dollar balances to US dollars in the following manner: assets and liabilities have been translated using the rate of exchange at the balance sheet date. The Company’s results of operations have been translated using average rates.
All amounts included in the accompanying financial statements and footnotes are stated in U.S. dollars.
Concentration of Credit Risk
The Company has no off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains all of its cash balances with two financial institutions in the form of demand deposits.
Loss per Share
Net income (loss) per share is computed by dividing the net income by the weighted average number of shares outstanding during the period. As of August 31, 2011, the company has outstanding common stock options of 800,000. The effects of the Company’s common stock equivalents are anti-dilutive for August 31, 2011 and 2010 and are thus not presented.
Comprehensive Income
The Company has adopted ASC 220 (formerly SFAS No. 130, “Reporting Comprehensive Income”), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company has disclosed this information on its Statement of Operations. Comprehensive income is comprised of net income (loss) and all changes to capital deficit except those resulting from investments by owners and distribution to owners.
Stock Options
Under ASC 718, Compensation-Stock Compensation, the Company is required to record compensation expense, based on the fair value of the awards, for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as at the date of adoption.
The Company grants stock options to non-employees for services that include researching land availability, lease acquisitions, geological consulting and geophysical services including interpretation of seismic data. These options are accounted for under ASC 505 (EITF 96-18) and were measured at the fair value of the options as determined by an option pricing model on the measurement date and recognized as the related services are provided and the options earned.
Compensation expense for unvested options to non-employees is revalued at each period end and is being amortized over the vesting period of the options.
Oil and Gas Property Payments and Exploration Costs
The Company follows the full cost method of accounting for natural gas and oil operations. Under the full cost method all costs incurred in the acquisition, exploration and development of natural gas and oil reserves are initially capitalized into cost centers on a country-by-country basis. The Company’s current cost center is located in Canada. Such costs include land acquisition costs, geological and geophysical expenditures, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition, exploration and development activities.
Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated net proved reserves, as determined by independent petroleum engineers. The Company has adopted revised oil and gas reserve estimation and disclosure requirements. The primary impact of the new disclosures is to conform the definition of proved reserves with the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008. The accounting standards update revised the definition of proved oil and gas reserves to require that the average, first-day-of-the-month price during the 12-month period before the end of the year
rather than the year-end price, must be used when estimating whether reserve quantities are economical to produce. This same 12-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows. The percentage of total reserve volumes produced during the year is multiplied by the net capitalized investment plus future estimated development costs in those reserves. Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion
calculations.
Under full cost accounting rules, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the ceiling) equal to the sum of: (i) the after tax present value of estimated future net revenues computed by applying current prices of oil and gas reserves to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on currents costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; (ii) the cost of properties not being amortized; and (iii)
the lower of cost or estimated fair value of unproven properties included in the costs being amortized. If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the ceiling, the excess shall be charged to expense and separately disclosed during the period in which the excess occurs. Amounts thus required to be written off shall not be reinstated for any subsequent increase in the cost center ceiling.
The Company has recognized $34,593 revenue from its oil and gas exploration activities which commenced in April, 2011
Impairment of Long-lived Assets
In accordance with ASC 360, Property, Plant and Equipment, long lived assets such as equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount of fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Asset Retirement Obligations
In accordance with ASC 410, Asset Retirement and Environmental Obligations the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company has not yet undertaken any field exploration on its properties and as such has not yet incurred an asset retirement obligation. At least annually, the Company will reassess the need to record an obligation or determine whether a change in any estimated obligation is necessary. The Company will evaluate whether there are indicators that suggest the estimated cash flows underlying the obligation have
materially changed. Should those indicators suggest the estimated obligation has materially changed the Company will accordingly update its assessment. The asset retirement obligation is measured at fair value on a non-recurring basis using level 3 inputs based on discounted cash flows involving estimates, assumptions, and judgments regarding the cost, timing of settlement, credit-adjusted risk-free rate and inflation rates.
Revenue recognition
Revenue from the production of crude oil and natural gas is recognized when title passes to the customer and when collection of the revenue is reasonably assured. The Company currently earns revenue from its 6% working interest it has in four producing wells in Alberta, Canada. The Company does not operate the wells but does currently market and sell its proportion of oil and gas produced from the wells. The customers take title when the crude oil is transferred to their pipeline.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If it is determined that the realization of the future tax benefit is not more likely than not, the enterprise establishes a valuation allowance.
Fair Value of Financial Instruments
The book values of cash, prepaid expenses, and accounts payable approximate their respective fair values due to the short-term nature of these instruments. The fair value hierarchy under GAAP distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
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|
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•
|
Level one — Quoted market prices in active markets for identical assets or liabilities;
|
|
•
|
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
|
|
•
|
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.
New Accounting Pronouncements
On December 1, 2009 the Company adopted the guidance in Accounting Standards Codification (“ASC”) 805, “Business Combinations”. ASC 805 establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The
adoption of this statement had no effect on the Company’s reported financial position or results of operations.
On December 1, 2009, the Company adopted the newly ratified guidance which is part of ASC 815-40, “Contracts in Entity’s Own Equity”. ASC 815-40 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The adoption of this statement had no effect on the Company’s reported financial position or results of operations.
On December 1, 2009, the Company became subject to revised reporting requirements relating to oil and natural gas reserves that a company holds, which were prescribed by the SEC. Included in the new rule entitled ―Modernization of Oil and Gas Reporting Requirements”, are the following changes: 1) permitting use of new technologies to determine proved reserves, if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes; 2) enabling companies to additionally disclose their probable and possible reserves to investors, in addition to their proved reserves; 3) allowing previously excluded
resources, such as oil sands, to be classified as oil and natural gas reserves rather than mining reserves; 4) requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria; 5) requiring the filing of reports for companies that rely on a third party to prepare reserve estimates or conduct a reserve audit; and 6) requiring companies to report oil and natural gas reserves using an average price based upon the prior 12-month period, rather than year-end prices. The new reporting requirements are applicable to registration statements filed on or after January 1, 2010, and for annual reports on Form 10K for fiscal years ending on or after December 31, 2009. As at August 31, 2011, the Company has proved and probable reserves and is therefore subject to the reporting requirements. The adoption of these
reporting requirements will result in increased disclosures to the financial statements.
On December 1, 2009 Accounting Standards Update (ASU) No. 2010-03 ― “Oil and Gas Reserve Estimation and Disclosures.” became effective for the Company. The guidance requires additional disclosures to be made relating to current oil and gas reserve estimation. The adoption of these reporting requirements will result in increased disclosures to the financial statements as the Company has proved and probable reserves.
In April 2010, the FASB issued ASU No. 2010-17, "Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition" (codified within ASC 605 - Revenue Recognition). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17 is effective for interim and annual periods beginning after June 15, 2010. The adoption of this statement had no effect on the Company’s reported financial position or results of operations.
In March 2010, the FASB issued ASU No. 2010-11, "Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives" (codified within ASC 815 - Derivatives and Hedging). ASU 2010-11 improves disclosures originally required under SFAS No. 161. ASU 2010-11 is effective for interim and annual periods beginning after June 15, 2010. The adoption of this statement had no effect on the Company’s reported financial position or results of operations.
In May 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-19 (ASU 2010-19), Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have any effect on the Company’s reported financial position or results of operations.
In September 2011, the Financial Accounting Standards Board (FASB) issued an update that is intended to simplify the annual goodwill impairment assessment process by permitting a company to assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If a company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the company would be required to conduct the current two-step goodwill impairment test. This change is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, but early
adoption is permitted. The adoption of this statement is not expected to have an effect on the Company’s reported financial position or results of operations.
NOTE 4 – OIL AND GAS PROPERTY INTERESTS (Unproven)
|
August 31, 2011 (Cumulative)
|
|
|
Southeast Alberta
|
|
Alberta Well Interest
|
|
Leaman Property
|
|
Total
|
|
|
(unproven)
|
|
(unproven)
|
|
|
|
|
|
Property acquisition and lease payments
|
|
$ |
167,857 |
|
|
$ |
6,043 |
|
|
$ |
149,325 |
|
|
$ |
323,225 |
|
Geological and geophysical (1)
|
|
|
97,009 |
|
|
|
1,086 |
|
|
|
1,593 |
|
|
|
99,688 |
|
Asset Retirement Obligation
|
|
|
- |
|
|
|
- |
|
|
|
2,684 |
|
|
|
2,684 |
|
Accumulated Depletion
|
|
|
- |
|
|
|
- |
|
|
|
(8,317 |
) |
|
|
(8,317 |
) |
Total expenditures
|
|
$ |
264,866 |
|
|
$ |
7,129 |
|
|
|
145,285 |
|
|
|
417,280 |
|
(1) Balance includes total capitalized stock-based compensation expense of $55,844.
Leaman Property
On April 14, 2011, the company entered into a general conveyance agreement (the “General Conveyance Agreement”) with Huron Energy Corporation (“Huron”), pursuant to which Huron conveyed to the Company a 6% working interest in the petroleum and natural gas rights, as well as the intangible and miscellaneous interests, (collectively, the “Assets”) in 800 acres of land located in the Leaman area of Alberta, Canada (the “Leaman”). In consideration for the Assets, the Company paid Huron an aggregate CDN $140,000. Including closing costs and taxes the Leaman was acquired for a total of USD $148,367. The Leaman consists of six oil wells with
five currently in production. Of the five currently in production, the Company receives revenue form four of the wells as a fifth well is currently in penalty. The one well in penalty is a result of Huron not paying its share of capital costs to the well’s operator. Huron did not pay its share of costs as the well has had minimal production to date. The Company does not expect to receive revenue from the well in penalty. The Company has registered to do business in the province of Alberta under the name TNGS Oil & Gas, Inc. (“TNGS”). The General Conveyance Agreement has been executed through the Company’s TNGS registration.
The Company has received a reserve report on its Leaman property. Based on the report prepared by GLJ Petroleum Consultants of Calgary, Alberta, Canada, the Company’s portion of estimated proved plus probable producing resources and reserves, on an after royalty basis, is 7,400 recoverable barrels equivalent of oil. As a result $8,317 has been recorded as depletion expense at August 31, 2011. The actual recoverable number of barrels may differ materially from this estimate.
Southeast Alberta Property
On August 19, 2010 the Company acquired an interest in one Petroleum and Natural Gas (“P&NG) Lease (the “August 2010 Lease”) in the province of Alberta, Canada. Including fees and closing costs the rights to the August 2010 Lease were acquired for an aggregate $13,099 and the purchase price includes the first year’s aggregate annual lease payments of $842. The total area covered by the August 2010 Lease is 256 hectares.
Between September 2 and September 30, 2010 the Company entered into six additional P&NG Leases (the “September 2010 Leases”) in the province of Alberta, Canada. Including fees and closing costs the rights to the September 2010 Leases were acquired for an aggregate $76,850 and the purchase price includes the first year’s aggregate annual lease payments of $5,360. The total area covered by the September 2010 Leases is 1,536 hectares.
On December 15, 2010 the Company acquired an interest in a P&NG Lease (the “December 2010 Lease”) in the province of Alberta, Canada. The rights to the December 2010 Lease were acquired for $9,484 and the purchase price includes the first year’s annual lease payments of approximately $899. The total area covered by the December 2010 Lease is 256 hectares.
On January 12, 2011, the Company acquired an interest in two PN&G Leases (the “January 2011 Leases”) in the province of Alberta, Canada. The rights to the January 2011 Leases were acquired for an aggregate $49,613 and the purchase price includes the first year’s aggregate annual lease payments of approximately $2,724. The total area covered by the Company’s January 2011 Leases is 768 hectares.
All of the leases comprising the Southeast Alberta Property were acquired through public land sales held on a regular basis by the Alberta provincial government. Upon being notified that it has submitted the highest bid for a specific land parcel the Company immediately pays the government the bid price and enters into a formal lease with the government. Each of the leases are for an initial five year term, requires minimum annual lease payments, and grants the Company the right to explore for potential petroleum and natural gas opportunities on the respective lease.
All of the Company’s leases are subject to royalties payable to the government of Alberta. The royalty is calculated using a revenue-less-cost formula. In years prior to the recovery of the project’s capital investment, the royalty is 1% of gross revenue. Once the project costs have been recovered, the royalty is the greater of 1% of gross revenue or 25% of net revenue.
Saskatchewan Property
On April 12, 2010 the Company acquired an interest in two P&NG leases in the province of Saskatchewan (the “Saskatchewan Leases”). Including fees and closing costs the rights to the Saskatchewan Leases were acquired for an aggregate $9,873 and the purchase price included the first year’s aggregate annual lease payments of $372. The total area covered by the Company’s portion of the Saskatchewan Leases is approximately 132 hectares. The interests in the Saskatchewan Leases were acquired through a public land sale process held on a regular basis by the Saskatchewan provincial government. Upon being notified that it has submitted the highest bid
for a specific land parcel the Company immediately pays the government the bid price and enters into a formal lease with the government. The Saskatchewan Leases are for a 5 year term, require minimum annual lease payments, and grant the Company the right to explore for potential petroleum and natural gas opportunities on the respective lease. The Company’s Saskatchewan Leases are subject to royalties payable to the government of Saskatchewan.
On February 16, 2011 the Company disposed of its Saskatchewan Leases to Westpoint Energy, Inc. (“Westpoint”) for total proceeds of $15,000 resulting in a gain of $4,572. The Company sold its interests in the Saskatchewan Leases as they are located in Saskatchewan while the majority of the Company’s other assets are located in Alberta where the Company is focusing its activities. The President and CEO of the Company is also the President and CEO of Westpoint. In addition, the Company and Westpoint have a member of the Board of Directors in common.
Alberta Well Interest
On April 12, 2010 the Company executed a Sale and Conveyance Agreement (the “Agreement”) with 966749 Alberta Corp. (the “Vendor”) for the acquisition of a 2.51255% working interest in an oil well located in Alberta, Canada. Under the Agreement the Company paid the Vendor $6,043 including taxes and closing costs. The underlying property lease is with the Alberta provincial government.
NOTE 5 – ASSET RETIREMENT OBLIGATION
As at August 31, 2011 the Company’s asset retirement obligation was comprised of its 6% working interest in the Leaman property. The Company has estimated its obligation at August 31, 2011 as $2,796 which includes $112 in accretion expense.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company currently pays two of its directors $500 per month to serve on its Board of Directors. The payments are made quarterly in advance. The total amount paid to the Directors for the year ended August 31, 2010 was $12,000 (2010 - $3,000).
NOTE 7 – SHARE CAPITAL
Common Share Transactions
On August 13, 2008, the Company issued 72,000,000 common shares at $0.000125 per share to its founder for total proceeds of $9,000.
On February 27, 2009 the Company issued 15,600,000 common shares at$0.00125 per share for total proceeds of $19,500.
On March 24, 2010, the Company’s controlling shareholder, Mr. Grewal returned 36,000,000 common shares to the Company for cancellation. Mr. Grewal returned the shares for cancellation in order to reduce the number of shares issued and outstanding. Subsequent to the cancellation, the Company had 51,600,000 shares issued and outstanding; a number that Mr. Grewal, who is also a director of the Company, considered more in line with the Company’s business plans at that time.
On April 12, 2010 the Company closed a private placement of 2,000,000 common shares at $0.025 per share for a total offering price of $50,000.
On August 18, 2010 the Company closed a private placement of 160,000 common shares at $0.50 per share for a total offering price of $80,000.
On September 10, 2010 the Company closed a private placement of 200,000 common shares at $0.25 per share for a total offering price of $50,000.
On January 3, 2011 the Company closed a private placement of 67,000 common shares at $1.50 per share for a total offering price of $100,500.
On January 10, 2011 the Company closed a private placement of 200,000 common shares at $2.00 per share for a total offering price of $400,000.
Stock Splits
On April 19, 2010 the Company received a written consent in lieu of a meeting of stockholders (the “Written Consent”) from the holder of 36,000,000 (at the time representing 67%) of the issued and outstanding shares of our common stock. The Written Consent adopted the resolution to change the Company’s name to Titan Oil & Gas, Inc. In connection with the name change the Written Consent also adopted a resolution to split the Company’s common stock. The Board of Directors subsequently approved an 8:1 forward stock split. The record and payment dates of the forward split were July 22 and
July 23, 2010 respectively. All of the common shares issued and outstanding on July 22, 2010 were split. All references to share and per share amounts have been restated in these financial statements to reflect the split.
Stock Options
On August 3, 2010 the Company adopted its 2010 Stock Option Plan (“the 2010 Plan”). The 2010 Plan provides for the granting of up to 5,000,000 stock options to key employees, directors and consultants, of common shares of the Company. Under the 2010 Plan, the granting of stock options, the exercise prices, and the option terms are determined by the Company's Option Committee, a committee designated to administer the 2010 Plan by the Board of Directors. For incentive options, the exercise price shall not be less than the fair market value of the Company's common stock on the grant date. (In the case of options granted to an employee who owns stock possessing more than
10% of the voting power of all classes of the Company's stock on the date of grant, the option price must not be less than 110% of the fair market value of common stock on the grant date.). Options granted are not to exceed terms beyond five years.
In order to exercise an option granted under the Plan, the optionee must pay the full exercise price of the shares being purchased. Payment may be made either: (i) in cash; or (ii) at the discretion of the Committee, by delivering shares of common stock already owned by the optionee that have a fair market value equal to the applicable exercise price; or (iii) with the approval of the Committee, with monies borrowed from us.
Subject to the foregoing, the Committee has broad discretion to describe the terms and conditions applicable to options granted under the Plan. The Committee may at any time discontinue granting options under the Plan or otherwise suspend, amend or terminate the Plan and may, with the consent of an optionee, make such modification of the terms and conditions of such optionee’s option as the Committee shall deem advisable.
For the year ended August 31, 2011, 250,000 (2010 – 550,000) stock options were granted to various consultants at an exercise price of $1.30 per share. The Black-Scholes option pricing model was used to calculate to estimate the fair value of the options at the grant date. The following assumptions were made:
|
2011
|
2010
|
|
|
|
Risk Free Rate
|
0.17%
|
0.19%
|
Expected Life of Option
|
5 years
|
5 years
|
Expected Volatility of Stock (Based on Historical Volatility)
|
115.6%
|
92.6%
|
Expected Dividend yield of Stock
|
0.00
|
0.00
|
Expected volatilities are based on industry comparables using available data and other factors due to the fact the Company’s business changed substantially from the previous electronic safe business to oil and gas exploration in 2010. When applicable, the Company will use historical data to estimate option exercise, forfeiture and employees termination within the valuation model. For non-employees, the expected term of the options approximates the full term of the options
Total stock-based compensation expense of $102, 463 (2010 - $14,756) was recognized for the year ended August 31, 2011 with $41,088 (2010 - $14,756) being capitalized to oil and gas property interests and $61,375 (2010 - $0) being expensed. The stock-based compensation expense includes expense relating to the 2011 stock option grants as well as the expense relating to the revaluation of the 2010 grants as the 2010 grants have vesting periods of up to four years.
The following table sets forth the options outstanding under the 2010 Plan as of August 31, 2011:
|
Available for Grant
|
Options Outstanding
|
Weighted Average Exercise Price
|
Balance, August 31, 2009
|
-
|
-
|
$ -
|
Approval of 2010 Plan
|
5,000,000
|
-
|
-
|
Options granted
|
(550,000)
|
550,000
|
$ 0.26
|
Balance, August 31, 2010
|
4,450,000
|
550,000
|
$ 0.26
|
Options granted
|
(250,000)
|
250,000
|
$ 1.30
|
Balance, August 31, 2011
|
4,200,000
|
800,000
|
$ 0.59
|
The following table summarizes information concerning outstanding and exercisable common stock options under the 2010 Plan at August 31, 2011:
Exercise Prices
|
Options Outstanding
|
Remaining Contractual Life
(in years)
|
Weighted
Average
Exercise Price
|
Number of Options Currently Exercisable
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
$ 0.26
|
550,000
|
3.92
|
$ 0.26
|
200,000
|
$ 0.26
|
$ 1.30
|
250,000
|
4.25
|
$1.30
|
50,000
|
$1.30
|
|
800,000
|
|
|
250,000
|
|
The aggregate intrinsic value of stock options outstanding at August 31, 2011 was $0 (2010 - $0) and the aggregate intrinsic value of stock options exercisable at August 31, 2011 was also $0 (2010 - $0). No stock options were exercised in 2011 or 2010. As of August 31, 2011 there was $45,031 in unrecognized compensation expense that will be recognized over three years.
A summary of status of the Company’s unvested stock options as of August 31, 2011 under all plans is presented below:
|
Number
of Options
|
Weighted
Average
Exercise
Price
|
Weighted Average
Grant Date Fair Value
|
Unvested at August 31, 2009
|
-
|
-
|
-
|
Granted
|
550,000
|
$ 0.26
|
$ 0.18
|
Vested
|
(75,000)
|
$ 0.26
|
$ 0.18
|
|
|
|
|
Unvested at August 31, 2010
|
475,000
|
$ 0.26
|
$ 0.18
|
Granted
|
250,000
|
$ 1.30
|
$ 0.97
|
Vested
|
(175,000)
|
$ 0.56
|
$ 0.47
|
|
|
|
|
Unvested at August 31, 2011
|
550,000
|
$ 0.64
|
$ 0.59
|
NOTE 8 - INCOME TAXES
Deferred tax assets of the Company are as follows:
|
|
2011
|
|
|
2010
|
|
Non-capital losses carried forward
|
|
|
52,300 |
|
|
|
25,700 |
|
Less: valuation allowance
|
|
|
(52,300 |
) |
|
|
(25,700 |
) |
Deferred tax asset recognized
|
|
|
- |
|
|
|
- |
|
A valuation allowance has been recorded to reduce the net benefit recorded in the financial statements related to these deferred tax assets. The valuation allowance is deemed necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets.
The provision for income tax differs from the amount computed by applying statutory federal income tax rate of 34% (2010 – 34%) to the net loss for the year. The sources and effects of the tax differences are as follows:
|
|
2011
|
|
|
2010
|
|
Computed expected tax benefit
|
|
|
47,500 |
|
|
|
19,500 |
|
Permanent differences
|
|
|
(20,900 |
) |
|
|
- |
|
Change in valuation allowance
|
|
|
(26,600 |
) |
|
|
(19,500 |
) |
Income tax provision
|
|
|
- |
|
|
|
- |
|
As of August 31, 2011, the Company had a net operating loss carryforward for income tax reporting purposes of approximately $153,900 (2010 - $75,600) which expire between 2028 and 2031.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As at August 31, 2011 the Company has entered into a total of ten PN&G leases with the Alberta provincial government (Note 4). Each lease is for a period of five years and has an annual minimum lease payment of CDN $3.50 (USD $3.57) per hectare. The first year’s minimum annual lease payment is included in the initial purchase price. Therefore, the commitments at August 31, 2011 are for the balance of the respective lease term.
Total annual minimum lease payments are as follows:
Contractual Obligations
|
Payments due by period
|
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
Annual PN&G Lease Payments:
|
|
|
|
|
Southeast Alberta Property Lease
|
$ 39,337
|
$ 10,063
|
$ 20,126
|
$ 9,148
|
Office Lease Obligation
|
$ 1,494
|
$ 1,494
|
$ -
|
$ -
|
Total
|
$ 40,831
|
$ 11,557
|
$ 20,126
|
$ 9,148
|
Commencing March 1, 2011 the Company renewed its one-year lease for its office space at $249 per month. It is expected that the Company will renew the lease for another year when the current lease expires.