NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012 and 2011
|
1.
|
NATURE OF BUSINESS AND BASIS OF PRESENTATION
|
Nature of Business
Allied Devices Corporation (“Allied”)
and its former subsidiaries were engaged in the manufacture and distribution of standard and custom precision mechanical assemblies
and components throughout the United States.
On February 19, 2003, Allied
filed a petition for bankruptcy in the United States Bankruptcy Court under Chapter 11 in the Eastern District of New York titled
“Allied Devices Corporation, Case No. 03-80962-511”. The company emerged from bankruptcy pursuant to a Bankruptcy Court
Order entered on September 10, 2003, with no remaining assets or liabilities and the company name was changed from “Allied
Devices Corporation” to “Deep Well Oil & Gas, Inc.” (“Deep Well”).
Upon emergence from Chapter 11
proceedings, Deep Well adopted fresh-start reporting in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). In connection
with the adoption of fresh-start reporting, a new entity was deemed created for financial reporting purposes. For financial reporting
purposes, Deep Well adopted the provisions of fresh-start reporting effective September 10, 2003. In adopting the requirements
of fresh-start reporting as of September 10, 2003, the company was required to value its assets and liabilities at fair value and
eliminate any accumulated deficit as of September 10, 2003. Deep Well emerged from Chapter 11 proceedings with no assets and liabilities
pursuant to the Bankruptcy Order. After the Bankruptcy Order and restructuring was completed, Deep Well entered into the oil and
gas exploration business and acquired properties in the Peace River oil sands area, located in the province of Alberta, Canada.
Because the current business, heavy oil and gas exploration has no relevance to the predecessor company, there is no basis for
financial comparisons between Deep Well’s current operations and the predecessor company.
This report has been prepared
showing the name “Deep Well Oil & Gas, Inc. (and Subsidiaries)” (“the Company”) and the post-split
common stock, with $0.001 par value, from inception. The accumulated deficit has been restated to zero and dated September 10,
2003, with the statement of operations to begin on that date.
Basis of Presentation
These consolidated financial
statements are expressed in U.S. dollars and are prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
These statements reflect all
adjustments, consisting solely of normal recurring adjustments (unless otherwise disclosed) which, in the opinion of management,
are necessary for a fair presentation of the information contained herein.
Going Concern
The Company’s consolidated
financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. As of September 30, 2012, the Company
has a working capital deficit, has an accumulated deficit, and has generated negative cash flows from operations. These factors
raise substantial doubt regarding the Company’s ability to continue as a going concern.
In order to continue as a going
concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and
to develop a consistent source of dependent upon the ability to raise equity or debt financing, and the attainment of profitable
operations from the Company's operations. The management of the Company has developed a strategy, which it believes will accomplish
this objective through short-term related party loans and additional equity funding, which will enable the Company to operate for
the coming year.
The accompanying financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Consolidation
These consolidated financial
statements include the accounts of two wholly owned subsidiaries: (1) Northern Alberta Oil Ltd. ("Northern") from the
date of acquisition, being June 7, 2005, incorporated under the Business Corporations Act (Alberta), Canada; and (2) Deep Well
Oil & Gas (Alberta) Ltd., incorporated under the Business Corporations Act (Alberta), Canada on September 15, 2005. All inter-company
balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly
liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Allowance for Doubtful
Accounts
The Company determines allowances
for doubtful accounts based on aging of specific accounts. Accounts receivable are stated at the historical carrying amounts net
of allowances for doubtful accounts and include only the amounts the Company deems to be collectable.
Property and Equipment
Property and equipment are stated
at cost less accumulated depreciation. Depreciation expense is computed using the declining balance method over the estimated useful
life of the asset. Only half of the depreciation rate is taken in the year of acquisition. The following is a summary of the depreciation
rates used in computing depreciation expense:
Software
|
-
|
100%
|
|
Computer equipment
|
-
|
55%
|
|
Portable work camp
|
-
|
30%
|
|
Vehicles
|
-
|
30%
|
|
Road Mats
|
-
|
30%
|
|
Wellhead
|
-
|
25%
|
|
Office furniture and equipment
|
-
|
20%
|
|
Oilfield Equipment
|
-
|
20%
|
|
Tanks
|
-
|
10%
|
|
Expenditures for major repairs
and renewals that extend the useful life of the asset are capitalized. Minor repair expenditures are charged to expense as incurred.
Leasehold improvements are amortized over the greater of five years or the remaining life of the lease agreement.
Long-Lived Assets
The Company reviews for the impairment
of long-lived assets annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition is less than its carrying amount. Impairment is measured as the amount by which
the assets’ carrying value exceeds its fair value. No impairments to our long-lived assets were identified or recorded in
the fiscal years ended September 30, 2012 and 2011.
Asset Retirement Obligations
The Company accounts for asset
retirement obligations by recording the estimated future cost of the Company’s plugging and abandonment obligations. The
asset retirement obligation is recorded when there is a legal obligation associated with the retirement of a tangible long-lived
asset and the fair value of the liability can be reasonably estimated. Upon initial recognition of an asset retirement obligation,
the Company increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the liabilities
are accreted for the change in their present value through charges to oil and gas production and well operations costs. The initial
capitalized costs are depleted over the useful lives of the related assets through charges to depreciation, depletion, and amortization.
If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement
obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates,
escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. As at September 30,
2012 and 2011, asset retirement obligations amount to $425,700 and $387,368, respectively. The Company has posted bonds, where
required, with the Government of Alberta based on the amount the government estimates the costs of abandonment and reclamation
to be.
Foreign Currency Translation
The functional currency of the
Canadian subsidiaries is the United States dollar. However, the Canadian subsidiaries transact in Canadian dollars. Consequently,
monetary assets and liabilities are remeasured into United States dollars at the exchange rate on the balance sheet date and non-monetary
items are remeasured at the rate of exchange in effect when the assets are acquired or obligations incurred. Revenues and expenses
are remeasured at the average exchange rate prevailing during the year. Foreign currency transaction gains and losses are included
in results of operations.
Accounting Methods
The Company recognizes income
and expenses based on the accrual method of accounting.
Dividend Policy
The Company has not yet adopted
a policy regarding payment of dividends.
Financial, Concentration and Credit Risk
The Company does not have any
concentration or related financial credit risk as most of the Company’s funds are maintained in a financial institution which
has its deposits fully guaranteed by the Government of Alberta and the accounts receivable are considered to be fully collectible.
Income Taxes
The Company utilizes the liability
method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and the tax bases of the assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets
is recorded when it is more likely than not that such tax benefits will not be realized.
Due to the uncertainty regarding
the Company’s profitability, a valuation allowance has been recorded against the future tax benefits of its losses and no
net benefit has been recorded in the consolidated financial statements.
Revenue Recognition
The Company is in the business
of exploring for, developing, producing, and selling crude oil and natural gas. Crude oil revenue is recognized when the product
is taken from the storage tanks on the lease and delivered to the purchaser. Natural gas revenues are recognized when the product
is delivered into a third party pipeline downstream of the lease. Occasionally the Company may sell specific leases, and the gain
or loss associated with these transactions will be shown separately from the profit or loss from the operations or sales of oil
and gas products.
Advertising and Market Development
The Company expenses advertising
and market development costs as incurred.
Basic and Diluted Net Income
(Loss) Per Share
Basic net income (loss) per share
amounts are computed based on the weighted average number of shares actually outstanding. Diluted net income (loss) per share amounts
are computed using the weighted average number of common shares and common equivalent shares outstanding as if shares had been
issued on the exercise of the common share rights, unless the exercise becomes anti-dilutive and then the basic and diluted per
share amounts are the same.
Financial Instruments
Fair Values
Financial instruments include
cash and cash equivalents, accounts receivable, accounts receivable – related parties, long term investments, investment
in equity securities, accounts payable and accounts payable – related parties. The fair value of these financial instruments
approximates their carrying values because of the short-term maturity of these items unless otherwise noted. The fair value of
the investment in equity securities cannot be determined as the market value is not readily obtainable. The equity securities are
reported using the cost method.
Environmental Requirements
At the report date, environmental
requirements related to the oil and gas properties acquired are unknown and therefore an estimate of any future cost cannot be
made.
Share-Based Compensation
The Company accounts for stock
options granted to directors, officers, employees and non-employees using the fair value method of accounting. The fair value of
stock options for directors, officers and employees are calculated at the date of grant and is expensed over the vesting period
of the options on a straight-line basis. For non-employees, the fair value of the options is measured on the earlier of the date
at which the counterparty performance is complete or the date at which the performance commitment is reached. The Company uses
the Black-Scholes model to calculate the fair value of stock options issued, which requires certain assumptions to be made at the
time the options are awarded, including the expected life of the option, the expected number of granted options that will vest
and the expected future volatility of the stock. The Company reflects estimates of award forfeitures at the time of grant and revises
in subsequent periods, if necessary, when forfeiture rates are expected to change.
Recently Adopted Accounting
Standards
In
June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” ASU 2011-05 amends ASC 220
to now require: (1) an entity should present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income; and (2) the
entity should present on the face of the financial statements reclassification adjustments for items that are reclassified from
other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive
income are presented; and (3) the tax effect for each component must be disclosed in the notes to the financial statements or presented
in the statement in which other comprehensive income is presented. ASU 2011-05 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition
disclosures. The adoption of these accounting standards has not had a significant effect on the financial statement presentation.
In May 2011, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement
(Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”
ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements. The amendments are effective for annual periods beginning after December 15, 2011. Early
application by public entities is not permitted. The adoption of these accounting standards has not had a significant effect on
the financial statement presentation.
Estimates and Assumptions
Management uses estimates and
assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates that were used in preparing these consolidated
financial statements.
Significant estimates by management
include valuations of oil and gas properties, valuation of accounts receivable, useful lives of long-lived assets, asset retirement
obligations, valuation of share-based compensation, and the realizability of future income taxes.
|
3.
|
OIL AND GAS PROPERTIES
|
The Company has acquired interests
in certain oil sands properties located in North Central Alberta, Canada. The terms include certain commitments related to oil
sands properties that require the payments of rents as long as the leases are non-producing. As of September 30, 2012, Northern’s
net payments due in Canadian dollars under this commitment are as follows:
|
2013
|
|
|
$
|
45,158
|
|
|
2014
|
|
|
$
|
45,158
|
|
|
2015
|
|
|
$
|
45,158
|
|
|
2016
|
|
|
$
|
45,158
|
|
|
2017
|
|
|
$
|
45,158
|
|
|
Subsequent
|
|
|
$
|
88,883.20
|
|
The Government of Alberta owns
this land and the Company has acquired the rights to perform oil and gas activities on these lands. If the Company meets the conditions
of the 15-year leases the Company will then be permitted to drill on and produce oil from the land into perpetuity. These conditions
give the Company until the expiration of the leases to meet the following requirements on its primary oil sands leases:
|
a.)
|
drill 68 wells throughout the 68 sections; or
|
|
b.)
|
drill 44 wells within the 68 sections and having acquired and processed 2 miles of seismic on each
other undrilled section.
|
The Company plans to meet the
second of these conditions. As at September 30, 2012 and 2011, the Company has an interest in ten wells, which can be counted towards
these requirements.
The Company has identified 2
other wells drilled on these leases, which may be included in the satisfaction of this requirement. The Company has also acquired
and processed 25 miles of seismic on the leases, which can be counted towards these requirements.
The Company follows the successful
efforts method of accounting for costs of oil and gas properties. Under this method, only those exploration and development costs
that relate directly to specific oil and gas reserves are capitalized; costs that do not relate directly to specific reserves are
charged to expense. Producing, non-producing and unproven properties are assessed annually, or more frequently as economic events
indicate, for potential impairment.
This consists of comparing the
carrying value of the asset with the asset's expected future undiscounted cash flows without interest costs. Estimates of expected
future cash flows represent management's best estimate based on reasonable and supportable assumptions. Proven oil and gas properties
are reviewed for impairment on a field-by-field basis. No impairment losses were recognized for the year ended September 30, 2012
(September 30, 2011 - $nil).
Capitalized costs of proven oil
and gas properties are depleted using the unit-of-production method when the property is placed in production.
Substantially all of the Company's
oil and gas activities are conducted jointly with others. The accounts reflect only the Company's proportionate interest in such
activities.
|
4.
|
CAPITALIZATION OF COSTS INCURRED IN OIL AND GAS ACTIVITIES
|
The Company accounts for the
cost of exploratory wells and continues to capitalize exploratory well costs after the completion of drilling as long as a sufficient
progress is being made in assessing the oil sands reserves to justify its completion as a producing well.
For the fiscal year ending September
30, 2012, the Company’s management determined that sufficient progress has been made in assessing its oil sands reserves
for continued capitalization of exploratory well costs. In relation to this sufficient progress assessment of its oil sands project
the Company considered among other criteria; long lead times in getting regulatory approval for oil sands thermal recovery projects,
road bans, winter access only properties and governmental and environmental regulations which can and often delay development of
oil sands projects. Because of these and other factors, the Company’s oil sands project can take significantly longer to
complete than regular conventional drilling programs for lighter oil. To date the Company’s geological, engineering and economic
studies continue to lead them to believe that there is continuing progress toward bringing the project to commercial production.
Therefore, the Company has continued to capitalize its costs associated with its oil sands project.
For the Company’s
exploratory wells, drilling costs are capitalized on the balance sheet under “Oil and Gas Properties” line item, pending
a determination of whether potentially economic oil sands reserves have been discovered by the drilling effort to justify completion
of the find as a producing well. The Company periodically assesses the exploration and drilling capitalized costs for impairment
and once a determination is made that a well is of no potential economic value, the costs related to that well are expensed as
dry hole and reported in exploration expense. No impairments to our long-lived assets were identified or recorded in the fiscal
years ended September 30, 2012 and 2011.
The following table illustrates
capitalized costs relating to oil and gas – producing activities for two fiscal years ended September 30, 2012 and September
30, 2011:
|
|
2012
|
|
|
2011
|
|
Unproved Oil and Gas Properties
|
|
$
|
13,222,551
|
|
|
$
|
13,165,546
|
|
Proved Oil and Gas Properties
|
|
|
–
|
|
|
|
–
|
|
Accumulated Depreciation
|
|
|
(32,033
|
)
|
|
|
(24,595
|
)
|
Net Capitalized Cost
|
|
$
|
13,190,518
|
|
|
$
|
13,140,951
|
|
|
5.
|
EXPLORATION ACTIVITIES
|
The following table presents
information regarding the Company’s costs incurred in the oil and gas property acquisition, exploration and development activities
for two fiscal years ended September 30, 2012 September 30, 2011:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Acquisition of Properties:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
–
|
|
|
$
|
–
|
|
Unproved
|
|
|
57,005
|
|
|
|
422,362
|
|
Exploration costs
|
|
|
119,353
|
|
|
|
163,914
|
|
Development costs
|
|
|
–
|
|
|
|
–
|
|
|
6.
|
INVESTMENT IN EQUITY SECURITIES
|
On February 25, 2005, the Company
acquired an interest in Signet Energy Inc. (“Signet” formerly Surge Global Energy, Inc.) as a result of a Farmout Agreement.
Signet amalgamated with Andora Energy Corporation (“Andora”) in 2007.
As of November 19, 2008, the
Company converted its Signet shares into 2,241,558 shares of Andora, which represents an equity interest in Andora of approximately
2.24% as of September 30, 2012, which is Andora’s fiscal year end. These shares are carried at a nominal value using the
cost method and their value is included under oil and gas properties on the Company’s balance sheet.
|
7.
|
PROPERTY AND EQUIPMENT
|
|
|
September 30, 2012
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
31,084
|
|
|
$
|
29,312
|
|
|
$
|
1,772
|
|
Office furniture and equipment
|
|
|
33,199
|
|
|
|
21,152
|
|
|
|
12,046
|
|
Software
|
|
|
5,826
|
|
|
|
5,826
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
4,936
|
|
|
|
3,934
|
|
|
|
1,002
|
|
Portable work camp
|
|
|
170,580
|
|
|
|
120,847
|
|
|
|
49,733
|
|
Vehicles
|
|
|
38,077
|
|
|
|
26,976
|
|
|
|
11,101
|
|
Oilfield equipment
|
|
|
154,713
|
|
|
|
82,689
|
|
|
|
72,024
|
|
Road mats
|
|
|
364,614
|
|
|
|
258,311
|
|
|
|
106,303
|
|
Wellhead
|
|
|
3,254
|
|
|
|
1,119
|
|
|
|
2,135
|
|
Tanks
|
|
|
96,085
|
|
|
|
29,541
|
|
|
|
66,544
|
|
|
|
$
|
902,368
|
|
|
$
|
579,707
|
|
|
$
|
322,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
30,655
|
|
|
$
|
28,060
|
|
|
$
|
2,595
|
|
Office furniture and equipment
|
|
|
33,199
|
|
|
|
18,141
|
|
|
|
15,058
|
|
Software
|
|
|
5,826
|
|
|
|
5,826
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
4,936
|
|
|
|
2,277
|
|
|
|
2,659
|
|
Portable work camp
|
|
|
170,580
|
|
|
|
99,533
|
|
|
|
71,047
|
|
Vehicles
|
|
|
38,077
|
|
|
|
22,218
|
|
|
|
15,859
|
|
Oilfield equipment
|
|
|
154,713
|
|
|
|
64,682
|
|
|
|
90,031
|
|
Road mats
|
|
|
364,614
|
|
|
|
212,752
|
|
|
|
151,862
|
|
Wellhead
|
|
|
3,254
|
|
|
|
407
|
|
|
|
2,847
|
|
Tanks
|
|
|
96,085
|
|
|
|
22,148
|
|
|
|
73,937
|
|
|
|
$
|
901,939
|
|
|
$
|
476,044
|
|
|
$
|
425,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was $104,033 of depreciation
expense for the year ended September 30, 2012 (September 30, 2011 - $141,031).
Long term investments
consist of cash held in trust by the Energy Resources Conservation Board (“ERCB”) which bears a interest at a rate
of prime minus 0.375% and has no stated date of maturity. These investments are required by the ERCB to ensure there are sufficient
future cash flows to meet the expected future asset retirement obligations and are restricted for this purpose.
|
9.
|
SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
|
Accounts receivable – related
party was $nil as of September 30, 2012 (September 30, 2011 - $2,522) for rents receivables from a corporation owned by a director.
This amount is unsecured, non-interest bearing and has no fixed terms of repayment. The balance was repaid subsequent to year-end.
Accounts payable – related
parties was $408,277 as of September 30, 2012 (September 30, 2011 - $202,638) for fees payable to corporations owned by directors.
This amount is unsecured, non-interest bearing, and has no fixed terms of repayment.
As of September 30, 2012, officers,
directors, their families, and their controlled entities have acquired 52.19% of the Company’s outstanding common capital
stock. This percentage does not include unexercised warrants or stock options.
The Company incurred expenses
totalling $327,459 to two related parties for professional fees and consulting services during the year ended September 30, 2012
(September 30, 2011 - $209,117).
|
10.
|
ASSET RETIREMENT OBLIGATIONS
|
The total future asset retirement
obligation is estimated by management based on the Company’s net working interests in all wells and facilities, estimated
costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. At September
30, 2012, the Company estimates the undiscounted cash flows related to asset retirement obligation to total approximately $664,403
(September 30, 2011 - $644,226). The fair value of the liability at September 30, 2012 is estimated to be $425,700 (September 30,
2011 - $387,368) using a risk free rate of 3.74% and an inflation rate of 2%. The actual costs to settle the obligation are expected
to occur in approximately 35 years.
Changes to the asset retirement
obligation were as follows:
|
|
September 30,
2012
|
|
|
September 30,
2011
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
387,368
|
|
|
$
|
386,934
|
|
Liabilities incurred
|
|
|
–
|
|
|
|
–
|
|
Effect of foreign exchange
|
|
|
22,038
|
|
|
|
(5,490
|
)
|
Disposal
|
|
|
–
|
|
|
|
(6,839
|
)
|
Accretion expense
|
|
|
16,294
|
|
|
|
12,763
|
|
Balance, end of year
|
|
$
|
425,700
|
|
|
$
|
387,368
|
|
On November 9, 2010, the Company
completed two private placements for an aggregate of 29,285,713 units at a price of $0.07 per unit for an aggregate of $2,050,000
(including the Deposit received prior to September 30, 2010 of $48,555). Each unit consists of one common share and one common
share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.105 per common
share for a period of three years from the date of closing, provided that if the closing price of the common shares of the Company
on the principal market on which the shares trade is equal to or exceeds $1.00 for 30 consecutive trading days, the warrant term
shall automatically accelerate to the date which is 30 calendar days following the date that written notice has been given to the
warrant holders. The warrants expire on November 9, 2013.
On March 23, 2011, the Board
of Directors (the “Board”) approved the issuance of 500,000 restricted common shares valued at $70,000 to be issued
to a new director as an incentive to join our Board. Also, on March 23, 2011, the Board approved issuance of 180,000 restricted
common shares valued at $25,200 to be issued on April 1, 2011 to a contractor as compensation for services provided to the Company
during the period from April 1, 2010 to March 31, 2011. These transactions have been recorded in the Balance Sheets under Shareholders’
Equity at the fair value of the common shares issued.
On August 14, 2011, 12,638,297 warrants previously
granted on August 14, 2008 expired unexercised.
On October 31, 2011, 14,500,000 warrants previously
granted on October 31, 2008 expired unexercised.
On June 22, 2012, 1,000,000 warrants previously granted
on June 22, 2007 expired unexercised.
On July 11, 2012, 38,800 warrants previously granted
on July 11, 2007 expired unexercised.
The
following table summarizes the Company’s warrants outstanding as of September 30, 2012:
|
|
Shares Underlying
Warrants Outstanding
|
|
|
Shares Underlying
Warrants Exercisable
|
|
Range of Exercise Price
|
|
Shares
Underlying
Warrants
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
Underlying
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.105 at September 30, 2012
|
|
|
29,285,713
|
|
|
|
1.11
|
|
|
$
|
0.105
|
|
|
|
29,285,713
|
|
|
$
|
0.105
|
|
|
|
|
29,285,713
|
|
|
|
1.11
|
|
|
$
|
0.105
|
|
|
|
29,285,713
|
|
|
$
|
0.105
|
|
The
following is a summary of warrant activity for the year ending September 30, 2012:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011
|
|
|
44,824,513
|
|
|
$
|
0.30
|
|
|
$
|
–
|
|
Warrants expired October 31, 2011
|
|
|
(14,500,000
|
)
|
|
|
0.63
|
|
|
|
–
|
|
Warrants expired June 22, 2012
|
|
|
(1,000,000
|
)
|
|
|
1.20
|
|
|
|
–
|
|
Warrants expired July 11, 2012
|
|
|
(38,800
|
)
|
|
|
1.20
|
|
|
|
–
|
|
Balance, September 30, 2012
|
|
|
29,285,713
|
|
|
$
|
0.105
|
|
|
$
|
–
|
|
Outstanding Warrants, September 30, 2012
|
|
|
29,285,713
|
|
|
$
|
0.105
|
|
|
$
|
–
|
|
There were 29,285,713 warrants
outstanding as of September 30, 2012 (September 30, 2011 – 44,824,513), which have a historical fair market value of $763,533
(September 30, 2011 - $2,798,059).
The Company received $300,000
for the year ended September 30, 2012 (September 30, 2011 - $nil) in deposits for stock, for which the Company received subsequent
subscription agreements.
On November 28, 2005, the Board
of Deep Well adopted the Deep Well Oil & Gas, Inc. Stock Option Plan (the “Plan”). The Plan was approved by the
majority of shareholders at the February 24, 2010 general meeting of shareholders. The Plan is administered by the Board, permits
options to acquire shares of the Company’s common stock (the “Common Shares”) to be granted to directors, senior
officers, and employees of the Company and its subsidiaries, as well as certain consultants and other persons providing services
to the Company or its subsidiaries.
The maximum number of shares,
which may be reserved for issuance under the Plan, may not exceed 10% of the Company’s issued and outstanding Common Shares,
subject to adjustment as contemplated by the Plan. The aggregate number of Common Shares with respect to which options may be vested
to any one person (together with their associates) in any one year, together with all other incentive plans of the Company, may
not exceed 500,000 Common Shares per year and in total may not exceed 2% of the total number of Common Shares outstanding.
On November 28, 2010, all of
the stock options granted previously to Dr. Horst A. Schmid, Portwest Investments Ltd., Mr. Curtis James Sparrow, Concorde Consulting,
Trebax Projects Ltd., Mr. Cyrus Spaulding, Mr. Donald E.H. Jones and Mr. Moses Ling, expired unexercised. In total 2,727,500 options
granted to directors and former directors and their controlled companies expired.
On March 23, 2011, the Board
approved to decrease the exercise price of the stock options to purchase 36,000 shares of common stock of Deep Well previously
granted to an employee of the Company on September 20, 2007. The exercise price of the stock option is reduced from $0.47 per common
share to $0.14 per common share, effective immediately. All other terms and conditions of the option agreement will remain unchanged.
The options expired unexercised on September 20, 2012.
On March 23, 2011, the Company
granted its directors, Dr. Horst A. Schmid, Mr. Said Arrata, Mr. Satya Das, Mr. David Roff, Mr. Curtis Sparrow and Mr. Malik Youyou,
options to purchase 450,000 shares each of common stock at an exercise price of $0.14 per common share, 150,000 vesting immediately
and the remaining vesting one-third on March 23, 2012, and one-third on March 23, 2013, with a five-year life.
On October 25, 2011, 375,000
stock options previously granted on October 25, 2006 to Mr. David Roff expired unexercised.
On September 20, 2012, 240,000
and 36,000 stock options previously granted on September 20, 2007 to R.N. Dell Energy Ltd. and a certain employee of the Company,
respectively, expired unexercised.
For the period ended September
30, 2012, the Company recorded share based compensation expense related to stock options in the amount of $108,664 (September 30,
2011 - $199,081) on the 2,700,000 stock options issued March 23, 2011. No options were exercised during the year ended September
30, 2012, therefore, the intrinsic value of the options exercised during the year ended September 30, 2012 is $nil. As of September
30, 2012, there was remaining unrecognized compensation cost of $25,952 related to the non-vested portion of these unit option
awards. Compensation expense is based upon straight-line depreciation of the grant-date fair value over the vesting period of the
underlying unit option.
|
|
Shares Underlying
Options Outstanding
|
|
|
Shares Underlying
Options Exercisable
|
|
Range of Exercise Prices
|
|
Shares
Underlying
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
Underlying
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.14 at September 30, 2012
|
|
|
2,700,000
|
|
|
|
3.48
|
|
|
|
0.14
|
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
|
|
|
2,700,000
|
|
|
|
3.48
|
|
|
$
|
0.14
|
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
The aggregate intrinsic value
of exercisable options as of September 30, 2012, was $nil (September 30, 2011 - $nil).
The following is a summary of
stock option activity as at September 30, 2012:
|
|
Number of
Underlying
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Fair
Market
Value
|
|
Balance, September 30, 2011
|
|
|
3,351,000
|
|
|
$
|
0.23
|
|
|
$
|
0.15
|
|
Options expired October 25, 2011
|
|
|
(375,000
|
)
|
|
|
0.71
|
|
|
|
0.27
|
|
Options expired September 20, 2012
|
|
|
(36,000
|
)
|
|
|
0.14
|
|
|
|
0.36
|
|
Options expired September 20, 2012
|
|
|
(240,000
|
)
|
|
|
0.47
|
|
|
|
0.24
|
|
Balance, September 30, 2012
|
|
|
2,700,000
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
Exercisable, September 30, 2012
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
The following table summarizes
the activity of the Company’s non-vested stock options since September 30, 2011:
|
|
Non-Vested Options
|
|
|
|
Number of
Underlying
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2011
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
Options vested at March 23, 2012
|
|
|
(900,000
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2012
|
|
|
900,000
|
|
|
$
|
0.14
|
|
Measurement Uncertainty
The Black-Scholes option-pricing
model (“Black-Scholes”) was developed for use in estimating the fair value of traded “European” options
which are liquid and that have no vesting restrictions and are fully transferable. Stock options and the warrants attached to the
units issued by the Company are non-transferable and vest over time, and are “American” options. Option pricing models
require the input of subjective assumptions including expected share price volatility. The fair value estimate can vary materially
as a result of changes in the assumptions. The following assumptions are used in the Black-Scholes option-pricing model:
Expected Term – Expected
term of 5 years represents the period the Company’s stock-based awards are expected to be outstanding.
Expected Volatility – Expected
volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual
and non-representative stock price activity not expected to recur. The expected volatility used was 116%.
Expected Dividend – The
Black-Scholes valuation model calls for a single expected dividend yield as an input. The company currently pays no dividends and
does not expect to pay dividends in the foreseeable future.
Risk-Free Interest rate –
The Company bases the risk-free rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent
remaining term. The risk-free rate used was 2.07%.
|
13.
|
CHANGES IN NON-CASH WORKING CAPITAL
|
|
|
September
|
|
|
September
|
|
|
|
30, 2012
|
|
|
30, 2011
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(119,002
|
)
|
|
$
|
(11,542
|
)
|
Prepaid expenses
|
|
|
2,066
|
|
|
|
38,419
|
|
Accounts payable
|
|
|
259,410
|
|
|
|
92,643
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142,474
|
|
|
$
|
119,520
|
|
As of September 30, 2012, the
Company has approximately $4,149,303 (2011 – $4,032,878) of operating losses expiring through 2032 that may be used to offset
future taxable income but are subject to various limitations imposed by rules and regulations of the Internal Revenue Service.
The net operating losses are limited each year to offset future taxable income, if any, due to the change of ownership in the Company's
outstanding shares of common stock. In addition, at September 30, 2012, the Company had an unused Canadian net operating loss carry-forward
of approximately $10,890,933 (2011 – $10,449,641), expiring through 2032. These operating loss carry-forwards may result
in future income tax benefits of approximately $4,215,830. However, because realization is uncertain at this time, a valuation
reserve in the same amount has been established. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of the net deferred
tax asset, the statutory tax rate, the effective rate and the elected amount of the valuation allowance are as follows:
|
|
Year Ended
September 30,
2012
|
|
|
Year Ended
September 30,
2011
|
|
|
|
|
|
|
|
|
Statutory and effective tax rate
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
Statutory U.S. federal rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Foreign
|
|
|
25.375
|
%
|
|
|
26.50
|
%
|
|
|
Year Ended
September 30,
2012
|
|
|
Year Ended
September 30,
2011
|
|
|
|
|
|
|
|
|
|
|
Income taxes recovered at the statutory and effective tax rate
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
Statutory U.S. federal rate
|
|
$
|
81,533
|
|
|
$
|
149,187
|
|
Foreign
|
|
|
218,758
|
|
|
|
292,549
|
|
|
|
|
|
|
|
|
|
|
Timing differences:
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
(93,161
|
)
|
|
|
(120,107
|
)
|
Other deductible charges
|
|
|
2,086
|
|
|
|
2,188
|
|
Benefit of tax losses not recognized in the year
|
|
|
(209,216
|
)
|
|
|
(323,817
|
)
|
|
|
|
|
|
|
|
|
|
Income tax recovery (expense) recognized in the year
|
|
$
|
–
|
|
|
$
|
–
|
|
The approximate tax effects of
each type of temporary difference that gives rise to deferred tax assets are as follows:
|
|
Year Ended
September 30,
2012
|
|
|
Year Ended
September 30,
2011
|
|
|
|
|
|
|
|
|
Deferred income tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
4,215,830
|
|
|
$
|
4,180,662
|
|
Oil and gas properties
|
|
|
107,344
|
|
|
|
108,009
|
|
Equipment
|
|
|
165,917
|
|
|
|
144,603
|
|
Valuation allowance
|
|
|
(4,489,091
|
)
|
|
|
(4,433,274
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
In accordance with generally
accepted accounting principles, the Company has analyzed its filing positions in all jurisdictions where it is required to file
income tax returns for the open tax years in such jurisdictions. The Company has identified its federal income tax returns for
the previous five years remain subject to examination. The Company’s income tax returns in state income tax jurisdictions
also remain subject to examination for the previous five years. The Company currently believes that all significant filing positions
are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore,
the Company has no significant reserves for uncertain tax positions, and no adjustments to such reserves were required by generally
accepted accounting principles. No interest or penalties have been levied against the Company and none are anticipated, therefore
no interest or penalty has been included in the provision for income taxes in the consolidated statements of operations.
Compensation to Directors
Since the acquisition of Northern
Alberta Oil Ltd., the Company and Northern have entered into the following contracts with the following companies for the services
of their officers:
|
1)
|
Portwest Investments Ltd., a company owned 100% by Dr. Horst A. Schmid, for providing services
to the Company as Chief Executive Officer and President for $12,500 Cdn per month. As of September 30, 2012, the Company has accrued
Cdn $259,500 owing to Portwest Investments Ltd., and did not pay out this accrued portion to Portwest Investments Ltd. since April
2010 for the services of Dr. Schmid as Chief Executive Officer and President of the Company.
|
|
2)
|
Concorde Consulting, a company owned 100% by Mr. Curtis J. Sparrow, for providing services as Chief
Financial Officer to the Company for $15,000 Cdn per month.
|
Rental Agreement
On November 20, 2007 and December
1, 2008, the Company entered into two office lease agreements commencing December 1, 2007 and January 1, 2009 and expiring on November
30, 2012 and December 31, 2013, respectively. The annual payments due in Canadian dollars are as follows:
|
2013
|
|
|
$
|
47,647
|
|
|
2014
|
|
|
$
|
10,625
|
|
Effective on November 23, 2012,
the Company completed a private placement for an aggregate of 42,857,142 units at a price of $0.07 per unit for an aggregate of
$300,000,000 (including the Deposit received prior to September 30, 2012 of $300,000). Each unit consists of one common share and
one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share at a price of $0.105
per common share for a period of three years from the date of closing, provided that if the closing price of the Common Shares
of the Company on the principal market on which the shares trade is equal to or exceeds US$1.00 for 30 consecutive trading days,
the warrant term shall automatically accelerate to the date which is 30 calendar days following the date that written notice has
been given to the warrantholders. The warrants expire on November 23, 2015.
Effective on December 3, 2012,
the Company entered into a Purchase and Sale agreement with 1132559 Alberta Ltd. (“113”) and acquired an additional
10% working interest in most of the Sawn Lake oil sands properties where the Company already owns working interests, in exchange
for the following: 1.) $2.4 million Canadian; 2.) the discontinuance, without costs, of the Court of Queen’s Bench, Judicial
District of Edmonton, Action No. 0803-0869 and Action No. 1003-14659 filed against 113; and 3.) Forgiving the amounts owned from
113 to the Company in the amount of $239,267.88 Canadian and any defaults and penalties that the Company had imposed upon 113.
I.G.M Resources Corp. vs.
Deep Well Oil & Gas, Inc., et al
On March 10, 2005, I.G.M. Resources
Corp. ("the Plaintiff") filed against Classic Energy Inc., 979708 Alberta Ltd., Deep Well Oil & Gas, Inc., Nearshore
Petroleum Corporation, Mr. Steven P. Gawne, Rebekah Gawne, Gawne Family Trust, 1089144 Alberta Ltd., John F. Brown, Diane Lynn
McClaflin, Cassandra Doreen Brown, Elissa Alexandra Brown, Brown Family Trust, Priority Exploration Ltd., Northern Alberta Oil
Ltd. and Gordon Skulmoski (“the Defendant”) a Statement of Claim in the Court of Queen's Bench of Alberta Judicial
District of Calgary. This suit is a part of a series of lawsuits or actions undertaken by the Plaintiff against some of the other
above Defendants.
The Plaintiff was and still is
a minority shareholder of 979708 Alberta Ltd. ("979708"). 979708 was in the business of discovering, assembling and acquiring
oil and gas prospects. In 2002 and 2003, 979708 acquired oil and gas prospects in the Sawn Lake area of Alberta. On or about the
14
th
of July, 2003, all or substantially all the assets of 979708 were sold to Classic Energy Inc. The Plaintiff claims
the value of the assets sold was far in excess of the value paid for those assets. On April 23, 2004 Northern Alberta Oil Ltd.,
purchased Classic Energy Inc.'s assets some of which are under dispute by the Plaintiff. On June 7, 2005 Deep Well acquired all
of the common shares of Northern thereby giving Deep Well an indirect beneficial interest in the assets in which the Plaintiff
is claiming an interest.
The Plaintiff seeks an order
setting aside the transaction and returning the assets to 979708, compensation in the amount of $15,000,000 Cdn, a declaration
of trust declaring that Northern and Deep Well hold all of the assets acquired from 979708 and any property acquired by use of
such assets, or confidential information of 979708, in trust for the Plaintiff.
This lawsuit has been stayed
pending the out come of the other litigation by the Plaintiff against some of the above Defendants other than Deep Well and Northern.
The Company believes the claims are without merit and will vigorously defend against them. As at September 30, 2012, no contingent
liability has been recorded, as the Company believes that a successful outcome for the Plaintiff is remote.
Hardie & Kelly vs.
Brown et al
On June 2, 2006, Hardie and Kelly
(“the Plaintiff”), Trustee of the Estate of John Forbes Brown filed against John Forbes Brown, a bankrupt, Diane Lynn
McClaflin, 1089144 Alberta Ltd., and Deep Well (“the Defendants”) an Amended Statement of Claim in the Court of Queen's
Bench of Alberta Judicial District of Calgary. John Forbes Brown was a former officer and then sub-contractor of Deep Well before
and during the time he was assigned into bankruptcy on July 12, 2004. The Plaintiff claims, in addition to other issues unrelated
to Deep Well, that John Forbes Brown received 4,812,500 Deep Well shares as a result of his employment at Deep Well and that John
Forbes Brown improperly assigned these shares to the numbered company as a ruse entered into on the eve of insolvency by John Forbes
Brown in order to facilitate the hiding of assets from his creditors and the trustee of his bankruptcy. The Plaintiff further claims
that on August 23, 2004 John Forbes Brown advised the Plaintiff that he in fact owned the above shares and did not disclose this
ownership in his filed bankruptcy statement of affairs.
The Plaintiff further claims
that John Forbes Brown would lodge the said shares with his lawyer until such time as these shares could be transferred to the
Plaintiff. The Plaintiff further claims that, unbeknownst to them, John Forbes Brown surreptitiously removed the shares from his
lawyer's office and delivered them to Deep Well so that Deep Well could cancel them. The Plaintiff claims that Deep Well conspired
with John Forbes Brown to defraud the creditors of John Forbes Brown by taking receipt and cancelling the said shares. The Plaintiff
claims that consideration paid by Deep Well for the said shares was invested in the home owned by John Forbes Brown and his wife.
The Plaintiff seeks; (1) an accounting of the proceeds and benefits derived by the dealings of the shares; (2) the home owned by
John Forbes Brown and his wife, to be held in trust on behalf of the Plaintiff and an accounting of proceeds related to this trust;
(3) damages from the Defendants because of their actions; (4) a judgement for $15,612,645 Cdn; (5) an order to sell John Forbes
Brown's home; and (6) interest and costs.
Deep Well plans to vigorously
defend itself against the Plaintiff’s claims. As at September 30, 2012, no contingent liability has been recorded, as the
Company believes that a successful outcome for the Plaintiff is remote.