Notes to the Condensed Consolidated
Financial Statements
December 31, 2012
|
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 Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 852-10. In connection with the adoption of fresh-start reporting, a new entity was deemed created for financial
reporting purposes, and Deep Well adopted the provisions of fresh-start reporting effective
September 10, 2003. As a result, 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.
These financial statements
have 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.
Going Concern
The
Company’s condensed 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 December 31, 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.
Basis
of Presentation
The interim condensed
consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate so as to make the information presented not misleading.
These interim condensed
consolidated financial statements follow the same significant accounting policies and methods of application as the
Company’s annual consolidated financial statements for the year ended September 30, 2012.
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 therein. However, the results of operations
for the interim periods may not be indicative of results to be expected for the full fiscal year. It is suggested that these
condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Consolidation
These
condensed 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 three months ended December 31, 2012 or 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 reasonably be 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 December 31, 2012 and September 30, 2012, asset retirement obligations amount to $424,058 and
$425,700, respectively. The Company has posted bonds, where required, with the Government of Alberta based on the amount the government
estimates the cost 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 period. Foreign currency transaction gains and losses are included
in results of operations.
Accounting
Method
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 collectable.
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 antidilutive 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 party, long term investments, investment
in equity securities, accounts payable and accounts payable - related parties. The fair value of these financial instruments approximates
their carrying value 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 July 2012, the
FASB issued ASC 350-30 (formerly the Accounting Standards Update (“ASU”) 2012-02, “Intangibles –
Goodwill and Other).” The amendments permit an entity first to assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether
it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill
and Other – General Intangibles Other than Goodwill. The more likely-than-not threshold is defined as having a
likelihood of more than 50 percent. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal
years beginning after September 15, 2012. Early adoption is permitted. The adoption of these accounting standards has not had
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 December 31, 2012, Northern’s
net payments due in Canadian dollars under this commitment are as follows:
|
|
|
|
|
2013
|
|
$
|
33,868
|
|
2014
|
|
$
|
45,158
|
|
2015
|
|
$
|
45,158
|
|
2016
|
|
$
|
45,158
|
|
2017
|
|
$
|
45,158
|
|
Subsequent
|
|
$
|
88,883
|
|
|
|
|
|
|
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 December 31, 2012 and 2011, the Company has an interest in ten wells, which can be counted towards
these requirements.
The Company has identified two
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 period ended
December 31, 2012 (September 30, 2012 - $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 sufficient
progress is being made in assessing the oil sands reserves to justify its completion as a producing well.
For the period ended December
31, 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 three months ended December 31, 2012 or 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 periods ended December 31, 2012 and September 30,
2012:
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Unproved Oil and Gas Properties
|
|
$
|
15,912,244
|
|
|
$
|
13,222,551
|
|
Proved Oil and Gas Properties
|
|
|
–
|
|
|
|
–
|
|
Accumulated Depreciation
|
|
|
(34,843
|
)
|
|
|
(32,033
|
)
|
|
|
|
|
|
|
|
|
|
Net Capitalized Cost
|
|
$
|
15,877,401
|
|
|
$
|
13,190,518
|
|
|
|
|
|
|
|
|
|
|
|
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 the three months ended December 31, 2012 and the fiscal year ended September 30, 2012:
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Acquisition of Properties:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
–
|
|
|
$
|
–
|
|
Unproved
|
|
|
2,689,694
|
|
|
57,005
|
|
Exploration costs
|
|
|
4,325
|
|
|
|
119,353
|
|
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
|
|
|
December 31, 2012
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
31,084
|
|
|
$
|
29,469
|
|
|
$
|
1,615
|
|
Office furniture and equipment
|
|
|
33,199
|
|
|
|
23,038
|
|
|
|
10,161
|
|
Software
|
|
|
5,826
|
|
|
|
5,826
|
|
|
|
--
|
|
Leasehold improvements
|
|
|
4,936
|
|
|
|
4,101
|
|
|
|
835
|
|
Portable work camp
|
|
|
170,580
|
|
|
|
124,578
|
|
|
|
46,002
|
|
Vehicles
|
|
|
38,077
|
|
|
|
27,808
|
|
|
|
10,269
|
|
Oilfield equipment
|
|
|
249,045
|
|
|
|
88,648
|
|
|
|
160,397
|
|
Road mats
|
|
|
364,614
|
|
|
|
266,284
|
|
|
|
98,330
|
|
Wellhead
|
|
|
3,254
|
|
|
|
1,252
|
|
|
|
2,002
|
|
Tanks
|
|
|
96,085
|
|
|
|
31,205
|
|
|
|
64,880
|
|
|
|
$
|
996,700
|
|
|
$
|
602,209
|
|
|
$
|
394,491
|
|
|
|
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
|
|
There was $22,500 of depreciation
expense for the period ended December 31, 2012 (September 30, 2012 - $104,033).
Long
term investments consist of cash held in trust by the Energy Resources Conservation Board (“ERCB”) which bears 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
payable – related parties was $411,431 as of December 31, 2012 (September 30, 2012 - $408,277) for fees payable to corporations
owned by directors. This amount is unsecured, non-interest bearing, and has no fixed terms of repayment.
As of December 31, 2012, officers,
directors, their families, and their controlled entities have acquired 63.6% of the Company’s outstanding common capital
stock. This percentage does not include unexercised warrants or stock options.
The Company incurred
expenses totalling $83,218 to two related parties for professional fees and consulting services during the period ended
December 31, 2012 (September 30, 2012 - $327,459). These amounts are included in the balance of accounts payable –
related parties as of December 31, 2012.
|
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 December
31, 2012, the Company estimates the undiscounted cash flows related to asset retirement obligation to total approximately $655,709
(September 30, 2012 - $664,403). The fair value of the liability at December 31, 2012 is estimated to be $424,058 (September 30,
2012 - $425,700) 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:
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
Balance, beginning of period
|
|
$
|
425,700
|
|
|
$
|
387,368
|
|
Liabilities incurred
|
|
|
–
|
|
|
|
–
|
|
Effect of foreign exchange
|
|
|
(5,593
|
)
|
|
|
22,038
|
|
Disposal
|
|
|
–
|
|
|
|
–
|
|
Accretion expense
|
|
|
3,951
|
|
|
|
16,294
|
|
Balance, end of period
|
|
$
|
424,058
|
|
|
$
|
425,700
|
|
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 the 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.
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 $3,000,000 (including a 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 $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 23, 2015. The value of
the common shares and the warrants totaled $1,985,249 and $1,014,751, respectively.
The
following table summarizes the Company’s warrants outstanding as of December 31, 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 December 31, 2012
|
|
|
72,142,855
|
|
|
|
2.07
|
|
|
|
0.105
|
|
|
|
72,142,855
|
|
|
|
0.105
|
|
|
|
|
72,142,855
|
|
|
|
2.07
|
|
|
|
0.105
|
|
|
|
72,142,855
|
|
|
|
0.105
|
|
The
following is a summary of warrant activity for the period ended December 31, 2012:
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2012
|
|
|
29,285,713
|
|
|
$
|
0.105
|
|
|
$
|
–
|
|
Warrants granted November 23, 2012
|
|
|
42,857,142
|
|
|
|
0.105
|
|
|
|
–
|
|
Balance, December 31, 2012
|
|
|
72,142,855
|
|
|
$
|
0.105
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Warrants, December 31, 2012
|
|
|
72,142,855
|
|
|
$
|
0.105
|
|
|
$
|
–
|
|
There were 72,142,855 warrants
outstanding as of December 31, 2012, (September 30, 2012 – 29,285,713), which have a historical fair market value of $1,778,284
(September 30, 2012 - $763,533).
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 previously granted 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 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 December
31, 2012, the Company recorded share based compensation expense related to stock options in the amount of $13,963 (September 30,
2012 – $108,664) on the 2,700,000 stock options issued March 23, 2011. No options were exercised during the period ended
December 31, 2012, therefore, the intrinsic value of the options exercised during the period ended December 31, 2012 is $nil. As
of December 31, 2012, there was remaining unrecognized compensation cost of $11,989 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 December 31, 2012
|
|
|
2,700,000
|
|
|
|
3.23
|
|
|
$
|
0.14
|
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
|
|
|
2,700,000
|
|
|
|
3.23
|
|
|
$
|
0.14
|
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
The aggregate intrinsic value
of exercisable options as of December 31, 2012, was $nil (September 30, 2012 - $nil).
The following is a summary of stock option activity
as at December 31, 2012:
|
|
Number of Underlying Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Fair Market Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2012
|
|
|
2,700,000
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
2,700,000
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2012
|
|
|
1,800,000
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
The following table summarizes the activity of the
Company’s non-vested stock options as of September 30, 2012 and December 31, 2012:
|
|
Non-Vested Options
|
|
|
|
Number of Underlying Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2012
|
|
|
900,000
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 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 that 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 interest 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
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
134,544
|
|
|
$
|
9,856
|
|
Prepaid expenses
|
|
|
(2,056
|
)
|
|
|
6,209
|
|
Accounts payable
|
|
|
38,984
|
|
|
|
36,317
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171,472
|
|
|
$
|
52,382
|
|
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 Cdn $12,500 per month. As of December 31, 2012, the
Company has accrued Cdn $294,395 owing to Portwest Investments Ltd., and has not paid out this accrued portion to Portwest
Investments Ltd. since April 2012 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 Cdn $15,000 per
month. As of September 30, 2012 and December 31, 2012 the Company has accrued as owing to Concorde Consulting Cdn $138,725
and Cdn $112,276,
respectively.
|
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. One of the Company’s office lease agreements has since expired and will not
be renewed. The annual payments due are as follows:
|
|
|
|
2013
|
|
$
|
31,974
|
|
2014
|
|
$
|
10,658
|
|
|
|
|
|
|
IGM 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 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 outcome 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 December 31, 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 December 31, 2012, no contingent liability has been recorded, as the Company
believes that a successful outcome for the Plaintiff is remote.
|
16.
|
Rental and Other Income
|
The Company reversed part of the receivables
and bad debts for our
joint venture co-owners in the period at an amount of $267,962 (Cdn $265,650.86) of which $239,459 was related to a purchase
agreement wherein the Company 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 $2,412,960 (Cdn $2,400,000), the discontinuance of two lawsuits, and forgiving the
amounts owed and any defaults and penalties that the Company had imposed. This amount it included in Rental and Other Income.