Long Term and Short Term Liabilities

3 Months Ended

Sep. 30, 2011

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

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

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.

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.

KODIAK ENERGY, INC. 10-Q