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EX-31.2 - SCOUT EXPLORATION 10K, CERTIFICATION 302, CFO - Scout Exploration, Incscoutexh31_2.htm
EX-32.2 - SCOUT EXPLORATION 10K, CERTIFICATION 906, CFO - Scout Exploration, Incscoutexh32_2.htm
EX-31.1 - SCOUT EXPLORATION 10K, CERTIFICATION 302, CEO - Scout Exploration, Incscoutexh31_1.htm
EX-32.1 - SCOUT EXPLORATION 10K, CERTIFICATION 906, CEO - Scout Exploration, Incscoutexh32_1.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x   Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal period ended: September 30, 2012
 
o   Transition Report under Section 13 or 15(d) of the Exchange Act of 1934
 
For the transition period from _____________ to ______________
 
Commission File Number: 0 - 52280
 
SCOUT EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
98-0504670
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

609-475 Howe Street, Vancouver, BC V6C 2B3
(Address of principal executive offices)

(604) 682-1643
(Issuer’s telephone number)
 
 
Securities registered pursuant to Section 12(b) of the Exchange Act:  None.
 
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $.001 per share
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o   No x
 
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 
Yes o   No x
 
Indicate by checkmark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 o   No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o   No o
 
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
 
 
 

 
 
 
Indicate by checkmark whether the registrant is a large accelerated filer, an 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.
 
 
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.
Yes o   No x
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed fiscal quarter: $783,700 based on the last sale price of our common stock of $0.10 on December 31, 2008.
 
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o     No oN/A
 
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 16,541,356 shares of Common Stock, par value $.001, as of February 25, 2013
 
DOCUMENTS INCORPORATED BY REFERENCE
 
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). Not Applicable
 
 
 
 
 
 
 

 
 
ii

 
 
 
PART I
 
Item 1. Business
 
General
 
We were incorporated in the State of Nevada on February 1, 1999 as “Virtual Curricula Corp.” On April 10, 2006, we changed our name to “Scout Exploration, Inc.” We were originally engaged in the business of developing interactive educational products for children, adults, business people and new language learners. On March 4, 2006, we abandoned that business to pursue the business of mineral exploration.
 
On March 4, 2006, we entered into a mineral property purchase agreement with Iscis Holdings Ltd., whereby they sold to us 100% right, title and interest in the mineral title “AAV 1-9 Claims” (also known as the “Wheaton River Property”) in the Whitehorse Mining District of the Yukon Territory.  For the foreseeable future, we plan to defer any further exploration work programs on Wheaton River Property.
 
Our principal executive office is located at 609-475 Howe Street, Vancouver, BC Canada V6C 2B3. Our phone number is (604) 682-1643. Our Internet address is http://www.scoutexploration.com. Information on our website is not, however, part of this report.
 
Letter of Intent with IDS Offshore Inc.
 
On September 14, 2011 and as amended on July 31, 2012 and September 15, 2012, we entered into a letter of intent with IDS Offshore Inc. (“IDS”) pursuant to which we may acquire the exclusive rights to certain intellectual property and patents surrounding the rapid oil boom project currently under development by IDS (the “Project”), for total cash consideration of $4,265,000 payable at various dates over a 3 year period commencing on June 15, 2013, and issuance of 5,000,000 common shares of the Company on signing the amended letter of intent (issued at a value of $0.05 per share), and a total of 7,500,000 common shares of the Company upon completion of various phases of the Project.

The cash consideration will be initially used to develop a prototype. The costs associated with the project will be expensed until capitalization criteria are met.

Faster and more effective oil spill response represents an immanent challenge and opportunity for the oil exploration, production and transportation industries. Reliable solutions targeted for primary response—the first few hours immediately following an incident, before traditional response infrastructure can reach spills, have a critical impact on the scale of ecological damage and overall remediation costs.

Oil spill remediation costs can reach the multi-billion dollar range. For example, nominal remediation costs for the British Petroleum Deepwater Horizon incident have exceeded $40 billion to date.

Current methods entail a significant lag prior to deployment of response measures, during which time spill damage can spread exponentially. The unmanned, air deployed Scout / IDS response systems target this period, and significantly reduce time to containment and oil spill spread.

Equipment delivery by air has been an essential military tool for decades, and will become increasingly important in marine emergencies around the world.
 
 
 
1

 

 
The Scout / IDS system leverages existing technology, infrastructure and air deployment methods to deliver an innovative, effective solution with potential order of magnitude benefits.
 
Employees
 
We have no employees, other than our executive officers, as of the time of this report. We intend to retain geologists and consultants on a contract basis to conduct the work programs on our properties to carry out our plan of operations.
 
Competition
 
We are a junior company. We compete with other companies for financing and for the acquisition of new projects. Many of the companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of projects of merit. This competition could result in competitors having projects of greater quality and interest to prospective investors who may finance additional development. This competition could adversely impact on our ability to achieve the financing necessary for us to conduct further development of our projects.
 
We also compete with other junior companies for financing from a limited number of investors that are prepared to make investments in junior companies. The presence of competing junior companies may impact on our ability to raise additional capital in order to fund our projects.
 
Governmental Regulations
 
Mineral resource exploration operations are subject to various federal, provincial and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds and taxation. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
 
Patents and Trademarks
 
We do not own, either legally or beneficially, any patents or trademarks.
 
Item 2. Properties
 
Our executive offices are located at 609-475 Howe Street, Vancouver, BC Canada V6C 2B3. We also have 9 mineral claims in the Yukon Territory.
 
Item 3. Legal Proceedings
 
We are not, and have not been during the period covered by this report, a party to any legal proceedings.
 
Item 4. (Removed and Reserved)
 
 
 
2

 
 
 
PART II
 
Item 5. Market for Common Equity and related Stockholder Matters
 
Market Information
 
We are a reporting company with the SEC. We participate in the Over-the-Counter Bulletin Board Quotation Service maintained by the Financial Industry Regulatory Authority (“FINRA”) (“OTCBB”). The OTCBB is an electronic quotation medium for securities traded outside of the Nasdaq Stock Market, and prices for our common stock are published on the OTC Bulletin Board under the trading symbol “SCXN.OB.” The OTCBB market is extremely limited and the prices quoted are not a reliable indication of the value of our common stock.
 
The first trade of our common stock on the Bulletin Board occurred on December 6, 2006. The following table sets forth the quarterly high and low closing sale prices for our common stock for the periods indicated below, based upon quotations between dealers, without adjustments for stock splits, dividends, retail mark-ups, mark-downs or commissions and, therefore, may not represent actual transactions:
 
Quarter Ending
 
High
   
Low
 
  
           
December 31, 2012
  $ 0.39     $ 0.05  
September 30, 2012
  $ 0.11     $ 0.05  
June 30, 2012
  $ 0.05     $ 0.01  
March 31, 2012
  $ 0.14     $ 0.01  
December 31, 2011
  $ 0.16     $ 0.05  
September 30, 2011
  $ 0.15     $ 0.08  
June 30, 2011
  $ 0.24     $ 0.02  
March 31, 2011
  $ 0.23     $ 0.06  
December 31, 2010
  $ 0.06     $ 0.01  
September 30, 2010
  $ 0.01     $ 0.01  
June 30, 2010
  $ 0.02     $ 0.01  
March 31, 2010
  $ 0.09     $ 0.02  
December 31, 2009
  $ 0.11     $ 0.04  
September 30, 2009
  $ 0.25     $ 0.04  
June 30, 2009
  $ 0.25     $ 0.07  
March 31, 2009
  $ 0.11     $ 0.04  
December 31, 2008
  $ 0.20     $ 0.10  
September 30, 2008
  $ 0.58     $ 0.20  
June 30, 2008
  $ 0.59     $ 0.40  
March 31, 2008
  $ 0.60     $ 0.32  
December 31, 2007
  $ 0.51     $ 0.31  
September 30, 2007
  $ 0.58     $ 0.23  
June 30, 2007
  $ 0.72     $ 0.35  
March 31, 2007
  $ 0.91     $ 0.11  
December 31, 2006
  $ 0.25     $ 0.02  
 
 
 
3

 
 
 
Holders of Our Common Stock
 
As of the date of this report, we have approximately 52 registered shareholders.
 
Dividends
 
There are no restrictions in our Articles of Incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends when, after giving effect to the distribution of the dividend:
 
 
We would not be able to pay our debts as they become due in the usual course of business; or
 
Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
 
As of the date of this report, we have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
Our 2007 Stock Option and Incentive Plan was approved by the unanimous written consent of our Board of Directors and by the written consent of a majority of our shareholders on July 23, 2007. One million (1,000,000) shares of our common stock are reserved for issuance pursuant to that plan. No options have been issued under the plan as of the date of this report.
 
Recent Sales of Unregistered Securities
 
None.
 
Item 6. Selected Financial Data
 
Not Applicable.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the market price of precious and base metals, oil and gas, availability of funds, government regulations, operating costs, exploration costs, outcomes of exploration programs and other factors. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Our actual results may differ materially. In evaluating these statements, you should consider various factors. These factors may cause actual results to differ materially from any forward-looking statement. While these forward-looking statements are made in good faith and reflect our current judgment regarding our business plans, actual results from our operations will almost always vary, sometimes materially, from any future performance suggested herein.
 
 
 
4

 
 
 
General
 
The following discussion and analysis should be read in conjunction with our financial statements (and notes related thereto) appearing elsewhere in this report.
 
Plan of Operations
 
Over the next year our plan of operations is to further develop the airborne oil spill response system we acquired from IDS, and secure financing to carry out our operations.
 
As of September 30, 2012, we had cash on hand of $Nil and negative working capital of $458,268.
 
We will need to obtain additional financing in order to continue our plan of operations.
 
We believe that debt financing will not be a feasible alternative, as we do not have sufficient unencumbered tangible assets to secure any debt financing. We anticipate that additional financing will be equity financing from the sale of our common stock. However, we do not have any financing arranged and nor can we provide investors with any assurance that we will be able to raise sufficient funding from such potential equity financings.  In the absence of such financing, we will not be able to continue our operations and our business plan will then fail. Even if we are successful in obtaining equity financing to fund development of the Project, as well as other operational costs, there is no assurance of success. In the event we do not continue to obtain additional financing, we will be forced to abandon the Project.
 
Going Concern
 
We have not attained profitable operations and are dependant upon obtaining financing to continue our plan of operations. For these reasons, our auditors stated in their report that they are concerned that we will not be able to continue as a going concern.
 
Future Financing
 
We anticipate continuing to rely on sales of our common stock to finance our business operations. Issuances of additional shares of our common stock will result in dilution to our existing shareholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our plan of operations.
 
 
 
 
 
5

 
 
 
Results of Operations
 
General and administrative expenses have increased from $73,459 for the year ended September 30, 2011 to $407,648 for the year ended September 30, 2012. The increase is principally due to research and development expense in the amount of $250,000 representing shares issued to IDS pursuant to the letter of intent. We also incurred a foreign exchange loss of $17,017 in the year ended September 30, 2012 as compared to a gain of $4,588 in the year ended September 30, 2011.
 
Our loss for the year ended September 30, 2012 was $407,648 as compared to $75,322 for the year ended September 30, 2011.
 
Off-Balance Sheet Arrangements.
 
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
 
Item 8. Financial Statements
 
See Index to Financial Statements immediately following the signature page of this report.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
There have been no disagreements with our accountants since our formation required to be disclosed pursuant to Item 304(b) of Regulation S-B.
 
Item 9A. Controls and Procedures
 
Disclosure Controls and Procedures
 
As required by Rule 13a-15 of the Exchange Act, our principal executive officer and principal financial officer evaluated our company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, these officers concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and include controls and procedures designed to ensure that such information is accumulated and communicated to our company's management, including our company's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in internal control over financial reporting which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines. Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.
 
 
 
6

 
 
 
We plan to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending September 30, 2013: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out above are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.
 
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
 
Changes in Internal Control over Financial Reporting
 
During the year ended September 30, 2012, there were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B. Other Information
 
None.
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
 
The following table sets forth certain information regarding our executive officers and directors as of February 25, 2013:
 
NAME OF DIRECTOR
 
AGE
 
TERM SERVED
 
POSITIONS WITH COMPANY
John Roozendaal
    44  
Since December 13, 2007
 
President and Director
Jason Walsh
    41  
Since March 3, 2006
 
Secretary, Treasurer and Director
Rene Lange
    41  
Since July 31, 2012
 
Director
 
On December 13, 2007, our Board of Directors increased the number of its members to three. On that same date, Kathleen Scalzo resigned as our President and Treasurer and as a director. Our remaining director, Shane Ivancoe, appointed Jason Walsh and John Roozendaal as directors to fill the vacancies on the Board of Directors and, also, appointed John Roozendaal as our President and Jason Walsh as our Treasurer. Shane Ivancoe resigned January 15, 2012. Rene Lange was appointed as a director on July 31, 2012.
 
All our directors hold office until the next annual meeting of our stockholders or until their successors are elected and qualified. Executive officers hold offices until their successors are elected and qualified, subject to earlier removal by the Board of Directors.
 
 
 
7

 
 
 
Set forth below is a biographical description of each director and executive officer based upon information supplied by him: 
 
Biographical Information
 
John Roozendaal has served as our President and as one of our directors since December 13, 2007. Mr. Roozendaal has been involved with the mineral exploration industry for over 15 years, focusing on precious, base and specialty metal exploration projects in North America. Mr. Roozendaal is the President and a director of VMS Ventures Inc. and Harvest Gold Corp., and a director of Thelon Ventures Ltd., which are all publicly traded companies on the TSX Venture exchange. Mr. Roozendaal helped found VMS Ventures in 1996, and Harvest Gold was spun off from VMS Ventures in 2005. He became a director of Thelon Ventures Ltd. in October 2005. Mr. Roozendaal holds a Bachelor of Science degree in Geology received from Brandon University in 1996.
 
Jason Walsh has served as our Secretary since March 3, 2006. He has served as our Treasurer and as one of our directors since December 13, 2007. Since April 15, 2003, he has also served as the President and a director of Thelon Ventures Ltd. (TSX Venture: THV). He has also served as an officer of International Ranger Corp. (Pink Sheets: IRNG) since February 19, 2006. From October 1997 to April 2003, he served as a registered representative with Global Securities in Vancouver, British Columbia.
 
Rene Lange has served as a director since July 31, 2012. Mr. Lange is a graduate of Ocean and Naval Architectural Engineering, Memorial University of Newfoundland. In 2008 Mr. Lange founded IDS Offshore Inc., an engineering design company focused on projects in the marine sector.
 
Significant Employees
 
We have no significant employees, other than the officers and directors described above.
 
Committees of the Board of Directors We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our Board of Directors, stock plan committee or any other committees.
 
Audit Committee Financial Expert We have no financial expert on our Board of Directors. We believe the cost related to retaining a financial expert at this time is prohibitive.
 
Section 16(a) Compliance. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. It appears that Kathleen Scalzo, Shane Ivancoe, Jason Walsh, Kassel Enterprises Inc. and Iscis Holdings Ltd. filed Form 3s during the year ended September 30, 2007, that were properly filed during the year ended September 30, 2006. It also appears that Shane Ivancoe, one of our directors, filed one Form 4 regarding one transaction on February 13, 2007, which was not timely filed. 
 
The Company has not yet adopted a written Code of Ethics, but management intends to do so in the next year.
 
 
 
8

 
 
 
Item 11. Executive Compensation
 
We paid or accrued to Jason Walsh, our Secretary and Treasurer and one of our directors, $12,000 in the year ended September 30, 2012, as a director’s fee. We also paid or accrued to a company controlled by Jason Walsh office and administration fees of $46,255 in the in the year ended September 30, 2012. We accrued to Shane Ivancoe, a former director, $3,500 in the year ended September 30, 2012 as director’s fees. We accrued to Rene Lange, a director, $8,500 in the year ended September 30, 2012 as director’s fees.
 
Stock Option Grants
 
We have not granted any stock options to our executive officers since our inception.
 
Consulting Agreements
 
We are a party to an agreement for services with Bua Group Holdings Ltd. dated October 1, 2006. Pursuant to this agreement, we are obligated to pay Bua Group Holdings Cdn$3,750 per month for services and expenses. The principals of Bua Group Holdings are Jason Walsh, our Secretary and Treasurer and one of our directors, and Ralf Hillebrand.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table provides the names and addresses of each person known to us to own more than 5% of our outstanding stock as of February 25, 2013, and by the officers and directors, individually or as a group. Except as otherwise indicated, all shares are owned directly.

Title of Class
 
Name and Address of
Beneficial Owner
 
Amount and Nature
of Beneficial Ownership
 
Percent of Class
             
$0.001 Par Value Common Stock
 
John Roozendaal
President and Director
c/o Scout Exploration, Inc.
609-475 Howe Street
Vancouver, BC V6C 2B3
 
60,000 (1)
 
0.4%
             
$0.001 Par Value Common Stock
 
Rene Lange
Director
c/o Scout Exploration, Inc.
609-475 Howe Street
Vancouver, BC V6C 2B3
 
5,000,000 (2)
 
30.2%
             
$0.001 Par Value Common Stock
 
All officers and directors as a group
 
5,060,000
 
30.6%
 
 
 
9

 
 
 
$0.001 Par Value Common Stock
 
Firdaus Capital Corp.
475 Howe Street
Vancouver, BC V6C 2B3
 
1,494,356
 
9.0%
             
$0.001 Par Value Common Stock
 
Bua Group Holdings Ltd.
c/o Scout Exploration, Inc.
609-475 Howe Street
Vancouver, BC V6C 2B3
 
1,150,000
 
7.0%
 
(1) These shares are held by 667981 BC Ltd., a company controlled by Mr. Roozendaal.
(2) These shares are held by IDS Offshore Inc., a company controlled by Mr. Lange.
 
The percentage of class is based upon 16,541,356 shares of our common stock and no shares of our preferred stock issued and outstanding as of the date of this report.
 
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees. Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them.
 
Item 13. Certain Relationships and Related Transactions
 
Except as described below, none of the following parties has, in the last two years, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us:
 
 
Any of our directors or officers;
 
Any person proposed as a nominee for election as a director;
 
Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock; or
 
Any member of the immediate family of any of the above person.
 
Office Space Arrangement
 
We accrued to Bua Group Holdings Ltd. office and administration fees of $46,255 in the in the year ended September 30, 2012.
 
Agreement with Iscis Holdings Ltd.
 
On March 4, 2006, we entered into a mineral property purchase agreement with Iscis Holdings Ltd., whereby it sold to us 100% right, title and interest in the mineral title “AAV 1-9 Claims” in the Whitehorse Mining District of the Yukon Territory. Iscis Holdings Ltd. is owned by Ivan Walsh, who is one of our shareholders and the brother of Jason Walsh, our Secretary and Treasurer and one of our directors. Iscis Holdings Ltd. also beneficially owns over 10% of our common stock.
 
As a part of our purchase agreement with Iscis Holdings Ltd., we entered into a net smelter return royalty agreement. The terms of this agreement specify that Iscis Holdings Ltd. is entitled to a royalty payment equal to 3% of the net smelter returns.
 
 
 
10

 
 
 
Agreement with Bua Group Holdings Ltd.
 
We are a party to an agreement for services with Bua Group Holdings Ltd. dated October 1, 2006. Pursuant to this agreement, we are obligated to pay Bua Group Holdings Cdn$3,750 per month for services and expenses. The principals of Bua Group Holdings are Jason Walsh, our Secretary and Treasurer and one of our directors, and Ralf Hillebrand.
 
Director Independence
 
We participate in the Over-the-Counter Bulletin Board Quotation Service maintained by FINRA.  As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of our Board of Directors be independent.
 
Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accord with the NASDAQ Global Market’s requirements for independent directors (NASDAQ Marketplace Rule 4200). The NASDAQ independence definition includes a series of objective tests, such as that the director is not our and has not engaged in various types of business dealings with us.
 
We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our Board of Directors, stock plan committee or any other committees.
 
Item 14. Principal Accountant Fees and Services
 
The following is a summary of the aggregate fees billed to us by our principal accountant, MacKay LLP, for professional services rendered for the fiscal years ended September 30, 2012 and 2011.
 
1. Audit Fees. Consists of fees billed for professional services rendered for the audits of our financial statements for the fiscal years ended September 30, 2008, 2009, 2010 and 2011, and for review of the financial statements included in our Quarterly Reports on Form 10-Q for those fiscal years. Fees billed in 2012 were $41,126 (2011 - $Nil).
 
2. Audit-Related Fees. Consists of fees billed for services rendered to us for audit-related services, which generally include fees for audit and review services in connection with a proposed spin-off transaction, separate audits of employee benefit and pension plans, and ad hoc fees for consultation on financial accounting and reporting standards. Fees billed in 2012 and 2011 were $Nil.
 
3. Tax Fees. Consists of fees billed for services rendered to us for tax services, which generally include fees for corporate tax planning, consultation and compliance. Fees billed in 2012 and 2011 were $Nil.
 
4. All Other Fees. Consists of fees billed for all other services rendered to us, which generally include fees for consultation regarding computer system controls and human capital consultations. Fees billed in 2012 and 2011 were $Nil.
 
Pre-Approval of Services of Principal Accounting Firm
 
We do not have an audit committee, and the tasks generally undertaken by an audit committee are undertaken by our Board of Directors. Our board’s policy is to pre-approve all audit and permissible non-audit services provided by our principal accounting firm. These services may include audit services, audit-related services, tax services and other permissible non-audit services. Any service incorporated within the independent auditor's engagement letter,
 
 
 
11

 
 
 
which is approved by our Board of Directors, is deemed pre-approved. Any service identified as to type and estimated fee in the independent auditor's written annual service plan, which is approved by our Board of Directors, is deemed pre-approved up to the dollar amount provided in such annual service plan.
 
During the year, the principal accounting firm may also provide additional accounting research and consultation services required by, and incident to, the audit of our financial statements and related reporting compliance. These additional audit-related services are pre-approved up to the amount approved in the annual service plan approved by our Board of Directors. Our Board of Directors may, also, pre-approve services on a case-by-case basis during the year.
 
The approval by our Board of Directors of proposed services and fees are noted in the meeting minutes of our Board of Directors and/or by signature of the appropriate members of our Board of Directors on the engagement letter. Our principal accounting firm and management are periodically requested to summarize the principal accounting firm services and fees paid to date, and management is required to report whether the principal accounting firm's services and fees have been pre-approved in accordance with the required pre-approval process of our Board of Directors.
 
Item 15. Exhibits
 
The following documents have been filed as a part of this annual report:

Exhibit No.
 
* Previously filed with the Securities and Exchange Commission on August 10, 2006 as exhibits to our Registration Statement on Form SB-2.
 
** Previously filed with the Securities and Exchange Commission on February 13, 2007 as an exhibit to our Quarterly Report on Form 10-QSB.
 
*** Previously filed with the Securities and Exchange Commission on August 21, 2008 as an exhibit to our Quarterly Report on Form 10-Q.
 
 
 
 
12

 
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
SCOUT EXPLORATION, INC.
 
Dated: February 25, 2013
 
By: /s/ John Roozendaal                                   
Name:  John Roozendaal
Title: President and Chief Executive Officer
 
 
By: /s/ Jason Walsh                                          
Name:  Jason Walsh
Treasurer and Principal Accounting Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Dated: February 25, 2013
 
By: /s/ John Roozendaal                                   
Name:  John Roozendaal
Title: President and Chief Executive Officer
Director
 
 
By: /s/ Jason Walsh                                          
Name:  Jason Walsh
Title: Secretary, Treasurer and Principal Accounting Officer
Director
 
By: /s/ Rene Lange                                            
Name:  Rene Lange
Title: Director
 
 
 
 
13

 
 
 
 
 
Scout Exploration, Inc.
(an Exploration Stage Enterprise)

Financial Statements
(presented in US dollars)

September 30, 2012 and 2011
 
 
 
 
 
 
 
 
 





 
F - 1

 

 
 
INDEX
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F - 2

 
 
 
 
 
Report of Independent Registered Public Accounting Firm

To the Shareholders of
Scout Exploration, Inc.
 
 
We have audited the balance sheets of Scout Exploration, Inc. (an exploration stage company) as at September 30, 2012 and 2011, and the statements of operations, stockholders’ deficit, and cash flows for the years then ended, and for the period from incorporation on February 1, 1999 to September 30, 2012.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatements.  The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, and for the period from incorporation on February 1, 1999 to September 30, 2012 in conformity with U.S. generally accepted accounting principles.
 
The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to financial statements, the Company is in the exploration stage, and has no permanently established source of revenue and is dependent on its ability to raise capital from shareholders or other sources to sustain operations.  These factors, along with other matters as set forth in Note 1, raise substantial doubt that the Company will be able to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



 
 
“MacKay LLP”
Vancouver, Canada.  
February 25, 2013 Chartered Accountants

 

 
 
 
 
 
 
F - 3

 
 
             
Scout Exploration, Inc.
           
(an Exploration Stage Enterprise)
           
Balance Sheets
           
(Presented in US Dollars)
           
             
As at September 30
 
2012
   
2011
 
             
Assets
           
Current
           
Cash
  $ -     $ 2,930  
                 
    $ -     $ 2,930  
                 
                 
Liabilities
               
Current
               
Bank indebtedness
  $ 466     $ -  
Accounts payable and accrued liabilities (note 5)
    395,903       335,075  
Notes payable (note 6)
    37,534       25,661  
Due to related parties (note 5)
    24,365       22,778  
      458,268       383,514  
                 
Stockholders' Deficit
               
Preferred stock
               
Authorized: 1,000,000 shares with par value of $0.01
               
Issued: Nil (2011 - Nil)
    -       -  
Common stock
               
Authorized: 50,000,000 shares with par value of $0.001
               
Issued: 15,441,356 (2011 - 8,947,000)
    15,441       8,947  
Subscriptions received in advance
    4,100       4,100  
Subscriptions receivable
    -       (5,246 )
Additional paid in capital
    1,315,077       996,853  
Accumulated deficit
    (1,792,886 )     (1,385,238 )
      (458,268 )     (380,584 )
    $ -     $ 2,930  
                 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
F - 4

 
 
                                           
Scout Exploration, Inc.
                                         
(an Exploration Stage Enterprise)
                                         
Statement of Stockholders' Deficit
                                         
(Presented in US Dollars)
                                         
                                           
From Incorporation on February 1, 1999 to September 30, 2012
 
                                           
   
Shares of
         
Additional
   
Subscriptions
                   
   
common
   
Capital
   
paid-in
   
received
   
Subscriptions
   
Accumulated
       
   
stock
   
stock
   
capital
   
in advance
   
receivable
   
Deficit
   
Total
 
                                           
Balance February 1, 1999
    -     $ -     $ -     $ -     $ -     $ -     $ -  
Subscriptions received in advance
    -       -       -       37,100       -       -       37,100  
Net loss for the period
    -       -       -       -       -       (32,002 )     (32,002 )
Balance September 30, 1999
    -       -       -       37,100       -       (32,002 )     5,098  
Net loss for the year
    -       -       -       -       -       (3,829 )     (3,829 )
Balance September 30, 2000
    -       -       -       37,100       -       (35,831 )     1,269  
Issue common shares for cash
    3,700,000       3,700       33,300       (37,000 )     -       -       -  
Net loss for the year
    -       -       -       -       -       (3,754 )     (3,754 )
Balance September 30, 2001
    3,700,000       3,700       33,300       100       -       (39,585 )     (2,485 )
Net loss for the year
    -       -       -       -       -       (3,216 )     (3,216 )
Balance September 30, 2002
    3,700,000       3,700       33,300       100       -       (42,801 )     (5,701 )
Net loss for the year
    -       -       -       -       -       (3,120 )     (3,120 )
Balance September 30, 2003
    3,700,000       3,700       33,300       100       -       (45,921 )     (8,821 )
Net loss for the year
    -       -       -       -       -       (3,127 )     (3,127 )
Balance September 30, 2004
    3,700,000       3,700       33,300       100       -       (49,048 )     (11,948 )
Net loss for the year
    -       -       -       -       -       (10,776 )     (10,776 )
Balance September 30, 2005
    3,700,000       3,700       33,300       100       -       (59,824 )     (22,724 )
Issue common shares for cash
    1,700,000       1,700       83,300       -       -       -       85,000  
Issue common shares for mineral property
    500,000       500       24,500       -       -       -       25,000  
Net loss for the year
    -       -       -       -       -       (85,201 )     (85,201 )
Balance September 30, 2006
    5,900,000       5,900       141,100       100       -       (145,025 )     2,075  
Issuance of common stock for
                                                 
cash and subscription receivable
    1,400,000       1,400       208,600       -       (75,000 )     -       135,000  
Net loss
    -       -       -       -       -       (131,869 )     (131,869 )
Balance September 30, 2007
    7,300,000       7,300       349,700       100       (75,000 )     (276,894 )     5,206  
Cash received for subscriptions receivable
    -       -       -       -       75,000       -       75,000  
Issuance of common stock for consulting services
    150,000       150       74,850       -       -       -       75,000  
Issuance of common stock for cash
    1,397,000       1,397       557,403       4,000       (23,000 )     -       539,800  
Net loss
    -       -       -       -       -       (792,378 )     (792,378 )
Balance September 30, 2008
    8,847,000       8,847       981,953       4,100       (23,000 )     (1,069,272 )     (97,372 )
Cash received for subscriptions receivable
    -       -       -       -       17,754       -       17,754  
Shares issued for consulting services
    100,000       100       14,900       -       -       -       15,000  
Net loss
    -       -       -       -       -       (167,156 )     (167,156 )
Balance September 30, 2009
    8,947,000       8,947       996,853       4,100       (5,246 )     (1,236,428 )     (231,774 )
Net loss
    -       -       -       -       -       (73,488 )     (73,488 )
Balance September 30, 2010
    8,947,000     $ 8,947     $ 996,853     $ 4,100     $ (5,246 )   $ (1,309,916 )   $ (305,262 )
Net loss
    -       -       -       -       -       (75,322 )     (75,322 )
Balance September 30, 2011
    8,947,000     $ 8,947     $ 996,853     $ 4,100     $ (5,246 )   $ (1,385,238 )   $ (380,584 )
Cash received for subscriptions receivable
    -       -       -       -       5,246       -       5,246  
Shares issued for intellectual property
    5,000,000       5,000       245,000       -       -       -       250,000  
Shares issued for settlement of accounts payable
    1,494,356       1,494       73,224       -       -       -       74,718  
Net loss
    -       -       -       -       -       (407,648 )     (407,648 )
Balance September 30, 2012
    15,441,356     $ 15,441     $ 1,315,077     $ 4,100     $ -     $ (1,792,886 )   $ (458,268 )
 
 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
F - 5

 
 
   
Scout Exploration, Inc.
                 
(an Exploration Stage Enterprise)
                 
Statements of Operations
                 
(Presented in US Dollars)
                 
                   
   
Cumulative from inception through
September 30
   
Year Ended September 30
 
   
2012
   
2012
   
2011
 
                   
General expenses
                 
Accounting and audit
  $ 238,584     $ 37,178     $ 9,000  
Bank charges and interest
    38,023       19,425       4,411  
Consulting fees
    117,983       -       -  
Directors’ fees (note 5)
    146,000       24,000       24,000  
Filing fees, dues and subscriptions
    20,190       2,046       1,320  
Foreign exchange loss (gain)
    34,657       17,017       (4,588 )
Legal
    144,217       4,390       1,620  
Magazine rights
    5,100       -       -  
Management fees
    35,575       -       -  
Office and administration (note 5)
    246,542       46,580       35,296  
Promotion and travel
    61,566       4,422       -  
Research and development (note 4)
    250,000       250,000       -  
Transfer agent
    24,966       2,590       2,400  
      1,363,403       407,648       73,459  
                         
Resource property expenses
                       
Acquisition costs
    30,000       -       -  
Exploration costs
    2,723       -       1,863  
      32,723       -       1,863  
Loss from impairment of investment
    396,760       -       -  
                         
Loss and comprehensive loss
  $ (1,792,886 )   $ (407,648 )   $ (75,322 )
                         
Basic and diluted loss per share
          $ (0.04 )   $ (0.01 )
                         
Basic and diluted weighted average shares outstanding
      9,830,587       8,947,000  
   

 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
F - 6

 
 
   
Scout Exploration, Inc.
                 
(an Exploration Stage Enterprise)
                 
Statements of Cash Flows
                 
(Presented in US Dollars)
                 
   
Cumulative from inception through
September 30
   
Year Ended September 30
 
   
2012
   
2012
   
2011
 
                   
Cash flows from operating activities
                 
Net loss
  $ (1,792,886 )   $ (407,648 )   $ (75,322 )
Adjustments to reconcile net loss to net cash used in
                       
operating activities
                       
Services settled by issuance of common stock
    115,100       -       -  
Shares issued for debt settlement
    74,718       74,718       -  
Shares issued for research and development
    250,000       250,000       -  
Loss from impairment of investment
    396,760       -       -  
Expenses paid by subsidiary and forgiven
    20,480       -       -  
Unrealized foreign exchange
    23,657       17,017       (4,588 )
Accrued interest
    11,484       3,895       3,253  
Changes in operating assets and liabilities
                       
Accounts payable and accrued liabilities
    381,676       49,057       71,512  
      (519,011 )     (12,961 )     (5,145 )
                         
Cash flows from investing activities
                       
Acquisition of investment
    (417,240 )     -       -  
                         
Cash flows from financing activities
                       
Proceeds from Issuance of common stock
    889,554       -       -  
Advances from related parties
    24,365       1,587       -  
Bank indebtedness
    466       466       -  
Proceeds from issuance of notes payable
    26,050       7,978       8,072  
      940,435       10,031       8,072  
                         
Effect of exchange rate changes on cash
    (4,184 )     -       (56 )
                         
Increase in cash
    -       (2,930 )     2,871  
                         
Cash at beginning of the year
    -       2,930       59  
                         
Cash at end of the year
  $ -     $ -     $ 2,930  
   
                         
Supplemental disclosure with respect to cash flows
                       
Interest paid
  $ -     $ -     $ -  
Income taxes paid
  $ -     $ -     $ -  
 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
F - 7

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
1.  
Nature of operations and going concern
 
Scout Exploration, Inc. (the “Company”) was incorporated in the State of Nevada on February 1, 1999. The Company was initially engaged in the business of designing, developing and marketing educational products. On April 10, 2006 the Company changed its name from Virtual Curricula Corp. to Scout Exploration, Inc.
 
The Company’s continuing operations, as intended, are dependent on management’s ability to raise required funding through future equity issuances, asset sales or a combination thereof, which is not assured. These financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business.
 
At September 30, 2012, the Company had suffered losses from exploration stage activities to date, and has a working capital deficit of $458,268. Although management is currently attempting to implement its business plan, and is seeking additional sources of equity or debt financing, there is no assurance these activities will be successful. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
2.  
Significant accounting policies
 
(a)    Management estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements; accordingly, actual results may differ from estimated amounts.
 
(b)    Exploration stage company
 
The company is considered to be in the exploration stage.
 
(c)    Cash and cash equivalents
 
Cash comprises of cash on hand and demand deposits. The Company considers highly liquid investments that are readily convertible to known amounts of cash on demand to be cash equivalents.
 
 
 
F - 8

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
2.  
Significant accounting policies (continued)
 
(d)    Mineral properties - exploration
 
The Company expenses all costs related to investments in mineral property interests. Such costs include mineral property acquisition costs and exploration, development and related administrative expenditures, net of any recoveries.
 
From time to time, the Company may acquire or dispose of a mineral property interest pursuant to the terms of an option agreement. Where the options are exercisable entirely at the discretion of the Company or the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as property expenses or recoveries when the payments are made or received.
 
Although the Company has taken steps to verify the title to mineral properties in which it has an interest, in accordance with industry norms for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects.
 
(e)    Income taxes
 
Income taxes are determined using the asset and liability method in accordance with ASC 740, “Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes that date of enactment. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
 
The Company accounts for uncertain income tax positions by recognizing in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on examination by taxation authorities, based on the technical merits of the position.
 
(f)    Financial instruments and fair value measurements
 
ASC 820, “Fair Value Measurements and Disclosures” requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
 
Level 1
 
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
 
 
F - 9

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
2.  
Significant accounting policies (continued)
 
(f)    Financial instruments and fair value measurements (continued)
 
Level 2
 
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
Level 3
 
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
The Company’s financial instruments consist principally of cash, accounts payable and accrued liabilities, notes payable and and amounts due to related parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
 
(g)    Valuation of equity units issued in private placements
 
The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.
 
(h)    Stock based compensation
 
The Company records compensation expense in the financial statements for share based payments using the fair value method pursuant to ASC 718, “Compensation – Stock Based Compensation” and ASC 505, “Equity Based Payments to Non-Employees”. The fair value of share-based compensation to employees will be determined using the Black-Scholes option valuation 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 and services received. Share-based compensation is expensed with a corresponding increase to share capital. Upon the exercise of the stock options, the consideration paid is recorded as an increase in share capital.
 
There were no options granted during the years ended September 30, 2012 or 2011, nor since inception.
 
(i)    Foreign currency transactions
 
The Company’s functional and reporting currency is the U.S. Dollar. All transaction initiated in foreign currencies are translated into U.S. dollars in accordance with ASC 740, “Foreign Currency Translation Matters” as follows:
 
 
 
F - 10

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
2.  
Significant accounting policies (continued)
 
(i)    Foreign currency transactions (continued)
 
 
i)
monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
 
ii)
non-monetary assets and liabilities at historical rates; and
 
iii)
revenue and expense items at the average rate of exchange prevailing during the period.
 
(j)    Loss per share
 
The Company computes loss per share in accordance with ASC 260, “Earnings per Share”. Diluted loss per share is computed after giving effect to all dilutive potential common shares that are outstanding during the period. Dilutive potential common shares consist of incremental shares issuable upon the exercise of stock options and warrants, contingent stock, and conversion of debentures. At September 30, 2012 there were no potentially dilutive instruments outstanding.
 
(k)    Research and development
 
Research and development costs are charged to operations in the year incurred.
 
(l)    Recently issued accounting pronouncements
 
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
 
 
3.  
Resource properties
 
On March 4, 2006 the Company signed a letter of agreement with a non-arms length private Canadian Corporation for a 100% interest in and to the Wheaton River AAV 1-9 Claims situated in the Whitehorse Mining District of the Yukon Territory, Canada. Terms of the purchase require a cash payment of $5,000 by March 31, 2006 (paid) and $20,000 on or before September 30, 2006 (subsequently deferred until such a time as the Company is able to secure financing), and the issuance of 500,000 common shares of the Company (issued at fair value of $0.05 per common share). The Vendor will retain 3% net smelter royalty, up to 2% of which can be re-purchased for $2,000,000.
 
 
4.  
IDS Letter of intent
 
On September 14, 2011 and as last amended on September 15, 2012, the Company entered into a letter of intent (“LOI”) with IDS Offshore Inc. (“IDS”) pursuant to which the Company may acquire the exclusive rights to certain intellectual property and patents surrounding the rapid oil boom project held and developed by IDS (the “Project”), for total cash consideration of $4,265,000 payable at various dates over a 3 year period commencing on June 15, 2013, and issuance of 5,000,000 common shares of the Company on signing the amended letter of intent (issued, valued at $0.05/share), and a total 7,500,000 common shares of the Company upon completion of various phases of the Project.
 
The cash consideration will be initially used to develop prototype. The costs associated with the project will be expenses until capitalization criteria are met.
 
 
 
F - 11

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
5.  
Related party transactions
 
 
a)
During the year ended September 30, 2012, directors’ fees of $24,000 (2011 - $24,000) were accrued to two Directors of the Company.
 
 
b)
During the year ended September 30, 2012, office and administration fees and management fees of $46,255 (2011 - $34,537) were charged by corporations controlled by a Director of the Company.
 
 
c)
At September 30, 2012, $238,636 (2011 - $161,083) owed to Directors and corporations controlled by a Director of the Company was included in accounts payable. The balances are due on demand, have no specific terms of repayment, are non-interest bearing, unsecured, and accordingly fair value cannot be reliably determined.
 
 
d)
As of September 30, 2012, directors of the Company have advanced $24,365 (2011 - $22,778) in short term loans to the Company. The advances are due on demand, have no specific terms of repayment, are non-interest bearing and unsecured, and accordingly fair value cannot be reliably determined.
 
The above transactions occurred in the normal course of operations and were measured at the exchange value which represented the consideration established and agreed to by the related parties.
 
 
6.  
Notes payable
 
Notes payable comprise five notes.
 
The first unsecured note has a principal amount of $10,000, bears interest at 25% per annum, and was due on June 21, 2010. As further consideration the lender will be issued shares of the Company’s capital stock having an aggregate value of $2,500. The principal amount, interest, and shares are all still outstanding subsequent to the year ended September 30, 2012.
 
The second unsecured note has a principal amount of $5,000, bears interest at 15% per annum, and is due on demand.
 
The third unsecured note has a principal amount of $3,072, bears interest at 15% per annum, and is due on demand.
 
The fourth unsecured note has a principal amount of $3,968, bears interest at 15% per annum, and is due on demand.
 
The fifth unsecured note has a principal amount of $4,010, bears interest at 15% per annum, and is due on demand.
 
 
 
F - 12

 
 
 

Scout Exploration, Inc.
(an Exploration Stage Enterprise)
Notes to the Financial Statements
(Presented in US dollars)

September 30, 2012 and 2011

 
 
7.  
Financial instruments and risk management
 
 
a)
Fair value
 
The Company’s financial instruments include cash and accounts payable and accrued liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.
 
 
b)
Foreign exchange risk
 
The Company expects to raise equity predominantly in United States dollars. The Company is conducting business in Canada where financial transactions are based on the Canadian dollar. As such, the Company is subject to risks due to fluctuations in the exchange rates for the U.S. and Canadian dollar. The Company does not enter into derivative financial instruments to mitigate its exposure to foreign currency risk.
 
 
8.  
Income taxes
 
The Company has available losses and unclaimed start up costs of approximately $1,777,000 for US income tax purposes, which may be carried forward to reduce taxable income in future years.
 
Future tax benefits related to the start up costs have not been recorded due to uncertainty regarding their utilization.
 
 
9.  
Subsequent events
 
Subsequent to September 30, 2012, the Company issued 1,100,000 shares at $0.05 to settle debt of $55,000.

In accordance with ASC 855 Company management reviewed all material events through filing of these financial statements and there are no additional material subsequent events to report.
 
 
 
 
 
 
 F - 13