- Quarterly Report (10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to_____________

Commission file number 333 - 38558

KODIAK ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	65-0967706
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Suite 1120, 833 4th Avenue S.W. Calgary, AB T2P 3T5

(Address of principal executive offices - Zip code)

(403) 262-8044

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ___	Accelerated Filer ___
Non-Accelerated Filer X (Do not check if a smaller reporting company)	Smaller Reporting Company ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act) Yes No X

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 129,683,294 common shares, $.001 par value, as at November 5, 2011.

KODIAK ENERGY, INC.

INDEX

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS	3

	Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34

ITEM 4.	CONTROLS AND PROCEDURES	35

PART II.	OTHER INFORMATION	35

ITEM 1.	LEGAL PROCEEDINGS	35

ITEM 1A.	RISK FACTORS	36

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36

ITEM 4.	REMOVED AND RESERVED	36

ITEM 5.	OTHER INFORMATION	36

ITEM 6.	EXHIBITS	36

	SIGNATURES	37

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KODIAK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2011			2010
	(unaudited)
Assets
Current Assets:
Cash and short term deposits	$	32,023		$	18,735
Accounts receivable		674,407			585,637
Prepaid expenses and deposits		170,812			145,873
Total current assets		877,242			750,245

Other assets (Note 5)		297,580			313,247

Oil and natural gas properties, Full cost accounting (Note 3)
Developed properties		12,722,280			9,266,193
Less accumulated depreciation, depletion and amortization		(5,280,857	)		(3,493,865	)
Net		7,441,423			5,772,328
Undeveloped properties excluded from amortization		23,529,272			22,622,246
Furniture and fixtures, net		45,183			57,220
		31,015,878			28,451,794

Total assets	$	32,190,700		$	29,515,286

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable	$	4,421,181		$	2,054,919
Accrued liabilities		110,129			677,335
Operating line of credit (Note 6)		2,170,387			2,035,994
Current debt		1,715,148			839,060
Total current liabilities		8,416,845			5,607,308

Long-term liabilities (Note 7)		2,829,650			2,769,965

Asset retirement obligations (Note 8)		1,824,547			1,471,808

Total liabilities		13,071,042			9,849,081

Commitments and contingencies (Note 12)		-			-

Stockholders' equity
Preferred stock, par value: $0.001 per share; 10,000,000 shares authorized, -0- issued and outstanding		-			-
Common stock, par value $0.001 per share; 300,000,000 shares authorized; 129,683,294 and 119,683,294 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		129,683			119,683
Additional paid in capital		58,617,891			54,628,900
Accumulated comprehensive (loss)		(1,087,835	)		(256,401	)
Deficit		(38,490,037	)		(35,237,407	)
Stockholders' equity attributable to Kodiak Energy, Inc.		19,169,702			19,254,775
Non controlling interest		(50,044	)		411,430
Total stockholders' equity		19,119,658			19,666,205

Total liabilities and stockholders' equity	$	32,190,700		$	29,515,286

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

KODIAK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
REVENUE:
Oil sales	$	704,390		$	770,674		$	1,983,802		$	2,435,939
Other		1,727			501			1,999			4,078
Total revenue		706,117			771,175			1,985,801			2,440,017

EXPENSES:
Operating		401,335			353,785			1,471,014			1,128,551
General and administrative		807,337			648,014			2,386,145			1,928,735
Depletion and depreciation		293,585			489,713			2,216,956			5,270,976
Total expenses		1,502,257			1,491,512			6,074,115			8,328,262

Net loss from operations		(796,140	)		(720,337	)		(4,088,314	)		(5,888,245	)

OTHER INCOME (EXPENSE):
Gain on settlement of debt		-			-			-			72,657
Gain on disposal of assets		-			897			-			897
Interest expense		(1,008,778	)		(84,602	)		(1,417,435	)		(246,163	)

Net loss before income taxes		(1,804,918	)		(804,042	)		(5,505,749	)		(6,060,854	)

Income taxes		-			-			-			-

Net loss		(1,804,918	)		(804,042	)		(5,505,749	)		(6,060,854	)

Non controlling interest		736,808			87,916			2,253,119			334,355

NET LOSS ATTRIBUTABLE TO KODIAK ENERGY, INC.	$	(1,068,110	)	$	(716,126	)	$	(3,252,630	)	$	(5,726,499	)

Loss per common share (basic and fully diluted)	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.05	)

Weighted average number of shares outstanding (basic and fully diluted)		129,683,294			110,407,186			129,023,953			110,407,186

Comprehensive loss:
Net loss	$	(1,804,918	)	$	(804,042	)	$	(5,505,749	)	$	(6,060,854	)
Foreign currency translation gain (loss)		(1,092,719	)		430,303			(831,434	)		1,059,501

Comprehensive loss:		(2,897,637	)		(373,739	)		(6,337,183	)		(5,001,353	)
Comprehensive loss attributable to non controlling interest		755,795			87,916			2,331,737			334,355

Comprehensive loss attributable to Kodiak Energy, Inc.	$	(2,141,842	)	$	(285,823	)	$	(4,005,446	)	$	(4,666,998	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

KODIAK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	Nine months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,252,630	)	$	(5,726,499	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from non controlling interest, net of tax		(2,253,119	)		(334,355	)
Depreciation and depletion		2,310,636			5,270,976
Amortization of debt discount		1,062,978			236,254
Stock based compensation		1,161,473			566,190
Gain on settlement of debt		-			(72,657	)
Interest expense charged to Notes payable		167,956			-
Working capital changes (Note 16)		1,685,347			625,416
Net cash provided by operating activities		882,641			565,325

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of oil and gas properties		(5,686,760	)		(2,213,925	)
Net cash used in investing activities		(5,686,760	)		(2,213,925	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock		1,380,000			-
Advances on the revolving line of credit		238,527			1,443,149
Proceeds from majority owned warrants exercised		1,275,951			-
Proceeds from long term debt net of repayments		1,702,088			173,473
Net cash provided by financing activities		4,596,566			1,616,622

Effect of foreign currency rate change on cash		220,841			86,142

Net increase in cash and cash equivalents		13,288			54,164

Cash and cash equivalents, beginning of period		18,735			2,058
Cash and cash equivalents, end of period	$	32,023		$	56,222

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	275,341		$	237,275
Taxes	$	-		$	-
Non-cash investing and financing activities:
Cougar Oil and Gas Canada, Inc. stock issued to acquire non-controlling interest in Cougar Energy Inc.	$	-		$	366,475
Effect of change in ownership interest in majority owned subsidiary	$	-		$	129,956
Disposition of non-controlling interest in Cougar Energy Inc.	$	-		$	50,200

The accompanying notes are in integral part of these unaudited condensed consolidated financial statements

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 are unaudited. These financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2010 financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Basis and Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Kodiak Energy Inc. and subsidiaries (collectively “Kodiak”, the “Company”, “we”, “us” or “our”). The Company was incorporated under the laws of the state of Delaware on December 15, 1999 under the name “Island Critical Care, Corp.” On December 30, 2004 the name was changed to “Kodiak Energy, Inc”. During the year ended December 31, 2009, the Company transitioned from a development stage enterprise to an operating company. The Company’s principal activity is in the exploration, development, production and sale of oil and natural gas.

The unaudited condensed consolidated financial statements include the accounts of the Company, three wholly-owned subsidiaries: Kodiak Petroleum ULC (“KULC”), an inactive Alberta company; Kodiak Petroleum (Montana), Inc. (“KPMI”), a Delaware company that operates Kodiak’s projects in New Mexico and Montana; and Kodiak Petroleum (Utah), Inc. (“KPUI”), an inactive Delaware company; and one majority- owned subsidiary, Cougar Oil and Gas Canada Inc. In British Columbia, Canada, the Company operates under the assumed name of Kodiak Bear Energy, Inc. All significant inter-company transactions have been eliminated in consolidation.

Reverse Acquisition

In January 2010, Cougar Oil and Gas Canada ("COG"), formerly Ore-More Resources, Inc. entered into a stock purchase Agreement (the “Agreement”) with Cougar Energy, Inc, a majority-owned subsidiary of the Company (which we refer to as CEI) and CEI’s then shareholders whereby COG agreed to acquire the entire issued and outstanding shares of the common stock of CEI in two stages:

a) On January 20, 2010, COG finalized stock purchase agreements effective January 18, 2010 by and between COG and Zentrum Energie Trust AG, CAT Brokerage AG, LB (Swiss) Private Bank for its client, Mauschen Finanz Inc. and Rahn and Bodmer (collectively the “Vendors”), whereby COG purchased from the Vendors shares and warrants of the common stock of CEI held by the Vendors. The Vendors tendered a total of 884,616 common shares of CEI and 884,616 warrants granting the right to the holder, which would be COG pursuant to the transfer, to purchase an additional 884,616 common shares of CEI on or before December 4, 2011. As consideration for the common shares and warrants of CEI tendered by the Vendors, COG issued a total of 3,980,775 shares of its common stock to the Vendors and an equal number of warrants, entitling the holders to exercise a total of 5,348,085 warrants. The warrants had the following exercise prices and expiry dates:

1,246,155 warrants to purchase common shares exercisable at $0.288 per common share and expiring on March 4, 2011.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

2,025,000 warrants to purchase common shares exercisable at $0.288 per common share and expiring on October 31, 2011.

2,076,930 warrants to purchase common shares exercisable at $0.577 per common share and expiring on December 4, 2011.

The shares and warrants were exchanged during the week ended January 30, 2010.

b) On January 25, 2010, COG finalized a share purchase agreement between COG and the Company whereby COG purchased from the Company a total of 8,461,549 shares of the common shares of CEI held by the Company. The share purchase agreement called for COG to issue a total of 1.5 shares of its common stock for each share of CEI tendered by the Company, resulting in COG issuing a total of 12,692,324 shares of common stock. As further consideration for the acquisition of the CEI common shares, COG forgave all current indebtedness owed to COG by the Company and guaranteed by CEI, which was in the amount of $1,296,888. An additional condition to the agreement was that a total of 12,000,000 restricted common shares of Ore-More Resources, Inc were cancelled.

Upon consummation of the acquisition, CEI became the only wholly-owned subsidiary of COG. Subsequently, on February 4, 2010, Ore-More Resources, Inc filed a Certificate of Amendment to its Certificate of Incorporation with the Registrar of Corporations in Alberta, Canada, changing the Company’s name to “Cougar Oil and Gas Canada, Inc.”.

The acquisition is accounted for as a “reverse acquisition”, since the stockholders of CEI owned a majority of COG’s common stock immediately following the transaction and their management has assumed operational, management and governance control. The reverse acquisition transaction is recorded as a recapitalization of CEI, pursuant to which CEI is treated as the surviving and continuing entity although Ore-More Resources, Inc is the legal acquirer, rather than a business combination. Cougar Oil and Gas Canada did not recognize goodwill or any intangible assets in connection with this transaction. Accordingly, the Company’s historical consolidated financial statements include those of CEI from its date of inception on November 21, 2008.

Functional currency

The reporting currency of the Company is the United States dollar, while the functional currency is the Canadian dollar. When a transaction is executed in a foreign currency, it is re-measured into Canadian dollars based on appropriate rates of exchange in effect at the time of the transaction. At each balance sheet date, all recorded balances are adjusted to the reporting currency of the Company to reflect the current exchange rate. The resulting foreign currency transactions gains (losses) are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

The cumulative translation adjustments are included in accumulated other comprehensive loss in the equity section of the unaudited condensed consolidated balance sheet.

Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from these estimates.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Significant estimates include volumes of oil and natural gas reserves used in calculating depletion of proved oil and natural gas properties, future net revenues and abandonment obligations, impairment of unproved properties, future taxable income and related assets/liabilities, the collectability of outstanding accounts receivable, stock-based compensation expense, contingencies and the results of current and future litigation.

Oil and natural gas reserve estimates which are the basis for unit-of-production depletion and the ceiling test, have numerous inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Subsequent drilling results, testing and production may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. In addition, reserve estimates are vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future.

The significant estimates are based on current assumptions that may be materially affected by changes to future economic conditions such as the market prices received for sales of volumes of oil and natural gas, the creditworthiness of counterparties, interest rates, the market value of the Company’s common stock and corresponding volatility and the Company’s ability to generate future taxable income. Future changes in these assumptions may affect these significant estimates materially in the near term. The Company has also evaluated subsequent events for recording and disclosures, including assumptions used in its estimates.

Reclassification

Certain reclassifications may have been made to prior periods’ data to conform to the current period’s presentation. These reclassifications had no effect on reported income or losses.

Revenue Recognition

The Company uses the sales method of accounting for the recognition of natural gas and oil revenues. The Company is the operator on all of its properties. The Company has an agreement with the marketers of our product to sell, on its behalf, production from the properties for which it has working interest ownership. Since there is a ready market for natural gas, crude oil and natural gas liquids (“NGLs”), production is sold at various locations at which time title and risk of loss pass to the marketer.

The Company records its share of revenues based on sales volumes and contracted sales prices. The sales price for natural gas, natural gas liquids and crude oil are adjusted for transportation cost and other related deductions. The transportation costs and other deductions are based on contractual or historical data and do not require significant judgment. Subsequently, these deductions and transportation costs are adjusted to reflect actual charges based on third party documents when received by the Company. Historically, these adjustments have been insignificant. In addition, natural gas and crude oil volumes sold are not significantly different from the Company’s share of production.

The Company receives its share of revenue after all calculated crown royalties are paid on natural gas, crude oil and NGLs in accordance with the particular contractual provisions of the lease, license or concession agreements and the laws and regulations applicable to those agreements. Private royalties are accrued and paid upon receipt of payment.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Cash and Cash Equivalents

Cash and cash equivalents represent cash in banks. The Company considers any highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.

Concentrations of Credit Risk

The Company’s accounts receivable are concentrated among entities engaged in the energy industry, within Canada and the United States. Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the Canada Deposit Insurance Corporation or Federal Deposit Insurance Corporation's insurance limit.

Furniture and Fixtures

Furniture and fixtures are recorded at cost and depreciated on both straight-line and declining balance basis over estimated useful lives of five years. Repair and maintenance costs are charged to expense as incurred while acquisitions are capitalized as additions to the related assets in the period incurred. Gains or losses from the disposal of property, plant and equipment are recorded in the period incurred. The net book value of the property, plant and equipment that is retired or sold is charged to accumulated depreciation and amortization, and the difference is recognized as a gain or loss in the results of operations in the period the retirement or sale transpires.

Segment Information

The Company applies Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”). ASC 280-10 establishes standards for reporting information regarding operating segments in annual consolidated financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, regarding how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company's principal operating segments.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration, and development of properties within a relatively large geopolitical cost center, in our case by country, are capitalized when incurred and are amortized as mineral reserves in the cost center as they are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves. In some cases, however, certain significant costs designated as unproven properties are deferred separately without amortization until the specific property to which they relate is found to be either productive or nonproductive, at which time those deferred costs and any reserves attributable to the property are included in the computation of amortization in the cost center. All costs incurred in oil and gas producing activities are regarded as integral to the acquisition, discovery, and development of whatever reserves ultimately result from the efforts as a whole, and are thus associated with the Company’s reserves. The Company capitalizes internal costs directly identified with performing or managing acquisition, exploration and development activities. The Company has not capitalized any internal costs or interest at September 30, 2011 and 2010. Unevaluated and undeveloped costs are excluded from the full cost pool and are periodically evaluated for impairment rather than amortized. Upon evaluation, costs associated with productive properties are transferred to the full cost pool and amortized. Gains or losses on the sale of oil and natural gas properties are generally included in the full cost pool unless the entire pool is sold.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Capitalized costs and estimated future development costs are amortized on a unit-of-production method based on proved reserves associated with the applicable country cost center. The Company has assessed for impairment of oil and natural gas properties for the full cost pool at September 30, 2011 and 2010 and will assess quarterly thereafter using a ceiling test to determine if impairment is necessary. Specifically, the net unamortized costs for each full cost pool less related deferred income taxes is compared to (a) the present value, discounted at 10%, of future net cash flows from estimated production of proved oil and gas reserves plus (b) all costs being excluded from the amortization base plus (c) the lower of cost or estimated fair value of unproved properties included in the amortization base less (d) the income tax effects related to differences between the book and tax basis of the properties involved. The present value of future net revenues is based on current prices, with consideration of price changes only to the extent provided by contractual arrangements, as of the latest balance sheet presented. The full cost ceiling test takes into account the prices of qualifying cash flow hedges in calculating the current price of the quantities of the future production of oil and gas reserves covered by the hedges as of the balance sheet date. In addition, the use of the hedge-adjusted price is consistently applied in all reporting periods and the effects of using cash flow hedges in calculating the ceiling test, the portion of future oil and gas production being hedged, and the dollar amount that would have been charged to income had the effects of the cash flow hedges not been considered in calculating the ceiling limitation has been disclosed. Any excess is charged to expense during the period that the excess occurs. The Company did not have any hedging activities since inception through September 30, 2011. Application of the ceiling test is required for reporting purposes, and any write-downs are not reinstated even if the cost ceiling subsequently increases by year-end. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonment of properties is accounted for as adjustments of capitalized costs with no loss recognized.

Impairment of long lived assets

The Company applies Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of is reported at the lower of the carrying amount or the fair value less costs to sell.

Reserves

In December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting, which is effective for reporting reserve information. In January 2010, the FASB issued its authoritative guidance on extractive activities for oil and gas to align its requirements with the SEC’s final rule. Under the SEC’s final rule, prior period reserves were not restated. The Company has complied with this guidance in reporting reserve information.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Fair Values

The Company applies Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. ASC 820-10 delayed, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations.

Comprehensive Income (Loss)

The Company applies Accounting Standards Codification subtopic 220-10, Comprehensive Income (“ASC 220-10”). ASC 220-10 establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities.

Net Loss per Share

The Company applies Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings per share information. Basic loss per share has been calculated based upon the weighted average number of common shares outstanding. Stock issued upon the conversion of convertible debt, stock options and warrants have been excluded as common stock equivalents in the diluted loss per share because their effect is anti-dilutive on the computation.

Stock based compensation

The Company follows Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires that all share-based payments to both employees and non-employees be recognized in the income statement based on their fair values. The fair value of share-based compensation to employees will be determined using an option pricing model at the time of grant. Fair value for common shares issued for goods or services rendered by non-employees are measured based on the fair value of the goods or services received. Stock-based compensation expense is included in general and administrative expense with a corresponding increase to Additional Paid in Capital. Upon the exercise of the stock options, consideration paid together with the previously recognized Additional Paid in Capital is recorded as an increase in share capital.

Asset Retirement Obligations

The Company recognizes a liability for asset retirement obligations in the period in which they are incurred and in which a reasonable estimate of such costs can be made. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites. The asset retirement obligation is measured at fair value and recorded as a liability and capitalized as part of the cost of the related long-lived asset as an asset retirement cost. The asset retirement obligation accretes until the time the asset retirement obligation is expected to settle while the asset retirement costs included in oil and gas properties are amortized using the unit-of-production method.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Amortization of asset retirement costs and accretion of the asset retirement obligation are included in depletion, depreciation and accretion. Actual asset retirement costs are recorded against the obligation when incurred. Any difference between the recorded asset retirement obligations and the actual retirement costs incurred is recorded in depletion, depreciation and accretion.

Environmental

Oil and gas activities are subject to extensive federal, provincial, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites.

Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated

Income Taxes

The Company applies Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statement amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The adoption of ASC 740-10 did not have a material impact on the Company’s consolidated results of operations or financial condition.

Flow-through Shares

From time to time the Company finances a portion of its Canadian exploration programs with flow-through common shares issued by its majority owned subsidiary pursuant to certain provisions of the Income Tax Act (Canada) (the “Act”). Under the Act, where the proceeds are used for eligible expenditures, the related income tax deductions may be renounced by the majority owned subsidiary to subscribers. Accordingly, the tax credits associated with the renunciation of such expenditures are recorded as an increase to deferred income tax liabilities. Any premium received from subscribers on the sale of such flow-through common shares is recorded initially as a current liability and then discharged and recognized as a reduction of deferred income taxes when the flow-through eligible expenditures relating to the flow-through premium are incurred by the Company.

Non-controlling Interests

We adopted the accounting standard for non-controlling interests in the consolidated financial statements as of January 1, 2009. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This standard also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interests of the non-controlling owner.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Accounting for Changes in Ownership Interests in Subsidiaries

The Company’s ownership interest in a consolidated subsidiary may change if it sells a portion of its interest, or if the subsidiary issues or re-purchases its own shares. If the transaction does not result in a change in control over the subsidiary and it is not deemed to be a sale of real estate, the transaction is accounted for as an equity transaction. If the transaction results in a change in control it would result in the deconsolidation of a subsidiary with a gain or loss recognized in the statement of operations. During the three and nine months ended September 30, 2011, the Company’s ownership interest in Cougar Energy Inc. changed and such changes were accounted for as equity transactions. See Note 11 Non-Controlling Interest for a description of the transactions and the impact to the unaudited condensed consolidated financial statements.

Accounting for Sales of Stock by a Subsidiary

The Company's majority owned subsidiary issued common shares in various transactions, which resulted in a dilution of the Corporation's percentage ownership in the Subsidiary. The Company accounted for the sale of the Subsidiary common shares in accordance with guidance related to equity transactions. The guidance allows for the election of an accounting policy of recording such increase or decreases in a parent's investment either in income or in equity. The Corporation adopted a policy of recording such gains or losses directly to additional paid in capital.

Recent Accounting Pronouncements

There were various updates recently issued by the Financial Accounting Standards Board, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.

NOTE 2 - GOING CONCERN MATTERS

These unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. The Company has incurred losses from operations since its inception and will need additional working capital for its future planned activities. The success of these programs is yet to be determined. These conditions raise doubt about the Company’s ability to continue as a going concern. The Company is subject to a financial covenant regarding its working capital ratio that is adjusted to meet requirements within its credit facility. Continuation of the Company as a going concern is dependent upon obtaining sufficient working capital to finance ongoing operations and to provide for an adequate working capital ratio as determined by the credit facility. The Company’s strategy to address this uncertainty includes additional equity and debt financing; however, there are no assurances that any such financings can be obtained on favorable terms, if at all. These unaudited condensed consolidated financial statements do not reflect the adjustments or reclassification of assets and liabilities that would be necessary if the Company were unable to continue its operations.

NOTE 3 - OIL AND GAS PROPERTIES

Major classes of oil and gas properties under the full cost method of accounting at September 30, 2011 and December 31, 2010 consist of the following:

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

	September 30, 2011			December 31, 2010
Proved properties, net of cumulative impairment charges	$	12,722,280		$	9,266,193
Unevaluated and Unproved properties		23,529,272			22,622,246
Gross oil and gas properties		36,251,552			31,888,439
Less: accumulated depletion, accretion and impairments		(5,280,857	)		(3,493,865	)
Net oil and gas properties	$	30,970,695		$	28,394,574

Unevaluated and Unproved Properties

The Company has certain unevaluated and unproved properties, valued at cost, that have been excluded from costs subject to depletion. These costs amounting to $23,529,272 and $22,622,246 as at September 30, 2011 and December 31, 2010, respectively, are subject to a test for impairment which is separate from the test applied to proved properties.

Full Cost Accounting Ceiling Test on Canadian Proved Oil and Gas Properties

Quarterly, the Company assesses the value of unamortized capitalized costs within its cost center over the discounted present value of cash flows associated with its reserves. Any excess requires an immediate write-down of its capital costs by this amount, under the full cost ceiling test.

At September 30, 2011, a ceiling test was performed on the Company's properties subject to depletion. Costs of unproved properties aggregating $23,529,272 and future abandonment costs of $307,000 have been excluded from this test. This test disclosed that the carrying costs of the Company's depletable Canadian properties exceeded their net present value and consequently the Company recorded a $1,354,563 ceiling write-down during the nine months ended September 30, 2011.

Included in the Company’s oil and gas properties are asset retirement obligations of $1,577,377 and $1,306,481, comprising both current and long term items as of September 30, 2011 and December 31, 2010, respectively.

NOTE 4 - ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

	September 30, 2011		December 31, 2010
Non-operating Partner joint venture accounts	$	547,815	$	487,265
Government of Canada Goods and Services Tax Claims		16,542		17,778
Alberta Government Drilling Credits		3,073		-
Other		106,977		80,594
	$	674.407	$	585,637

During the period, the Company incurred costs relating to a significant development program which generated a large Goods and Services Tax receivable.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 5 - OTHER ASSETS

Other assets represent long term deposits required by governmental regulatory authorities for environmental obligations relating to well abandonment and site restoration activities.

	September 30, 2011		December 31, 2010
Alberta Energy and Utility Board Drilling Deposit	$	44,491	$	46,519
Department of Energy Reclamation Deposit		477		503
British Columbia Oil and Gas Commission Deposit		252,612		266,225
	$	297,580	$	313,247

NOTE 6 - OPERATING LINE OF CREDIT

During the year ended December 31, 2010, the Company reached formal agreement with a Canadian bank for credit facilities. The credit facility is a revolving demand loan facility in the amount of Cdn$2,500,000 bearing an interest at prime plus 3.5% per annum. Under the terms of the Agreement, the credit facility is committed for the development of existing proved non-producing/undeveloped petroleum and natural gas reserves. As at September 30, 2011, U.S $2,170,387 of the revolving line was drawn.

NOTE 7- LONG TERM AND SHORT TERM LIABILITIES

The Company has the following liabilities:

	September 30, 2011			December 31, 2010
Amount due to vendor of acquired properties present value of total amount due	$	3,019,462		$	3,951,337
Amount of Discount to be accreted in the future (at 7.5% annually - .0625% per month)		(238,133	)		(416,155	)
Present value of amount due		2,781,329			3,535,182
Convertible debentures, net of unamortized debt discount of $808,395		1,701,577			-
Other short term debt		16,269			25,762
Total indebtedness from the purchase of properties		4,499,175			3,560,944

Less current portion		(1,715,148	)		(839,060	)
Long-term portion		2,784,027			2,721,884

Funds advanced by partners for their share of a drilling deposit required to be lodged by the Company with the British Columbia Oil and Gas Commission (See Note 5) as security for future well abandonment and site restoration activities		45,623			48,081
Total	$	2,829,650		$	2,769,965

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The total amount due to the vendor of the Trout Core properties is payable in accordance with the following schedule:

Due in 2011 in 12 monthly installments	$	243,274
Due in 2012 in 12 monthly installments		1,144,820
Due in 2013 in 12 monthly installments		1,316,543
Due in 2014 in 2 monthly installments		314,825
	$	3,019,462

The Company has the right to prepay the vendor loan in full, without penalty, semi-annually commencing March 31, 2010 at a proportionate discount to the original purchase price. The indebtedness is secured by a debenture covering a fixed and floating charge over Cougar's interest in the acquired properties.

During the nine months ended September 30, 2011, interest of $167,956 was recorded as interest expense in relation to the discount on the vendor acquired indebtedness.

Convertible Debentures

On February 3, 2011 the Company's majority owned subsidiary, Cougar Oil and Gas Canada, Inc ("Cougar") entered into a financing agreement to be administered through the issuance of convertible debentures to a maximum of 4,700,000 Swiss Francs (approximately $5,200,000 USD), subject to certain conditions. The debentures have a term of 18 months from receipt of funds and accrue interest at the rate of Bank of Canada prime plus 3% per annum. As renegotiated, the holders of the secured debentures have the option to convert the balance of the note plus accrued interest into common shares of Cougar at a price based on a 10 day volume weighted average discounted at 10%, at time of notice to convert, with a minimum price of $0.75 USD. In addition, an equivalent number of common share purchase warrants priced at 130% of the conversion price and with a 4 year term will be issued when the debenture is converted.

In accordance with ASC 470-20, the Company recognizes an embedded beneficial conversion feature present in the debenture when it is issued. The Company allocates a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The debt discount attributed to the beneficial conversion feature is amortized over the debenture’s maturity period (eighteen months) as interest expense.

In connection with the placement of the debentures, the Company is contingently obligated to issue detachable warrants granting the holder the right to acquire shares of the Company’s common stock at 130% of the conversion price upon debenture conversion. The warrants, if issued, expire four years from the issuance. In accordance with ASC 470-20, the Company determines the allocated value attributable to the warrants and will recognize it as a charge to interest expense upon issuance.

The following debentures have been issued pursuant to the financing agreement:

On February 25, 2011, the Company received the initial draw down of 950,000 Swiss Francs ($1,023,530 USD) and issued a secured convertible debenture as described above.

The Company recognized and measured an aggregate of $425,666 of the proceeds, which is equal to the allocated intrinsic value of the revised embedded beneficial conversion feature, to additional paid-in capital and a discount against the debenture

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The Company determined the allocated value attributable to the contingent warrants in the amount of $364,100 and will recognize a charge to interest expense upon issuance. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 4 years, an average risk free interest rate of 1.86%, a dividend yield of 0%, and volatility of 80.61%.

Amortization of $222,355 of the discount due to the beneficial conversion feature was recorded for nine months ended September 30, 2011.

On April 13, 2011, the Company received 927,500 Swiss Francs ($1,034,997 USD) under the financing agreement and issued a secured convertible debenture as the second draw down on the $5,200,000 facility previously described.

The Company recognized and measured an aggregate of $430,435 of the proceeds, which is equal to the allocated intrinsic value of the revised embedded beneficial conversion feature, to additional paid-in capital and a discount against the debenture.

The Company determined the allocated value attributable to the warrants in the amount of $368,180 and will recognize a charge to interest expense upon issuance. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 4 years, an average risk free interest rate of 1.86%, a dividend yield of 0%, and volatility of 80.61%.

Amortization of $125,730 of the discount due to the beneficial conversion feature was recorded for nine months ended September 30, 2011.

On May 5, 2011, the Company issued a 200,000 Swiss Franc ($232,200 USD) secured convertible debenture on receipt of funds representing the third draw on the financing agreement facility previously described.

The Company recognized and measured an aggregate of $94,922 of the proceeds, which is equal to the allocated intrinsic value of the revised embedded beneficial conversion feature, to additional paid-in capital and a discount against the debenture.

The Company determined the allocated value attributable to the warrants in the amount of $80,955 and will recognize a charge to interest expense upon issuance. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 4 years, an average risk free interest rate of 1.86%, a dividend yield of 0%, and volatility of 80.61%.

Amortization of $18,866 of the discount due to the beneficial conversion feature was recorded for nine months ended September 30, 2011.

On August 1, 2011, the Company issued a $85,000 CAN ($88,959 USD) secured convertible debenture on receipt of funds representing the fourth draw on the financing agreement facility previously described.

The Company recognized and measured an aggregate of $37,776 of the proceeds, which is equal to the allocated intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the debenture.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

The Company determined the allocated value attributable to the warrants in the amount of $31,709 and will recognize a charge to interest expense upon issuance. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 4 years, an average risk free interest rate of 1.86%, a dividend yield of 0%, and volatility of 80.61%.

Amortization of $3,892 of the discount due to the beneficial conversion feature was recorded for nine months ended September 30, 2011.

On September 1, 2011, Company issued a $85,000 CAN ($86,788 USD) secured convertible debenture on receipt of funds representing the fifth draw on the financing agreement facility previously described.

The Company recognized and measured an aggregate of $40,960 of the proceeds, which is equal to the allocated intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the debenture.

The Company determined the allocated value attributable to the warrants in the amount of $32,656 and will recognize a charge to interest expense upon issuance. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 4 years, an average risk free interest rate of 1.58%, a dividend yield of 0%, and volatility of 88.47%.

Amortization of $2,222 of the discount due to the beneficial conversion feature was recorded for nine months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company modified the conversion features of the originally issued convertible notes dated February 25, 2011, April 13, 2011 and May 5, 2011. As such, the Company wrote off the remaining original debt discounts of $689,913 to current period operations.

The short term notes payable is comprised of the following:

On December 19, 2009, the Company issued a $15,000 U.S. promissory note, due on demand with interest at Canada prime plus 2%. As of September 30, 2011, the balance under this promissory note was $16,269.

NOTE 8- ASSET RETIREMENT OBLIGATIONS

The Company’s unaudited condensed consolidated financial statements reflect the provisions of Accounting Standards Codification Subtopic 410-20, Asset Retirement Obligations (“ASC 410-20”). ASC 410-20 provides that, if the fair value for an asset retirement obligation can be reasonably estimated, the liability should be recognized in the period when it is incurred. Oil and gas producing companies incur this liability upon acquiring or drilling a well. Under the method prescribed by ASC 410-20, the retirement obligation is recorded as a liability at its estimated present value at the asset’s inception, with an offsetting increase to producing properties on the Unaudited Condensed Consolidated Balance Sheet. Periodic accretion of discount of the estimated liability is recorded, as appropriate, as an expense in the Unaudited Condensed Consolidated Statement of Operations and is included in depletion, depreciation and accretion. The Company’s asset retirement obligations relate to all wells. The Company has recognized an asset retirement liability of $1,824,547 and $1,471,808 at September 30, 2011 and December 31, 2010, respectively.

At September 30, 2011, the estimated total undiscounted amount required to settle the asset retirement obligations was $3,733,949 (December 31, 2010 - $3,227,980). These obligations will be settled at the end of the useful lives of the underlying assets, which currently extends up to 14 years into the future. This amount has been discounted using a credit adjusted risk-free interest rate of 7.5% and an inflation rate of 2.5%.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Changes in the carrying amounts of the asset retirement obligations associated with the Company’s oil and natural gas properties are as follows:

Asset retirement obligations, December 31, 2009	$	1,285,614
Additions		36,666
Accretion		100,436
Retirements		(20,966	)
Foreign exchange gain		70,058
Asset retirement obligations, December 31, 2010		1,471,808
Additions		362,494
Accretion		93,681
Retirements		-
Foreign exchange (loss)		(103,436	)
Asset retirement obligations, September 30, 2011	$	1,824,547

NOTE 9- STOCK OPTION PLAN AND STOCK BASED COMPENSATION

The Company has a stock option plan under which it may grant options to its directors, officers, employees and consultants for up to a maximum of 8,000,000 of its issued and outstanding common shares at market price at the date of grant for up to a maximum term of five years. Options are exercisable equally over the first three years of the term of the option.

	September 30, 2011
	Weighted average Exercise
	Price		Shares
Outstanding at beginning of period	$	0.50		5,405,000
Options granted		-
Options forfeited		0.45		(200,000	)
Outstanding at end of period		0.50		5,205,000
Exercisable at end of period	$	0.60		3,705,000

Significant option groups outstanding at September 30, 2011 and related weighted average price and life information as follow:

Range of Exercise Price		Number outstanding	Weighted Average remaining Contractual life		Weighted average Exercise Price		Exercisable Number Outstanding		Exercisable Weighted average Exercise price
$	0.19-0.69	4,300,000		2.79	$	0.28		2,800,000	$	0.30
	1.28-1.50	805,000		0.15		1.39		805,000		1.39
	2.58-2.58	100,000		1.17		2.58		100,000		2.58
		5,205,000		2.36	$	0.50		3,705,000	$	0.60

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Transactions involving options issued to employees are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at December 31, 2009		6,060,000		$	0.57
Granted		300,000			0.19
Exercised		-
Canceled or expired		(955,000	)		0.85
Outstanding at December 31, 2010		5,405,000		$	0.50
Granted		-
Exercised		-
Canceled or expired		(200,000	)		0.45
Outstanding at September 30, 2011		5,205,000		$	0.50

Cougar Oil and Gas Canada Stock Option Plan

Cougar Oil and Gas Canada has a stock option plan under which it may grant options to its directors, officers, employees and consultants for up to a maximum of 10% of its issued and outstanding common shares at market price at the date of grant for up to a maximum term of five years. Options are exercisable equally over the first three years of the term of the option.

A summary of options granted and outstanding September 30, 2011 under the plan is as follows:

Outstanding						Exercisable
Number Outstanding		Weighted Average remaining Contractual life		Weighted average Exercises Price (Cdn$)		Number Outstanding	Weighted average Exercise price
	3,262,500		2.29	$	0.144	2,175,000	$	0.144
	892,500		3.08	$	0.289	397,500		0.289
	35,000		3.50	$	2.02	-		-
	600,000		3.67	$	2.38	200,000		2.38
	50,000		4.04	$	1.40	-		-
	50,000		4.08	$	1.52	-		-
	45,000		4.17	$	1.83	-		-
	30,000		4.19	$	2.36	-		-
	450,000		4.21	$	2.92	-		-
	400,000		4.50	$	3.07
	5,815,000		2.92	$	0.87	2,772,500	$	0.33

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Transactions involving options issued to employees are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at December 31, 2009		-		$	-
Granted		1,260,000			2.47
Exercised		-			-
Canceled or expired		-
Outstanding at December 31, 2010		1,260,000			2.47
Granted		400,000			3.07
Transfers (see below)		4,455,000			0.18
Canceled or expired		(300,000	)		0.29
Outstanding at September 30, 2011		5,815,000		$	0.87

During the nine months ended September 30, 2011, the Company granted 400,000 stock options with an exercise price of Cdn $3.07 per share expiring five years from issuance. The fair values were determined using the Black Scholes option pricing model with the following assumptions:

Dividend yield:	-0-	%
Volatility	81	%
Risk free rate:	2.71	%

On January 1, 2011, Cougar Energy, Inc. merged with its parent, Cougar Oil and Gas Canada Inc. Both of the companies are Alberta corporations and were merged in a statutory amalgamation under Alberta corporate law. Upon that merger, and after giving effect to the Cougar Oil and Gas Canada/Cougar Energy Inc. share exchange at 1:1.5 and the subsequent 3:1 split of Cougar Canada Oil and Gas Canada Inc. shares, the 725,000 and 265,000 outstanding Cougar Energy, Inc stock options exercisable at $0.65 and $1.30 per share respectively shown above became 3,262,500 and 1,192,500 outstanding Cougar Oil and Gas Canada stock options exercisable at Cdn $0.144 and Cdn $.289 per share, respectively.

Kodiak Energy Inc. Warrants

During each of the year ended December 31, 2010 and period ended September 30, 2011, the Company, as part of certain private placement financings, issued warrants that are exercisable in common shares of the Company. A summary of such outstanding warrants follows:

	Exercise Price		Expiry Date	Equivalent Shares Outstanding		Weighted Average Years to Expiry
Issued Nov 4, 2010	$	0.50	Aug 15/12		4,776,108		0.88
Issued Dec 9, 2010		0.50	Aug 15/12		4,500,000		0.88
Issued Jan 17, 2011		0.34	Jan 17/16		10,000,000		4.30
	$	0.42			19,276,108		2.65

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Transactions involving Kodiak Energy Inc. are summarized as follows:

	Number of Shares			Weighted Average Price Per Share (Cdn$)
Outstanding at December 31, 2009		1,130,000		$	3.50
Issued		9,276,108			0.50
Exercised		-			-
Canceled or expired		-
Outstanding at December 31, 2010		10,406,108		$	0.83
Issued		10,000,000			0.34
Exercised		-			-
Canceled or expired		(1,130,000	)		(3.50	)
Outstanding at September 30, 2011		19,276,108		$	0.42

During the nine months ended September 30, 2011, in connection with the sale of the Company's common stock, the Company issued 10,000,000 warrants to purchase the Company's common stock at $0.34 per share expiring five years from the date of issuance.

Cougar Oil and Gas Canada Warrants

Warrants

The following table summarizes warrants outstanding and related prices for the shares of the Company’s common stock issued to shareholders at September 30, 2011:

Transactions involving the Company’s warrant issuance are summarized as follows:

	Number of Shares			Weighted Average Price Per Share

Outstanding at December 31, 2009		-		$	-
Issued		6,223,506			0.33
Exercised		(2,014,848	)		0.29
Canceled or expired		-			-
Outstanding at December 31, 2010		4,208,658		$	0.35
Issued		-			-
Exercised		(3,840,501	)		(0.33	)
Canceled or expired		(368,157	)		(0.56 )
Outstanding at September 30, 2011		-		$	-

During the nine months ended September 30, 2011, the Company received $1,275,951, net of costs, in connection with the exercise of 3,840,501 previously issued warrants to acquire the Company’s’ common stock.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 10 - STOCKHOLDER’S EQUITY

The Company is authorized to issue 10,000,000 and 300,000,000 shares of $0.001 par value preferred and common stock, respectively. As of September 30, 2011 and December 31, 2010, the Company had nil preferred shares issued and outstanding and 129,683,294 and 119,683,294 shares of common stock issued and outstanding, respectively. During the nine months ended September 30, 2011, the Company sold 10,000,000 shares of common stock in exchange for cash of $1,380,000, net of costs.

NOTE 11- NON CONTROLLING INTEREST

A reconciliation of the non controlling loss attributable to the Company:

Net loss Attributable to the Company and transfers (to) from non-controlling interest for the nine months ended September 30:

		2011			2010
Net loss	$	5,163,827		$	1,154,027
Average Non-controlling interest percentage		43.64	%		38.46	%
Net loss attributable to the non-controlling interest		2,253,119			443,806
Gain from change in non-controlling interest ownership		-			(109,451)
Net loss attributable to the non-controlling interest	$	2,253,119		$	334,355

The following table summarizes the changes in Non Controlling Interest from December 31, 2009 to September 30, 2011:

Balance, December 31, 2009	$	258,127
Transfer (to) from the non-controlling interest as a result of change in ownership		881,533
Foreign currency translation		21,874
Net loss attributable to the non-controlling interest		(750,104	)
Balance, December 31, 2010		411,430
Transfer (to) from the non-controlling interest as a result of change in ownership		1,870,264
Foreign currency translation		(78,619	)
Net loss attributable to the non-controlling interest		(2,253,119	)
Balance, September 30, 2011	$	(50,044	)

NOTE 12- COMMITMENTS AND CONTINGENCIES

Lease Commitments

As of September 30, 2011 and 2010, the Company had lease commitments for vehicles, office rent and office equipment. The following lease commitments for the years shown:

Amounts payable in:	September 30, 2011		September 30, 2010
2011	$	50,621	$	177,954
2012	$	201,854	$	173,556
2013	$	71,927	$	43,876

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

Cougar Oil and Gas Canada, Inc.

The Company relocated its offices in December 2009 and pays rent of approximately $14,000 per month until the lease expires in February 2013. The remaining lease commitments pertain to two trucks and a number of office computers. Rent expense for the nine months ended September 30, 2011 and 2010 is $136,030 and $91,639, respectively.

Litigation

The Company is subject to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. There was no outstanding litigation as of September 30, 2011.

NOTE 13 - FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

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

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

The carrying amounts of financial instruments, which include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, other current liabilities, revolving credit facility and debt approximate their fair values due to their short maturities and variable interest rate on the revolving credit facility and fixed rates which approximate market rates on notes payable.

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 14- RELATED PARTY TRANSACTIONS

For the nine months ended September 30, 2011 and 2010, the Company incurred fees of $30,120 (September 30, 2010 - $31,333) charged by a Director and the former Chief Financial Officer. An amount of $4,168 (2010 - $4,374) was payable at September 30, 2011. The Company incurred charges of $92,484 (September 30, 2010 - $86,637) by a Company owned and controlled by the chairman of the Company for management consulting services. An amount of $10,017 (2010 - $10,104) was payable on September 30, 2011. The Company incurred expenses of the wife of the chairman of the Company of $3,530 (September 30, 2010 - $18,442) for administration consulting services. A total of $3,530 (2010 - $6,122) was outstanding on September 30, 2011. These amounts were charged to General and Administrative Expense.

These related party transactions were non arm's length transactions in the normal course of business and agreed to by the related parties and the Company based on negotiations and Board approval and accordingly had been measured at the exchange amounts.

NOTE 15- SEGMENTED INFORMATION

The Company’s two geographical segments are the United States and Canada. Both segments use accounting policies that are identical to those used in the consolidated financial statements. The Company’s geographical segmented information is as follows:

	Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
	U. S.			Canada			Total			U. S.			Canada			Total
Revenue, net of royalties	$	-		$	704,390		$	704,390		$	-		$	1,983,802		$	1,983,802
Income during the Evaluation Period:		-			-			-			-			-			-
Net Loss		(3,912	)		(1,064,198	)		(1,068,110	)		(14,779	)		(3,237,851	)		(3,252,630	)
Capital Assets		7,135,094			23,880,784			31,015,878			7,135,094			23,880,784			31,015,878
Total Assets		7,152,033			25,038,667			32,190,700			7,152,033			25,038,667			32,190,700
Capital Expenditures		-			126,543			126,543			2,469			5,602,103			5,604,572

	Three Months Ended September 30, 2010									Nine Months Ended September 30, 2010
	U. S.			Canada			Total			U. S.			Canada			Total
Revenue, net of royalties	$	-		$	771,177		$	771,177		$	-		$	2,440,017		$	2,440,017
Income during the Evaluation Period:		-			-			-			-			-			-
Net Loss		(5,583	)		(710,540	)		(716,123	)		(4,157,856	)		(1,568,642	)		(5,726,498	)
Capital Assets		7,132,466			20,660,411			27,792,877			7,132,466			20,660,411			27,792,877
Total Assets		7,133,989			21,768,080			28,902,069			7,133,989			21,768,080			28,902,069
Capital Expenditures		-			1,921,284			1,921,284			1,656			2,623,846			2,625,502

KODIAK ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 16- CHANGES IN WORKING CAPITAL

	Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
Operating Activities:
Accounts Receivable	$	(88,771	)	$	(196,274	)
Prepaid Expenses and Deposits		(24,939	)		1,253
Accounts Payable		2,366,263			878,496
Accrued Liabilities		(567,206	)		(6,058	)
Other		-			(52,001	)
Total	$	1,685,347		$	625,416

NOTE 17- SUBSEQUENT EVENTS

On October 12, 2011 Kodiak Energy Inc. and Cougar Oil and Gas Canada Inc. filed in the Court of Queen’s Bench of Alberta a Statement of Claim against CREEnergy Oil and Gas Inc. (CREEnergy) and four individuals associated with CREEnergy. Kodiak and Cougar are seeking compensatory, punitive and exemplary damages from CREEnergy et al.

On October 21, 2011 Kodiak negotiated and executed an amending agreement with the private company that was farming in on the New Mexico prospect to divest 100% of the Kodiak New Mexico assets including the 3 standing wellbores in exchange for a 4% nonconvertible GORR and a 5 year area of mutual interest extending 5 miles around the current leased lands. The anticipated closing date of the transaction is January 31, 2012.

On November 1, 2011, TAMM Oil and Gas Corporation and Cougar Oil and Gas Canada, Inc agreed to terminate the farm in previously announced on March 17, 2011 in order to replace it with a new agreement.

On November 7, 2011 Cougar Oil and Gas Canada, Inc. signed an agreement with TAMM Oil and Gas Corp ( a related party due to common CEO) and a private corporation (also a related party due to common family relationships between board members) to provide Services including Project Management, engineering, Geophysical and designated Operator under the context of ERCB regulations and CAPL definitions for a consolidated operations plan for the group’s Manning projects. Cougar will be compensated for the services provided and receive a 5% working interest in the combined project after one year.

On November 5, 2011 – as an employee retention plan, the Board of Directors approved a repricing of outstanding employee options to the 5 day volume weighted average as of close of business – no other revision to the terms of those options. – in addition the Board approved an additional award of options under the terms of the approved option plan including additional 1,800,000 options to board members, 900,000 additional to officers and 200,000 options to employees.

Cougar Oil and Gas Canada, Inc. issued secured convertible debentures under the terms of the financing facility described in Note 7 in the amount of $162,183 based on funds received subsequent to September 30, 2011.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission. Words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project or projected", or similar expressions are intended to identify "forward-looking statements". Such statements are qualified in their entirety by reference to and are accompanied by the above discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.

Investors should be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue, (ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so, (iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future and, (vi) a very competitive and rapidly changing operating environment. The risks identified here are not all inclusive. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.

The financial information set forth in the following discussion should be read in conjunction with the consolidated financial statements of Kodiak Energy, Inc. included elsewhere herein.

PLAN OF OPERATION

Canada

Cougar Oil and Gas Canada, Inc.

At this time, due to various financing activities of Cougar Oil and Gas Canada, Inc. (Cougar), Kodiak owns approximately 56.4% of the outstanding stock of Cougar. Kodiak also provided a $900K note for drilling purposes to Cougar for the 2011 winter drilling program. Through Cougar Oil and Gas Canada, Inc., the Company’s focus is as follows:

PLANS FOR GROWTH

Trout Operations Growth Plans

Cougar has prepared a multifaceted development program that is designed to carry it forward with the overall goals of increasing production. The plan is to efficiently execute field programs that combine the optimization of existing wells and infrastructure with additional infill drilling and supplemented with land acquisitions and 3D seismic supported exploration drilling. This combination of field operations represents a balanced portfolio of risk versus reward, which can be easily adjusted depending on cash flow, commodity prices and financing and or type of financing.

Field Optimization

Following the acquisition of the properties in the Trout area all of the existing wellbores and production practices were reviewed to identify inefficient practices and additional production opportunities. Approximately thirty field optimization projects were identified during the field review. Cougar has continuously reviewed and implemented the optimization projects. The projects were primarily focused around field management and deliverability of existing assets.

The projects implemented in the field have included repair and replacement of surface and down hole production equipment, implementation of chemical enhancement programs and debottlenecking of pipeline and infrastructure facilities. Cougar plans to continue executing field optimization programs in order to efficiently utilize the existing Trout field infrastructure.

Infill Drilling

The majority of the wells on the Trout properties were drilled almost twenty years ago when oil prices were much lower and infrastructure was much less developed. Infill drilling is an important optimization technique in which new vertical, directional and horizontal wells are added to an existing pool to maximize the total oil recovery.

In order to accurately identify infill drilling opportunities Cougar utilizes 3D seismic technology. The 3D seismic provides the information required to evaluate the geological structure of the Keg River and Granite Wash formations.

Cougar has acquired three complete sets of 3D seismic in the Trout area consisting of two proprietary pieces and one trade piece. The 3D seismic was used to identify 6 additional infill drilling locations to increase the drainage of existing oil reserves. These infill locations have an expected find and development cost of $10 per barrel of recoverable oil.

3D Seismic Supported Exploration Drilling

The Trout field was initially developed in the early 1990’s and all of the production comes from these very mature oil reservoirs. Using 3D seismic Cougar has been able to identify potentially new undeveloped oil reservoirs. It is anticipated that these identified prospective oil reservoirs would follow similar production profiles to the many current production analogues in the area.

In January and February, 2011 Cougar completed a 23.8Km2 3D seismic program in the Trout field. The seismic program primarily focused on new lands that Cougar leased in July 2010 but also covered several existing oil reservoirs. The seismic data confirmed the multi-well vertical and horizontal infill development potential of the existing Keg River and Granite Wash oil pools but the 3D seismic also identified several potential new undeveloped oil reservoirs. After completing the evaluation of this new Trout 3D seismic Cougar has identified over 20 vertical Keg River and Granite Wash light oil targets. 15 of these targets were selected to be included in a drilling prospect reserve evaluation report. On June 3, 2011 Cougar signed an engagement letter with an independent reserves company to review and prepare the drilling prospect report. During the initial project meeting it was confirmed the 15 selected locations will be evaluated and assigned a range of proven and unproven (probable and possible) reserve estimates and risked NPV values. The 7 development drilling locations are key to increasing production and cash flow and the 8 locations targeting new undeveloped reservoirs can add significant reserves for the company to pursue. The report was finalized on July 11, 2011. and filed by Cougar as a 6K. Cougar has continued to review and evaluate the seismic data and feels very strongly that this newly identified series of undeveloped oil reservoirs can be developed using vertical wellbores eliminating the need for costly horizontal drilling and multi-stage completion practices.

Additional Development

In addition to the production optimization and infill exploration drilling projects, Cougar has been aggressively planning out its future growth. These plans include the acquisition of existing assets in the area and the development of neglected production areas. Cougar is continuously evaluating acquisition opportunities in the core area and will act on these opportunities if the project details and economics are synergistic.

Continued Development of the Trout Area through Systematic Operational Controls

As we develop our maintenance program through the Trout Area lands in north central Alberta, we will continue to utilize our economic model to drive efficiency and minimize costs. We will focus our maintenance program on industry best practices and continued technological enhancements to maximize our return on assets and capital deployed.

Consolidate the Trout Area

To further enhance our economies of scale, we intend to seek other acquisition opportunities in the area. Consistent with our strategy to improve our financial flexibility, we intend to make acquisitions utilizing either equity and/ or debt instruments.

Develop Trout Area Assets

We intend to prudently develop this acreage position by redeploying cash flow generated from area operations. We are currently evaluating a series of developmental drilling locations in addition to several step-out drilling locations with the goal of adding incremental reserves and cash flow. As we are focused on locations in areas with existing infrastructure, we expect our development plan to have a near-term material impact on our proved reserves and production. We believe investing in this area is the most expedient way for us to improve our financial flexibility and return on capital.

The First Nation Joint Ventures

First Nation Joint Ventures provide additional drilling and development opportunities with land adjacent to our Core Trout Project that may use the existing infrastructure. Cougar continues to actively work on the First Nation Joint Ventures with a goal of responsible development of the leased oil and natural gas mineral rights. Private First Nation land represents some of the largest un-leased blocks of mineral rights in the province of Alberta. Cougar has identified this type of Joint Venture as a strategically critical growth opportunity. Cougar is also currently working with other First Nation groups to develop mutually beneficial joint venture agreements, which will allow Cougar and the First Nations groups to explore and develop conventional oil and natural gas prospects on both private and public lands. These joint venture projects will generally be developed using traditional exploration and development techniques, which include leasing blocks of mineral rights and using seismic and drilling to develop the prospects. Further information regarding these joint ventures will be provided when available.

Current Operational Status

On August 16, 2011 Plains Midstream Canada was given approval from Alberta regulators to begin restarting operations of the Rainbow Pipeline which had been shut-in since April 28, 2011. Following the pipeline restart Plains began accepting shipment from the Cougar terminal on August 30, 2011 and at that time Cougar was able to ship its oil via the pipeline instead of trucking it to remote terminal stations. This will immediately allow Cougar to begin reducing its operating costs to more standard levels. Cougar did not have to shut in any wells during the period of time that the pipeline was shut-in but the Corporation did carry a higher than usual oil inventory for the months of June, July and August which has since been moved to market.

On September 19, 2011 Cougar announced a farm-in agreement on the Trout property. Under the terms of the Agreement, Zentrum Energie Trust AG ("Zentrum") will pay 100% of the costs of the first 2 well drilling program for an estimated total of $3.5 million Cdn to earn 90% of the net revenue before payout and 50% of the working interest in those wells after payout. Upon completion of the 2 well programs, Zentrum will earn the rights to participate in subsequent wells identified in the 15 well prospect reserve report on similar terms.

With this funding commitment the licensing of 4 wells will be finalized, however, with the very busy drilling season currently getting underway, it is not expected that equipment will be available until Q1/Q2 2012.

Once drilled and placed on production, pay out of each well is currently projected to be approximately 130 to 180 days if average production rates for the area are achieved. Cougar will retain operatorship of the properties and will be a 50/50 working interest partner post payout on each well drilled in this agreement. Cougar has an 85% working interest average on the balance of the properties.

Zentrum has agreed to accept secured convertible debentures of Cougar as payment of 40% of the revenue for the first two wells up to a cap of 3 million dollars. Proceeds of those debentures shall be used for working capital by Cougar.

Lucy, British Columbia

Our Muskwa Shale project in the Horn River Basin of north east British Columbia has prospects for natural gas that are comparable to many of the major developments currently under way in the area. A stimulation program on the two existing wells is necessary to determine whether these wells can be produced and if the leases are capable of holding large recoverable reserves seen in the area.

The current intention is to perform the previously planned vertical and horizontal work programs for the license. In lieu of obtaining our own financing, we are actively enlisting joint venture partners to move the project forward by way of divesting part of our interest. Monthly, the Company reviews the opportunity and balances the risk versus reward, which can be adjusted depending on cash flow, commodity prices and financing. When natural gas prices stabilize over a period of time at rates that translate into profitable netbacks on the Lucy prospect we will look to assign capital dollars to the project. Until then there is no expiry on the lease.

Manning Heavy Oil Project

On February 14, 2011, Cougar completed negotiations on a two section heavy oil farm-in with a private company in the Manning area of north western Alberta. The farm-in includes a commitment for Cougar to drill one well to a minimum contract depth of 500m by the end of Q3, 2011 in order to earn a 100% working interest. Upon successful completion of the farm-in, the private company retains a 3% royalty interest on the two sections. Cougar has completed the initial review of this farm-in acreage and selected two possible drilling locations for the commitment well.

The permitting process has started and we are targeting a Q3, 2011 drilling program for this project. Cougar will earn a 100% working interest in 1280 acres of land in the Manning Heavy Oil Project after drilling this well.

On March 17, 2011 Cougar entered into a two phase farm-in agreement with TAMM Oil and Gas Corporation (TAMM) which would have ultimately resulted in Cougar earning a 50% working interest in approximately 47 sections or 30,000 acres of heavy oil prospect lands in the Manning area. This is in the same area as the heavy oil farm-in agreement previously announced by Cougar on February 14, 2011. TAMM originally acquired these lands in 2008 and has a previously prepared independent third party estimate of 3.14 billion barrels of original oil in place for the prospect.

On November 1, 2011, Cougar agreed to terminate this farm-in and replace it with a new agreement.

On November 7, 2011 Cougar Oil and Gas Canada, Inc. signed an agreement TAMM to provide services including project management, engineering, Geophysical and designated Operator under the context of ERCB regulations and CAPL definitions for a consolidated operations plan for the group’s Manning projects. Cougar will be compensated for the services provided and receive a 5% working interest in the combined project after one year.

The activity level is rapidly changing in this area, with increased recent interest demonstrated by the land sales in April that resulted in over 148,000 acres in the immediate or adjacent area and an additional 130,000 acres close by being leased on 15 year leases for over $6 million.

Little Chicago – Northwest Territories

The Mackenzie Valley Pipeline project has been approved by various levels of Government in Canada – with a large amount of qualifications as to social and environmental commitments by the construction and operating companies. However, the license holders of the pipeline continue to delay any commitment for the construction of the pipeline until sometime in the future. Without a firm date, the governmental deadline for the commitment seemingly is being ignored.

We still retain the confidential proprietary seismic data for future assessment of the "Little Chicago Prospect" and the Company will determine the best way to monetize that asset through either divestiture and/or possibly re-nominating the prospect when conditions are more appropriate.

Summary

The Company plans to develop and optimize its assets in Alberta and British Columbia as the primary focus. Due to the strength of the crude oil commodity prices Cougar will focus on the development of the crude oil properties over natural gas. A maintenance and development program focusing on low risk work has been prepared and is being implemented, as capital is available. Cougar will also continue preparing for a planned multi- well drilling program on the Trout Properties and a multi-well drill, core and test program for the Manning area. The work programs are subject to financing and partner approvals.

UNITED STATES

New Mexico

Through its acquisition of Thunder Energy, the Company acquired a 100% interest in 55,000 acres of property located in northeast New Mexico. These lands have potential for natural gas and CO2 and oil and helium resources at shallow depths.

If the price of oil approaches $100/bbl on a sustained basis, we believe there will be renewed activity in the Permian Basin of SW Texas – with the resultant increase in enhanced recovery projects with a need for CO2 for that stimulation. However there have been several large projects that were in process of construction at the time of the recession which have come on line and the overall CO2 prices are still depressed due to a lack of overall demand and uncertainty due to no clear plan from the governments as to greenhouse gas policies as they would relate to these type of projects.

Without the ability to obtain a long term contract for our product for at least 50% of the minimal facility capacity – it is currently unfeasible to finance the $25 million estimated facility. However as oil prices stabilize, and as the excess CO2 capacity is used up, and if the regulators finalizes a greenhouse gas policy that reflects regional economics – we believe that there is still an opportunity to profitably exploit these technologies. The leases have 5 years without any further development required before expiry. The Company has allowed some lands which are located the farthest from the Sheep Mountain Pipeline to expire. Thus reducing rentals for these lands in which development would have the longest timeline.

Kodiak has entered into a Farmout Agreement with a private company to develop the deeper rights of Kodiak’s approximate 30,000 gross acres of oil and gas rights in NE New Mexico. Kodiak retains the rights to the CO2 and Helium. The transaction anticipates additional seismic work and/or drilling of a number of wells on the Farmout acreage in 2011. The Farmee will earn 100% of pre-selected, semi-contiguous 6-section blocks for each 2000’ well drilled until their continuous option or right to earn ceases. Kodiak will retain a convertible overriding royalty of 7.5% on Helium and 5% on the balance of rights (no deductions) on the test well blocks and a 25% potential working interest in an Area of Mutual Interest opportunity. There is a provision for a drop fee in the event of default on the part of the Farmee. Kodiak retain the CO2 rights on the lands.

In July 2011, Kodiak agreed to renegotiate the farm-in with the private company and on October 21, 2011 executed an amending agreement which is described in the subsequent event section.

OTHER PROJECTS

Kodiak management continues to keep costs at a minimum by controlling G&A where ever possible and thus reducing requirements for financing. We have been working to find new projects, both domestic and international, that fit our current situation where we can add value with minimal capital commitments, with specific project deliverables and timelines.

FINANCIAL INFORMATION

Financial Condition and Changes in Financial Condition:

The Company has a working capital deficit of $7,539,603 at September 30, 2011, which has increased by $2,682,540 from $4,857,063 at December 31, 2010. Approximately $4.4 million of the working capital deficit at September 30, 2011 relates to supplier debt (December 31, 2010 – approximately $2.0 million), while the remainder relates to debts that are secured by the oil and gas assets, and related party amounts. The Company is working to reduce the working capital deficiency through equity and convertible debt financing and asset dispositions.

The Company’s total assets have increased to $32,190,700 as at September 30, 2011 from $29,515,286 as at December 31, 2010. This increase is primarily due to the costs associated with the drilling of a horizontal well and a 3D seismic program during the nine months ended September 30, 2011. Total current assets consist of cash and other current assets of $877,242 (December 31, 2010 - $750,245).

The Company has included in oil and gas properties both developed and undeveloped properties. Developed properties net of accumulated depreciation, depletion and amortization was $7,441,4230 (December 31, 2010 - $5,772,328). Undeveloped properties increased to $23,529,272 from $22,622,246 on December 31, 2010. The increase in capitalized cost of developed properties was mainly due to drilling of a horizontal well during the quarter. Increases in undeveloped properties in the quarter were primarily the result of a 3D seismic program that was completed in the Trout area. There was a requirement for a ceiling test write down for the nine month period ended September 30, 2011 of $1,354,563.

Other assets decreased marginally to $297,580 as of September 30, 2011 (December 31, 2010 - $313,247). The increase is due to currency translations from Canadian to United States dollars.

Our total current liabilities increased by $2,809,537 to $8,416,845 (December 31, 2010 - $5,607,308). The net increase is due primarily to increases in our trade accounts payable. Accounts payable and accrued liabilities increased to $4,531,310 (December 31, 2010 - $2,732,254). The increase is due to increased work activity during the current period and capital spending. Our current debt increased to $3,885,535 (December 31, 2010 - $2,875,054).The increase is caused by an increase in our operating line and current portions of long term debt.

We had long term liabilities of $2,829,650 (December 31, 2010 - $2,769,965). This increase is due to added borrowing of approximately $2,550,000 of unsecured convertible debenture net with reductions in existing debt. Asset retirement obligations increased by $352,739 for the nine months ended September 30, 2011 to $1,824,547 (December 31, 2010 - $1,471,808). The increase is a result of accretion expense of $93,680 (September 30, 2010 – $72,145), asset retirement obligation additions of $362,494 (September 30, 2010 – $61,972), and foreign exchange amounts of $103,436 (September 30, 2010 - $(17,191).

Liquidity and Capital Resources

During the nine months ended September 30, 2011, the Company, received $1,380,000, net of costs, in connection with the sale of 10,000,000 shares of the Company’s common stock.

During the nine months ended September 30, 2011, Cougar Oil and Gas Canada, Inc., the Company’s majority owned subsidiary, received $1,275,951, net of costs, in connection with the exercise of 3,840,501 previously issued warrants to acquire the Cougar common stock.

On February 25, 2011, April 13, 2011, May 5, 2011, August 1, 2011 and September 1, 2011, the Company's majority owned subsidiary, Cougar Oil and Gas Canada, Inc ("Cougar") issued an aggregate of approximately $2,500,000 unsecured convertible debentures to investors due eighteen months from issuance with interest at Bank of Canada Prime, plus 3% per annum, due upon maturity. The amended debenture is convertible at any time prior to maturity, at the holder’s option, into shares of Cougar common stock at to a price based on a 10 day volume weighted average discounted 10% at time of notice to convert with a minimum price of $0.75 USD. In the event of a conversion election by the holder, the holder will receive one warrant for each share received, exercisable four years from issuance with an exercise price of 130% of the conversion price.

Our registered independent certified public accountants have stated in their report dated April 13, 2011, that we are dependent upon management's ability to develop profitable operations and raise additional capital. These factors among others may raise substantial doubt about our ability to continue as a going concern.

The Corporation has used in the past and expects to use a variety of sources of funding to finance its acquisitions and capital development and exploration programs for 2011, including financing based on cash flow, specific debt instruments for discrete projects, vendor financing, and equity and debt financing.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risk from changes in petroleum and natural gas and related hydrocarbon prices, foreign currency exchange rates and interest rates.

PETROLEUM AND NATURAL GAS AND RELATED HYDROCARBON PRICES

The Company’s revenues are derived from the sale of its crude oil and natural gas production. The prices for oil and gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. From time to time, the Company may enter into derivative financial instruments to manage oil and gas price risk.

The Company may utilize fixed price “swaps,” which reduce the Company’s exposure to decreases in commodity prices and limit the benefit the Company might otherwise have received from any increases in commodity prices.

The Company may utilize price “collars” to reduce the risk of changes in oil and gas prices. Under these arrangements, no payments are due by either party as long as the market price is above the floor price and below the ceiling price set in the collar. If the price falls below the floor, the counter-party to the collar pays the difference to the Company, and if the price rises above the ceiling, the counter-party receives the difference from the Company.

Kodiak may purchase “puts” which reduce the Company’s exposure to decreases in oil and gas prices while allowing realization of the full benefit from any increases in oil and gas prices. If the price falls below the floor, the counter-party pays the difference to the Company.

The Company may enter into various agreements from time to time to reduce the effects of volatile oil and gas prices and does not enter into derivative transactions for speculative purposes. However, under certain circumstances some of the Company’s derivative positions may not be designated as hedges for accounting purposes The Company’s oil and gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas.

Such prices have been volatile in the past and can be expected to be volatile in the future. By definition, proved reserves are based on current oil and gas prices. Declines in oil and gas prices reduce the estimated quantity of proved reserves and increase annual amortization expense (which is based on proved reserves). Declines in oil and gas prices can reduce the value of our oil and gas properties and increase impairment expense.

We expect oil and gas price volatility to continue. We do not currently utilize hedging contracts to protect against commodity price risk. As our oil and gas production grows, we may manage our exposure to oil and natural gas price declines by entering into oil and natural gas price hedging arrangements to secure a price for a portion of our expected future oil and natural gas production.

FOREIGN CURRENCY EXCHANGE RATES

The Company, operating in both the United States and Canada, faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could materially impact the Company’s financial results in the future. To the extent revenues and expenditures denominated in other currencies vary from their U. S. dollar equivalents, the Company is exposed to exchange rate risk. The Company can also be exposed to the extent revenues in one currency do not equal expenditures in the same currency. The Company is not currently using exchange rate derivatives to manage exchange rate risks.

INTEREST RATES

The Company’s interest income and interest expense, in part, is sensitive to the general level of interest rates in North America. The Company is not currently using interest rate derivatives to manage interest rate risks.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report. They concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were adequate and effective in ensuring that material information relating to the Company would be made known to them by others within those entities, particularly during the period in which this report was being prepared.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting during the third quarter ended September 30, 2011 other than the finalization of the remediation of the weakness in internal control referred to above, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

On October 12, 2011 Kodiak Energy Inc. (Kodiak) and Cougar Oil and Gas Canada Inc. (Cougar) filed in the Court of Queen’s Bench of Alberta a Statement of Claim against CREEnergy Oil and Gas Inc. (CREEnergy) and four individuals associated with CREEnergy. Kodiak and Cougar are seeking compensatory, punitive and exemplary damages in excess of $1,465,000 from CREEnergy et al. The statement of claim outlines the misrepresentations from CREEnergy et al which led to CREEnergy et al entering into agreements with Kodiak and Cougar regarding the proposed development of certain oil and natural gas properties. CREEnergy et al claimed to have legal authority to enter into binding agreements with Kodiak and Cougar and accepted payments from Kodiak and Cougar based on fee schedules described in the binding agreements. CREEnergy et al did not have the authority to enter into any type of agreement with Kodiak and Cougar for the certain oil and natural gas properties which further resulted in CREEnergy et al enjoying unlawful enrichment while not satisfying any of the commitments defined in the agreements. Kodiak and Cougar intend to aggressively pursue the recovery of damages from CREEnergy et al.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. Removed and reserved

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBITS

31.1	Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer to Section 302 of the Sarbane-Oxley Act of 2002

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance

101.SCH	XBRL Schema

101.CAL	XBRL Calculation

101.DEF	XBRL Definition

101.LAB	XBRL Label

101.PRE	XBRL Presentation

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KODIAK ENERGY, INC.
		(Registrant)

Dated: November 14, 2011		By: /s/ William S. Tighe
		William S. Tighe
		Chief Executive Officer

Dated: November 14, 2011		By: /s/ Richard D. Carmichael
		Richard D. Carmichael
		Chief Financial Officer

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