Filed
pursuant to Rule 424(b)(3)
File
No.
333-132352
Prospectus
Gran
Tierra Energy Inc.
17,572,745 shares
of common stock
This
prospectus relates to the offering by the selling stockholders of Gran Tierra
Energy Inc. of up to 17,572,745 shares of our common stock, par value
$0.001 per share. Those shares of common stock include 10,336,434 shares of
common stock and 7,236,311 shares of common stock underlying warrants,
issued to certain investors in three private offerings. We are registering
the
offer and sale of the common stock, including common stock underlying warrants,
to satisfy registration rights we have granted to the selling stockholders.
We
will
not receive any proceeds from the sale of common stock by the selling
stockholders. We may receive proceeds from the exercise price of the warrants
if
they are exercised by the selling stockholders. We intend to use any proceeds
received from the selling stockholders’ exercise of the warrants for working
capital and general corporate purposes.
The
selling stockholders have advised us that they will sell the shares of common
stock from time to time in the open market, on the OTC Bulletin Board, in
privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or otherwise as described under the section
of this prospectus titled “Plan of Distribution.”
Our
common stock is traded on the OTC Bulletin Board under the symbol “GTRE.OB”.
On February
2, 2007 the
closing price of the common stock was $1.46
per
share.
Investing
in our common stock involves risks. Before making any investment in our
securities, you should read and carefully consider risks described in the
Risk
Factors beginning on page 4 of this prospectus.
You
should rely only on the information contained in this prospectus or any
prospectus supplement or amendment. We have not authorized anyone to provide
you
with different information.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
This
prospectus is dated March 6, 2007
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Page
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SUMMARY
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1
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RISK
FACTORS
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4
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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17
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SELLING
STOCKHOLDERS
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17
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USE
OF PROCEEDS
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29
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DETERMINATION
OF OFFERING PRICE
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29
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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29
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DIVIDEND
POLICY
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29
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MANAGEMENT’S
DISCUSSION AND ANALYSIS
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30
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BUSINESS
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40
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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52
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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56
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EXECUTIVE
COMPENSATION
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58
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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61
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PLAN
OF DISTRIBUTION
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61
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DESCRIPTION
OF SECURITIES
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64
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LEGAL
MATTERS
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68
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EXPERTS
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68
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WHERE
YOU CAN FIND MORE INFORMATION
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68
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| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
68
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| CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
-i-
SUMMARY
This
summary highlights information contained elsewhere in this prospectus but might
not contain all of the information that is important to you. Before investing
in
our common stock, you should read the entire prospectus carefully, including
the
“Risk Factors” section and our financial statements and the note thereto
included elsewhere in this prospectus.
For
purposes of this prospectus, unless otherwise indicated or the context otherwise
requires, all references herein to “Gran Tierra,” “we,” “us,” and “our,” refer
to Gran Tierra Energy Inc., a Nevada corporation, and our
subsidiaries.
Our
Company
On
November 10, 2005 (the “Closing Date”), Goldstrike Inc. (the previous public
reporting entity), Gran Tierra Energy Inc., a privately held Canadian
corporation (“Gran Tierra Canada”) and the holders of Gran Tierra Canada’s
capital stock entered into a share purchase agreement, and Goldstrike and Gran
Tierra Goldstrike, Inc. (“Goldstrike Exchange Co.”), a Canadian subsidiary of
Goldstrike, entered into an assignment agreement. In these two transactions,
the
holders of Gran Tierra Canada’s capital stock acquired shares of either
Goldstrike common stock or exchangeable shares of Goldstrike Exchange Co.,
and
Goldstrike Exchange Co. acquired substantially all of Gran Tierra Canada’s
capital stock. Immediately following these transactions, Goldstrike
Exchange Co. acquired the remaining shares of Gran Tierra Canada outstanding
after the initial share exchange for shares of common stock of Gran Tierra
Energy Inc. using the same exchange ratio as used in the initial exchange.
This
two step process was part of a single transaction, whereby Gran Tierra Canada
became a wholly-owned subsidiary of Goldstrike Inc. Additionally,
Goldstrike changed its name to Gran Tierra Energy Inc. with the management
and
business operations of Gran Tierra Canada, remaining incorporated in the State
of Nevada.
Following
the above-described transaction, our
operations and management are substantially the operations and management of
Gran Tierra Canada prior to the transactions. The former Gran Tierra Canada
was
formed by an experienced management team in early 2005, which collectively
has
over 100 years of hands-on experience in oil and natural gas exploration and
production in most of the world’s principal petroleum producing regions. Our
objective is to acquire and exploit international opportunities in oil and
natural gas exploration, development and production, focusing on South America.
We made our initial acquisition of oil and gas producing and non-producing
properties in Argentina in September 2005 for a total purchase price of
approximately $7 million. In addition, we recently acquired assets in
Colombia and other minor interests in Argentina and Peru.
1
Goldstrike
Inc. was incorporated on June 9, 2003 in the State of Nevada and commenced
operations as an exploration stage company to pursue opportunities in the field
of mineral exploration. Goldstrike was engaged in the acquisition, and
exploration of mineral properties with a view to exploiting any discovered
mineral deposits that demonstrate economic feasibility. Goldstrike owned a
100%
undivided interest in 32 contiguous mineral claim units located in British
Columbia, Canada. Immediately following the share exchange described above,
Goldstrike disposed of its mineral claims and its resulting operations consisted
primarily of the operations of Gran Tierra Canada before the share exchange.
Recent
Developments
In
the
above-described transactions between Goldstrike and the holders of Gran Tierra
Canada common stock, Gran Tierra Canada shareholders were permitted to elect
to
receive, for each share of Gran Tierra Canada’s common stock: (1) 1.5873016
exchangeable shares of Goldstrike Exchange Co. (and ancillary rights), or
(2) 1.5873016 shares of common stock of Goldstrike, or (3) a
combination of Goldstrike Exchange Co. exchangeable shares and Goldstrike common
stock. All of Gran Tierra Canada’s shares were, through a series of exchanges,
exchanged for shares of Goldstrike and/or exchangeable shares of Goldstrike
Exchange Co. Each exchangeable share of Goldstrike Exchange Co. is exchangeable
into one share of our common stock.
The
share
exchange between the former shareholders of Gran Tierra Canada and the former
Goldstrike brought the assets, management, business operations and business
plan
of the former Gran Tierra into the framework of the company formerly known
as
Goldstrike and it is treated as a recapitalization of Gran Tierra for financial
accounting purposes. Accordingly, the historical financial statements of
Goldstrike before the share purchase and assignment transactions will be
replaced with the historical financial statements of Gran Tierra Canada before
the share exchange in all future filings with the SEC.
Before
the share purchase and assignment transactions and in contemplation of such,
Goldstrike provided Gran Tierra Canada with financing to allow Gran Tierra
Canada to acquire properties in Argentina on September 1, 2005. Goldstrike
derived the funds necessary to provide this financing from the proceeds of
the
initial closing of a private offering of its securities, described in more
detail below. Gran Tierra Canada’s financing was evidenced by a loan agreement
and promissory note dated September 1, 2005, under which Goldstrike
committed to loan Gran Tierra Canada up to $8,337,916, of which Gran Tierra
Canada borrowed an initial $6,665,198.30.
On
September 1 and October 7, 2005, Goldstrike completed closings on a first
private placement offering (the “First 2005 Offering”) to accredited investors
raising $9,353,507 from the sale of 11,691,884 units of Goldstrike’s securities,
each unit consisting of one share of common stock and a warrant to purchase
one-half share of common stock. Canaccord Capital Corporation received $52,178
in cash and 250,000 shares of Goldstrike’s common stock in payment of fees for
services to Goldstrike as placement agent. The proceeds from the September
1,
2005 closing of the sale of Goldstrike’s units were used to fund the September
1, 2005 loan from Goldstrike to Gran Tierra Canada. Proceeds derived from the
October 7, 2005 closing were used to increase Goldstrike’s loan commitment to
Gran Tierra Canada from $8,337,916 to $9,313,492, and Gran Tierra Canada
borrowed an additional $800,000 from Goldstrike. On April 12, 2006, one
investor from the First 2005 Offering exercised options underlying a total
of
37,500 shares of our common stock.
On
October 27, 2005, Goldstrike completed a first closing on a second private
placement offering of units to accredited investors in which it sold 1,250,000
units for consideration of $1,000,000. Goldstrike used the proceeds of the
October 27, 2005 closing to increase its loan commitment to Gran Tierra Canada
from $9,313,492 to $10,313,492. Gran Tierra Canada borrowed an additional
$700,000 under the Goldstrike loan commitment. The terms of the original agreement
for the loan commitment stated
that the amounts borrowed by Gran Tierra Canada under the loan
commitment would
be deemed forgiven upon the consummation of the merger between Goldstrike and
Gran Tierra Canada.
However,
on November 11, 2005 Goldstrike and Gran Tierra Canada
agreed to amend the terms of the agreement to provide that all amounts borrowed
under the loan commitment would remain outstanding after the merger, and that
the promissory note evidencing such amounts would be amended to a demand note
without a stated due date. Gran Tierra has
executed an amended and restated bridge loan
promissory note and an amendment to the loan agreement. This loan is currently
outstanding. We have
not presented the note to Gran Tierra Canada or otherwise made
a demand on
Gran Tierra Canada to pay
any portion of the outstanding principal or accrued interest on the
loan.
Following
the October 27, 2005 closing date, on December 14, 2005, we completed a sale
of
units in a second closing of the second offering to accredited investors
(together with the October 27, 2005 closing, the “Second 2005 Offering”). In
this second closing of the Second 2005 Offering, we sold an additional 1,343,222
units for consideration of $1,074,578. The net proceeds from the second closing
of the second offering were used for working capital and general corporate
purposes. In total, we sold 2,593,222 units for an aggregate of $2,074,578
in
the second private offering.
A
final
sale of unregistered shares of common shares to accredited investors was
completed on February 2, 2006 (the “Third 2005 Offering”). In the Third
2005 Offering, we sold 762,500 shares of our common stock and warrants to
acquire 381,250 shares of common stock for consideration of $610,000. We also
issued 250,000 shares of common stock as a finder’s fee in conjunction with the
private offerings. On February 2, 2006, two investors from the Third 2005
Offering exercised warrants underlying a total of 250,000 shares of our
common stock.
Argosy
Acquisition
On
June
20, 2006, we acquired all of the limited partnership interests of Argosy
Energy
International (“Argosy”) and all of the issued and outstanding capital stock of
Argosy Energy Corp. (“AEC”), a Delaware corporation and the general partner of
Argosy. We paid $37.5 million in cash, issued 870,647 shares of our common
stock and granted participation rights (including overriding royalty interests
and net profit interests) in certain Argosy assets valued at $1
million. Argosy, a Utah limited partnership, holds a diverse portfolio of
producing properties, drill-ready prospects and exploration acreage in
Colombia.
Argosy’s
oil production averaged approximately 987 barrels per day (after royalty)
during
the fourth quarter of 2005. Royalty rates are 20% and 8% for Argosy’s producing
properties. Argosy’s net land position was approximately 153,000
acres.
CGC
Acquisition
On
February 15, 2006, we made an offer to acquire certain interests of Compania
General de Combustibles S.A. ("CGC") in eight properties in Argentina.
On
November 2, 2006, we closed on the purchase of interests in four properties
for
a total purchase price of $2.1 million. The assets purchased include a
93.18%
participation interest in the Valle Morado block, a 100% interest in the
Santa
Victoria block and the remaining 50% interests in the Nacatimbay and Ipaguazu
blocks (in which we currently hold 50% interests).
On
December 1, 2006, we closed on the purchase of interests in two other properties
from CGC, including a 75% interest in the El Chivil block and a 75%
participation interest in the Surubi block, each located in the Noroeste
Basin
of Argentina, for a total purchase price of $2.5 million. We also purchased
the
remaining 25% minority interest in each property from the joint venture
partner
for a total purchase price of $280,000.
The
total
purchase price for the acquisition of CGC’s interests in all six properties
acquired to date is equal to $4.6 million. Post-closing adjustments which
reflect original values assigned to the properties, amended terms, revenues
and
costs from the effective date of January 1, 2006 are expected to amount
to a net
cash outlay of approximately $3.5 million.
On
November 30, 2006, in connection with the closings of the transactions
described
above, our board of directors reached a final determination not to pursue
the
acquisition of either CGC’s 17.85% interest in the Palmar Largo joint venture or
CGC’s 5% interest in the Aguarague joint venture, and to allow our option
to
acquire these interests to expire by its terms on December 5,
2006. The
offer
to purchase those properties was subject to rights of first refusal and
certain
third party consents.
Recent
Financing Activity
On
June
20, 2006, we completed the sale of 43,336,051 units of our securities, deriving
gross proceeds of $65,004,076. Each unit consisted of one share of our common
stock and a warrant to purchase one-half share of our common stock for a
period
of five years at an exercise price of $1.75 per whole share. On June 29,
2006,
we conducted a second closing of the offering of units of our securities,
deriving additional gross proceeds of $5,454,944 from the sale of 3,636,629
additional units. On June 30, 2006, we conducted a final closing of the offering
of units of our securities, deriving additional gross proceeds of $4,540,980
from the sale of 3,027,320 additional units. In connection with the three
closings of the offering, we sold a total of 50,000,000 units for gross proceeds
totaling $75,000,000.
Proceeds
of $1,280,993 from this private placement remain in escrow. Those proceeds
will
be released to us when we receive the required exemption from
the Alberta Securities Commission that the trading of our shares issued in
this private placement is exempt from the prospectus requirements for
purchasers resident in Alberta, Canada. We have applied for the relevant
exemption and have provided information requested by the Alberta Securities
Commission.
Management
We
announced on January 3, 2007 that we had accepted the resignation of
James Hart
from his position as our Chief Financial Officer and Vice President,
Finance.
Mr. Hart’s resignation was not based upon any disagreement with us. Effective
January 2, 2007, our Board of Directors elected Martin H. Eden to fill
the
position of Chief Financial Officer, filling the vacancy created by Mr.
Hart’s
resignation. The election of Mr. Eden to the position of Chief Financial
Officer
was not pursuant to any arrangement or understanding between Mr. Eden
and any
third party. Mr. Eden began full time employment with us on January 2,
2007. Mr.
Hart will continue to serve us in a business development position and
as a
director.
2
Corporate
Information
Goldstrike
Inc., now known as Gran Tierra Energy Inc., was incorporated under the laws
of
the State of Nevada on June 6, 2003. Our principal executive offices are located
at 300, 611 - 10th
Avenue
S.W., Calgary, Alberta, Canada. The telephone number at our principal executive
offices is (403) 265-3221. Our website address is www.grantierra.com.
Information contained on our website is not deemed part of this
prospectus.
The
Offering
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Common
stock currently outstanding (1)
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95,455,765 shares
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Common
stock offered by the selling stockholders (2)
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17,572,745 shares
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Common
stock outstanding after the offering (3)
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102,692,076 shares
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Use
of Proceeds
|
We
will not receive any proceeds from the sale of common stock offered
by
this prospectus. We will receive the proceeds from any warrant exercises,
which we intend to use for general corporate purposes, including
for
working capital.
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OTC
Bulletin Board Symbol
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GTRE.OB
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(1)
Includes 10,336,434 shares of common stock which will not be available to
trade publicly until the registration statement of which this prospectus is
a
part is declared effective by the SEC. Also includes 16,666,667 shares of
common stock which are issuable upon the exchange of exchangeable shares of
Goldstrike Exchange Co. and 68,452,664 shares of issued and
outstanding common stock which will not be registered under this
registration statement.
(2)
Includes 7,236,311 shares of common stock underlying warrants issued to the
selling stockholders.
(3)
Assumes the full exercise of all 7,236,311 warrants.
3
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks below before making an investment decision. Our business,
financial condition or results of operations could be materially adversely
affected by any of these risks. In such case, the trading price of our common
stock could decline and you could lose all or part of your investment.
Risks
Related to Our Business
We
are a
new enterprise engaged in the business of oil and natural gas exploration and
development. The business of exploring for, developing and producing oil and
natural gas reserves is inherently risky. We will face numerous and varied
risks
which may prevent us from achieving our goals.
We
are a Development Stage Company With Limited Operating History for You to
Evaluate Our Business. We May Never Attain
Profitability.
We
are a
development stage company and have limited current oil or natural gas
operations. As an oil and gas exploration and development company with limited
operating history, it is difficult for potential investors to evaluate our
business. Our proposed operations are therefore subject to all of the risks
inherent in light of the expenses, difficulties, complications and delays
frequently encountered in connection with the formation of any new business,
as
well as those risks that are specific to the oil and gas industry. Investors
should evaluate us in light of the delays, expenses, problems and uncertainties
frequently encountered by companies developing markets for new products,
services and technologies. We may never overcome these obstacles.
Our
business is speculative and dependent upon the implementation of our business
plan and our ability to enter into agreements with third parties for the rights
to exploit potential oil and gas reserves on terms that will be commercially
viable for us.
Unanticipated
Problems in Our Operations May Harm Our Business and Our
Viability.
If
our
operations in Argentina and Colombia are disrupted and/or the economic
integrity of these projects is threatened for unexpected reasons, our business
may experience a setback. These unexpected events may be due to technical
difficulties, geographic and weather conditions, business reasons or otherwise.
Because we are at the beginning stages of our development, we are particularly
vulnerable to these events. Prolonged problems may threaten the commercial
viability of our operations. Moreover, the occurrence of significant unforeseen
conditions or events in connection with our acquisition of operations in
Argentina and Colombia may cause us to question the thoroughness of our due
diligence and planning process which occurred before the acquisitions, which
may
cause us to reevaluate our business model and the viability of our contemplated
business. Such actions and analysis may cause us to delay development efforts
and to miss out on opportunities to expand our operations.
We
May Be Unable to Obtain Development Rights We Need to Build Our Business, and
Our Financial Condition and Results of Operations May
Deteriorate.
Our
business plan focuses on international exploration and production opportunities,
initially in South America and later in other parts of the world. Thus far,
we
have acquired interests for
exploration and development in four properties in
Argentina, seven properties in Colombia and one property in Peru. In the
event that we do not succeed in negotiating additional property acquisitions,
our future prospects will likely be substantially limited, and our financial
condition and results of operations may deteriorate.
4
Our
Lack of Diversification Will Increase the Risk of an Investment in Our Common
Stock.
Our
business will focus on the oil and gas industry in a limited number of
properties, initially in Argentina, Colombia and Peru, with the intention
of expanding elsewhere in South America and later into other parts of the world.
Larger companies have the ability to manage their risk by diversification.
However, we will lack diversification, in terms of both the nature and
geographic scope of our business. As a result, factors affecting our industry
or
the regions in which we operate will likely impact us more acutely than if
our
business were more diversified.
Strategic
Relationships Upon Which We May Rely are Subject to Change, Which May Diminish
Our Ability to Conduct Our Operations.
Our ability
to successfully bid on and acquire additional properties, to discover reserves,
to participate in drilling opportunities and to identify and enter into
commercial arrangements with customers will depend on developing and maintaining
close working relationships with industry participants and on our ability to
select and evaluate suitable properties and to consummate transactions in a
highly competitive environment. These realities are subject to change and may
impair Gran Tierra’s ability to grow.
To
develop our business, we will endeavor to use the business relationships of
our
management to enter into strategic relationships, which may take the form of
joint ventures with other private parties or with local government bodies,
or
contractual arrangements with other oil and gas companies, including those
that
supply equipment and other resources that we will use in our business. We may
not be able to establish these strategic relationships, or if established,
we
may not be able to maintain them. In addition, the dynamics of our relationships
with strategic partners may require us to incur expenses or undertake activities
we would not otherwise be inclined to in order to fulfill our obligations to
these partners or maintain our relationships. If our strategic relationships
are
not established or maintained, our business prospects may be limited, which
could diminish our ability to conduct our operations.
Competition
in Obtaining Rights to Explore and Develop Oil and Gas Reserves and to Market
Our Production May Impair Our Business.
The
oil
and gas industry is highly competitive. Other oil and gas companies will compete
with us by bidding for exploration and production licenses and other properties
and services we will need to operate our business in the countries in which
we
expect to operate. This competition is increasingly intense as prices of oil
and
natural gas on the commodities markets have risen in recent years. Additionally,
other companies engaged in our line of business may compete with us from time
to
time in obtaining capital from investors. Competitors include larger, foreign
owned companies, which, in particular, may have access to greater resources
than
us, may be more successful in the recruitment and retention of qualified
employees and may conduct their own refining and petroleum marketing operations,
which may give them a competitive advantage. In addition, actual or potential
competitors may be strengthened through the acquisition of additional assets
and
interests.
We
May Be Unable to Obtain Additional Capital that We Will Require to Implement
Our
Business Plan, Which Could Restrict Our Ability to
Grow.
We
expect
that our current capital and our other existing resources will be sufficient
only to provide a limited amount of working capital, and the revenues generated
from our properties in Argentina and Colombia will not alone be sufficient
to
fund our operations or planned growth. We will require additional capital to
continue to operate our business beyond the initial phase of our current
activities and to expand our exploration and development programs to
additional properties. We may be unable to obtain additional capital required.
Furthermore, inability to attain capital may damage our reputation and
credibility with industry participants in the event we cannot close previously
announced transactions.
5
Future
acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries,
insurance expenses and general overhead expenses, as well as legal compliance
costs and accounting expenses) will require a substantial amount of additional
capital and cash flow.
We
will
immediately require such additional capital and we plan to pursue sources of
such capital through various financing transactions or arrangements, including
joint venturing of projects, debt financing, equity financing or other means.
We
may not be successful in locating suitable financing transactions in the time
period required or at all, and we may not obtain the capital we require by
other
means. If we do succeed in raising additional capital, the capital received
through our past private offerings to accredited investors may not be sufficient
to fund our operations going forward without obtaining additional capital
financing. Furthermore, future financings are likely to be dilutive to our
stockholders, as we will most likely issue additional shares of common stock
or
other equity to investors in future financing transactions. In addition, debt
and other mezzanine financing may involve a pledge of assets and may be senior
to interests of equity holders.
Our
ability to obtain needed financing may be impaired by such factors as the
capital markets (both generally and in the oil and gas industry in particular),
our status as a new enterprise without a demonstrated operating history, the
location of our oil and natural gas properties in developing countries and
prices of oil and natural gas on the commodities markets (which will impact
the
amount of asset-based financing available to us) and/or the loss of key
management. Further, if oil and/or natural gas prices on the commodities markets
decrease, then our revenues will likely decrease, and such decreased revenues
may increase our requirements for capital. Some of the contractual arrangements
governing our operations may require us to maintain minimum capital, and we
may
lose our contract rights (including exploration, development and production
rights) if we do not have the required minimum capital. If the amount of capital
we are able to raise from financing activities, together with our revenues
from
operations, is not sufficient to satisfy our capital needs (even to the extent
that we reduce our operations), we may be required to cease our
operations.
We
May Be Unable to Meet Our Capital Requirements in the Future, Causing Us to
Curtail Future Growth Plans or Cut Back Existing Operations.
We
may
need additional capital in the future, which may not be available to us on
reasonable terms or at all. The raising of additional capital may dilute our
stockholders’ interests. We may need to raise additional funds through public or
private debt or equity financings in order to meet various objectives including
but not limited to:
| § |
pursuing
growth opportunities, including more rapid expansion;
|
| § |
acquiring
complementary businesses;
|
| § |
making
capital improvements to improve our infrastructure;
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| § |
hiring
qualified management and key employees;
|
| § |
responding
to competitive pressures;
|
| § |
complying
with licensing, registration and other requirements;
and
|
| § |
maintaining
compliance with applicable laws.
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6
Any
additional capital raised through the sale of equity may dilute stockholders’
ownership percentage in us. This could also result in a decrease in the fair
market value of our equity securities because our assets would be owned by
a
larger pool of outstanding equity. The terms of securities we issue in future
capital transactions may be more favorable to our new investors, and may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and issuances of incentive awards under equity employee
incentive plans, which may have a further dilutive effect.
Furthermore,
any additional financing we may need may not be available on terms favorable
to
us, or at all. If we are unable to obtain required additional financing, we
may
be forced to curtail our growth plans or cut back our existing
operations.
We
may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities
we
may issue, such as convertible notes and warrants, which will adversely impact
our financial condition.
If
We Fail to Make the Cash Calls Required by Our Current Joint Ventures or
Any
Future Joint Ventures, We May be Required to Forfeit Our Interests in Such
Joint
Ventures and Our Results of Operations and Our Liquidity Would be Negatively
Affected.
If
we
fail to make the cash calls required by our joint ventures, we may be required
to forfeit our interests in such joint ventures, which could substantially
affect the implementation of our business strategy. In
connection with our joint venture in Palmar Largo, we were required to place
$400,000 in escrow to secure future cash calls. All of these funds have been
returned to us. However, in the future we will
be required to make periodic cash calls in connection with our Palmar
Largo joint venture or any of our other joint venture activity, or we may be
required to place additional funds in escrow to secure our obligations related
to our joint venture activity. If we fail to make the cash calls required in
connection with the joint ventures, we will be subject to certain penalties
and
eventually would be required to forfeit our interest in the joint
venture.
We
May Not Be Able To Effectively Manage Our Growth, Which May Harm Our
Profitability.
Our
strategy envisions expanding our business. If we fail to effectively manage
our
growth, our financial results could be adversely affected. Growth may place
a
strain on our management systems and resources. We must continue to refine
and
expand our business development capabilities, our systems and processes and
our
access to financing sources. As we grow, we must continue to hire, train,
supervise and manage new employees. We cannot assure you that we will be able
to:
| § |
expand
our systems effectively or efficiently or in a timely manner;
|
| § |
allocate
our human resources optimally;
|
| § |
identify
and hire qualified employees or retain valued employees; or
|
| § |
incorporate
effectively the components of any business that we may acquire in
our
effort to achieve growth.
|
If
we are
unable to manage our growth and our operations our financial results could
be
adversely affected by inefficiency, which could diminish our profitability.
Our
Business May Suffer If We Do Not Attract and Retain Talented
Personnel.
Our
success will depend in large measure on the abilities, expertise, judgment,
discretion integrity and good faith of our management and other personnel in
conducting the business of Gran Tierra. We have a small management team
consisting of Dana Coffield, our President and Chief Executive Officer, James
Hart, our Vice President, Finance and Chief Financial Officer, Max Wei, our
Vice
President, Operations, Rafael Orunesu, our President of Gran Tierra
activities in Argentina, and Edgar Dyes, our President of Gran Tierra activities
in Colombia. The loss of any of these individuals or our inability to attract
suitably qualified staff could materially adversely impact our business. We
may
also experience difficulties in certain jurisdictions in our efforts to obtain
suitably qualified staff and retaining staff who are willing to work in that
jurisdiction. We do not currently carry life insurance for our key
employees.
Our
success depends on the ability of our management and employees to interpret
market and geological data correctly and to interpret and respond to economic
market and other conditions in order to locate and adopt appropriate investment
opportunities, monitor such investments and ultimately, if required,
successfully divest such investments. Further, our key personnel may not
continue their association or employment with Gran Tierra and we may not be
able
to find replacement personnel with comparable skills. We have sought to and
will
continue to ensure that management and any key employees are appropriately
compensated; however, their services cannot be guaranteed. If we are unable
to
attract and retain key personnel, our business may be adversely affected.
7
Our
Management Team Does Not Have Extensive Experience in Public Company Matters,
Which Could Impair Our Ability to Comply With Legal and Regulatory
Requirements.
Our
management team has had limited U.S. public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements, such as the Sarbanes-Oxley Act of 2002 and applicable
federal securities laws including filing required reports and other information
required on a timely basis. Our management may not be able to implement and
affect programs and policies in an effective and timely manner that adequately
respond to increased legal, regulatory compliance and reporting requirements
imposed by such laws and regulations. Our failure to comply with such laws
and
regulations could lead to the imposition of fines and penalties and further
result in the deterioration of our business.
We
may not be Able to Continue as a Going Concern.
Our
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. We have a history of net losses that are
likely to continue in the future. We have included an explanatory paragraph
in
Note 1 of our audited financial statements for the year ended December 31,
2005
and for the most recent quarter ended September 30, 2006, to the effect that
our dependence on equity and debt financing raises substantial doubt about
our ability to continue as a going concern. Our accumulated deficit at September
30, 2006 was $4,076,711. Our financial statements do not include any
adjustments that might be necessary should we be unable to continue as a
going
concern.
Our
operations must begin to provide sufficient revenues to improve our working
capital position. If we are unable to become profitable and cannot generate
cash
flow from our operating activities sufficient to satisfy our current obligations
and meet our capital investment objectives, we may be required to raise
additional capital or debt to fund our operations, reduce the scope of our
operations or discontinue our operations.
Risks
Related to our Prior Business May Adversely Affect our
Business.
Before
the share exchange transaction between Goldstrike and Gran Tierra Canada,
Goldstrike’s business involved mineral exploration, with a view towards
development and production of mineral assets, including ownership of 32 mineral
claim units in a property in British Columbia, Canada and the exploration of
this property. We have determined not to pursue this line of business following
the share exchange, but could still be subject to claims arising from the former
Goldstrike business. These claims may arise from Goldstrike’s operating
activities (such as employee and labor matters), financing and credit
arrangements or other commercial transactions. While no claims are pending
and
we have no actual knowledge of any threatened claims, it is possible that third
parties may seek to make claims against us based on Goldstrike’s former business
operations. Even if such asserted claims were without merit and we were
ultimately found to have no liability for such claims, the defense costs and
the
distraction of management’s attention may harm the growth and profitability of
our business. While the relevant definitive agreements executed in connection
with the share exchange provide indemnities to us for liabilities arising from
the prior business activities of Goldstrike, these indemnities may not be
sufficient to fully protect us from all costs and expenses.
Risks
Related to Our Industry
Our
Exploration for Oil and Natural Gas Is Risky and May Not Be Commercially
Successful, Impairing Our Ability to Generate Revenues from Our
Operations.
Oil
and
natural gas exploration involves a high degree of risk. These risks are more
acute in the early stages of exploration. Our expenditures on exploration may
not result in new discoveries of oil or natural gas in commercially viable
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions,
such as over pressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof. If exploration costs exceed our estimates,
or
if our exploration efforts do not produce results which meet our expectations,
our exploration efforts may not be commercially successful, which could
adversely impact our ability to generate revenues from our
operations.
8
We
May Not Be Able to Develop Oil and Gas Reserves on an Economically Viable Basis,
and Our Reserves and Production May Decline as a
Result.
To
the
extent that we succeed in discovering oil and/or natural gas reserves, we cannot
assure that these reserves will be capable of production levels we project
or in
sufficient quantities to be commercially viable. On a long-term basis, Gran
Tierra’s viability depends on our ability to find or acquire, develop and
commercially produce additional oil and gas reserves. Without the addition
of
reserves through exploration, acquisition or development activities, our
reserves and production will decline over time as reserves are produced. Our
future reserves will depend not only on our ability to develop then-existing
properties, but also on our ability to identify and acquire additional suitable
producing properties or prospects, to find markets for the oil and natural
gas
we develop and to effectively distribute our production into our
markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery
of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals
or
consents, shut-downs of connected wells resulting from extreme weather
conditions, problems in storage and distribution and adverse geological and
mechanical conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be
able
to eliminate them completely in any case. Therefore, these conditions could
diminish our revenue and cash flow levels and result in the impairment of our
oil and natural gas interests.
Estimates
of Oil and Natural Gas Reserves that We Make May Be Inaccurate and Our Actual
Revenues May Be Lower than Our Financial Projections.
We
will
make estimates of oil and natural gas reserves, upon which we will base our
financial projections. We will make these reserve estimates using various
assumptions, including assumptions as to oil and natural gas prices, drilling
and operating expenses, capital expenditures, taxes and availability of funds.
Some of these assumptions are inherently subjective, and the accuracy of our
reserve estimates relies in part on the ability of our management team,
engineers and other advisors to make accurate assumptions. Economic factors
beyond our control, such as interest rates and exchange rates, will also impact
the value of our reserves. The process of estimating oil and gas reserves is
complex, and will require us to use significant decisions and assumptions in
the
evaluation of available geological, geophysical, engineering and economic data
for each property. As a result, our reserve estimates will be inherently
imprecise. Actual future production, oil and natural gas prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable oil and gas reserves may vary substantially from those we estimate.
If actual production results vary substantially from our reserve estimates,
this
could materially reduce our revenues and result in the impairment of our oil
and
natural gas interests.
Drilling
New Wells Could Result in New Liabilities, Which Could Endanger Our Interests
in
Our Properties and Assets.
There
are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, craterings, sour gas releases, fires and spills. The
occurrence of any of these events could significantly reduce our revenues or
cause substantial losses, impairing our future operating results. We may become
subject to liability for pollution, blow-outs or other hazards. We will obtain
insurance with respect to these hazards, but such insurance has limitations
on
liability that may not be sufficient to cover the full extent of such
liabilities. The payment of such liabilities could reduce the funds available
to
us or could, in an extreme case, result in a total loss of our properties and
assets. Moreover, we may not be able to maintain adequate insurance in the
future at rates that are considered reasonable. Oil and natural gas production
operations are also subject to all the risks typically associated with such
operations, including premature decline of reservoirs and the invasion of water
into producing formations.
9
Decommissioning
Costs Are Unknown and May be Substantial; Unplanned Costs Could Divert Resources
from Other Projects.
We
may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we use for production of oil and gas reserves.
Abandonment and reclamation of these facilities and the costs associated
therewith is often referred to as “decommissioning.” We have not yet determined
whether we will establish a cash reserve account for these potential costs
in
respect of any of our current properties or facilities, or if we will satisfy
such costs of decommissioning from the proceeds of production in accordance
with
the practice generally employed in onshore and offshore oilfield operations.
If
decommissioning is required before economic depletion of our properties or
if
our estimates of the costs of decommissioning exceed the value of the reserves
remaining at any particular time to cover such decommissioning costs, we may
have to draw on funds from other sources to satisfy such costs. The use of
other
funds to satisfy such decommissioning costs could impair our ability to focus
capital investment in other areas of our business.
Our
Inability to Obtain Necessary Facilities Could Hamper Our
Operations.
Oil
and
natural gas exploration and development activities are dependent on the
availability of drilling and related equipment, transportation, power and
technical support in the particular areas where these activities will be
conducted, and our access to these facilities may be limited. To the extent
that
we conduct our activities in remote areas, needed facilities may not be
proximate to our operations, which will increase our expenses. Demand for such
limited equipment and other facilities or access restrictions may affect the
availability of such equipment to us and may delay exploration and development
activities. The quality and reliability of necessary facilities may also be
unpredictable and we may be required to make efforts to standardize our
facilities, which may entail unanticipated costs and delays. Shortages and/or
the unavailability of necessary equipment or other facilities will impair our
activities, either by delaying our activities, increasing our costs or
otherwise.
We
are Not the Operator of All Our Current Joint Ventures and Therefore
the Success
of the Projects Held Under Joint Ventures is Substantially Dependent
On Our
Joint Venture Partners.
As
our
company does not operate all the joint ventures we are currently involved
in, we
do not have a direct control over operations. When we participate in decisions
as a joint venture partner, we must rely on the operator’s disclosure for all
decisions. Furthermore, the operator is responsible for the day to day
operations of the joint venture including technical operations, safety,
environmental compliance, relationships with governments and vendors. As
we do
not have full control over the activities of our joint ventures, our results
of
operations are dependent upon the efforts of the operating partner.
We
May Have Difficulty Distributing Our Production, Which Could Harm Our Financial
Condition.
In
order
to sell the oil and natural gas that we are able to produce, we will have to
make arrangements for storage and distribution to the market. We will rely
on
local infrastructure and the availability of transportation for storage and
shipment of our products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This could be
particularly problematic to the extent that our operations are conducted in
remote areas that are difficult to access, such as areas that are distant from
shipping and/or pipeline facilities. In
certain areas, we may be required to rely on only one gathering system, pipeline
or trucking company, and, if so, our ability to market our production would
be
subject to their reliability and operations. For example, our revenues in
November and December of 2005 decreased as a result of bad weather which
affected the roads and the ability of the trucking company to make deliveries.
These factors may affect our ability to explore and develop properties
and to store and transport our oil and gas production and may increase our
expenses.
Furthermore,
future instability in one or more of the countries in which we will operate,
weather conditions or natural disasters, actions by companies doing business
in
those countries, labor disputes or actions taken by the international community
may impair the distribution of oil and/or natural gas and in turn diminish
our
financial condition or ability to maintain our operations.
Our
Oil Sales Will Depend on a Relatively Small Group of Customers, Which Could
Adversely Affect Our Financial Results
The
entire Argentine domestic refining market is small and export opportunities
are
limited by available infrastructure. As a result, our oil sales in Argentina
will depend on a relatively small group of customers, and currently, on just
one
customer in the area of our activity in the country. During 2005, we sold
all of
our production to Refinor S.A. The lack of competition in this market
could result in unfavorable sales terms which, in turn, could adversely affect
our financial results.
Oil
sales in Colombia are made to
Ecopetrol, a government agency. While oil prices in Colombia are related
to
international market prices, lack of competition for sales of oil may diminish
prices and depress our financial results.
Drilling
Oil and Gas Wells and Production and Transportation Activity Could be
Hindered by Hurricanes, Earthquakes and Other Weather-Related Operating
Risks.
We
are
subject to operating hazards normally associated with the exploration and
production of oil and gas, including blowouts, explosions, oil spills,
cratering, pollution, earthquakes, hurricanes, labor disruptions and fires.
The
occurrence of any such operating hazards could result in substantial losses
to
us due to injury or loss of life and damage to or destruction of oil and
gas
wells, formations, production facilities or other properties. During
November and December of 2005, our operations were negatively effected by
heavy
rains and flooding in Northern Argentina. This caused trucking delays which
prevented delivery of oil to the refinery for several days.
As
the
majority of current oil production in Argentina is trucked to a local refinery,
sales of oil can be delayed by adverse weather and road conditions. While
storage facilities are designed to accommodate ordinary disruptions without
curtailing production, delayed sales will delay revenues and may adversely
impact the company’s working capital position. Furthermore, a prolonged
disruption in oil deliveries could exceed storage capacities and shut-in
production, which could have a negative impact on future production capability.
All
of our current oil production
in Colombia is transported by an export pipeline, sales of oil could be
disrupted by landslides or other natural events.
Prices
and Markets for Oil and Natural Gas Are Unpredictable and Tend to Fluctuate
Significantly, Which Could Reduce Profitability, Growth and the Value of Gran
Tierra.
Oil
and
natural gas are commodities whose prices are determined based on world demand,
supply and other factors, all of which are beyond our control. World prices
for
oil and natural gas have fluctuated widely in recent years. The average price
for West Texas Intermediate oil in 1999 was $22 per barrel. In 2002 it was
$27
per barrel. In 2005, it was $57 per barrel. We expect that prices will fluctuate
in the future. Price fluctuations will have a significant impact upon our
revenue, the return from our reserves and on our financial condition generally.
Price fluctuations for oil and natural gas commodities may also impact the
investment market for companies engaged in the oil and gas industry. Although
during 2005 market prices for oil and natural gas have risen to near-record
levels, these prices may not remain at current levels. Future decreases in
the
prices of oil and natural gas may have a material adverse effect on our
financial condition, the future results of our operations and quantities of
reserves recoverable on an economic basis.
10
Our
Foreign Operations Involve Substantial Costs and are Subject to Certain
Risks
Because the Oil and Gas Industries in the Countries in Which We Operate
are Less
Developed.
The
oil
and gas industry in South America is not as developed as the oil and gas
industry in North America. As a result, our exploration and
development activities may take longer to complete and may be
more expensive than similar operations in North America. The availability
of technical expertise, specific equipment and supplies may be more limited
than
in North America. We expect that such factors will subject our international
operations to economic and operating risks that may not be experienced
in North
American operations. In addition, oil
and
natural gas prices in Argentina are effectively regulated and as a result
are
substantially lower than those received in North America. Our average gas
price
for 2005 in Argentina was $1.50/mcf and our oil price was $37.80 per barrel.
Oil
prices in Colombia are related to international market prices, but adjustments
that are defined by contract with Ecopetrol, a government agency and
the purchaser of all oil that we produce in Colombia, may cause realized
prices to be lower than those received in North America. This means that
our
revenue and gross profit may be lower compared to similar production levels
in
North America.
Negative
Economic, Political and Regulatory Developments in Argentina, Including
Export
Controls May Negatively Effect our Operations.
The
Argentine economy has experienced volatility in recent decades. This volatility
has included periods of low or negative growth and variable levels of inflation.
Inflation was at its peak in the 1980’s and early 1990’s. In late-2001 there was
a deep fiscal crisis in Argentina involving restrictions on banking
transactions, imposition of exchange controls, suspension of payment of
Argentina’s public debt and abrogation of the one-to one peg of the peso to the
dollar. For the next year, Argentina experienced contractions in economic
growth, increasing inflation and a volatile exchange rate. Currently, GDP
is
growing, inflation is normalized, and public finances are strengthened.
However,
there is no guarantee of economic stability. Any de-stabilization may seriously
impact the economic viability of operations in the country or restrict
the
movement of cash into and out of the country, which would impair current
activity and constrain growth in the country.
On
June
3, 2002, the Argentine government issued a resolution authorizing the
Energy
Secretariat to limit the amount of crude oil that companies can export.
The
restriction was to be in place from June 2002 to September 2002.
However, on June 14, 2002, the government agreed to abandon the limit
on crude
export volumes in exchange for a guarantee from oil companies that domestic
demand will be supplied. Oil companies also agreed not to raise natural
gas
and related prices to residential customers during the winter months and
to maintain gasoline, natural gas and oil prices in line with those in
other South American countries. Any future regulations that limit the
amount of
oil and gas that we could sell or any regulations that limit price
increases in Argentina and elsewhere could severely limit the amount of our
revenue and affect our results of operations.
The
United States government may impose economic or trade sanctions on
Colombia that
could result in a significant loss to us.
Colombia
is among several nations whose progress in stemming the production
and transit
of illegal drugs is subject to annual certification by the President
of the
United States. Although Colombia has received a 2006 certification, there
can be no assurance that, in the future, Colombia will receive certification
or
a national interest waiver. The failure to receive certification or
a national
interest waiver may result in any of the following:
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all
bilateral aid, except anti-narcotics and humanitarian aid,
would be
suspended,
|
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·
|
the
Export-Import Bank of the United States and the Overseas
Private
Investment Corporation would not approve financing for new
projects in
Colombia,
|
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·
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United
States representatives at multilateral lending institutions
would be
required to vote against all loan requests from Colombia
, although such
votes would not constitute vetoes,
and
|
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·
|
the
President of the United States and Congress would retain
the right to
apply future trade sanctions.
|
Each
of
these consequences could result in adverse economic consequences in
Colombia and
could further heighten the political and economic risks associated
with our
operations there. Any changes in the holders of significant government
offices
could have adverse consequences on our relationship with the Colombian
national
oil company and the Colombian government’s ability to control guerrilla
activities and could exacerbate the factors relating to our foreign
operations.
Any sanctions imposed on Colombia by the United States government could
threaten
our ability to obtain necessary financing to develop the Colombian
properties or
cause Colombia to retaliate against us, including by nationalizing
our Colombian
assets. Accordingly, the imposition of the foregoing economic and trade
sanctions on Colombia would likely result in a substantial loss and
a decrease
in the price of our common stock. There can be no assurance that the
United
States will not impose sanctions on Colombia in the future, nor can
we predict
the effect in Colombia that these sanctions might cause.
11
Guerrilla
activity in Colombia could disrupt or delay our operations, and we
are concerned
about safeguarding our operations and personnel in
Colombia.
A
40-year
armed conflict between government forces and anti-government insurgent
groups and illegal paramilitary groups - both funded by the drug trade
- continues in Colombia. Insurgents continue to attack civilians
and violent guerilla activity continues in many parts of
the country.
We,
through our acquisition of Argosy Energy International, have interests in
three regions of Colombia - in the Middle Magdalena, Llanos and Putamayo
regions. The Putamayo region has been prone to guerilla activity in
the past. In
1989, Argosy’s facilities in one field were attacked by guerillas and operations
were briefly disrupted. Pipelines have also been targets, including
the
Trans-Andean export pipeline which transports oil from the Putamayo
region.
There
can
be no assurance that continuing attempts to reduce or prevent guerilla
activity
will be successful or that guerilla activity will not disrupt our operations
in
the future. There can also be no assurance that we can maintain the
safety of
our operations and personnel in Colombia or that this violence will
not affect
our operations in the future. Continued or heightened security concerns
in
Colombia could also result in a significant loss to us.
Increases
in Our Operating Expenses will Impact Our Operating Results and Financial
Condition.
Exploration,
development, production, marketing (including distribution costs) and regulatory
compliance costs (including taxes) will substantially impact the net revenues
we
derive from the oil and gas that we produce. These costs are subject to
fluctuations and variation in different locales in which we will operate, and
we
may not be able to predict or control these costs. If these costs exceed our
expectations, this may adversely affect our results of operations. In addition,
we may not be able to earn net revenue at our predicted levels, which may impact
our ability to satisfy our obligations.
Penalties
We May Incur Could Impair Our Business.
Our
exploration, development, production and marketing operations are regulated
extensively under foreign, federal, state and local laws and regulations.
Under
these laws and regulations, we could be held liable for personal injuries,
property damage, site clean-up and restoration obligations or costs and other
damages and liabilities. We may also be required to take corrective actions,
such as installing additional safety or environmental equipment, which could
require us to make significant capital expenditures. Failure to comply with
these laws and regulations may also result in the suspension or termination
of
our operations and subject us to administrative, civil and criminal penalties,
including the assessment of natural resource damages. We could be required
to
indemnify our employees in connection with any expenses or liabilities that
they
may incur individually in connection with regulatory action against them.
As a
result of these laws and regulations, our future business prospects could
deteriorate and our profitability could be impaired by costs of compliance,
remedy or indemnification of our employees, reducing our profitability.
Environmental
Risks May Adversely Affect Our Business.
All
phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and federal, provincial and municipal laws and
regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases or emissions of various
substances produced in association with oil and gas operations. The legislation
also requires that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with such legislation can require significant expenditures and a
breach may result in the imposition of fines and penalties, some of which may
be
material. Environmental legislation is evolving in a manner we expect may result
in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. The discharge
of
oil, natural gas or other pollutants into the air, soil or water may give rise
to liabilities to foreign governments and third parties and may require us
to
incur costs to remedy such discharge. The application of environmental laws
to
our business may cause us to curtail our production or increase the costs of
our
production, development or exploration activities.
Our
Insurance May Be Inadequate to Cover Liabilities We May
Incur.
Our
involvement in the exploration for and development of oil and natural gas
properties may result in our becoming subject to liability for pollution,
blow-outs, property damage, personal injury or other hazards. Although we will
obtain insurance in accordance with industry standards to address such risks,
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. In addition, such risks may not, in all
circumstances be insurable or, in certain circumstances, we may choose not
to
obtain insurance to protect against specific risks due to the high premiums
associated with such insurance or for other reasons. The payment of such
uninsured liabilities would reduce the funds available to us. If we suffer
a
significant event or occurrence that is not fully insured, or if the insurer
of
such event is not solvent, we could be required to divert funds from capital
investment or other uses towards covering our liability for such events.
12
Our
Business is Subject to Local Legal, Political and Economic Factors Which are
Beyond Our Control, Which Could Impair Our Ability to Expand Our Operations
or
Operate Profitably.
We
expect
to operate our business in Argentina, Colombia and Peru, and to expand our
operations into other countries in the world. Exploration and production
operations in foreign countries are subject to legal, political and economic
uncertainties, including terrorism,
military repression, interference with private contract rights (such as
privatization), extreme fluctuations in currency exchange rates, high rates
of
inflation, exchange controls and other laws or policies affecting environmental
issues (including land use and water use), workplace safety, foreign investment,
foreign trade, investment or taxation, as well as restrictions imposed on the
oil and natural gas industry, such as restrictions on production, price controls
and export controls. Central
and South America have a history of political and economic instability. This
instability could result in new governments or the adoption of new policies,
laws or regulations that might assume a substantially more hostile attitude
toward foreign investment. In an extreme case, such a change could result in
termination of contract rights and expropriation of foreign-owned assets.
Any changes in oil and gas or investment regulations and policies or
a
shift in political attitudes in Argentina, Colombia, Peru or other
countries in which we intend to operate are beyond our control and may
significantly hamper our ability to expand our operations or operate our
business at a profit.
For
instance, changes in laws in the jurisdiction in which we operate or expand
into
with the effect of favoring local enterprises, changes in political views
regarding the exploitation of natural resources and economic pressures may
make
it more difficult for us to negotiate agreements on favorable terms, obtain
required licenses, comply with regulations or effectively adapt to adverse
economic changes, such as increased taxes, higher costs, inflationary pressure
and currency fluctuations.
Local
Legal and Regulatory Systems in Which We Operate May Create Uncertainty
Regarding Our Rights and Operating Activities, Which May Harm Our Ability to
do
Business.
We
are a
company organized under the laws of the State of Nevada and are subject to
United States laws and regulations. The jurisdictions in which we intend to
operate our exploration, development and production activities may have
different or less developed legal systems than the United States, which may
result in risks such as:
| § |
effective
legal redress in the courts of such jurisdictions, whether in respect
of a
breach of law or regulation, or, in an ownership dispute, being more
difficult to obtain;
|
| § |
a
higher degree of discretion on the part of governmental authorities;
|
| § |
the
lack of judicial or administrative guidance on interpreting applicable
rules and regulations;
|
13
| § |
inconsistencies
or conflicts between and within various laws, regulations, decrees,
orders
and resolutions; and
|
| § |
relative
inexperience of the judiciary and courts in such
matters.
|
In
certain jurisdictions the commitment of local business people, government
officials and agencies and the judicial system to abide by legal requirements
and negotiated agreements may be more uncertain, creating particular concerns
with respect to licenses and agreements for business. These licenses and
agreements may be susceptible to revision or cancellation and legal redress
may
be uncertain or delayed. Property right transfers, joint ventures, licenses,
license applications or other legal arrangements pursuant to which we operate
may be adversely affected by the actions of government authorities and the
effectiveness of and enforcement of our rights under such arrangements in these
jurisdictions may be impaired.
We
are Required to Obtain Licenses and Permits to Conduct Our Business and
Failure
to Obtain These Licenses Could Cause Significant Delays and Expenses That
Could
Materially Impact Our Business.
We
are
subject to licensing and permitting requirements relating to drilling for
oil
and natural gas. We cannot assure you that we will be able to obtain, sustain
or
renew such licenses. We cannot assure you that regulations and policies relating
to these licenses and permits will not change or be implemented in a way
that we
do not currently anticipate. These licenses and permits are subject to numerous
requirements, including compliance with the environmental regulations of
the
local governments. As we are not the operator of all the joint ventures we
are
currently involved in, we may rely on the operator to obtain all necessary
permits and licenses. If we fail to comply with these requirements, we could
be
prevented from drilling for oil and natural gas, and we could be subject
to
civil or criminal liability or fines. Revocation or suspension of our
environmental and operating permits could have a material adverse effect
on our
business, financial condition and results of operations.
Challenges
to Our Properties May Impact Our Financial Condition.
Title
to
oil and natural gas interests is often not capable of conclusive determination
without incurring substantial expense. While Gran Tierra intends to make
appropriate inquiries into the title of properties and other development rights
we acquire, title defects may exist. In addition, we may be unable to obtain
adequate insurance for title defects, on a commercially reasonable basis or
at
all. If title defects do exist, it is possible that we may lose all or a portion
of our right, title and interest in and to the properties to which the title
defects relate.
Furthermore,
applicable governments may revoke or unfavorably alter the conditions of
exploration and development authorizations that we procure, or third parties
may
challenge any exploration and development authorizations we procure. Such rights
or additional rights we apply for may not be granted or renewed on terms
satisfactory to us.
If
our
property rights are reduced, whether by governmental action or third party
challenges, our ability to conduct our exploration, development and production
may be impaired.
Foreign
Currency Exchange Rate Fluctuations May Affect Our Financial
Results.
We
expect
to sell our oil and natural gas production under agreements that will be
denominated in United States dollars and foreign currencies. Many of the
operational and other expenses we incur will be paid in the local currency
of
the country where we perform our operations. Our
production is generally invoiced in United States dollars, but payment is
also
made in Argentine and Colombian pesos, at the then-current exchange rate.
As
a
result, we are exposed to translation risk when local currency financial
statements are translated to United States dollars, our company’s functional
currency. Since
we
began operating in Argentina (September 1, 2005), the rate of exchange between
the Argentine peso and US dollar has varied between 2.89 pesos to one US
dollar
to 3.13 pesos to the US dollar, a fluctuation of approximately 8%. Exchange
rates between the Colombian peso and US dollar have varied between 2,245
pesos
to one US dollar to 2,640 pesos to one US dollar since September 1, 2005,
a
fluctuation of approximately 18%. As currency exchange rates
fluctuate, translation of the statements of income of international businesses
into United States dollars will affect comparability of revenues and expenses
between periods.
Exchange
Controls and New Taxes Could Materially Affect our Ability to Fund Our
Operations and Realize Profits from Our Foreign
Operations.
Foreign
operations may require funding if their cash requirements exceed operating
cash
flow. To the extent that funding is required, there may be exchange controls
limiting such funding or adverse tax consequences associated with such funding.
In addition, taxes and exchange controls may affect the dividends that we
receive from foreign subsidiaries.
Exchange
controls may prevent us from transferring funds abroad. For example, the
Argentine government has imposed a number of monetary and currency exchange
control measures that include restrictions on the free disposition of funds
deposited with banks and tight restrictions on transferring funds abroad,
with
certain exceptions for transfers related to foreign trade and other authorized
transactions approved by the Argentine Central Bank. We cannot assure you
that
the Central Bank will not require prior authorization or will grant such
authorization for our Argentine subsidiaries to make dividend payments to
us and
we cannot assure you that there will not be a tax imposed with respect to
the
expatriation of the proceeds from our foreign subsidiaries.
14
We
Will Rely on Technology to Conduct Our Business and Our Technology Could Become
Ineffective Or Obsolete.
We
rely
on technology, including geographic and seismic analysis techniques and economic
models, to develop our reserve estimates and to guide our exploration and
development and production activities. We will be required to continually
enhance and update our technology to maintain its efficacy and to avoid
obsolescence. The costs of doing so may be substantial, and may be higher than
the costs that we anticipate for technology maintenance and development. If
we
are unable to maintain the efficacy of our technology, our ability to manage
our
business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient.
Risks
Related to Our Common Stock
The
Market Price of Our Common Stock May Be Highly Volatile and Subject to Wide
Fluctuations.
The
market price of our common stock may be highly volatile and could be subject
to
wide fluctuations in response to a number of factors that are beyond our
control, including:
| § |
dilution
caused by our issuance of additional shares of common stock and other
forms of equity securities, which we expect to make in connection
with
future capital financings to fund our operations and growth, to attract
and retain valuable personnel and in connection with future strategic
partnerships with other companies;
|
| § |
announcements
of new acquisitions, reserve discoveries or other business initiatives
by
our competitors;
|
| § |
fluctuations
in revenue from our oil and natural gas business as new reserves
come to
market;
|
| § |
changes
in the market for oil and natural gas commodities and/or in the capital
markets generally;
|
| § |
changes
in the demand for oil and natural gas, including changes resulting
from
the introduction or expansion of alternative fuels;
and
|
| § |
changes
in the social, political and/or legal climate in the regions in which
we
will operate.
|
In
addition, the market price of our common stock could be subject to wide
fluctuations in response to:
| § |
quarterly
variations in our revenues and operating
expenses;
|
| § |
changes
in the valuation of similarly situated companies, both in our industry
and
in other industries;
|
| § |
changes
in analysts’ estimates affecting our company, our competitors and/or our
industry;
|
| § |
changes
in the accounting methods used in or otherwise affecting our
industry;
|
| § |
additions
and departures of key personnel;
|
15
| § |
announcements
of technological innovations or new products available to the oil
and
natural gas industry;
|
| § |
announcements
by relevant governments pertaining to incentives for alternative
energy
development programs;
|
| § |
fluctuations
in interest rates, exchange rates and the availability of capital
in the
capital markets; and
|
| § |
significant
sales of our common stock, including sales by the investors following
registration of the shares of common stock under the registration
statement of which this prospectus is a part and/or future investors
in
future offerings we expect to make to raise additional capital.
|
These
and
other factors are largely beyond our control, and the impact of these risks,
singularly or in the aggregate, may result in material adverse changes to the
market price of our common stock and/or our results of operation and financial
condition.
Our
Operating Results May Fluctuate Significantly, and These Fluctuations May Cause
Our Stock Price to Decline.
Our
operating results will likely vary in the future primarily from fluctuations
in
our revenues and operating expenses, including the coming to market of oil
and
natural gas reserves that we are able to develop, expenses that we incur, the
prices of oil and natural gas in the commodities markets and other factors.
If
our results of operations do not meet the expectations of current or potential
investors, the price of our common stock may decline.
We
Do Not Expect to Pay Dividends In the Foreseeable
Future.
We
do not
intend to declare dividends for the foreseeable future, as we anticipate that
we
will reinvest any future earnings in the development and growth of our business.
Therefore, investors will not receive any funds unless they sell their common
stock, and stockholders may be unable to sell their shares on favorable terms
or
at all. Investors cannot be assured of a positive return on investment or that
they will not lose the entire amount of their investment in our common
stock.
Applicable
SEC Rules Governing the Trading of “Penny Stocks” Limit the Trading and
Liquidity of Our Common Stock, Which May Affect the Trading Price of the Common
Stock.
Shares
of
common stock may be considered a “penny stock” and be subject to SEC rules and
regulations which impose limitations upon the manner in which such shares may
be
publicly traded and regulate broker-dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, before a transaction in a penny stock not otherwise exempt
from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer’s account. In addition,
the penny stock rules generally require that before a transaction in a penny
stock, the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have
the
effect of reducing the level of trading activity in the secondary market for
a
stock that becomes subject to the penny stock rules which may increase the
difficulty investors may experience in attempting to liquidate such
securities.
16
SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements within the meaning of Section
27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
This prospectus includes statements regarding our plans, goals, strategies,
intent, beliefs or current expectations. These statements are expressed in
good
faith and based upon a reasonable basis when made, but there can be no assurance
that these expectations will be achieved or accomplished. These forward looking
statements can be identified by the use of terms and phrases such as “believe,”
“plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like,
and/or future-tense or conditional constructions “may,” “could,” “should,” etc.
Items contemplating or making assumptions about, actual or potential future
sales, market size, collaborations, and trends or operating results also
constitute such forward-looking statements.
Although
forward-looking statements in this prospectus reflect the good faith judgment
of
our management, forward-looking statements are inherently subject to known
and
unknown risks, business, economic and other risks and uncertainties that may
cause actual results to be materially different from those discussed in these
forward-looking statements. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
prospectus. We assume no obligation to update any forward-looking statements
in
order to reflect any event or circumstance that may arise after the date of
this
prospectus, other than as may be required by applicable law or regulation.
Readers are urged to carefully review and consider the various disclosures
made
by us in our reports filed with the Securities and Exchange Commission which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operation and cash flows. If
one
or more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, our actual results may vary materially from those
expected or projected.
SELLING
STOCKHOLDERS
This
prospectus covers shares, including shares underlying warrants, sold in our
recent private equity offerings to “accredited investors” as defined by Rule
501(a) under the Securities Act pursuant to an exemption from registration
provided in Regulation D, Rule 506 under Section 4(2) of the Securities
Act. The selling stockholders may from time to time offer and sell under this
prospectus any or all of the shares listed opposite each of their names below.
We are required, under a registration rights agreement, to register for resale
the shares of our common stock described in the table below.
The
following table sets forth information about the number of shares beneficially
owned by each selling stockholder that may be offered from time to time under
this prospectus. Certain selling stockholders may be deemed to be “underwriters”
as defined in the Securities Act. Any profits realized by the selling
stockholder may be deemed to be underwriting commissions.
The
table
below has been prepared based upon the information furnished to us by the
selling stockholders as of February 2, 2007. The selling stockholders identified
below may have sold, transferred or otherwise disposed of some or all of their
shares since the date on which the information in the following table is
presented in transactions exempt from or not subject to the registration
requirements of the Securities Act. Information concerning the selling
stockholders may change from time to time and, if necessary, we will amend
or
supplement this prospectus accordingly. We cannot give an estimate as to the
number of shares of common stock that will be held by the selling stockholders
upon termination of this offering because the selling stockholders may offer
some or all of their common stock under the offering contemplated by this
prospectus. The total number of shares that may be sold hereunder will not
exceed the number of shares offered hereby. Please read the section entitled
“Plan of Distribution” in this prospectus.
17
We
have
been advised, as noted below in the footnotes to the table, none
of the
selling stockholders are broker-dealers and 13
of
the
selling stockholders are affiliates of broker-dealers. We have been advised
that
each such affiliate of a broker-dealer purchased our common stock and warrants
in the ordinary course of business, not for resale, and at the time of purchase,
did not have any agreements or understandings, directly or indirectly, with
any
person to distribute the related common stock.
The
following table sets forth the name of each selling stockholder, the nature
of
any position, office, or other material relationship, if any, which the selling
stockholder has had, within the past three years, with us or with any of our
predecessors or affiliates, and the number of shares of our common stock
beneficially owned by such stockholder before this offering. The number of
shares owned are those beneficially owned, as determined under the rules of
the
SEC, and such information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership includes any
shares of common stock as to which a person has sole or shared voting power
or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or right,
through conversion of any security or pursuant to the automatic termination
of a
power of attorney or revocation of a trust, discretionary account or similar
arrangement.
Unless
otherwise indicated, the stockholders listed in the table below acquired their
shares in the private offerings. The percentage of common stock outstanding
is
based upon a total of 95,455,765 shares of common stock outstanding, which
includes 16,666,667 exchangeable shares of Goldstrike Exchange Co. issued to
holders of Gran Tierra Canada’s common stock. Shares underlying warrants
exercisable within 60 days of February 2, 2007 are considered for the purpose
of
determining the percent of the class held by the holder of such warrants, but
not for the purpose of computing the percentages held by others. We have assumed
all shares reflected on the table will be sold from time to time. Because the
selling stockholders may offer all or any portion of the common stock listed
in
the table below, no estimate can be given as to the amount of those shares
of
common stock that will be held by the selling stockholders upon the termination
of any sales of common stock.
Beneficial
ownership is calculated based on 95,455,765 shares of our common stock
outstanding as of February 2, 2007, which includes 16,666,667 exchangeable
shares of Goldstrike Exchange Co. issued to holders of Gran Tierra Canada’s
common stock. Beneficial ownership is determined in accordance with Rule 13d-3
of the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or become exercisable within 60 days of February 2,
2007 are deemed outstanding even if they have not actually been exercised.
Those
shares, however, are not deemed outstanding for the purpose of the table. The
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the stockholder’s name,
subject to community property laws, where applicable.
18
|
Shares
of Common
Stock Owned
Before the
Offering
|
Shares
of Common Stock
Being Offered
|
Shares
of Common
Stock Owned
Upon Completion
of the
Offering (a)
|
Percentage
of Common
Stock Outstanding
Upon Completion
of Offering
|
||||||||||
|
Amaran
Tyab1
|
7,500
|
7,500
|
--
|
--
|
|||||||||
|
Arleen
Agate2
|
41,125
|
15,625
|
25,500
|
*
|
|||||||||
|
Arnie
Charbonneau3
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Arthur
Ruoff4
|
48,000
|
48,000
|
--
|
--
|
|||||||||
|
Aton
Select Fund Ltd.5
|
937,431
|
937,431
|
--
|
--
|
|||||||||
|
Bank
Sal. Oppenheim jr. & Cie (Switzerland) Ltd.6
|
1,536,500
|
1,536,500
|
--
|
--
|
|||||||||
|
Barbara
Jean Taylor7
|
149,982
|
149,982
|
--
|
--
|
|||||||||
|
Barry
R. Balsillie8
|
233,730
|
75,000
|
158,730
|
*
|
|||||||||
|
Bashaw
Fertilizer Ltd.9
|
112,500
|
112,500
|
--
|
--
|
|||||||||
|
Bayford
Investments, Ltd.10
|
150,000
|
150,000
|
--
|
--
|
|||||||||
|
Beattie
Homes Ltd.11
|
149,982
|
149,982
|
--
|
--
|
|||||||||
|
Bela
Balaz12
|
29,978
|
29,978
|
--
|
--
|
|||||||||
|
Ben
T. Morris13
|
138,750
|
93,750
|
45,000
|
*
|
|||||||||
|
Bernie
Broda14
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Betty
Wong15
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Catherine
E. Coffield16
|
75,000
|
75,000
|
--
|
--
|
|||||||||
|
Chad
Oakes17
|
644,957
|
374,972
|
269,985
|
*
|
|||||||||
|
Clive
Mark Stockdale18
|
48,000
|
48,000
|
--
|
--
|
|||||||||
|
Code
Consulting Ltd.19
|
75,000
|
75,000
|
--
|
--
|
|||||||||
|
Dale
Foster20
|
191,825
|
37,472
|
154,353
|
*
|
|||||||||
|
Dana
Quentin Coffield21
|
1,834,662
|
44,978
|
1,789,784
|
1.87
|
%
|
||||||||
|
Danich
Investments, Ltd.22
|
21,875
|
21,875
|
--
|
--
|
|||||||||
|
Daniel
Todd Dane23
|
849,977
|
749,978
|
99,999
|
*
|
|||||||||
|
Don
A. Sanders24
|
675,000
|
375,000
|
300,000
|
*
|
|||||||||
|
Donald
A. Wright25
|
1,658,730
|
750,000
|
908,730
|
*
|
|||||||||
|
Donald
V. Weir and Julie E. Weir26
|
258,750
|
93,750
|
165,000
|
*
|
|||||||||
|
Earl
Fawcett27
|
21,875
|
21,875
|
--
|
--
|
|||||||||
|
Edward
B. Antonsen28
|
102,500
|
20,000
|
82,500
|
*
|
|||||||||
|
Edward
Armogan29
|
18,000
|
18,000
|
--
|
--
|
|||||||||
|
Edward
C. Grant30
|
74,982
|
74,982
|
--
|
--
|
|||||||||
|
Edwin
Lau31
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Elizabeth
J. Fenton32
|
37,500
|
37,500
|
--
|
--
|
|||||||||
|
Eric
Pederson33
|
21,875
|
21,875
|
--
|
--
|
|||||||||
|
Faccone
Enterprises Ltd.34
|
45,625
|
15,625
|
30,000
|
*
|
|||||||||
|
Gary
Gee Wai Hoy and Lily Lai Wan Hoy35
|
41,119
|
15,619
|
25,500
|
*
|
|||||||||
|
George
L. Ball36
|
198,750
|
93,750
|
105,000
|
--
|
|||||||||
|
George
Vernon Symons37
|
44,978
|
44,978
|
--
|
--
|
|||||||||
|
Grant
Hodgins38
|
41,119
|
15,619
|
25,500
|
*
|
|||||||||
|
Greg
Crowe39
|
46,875
|
46,875
|
--
|
--
|
|||||||||
19
|
Shares
of Common
Stock Owned
Before the
Offering
|
Shares
of Common Stock
Being Offered
|
Shares
of Common
Stock Owned
Upon Completion
of the
Offering (a)
|
Percentage
of Common
Stock Outstanding
Upon Completion
of Offering
|
||||||||||
|
Gregg
J. Sedun40
|
212,491
|
62,491
|
150,000
|
*
|
|||||||||
|
Hans
Rueckert41
|
13,500
|
13,500
|
--
|
--
|
|||||||||
|
Henry
Polessky42
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Hollyvale
Limited43
|
35,500
|
10,000
|
25,500
|
*
|
|||||||||
|
Humbert
B. Powell III44
|
46,875
|
46,875
|
--
|
--
|
|||||||||
|
James
E. Anderson45
|
75,000
|
75,000
|
--
|
--
|
|||||||||
|
James
Fletcher46
|
15,000
|
15,000
|
--
|
--
|
|||||||||
|
James
L. Harris47
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Jamie
Gilkison48
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Janet
R. Denhamer49
|
37,472
|
37,472
|
--
|
--
|
|||||||||
|
Jason
Soprovich Realty Inc.50
|
46,875
|
46,875
|
--
|
--
|
|||||||||
|
Jeffrey
J. Scott51
|
2,513,861
|
674,972
|
1,838,889
|
1.93
|
%
|
||||||||
|
Jim
and Kathleen Gilders52
|
93,728
|
93,728
|
--
|
--
|
|||||||||
|
Jim
Anderson53
|
7,500
|
7,500
|
--
|
--
|
|||||||||
|
John
and Jodi Malanga54
|
63,000
|
37,500
|
25,500
|
*
|
|||||||||
|
John
W. Seaman55
|
9,999
|
9,999
|
--
|
--
|
|||||||||
|
Joseph
Grosso56
|
25,000
|
25,000
|
--
|
--
|
|||||||||
|
Ken
Wong57
|
41,125
|
15,625
|
25,500
|
*
|
|||||||||
|
Kent
Kirby58
|
7,500
|
7,500
|
--
|
--
|
|||||||||
|
Kent
Milani59
|
15,000
|
15,000
|
--
|
--
|
|||||||||
|
Kyung
Chun Min60
|
27,700
|
2,500
|
25,200
|
*
|
|||||||||
|
Lamond
Investments Ltd61
|
187,500
|
187,500
|
--
|
--
|
|||||||||
|
Lindsay
Bottomer62
|
37,500
|
37,500
|
--
|
--
|
|||||||||
|
Lisa
Streu63
|
84,375
|
84,375
|
--
|
--
|
|||||||||
|
LSM
Business Services Ltd.64
|
76,875
|
46,875
|
30,000
|
*
|
|||||||||
|
Mahmood
Mangalji65
|
7,500
|
7,500
|
--
|
--
|
|||||||||
|
Mark
E. Cline66
|
46,875
|
46,875
|
--
|
--
|
|||||||||
|
Michael
Graham67
|
60,000
|
60,000
|
--
|
--
|
|||||||||
|
Michael
J. Stark68
|
187,472
|
187,472
|
--
|
--
|
|||||||||
|
Michael
Paraskake69
|
63,000
|
37,500
|
25,500
|
*
|
|||||||||
|
Michael
F. Schaefer70
|
500,000
|
500,000
|
--
|
--
|
|||||||||
|
Nadine
C. Smith and John D. Long, Jr71
|
2,065,761
|
937,500
|
1,128,261
|
1.18
|
%
|
||||||||
|
Neil
Davey72
|
7,500
|
7,500
|
--
|
--
|
|||||||||
|
Nell
Dragovan73
|
46,875
|
46,875
|
--
|
--
|
|||||||||
|
Nick
DeMare74
|
62,491
|
62,491
|
--
|
--
|
|||||||||
|
North
Group Limited75
|
20,000
|
20,000
|
|||||||||||
|
Perfco
Investments Ltd.76
|
2,412,302
|
525,000
|
1,877,302
|
1.97
|
%
|
||||||||
20
|
Shares
of Common
Stock Owned
Before the
Offering
|
Shares
of Common Stock
Being Offered
|
Shares
of Common
Stock Owned
Upon Completion
of the
Offering (a)
|
Percentage
of Common
Stock Outstanding
Upon Completion
of Offering
|
||||||||||
|
Postell
Energy Co Ltd77
|
37,500
|
37,500
|
--
|
--
|
|||||||||
|
Professional
Trading Services SA78
|
937,500
|
937,500
|
--
|
--
|
|||||||||
|
Prussian
Capital Corp79
|
75,000
|
75,000
|
--
|
--
|
|||||||||
|
Richard
M. Crawford80
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
Richard
Machin81
|
63,750
|
37,500
|
26,250
|
*
|
|||||||||
|
Richard
MacDermott82
|
247,478
|
187,478
|
60,000
|
*
|
|||||||||
|
Rob
Anderson83
|
91,250
|
91,250
|
--
|
--
|
|||||||||
|
Robert
A. Fenton84
|
37,500
|
37,500
|
--
|
--
|
|||||||||
|
Robert
D. Steele85
|
549,960
|
112,500
|
437,460
|
*
|
|||||||||
|
Robert
K. Macleod86
|
39,999
|
15,000
|
24,999
|
*
|
|||||||||
|
Ron
Carey87
|
74,978
|
74,978
|
--
|
--
|
|||||||||
|
Rowena
M. Santos88
|
41,125
|
15,625
|
25,500
|
*
|
|||||||||
|
Samuel
Belzberg89
|
156,250
|
156,250
|
--
|
--
|
|||||||||
|
Sanders
1998 Childrens Trust90
|
187,500
|
187,500
|
--
|
--
|
|||||||||
|
Sanders
Opportunity Fund (Institutional) LP91
|
1,520,904
|
721,329
|
799,575
|
*
|
|||||||||
|
Sanders
Opportunity Fund LP92
|
475,971
|
225,546
|
250,425
|
*
|
|||||||||
|
Sanovest
Holdings Ltd.93
|
577,500
|
202,500
|
375,000
|
--
|
|||||||||
|
Sara
Tyab94
|
2,500
|
2,500
|
--
|
--
|
|||||||||
|
Sean
Warren95
|
33,750
|
33,750
|
--
|
--
|
|||||||||
|
Standard
Bank PLC 96
|
1,875,000
|
1,875,000
|
--
|
--
|
|||||||||
|
Suljo
Dzafovic97
|
15,000
|
15,000
|
--
|
--
|
|||||||||
|
Tammy
L. Gurr98
|
28,125
|
28,125
|
--
|
--
|
|||||||||
|
The
Brewster Family Trust99
|
15,625
|
15,625
|
--
|
--
|
|||||||||
|
The
MacLachlan Investments Corporation100
|
62,500
|
62,500
|
--
|
--
|
|||||||||
|
Tom
Chmilar101
|
15,000
|
15,000
|
--
|
--
|
|||||||||
|
Tom
Rebane102
|
22,500
|
22,500
|
--
|
--
|
|||||||||
|
Ursula
Kaiser103
|
37,500
|
37,500
|
--
|
--
|
|||||||||
|
Verne
G. Johnson104
|
1,232,725
|
187,478
|
1,645,247
|
1.72
|
%
|
||||||||
|
VP
Bank (Switzerland) Ltd.105
|
562,550
|
312,500
|
250,050
|
--
|
|||||||||
|
Walter
A. Dawson106
|
401,587
|
300,000
|
101,587
|
*
|
|||||||||
|
Wayne
Hucik107
|
21,875
|
21,875
|
--
|
--
|
|||||||||
|
Wildcat
Investments Ltd.108
|
75,000
|
75,000
|
--
|
--
|
|||||||||
|
William
Lowe109
|
93,750
|
93,750
|
--
|
--
|
|||||||||
|
William
McCluskey110
|
393,750
|
393,750
|
--
|
--
|
|||||||||
|
1053361
Alberta Ltd.111
|
491,865
|
262,500
|
229,365
|
*
|
|||||||||
|
1087741
Alberta Ltd.112
|
15,993
|
15,993
|
--
|
--
|
|||||||||
|
666977
Alberta Ltd.113
|
12,000
|
12,000
|
--
|
--
|
|||||||||
|
893619
Alberta Ltd.114
|
149,972
|
149,972
|
--
|
--
|
|||||||||
|
954866
Alberta Ltd.115
|
30,000
|
30,000
|
--
|
--
|
|||||||||
*
Less
than 1.0%.
(a)
Assumes all of the shares of common stock beneficially owned by the selling
stockholders, including all shares of common stock underlying warrants
held by
the selling stockholders, are sold in the offering.
21
1Includes
5,000 shares of common stock and warrants to acquire an additional 2,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering.
2Includes
warrants to acquire 15,625 shares of common stock at an exercise price of $1.25
per share, acquired in the First 2005 Offering. Mrs. Agate also holds 17,000
shares of common stock and warrants to acquire an additional 8,500 shares
of
common stock at an exercise price of $1.75 per share, acquired in the June,
2006
private offering.
3 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
4
Includes
32,000 shares of common stock and warrants to acquire an additional 16,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
5 Includes
624,954 shares of common stock and warrants to acquire an additional 312,477
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Werner Keicher and David Dawes have the power to vote
and
dispose of the shares being registered on behalf of Aton Select Fund Ltd.
6 Includes 474,000
shares of common stock and warrants to acquire an additional 1,062,500
shares of
common stock at an exercise price of $1.25 per share, acquired in the First
2005
Offering. R. Gelant and U. Fricher have the power to vote and dispose of
the
shares being registered on behalf of Bank Sal. Oppenheimer Jr.
7Includes
99,988 shares of common stock and warrants to acquire an additional 49,994
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
8 Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Includes 158,703 exchangeable shares issued on November
10,
2005 in connection with the share exchange.
9 Includes 112,500
shares of common stock acquired in the First 2005 Offering, including 37,500
shares of common stock acquired upon exercise of warrants. Richard Groom
has the power to vote and dispose of the common shares being registered
on
behalf of Bashaw Fertilizer Ltd.
10 Includes
100,000 shares of common stock and warrants to acquire an additional 50,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Ronald Brimacombe has the power to vote and dispose
of the
common shares being registered on behalf of Bayford Investments, Ltd.
11
Includes
99,988 shares of common stock and warrants to acquire an additional 49,994
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. William K. Beattie has the power to vote and dispose
of the
common shares being registered on behalf of Beattie Homes Ltd.
12 Includes
19,985 shares of common stock and warrants to acquire an additional 9,993
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering.
13 Includes
62,500 shares of common stock and warrants to acquire an additional 31,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Morris also holds 30,000 shares of common
stock and warrants to acquire an additional 15,000 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Mr. Morris is an affiliate of a broker-dealer.
14 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
15 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
16 Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Ms. Coffield is the mother of Dana Coffield, who serves
as
our President, Chief Executive Officer and as a member of the board of
directors.
17 Includes
249,981 shares of common stock and warrants to acquire an additional 124,991
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Oakes also holds 179,990 shares of common
stock and warrants to acquire an additional 89,995 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private
offering.
22
18 Includes
32,000 shares of common stock and warrants to acquire an additional 16,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Stockdale is an affiliate of a broker-dealer.
19 Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. Lance Tracey has the power to vote and dispose of
the
common shares being registered on behalf of Code Consulting Ltd.
20 Includes
24,981 shares of common stock and warrants to acquire an additional 12,491
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Foster also holds 79,365 exchangeable shares
issued on November 10, 2005 in connection with the share exchange, and
49,992
shares of common stock and warrants to acquire an additional 24,996 shares
of
common stock at an exercise price of $1.75 per share, acquired in the June,
2006
private offering.
21 Includes
29,985 shares of common stock and warrants to acquire an additional 14,993
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Coffield also holds 66,667 shares of common
stock and warrants to acquire an additional 33,334 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering,
and 1,689,683 exchangeable shares issued on November 10, 2005 in connection
with the share exchange. Mr. Coffield serves as our President, Chief Executive
Officer and as a member of the board of directors.
22 Includes
warrants to acquire 21,875 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. Danny Remenda has the power
to
vote and dispose of the common shares being registered on behalf of Danich
Investments, Ltd.
23 Includes
499,985 shares of common stock and warrants to acquire an additional 249,993
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Dane also holds 66,666 shares of common stock
and warrants to acquire an additional 33,333 shares of common stock at
an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
24 Includes
250,000 shares of common stock and warrants to acquire an additional 125,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Sanders also holds 200,000 shares of common
stock and warrants to acquire an additional 100,000 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Mr. Sanders is an affiliate of a broker-dealer.
25 Includes
500,000 shares of common stock and warrants to acquire an additional 250,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Wright also holds 158,730 exchangeable shares
issued on November 10, 2005 in connection with the share exchange,
and 500,000 shares of common stock and warrants to acquire an additional
250,000 shares of common stock at an exercise price of $1.75 per share,
acquired
in the June, 2006 private offering.
26
Includes
62,500 shares of common stock and warrants to acquire an additional 31,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 100,000 shares
of common stock and warrants to acquire an additional 50,000 shares of
common
stock at an exercise price of $1.75 per share, acquired in the June, 2006
private offering, and 10,000 shares of common stock and warrants to acquire
an additional 5,000 shares of common stock at an exercise price of $1.75
per
share, held by IRA for the benefit of Julie Weir/Pershing LLC as Custodian,
acquired in the June, 2006 private offering. This selling stockholder is
a
broker-dealer.
27 Includes
warrants to acquire 21,875 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
28 Includes
warrants to acquire 20,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the Second 2005 Offering. Mr. Antonsen also
holds 55,000 shares of common stock and warrants to acquire an additional
27,500 shares of common stock at an exercise price of $1.75 per share,
acquired
in the June, 2006 private offering.
29 Includes
12,000 shares of common stock and warrants to acquire an additional 6,000
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
30 Includes
49,988 shares of common stock and warrants to acquire an additional 24,994
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
31 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
32 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
23
33
Includes
warrants to acquire 21,875 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
34
Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 20,000 shares of common stock and warrants to acquire an additional
10,000
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering. Mario Faccone has the power to vote and dispose
of
the common shares being registered on behalf of Faccone Enterprises.
35 Includes
warrants to acquire 15,619 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 17,000 shares of common stock and warrants to acquire an additional
8,500
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
36 Includes
62,500 shares of common stock and warrants to acquire an additional 31,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 70,000 shares of
common
stock and warrants to acquire an additional 35,000 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Mr. Ball is an affiliate of a broker-dealer.
37 Includes
29,985 shares of common stock and warrants to acquire an additional 14,993
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
38
Includes
warrants to acquire 15,619 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 17,000 shares of common stock and warrants to acquire an additional
8,500
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
39 Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
40 Includes
warrants to acquire 62,491 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 100,000 shares of common stock and warrants to acquire an additional
50,000 shares of common stock at an exercise price of $1.75 per share,
acquired
in the June, 2006 private offering.
41 Includes
warrants to acquire 13,500 shares of common stock at an exercise price
os $1.25
per share, acquired in the First 2005 Offering.
42
Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
43 Includes
warrants to acquire 10,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds17,000 shares of common stock and warrants to acquire an additional
8,500
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering. Jeremy Spring has the power to vote and dispose
of
the common shares being registered on behalf of Hollyvale Limited.
44
Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Mr. Powell is an affiliate of a broker-dealer.
45 Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
46 Includes
warrants to acquire 15,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
47 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
48 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
49 Includes
24,981 shares of common stock and warrants to acquire an additional 12,491
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
50 Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Jason Soprovich has the power to vote and dispose
of the
common shares being registered on behalf of Jason Soprovich Realty.
51 Includes
349,981 shares of common stock and warrants to acquire an additional 174,991
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Includes 100,000 shares of common stock and warrants
to
acquire an additional 50,000 shares of common stock at an exercise price
of
$1.25 per share, acquired in the Second 2005 Offering. Mr. Scott also holds
1,688,889 exchangeable shares issued on November 10, 2005 in connection
with the
share exchange and
100,000 shares of common stock and warrants to acquire 50,000 shares of
common
stock at an exercise price of $1.75 per share, acquired in our June, 2006
private offering. Mr. Scott serves as our Chairman of the Board.
24
52
Includes
62,485 shares of common stock and warrants to acquire an additional 31,243
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
53 Includes
5,000 shares of common stock and warrants to acquire an additional 2,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
54 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. John and Jodi Malanga are affiliates of a broker-dealer.
The selling stockholders also hold 17,000 shares of common stock and warrants
to
acquire an additional 8,500 shares of common stock at an exercise price
of $1.75
per share, held by IRA for the benefit of Jodi Malanga/Pershing LLC as
Custodian, acquired in the June, 2006 private offering.
55 Includes
warrants to acquire 9,999 shares of common stock at an exercise price of
$1.25
per share, acquired in the Second 2005 Offering.
56 Includes
warrants to acquire 25,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
57 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 17,000 shares of common stock and warrants to acquire an additional
8,500
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
58 Includes
5,000 shares of common stock and warrants to acquire an additional 2,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
59 Includes
10,000 shares of common stock and warrants to acquire an additional 5,000
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
60 Includes
warrants to acquire 2,500 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 16,800 shares of common stock and warrants to acquire an additional
8,400
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
61 Includes
125,000 shares of common stock and warrants to acquire an additional 62,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. Robert Lamond, president of Lamond Investments, Ltd.
has
the power to vote and dispose of the common shares being registered on
behalf of
Lamond Investments, Ltd.
62
Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
63 Includes
56,250 shares of common stock and warrants to acquire an additional 28,125
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
64 Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. The selling stockholder also holds 20,000 shares
of common
stock and warrants to acquire an additional 10,000 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Lloyd Guenther has the power to vote and dispose of the common shares being
registered on behalf of LSM Business Services, Ltd.
65 Includes
5,000 shares of common stock and warrants to acquire an additional 2,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering.
66
Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
67
Includes
40,000 shares of common stock and warrants to acquire an additional 20,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
68 Includes
124,981 shares of common stock and warrants to acquire an additional 62,491
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
69 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 17,000 shares of
common
stock and warrants to acquire an additional 8,500 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
70 Includes
warrants to acquire 125,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. Includes 250,000 shares
of
common stock and warrants to acquire an additional 125,000 shares of common
stock at an exercise price of $1.25 per share, acquired in the Second 2005
Offering.
25
71
Includes
625,000 shares of common stock and warrants to acquire an additional 312,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholders also own 978,261 shares of
Goldstrike Inc., the former public reporting company, and 100,000 shares
of
common stock and warrants to acquire an additional
50,000 shares of common stock at an exercise price of $1.75 per share,
acquired
by John D. Long in the June, 2006 private offering. Ms. Smith serves as
a member
of our board of directors.
72 Includes
5,000 shares of common stock and warrants to acquire an additional 2,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering.
73 Includes
31,250 shares of common stock and warrants to acquire an additional 15,625
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
74 Includes
warrants to acquire 62,491 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
75 Includes
warrants to acquire 20,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the Second 2005 Offering. Tom Kusumoto has the power
to
vote and dispose of the common shares being registered on behalf of North
Group
Limited.
76 Includes
350,000 shares of common stock and warrants to acquire an additional 175,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 200,000 shares
of common
stock and warrants to acquire an additional 100,000 shares of common stock
at an
exercise price of $1.75 per share, acquired
in the June, 2006 private offering, and 1,587,302 exchangeable shares
issued on November 10, 2005 in connection with the share exchange. Mr.
Dawson,
is a member of our board of directors, is the sole owner of Perfco Investments
Ltd. Mr. Dawson has sole investment and voting power over the shares of
common
stock owned by Perfco and disclaims beneficial ownership of such shares.
77 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Jeffrey
Scott, Chairman of our Board of Directors, is the President of Postell
Energy
Co. Ltd. and has the power to vote and dispose of the common shares being
registered on its behalf.
78
Includes
625,000 shares of common stock and warrants to acquire an additional 312,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Rene Simon has the power to vote and dispose of the
common
shares being registered on behalf of Professional Trading Services SA.
79
Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. Cary Pinkowski has the power to vote and dispose
of the
common shares being registered on behalf of Prussian Capital Corp.
80
Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
81 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 17,500 shares of
common
stock
and
warrants to acquire an additional 8,750 shares of common stock at an exercise
price of $1.75 per share, acquired in the June, 2006 private offering.
82 Includes
124,985 shares of common stock and warrants to acquire an additional 62,493
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 40,000 shares of
common
stock and warrants to acquire an additional 20,000 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
83 Includes
warrants to acquire 31,250 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. Includes 40,000 shares
of common
stock and warrants to acquire an additional 20,000 shares of common stock
at an
exercise price of $1.25 per share, acquired in the Second 2005 Offering.
This
selling stockholder is a broker-dealer.
84 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
85 Includes
75,000 shares of common stock and warrants to acquire an additional 37,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 80,000 shares
of common stock and warrants to acquire an additional 40,000 shares of
common
stock at an exercise price of $1.75 per share, acquired in the June, 2006
private offering.
86 Includes
warrants to acquire 15,000 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 16,666 shares of common stock and warrants to acquire an additional
8,333
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
26
87
Includes
49,985 shares of common stock and warrants to acquire an additional 24,993
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
88 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The selling stockholder
also
holds 17,000 shares of common stock and warrants to acquire an additional
8,500
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering.
89 Includes
warrants to acquire 156,250 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering.
90 Includes
125,000 shares of common stock and warrants to acquire an additional 62,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Sanders 1998 Children’s Trust is an affiliate of a
broker-dealer. Don Sanders has the power to vote and dispose of the common
shares being registered on behalf of Sanders 1998 Children’s Trust. Sanders 1998
Children’s Trust does not have any agreements, arrangements or understandings
with any other persons, either directly or indirectly to dispose of the
common
stock being registered.
91 Includes
480,886 shares of common stock and warrants to acquire an additional 240,443
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 533,050 shares
of common
stock and warrants to acquire an additional 266,525 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Sanders Opportunity Fund (Institutional) LP is an affiliate of a broker-dealer.
Don Sanders has the power to vote and dispose of the common shares being
registered on behalf of Sanders Opportunity Fund (Inst) LP.
92 Includes
150,364 shares of common stock and warrants to acquire an additional 75,182
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 166,950 shares
of common
stock and warrants to acquire an additional 83,475 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering.
Sanders Opportunity Fund LP is an affiliate of a broker-dealer. Don Sanders
has
the power to vote and dispose of the common shares being registered on
behalf of
Sanders Opportunity Fund LP.
93 Includes
62,500 shares of common stock and warrants to acquire an additional 31,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering, and 72,500 shares of common stock and warrants to
acquire
an additional 36,250 shares of common stock at an exercise price of $1.25
per
share, acquired in the Second 2005 Offering. The selling stockholder also
holds
250,000 shares of common stock and warrants to acquire an additional 125,000
shares of common stock at an exercise price of $1.75 per share, acquired
in the
June, 2006 private offering. Tom and Hydri Kusumoto have the power to vote
and
dispose of the common shares being registered on behalf of Sanovest Holdings
Ltd.
94 Includes
warrants to acquire 2,500 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering.
95
Includes
22,500 shares of common stock and warrants to acquire an additional 11,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering.
96
Includes
1,250,000 shares of common stock and warrants to acquire an additional
625,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Roderick Frasier and Manuel Gonzales have the power
to vote
and dispose of the common shares being registered on behalf of Standard
Bank
PLC.
97 Includes
10,000 shares of common stock and warrants to acquire an additional 5,000
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
98
Includes
18,750 shares of common stock and warrants to acquire an additional 9,375
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering.
99 Includes
warrants to acquire 15,625 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. Jim Brewster has the power
to
vote and dispose of the common shares being registered on behalf of The
Brewster
Family Trust.
100 Includes
warrants to acquire 62,500 shares of common stock at an exercise price
of $1.25
per share, acquired in the First 2005 Offering. The MacLachlan
Investments Corporation
is an affiliate of a broker-dealer. Peter Brown has the power to vote and
dispose of the common shares being registered on behalf of The MacLachlan
Investments Corporation.
27
101 Includes
warrants to acquire 15,000 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering.
102 Includes
15,000 shares of common stock and warrants to acquire an additional 7,500
shares
of common stock at an exercise price of $1.25 per share, acquired in the
Second
2005 Offering.
103 Includes
25,000 shares of common stock and warrants to acquire an additional 12,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
104 Includes
124,985 shares of common stock and warrants to acquire an additional 62,493
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 100,006 shares of
common
stock and warrants to acquire an additional 50,003 shares of common stock
at an
exercise price of $1.75 per share, acquired in the June, 2006 private offering,
and 895,238 exchangeable shares issued on November 10, 2005 in connection
with the share exchange. Mr. Johnson serves as a member of our board of
directors.
105 Includes
warrants to acquire 312,500 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering. The selling stockholder also
holds 166,700 shares of common stock and warrants to acquire an additional
83,350 shares of common stock at an exercise price of $1.75 per share, acquired
in the June, 2006 private offering. Daniel Lacher has the power to vote and
dispose of the common shares being registered on behalf of VP Bank (Switzerland)
Ltd.
106 Includes
200,000 shares of common stock and warrants to acquire an additional 100,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. The selling stockholder also holds 101,587 exchangeable
shares issued on November 10, 2005 in connection with the share exchange.
Mr.
Dawson serves as a member of our board of directors.
107 Includes
warrants to acquire 21,875 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering.
108
Includes
50,000 shares of common stock and warrants to acquire an additional 25,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Bruce Nurse has the power to vote and dispose of the
common
shares being registered on behalf of Wildcat Investments Ltd.
109 Includes
62,500 shares of common stock and warrants to acquire an additional 31,250
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering.
110 Includes
262,500 shares of common stock and warrants to acquire 131,250 shares of
common
stock at an exercise price of $1.25 per share, acquired in the Third 2005
Offering. Mr. McCluskey is an affiliate of a broker-dealer.
111 Includes
175,000 shares of common stock and warrants to acquire an additional 87,500
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. The selling stockholder also holds 79,365 exchangeable
shares issued on November 10, 2005 in connection with the share exchange,
and 100,000 shares of common stock and warrants to acquire an additional
50,000 shares of common stock at an exercise price of $1.75 per share, acquired
in the June, 2006 private offering. Glenn Gurr, President of 1053361 Alberta
Ltd. has sole voting and investment power over these shares.
112 Includes
warrants to acquire 15,993 shares of common stock at an exercise price of
$1.25
per share, acquired in the First 2005 Offering. Wade MacBain has the power
to
vote and dispose of the common shares being registered on behalf of 1087741
Alberta Ltd.
113 Includes
8,000 shares of common stock and warrants to acquire an additional 4,000
shares
of common stock at an exercise price of $1.25 per share, acquired in the
First
2005 Offering. Serge Bonnet has the power to vote and dispose of the common
shares being registered on behalf of 666977
Alberta Ltd.
114 Includes
99,981 shares of common stock and warrants to acquire an additional 49,991
shares of common stock at an exercise price of $1.25 per share, acquired
in the
First 2005 Offering. Dale Foster has the power to vote and dispose of the
common
shares being registered on behalf of 893619
Alberta Ltd.
115 Includes
20,000 shares of common stock and warrants to acquire an additional 10,000
shares of common stock at an exercise price of $1.25 per share, acquired
in the
Second 2005 Offering. Scott Harkness has the power to vote and dispose of
the
common shares being registered on behalf of 954866 Alberta Ltd.
28
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale by the selling stockholders of our common
stock. We will receive approximately $9,092,264 if the selling stockholders
exercise their warrants in full. The warrant holders may exercise their warrants
at any time until their expiration, as further described in the “Description of
Securities.” Because the warrant holders may exercise the warrants in their own
discretion, we cannot plan on specific uses of proceeds beyond application
of
proceeds to general corporate purposes. These proceeds will be used for general
corporate purposes and capital expenditures. We have agreed to bear the expenses
in connection with the registration of the common stock being offered hereby
by
the selling stockholders.
DETERMINATION
OF OFFERING PRICE
The
selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices, or at privately
negotiated prices.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock was first cleared for quotation on the OTC Bulletin Board on
November 11,
2005
and has been trading since that time under the symbol "GTRE.OB."
As
of February 2, 2007 there were approximately 544 holders of
record of shares of our common stock (including holders of exchangeable shares).
On February
2, 2007, the last reported sales price of our shares on the OTC Bulletin Board
was $1.46. For
the
periods indicated, the following table sets forth the high and low bid prices
per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
|
Quarter
Ended
|
High
|
Low
|
|||||
| March 31, 2007 (through February 2) | $ |
1.64
|
$ |
0.88
|
|||
| December 31, 2006 |
$
|
1.85 |
$
|
1.08 | |||
| September 30, 2006 |
$
|
3.70 |
$
|
1.45 | |||
|
June
30, 2006
|
$ |
5.12
|
$ |
2.57
|
|||
|
March
31, 2006
|
$ |
6.06
|
$ |
2.94
|
|||
|
December
31, 2005
|
$
|
2.83
|
$
|
1.01
|
|||
As
of
February 2, 2007, there are 95,455,765 shares of common stock issued and
outstanding, which number includes shares of common stock issuable upon exchange
of the exchangeable shares of Goldstrike Exchange Co. issued to former holders
of Gran Tierra Canada’s common stock.
Equity
Compensation Plan
Securities
authorized for issuance under equity compensation plans as of December 31,
2006
are as follows:
29
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||
|
(a)
|
(b)
|
(c)
|
||||
|
Equity
compensation plans approved by security holders
|
1,830,000
|
$1.12
|
170,000
|
|||
|
Equity
compensation plans not approved by security
holders
|
875,000
|
$1.27
|
1,125,000
|
|||
|
Total
|
2,705,000
|
—
|
1,295,000
|
Equity
compensation plans approved by our stockholders include our 2005 Equity
Incentive Plan, under which our board of directors is authorized to issue
options or other rights to acquire up to 2,000,000 shares of our common stock.
The shares of common stock underlying awards granted under the 2005 Equity
Compensation Plan include options to acquire 1,580,000 shares of common stock
at
an exercise price of $0.80 per share, granted on November 10, 2005 and options
to acquire 250,000 shares of common stock at an exercise price of $2.62 per
share, granted on December 15, 2005. The compensation committee will determine
the period of time during which an option may be exercised, except that no
option may be exercised more than ten years after the date of
grant.
On
November 8, 2006 our Board of Directors amended the 2005 Equity Incentive
Plan
to increase the number of shares of our common stock which may be issued
pursuant to awards under the plan, from 2,000,000 shares to 4,000,000 shares.
On
that same day, the Board of Directors granted options to acquire 875,000
shares
of our common stock to certain of our employees and directors. The Board
of
Directors’ amendment of the 2005 Equity Incentive Plan, and all such grants,
were made expressly conditioned on our stockholder’s approval of such amendment,
which approval must be given no later than November 8, 2007. If we have not
received stockholder approval of the amendment by November 8, 2007, the
amendment will be rescinded and all such awards will be
forfeited.
DIVIDEND
POLICY
We
have
never declared or paid dividends on the shares of common stock and we intend
to
retain future earnings, if any, to support the development of the business
and
therefore do not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board
of
directors after taking into account various factors, including current financial
condition, operating results and current and anticipated cash needs.
30
MANAGEMENT’S
DISCUSSION AND ANLAYSIS
The
following discussion should be read in conjunction with the attached financial
statements and notes thereto. Except for the historical information contained
herein, the matters discussed below are forward-looking statements that involve
certain risks and uncertainties, including, among others, the risks and
uncertainties discussed below.
Overview
We
are an
independent international energy company involved in oil and natural gas
exploration and exploitation. We plan to continually increase our oil and
natural gas reserves through a balanced strategy of exploration drilling,
development and acquisitions in South America. Initial countries of interest
are
Argentina, Colombia and Peru.
We
took our current form on November 10, 2005 when the former Gran Tierra
Energy Inc, a privately held corporation in Alberta (“Gran Tierra Canada”), was
acquired by an indirect subsidiary of Goldstrike Inc, a Nevada corporation,
which was publicly traded on the OTC Bulletin Board. Goldstrike adopted the
assets, management, business operations, business plan and name of Gran Tierra
Canada. The predecessor company in the transaction was the former Gran
Tierra Canada; the financial information of the former Goldstrike was
eliminated at consolidation. This transaction is accounted for as a reverse
takeover of Goldstrike Inc. by Gran Tierra Canada.
We
currently hold several interests in the Noroeste region of Argentina, including
a non-operating (14%) interest in the Palmar Largo joint venture involving
several producing fields; an operating 50% interest in the El Vinalar Block,
also currently producing, and; a non-operating 50% interest in two minor
properties, both currently non-producing. We acquired the Palmar Largo and
minor
property interests on September 1, 2005 and the acquisition of the El Vinalar
interest became effective on June 30, 2006. We began operations in Colombia
on June 20, 2006 through the acquisition of Argosy Energy International.
Argosy holds interests in a portfolio of producing and non-producing assets
in
Colombia. Before the acquisitions in Argentina and Colombia, we had no oil
and
gas interests or properties. The acquisitions were funded through a series
of
private placements between September 2005 and February 2006 and additional
private placements in June 2006.
We
entered into a Securities Purchase Agreement dated May 25, 2006 with Crosby
Capital LLC to acquire all of the limited partnership interests of Argosy
Energy International and all of the issued and outstanding capital stock of
Argosy Energy Corp. On June 20, 2006 we closed the Argosy acquisition and
paid
consideration to Crosby consisting of $37.5 million cash, 870,647 shares
of our
common stock and overriding and net profit interests in certain of Argosy’s
assets valued at $1 million. The value of the overriding and net profit
interests was based on present value of expected future cash flows. All of
Argosy Energy’s assets are in Colombia.
On
June
30, 2006, we closed a farm-in arrangement with Golden Oil Corporation whereby
we
purchased 50% of the El Vinalar field in Argentina for $950,000. We also
have
agreed to pay 100% of the first $2.7 million in costs of a sidetrack well
related to this farm-in agreement.
Our
ability to continue as a going concern is dependent upon obtaining the necessary
financing to acquire oil and natural gas interests and generating profitable
operations from our oil and natural gas interests in the future. Our financial
statements as at and for the period ended September 30, 2006 have been prepared
on a going concern basis, which contemplates the realization of assets and
the
settlement of liabilities and commitments in the normal course of business.
We
incurred a net loss of $1,857,032 for the nine months ended September 30,
2006.
At September 30, 2006 we had an accumulated deficit of $4,076,711. We expect
to
incur substantial expenditures to further our capital investment programs
and
our cash flow from operating activities and current cash balances may not
be
sufficient to satisfy our current obligations and meet our capital investment
objectives.
To
address our ability to continue as a going concern, we have raised additional
capital through the sale and issuance of common shares, and may do so again
in
the future. We plan to expand our portfolio of production, development, step-out
and exploration opportunities using additional capital raised and cash provided
from future operating activities. We are also negotiating a credit facility
with
a major bank.
On
June
20, 2006 we completed the sale of 43,336,051 units of our securities for
total
proceeds of $65,004,076. Each unit consisted of one share of common stock
and
one warrant to purchase one half of a common share for five years at an exercise
price of $1.75 per whole share. On June 29, 2006 there was a second closing
of
the offering of units of our securities, selling 3,636,629 units for proceeds
of
$5,454,954. Finally, on June 30, 2006 we closed the offering with an additional
sale of 3,027,320 units for $4,540,980. In total, we raised $75,000,000 from
the
sale of 50,000,000 units of securities. Issue costs totaled $6,000,077 for
the
three closings.
Our
financial results for 2005 and 2006 are principally impacted by acquisitions
of
oil and gas interests in Argentina and Colombia in the third quarter of 2005
and
the second quarter of 2006, as described above, which affected our results
of
operations. Our financial condition has also been affected by the equity
financings described above. In 2007, our production may be subject to natural
production declines, and our revenues may be impacted by international oil
prices, which are uncertain. Results from operations may also be affected
by
drilling efforts and planned remedial work programs. Our drilling and work
plans
for 2007 are expected to be funded from available cash and anticipated cash
flow
from operations. Oil price declines combined with unexpected costs may require
additional equity and/or debt financing during the year.
Net
loss
for the third quarter of 2006 was $66,355, or $0.00 per share. This compares
to
a loss of $284,644 for the third quarter of 2005, which included only one
month
of operations at Palmar Largo in Argentina, acquired on September 1, 2005
Per
share calculations for the third quarter of 2006 are based on basic weighted
average shares outstanding of 95,455,759 for the three month period ended
September 30, 2006. Revenue for the third quarter was $5,394,949. Operating
expenses totaled $1,259,888 and total expenses were $4,750,887 for the third
quarter of 2006. Results for the third quarter of 2006 reflect a full quarter
of
operations at El Vinalar and Palmar Largo in Argentina and for Argosy Energy
in
Colombia. These results compare to net revenue of $1,049,629 for the first
quarter of 2006 which reflected a full quarter of operations at Palmar Largo
and
two months of minor production at Nacatimbay in Argentina. Production at
Nacatimbay was suspended on March 1, 2006 due to low flow conditions. Net
revenue was $2,089,984 for the second quarter of 2006, reflecting two months
of
operations at Palmar Largo in Argentina plus ten days of operations in Colombia.
Operating expense increased from $353,080 in quarter one and $1,089,540 in
quarter two for 2006, primarily due to workover activity at Palmar Largo.
Total
expenses increased from $2,211,120 for the first quarter of 2006 to $2,581,393
for the second quarter of the year, as increased operating expenses were
partially offset by reduced general and administrative expenses. We incurred
a
loss of $1,218,948 for the first quarter of 2006 and a loss of $571,734 for
the
second quarter.
31
For
the
nine months ended September 30, 2006 the net loss was $1,857,032, or $0.03
per
share, based on weighted average shares outstanding for the nine months ended
September 30, 2006 of 63,043,998. Net revenue was $8,554,737 and operating
expenditures totaled $2,702,507, depletion, depreciation and accretion expense
was $2,324,158 and total expenses were $9,563,569. Operating cash flow was
positive $2,223,931, capital expenditures were $6,011,735, and financing
activities provided inflow of $70,826,137.
We
began
oil and gas operations in Argentina on September 1, 2005 and therefore operating
results for 2005 are not directly comparable to results for 2006 which include
Palmar Largo for the entire period and the impacts of El Vinalar and the
Argosy
acquisition from July 1, 2006 and June 21, 2006 respectively. Net revenue
was
$349,263 and operating expenses were $125,000 both for the third quarter
and the
nine months ended September 30, 2005, reflecting one month of operating activity
in Argentina. General and administrative expenditures for the third
quarter of 2005 were $414,397 and were $668,909 for the nine months ended
September 30, 2005. Net loss for the third quarter of 2005 was $284,644 or
$0.02
per share, based on 12,083,333 weighted average shares outstanding. Net loss
for
the nine months ended September 30, 2005 was $546,160 or $0.11 per share
on
4,903,297 weighted average shares outstanding. Capital expenditures for the
nine
months ended September 30, 2005 were $6,934,542, with depletion, depreciation
and amortization of $115,209 for net capital additions of $6,819,333. These
amounts include the purchase of 14% interest in Palmar Largo and 50% interests
in Nacatimbay and Ipaguazu. Operating cash flow for the nine months to September
30, 2005 was an outflow of $623,683 and financing activities provided cash
inflow of $8,368,365.
Plan
of Operations
During
2006, we participated in joint venture activities in Argentina. In connection
with the Palmar Largo joint venture, eight workovers were completed in
2006.
Separately workover operations were conducted on the Nacatimbay block
and
production was re-established at a rate of approximately 5 thousand cubic
feet
of gas per day and approximately 10 barrels of associated liquids per
day.
Workover operations were initiated late in 2006 in the Ipaguazu block
and are
continuing. One well was drilled at El Vinalar in late 2006. Puesto Climaco-2
sidetrack has successfully been put on production at approximately 600
barrels
of oil per day, 300 barrels of oil net to Gran Tierra Energy.
In
Colombia, a total of two wells were drilled in 2006. One well, Popa-1
in the Rio
Magdalena block, was drilled at the end of the second quarter and was
subsequently plugged and abandoned in late November 2006. One well in
the Talora
Block, Laura-1 was subsequently plugged and abandoned in January, 2007.
Exploration terms for the Rio Magdalena Block require the drilling of
a second
well by February 2007, and this well began drilling on February 2 2007
and will
be completed before the end of the month.
We
signed
a License Contract with PeruPetro S.A. for the Exploration and Exploitation
of
Hydrocarbons covering Block 122 in Peru on June 8, 2006. Terms of the
License
define a seven-year exploration term with four periods, each with minimum
work
obligations. The minimum commitment for the first work period, which
is
mandatory, is $0.5 million. The potential commitment over the seven-year
period,
at our option, is $5.0 million and includes technical studies, seismic
acquisition and the drilling of one exploration well. The License Contract
defines an exploitation term of thirty years for commercial discoveries
of oil.
Block 122 is located on the eastern flank of the Maranon Basin of northern
Peru,
on the crest of the Iquitos Arch and covers 1.2 million acres. Final
ratification by the government of Peru occurred on November 3, 2006.
A second
License Contract for the adjacent Block 128 was subsequently awarded
and
ratified on December 12, 2006. This second License encompasses 2.2 million
acres
and has the same terms as that for Block 122.
During
2007, we plan to drill nine wells, conduct several workovers of existing
wells,
and conduct technical studies on existing Gran Tierra Energy acreage.
In
Argentina, two new wells are scheduled for 2007. This includes completing
the
Puesto Climaco-2 sidetrack in the Vinalar Block,in January 2007, and drilling
an
exploration well in the Surubi Block in the second half of 2007. Several
well
workovers are contemplated for wells on existing producing and shut-in
fields.
In
Colombia, seven new wells are scheduled for 2007, including the Laura-1
exploration well in the Talora Block, the Caneyes-1 exploration well in
the Rio
Magdalena Block, the Capibara-1 and Cachapa-1 exploration wells in the
Primavera
Block, the Juanambu-1 and Floresta-1 exploration wells in the Guayuyaco
Block,
and an exploration well in the Chaza Block. Several workovers are also
contemplated for wells on existing producing and shut-in fields.
In
Peru,
operations in 2007 are limited to technical studies of Block 122 and Block
128.In addition to current projects, we may pursue new ventures in South
America, in areas of current activity and in new regions or countries.
There is
no assurance additional opportunities will be available, or if we participate
in
additional opportunities that those opportunities will be successful. Based
on
projected production, prices and costs, we believe that our current cash
position and cash flow from operations are sufficient to sustain current
activity through to the end of 2007. New business opportunities will require
equity and/or debt financing for acquisitions and/or future work
programs.
We
have
not entered into any commodity derivative arrangements or hedging transactions.
Although we have no current plans to do so, we may enter in to some swap
and/or
hedging arrangements in conjunction with future financings. We have no
off-balance sheet arrangements.
Results
of Operations for the period ended September
30, 2006
Revenues
Production
after royalties in Argentina averaged 338 barrels per day for the third quarter
of 2006 including 295 barrels per day from Palmar Largo and 43 barrels per
day
from El Vinalar. Production for the nine-month period to September 30, 2006
averaged 303 barrels per day (288 barrels per day from Palmar Largo; 14 barrels
per day for El Vinalar, which contributed to production beginning July 1
2006; 1
barrel per day for Nacatimbay where production was suspended on March 1 due
to
low flow conditions). During January and February of 2006, production at
Nacatimbay averaged 3 barrels per day of condensate and 476 thousand cubic
feet
per day of natural gas after royalties. A remedial work program is being
assessed to restore production at Nacatimbay. We cannot assure you that
production can be restored.
Oil
sales
in Argentina averaged 422 barrels per day for the third quarter of 2006
including 376 barrels per day for Palmar Largo and 46 barrels per day for
El
Vinalar. For the nine-month period ended September 30, 2006, sales averaged
382
barrels per day (365 barrels per day at Palmar Largo, 16 barrels per day
for El
Vinalar, 1 barrel per day at Nacatimbay).
Production
after royalties in Colombia averaged 704 barrels per day for the third quarter
of 2006. Oil sales were 684 barrels per day on average during that period
and
were hampered by a temporary shut-down of pipeline facilities in July, 2006.
As
the Argosy acquisition was made in June 2006, no production was recorded
in the
prior year and the third quarter of 2006 was our first full quarter of
operations in Colombia. Net production for the nine-month period ended September
30, 2006 includes results from June 21 only, averaging 266 barrels per day.
Sales over the period averaged 260 barrels per day.
In
Argentina, net revenue for the third quarter of 2006 was $1,602,474 with
an
average sales price at $41.27 per barrel . For the nine months ended September
30, 2006, net revenue was $4,281,885 with an average sales price of $41.06
per
barrel. Revenues reflect an average royalty of 12% of production revenue
minus
transportation and storage costs.
32
In
Colombia, we recorded production beginning June 21, 2006 in conjunction with
our
acquisition of Argosy Energy. Net revenue was $3,616,833 for the third quarter
and $4,077,035 for the period from June 21 to September 30, 2006, reflecting
royalty rates of 20% for the Santana block and 8% for the Guayuyaco block.
Average sales price for the quarter was $57.47. The average sales price for
the
nine-month period ended September 30, 2006 was $57.44 per barrel.
Interest
revenue was $175,641 for the third quarter of 2006 and $195,816 for the nine
months ended September 30, 2006.
Net
Revenue for the third quarter of 2005 was $349,263, reflecting one month
of
sales from Palmar Largo. No revenue was recorded for the first half of
2005.
Operating
Expenses
For
the
three months ended September 30, 2006, operating expenses were $1,259,888,
and
for the nine months ended September 30, 2006 operating expenses were $2,702,507.
For the nine-month period ended September 30, 2006 we had a full nine months
of
operating activities at Palmar Largo, two months at Nacatimbay before production
was suspended on March 1, 2006, three months of activities at El Vinalar
beginning July 1, 2006 and three months plus ten days of operations in Colombia
beginning June 21, 2006.
Operating
expenses in Argentina for the third quarter of 2006 totaled $883,658 ($22.76
per
barrel), primarily at Palmar Largo and including transportation costs of
$116,949 ($3.01 per barrel) plus an inventory adjustment of $409,582 ($10.55
per
barrel) due to an underlift of crude oil volumes by a partner in the Palmar
Largo joint venture. The impact of an agreement among the joint venture partners
providing for the recovery of underlifted volumes has been accrued in September
of 2006. Operating expenses in Argentina for the nine-month period ended
September 30, 2006 were $2,186,278 ($20.96 per barrel) including transportation
costs of $310,901 ($2.98 per barrel) and the inventory adjustment of $409,582
($3.93 per barrel). Operating costs for 2006 have increased primarily due
to
workover activity at Palmar Largo, which expenditures are treated as an
operating expense.
Operating
expenses in Colombia were $376,229 for the third quarter of 2006, and totaled
$516,229 including the ten day operating period from June 21 to June 30.
This
translates to $5.98 per barrel for the third quarter and $7.27 per barrel
for
the period June 21 to September 30, 2006.
For
the
period ended September 30, 2005 we had operations at Palmar Largo and Nacatimbay
for 30 days. Operating expenses totaled $125,000, ($18.42 per
barrel).
Other
Operating Expenses
Depreciation,
depletion and accretion was $1,449,694 for the third quarter of 2006 and
for the
nine months ended September 30, 2006 was $2,324,158, including accretion
of
asset retirement obligations of $2,896 and $5,459 respectively. The majority
of
this expense represents the depletion of oil and gas assets in Argentina
and the
newly acquired Colombia properties. Depreciation, depletion and accretion
recorded for the nine months ended September 30, 2005 was $115,209 and was
$111,843 for the third quarter of 2005.
Remaining
operating expenses for the third quarter of 2006 were principally general
and
administrative in nature, which totaled $1,764,856. Of this amount, legal
costs,
accounting expenses, insurance premiums and consulting costs were $384,917.
The
majority of these costs were associated with audit activities, share
registration, and marketing initiatives. Salaries and benefits were $687,948
and
travel costs were $71,749. Office costs were $220,768, consultant expenses
were
$60,275, bank expenses were $45,706 and other expenses totaled
$293,493. Interest expense was $2,765. Total general and
administrative expenses for the third quarter of 2005 were
$414,397.
For
the
nine months ended September 30, 2006, general and administrative costs were
$4,256,303. Legal, accounting, insurance and consulting costs were $1,667,241.
Salaries and benefits and other employee costs were $1,520,168 and travel
costs
were $251,498. Office expenses totaled $456,948, bank expenses were
$94,902 and other expenses were $265,546. Interest expense was
$3,075. Total general and administrative expenses for the period from
January 26, 2005 (inception) to September 30, 2005 were $668,908.
Foreign
exchange loss was $273,684 for the third quarter of 2006 and $277,526 for
the
nine months ended September 30, 2006.
Net
Income (Loss) Available to Common Shares
Net
loss
for the third quarter of 2006 was $66,355, which equates to $0.00/share.
These
results reflect a full quarter of operating activities at Palmar Largo, El
Vinalar and Colombia. This compares to a loss of $284,644 or $0.02 per share
for
the third quarter of 2005.
For
the
nine months ended September 30, 2006 net loss was $1,857,032, or $0.03 per
share. This loss reflects a full nine months of operating activities at Palmar
Largo, two months of activities at Nacatimbay, three months at El Vinalar
and
three months plus ten days of operations in Colombia. The net loss for the
period from January 26, 2005 (inception) to September 30, 2005 was $546,160
or
$0.11 per share.
Results
of Operations for the period from incorporation on January 26, 2005 to
December 31, 2005
Revenues
Production
after royalties of 12% for the year averaged approximately 298 barrels of
liquids per day; 293 barrels per day of oil from Palmar Largo and 5
barrels per day of condensate from Nacatimbay. Oil sales at Palmar Largo
were
reduced to an average of 206 barrels per day due to severe weather conditions
in
Northern Argentina, as extreme rainfall and poor road conditions curtailed
tanker truck traffic through November and December. Oil inventory increased
to
13,948 barrels by December 31, 2005 as a result. Natural gas sales at Nacatimbay
averaged 494 thousand cubic feet per day, after 12% royalty.
33
Since
the
date of acquisition, September 1, 2005, gross revenue for 2005 was
$1,115,954 at Palmar Largo and $128,635 at Nacatimbay, totaling $1,244,589
for
the year. Average sales price for Palmar Largo oil was $37.80 per barrel.
Average sales prices at Nacatimbay were $37.58 per barrel of condensate and
$1.50 per thousand cubic feet of natural gas. Oil and natural gas prices
are
effectively regulated in Argentina.
Net
revenue for the period from incorporation on January 26, 2005 to December
31, 2005 was $1,059,297, reflecting an average royalty rate of 12% of
production revenue minus transportation and storage costs.
Operating
Expenses
Operating
expenses totaled $395,287 for the period from incorporation on January 26,
2005
to December 31, 2005, representing four months of operations in Argentina.
This
equates to an average operating cost of $8.90 per barrel of oil equivalent
(natural gas conversion 20 to 1).
Depreciation,
depletion and amortization for the period was $462,119. The majority of
this cost represents the depletion of the acquisition cost for the Argentina
properties.
Remaining
operating expenses for the period from incorporation on January 26, 2005
to
December 31, 2005, were general and administrative in nature, totaling
$2,482,070. Of this amount, legal costs, accounting expenses and consulting
costs were $1,482,824. The majority of these costs were associated with the
share exchange on November 10, 2005 and related activities. Salaries and
benefits were $594,585 and travel costs were $168,134. Office, insurance
and
other expenses totaled $236,527.
Foreign
exchange gain was $31,271 for the period.
Net
Income (Loss) Available to Common Shares
Net
loss
for the period from incorporation on January 26, 2005 to December 31, 2005,
was
$2,219,680, equivalent to a loss of $0.16/share. These results reflect four
months of operating activity, twelve months of business activity and significant
costs relating to the November 10, 2005 share exchange.
Liquidity
and Capital Resources
Liquidity
Gross
capital expenditures for the three months ended September 30, 2006 were
$4,617,908 and for nine months ended September 30, 2006 were $6,011,735.
Capital
expenditures for the quarter were predominantly for development activity
at
Palmar Largo, for the purchase of El Vinalar, drilling activities in Colombia,
and office equipment and leasehold improvements in both Calgary and Argentina.
Capital expenditures in the first nine months of 2005 were $6,934,542 which
included the purchase of Palmar Largo, Nacatimbay and Ipaguazu interests
in
Argentina.
Gross
capital expenditures for the period from incorporation on January 26, 2005
to December 31, 2005, were $8,775,327, predominantly for the acquisition
cost of
the Argentina properties. The purchase price for the Argentina acquisition
was
$7,032,714 plus post-closing adjustments of $708,955. The majority of remaining
capital expenditures relates to our share of the cost of drilling one well
at
Palmar Largo.
During
the first three quarters of 2006, we funded the majority of our capital
expenditures and operating expenditures from cash balances existing at the
end
of 2005, which were received through a series of private placements of equity
in
our Company in the fourth quarter of 2005 and the first quarter of 2006,
and via
private placements which closed in June 2006. On June 20, 2006 we completed
the
sales of 43,336,051 units of our securities for total proceeds of $65,004,076.
Each unit consisted of one share of common stock and one warrant to purchase
one
half a common share for five years at an exercise price of $1.75 per whole
share. On June 29, 2006 there was a second closing of the offering of units
of
our securities, selling 3,636,629 units for proceeds of $5,454,954. Finally,
on
June 30, 2006, we closed the offering with an additional sale of 3,027,320
units
for $4,540,980. In total, we raised $75,000,000 from the sale of 50,000,000
units of securities, less issue costs of $6,000,077 for net proceeds of
68,999,923. Our cash balance at September 30, 2006 was $18,796,084 compared
to
$2,221,456 at December 31, 2005 and $21,263,776 at June 30, 2006. Restricted
cash of $12,617,263 as at September 30, 2006 will become or has become available
to us as follows:
|
|
·
|
$4,000,100
held in escrow relating to the Argosy acquisition is required to
be
replaced by a letter of credit. Release of these funds occurred
on November 9, 2006.
|
|
|
·
|
$4,000,000
is being held by Standard Bank in support of the letter of credit
noted
above.
|
|
|
·
|
$3,100,000
will become available upon the expiry of the offer to purchase
certain
assets from CGC.
|
|
|
·
|
$200,426
is held in escrow with our joint venture partners in Palmar Largo
against
our future cash calls. These funds were released to us in November
2006.
|
|
|
·
|
$1,280,993
is held in escrow related to the June 2006 financing. These funds
will be
released from escrow pending our request to the Alberta
Securities Commission requesting an exemption from prospectus requirements
for the trading of our common shares for purchasers resident in
Alberta
under “accredited investor” exemptions.
|
|
|
·
|
$35,744
relates to interest earned on various escrow accounts, which will
be
released along with the principal funds involved.
|
During
2005, we funded the majority of our capital expenditures from funds received
through three private placements of equity in our Company. Total equity from
common shares was $13,206,116. A total of 14,285,106 units consisting of
one
common share at $0.80 per share plus one warrant to purchase one half share
at
$0.625 per half share were issued during 2005 through private placements
for
gross proceeds of $11,428,084. The funds were used to acquire the Argentina
properties and to provide working capital for the company. Our cash balance
at
year-end was $2,221,456 and net working capital was $2,656,504.
34
Operating
activities used $1,876,638 from the period from incorporation on January
26,
2005 to December 31, 2005, and investing activities used $9,108,022. Cash
used
in investing activities was primarily for acquisition of our properties in
Argentina.
We
have
no capital expenditure commitments other than discretionary capital expenditures
to be made in the normal course of operations for workovers and drilling
activities. We
believe that our current operations and capital expenditure program can be
maintained from cash flow from existing operations and cash on hand, barring
unforeseen events or a severe downturn in oil and gas prices. Should our
operating cash flow decline, we would examine measures such as reducing our
capital expenditure program, issuance of debt, or issuance of
equity.
Future
growth and acquisitions will depend on our ability to raise additional funds
through equity and/or debt markets. We have recently completed financing
initiatives to support recent acquisition initiatives, which have also brought
additional production and cash flow into our company.
Our
initiatives to raise debt or equity financing to fund capital expenditures
or
other acquisition and development opportunities may be affected by the market
value of our common stock. If the price of our common stock declines, our
ability to utilize our stock either directly or indirectly through convertible
instruments for raising capital could be negatively affected. Also, raising
funds by issuing stock or other equity securities would further dilute our
existing stockholders, and this dilution would be exacerbated by a decline
in
stock price. Any securities we issue may have rights, preferences and privileges
that are senior to our existing equity securities. Borrowing money may also
involve pledging some or all of our assets.
Off-Balance
Sheet Arrangements
For
the
fiscal period ended September 30, 2006 and the year ended December 31,
2005, we had no off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B, promulgated by the SEC.
Subsequent
Events
On
February 15, 2006, we made an offer to acquire certain interests of Compania
General de Combustibles S.A. ("CGC") in eight properties in Argentina. On
November 2, 2006, we closed on the purchase of interests in four properties
for
a total purchase price of $2.1 million. The assets purchased include a 93.18%
participation interest in the Valle Morado block, a 100% interest in the
Santa
Victoria block and the remaining 50% interests in the Nacatimbay and Ipaguazu
blocks (in which we currently hold 50% interests).
On
December 1, 2006, we closed on the purchase of interests in two other properties
from CGC, including a 75% interest in the El Chivil block and a 75%
participation interest in the Surubi block, each located in the Noroeste
Basin
of Argentina, for a total purchase price of $2.5 million. We also purchased
the
remaining 25% minority interest in each property from the joint venture partner
for a total purchase price of $280,000.
The
total
purchase price for the acquisition of CGC’s interests in all six properties
acquired to date is equal to $4.6 million. Post-closing adjustments which
reflect original values assigned to the properties, amended terms, revenues
and
costs from the effective date of January 1, 2006 are expected to amount to
a net
cash outlay of approximately $3.5 million which will be financed from existing
cash on hand.
The
acquisitions are expected to add net production of 123 barrels per day to
our
production base.
On
November 30, 2006, in connection with the closings of the transactions described
above, our board of directors reached a final determination not to pursue
the
acquisition of either CGC’s 17.85% interest in the Palmar Largo joint venture or
CGC’s 5% interest in the Aguarague joint venture, and to allow our option to
acquire these interests to expire by its terms on December 5,
2006. The
offer
to purchase those properties was subject to rights of first refusal and certain
third party consents.
We
signed
a License Contract for the Exploration and Exploitation of Hydrocarbons
covering
Block 122 in Peru on June 8, 2006. Terms of the License define a seven-year
exploration term with four periods, each with minimum work obligations.
The
minimum commitment for the first work period, which is mandatory, is $0.5
million. The potential commitment over the seven-year period, at our option,
is
$5.0 million and includes technical studies, seismic acquisition and the
drilling of one exploration well. The License Contract defines an exploitation
term of thirty years for commercial discoveries of oil. Block 122 is located
on
the eastern flank of the Maranon Basin of northern Peru, on the crest of
the
Iquitos Arch and covers 1.2 million acres.Final ratification by the government
of Peru occurred on November 3, 2006. A second License Contract for the
adjacent
Block 128 was subsequently awarded and ratified on December 12, 2006. This
second License encompasses 2.2 million acres and has the same terms as
that for
Block 122.
35
Critical
Accounting Estimates
Use
of Estimates
The
preparation of financial statements under generally accepted accounting
principles (“GAAP”) in the United States 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. Actual results could differ from those estimates.
Oil
and Gas Accounting-Reserves Determination
The
process of estimating reserves is complex. It requires significant judgments
and
decisions based on available geological, geo-physical, engineering and economic
data.
To
estimate the economically recoverable oil and natural gas reserves and related
future net cash flows, we incorporate many factors and assumptions
including:
| § |
expected
reservoir characteristics based on geological, geophysical and engineering
assessments;
|
| § |
future
production rates based on historical performance and expected future
operating and investment
activities;
|
| § |
future
oil and gas quality differentials;
|
| § |
assumed
effects of regulation by governmental agencies;
and
|
| § |
future
development and operating costs.
|
We
believe these factors and assumptions are reasonable based on the information
available to us at the time we prepare our estimates. However, these estimates
may change substantially as additional data from ongoing development activities
and production performance becomes available and as economic conditions
impacting oil and gas prices and costs change.
36
Management
is responsible for estimating the quantities of proved oil and natural gas
reserves and for preparing related disclosures. Estimates and related
disclosures are prepared in accordance with SEC requirements and generally
accepted industry practices in the US as promulgated by the Society of Petroleum
Engineers.
Reserve
estimates, including the standardized measure of discounted future net cash
flow
and changes therein, are prepared at least annually by independent qualified
reserves consultants.
Our board
of directors oversees the annual review of our oil and gas reserves and related
disclosures. The Board meets with management periodically to review the reserves
process, results and related disclosures and appoints and meets with the
independent reserves consultants to review the scope of their work, whether
they
have had access to sufficient information, the nature and satisfactory
resolution of any material differences of opinion, and in the case of the
independent reserves consultants, their independence.
Reserves
estimates are critical to many of our accounting estimates,
including:
| § |
Determining
whether or not an exploratory well has found economically producible
reserves.
|
| § |
Calculating
our unit-of-production depletion rates. Both proved and proved developed
reserves estimates are used to determine rates that are applied to
each
unit-of-production in calculating our depletion expense. Proved reserves
are used where a property is acquired and proved developed reserves
are
used where a property is drilled and
developed.
|
| § |
Assessing,
when necessary, our oil and gas assets for impairment. Estimated
future
cash flows are determined using proved reserves. The critical estimates
used to assess impairment, including the impact of changes in reserves
estimates, are discussed below.
|
Oil
and Gas Accounting-Impairment
We
evaluate our oil and gas properties for impairment on a quarterly basis. We
assess estimated discounted future cash flows to determine if properties are
impaired on a cost center basis. If the 10% discounted future cash flows for
a
cost center are less than the carrying amount, the cost center is impaired
and
written down to its fair value.
We
assessed our oil and gas properties for impairment at the end of the third
quarter of 2006 and at the end of 2005 and found no impairments were required
based on our assumptions.
Cash
flow
estimates for our impairment assessments require assumptions about two primary
elements - future prices and reserves.
It
is
difficult to determine and assess the impact of a decrease in our proved
reserves on our impairment tests. The relationship between the reserves estimate
and the estimated discounted cash flows is complex because of the necessary
assumptions that need to be made regarding future production rates, future
prices and future costs. Under full cost accounting, a ceiling test is performed
to ensure that unamortized capitalized costs in each cost centre do not exceed
their fair value. An impairment loss is recognized in net earnings when the
carrying amount of a cost center is not recoverable and the carrying amount
of
the cost center exceeds its fair value. A cost center is defined as a country.
Capitalized costs, less accumulated depreciation (carrying value) are limited
to
the sum of: the present value of estimated future net revenues from proved
oil
and gas reserves, less future value of unproven properties included in the
costs
being amortized; less income tax effects related to the differences between
the
book and tax basis of the properties. If unamortized capital costs within a
cost
center exceed the cost center ceiling, the excess shall be charged to expense
and separately disclosed during the period in which the excess occurs. As a
result, we are unable to provide a reasonable sensitivity analysis of the impact
that a reserves estimate decrease would have on our assessment of
impairment.
Asset
Retirement Obligations
We
are
required to remove or remedy the effect of our activities on the environment
at
our present and former operating sites by dismantling and removing production
facilities and remediating any damage caused. Estimating our future asset
retirement obligations requires us to make estimates and judgments with respect
to activities that will occur many years into the future. In addition, the
ultimate financial impact of environmental laws and regulations is not always
clearly known and cannot be reasonably estimated as standards evolve in the
countries in which we operate.
37
We
record
asset retirement obligations in our consolidated financial statements by
discounting the present value of the estimated retirement obligations associated
with our oil and gas wells and facilities and chemical plants. In arriving
at
amounts recorded, numerous assumptions and judgments are made with respect
to
ultimate settlement amounts, inflation factors, credit adjusted discount rates,
timing of settlement and expected changes in legal, regulatory, environmental
and political environments. The asset retirement obligations we have recorded
result in an increase to the carrying cost of our property, plant and equipment.
The obligations are accreted with the passage of time. A change in any one
of
our assumptions could impact our asset retirement obligations, our property,
plant and equipment and our net income.
It
is
difficult to determine the impact of a change in any one of our assumptions.
As
a result, we are unable to provide a reasonable sensitivity analysis of the
impact a change in our assumptions would have on our financial results. We
are
confident, however, that our assumptions are reasonable.
Deferred
Income Taxes
We
follow
the liability method of accounting for income taxes whereby future income tax
assets and liabilities are recognized based on temporary differences in reported
amounts for financial statement and tax purposes. We carry on business in
several countries and as a result, we are subject to income taxes in numerous
jurisdictions. The determination of our income tax provision is inherently
complex and we are required to interpret continually changing regulations and
make certain judgments. While income tax filings are subject to audits and
reassessments, we believe we have made adequate provision for all income tax
obligations. However, changes in facts and circumstances as a result of income
tax audits, reassessments, jurisprudence
and any
new legislation may result in an increase or decrease in our provision for
income taxes.
New
Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement 151, Inventory
Costs.
This
statement amends Accounting Research Bulletin (“ARB”) 43 to clarify
that:
| § |
abnormal
amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) should be recognized as current-period charges;
and
|
| § |
the
allocation of fixed production overhead to inventory based on the
normal
capacity of the production facilities is required.
|
The
provisions of this statement are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not expect the adoption of
this statement will have any material impact on our results of operations or
financial position.
In
December 2004, the FASB issued Statement 153, Exchanges
of Nonmonetary Assets,
an
amendment of Accounting Principles Bulletin (“APB”) Opinion 29, Accounting
for Nonmonetary Transactions.
This
amendment eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Under Statement 153,
if a nonmonetary exchange of similar productive assets meets a
commercial-substance test and fair value is determinable, the transaction must
be accounted for at fair value resulting in the recognition of any gain or
loss.
This statement is effective for nonmonetary transactions in fiscal periods
that
begin after June 15, 2005. We do not expect the adoption of this statement
will
have any material impact on our results of operations or financial
position.
38
In
March
2005, the FASB issued Financial Interpretation 47, Accounting
for Conditional Asset Retirement Obligations (“FIN
47”). FIN 47 clarifies that the term conditional asset retirement obligation as
used in FASB Statement No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which the
timing and (or) method of settlement are conditional on a future event that
may
or may not be within the control of the entity. The obligation to perform the
asset retirement activity is unconditional even though uncertainty exists about
the timing and (or) method of settlement. Thus, the timing and (or) method
of
settlement may be conditional on a future event. Accordingly, an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The adoption of this statement has not had a material
impact on our results of operations or financial position.
In
June
2005, the FASB issued Statement 154, Accounting
Changes and Error Corrections,
which
replaces APB Opinion 20 and FASB Statement 3. Statement 154 changes the
requirements for the accounting and reporting of a change in accounting
principle. Opinion 20 previously required that most voluntary changes in
accounting principles be recognized by including the cumulative effect of the
new accounting principle in net income of the period of the change. In the
absence of explicit transition provisions provided for in new or existing
accounting pronouncements, Statement 154 now requires retrospective application
of changes in accounting principle to prior period financial statements, unless
it is impracticable to do so. The Statement is effective for fiscal years
beginning after December 15, 2005. We do not expect the adoption of this
statement will have a material impact on our results of operations or financial
position.
In
September 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on
Issue No. 04-13, Accounting
for Purchases and Sales of Inventory with the Same Counterparty.
This
issue addresses the question of when it is appropriate to measure purchase
and
sales of inventory at fair value and record them in cost of sales and revenues
and when they should be recorded as exchanges measured at the book value of
the
item sold. The EITF concluded that purchases and sales of inventory with the
same counterparty that are entered into in contemplation of one another should
be combined and recorded as exchanges measured at the book value of the item
sold. The consensus should be applied to new arrangements entered into and
modifications or renewals of existing agreements, beginning with the second
quarter of 2006. We do not expect the adoption of this statement will have
a
material impact on our results of operations or financial position.
In
February 2006, the Financial Accounting Standards Board (FASB) issued statement
155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
no.
133 and 140
. This
statement resolves issues addressed in Statement 133 Implementation Issue
no. D1
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” This implementation guidance indicated that entities could continue to
apply guidance related to accounting for beneficial interests in paragraphs
14
and 362 of Statement 140, which indicate that any security that can be
contractually prepaid or otherwise settled in such a way that the holder
of the
security would not recover substantially all of its recorded investment should
be subsequently measured like investments in debt securities classified as
available for sale or trading, and may not be classified as held to maturity.
Also, Implementation issue D1 indicated that holders of beneficial interests
in
securitized financial assets that are not subject to paragraphs 14 and 362
of
Statement 140 are not required to apply Statement 133 to those beneficial
interests, pending further guidance. Statement 155 eliminates the exemption
from
Statement 133 for interests in securitized financial assets. It also allows
the
preparer to elect fair value measurement at acquisition, at issuance or when
a
previously recognized financial instrument is subject to a remeasurement
event.
We do not expect the adoption of this statement will have a material impact
on
our results of operations or financial position.
In
March
2006, the FASB issued statement 156 Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140.
Under
statement 140, servicing assets and servicing liabilities are amortized over
the
expected period of estimated net servicing income or loss and assessed for
impairment or increased obligation at each reporting date. This statement
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. Subsequent
measurement of servicing assets and servicing liabilities at fair value is
permitted, but not required. If derivatives are used to mitigate risks inherent
in servicing assets and servicing liabilities, those derivatives must be
accounted for at fair value. Servicing assets and servicing liabilities
subsequently measured at fair value must be presented separately in the
statement of financial position and there are additional disclosures for
all
separately recognized servicing assets and servicing liabilities. We do not
expect the adoption of this statement will have a material impact on our
results
of operations or financial position.
In
June
2006, the FASB issued interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109.
This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statement in accordance to FASB Statement
No. 109. Recognition of a tax position should be based on whether it is
more
likely than not that a tax position will be sustained. The tax position
is
measured at the largest amount of benefit that is greater than 50% likely
of
being realized upon settlement. This interpretation is effective for fiscal
years beginning after December 15, 2006. We do not expect the adoption
of this
statement will have material impact on our results of operations or financial
position.
In
September 2006, the Securities and Exchange Commission (SEC) released
Staff
Accounting Bulletin (SAB) No. 108 regarding the effects of prior year
misstatements in considering current year misstatements for the purpose
of a
materiality assessment. The opinion in SAB 108 is that in the case of
an error
that has occurred and been immaterial in a number of previous years,
the
cumulative effect should be considered in assessing the materiality of
the error
in the current year. If the cumulative effect of the error is material,
then the
current year statements, as well as prior year statements should be restated.
In
the case of restated prior year statements, previously filed reports
do not need
to be amended, if the error was considered immaterial to previous year’s
financial statements. However the statements should be amended the next
time
they are filed. The effects of this guidance should be applied cumulatively
to
fiscal years ending after November 15, 2006. Additional disclosure should
be
made regarding any cumulative adjustments made in the current year financial
statements. We do not expect the adoption of this SAB will have material
impact
on our results of operations or financial
position.
39
BUSINESS
On
November 10, 2005, the closing date, Goldstrike, Inc., the previous public
reporting entity, Gran Tierra Canada and the holders of Gran Tierra Canada’s
capital stock entered into a share purchase agreement, and Goldstrike and
Goldstrike Exchange Co. entered into an assignment agreement. In these two
transactions, the holders of Gran Tierra Canada’s capital stock acquired shares
of either Goldstrike common stock or exchangeable shares of Goldstrike Exchange
Co., and Goldstrike Exchange Co. acquired substantially all of Gran Tierra
Canada’s capital stock. Immediately following the transactions, Goldstrike
Exchange Co. acquired the remaining shares of Gran Tierra Canada outstanding
after the initial share exchange for shares of common stock of Gran Tierra
Energy Inc. using the same exchange ratio as used in the initial exchange.
This
two step process was part of a single transaction whereby Gran Tierra Canada
became a wholly-owned subsidiary of Goldstrike Inc. Additionally,
Goldstrike changed its name to Gran Tierra Energy Inc. with the management
and
business operations of Gran Tierra Canada, but remains incorporated in the
State
of Nevada.
In
the
above-described transactions between Goldstrike and the holders of Gran Tierra
Canada common stock, Gran Tierra Canada shareholders were permitted to elect
to
receive, for each share of Gran Tierra Canada’s common stock: (1) 1.5873016
exchangeable shares of Goldstrike Exchange Co. (and ancillary rights), or
(2) 1.5873016 shares of common stock of Goldstrike, or (3) a
combination of Goldstrike Exchange Co. exchangeable shares and Goldstrike
common
stock. All of Gran Tierra Canada’s shares were, through a series of exchanges,
exchanged for shares of Goldstrike and/or exchangeable shares of Goldstrike
Exchange Co. Each exchangeable share of Goldstrike Exchange Co. is exchangeable
into one share of our common stock.
The
share
exchange between the former shareholders of Gran Tierra Canada and the former
Goldstrike is treated as a recapitalization of Gran Tierra for financial
accounting purposes. Accordingly, the historical financial statements of
Goldstrike before the share purchase and assignment transactions will be
replaced with the historical financial statements of Gran Tierra Canada before
the share exchange in all future filings with the SEC.
Company
Overview
Following
the above-described transactions, our operations and management are
substantially the operations and management of Gran Tierra Canada prior to
the
transactions. The former Gran Tierra Canada was formed by an experienced
management team in early 2005, which collectively has over 100 years of hands-on
experience in oil and natural gas exploration and production in most of the
world’s principal petroleum producing regions. Our objective is to acquire and
exploit international opportunities in oil and natural gas exploration,
development and production, focusing on South America. We made our initial
acquisition of oil and gas producing and non-producing properties in Argentina
in September 2005 for a total purchase price of approximately $7
million. In addition, we have recently acquired assets in Colombia and
other minor interests in Argentina and Peru.
The
international oil and gas industry is extremely diverse and offers distinct
opportunities for companies in different countries. The fundamentals of the
industry, however, are common:
| § |
Oil
and gas reserves tend to be distributed in a pyramid
pattern.
The distribution of oil and gas reserves is generally depicted as
a
“pyramid” with the greatest number of fields being smaller fields and with
very few large fields. Because of their size, the large fields are
more
easily located - most have already been discovered and tend to be,
though
are not always, the most economical to produce.
|
| § |
Oil
and gas companies tend to be distributed in a pyramid
pattern.
Oil and gas companies tend to be distributed in a pattern that is
similar
to that of oil and gas reserves. There are many small companies and
few
very large companies. Large companies tend to operate at the top
of the
resource pyramid, where rewards are larger but fewer. Smaller companies
tend to operate at the base of the resource pyramid, where rewards
are
smaller but plentiful. Furthermore, large companies tend to divest
smaller, non-core assets as they grow, and tend to acquire smaller
companies that have reached a critical mass, perpetuating a cycle
of
growth.
|
40
| § |
In
a mature producing area with a mature industry, the entirety of the
resource pyramid is being explored and developed by both small and
large
oil and gas companies.
Maturity is typically a function of time and market forces. Government
policy can have an important role, encouraging or discouraging the
full
potential of the resource base and industry.
|
| § |
By
its nature, finding and producing oil and gas is a risky
business.
Oil and gas deposits may be located miles below the earth’s surface. There
is no guarantee, despite the sophistication of modern exploration
techniques, that oil or gas will be present in a particular location
without drilling. Additionally, there is no guarantee that a discovery
will be commercially viable without follow up drilling, nor can there
be
any guarantee that such follow up drilling will be successful. There
is
also no guarantee that reserves once established will produce at
expected
rates. Furthermore, adverse political events and changing laws/regulations
can threaten the economic viability of oil and gas activity, the
safety
and security of workers, or the reputation of a company that conducts
business outside of more stable countries. The effective management
of
risk is integral to the oil and gas
industry.
|
| § |
The
oil and gas industry is capital intensive. Investment
decisions are based on long time horizons - the typical oil and gas
project has a life of greater than 20 years. Economics and value
are based
on a long-term perspective.
|
| § |
The
production profile for a substantial majority of oil and gas reservoirs
is
a declining trend. Production
from an oil or gas field with a fixed number of wells declines over
time.
That decline rate varies depending on the reservoir and well/development
characteristics but in general, steepest declines are earlier in
the
production life of the field. Typically, production falls to a point
where
revenues are insufficient to cover operating costs (the project reaches
its economic limit) and the field is
abandoned.
|
| § |
Production
levels in a field can be maintained by more intensive drilling and/or
enhancement of existing wells and such efforts are usually made to
offset
the natural decline in production.
A
low price environment, budgetary constraints or lack of imagination
can
prevent companies from taking appropriate action to offset a natural
decline in production, however, this can present a significant opportunity
for new operators in a high price environment. While
production levels may be maintained for a period of time by more
intensive
drilling, such efforts can only be maintained for short periods of
time
and may not be effective. Moreover, such efforts may also be economically
unfeasible and may be impermissible under rules and regulations applying
to the field.
|
New
Opportunities for Smaller Companies
Several
forces are at work in today’s energy industry which provide a significant
opportunity for smaller companies, like ours. The greatest opportunity is in
countries where resource opportunities have been undervalued or overlooked
or
have been considered immaterial or uneconomic by larger companies, and/or where
governments are moving to realize the potential at the base of the resource
pyramid by attracting smaller companies.
41
Company
Business Plan
Our
plan
is to build an international oil and gas company, sensibly and aggressively,
by
positioning in countries where a smaller company can proliferate. Our initial
focus is South America, specifically Argentina, Colombia and Peru.
We
are applying a two-pronged approach to growth, establishing a base of
production, development and exploration assets by selective acquisitions and
achieving future growth through drilling. We intend to duplicate this business
model across countries in South America and across regions within these
countries, continually.
A
key to
our business plan is positioning - being in the right place at the right time
with the right resources. The fundamentals of this strategy are described in
more detail below:
| § |
Position
in countries that are welcoming to foreign investment, that provide
attractive fiscal terms and/or offer opportunities that have been
previously ignored or undervalued;
|
The
pace
of oil and gas exploration and development in countries around the world is
dictated by geology and market forces and the intermediary impact of government
policy and regulation. These factors have combined today to create opportunities
in South America. The initial countries of interest to Gran Tierra are Argentina
- where activity has historically been dominated by the national oil company;
Colombia - which has restructured its energy policies to appeal to smaller
foreign companies; and Peru - which is entering a new phase of exploration
activity.
| § |
Engage
qualified, experienced and motivated professionals;
|
Our
management consists of three senior international oil and gas and professionals
most recently with EnCana Corporation of Canada, a fourth member most recently
with Pluspetrol in South America, and a fifth member who joined our company
in conjunction with the acquisition of Argosy Energy in Colombia. The management
team represents over 100 years of broad and progressive international
experience, in South America and across the globe. International experience
provides an awareness of the fundamentals of opportunity and risk, of problems
and resolutions, of what can or cannot be done by when, and what resources
are
needed to get the job done. It also brings with it a network of professional
relationships that can be drawn upon to bring new business to us.
The
qualifications of our board of directors complement the international experience
of the management team, providing an entrepreneurial, financial and market
perspective of our business by a group of individuals with successful track
records overseeing the strategic growth of development stage public and private
companies. In addition, the board is responsible for overseeing
our financial reporting and corporate governance policies and reviewing
management’s compensation.
As
of September 30, 2006, we had 102 full-time employees, 8 in
Calgary, 9 in Buenos Aires and 85 in Colombia (17 staff in Bogota
plus 68 field personnel). All employees had previously worked with members
of our management team; six employees were formerly with EnCana Corporation.
Qualified geophysicists, geologists and engineers are in short supply in today’s
market; our management has demonstrated the ability to attract qualified
professionals.
Our
success equally depends on a strong support network in the legal, accounting
and
finance disciplines, both at a corporate level and a local level. Our aggressive
business plan means a succession of acquisition and operating agreements in
addition and concurrent financings, all requiring significant outside support.
We have quickly transitioned from a private company with no employees in
January 2005, through an initial acquisition in September, a share exchange
and
trading in the US market in November 2005 and subsequent transactions, and
we
intend to maintain this pace. Our accomplishments to date are an indication
of
the capabilities of our support network.
42
| § |
Establish
an effective local presence;
|
Our
management believes that establishing an effective local presence is essential
for success - one that is familiar with the local operating environment, with
the local oil and gas industry and with local companies and governments in
order
to establish and expand business in the country. We have established our office
in Buenos Aires and have engaged qualified and respected local management and
professionals. We intend to establish offices in all countries where we operate.
We expect our presence in Buenos Aires and recently acquired presence in
Colombia to bring new and increasing opportunities.
| § |
Create
alliances with companies that are active in areas and countries of
interest, and consolidate initial land/property positions;
|
Our
initial acquisitions in Argentina and Colombia have brought us to the
attention of other companies in the country, including partners, former
employers and associates. We hope to build on these business relationships
to
bring other opportunities to us, and we expect to continue to build new
relationships in the future. Such cooperation effectively multiplies our
business development initiatives and develops synergies within the local
industry.
| § |
Build
a balanced portfolio of production, development, step-out and more
speculative exploration opportunities;
|
Our
initial acquisitions in Argentina and Colombia provide a base of production
to
provide immediate cashflow and upside drilling potential. We are now focusing
on
expansion opportunities in Argentina, Colombia and Peru, which are expected
to
include both low and higher risk projects, with working interests that achieve
an optimal balance of risk and reward.
The
most
effective risk mitigation in international oil and gas is diversification,
and
the highest chance of success results from a diverse portfolio of independent
opportunities. We are moving purposefully in the regard.
| § |
Assess
and close opportunities expeditiously;
|
We
assess
many oil and gas opportunities before we move to advance one; it is necessary
to
assess the technical, economic and strategic merits quickly in order to focus
our efforts. This approach to business often provides a competitive advantage.
During 2005, we evaluated more than 70 potential acquisition
opportunities.
| § |
Do
business in familiar countries with familiar people and familiar
assets.
|
Our
business model is a bringing together of peoples’ knowledge and relationships
into a single entity with a single purpose. We cannot compete with the
international oil and gas industry on an open tender basis. Assets and
opportunities that are offered globally will receive a premium price and chance
of success for any one bidder is low. Our approach is based on niche
opportunities for buyer and seller, where the combination of our strategic
relationships, established technical know-how and access to capital provide
a
compelling opportunity to act opportunistically.
43
Proprietary
Deal Flow
Our
access to opportunities stems from a combination of experience and industry
relationships of the management team and board of directors, both within and
outside of South America. Deal flow is critical to growing a portfolio
efficiently and effectively, to capitalize on our capabilities today, and into
the future as we grow in scale and our needs evolve.
Company
Financial Fundamentals
A
brief
discussion of our financial fundamentals is provided below. Potential investors
are encouraged to read the following information in conjunction with all of
the
other information provided in this prospectus.
Our
financial results present the former Gran Tierra Canada as the predecessor
company in the share exchange with Goldstrike on November 10, 2005. The
financial performance of the former Goldstrike was eliminated at consolidation.
Gran Tierra financials therefore present the activities of the former Gran
Tierra Canada before the share exchange, including the initial Argentina
acquisition on September 1, 2005.
Financial
results for 2005 are defined by three principal events: the Argentina
acquisitions on September 1, 2005, a series of private placements of common
stock of Gran Tierra associated with the acquisitions, and the share exchange
between the former holders of common shares of Goldstrike Inc. and Gran Tierra
Energy Inc. on November 10, 2005.
Financial
results for the nine months ended September 30, 2006 reflect a full nine months
of operations at Palmar Largo, two months of operations at Nacatimbay, three
months of operations at El Vinalar (all in Argentina), in addition to three
months and ten days of operations in Colombia.
The
Argentina Acquisitions
We
acquired participating interests in three joint ventures on September 1, 2005.
We made a formal offer to purchase the Argentina assets of Dong Won S.A
(Argentinean branch of the Korean company) on May 30, 2005, that was accepted
on
June 22, 2005. The total acquisition cost was approximately $7 million. Our
initial offer covered interests in five properties; preferential acquisition
rights were exercised on two properties but the major property of interest
to
Gran Tierra and two minor properties became available to us. All properties
are
located in the Noroeste Basin region of Northern Argentina.
| § |
Palmar
Largo Joint Venture - Gran Tierra participation 14%, Pluspetrol (Operator)
38.15%, Repsol YPF 30%, Compañia General de Combustibles (“CGC”)
17.85%.
|
| § |
Nacatimbay
Concession - Gran Tierra participation 50%, CGC (Operator)
50%.
|
| § |
Ipaguazu
Concession - Gran Tierra participation 50%, CGC (Operator)
50%.
|
Palmar
Largo is the principal property, producing approximately 293 barrels per
day of oil net to Gran Tierra (after 12% royalties) at the time of the
acquisition. Acquisition cost for Palmar Largo was $6,969,659 and translated
to
a cost of $9.89 per barrel of proved reserves based on an estimate of remaining
proven reserves of 705,000 (net before royalties) at June 1, 2005. This equates
to $11.24 per barrel on reserves of 620,400 after 12% royalties. Minor volumes
of natural gas and associated liquids were being produced from a single well
at
Nacatimbay; the Ipaguazu property is non-producing. Total acquisition cost
for
these two properties was $63,055.
The
Colombia Acquisition
On
June
20, 2006, we acquired all of the limited partnership interests of Argosy
Energy
International (“Argosy”) and all of the issued and outstanding capital stock of
Argosy Energy Corp. (“AEC”), a Delaware corporation and the general partner of
Argosy. Argosy’s oil production averaged approximately 987 barrels per day
(after royalty) during the fourth quarter of 2005. Royalty rates are 20%
and 8%
for Argosy’s producing properties. Argosy’s net land position was
approximately 153,000 acres.
Other
Acquisitions
On
June
30, 2006, we closed a farm-in arrangement with Golden Oil Corporation whereby
we
purchased 50% of the El Vinalar field in Argentina for $950,000. We also
agreed
to pay the first $2.7 million in costs for a sidetrack well related to
our
farm-in agreement.
On
June
8, 2006, we signed a License Contract for the Exploration and Exploitation
of
Hydrocarbons covering Block 122 in Peru. The license contract was approved
by
the government of Peru on November 3, 2006. The license contract defines
a
seven-year exploration term divided into four periods, each requiring a
minimum
work plan and financial commitment. The minimum commitment for the first
work
period, which is mandatory, is $0.5 million. The potential commitment over
the
seven-year period, at our option, is $5.0 million and includes technical
studies, seismic acquisition and the drilling of one exploration well.
The
license contract defines an exploitation term of thirty years for commercial
discoveries of oil. Block 122 is located on the eastern flank of the Maranon
Basin of northern Peru, on the crest of the Iquitos Arch and covers 1.2
million
acres.
44
Financing
The
initial seed round of financing for the former Gran Tierra Energy (the Canadian
company) occurred in April and June 2005, raising approximately $1.9 million
to
fund our initial activities. We had no oil and gas revenue until September
1,
2005. We made a series of private placements of common shares beginning on
August 31, 2005 to fund the Argentina acquisitions and to provide general
working capital. A total of approximately $11.4 million was initially raised
during 2005 from the issuance of approximately 14.3 million units consisting
of
one share of Gran Tierra at $0.80 per share plus one warrant to purchase
one-half share at $0.625 per half-share. At December 31, 2005, our outstanding
cash balance was approximately $2.2 million.
On
June 20, 2006, we completed the sale of 43,336,051
units of our securities, deriving gross proceeds of $65,004,076. Each unit
consisted of one share of our common stock and a warrant to purchase one-half
share of our common stock for a period of five years at an exercise price of
$1.75 per whole share. On June 29, 2006, we conducted a second closing of the
offering of units of our securities, deriving additional gross proceeds of
$5,454,944 from the sale of 3,636,629 additional units. On June 30, 2006, we
conducted a final closing of the offering of units of our securities, deriving
additional gross proceeds of $4,540,980 from the sale of 3,027,320 additional
units. In connection with the three closings of the offering, we sold a total
of
50,000,000 units for gross proceeds totaling $75,000,000.
The
Share Exchange
The
share
exchange between Goldstrike Inc. and the shareholders of the former Gran Tierra
Energy Inc. (the Canadian corporation) occurred on November 10, 2005, bringing
the assets, management, business operations and business plan of the former
Gran
Tierra into the framework of the company formerly known as Goldstrike Inc.,
a
publicly traded company.
Prior
Goldstrike Business
In
connection with our recent share exchange between Goldstrike Inc. and the
shareholders of the former Gran Tierra Energy Inc. (the Canadian corporation),
Goldstrike transferred to Dr. Yenyou Zheng all of the capital stock of
Goldstrike’s wholly-owned subsidiary, Leasco. Leasco was organized to hold
mineral assets located in the Province of British Columbia. Those assets
consist
primarily of 32 mineral claims covering approximately 700 hectares. As a
result
of the transfer, this line of business is owned by Dr. Yenyou Zheng, through
his
ownership of Leasco, and we will not pursue any of those mineral claims.
Markets
and Competition
We
market
our own share of production in Argentina. Production from Palmar Largo is a
high
quality oil and is transported by pipeline and truck to a nearby refinery.
Prices are defined by a multi-year contract. Minor volumes of natural gas and
liquids from Nacatimbay were previously sold locally. Production at Nacatimbay
was suspended on March 1, 2006. All sales are denominated in pesos but refer
to
reference or base prices in US dollars. Our average oil price in Argentina
was
$41.06 per barrel over the first three quarters of 2006.
The purchaser of all oil sold in Colombia is Ecopetrol, a government agency.
Oil
is eventually exported via the Trans-Andean pipeline. Prices are defined
by a
multi-year contract with 25% of revenue received in pesos, and 75% of revenue
received in US dollars. Prices averaged $57.44 per barrel for the nine months
ended September 30, 2006.
The
oil
and gas industry is highly competitive. We face competition from both local
and
international companies in acquiring properties, contracting for drilling
equipment and securing trained personnel. Many of these competitors have
financial and technical resources that exceed those of Gran Tierra, and we
believe that such companies have a competitive advantage in these
areas.
Regulation
The
oil
and gas industry in South America is heavily regulated. Rights and obligations
with regard to exploration and production activities are explicit for each
project; economics are governed by a royalty/tax regime. Various government
approvals are required for property acquisitions and transfers, including,
but
not limited to, meeting financial and technical qualification criteria in order
to be a certified as an oil and gas company in the country. Oil and gas
concessions are typically granted for fixed terms with opportunity for
extension. In Argentina, concession rights for our principal property - Palmar
Largo - extend to the year 2017 and may be extended an additional ten
years. In Colombia, the contract for the Santana area expires in 2015, and
the contract for the Guayuyaco area expires in 2030.
Oil
and
gas prices in Argentina are effectively controlled and are established by decree
or according to specified formulae. A tax on oil exports sets an effective
cap
on prices within the country; gas prices are set by statute and reflected in
contract terms. Oil
prices in Colombia are related to international market prices with
pre-defined adjustments for quality and transportation.
The
pace
of bureaucracy in South America tends to be slow in comparison to
North American standards and legal structures are less mature, but the overall
business environment is supportive of foreign investment and we believe is
continuing to improve. Changes in regulations or shifts in political attitudes
are beyond our control and may adversely impact our business. Operations may
be
affected in varying degrees by government regulations with respect to
restrictions on production, price controls, export controls, income taxes and
environmental legislation.
45
Future
Activity
We
plan
to continue assessing production and exploration opportunities that can provide
a base for growth. We are currently assessing opportunities in Argentina,
Colombia and elsewhere in South America which, if consummated, could
substantially increase reserves and production.
Environmental
Compliance
Our
activities are subject to existing laws and regulations governing environmental
quality and pollution control, in Canada and in the foreign countries where
we
maintain operations. Our activities with respect to exploration, drilling and
production from wells, natural gas facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing gas and other products, are subject to stringent
environmental regulation by provincial and federal authorities in Argentina
and
Colombia. Costs
related to environmental compliance totalled $6,559 in 2005. Risks are
inherent in oil and gas exploration and production operations, and we can give
no assurance that significant costs and liabilities will not be incurred in
connection with environmental compliance issues. We cannot predict
what effect future regulation or legislation, enforcement policies issued,
and
claims for damages to property, employees, other persons and the environment
resulting from our operations could have.
Employees
At September
30, 2006, we had 102 full-time employees - 8 located in the
Calgary corporate office, 9 in Buenos Aires and 85 in Colombia (17
staff in Bogota and 68 field personnel). None of our employees are
represented by labor unions, and we consider our employee relations to be good.
Corporate
Information
Goldstrike
Inc., now known as Gran Tierra Energy Inc., was incorporated
under the laws of the State of Nevada on June 6, 2003. Our principal
executive offices are located at 300, 611-10th Avenue S.W., Calgary, Alberta,
Canada. The telephone number at our principal executive office is (403)
265-3221.
Additional
Information
We
are
required to comply with the informational requirements of the Exchange Act,
and
accordingly, we file annual reports, quarterly reports, current reports,
proxy
statements and other information with the SEC. You may read or obtain a copy
of
these reports at the SEC’s public reference room at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. You may obtain information on the operation
of the
public reference room and their copy charges by calling the SEC at
1-800-SEC-0330. The SEC maintains a website that contains registration
statements, reports, proxy information statements and other information
regarding registrants that file electronically with the SEC. The address
of the
website is http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act to register the shares offered by this prospectus. The term “registration
statement” means the original registration statement and any and all amendments
thereto, including the schedules and exhibits to the original registration
statement or any amendment. This prospectus is part of that registration
statement. This prospectus does not contain all of the information set forth
in
the registration statement or the exhibits to the registration statement.
For
further information with respect to us and the shares we are offering pursuant
to this prospectus, you should refer to the registration statement and its
exhibits. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete,
and you should refer to the copy of that contract or other documents filed
as an
exhibit to the registration statement. You may read or obtain a copy of the
registration statement at the SEC’s public reference facilities and Internet
site referred to above.
46
Description
of Property
Offices
We
currently lease office space in Calgary, Alberta; Buenos Aires, Argentina;
and
Bogota, Colombia. We currently maintain temporary office space in Quito,
Ecuador. The Calgary lease covers a term of five years (beginning February,
2006), with monthly lease payments of $6,824. Our Buenos Aires lease is for
two
years beginning March, 2006, with
monthly lease payments of $2,000. Our Bogota leases are for $696 and $2,326
per
month, and expire in 2009 and 2007, respectively. Our Quito lease is on a
month-to-month basis. The condition of the properties is excellent.
Oil
and Gas Properties-Argentina
Palmar
Largo
We hold a 14% participation interest in the Palmar Largo joint venture. The
Palmar Largo joint venture encompasses several producing oil fields in the
Noroeste Basin of Argentina. Approximately 39 million barrels of oil (gross
before royalties) have been recovered from the area since 1984. A total of
15
(gross) wells are currently producing. Gran Tierra’s share of remaining proved
reserves at December 31, 2005 was 580,976 barrels (net after 12% royalties)
according to an independent reserve assessment.
Our
share
of production at Palmar Largo averaged 293 barrels per day (net after
12% royalties) over the September 1 to December 31, 2005 period. Sales for
the period were significantly less than production and inventories increased
as
a result, as oil deliveries were disrupted in November and December due to
heavy
rainfall in the region, which made roads impassable for tanker trucks. Sales
averaged 206 barrels per day and oil inventory reached approximately 14,000
barrels at year-end. For the first three quarters of 2006, our net production
from Palmar Largo was 295 barrels per day and our sales averaged 376 barrels
per
day.
The
joint
venture partners at Palmar Largo conducted a 3-D seismic survey over a portion
of the area in 2003 and identified several exploration prospects and leads.
One
exploration well was drilled in late-2005 but did not indicate commercial
quantities of oil. A portion of the drilling costs for this well was factored
into the purchase price for Palmar Largo. A twin of an existing well was also
recently drilled and completed. The Ramon Lista-1001 well commenced drilling
in
September 2005 and reached its target depth in late-December. Production from
the well was initiated in early February 2006 at 299 barrels per day
(gross after 12% royalty) or 42 barrels per day net to Gran
Tierra (after 12% royalty). No additional wells were drilled in
2006.
47
Our
participation at Palmar Largo provides us with a reliable cashflow stream and
a
base for expansion in the region and in the country.
Nacatimbay
We
have a
50% interest in the Nacatimbay block in the Noroeste Basin in northern
Argentina. Production from the Nacatimbay oil, gas and condensate field began
in
1996. A single well was producing until March 1, 2006, when its production
was
suspended due to low flow conditions. Natural gas was sold into the
adjacent pipeline grid at regulated prices and liquids were sold locally.
Over the September 1 to December 31, 2005 period, natural gas sales
averaged 494 thousand cubic feet per day (net after 12% royalty).
Total liquids production averaged 5 barrels per day for the September 1 to
December 31, 2005 period (net after 12% royalty). Reserves
associated with former activities at Nacatimbay are limited according to an
independent reserve assessment.
For
the
first three quarters of 2006, net production from Nacatimbay was 1 barrel
per
day of condensate and 103 thousand cubic feet per day of natural gas. There
was
no production for the third quarter of 2006.
We
assessed the production potential of the block in late 2006, including
opportunities to extend production from the existing well. Production
at the Nacatimbay Field was re-established in January 2007 following facilities
upgrade activity. This previously shut-in field is now producing
approximately 500 thousand cubic feet of gas per day (net after 12%
royalty).
Ipaguazu
We
hold a
50% participation in the Ipaguazu block in the Noroeste Basin. The Ipaguazu
oil
and gas field was discovered in 1981 and produced approximately 100 thousand
barrels of oil and 400 million cubic feet of natural gas until 2003. No
producing activities are carried out in the field at this time. The Ipaguazu
block covers 43,200 acres and has not been fully appraised, leaving scope
for both reactivation and exploration in the
future.
El
Vinalar
We
hold a
50% interest in the El Vinalar block in the Noroeste Basin. The block covers
248,235 acres. Our share of net production for the third quarter of 2006
was 43
barrels per day with sales of 46 barrels per day. We acquired our interest
at El
Vinalar effective July 1, 2006.
Reserves
Summary-Argentina
|
Estimated
Reserves (1)
Net
to Gran Tierra, After 12% Royalty, at December 31,
2005
|
|||
|
Oil
(thousand
barrels)
|
Natural
Gas
(million
cubic feet)
|
Liquids
(thousand
barrels)
|
|
|
Palmar
Largo
|
Nacatimbay
|
Nacatimbay
|
|
|
Proved
Developed
|
462
|
24.5
|
1.72
|
|
Proved
Undeveloped
|
119
|
—
|
—
|
|
Total
Proved
|
581
|
24.5
|
1.72
|
(1)
Reserves certified by Gaffney, Cline and Associates, as of February
2006.
We
had no
reserves at December 31, 2004.
Our
acquisition of Palmar Largo was based on an estimate of proved reserves at
June
1, 2005 of 620,400 barrels net to Gran Tierra. Year-end proved reserves of
580,976 barrels plus June 1 through December 31 production of 63,360 thousand
barrels translates to a proved reserves balance of 644,336 barrels at June
1,
representing a variance of less than 4% for actual reserves versus estimated
reserves at June 1, 2005.
48
Production
Summary
|
Production
Net
to Gran Tierra, After 12% Royalty, September 1 - December 31,
2005
|
|
Oil -
Palmar Largo
|
Natural
Gas - Nacatimbay
|
Liquids
- Nacatimbay
|
|||
|
(barrels
per day)
|
(average
price)
|
(thousand
cubic feet per day)
|
(average
price)
|
(barrels
per day)
|
|
|
293
|
$37.80/barrel
|
494
|
$1.50/thousand
cubic feet
|
5
|
|
We
had no
production in 2004.
Productive
Wells
|
Productive
Wells
Gran
Tierra, December 31, 2005
|
||||||
|
(Number
of wells)
|
Oil
|
Natural
Gas
|
Total
|
|||
|
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
|
Palmar
Largo
|
16
|
2.2
|
—
|
—
|
16
|
2.2
|
|
Nacatimbay
|
—
|
—
|
1
|
0.5
|
1
|
0.5
|
|
Ipaguazu
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Total
|
16
|
2.2
|
1
|
0.5
|
17
|
2.7
|
(1)
Represents the total number of wells at each property.
(2)
Represents
our interest in the total number of
wells at each property.
Acreage
|
Acreage
Gran
Tierra, December 31, 2005
|
||||||
|
(Acres)
|
Developed
|
Undeveloped
|
Total
|
|||
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
|
|
Palmar
Largo
|
301,700
|
42,238
|
—
|
—
|
301,700
|
42,238
|
|
Nacatimbay
|
36,600
|
18,300
|
—
|
—
|
36,600
|
18,300
|
|
Ipaguazu
|
43,200
|
21,600
|
—
|
—
|
43,200
|
21,600
|
|
Total
|
381,500
|
82,138
|
—
|
—
|
381,500
|
82,138
|
(1)
Represents the total acreage at each property.
(2)
Represents
our interest in the total acreage
at each property.
49
Drilling
Activity
|
Drilling
Activity
Gran
Tierra, 2005
|
||||||
|
(Number
of wells)
|
Productive
|
Dry
|
Total
|
|||
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
Gross(1)
|
Net(2)
|
|
|
Exploration
|
—
|
—
|
1
|
0.14
|
1
|
0.14
|
|
Development
|
1
|
0.14
|
—
|
—
|
1
|
0.14
|
|
Total
|
1
|
0.14
|
1
|
0.14
|
2
|
0.28
|
(1)
Represents the total number of wells at which there is drilling
activity.
(2)
Represents
our interest in the total number of
wells at which there is drilling activity.
Oil
and Gas
Properties-Colombia
We are
the operator and hold interests in 7 blocks in Colombia. The Santana
and Guayuyaco blocks are currently producing. The Rio Magdalena,
Talora, Chaza, Primavera and Mecaya blocks are in their exploration
phases.
Santana
The
Santana Contract area covers 1,120 acres and includes 4 producing fields -
Linda, Mary, Miraflor and Toroyaco - and 15 wells. Activities are governed
by terms of an Association Contract with Ecopetrol, and we are the
operator. The properties are subject to a 20% royalty and we
hold a 35% interest in all fields with the exception of the Inchyaco-1 well
in the Mary field, where we hold a 25.83% working interest.
Ecopetrol holds the remaining interests. The Block has been
producing since 1991; a total of 20.2 million barrels (gross) have been produced
to date (to December 31, 2005). Production (net after royalty)
averaged 364 barrels per day during the three months ended September
30, 2006.
Oil
is
sold to Ecopetrol and is exported via the Trans-Andean pipeline. Oil
quality is approximately 26 degrees API. Oil prices are defined by
contract and are related to a West Texas Intermediate reference. By
contract, 25% of sales are denominated in pesos and 75% in US
dollars.
Guayuyaco
The
Guayuyaco Block covers 52,365 acres and comprises the area surrounding the
4 producing fields of the Santana Contract area. The Guayuyaco Block is
governed by an “Adjacent Play” Association Contract with Ecopetrol, providing a
royalty of 8%. We are the operator and have a 35% participation
interest. Solana also has a 35% participation interest and Ecopetrol has
a 30% participation interest. The Guayuyaco field within the Block
was discovered in 2005. Two wells are now producing, with Guayuyaco-1 on
stream in February 2005 and Guayuyaco-2 on stream in September 2005. Production
(net after royalty) averaged 340 barrels per day during the three months
ended September 30, 2006. Oil quality and sales terms are comparable to
Santana oil and volumes are similarly transported via the Trans-Andean pipeline
for export.
A
combined 2D and 3D seismic survey was acquired over the Block in
2005. Ecopetrol may back-in to a 30% participation interest in
any new discoveries in the Block.
50
Rio
Magdalena
Argosy entered
into the Rio Magdalena Association Contract in February 2002. The Rio
Magdalena contract area covers 144,670 acres. We are the operator,
and according to terms of the contract, we are obligated to drill two
exploration wells prior to February, 2007. The first of these wells,
Popa-1, has been drilled and was subsequently plugged and abandoned. According
to the terms of the Association Contract, Ecopetrol may back-in for a 30%
participation at commerciality, and a sliding scale royalty applies, currently
at 8%.
Chaza
The
Chaza
Block covers 80,242 acres and is governed by terms of an Exploration &
Exploitation Contract with the government agency ANH, reflecting re-vamped
and
improved fiscal terms. The Chaza Contract was signed June 2005 and defines
a 6 year exploration period and 24 year production period. We are the operator
and have a 50% participation interest. Solana holds the remaining 50%
participation interest.
Talora
The
Talora Exploration & Exploitation Contract was signed September 2004,
providing for a 6 year exploration period and 24 year production period.
The Talora contract area covers 108,333 acres. We are the operator and
have a 20% participation interest. PEI also has an 80% participation
interest.
Primavera
The
Primavera Exploration & Exploitation contract was signed May 2006. The
Primavera contract area covers 359,072 acres. We are the operator and have
a 15% participation interest. Chaco Resources also has a 55% participation
interest and Expet also has a 30% participation interest.
51
Mecaya
The
Mecaya Exploration & Exploitation contract was signed June 2006. The
Mecaya contract area covers 74,128 acres. We are the operator and have a
15% participation interest. MCP also has a 55% participation interest and
Expet also has a 30% participation interest.
Legal
Proceedings.
From
time
to time we may become a party to litigation or other legal proceedings that
are
part of the ordinary course of our business, involving routine litigation
that
is incidental to our business. As
of
September 30, 2006 the contracting parties of Guayuyaco Association Contract,
Ecopetrol and Argosy Energy International, consulted with their legal advisors
to clarify the procedure for allocation of oil produced and sold during the
long
term test of the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has advised
Argosy
of a material difference in the interpretation of the procedure established
in
the Clause 3.5 of Attachment-B of the Guayuyaco Association Contract. Ecopetrol
interprets the contract to provide that the extend test production up to
a value
equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s
account only and serves as reimbursement of its 30% back in to the Guayuyaco
discovery. Argosy’s contention is that this amount is merely the recovery of 30%
of the direct exploration costs of the wells and not exclusively for benefit
of
Ecopetrol. While Argosy believes its interpretation of the Guayuyaco Association
Contract is correct, the resolution of this issue is still pending agreement
between the parties or determination through legal proceedings. At this time
no
amount has been accrued in the financial statements as it is not considered
probable that a loss will be incurred. The estimated value of disputed
production is US$2,361,188 which possible loss is shared 50% (US$1,180,594)
with
Solano Petroleum Exploration (Colombia) S.A. partner in the contract and
50%
Argosy. Currently, no other legal claims or proceedings are pending
against us (i) which claim damages in excess of 10% of our current assets,
(ii) which involve bankruptcy, receivership or similar proceedings,
(iii) which involve federal, state or local environmental laws, or
(iv) which involve any of our directors, officers, affiliates, or
stockholders as a party with a material interest adverse to us. To our
knowledge, no proceeding against us is currently contemplated by any
governmental authority.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive
Officers and Directors
|
Name
|
Age
|
Position
|
||
|
Dana
Coffield
|
48
|
President
and Chief Executive Officer; Director
|
||
|
James
Hart
|
52
|
Director
|
||
|
Max
Wei
|
56
|
Vice
President, Operations
|
||
|
Rafael
Orunesu
|
50
|
President,
Gran Tierra Energy Argentina
|
||
| Edgar Dyes |
61
|
President, Argosy Energy/Gran Tierra Energy Colombia | ||
|
Jeffrey
Scott
|
44
|
Chairman
of the Board of Directors
|
||
|
Walter
Dawson
|
66
|
Director
|
||
|
Verne
Johnson
|
62
|
Director
|
||
|
Nadine
C. Smith
|
49
|
Director
|
||
| Martin H. Eden |
59
|
Chief Financial Officer |
Our
directors and officers hold office until the earlier of their death,
resignation, or removal or until their successors have been qualified.
Dana
Coffield, President, Chief Executive Officer and Director. Before
joining Gran Tierra as President, Chief Executive Officer and a Director in
May,
2005, Mr. Coffield led the Middle East Business Unit for EnCana Corporation,
North America’s largest independent oil and gas company, from 2003 through 2005.
His responsibilities included business development, exploration operations,
commercial evaluations, government and partner relations, planning and
budgeting, environment/health/safety, security and management of several
overseas operating offices. From 1998 through 2003, he was New Ventures Manager
for EnCana’s predecessor - AEC International - where he expanded activities into
five new countries on three continents. Mr. Coffield was previously with ARCO
International for ten years, where he participated in exploration and production
operations in North Africa, SE Asia and Alaska. He began his career as a
mud-logger in the Texas Gulf Coast and later as a Research Assistant with the
Earth Sciences and Resources Institute where he conducted geoscience research
in
North Africa, the Middle East and Latin America. Mr. Coffield has participated
in the discovery of over 130,000,000 barrels of oil equivalent
reserves.
52
Mr.
Coffield graduated from the University of South Carolina with an MSc and PhD
in
Geology, based on research conducted in the Oman Mountains in Arabia and Gulf
of
Suez in Egypt, respectively. He has a BSc in Geological Engineering from the
Colorado School of Mines. Dana is a member of the AAPG, the GSA and the CSPG,
and is a Fellow of the Explorers Club.
James
Hart, Director. Before
joining Gran Tierra as Vice President Finance, Chief Financial Officer and
a
Director in May, 2005, Mr. Hart was an internal consultant with EnCana
Corporation, from 2001 through April 2005, providing specialized business
analyses, ideas and advice for international and corporate clients. Previously,
from 1994 to 2001, he was Treasurer of Gulfstream Resources, an international
oil and gas company active in Qatar, Oman and Madagascar (eventually acquired
by
Anadarko). Mr. Hart was responsible for financing initiatives and commercial
assessments and served as spokesperson for the company. Mr. Hart’s prior
experience includes a varied tenure at Nexen (formerly Canadian Occidental
Petroleum) from 1984 to 1994, as Manager of the company’s worldwide Treasury
activities and as Senior Advisor responsible for corporate acquisitions. He
was
primarily responsible for completing several international acquisitions totaling
$220,000,000, and was actively involved in strategy initiatives of the company.
He began his career with the Alberta Petroleum Marketing Commission, providing
policy advice to the Provincial Government.
Mr.
Hart
graduated from the University of Manitoba with a Masters in Natural Resources
Management (Economics specialization) and a BSc in Geology. He is a frequent
instructor for the Canadian Petroleum Institute and EuroMaTech Seminars.
Max
Wei, Vice President, Operations. Mr.
Wei
is a Petroleum Engineering graduate from University of Alberta and has
twenty-five years of experience as a reservoir engineer and project manager
for
oil and gas exploration and production in Canada, the US, Qatar, Bahrain, Oman,
Kuwait, Egypt, Yemen, Pakistan, Bangladesh, Russia, Netherlands, Philippines,
Malaysia, Venezuela and Ecuador, among other countries. Mr. Wei began his career
with Shell Canada and later with Imperial Oil, in Heavy Oil Operations. He
moved
to the US in 1986 to work with Bechtel Petroleum Operations at Naval Petroleum
Reserves in Elk Hills, California and eventually joined Occidental Petroleum
in
Bakersfield. Mr. Wei returned to Canada in 2000 as Team Leader for Qatar and
Bahrain operations with AEC International and its successor, EnCana Corporation,
where he worked until 2004. He completed a project management position with
Petronas in Malaysia in April, 2005, before joining Gran Tierra in May,
2005.
Mr.
Wei
is specialized in reservoir engineering, project management, production
operations, field acquisition and development, and mentoring. He is a registered
Professional Engineer in the State of California and a member of the Association
of Professional Engineers, Geologists and Geophysicists of Alberta. Mr. Wei
has
a BSc in Petroleum Engineering from the University of Alberta and Certification
in Petroleum Engineering from Southern Alberta Institute of
Technology.
53
Rafael
Orunesu, Vice President, Latin America. Mr.
Orunesu joined Gran Tierra in March 2005 and brings a mix of operations
management, project evaluation, production geology, reservoir and production
engineering as well as leadership skills to Gran Tierra, with a South American
focus. He was most recently Engineering Manager for Pluspetrol Peru, from 1997
through 2004, responsible for planning and development operations in the
Peruvian North jungle. He participated in numerous evaluation and asset purchase
and sale transactions covering Latin America and North Africa, incorporating
200,000,000 barrels of oil over a five-year period. Mr. Orunesu was previously
with Pluspetrol Argentina from 1990 to 1996 where he managed the
technical/economic evaluation of several oil fields. He began his career with
YPF, initially as a geologist in the Austral Basin of Argentina and eventually
as Chief of Exploitation Geology and Engineering for the Catriel Field in the
Nuequén Basin, where he was responsible for drilling programs, workovers and
secondary recovery projects.
Mr. Orunesu has a postgraduate degree in Reservoir Engineering and Exploitation
Geology from Universidad Nacional de Buenos Aires and a degree in Geology from
Universidad Nacional de la Plata, Argentina.
Edgar
Dyes, President Argosy Energy / Gran Tierra Energy Colombia.
Mr. Dyes
joined our company through the acquisition of Argosy Energy, where he was
Executive Vice-President and Chief Operating Officer. His experience in the
Colombian oil industry spans twenty-one years, with the last six years in
charge
of Argosy Energy’s planning, management, finance and administration activities.
Mr. Dyes began his career with Union Texas Petroleum as a petroleum accountant,
where he eventually advanced into supervision and management positions in
international operations for the company. He subsequently worked for Quintana
Energy Corporation; Jackson Exploration, Inc.; CSX Oil and Gas; and Garnet
Resources Corporation, where he held the position of Chief Financial Officer.
Mr. Dyes has worked in various financial and management roles on projects
located in the United Kingdom, Germany, Indonesia, Oman, Brunei, Egypt, Somalia,
Ecuador and Colombia. Mr. Dyes holds a Bachelor’s degree in Business Management
from Stephen F. Austin State University, with postgraduate studies in
accounting.
Jeffrey
Scott, Chairman of the Board of Directors.
Mr.
Scott has served as Chairman of our board of directors since January 2005.
Since
2001, Mr. Scott has served as President of Postell Energy Co. Ltd., a privately
held oil and gas producing company. He has extensive oil and gas management
experience, beginning as a production manager of Postell Energy Co. Ltd in
1985
advancing to President in 2001. Mr. Scott is also currently a Director of Saxon
Energy Services, Inc., High Plains Energy, Inc. and Suroco Energy, Inc.,
all of which are publicly traded companies. Mr. Scott holds a Bachelor
of Arts degree from the University of Calgary, and a Masters of Business
Administration from California Coast University.
Walter
Dawson, Director.
Mr.
Dawson has served as a director since January 2005. Mr. Dawson has been the
Chairman, CEO and director of Saxon Energy Services, Inc., a publicly traded
company, since 2001. Before his time at Saxon, Mr. Dawson served for 19
years as President, Chief Executive Officer and a director and founded what
became known as Computalog Gearhart Ltd., which is now an operating division
of
Precision Drilling Corp. Computalog’s primary businesses are oil and gas
logging, perforating, directional drilling and fishing tools. Mr. Dawson
instituted a technology center at Computalog, located in Fort Worth, Texas,
where electronics were designed to develop wellbore logging tools technologies
which continue in use today. In 1993 Mr. Dawson founded what became known as
Enserco Energy Services Company Inc., formerly Bonus Resource Services Corp.
Enserco entered the well servicing businesses through the acquisition of 26
independent Canadian service rig operators. Mr. Dawson is currently the chairman
of the board of directors of High Plains Energy, Inc. and a director of Suroco
Energy, Inc. and Saxon Energy Services Inc., all of which are publicly traded
companies.
Verne
Johnson, Director.
Mr.
Johnson has served as a director since April 2005. Starting
with Imperial Oil in 1966, he has spent his entire career in the petroleum
industry, primarily in western Canada, contributing to the growth of oil and
gas
companies of various sizes. He
worked
with Imperial Oil Limited until 1981 (including two years with Exxon Corporation
in New York from 1977 to 1979). From
1981
to 2000, Mr. Johnson served in senior capacities with companies such as Paragon
Petroleum Ltd., ELAN Energy Inc., Ziff Energy Group and Enerplus Resources
Group. He
was
President and Chief Executive Officer of ELAN Energy Inc., President of Paragon
Petroleum and Senior Vice President of Enerplus Resources Group until February
2002. Mr.
Johnson retired in February 2002. Mr. Johnson is a director of Fort
Chicago Energy Partners LP, Harvest Energy Trust, Blue Mountain Energy Ltd.,
Builders Energy Services Trust and Mystique Energy, all publicly traded
companies. Mr.
Johnson received a Bachelor of Science degree in Mechanical Engineering from
the
University of Manitoba in 1966. He is currently president of his private family
company, KristErin Resources Ltd.
54
Nadine
C. Smith, Director.
Ms.
Smith has served as a director since January 10, 2006. She
has
served as a director of Patterson-UTI, which is traded on NASDAQ, since May
2001 and served as a director of UTI from 1995 to May 2001. Ms. Smith is also
a
director of American Retirement Corporation, a New York Stock Exchange listed
company that owns and manages senior housing properties. From August 2000
to December 2001, Ms. Smith was President of Final Arrangements, LLC, a
company providing software and web-based internet services to the funeral
industry. From April 2000 to August 2000, she served as the President of Aegis
Asset Management, Inc., an asset management company. From 1997 to April 2000,
Ms. Smith was President and Chief Executive Officer of Enidan Capital
Corp., an investment company. Previously, Ms. Smith was an investment
banker and principal with NC Smith & Co. and The First Boston
Corporation and a management consultant with McKinsey & Co.
Ms. Smith holds a Bachelor of Science degree in economics from Smith
College and a Masters of Business Administration from Yale
University.
Martin
H. Eden, Chief Financial Officer. Mr.
Eden
joined our company as Chief Financial Officer on January 2, 2007. He has
over 26
years experience in accounting and finance in the energy industry in Canada
and
overseas. He was Chief Financial Officer of Artumas Group Inc., a publicly
listed Canadian oil and gas company from April 2005 to December 2006 and
was a
director from June 2006 to October 2006. He has been president of Eden and
Associates Ltd., a financial consulting firm, from January 1999 to present.
From
October 2004 to March 2005, he was CFO of Chariot Energy Inc., a Canadian
private oil and gas company. From January 2004 to September 2004, he
was also CFO of Assure Energy Inc., a publicly traded oil and gas company
listed
in the United States. From January 2001 to December 2002, he was CFO of Geodyne
Energy Inc., a publicly listed Canadian oil and gas company. From 1997 to
2000,
he was Controller and subsequently CFO of Kyrgoil Corporation, a publicly
listed
Canadian oil and gas company with operations in Central Asia. He spent nine
years with Nexen Inc. (1986-1996), including three years as Finance Manager
for
Nexen's Yemen operations and six years in Nexen's financial reporting and
special projects areas in its Canadian head office. Mr. Eden has worked in
public practice, including two years as an audit manager for Coopers &
Lybrand in East Africa. Mr. Eden holds a B.Sc. in Economics from Birmingham
University, England, an MBA from Henley Management College/Brunel University,
England, and is a member of the Institute of Chartered Accountants of Alberta
and the Institute of Chartered Accountants in England and
Wales.
Our
above-listed officers and directors have neither been convicted in any criminal
proceeding during the past five years nor been parties to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining them from future violations of, or
prohibiting activities subject to, federal or state securities laws or a finding
of any violation of federal or state securities law or commodities law.
Similarly, no bankruptcy petitions
have been filed by or against any business or property of any of our directors
or officers, nor has any bankruptcy petition been filed against a partnership
or
business association in which these persons were general partners or executive
officers.
Board
of Directors
Our
board
of directors consists of six directors and includes two committees: an audit
committee and a compensation committee. We adhere to the Nasdaq Marketplace
Rules in determining whether a director is independent and our board of
directors has determined that four of our six directors, Messrs. Scott, Johnson
and Dawson and Ms. Smith, are "independent" within the meaning of Rule
4200(a)(15) of the NASD's published listing standards.
Board
Committees
The
board
of directors has designated an audit committee to oversee management’s conduct
of our accounting and financial reporting processes. The audit committee reviews
our financial reports and other financial information disclosed to the public,
the government and various regulatory bodies, our system of internal accounting,
our financial controls, and the annual independent audit of our financial
statements. The audit committee also oversees compliance with legal and
regulatory requirements. Currently, the audit committee members are Messrs.
Scott and Johnson and Ms. Smith. Ms. Smith serves as Chair of the audit
committee.
Our
board
of directors has determined that all of the current members of our audit
committee are “independent” within the meaning of Rule 4200(a)(15) of the NASD’s
published listing standards. The board of directors has determined that Nadine
Smith, an independent director, qualifies as an “audit committee financial
expert” within the meaning Item 401(h) of Regulation S-K and Item 401(e) of
Regulation S-B, both promulgated by the SEC. The audit committee selects,
subject to the board of directors’ approval, the independent accountants to
audit our books and financial records, and considers and acts upon accounting
matters as they arise. A copy of the charter of the Audit Committee will be
available as soon as practicable on our website at www.grantierra.com. The
audit
committee was established, and the members of the audit committee were
appointed, on March 9, 2006.
The
board
of directors has appointed a compensation committee and is expected to
appoint a nominating committee. Mr. Johnson serves as chairman of
the compensation committee and Messrs. Scott and Dawson are the
remaining members of the compensation committee. Until further
determination by the board, the full board of directors will undertake the
duties of the nominating committee of the board of directors. The board is
in the process of formulating and adopting a code of ethics to govern the
conduct of our officers, directors and employees.
55
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 2, 2007 by (1) each person
who, to our knowledge, beneficially owns more than 5% of the outstanding shares
of the common stock; (2) each of our directors and executive officers; and
(3)
all of our executive officers and directors as a group. Unless otherwise
indicated in the footnotes to the following table, each person named in the
table has sole voting and investment power and that person’s address is 300,
611-10th Avenue, S.W., Calgary, Alberta, Canada, T2R 0B2. Shares of
common stock subject to options or warrants currently exercisable or exercisable
within 60 days following February 2, 2007 are deemed outstanding for computing
the share ownership and percentage of the person holding such options and
warrants, but are not deemed outstanding for computing the percentage of any
other person. All share numbers and ownership percentage calculations below
assume that all exchangeable shares of Goldstrike Exchange Co. have been
converted on a one-for-one basis into corresponding shares of our common stock.
56
|
Name
and Address of Beneficial Owner
|
Amount
and
Nature
of
Beneficial
Owner
|
Percentage
of
Class
|
|||||
|
Dana
Coffield (2)
|
1,888,829
|
1.98
|
%
|
||||
|
James
Hart (3)
|
1,743,850
|
1.83
|
%
|
||||
|
Max
Wei (3)
|
1,783,834
|
1.87
|
%
|
||||
|
Rafael
Orunesu (3)
|
1,863,850
|
1.95
|
%
|
||||
|
Jeffrey
Scott (4)
|
2,563,861
|
2.68
|
%
|
||||
|
Walter
Dawson (5)
|
3,005,952
|
3.14
|
%
|
||||
|
Verne
Johnson (6)
|
1,662,884
|
1.74
|
%
|
||||
|
Nadine
C. Smith (7)
|
2,099,094
|
2.19
|
%
|
||||
|
Greywolf
Capital Management LP (8)
|
10,000,001
|
10.12
|
%
|
||||
|
Millennium
Global Investments Limited (9)
|
5,002,500
|
5.15
|
%
|
||||
|
US
Global Investors, Inc. (10)
|
5,000,000
|
5.15
|
%
|
||||
|
Directors
and officers as a group (total of 8 persons)
|
16,612,154
|
17.13
|
%
|
||||
|
(1)
|
Beneficial
ownership is calculated based on 95,455,765 shares of common stock
issued and outstanding as of February 2, 2007, which number includes
shares of common stock issuable upon the exchange of the exchangeable
shares of Goldstrike Exchange Co. issued to certain former holders
of Gran
Tierra Canada's common stock. Beneficial ownership is determined
in
accordance with Rule 13d-3 of the SEC. The number of shares beneficially
owned by a person includes shares of common stock underlying options
or
warrants held by that person that are currently exercisable or
exercisable
within 60 days of February 2, 2007. The shares issuable pursuant
to the
exercise of those options or warrants are deemed outstanding for
computing
the percentage ownership of the person holding those options and
warrants
but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Unless otherwise indicated,
the
persons and entities named in the table have sole voting and sole
investment power with respect to the shares set forth opposite
that
person's name, subject to community property laws, where
applicable.
|
|
(2)
|
The
number of shares beneficially includes an option to acquire 54,167
shares
of common stock exercisable within 60 days of February 2, 2007,
and a
warrant to acquire 48,334 shares of common stock exercisable within
60
days of February 2, 2007. The number of shares beneficially owned
also
includes 1,689,683 exchangeable
shares.
|
|
(3)
|
The
number of shares beneficially includes an option to acquire 54,167
shares
of common stock exercisable within 60 days of February 2, 2007.
All other
shares beneficially owned by such stockholder are exchangeable
shares.
|
|
(4)
|
The
number of shares beneficially includes an option to acquire 50,000
shares
of common stock exercisable within 60 days of February 2, 2007,
and a
warrant to acquire 274,991 shares of common stock exercisable within
60
days of February 2, 2007. The number of shares beneficially owned
also
includes 1,688,889 exchangeable
shares.
|
|
(5)
|
The
number of shares beneficially includes an option to acquire 33,333
shares
of common stock exercisable within 60 days of February 2, 2007.
The number
beneficially owned also includes warrants to acquire 375,000 shares
of
common stock exercisable within 60 days of February 2, 2007, of
which
warrants to acquire 275,000 shares are held by Perfco Investments
Ltd
("Perfco"). The number of shares beneficially owned also includes
550,000
shares of common stock directly owned by Perfco and 158,730 shares
of
common stock directly owned by Mr. Dawson's spouse. The number
of shares
beneficially owned includes 1,688,889 exchangeable shares, of which
1,587,302 are held by Perfco. Mr. Dawson is the sold owner of Perfco
and
has sole voting and investment power over the shares beneficially
owned by
Perfco. Mr. Dawson disclaims beneficial ownership over the shares
beneficially owned by Perfco.
|
|
(6)
|
The
number of shares beneficially includes an option to acquire 33,333
shares
of common stock exercisable within 60 days of February 2, 2007,
and a
warrant to acquire 112,496 shares of common stock exercisable within
60
days of February 2, 2007. The number of shares beneficially owned
includes
1,292,064 exchangeable shares, of which 396,825 are held by KirstErin
Resources, Ltd., a private family-owned business of which Mr. Johnson
is
the President. Mr. Johnson has sole voting and investment power
over the
shares held by KirstErin Resources, Ltd.
|
|
(7)
|
The
number of shares beneficially includes an option to acquire 33,333
shares
of common stock exercisable within 60 days of February 2, 2007,
and a
warrant to acquire 362,500 shares of common stock exercisable within
60
days of February 2, 2007.
|
|
(8)
|
Greywolf
Capital Management LP is the investment manager for (a) Greywolf
Capital
Overseas Fund ("GCOF"), which owns 4,800,000 shares of common stock
and a
warrant to acquire 2,400,000 shares of common stock exercisable
within 60
days of February 2, 2007, and (b) Greywolf Capital Partners II
("GCP"),
which owns 1,888,667 shares of common stock and a warrant to acquire
933,334 shares of common stock exercisable within 60 days of February
2,
2007. William Troy has the power to vote and dispose of the shares
of
common stock beneficially owned by GCOF and GCP. The address for
Greywolf
Capital Management LP is 4 Manhattanville Road, Purchase, NY 10577.
|
|
(9)
|
Includes
shares beneficially owned by Millennium Global High Yield Fund
Limited
(the "High Yield Fund") and Millennium Global Natural Resources
Fund
Limited (the "Natural Resources Fund"). The High Yield Fund owns
2,668,000
shares of common stock and a warrant to acquire 1,334,000 shares
of common
stock exercisable within 60 days of February 2, 2007. The Natural
Resources Fund owns 667,000 shares of common stock and a warrant
to
acquire 333,500 shares of common stock exercisable within 60 days
of
February 2, 2007. Joseph Strubel has the power to vote and dispose
of the
shares of common stock beneficially owned by the High Yield Fund
and the
Natural Resources Fund. The address for Millennium Global Investments
Limited is 57-59 St. James Street, London, U.K., SW1A
1LD.
|
|
(10)
|
Includes
shares beneficially owned by US Global Investors - Global Resources
Fund
(the "Global Fund") and US Global Investors - Balanced Natural
Resources
Fund (the "Balanced Fund"). The Global Fund owns 3,100,000 shares
of
common stock and a warrant to acquire 1,550,000 shares of common
stock
exercisable within 60 days of February 2, 2007. The Balanced Fund
owns
233,333 shares of common stock and a warrant to acquire 116,667
shares of
common stock exercisable within 60 days of February 2, 2007. Evan
Smith,
portfolio manager, has the power to vote and dispose of the shares
of
common stock beneficially owned by the Global Fund and the Balanced
Fund.
The address for US Global Investors, Inc. is 7900 Callaghan Road,
San
Antonio, Texas 78229.
|
57
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in each of the
last
two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000
and up to two additional individuals for whom disclosure would have been
made in
this table but for the fact that the individual was not serving as an executive
officer of our company at the end of our fiscal year. Such officers are referred
to herein as our “Named Executive Officers.”
|
Summary
Compensation Table
|
|||||||||
|
Name
and principal position
|
Year
|
Salary
($) (1)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($) (2)(3)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($) (4)
|
Total
($)
|
|
Dana
Coffield
President
and Chief Executive Officer
|
2006
|
$154,458
|
0
|
0
|
$23,400
|
0
|
0
|
0
|
$177,858
|
|
2005
|
$154,386
|
0
|
0
|
$41,546
|
0
|
0
|
0
|
$195,932
|
|
|
James
Hart
Vice
President, Finance and Chief Financial Officer
|
2006
|
$154,458
|
0
|
0
|
$14,625
|
0
|
0
|
0
|
$169,083
|
|
2005
|
$154,386
|
0
|
0
|
$41,546
|
0
|
0
|
0
|
$195,392
|
|
|
Max
Wei
Vice
President, Operations
|
2006
|
$154,458
|
0
|
0
|
$11,700
|
0
|
0
|
0
|
$166,158
|
|
2005
|
$154,386
|
0
|
0
|
$41,546
|
0
|
0
|
0
|
$195,392
|
|
|
Rafael
Orunesu
President,
Gran Tierra Argentina
|
2006
|
$150,000
|
0
|
0
|
$11,700
|
0
|
0
|
$55,200
|
$216,900
|
|
2005
|
$150,000
|
0
|
0
|
$41,546
|
0
|
0
|
$55,200
|
$246,746
|
|
(1)
Dana
Coffield, James Hart and Max Wei’s salaries are paid in Canadian dollars: CDN
$180,000 per year.
(2)
Granted under terms of our Equity Incentive Plan.
(3)
Assumptions made in the valuation of stock options granted on November
10, 2005
are discussed in Note 4 to the Consolidated Financial Statements for Gran
Tierra
Energy, Inc. for the period from Incorporation on January 26, 2005 to December
31, 2005. The stock options issued on November 8, 2006 have not yet been
discussed in any financial statements. The Black-Scholes option pricing
model
was used to determine the fair value of the November 8, 2006 option grants
with
the following assumptions:
|
Dividend
Yield (per share)
|
$0.00
|
|
Volatility
(%)
|
85.1353%
|
|
Risk-free
interest rate (%)
|
5%
|
|
Expected
life
|
3
years
|
The
weighted average fair value per option is $0.20.
(4)
Cost
of living allowance.
Agreements
with Executive Officers
We
have
entered into executive employment agreements with all members of our current
management team. The employment agreements entered into between Gran Tierra
and
Dana Coffield, James Hart and Max Wei have identical terms except for the
position held by each such person and terms related to participation on the
board of directors for Mr. Coffield and Mr. Hart. The respective employment
agreements provide for an initial annual base salary of CDN$180,000
($154,386 US dollars) and provide for unspecified annual bonuses and options
as
warranted. The executive employment agreements became effective on May 1, 2005
and have initial terms of three-years, subject to extension or earlier
termination and provide for severance payments to each employee, in the event
the employee is terminated without cause or the employee terminates the
agreement for good reason, in the amount of two times total compensation for
the
prior year. “Good reason” includes an adverse change in the executive’s
position, title, duties or responsibilities, or any failure to re-elect him
to
such position (except for termination for “cause”). Initial contract terms for
Messrs. Coffield, Hart and Wei included rights to purchase 200,000 shares of
our
common stock before an initial public offering. These rights have been removed,
with the mutual consent of Grant Tierra and the applicable executives. All
agreements include standard indemnity, insurance, non-competition and
confidentiality provisions.
58
We
have
also entered into an employment agreement with Mr. Orunesu which provides for
an
initial annual base salary of $150,000, unspecified annual bonuses and options
as warranted. The contract includes provision for payment of a cost of living
adjustment of $55,200 per year. The agreement became effective on March 1,
2005
and has an initial term of two-years, terminating on March 1, 2007, subject
to
extension or earlier termination. The agreement provides for severance payments
in the event of the employee’s termination without cause or for good reason, in
an amount equal to the salary payable under the employment agreement during
any
remaining time in the initial two year term. Initial
rights provided in Mr. Orunesu’s agreement, to purchase 200,000 shares of our
common stock before an initial public offering, have since been removed with
mutual consent of us and Mr. Orunesu.
We
entered into an employment agreement with Edgar Dyes which provides for an
initial base salary of $108,000 per year plus a supplemental amount of $42,000
per year. The contract became effective on April 1, 2006 and terminates on
April
1, 2008. Mr. Dyes also receives reasonable living expenses while performing
his
duties in Colombia. The agreement provides for severance payments equal to
the
amount of base salary plus bonus received for the prior 12-month period in
the
event of termination without cause, termination for good reason or termination
for disability.
On
December 1, 2006, we entered into an executive employment agreement with
Mr.
Eden that provides for an initial annual base salary of $194,743 and provides
for unspecified annual bonuses and options as warranted. Mr. Eden’s employment
agreement became effective on January 2, 2007 and has an initial term of
three
years, subject to extension or earlier termination and provides for severance
payments, in the event he is terminated without cause or terminates the
agreement for good reason, in the amount of his total compensation for the
prior
year. “Good reason” includes an adverse change in the Mr. Eden’s position,
title, duties or responsibilities, or any failure to re-elect him to such
position (except for termination for “cause”). Mr. Eden’s employment agreement
includes customary indemnity, insurance, non-competition and confidentiality
provisions.
Directors’
Compensation
There
are
currently no compensation arrangements in place for the members of our board
of
directors who are not also our employees. In
2007,
we intend to pay a fee of C$15,000 per year to each director who serves on
our
board of directors and an additional C$15,000 per year for the chairman of
our
board of directors. We will also pay an additional fee of C$7,500 per year
for
each committee chair and a fee of C$750 for each meeting attended in person.
Directors who are not our employees are eligible to receive awards
under
our 2005 Equity Incentive Plan. Compensation arrangements with the directors
who
are also our employees are described in the preceding sections of this
prospectus under the heading “Executive Compensation.”
2005
Equity Incentive Plan
Our
2005
Equity Incentive Plan (the “Plan”) enables our board of directors to provide
equity-based incentives through grants or awards to our present and future
employees, non-employee directors, consultants and other third party advisors.
However, grants and awards under the Plan may only be made to those persons
who
are includable in the definition of “employee” under the general instructions to
the registration statement on Form S-8.
Only
individuals who are our employees (not those who are includable in the
definition under the instructions to Form S-8 but are otherwise not employees)
are eligible to receive incentive stock options under the Plan. All employees,
non-employee directors, consultants and advisors are eligible to receive
nonqualified stock options, stock appreciation rights and restricted stock
awards, though such awards may not be granted to any consultant or advisor
unless bona fide services have been or are to be rendered by such consultant
or
advisor, and such services are not provided by such consultant or advisor
in
connection with the offer or sale of our securities in a capital raising
transaction.
Our
board
of directors reserved a total of 2,000,000 shares of our common stock for
issuance under the Plan. If an incentive award granted under the Plan expires,
terminates, is unexercised or is forfeited, or if any shares are surrendered
to
us in connection with an incentive award, the shares subject to such award
and
the surrendered shares will become available for further awards under the
Plan.
Shares
issued under the Plan through the settlement, assumption or substitution
of
outstanding awards or obligations to grant future awards as a condition of
acquiring another entity will not reduce the maximum number of shares available
under the Plan. In addition, the number of shares of our common stock subject
to
the Plan, any number of shares subject to any numerical limit in the Plan,
and
the number of shares and terms of any incentive award may be adjusted in
the
event of any change in our outstanding common stock by reason of any stock
dividend, spin-off, split-up, stock split, reverse stock split,
recapitalization, reclassification, merger, consolidation, liquidation, business
combination or exchange of shares or similar transaction.
No
more
than 200,000 of the authorized shares under the Plan may be allocated to
incentive awards granted or awarded to any individual participant during
any
calendar year.
59
Administration
The
compensation committee of the Board (or the Board in the absence of such
a
committee), will administer the Plan. Subject to the terms of the Plan, the
compensation committee will have complete authority and discretion to determine
the terms of awards under the Plan. The compensation committee may adopt
rules
and regulations with respect to participants in the Plan or beneficiaries
designated by participants in the Plan.
Stock
Options
The
Plan
authorizes the grant of both incentive stock options and non-qualified stock
options. Options granted under the Plan entitle the grantee, upon exercise,
to
purchase a specified number of shares of our common stock from us at a specified
exercise price per share. The administrator of the Plan will determine the
period of time during which an option may be exercised, as well as any vesting
schedule, except that no option may be exercised more than 10 years after
the
date of grant. The exercise price for shares of our common stock covered
by an
option cannot be less than the fair market value of our common stock on the
date
of grant, unless we agree otherwise at the time of the grant.
Under
the
Plan, a participant may not surrender an option for the grant of a new option
with a lower exercise price or another award under the Plan. In addition,
if a
participant’s option is cancelled before its termination date, the participant
may not receive another option within six months of the cancellation date
unless
the exercise price of the new option equals or exceeds the exercise price
of the
cancelled option.
Options
may be awarded with a reload feature. A reload feature may only apply when
the
exercise price of the option is paid by delivery of our common stock in under
the provisions of the Plan. The reload feature gives an option holder,
contemporaneously with the payment of the option exercise price in shares
of our
common stock, the right to receive a reload option to purchase that number
of
shares of our common stock as is equal to the sum of the number of shares
used
to exercise the option and, with respect to nonqualified stock options, the
number of shares used to pay any applicable withholding taxes.
Stock
Appreciation Rights
Stock
appreciation rights may be granted to any participant in the Plan who was
previously issued a stock option. The stock appreciation right permits an
option
holder to be paid the appreciation on the related option instead of exercising
the option. A participant exercising a stock appreciation right will receive
a
cash distribution in an amount not to exceed the number of shares of common
stock subject to the portion of the stock appreciation right exercised,
multiplied by the difference between the market price of a share of our common
stock on the date of exercise of the stock appreciation right and the market
price of a share of common stock on the date of grant of the stock appreciation
right.
A
stock
appreciation right may only be exercised if the underlying option is
exercisable, and in no event more than 10 years after the date of grant.
To the
extent a stock appreciation right is exercised, the underlying option shall
be
cancelled, and the shares of stock underlying such option shall no longer
be
available for awards under the Plan.
Restricted
Stock Awards
The
Plan
also authorizes the grant of restricted stock awards on terms and conditions
established by the compensation committee, which may include performance
conditions. The terms and conditions will include the designation of a
restriction period during which the shares of restricted stock are not
transferable and are subject to forfeiture.
Duration,
Amendment and Termination
Our
board
of directors may suspend or terminate the Plan without stockholder approval
or
ratification at any time or from time to time. Unless sooner terminated,
the
Plan will terminate on November 10, 2015. The Board may also amend the Plan
at
any time. No such amendment may increase the total number of shares of our
common stock reserved for issuance under the Plan, reduce the minimum exercise
price for options or exchange options for other types of awards, unless such
amendment is authorized by our stockholders. The termination or amendment
of the
Plan will not, without the consent of the participant, adversely affect a
participant’s rights under a previously granted award.
Restrictions
on Transfer: Deferral
Except
as
otherwise permitted by the compensation committee and provided in an award
under
the Plan, awards may not be transferred or exercised by another person except
by
will or by the laws of descent and distribution.
60
Option
/ SAR Grants in Last Fiscal Year
|
Name
|
Number
of Securities Underlying Options/SARs Granted (#)
|
Percent
of Total Options/SARs Granted to Employees In Fiscal
Year
|
Exercise
or Base Price ($/Sh) (1)
|
Expiration
Date
|
|
Dana
Coffield
|
200,000
|
22.9%
|
$1.27
|
November
8, 2016
|
|
James
Hart
|
125,000
|
14.3%
|
$1.27
|
November
8, 2016
|
|
Max
Wei
|
100,000
|
11.4%
|
$1.27
|
November
8, 2016
|
|
Rafael
Orunesu
|
100,000
|
11.4%
|
$1.27
|
November
8, 2016
|
(1) The
exercise price of $1.27 per share is equal to the base price of the common
stock
on November 8, 2006, as determined by the our common stock on November 8, 2006
on the OTC bulletin board.
The
following table provides information concerning unexercised options, stock
that
has not vested and equity incentive plan awards for each Named Executive
Officer
outstanding as of December 31, 2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|||||||||
|
OPTION
AWARDS
|
STOCK
AWARDS
|
||||||||
|
Name
(a)
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
(b)
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
(c)
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
(d)
|
Option
Exercise Price
($)
(e)
|
Option
Expiration Date
(f)
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
(g)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
(h)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
(i)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
(#)
(j)
|
|
Dana
Coffield
|
54,167(1)
|
108,333(2)
|
$0.80
|
11/10/2015
|
|||||
|
200,000(3)
|
$1.27
|
11/8/2016
|
|||||||
|
James
Hart
|
54,167(1)
|
108,333(2)
|
$0.80
|
11/10/2015
|
|||||
|
125,000(3)
|
$1.27
|
11/8/2016
|
|||||||
|
Max
Wei
|
54,167(1)
|
108,333(2)
|
$0.80
|
11/10/2015
|
|||||
|
100,000(3)
|
$1.27
|
11/8/2016
|
|||||||
|
Rafael
Orunesu
|
54,167(1)
|
108,333(2)
|
$0.80
|
11/10/2015
|
|||||
|
100,000(3)
|
$1.27
|
11/8/2016
|
|||||||
(1)
The
right to exercise the shares reported in this column vested on November 10,
2006.
(2)
The
right to exercise one-half of the shares reported in this column will vest
on
November 10, 2007 and November 10, 2008, in each such case if the option
holder
is still employed by the Company on such date.
(3)
The
right to exercise one-third of the shares reported in this column will vest
on
each of November 8, 2007, November 8, 2009 and November 8, 2010.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During
the last two years, there have been no transactions, or proposed transactions,
to which we are or were a party, in which any of our directors or executive
officers, any nominee for election as a director, any persons who beneficially
owned, directly or indirectly, shares with more than 5% of the common stock
or
any relatives of any of the foregoing had or is to have a direct or indirect
material interest.
We
have
not engaged in any transactions with promoters or founders in which a promoter
or founder has received any type of consideration from Gran Tierra.
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their shares
of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. If the shares of common stock
are
sold through underwriters or broker-dealers, the selling stockholders will
be
responsible for underwriting discounts or commissions or agent’s commissions.
These sales may be at fixed prices, at prevailing market prices at the time
of
the sale, at varying prices determined at the time of sale, or negotiated
prices. The selling stockholders may use any one or more of the following
methods when selling shares:
61
| § |
any
national securities exchange or quotation service on which the securities
may be listed or quoted at the time of
sale;
|
| § |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
| § |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
| § |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
| § |
transactions
otherwise than on these exchanges or systems or in the over-the-counter
market;
|
| § |
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
| § |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
| § |
privately
negotiated transactions;
|
| § |
short
sales;
|
| § |
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
| § |
a
combination of any such methods of sale;
and
|
| § |
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
The
selling stockholders may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under
the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
62
In
connection with the sale of the shares of common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which
may
in turn engage in short sales of the shares of common stock in the course of
hedging in positions they assume. The selling stockholders may also sell shares
of common stock short and deliver shares of common stock covered by this
prospectus to close out short positions and to return borrowed shares in
connection with such short sales. The selling stockholders may also loan or
pledge shares of common stock to broker-dealers that in turn may sell such
shares.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act amending the
list
of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The
selling stockholders also may transfer and donate the shares of common stock
in
other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
paid, or any discounts or concessions allowed to, such broker-dealers or agents
and any profit realized on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
At
the
time a particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers. Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. There can
be no
assurance that any selling stockholder will sell any or all of the shares of
common stock registered pursuant to the shelf registration statement, of which
this prospectus forms a part.
Each
selling stockholder has informed us that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock. None of the selling stockholders who are affiliates of broker-dealers,
other than the initial purchasers in private transactions, purchased the shares
of common stock outside of the ordinary course of business or, at the time
of
the purchase of the common stock, had any agreements, plans or understandings,
directly or indirectly, with any person to distribute the
securities.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. Except as provided for indemnification of the selling
stockholders, we are not obligated to pay any of the expenses of any attorney
or
other advisor engaged by a selling stockholder. We have agreed to indemnify
the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
63
If
we are
notified by any selling stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of shares of common stock, if
required, we will file a supplement to this prospectus. If the selling
stockholders use this prospectus for any sale of the shares of common stock,
they will be subject to the prospectus delivery requirements of the Securities
Act.
The
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of our common stock and activities of the selling stockholders, which
may
limit the timing of purchases and sales of any of the shares of common stock
by
the selling stockholders and any other participating person. Regulation M may
also restrict the ability of any person engaged in the distribution of the
shares of common stock to engage in passive market-making activities with
respect to the shares of common stock. Passive market making involves
transactions in which a market maker acts as both our underwriter and as a
purchaser of our common stock in the secondary market. All of the foregoing
may
affect the marketability of the shares of common stock and the ability of any
person or entity to engage in market-making activities with respect to the
shares of common stock.
Once
sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
The
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of our common stock and activities of the selling
stockholders.
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
The
Certificate of Amendment to our Articles of Incorporation filed with the
Secretary of State of Nevada on June 1, 2006, authorized the issuance of
325,000,001 shares of our capital stock, of which 300 million were
designated as common stock, par value $0.001 per share, 25 million were
designated as preferred stock, par value $0.001 per share, and 1 share was
designated as special voting stock, par value $0.001 per share.
Capital
Stock Issued and Outstanding
As
of
February 2, 2007, there were issued and outstanding 95,455,765 shares of
common stock (including 16,666,667 shares of common stock issuable upon
exchange of exchangeable shares), 0 shares of preferred stock and 1 special
voting share.
The
following description of our capital stock is derived from various provisions
of
our Articles of Incorporation and our First Amended and Restated Bylaws as
well
as provisions of applicable law. Such description is not intended to be complete
and is qualified in its entirely by reference to the relevant provisions of
our
Articles of Incorporation and our First Amended and Restated
Bylaws.
Description
of Common Stock
We
are
authorized to issue 300,000,000 shares of common stock, par value $0.001 per
share, 78,789,098 of which was outstanding as of February 2, 2007. Holders
of the common stock are entitled to one vote for each share on all matters
submitted to a stockholder vote. Holders of common stock do not have cumulative
voting rights. Therefore, holders of a majority of the shares of common stock
voting for the election of directors can elect all of the directors. Holders
of
the common stock representing a majority of the voting power of the capital
stock issued, outstanding and entitled to vote, represented in person or by
proxy, are necessary to constitute a quorum at any meeting of stockholders.
A
vote by the holders of a majority of the outstanding shares of common stock
is
required to effectuate certain fundamental corporate changes such as
liquidation, merger or an amendment to the articles of incorporation.
64
Holders
of common stock are entitled to share in all dividends that the board of
directors, in its discretion, declares from legally available funds. In the
event of a liquidation, dissolution or winding up, each outstanding share
entitles its holder to participate pro rata in all assets that remain after
payment of liabilities and after providing for each class of stock, if any,
having preference over the common stock. Holders of the common stock have no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to the common stock.
Preferred
Stock
We
are
authorized to issue 25,000,000 shares of “blank check” preferred stock, par
value $0.001 per share, none of which as of February 2, 2007 was designated,
issued or outstanding. The board of directors is vested with authority to divide
the shares of preferred stock into series and to fix and determine the relative
rights and preferences of the shares of any such series. Once authorized, the
dividend or interest rates, conversion rates, voting rights, redemption prices,
maturity dates and similar characteristics of the preferred stock will be
determined by the board of directors, without the necessity of obtaining
approval of the stockholders.
Special
Voting Stock
The
one
share of our special voting stock was designated to allow the holders of
exchangeable shares issued in connection with the transaction between the former
shareholders of Gran Tierra Canada and Goldstrike to vote at our stockholder
meetings. The holder of the share of special voting stock is not entitled to
receive dividends or distributions, but has the right to vote on each matter
on
which holders of our common stock are entitled to vote and to cast that number
of votes equal to the number of exchangeable shares outstanding that are not
owned by us or our affiliates. In
connection with the share exchange transaction involving the former shareholders
of Gran Tierra Canada, the share of special voting stock was issued to Olympia
Trust Company as trustee for the holders of exchangeable shares. The trustee
may
only cast votes with respect to the share of special voting stock based on
instructions received from the holders of exchangeable shares. The
exchangeable shares are described more fully below.
Exchangeable
Shares
In
the
share exchange transaction involving the former shareholders of Gran Tierra
Canada and Goldstrike, the Gran Tierra Canada stockholders were permitted to
elect to receive, for each share of Gran Tierra Canada’s common stock held
before the share exchange, 1.5873016 exchangeable shares of Goldstrike Exchange
Co. The exchangeable shares are a means to defer taxes paid in Canada. Each
exchangeable share can be exchanged by the holder for one share of our common
stock at any time, and will receive the same dividends payable on our common
stock. At the time of exchange, taxes may be due from the holders of the
exchange shares. The exchangeable shares have voting rights through special
voting stock described above, and the holders thereof are able to vote on all
matters on which the holders of our common stock are entitled to vote.
In
order
to exchange exchangeable shares for shares of common stock a holder of
exchangeable shares must submit a retraction request to Goldstrike Exchange
Co.
together with the share certificate representing the exchangeable shares. 120367
Alberta Inc. is a corporation incorporated under the laws of Alberta and is
a
wholly-owned subsidiary of Gran Tierra. Pursuant to a Voting Exchange and
Support Agreement included as Exhibit 10.4 to the registration statement of
which this prospectus forms a part, 120367 Alberta Inc. has an overriding right
to purchase any exchangeable shares for which a retraction request has been
submitted by providing the holder of the exchangeable shares subject to a
retraction request with one share of common stock for each exchangeable share.
Pursuant to the Voting Exchange and Support Agreement between 120367 Alberta
Inc. and Gran Tierra, Gran Tierra is obligated to deliver shares of its common
stock to 120367 Alberta Inc. in order to satisfy the obligations of 120367
Alberta Inc.
Holders
of exchangeable shares have the right to instruct the trustee to cause 120367
Alberta Inc. to purchase exchangeable shares for shares of common stock if
Goldstrike Exchange Co becomes insolvent or institutes insolvency proceedings.
In addition, 120367 Alberta Inc. will be deemed to have purchased the
exchangeable shares for shares of common stock if we are subject to liquidation,
wound up or dissolved.
The
exchangeable shares are subject to retraction by Goldstrike Exchange Co. for
shares of common stock at the earlier of: (i) November 10, 2012; (ii) the date
that less than 10% of the issued and outstanding exchangeable shares are held
by
parties not affiliated with us; (iii) the date when the holders of exchangeable
shares fail to approve a sale of all or substantially all of the assets of
Goldstrike Exchange Co when requested to do so by us; (iv) the date when holders
of exchangeable shares fail to approve a change in the terms of the exchangeable
shares that is required to maintain their economic equivalence to shares of
common stock; or (v) if there is a change of control transaction with respect
to
us. 120367 Alberta Inc has the right to purchase all exchangeable shares for
common stock on the of the occurrence of any of these retraction events or
if
Goldstrike Exchange Co is being liquidated. In addition, we have the right
to
purchase (or to cause 120367 Alberta Inc. to purchase) all exchangeable shares
if there is a change of law that permits holders of exchangeable shares to
exchange their exchangeable shares for shares of common stock on a basis that
will not require holders to recognize a capital gain for Canadian tax
purposes.
Warrants
As
of February 2, 2007, the following warrants were issued and
outstanding:
| · |
Warrants
representing the right to purchase 7,236,311 shares of our common
stock.
The outstanding warrants were issued on varying dates
between September 2005 and February 2006, and are exercisable
for 5 years from the date of issuance at an exercise price of $1.25
per share. The
shares of common stock underlying the outstanding warrants are being
registered under this registration
statement.
|
| · |
Warrants
representing the right to purchase 25,000,030 shares of our common
stock. The outstanding warrants are exercisable until June 2011
at an exercise price of $1.75 per share. The warrants can be called
by us
if our common stock trades above $3.50 for 20 consecutive
days.
|
65
Options
As
of
February 2, 2007, options representing the right to purchase 2,705,000
shares of common stock are issued and outstanding. The outstanding options
were
granted pursuant to our 2005 Equity Incentive Plan to certain of our employees,
officers and employee-directors and are exercisable for 10 years at an exercise
price of $0.80 per share for 1,580,000 options issued on November 10,
2005, $2.62 per share for 250,000 options issued on December 15, 2005,
and $1.27 per share for 875,000 options issued on November 8, 2006.
Indemnification;
Limitation of Liability
Nevada
Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power
to indemnify any of our directors and officers. The director or officer must
have conducted himself/herself in good faith and reasonably believe that his/her
conduct was in, or not opposed to our best interests. In a criminal action,
the
director, officer, employee or agent must not have had reasonable cause to
believe his/her conduct was unlawful.
Under
NRS
Section 78.751, advances for expenses may be made by agreement if the director
or officer affirms in writing that he/she believes he/she has met the standards
and will personally repay the expenses if it is determined such officer or
director did not meet the standards.
Our
bylaws include an indemnification provision under which we have the power to
indemnify our directors, officers, employees and former
directors, officers and employees (including heirs and personal
representatives) to the fullest extent permitted under Nevada law.
Our
articles of incorporation and bylaws provide a limitation of liability in
that no director or officer shall be personally liable to Gran Tierra or any
of
its shareholders for damages for breach of fiduciary duty as director or officer
involving any act or omission of any such director or officer, provided there
was no intentional misconduct, fraud or a knowing violation of the law, or
payment of dividends in violation of NRS Section 78.300.
Our
employment agreements with certain of our executive officers contain provisions
which require us to indemnify them for costs, charges and expenses incurred
in
connection with (i) civil, criminal or administrative actions resulting from
the
executive officers service as such and (ii) actions by or on behalf of the
Company to which the executive officer is made a party. We are required to
provide such indemnification if (i) the executive officer acted honestly
and in
good faith with a view to the best interests of the Company, and (ii) in
the
case of a criminal or administrative proceeding or proceeding that is enforced
by a monetary policy, the executive officer had reasonable grounds for believing
that his conduct was lawful.
We
have
also entered into an indemnity agreement with all of our officers and
directors. The agreement provides that the we will indemnify officers and
directors to the fullest extent permitted by law, including indemnification
in
third party claims and derivative actions. The agreement also provides that
we
will provide an advancement for expenses incurred by the officers or directors.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
66
Anti-Takeover
Effects of Provisions of Nevada State Law
We
may be
or in the future we may become subject to Nevada's control share law. A
corporation is subject to Nevada's control share law if it has more than 200
stockholders, at least 100 of whom are stockholders of record and residents
of
Nevada, and if the corporation does business in Nevada or through an affiliated
corporation.
The
law
focuses on the acquisition of a “controlling interest” which means the ownership
of outstanding voting shares is sufficient, but for the control share law,
to
enable the acquiring person to exercise the following proportions of the voting
power of the corporation in the election of directors: (1) one-fifth or more
but
less than one-third, (2) one-third or more but less than a majority, or (3)
a
majority or more. The ability to exercise such voting power may be direct or
indirect, as well as individual or in association with others.
The
effect of the control share law is that the acquiring person, and those acting
in association with it, obtain only such voting rights in the control shares
as
are conferred by a resolution of the stockholders of the corporation, approved
at a special or annual meeting of stockholders. The control share law
contemplates that voting rights will be considered only once by the other
stockholders. Thus, there is no authority to take away voting rights from the
control shares of an acquiring person once those rights have been approved.
If
the stockholders do not grant voting rights to the control shares acquired
by an
acquiring person, those shares do not become permanent non-voting shares. The
acquiring person is free to sell its shares to others. If the buyers of those
shares themselves do not acquire a controlling interest, their shares do not
become governed by the control share law.
If
control shares are accorded full voting rights and the acquiring person has
acquired control shares with a majority or more of the voting power, any
stockholder of record, other than an acquiring person, who has not voted in
favor of approval of voting rights is entitled to demand fair value for such
stockholder's shares.
Nevada's
control share law may have the effect of discouraging corporate
takeovers.
In
addition to the control share law, Nevada has a business combination law, which
prohibits certain business combinations between Nevada corporations and
"interested stockholders" for three years after the "interested stockholder"
first becomes an "interested stockholder" unless the corporation's board of
directors approves the combination in advance. For purposes of Nevada law,
an
"interested stockholder" is any person who is (1) the beneficial owner, directly
or indirectly, of ten percent or more of the voting power of the outstanding
voting shares of the corporation, or (2) an affiliate or associate of the
corporation and at any time within the three previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of
the
then outstanding shares of the corporation. The definition of the term "business
combination" is sufficiently broad to cover virtually any kind of transaction
that would allow a potential acquirer to use the corporation's assets to finance
the acquisition or otherwise to benefit its own interests rather than the
interests of the corporation and its other stockholders.
The
effect of Nevada's business combination law is to potentially discourage parties
interested in taking control of Gran Tierra from doing so if it cannot obtain
the approval of our board of directors.
67
LEGAL
MATTERS
The
validity of the common stock being offered hereby will be passed upon by
McGuireWoods LLP, New York, New York.
EXPERTS
The
consolidated financial statements of Gran Tierra Energy as of December 31,
2005
and for the period of incorporation from January 26, 2005 to December 31, 2005
in this prospectus have been audited by Deloitte & Touche LLP, independent
registered chartered accountants, as stated in their report appearing herein
(which audit report expresses an unqualified opinion on the financial statements
and includes Comments by Independent Registered Chartered Accountants on
Canada-United States of America Reporting Differences relating to substantial
doubt on the Company's ability to continue as a going concern) and are included
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The
schedules of revenues, royalties and operating costs corresponding to the 14%
interest in the Palmar Largo joint venture included in this prospectus have
been
audited by Deloitte & Co. SRL, an independent registered public accounting
firm, as stated in their reports appearing herein and are included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The
financial statements of Argosy Energy International, LP as of December
31, 2005
and 2004, and for each of the years then ended, have been included herein
in
reliance upon the report of KPMG Ltda., independent public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts
in
accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We are
required to file annual reports, quarterly reports, current reports, proxy
statements and other information with the SEC. You may read or obtain a copy
of
these reports at the SEC’s public reference room at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. You may obtain information on the operation of
the
public reference room and their copy charges by calling the SEC at
1-800-SEC-0330. The SEC maintains a website that contains registration
statements, reports, proxy information statements and other information
regarding registrants that file electronically with the SEC. The address of
the
website is http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act to register the shares offered by this prospectus. The term “registration
statement” means the original registration statement and any and all amendments
thereto, including the schedules and exhibits to the original registration
statement or any amendment. This prospectus is part of that registration
statement. This prospectus does not contain all of the information set forth
in
the registration statement or the exhibits to the registration statement. For
further information with respect to us and the shares we are offering pursuant
to this prospectus, you should refer to the registration statement and its
exhibits. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete,
and you should refer to the copy of that contract or other documents filed
as an
exhibit to the registration statement. You may read or obtain a copy of the
registration statement at the SEC’s public reference facilities and Internet
site referred to above.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On
November 10, 2005, we consummated a share purchase agreement with Gran Tierra
Energy Inc. and the holders of Gran Tierra Canada’s capital stock. That same
day, we and Gran Tierra Goldstrike, Inc., our Canadian subsidiary, consummated
an assignment agreement. In these two transactions, the holders of Gran Tierra
Canada’s capital stock acquired shares of either our common stock or
exchangeable shares of Goldstrike Exchange Co., and Goldstrike Exchange Co.
acquired substantially all of Gran Tierra Canada’s capital stock. Through these
transactions, Gran Tierra Canada became our wholly-owned
subsidiary.
Prior
to
the above-described transactions, our independent registered public accounting
firm was Moen and Company, and the independent auditors for Gran Tierra Canada
were Deloitte & Touche LLP. Because the above-described transactions were
treated as a reverse acquisition for accounting purposes, our historical
financial reports filed are those of Gran Tierra Canada, the accounting
acquirer. Accordingly, our board of directors determined to change our
independent registered public accounting firm from Moen and Company to Deloitte
& Touche LLP. Moen and Company was dismissed as our independent registered
public accounting firm on April 12, 2006, effective as of November 10, 2005,
and
Deloitte & Touche LLP was engaged as our independent registered public
accounting firm on November 10, 2005. As a result of being the auditors of
Gran
Tierra Canada, Deloitte & Touche LLP consulted with us and Gran Tierra
Canada regarding the above-described transactions.
The
reports of Moen and Company on our financial statements for the fiscal years
ended December 31, 2004 and December 31, 2003 did not contain an adverse
opinion
or a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles. Moen and Company did express concern
that
that we would not be able to continue as a “going concern” because we had not
sustained profitable operations. However, the report of Moen and Company
on our
financial statements for the fiscal years ended December 31, 2004 and December
31, 2003 did not contain an explanatory paragraph relating to our ability
to
continue as a “going concern.”
In
connection with the audit of our financial statements for the fiscal year
ended
December 31, 2004, and during the fiscal years ended December 31, 2003 and
December 31, 2004 through April 12, 2006, there were no disagreements with
Moen
and Company on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved
to
the satisfaction of Moen and Company, would have caused Moen and Company
to make
reference to the matter in its reports.
During
the most recent fiscal year and through the date of the dismissal of Moen
and
Company, no information is required to be reported under Item 304(a)(1)(iv)(B)
of Regulation S-B.
Pursuant
to our request, Moen and Company furnished us with a letter addressed to
the
Securities and Exchange Commission stating whether it agrees with the statements
we have made in a report on Form 8-K/A. A copy of this letter was filed as
exhibit 16.1 to our Form 8-K/A, filed on June 1, 2006.
68
GRAN
TIERRA ENERGY INC.
(FORMERLY
GOLDSTRIKE INC.)
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page(s)
|
|
|
Consolidated
Financial Statements (Unaudited) for the three month and nine month
period ended September 30, 2006:
|
F-1
|
|
Consolidated
Statement of Operations
|
F-1
|
|
Consolidated
Balance Sheet
|
F-2
|
|
Consolidated
Statement of Cash Flows
|
F-3
|
|
Consolidated
Statement of Shareholders’
Equity
|
F-4
|
|
Notes
to the Consolidated Financial Statements
|
F-5
- F-19
|
| Consolidated Financial Statements (Audited) for the nine months ended September 30,2006 |
F-20
|
|
Report
of Independent Registered Chartered Accountants
|
F-20
|
|
Consolidated
Statement of Operations
|
F-21
|
|
Consolidated
Balance Sheet
|
F-22
|
|
Consolidated
Statement of Cash Flows
|
F-23
|
|
Consolidated
Statement of Shareholders’
Equity
|
F-24
|
|
Notes
to the Consolidated Financial Statements
|
F-25
- F-41
|
|
Consolidated
Financial Statements for the period from incorporation on January
26, 2005
to December 31, 2005:
|
F-42
|
|
Report
of Independent Registered Chartered Accountants
|
F-42
|
|
Comments
by Independent Registered Chartered Accountants on Canada-United
States of
America Reporting Differences
|
F-42
|
|
Consolidated
Statement of Operations and Deficit
|
F-43
|
|
Consolidated
Balance Sheet
|
F-44
|
|
Consolidated
Statement of Cash Flows
|
F-45
|
|
Consolidated
Statement of Shareholders’
Equity
|
F-46
|
|
Notes
to the Consolidated Financial Statements
|
F-47
- F-59
|
|
Supplementary
Data (unaudited)
|
F-60
- F-62
|
| Pro Forma Financial Statements for the nine months ended September 30, 2006 and the year ended December 31, 2005: |
F-63
|
|
Pro
Forma Statement of Operations for the period January 1, 2006
to September 30, 2006
|
F-64
|
|
Pro
Forma Statement of Operations for the period January 1, 2005 to
December
31, 2005
|
F-65
|
|
Notes
to Pro Forma Consolidated Financial Statements
|
F-66
- F-68
|
| Financial Statements for Argosy Energy International, LP as of March 31, 2006 and for the period ended March 31, 2006 (Unaudited) |
F-69
|
|
Statement
of Income
|
F-70
|
|
Balance
Sheet
|
F-71
|
|
Statement
of Cash Flows
|
F-72
|
|
Statement
of Partner's Equity
|
F-73
|
|
Notes
to Financial Statements
|
F-74
- F-86
|
| Financial Statements for Argosy Energy International, LP as of December 31, 2005 and 2004 |
F-87
|
|
Independent
Auditor's Report
|
F-88
|
|
Statements
of Income
|
F-89
|
|
Balance
Sheets
|
F-90
|
|
Statement
of Cash Flows
|
F-91
|
|
Statement
of Partner's Equity
|
F-92
|
|
Notes
to Financial Statements
|
F-93-
F-106
|
|
Supplemental
Oil and Gas Information
|
F-107-
F-113
|
|
Schedule
of Revenues, Royalties and Operating Cost corresponding to the
14%
interest
in the Palmar Largo joint venture for the
eight-month period ended
August 31, 2005:
|
F-114
|
|
Report
of Independent Registered Public Accounting Firm
|
F-115
|
|
Schedule
of Revenues, Royalties and Operating Cost
|
F-115
|
|
Notes
to the Schedule of Revenues, Royalties and Operating
Costs
|
F-116
- F-118
|
|
|
|
|
Schedule
of Revenues, Royalties and Operating Cost corresponding to the
14%
interest
in the Palmar Largo joint venture for the
years ended December 31,
2004 and 2003 (audited) and for the six months ended June 30, 2005
and 2004 (unaudited):
|
F-119
|
|
Report
of Independent Registered Public Accounting Firm
|
F-119
|
|
Schedule
of Revenues, Royalties and Operating Cost
|
F-120
|
|
Notes
to the Schedule of Revenues, Royalties and Operating
Cost
|
F-121
- F-124
|
|
Gran
Tierra Energy Inc.
Condensed
Consolidated Statement of Operations (Unaudited)
Stated
in US dollars
|
|||||||||||||
|
Three
months ended
September
30,
|
Nine
months ended
September
30, 2006 and the period from January 26 to September 30,
2005
|
||||||||||||
|
2006
$
|
2005
$
|
2006
$
|
2005
$
|
||||||||||
|
Revenue
|
|||||||||||||
|
Oil
and Natural Gas Sales
|
5,219,308
|
349,263
|
8,358,921
|
349,263
|
|||||||||
|
Interest
Revenue
|
175,641 |
—
|
195,816 |
—
|
|||||||||
| 5,394,949 | 349,263 | 8,554,737 | 349,263 | ||||||||||
|
EXPENSES
|
|||||||||||||
|
Operating
Expenses
|
1,259,888
|
125,000
|
2,702,507
|
125,000
|
|||||||||
|
General
and Administrative
|
1,764,856
|
414,397
|
4,256,303
|
668,908
|
|||||||||
|
Interest
Expenses
|
2,765
|
|
—
|
3,075
|
|
—
|
|||||||
|
Depreciation,
Depletion and Accretion
|
1,449,694
|
111,843
|
2,324,158
|
115,209
|
|||||||||
|
Foreign
Exchange (gain)/loss
|
273,684
|
(24,703
|
)
|
277,526
|
(21,064
|
)
|
|||||||
|
4,750,887
|
626,537
|
9,563,569
|
888,053
|
||||||||||
|
INCOME/(LOSS)
BEFORE INCOME TAXES
|
644,062
|
(277,274
|
)
|
(1,008,832
|
)
|
(538,790
|
)
|
||||||
|
Income
Taxes (Note 8)
|
710,417
|
7,370
|
848,200
|
7,370
|
|||||||||
|
NET
INCOME/(LOSS)
|
(66,355
|
)
|
(284,644
|
)
|
(1,857,032
|
)
|
(546,160
|
)
|
|||||
|
NET
EARNINGS/(LOSS) PER SHARE
|
|||||||||||||
|
Basic
|
0.00
|
(0.02
|
)
|
(0.03
|
)
|
(0.11
|
)
|
||||||
|
Diluted
|
0.00
|
(0.02
|
)
|
(0.03
|
)
|
(0.11
|
)
|
||||||
|
Weighted
average number of shares - Basic
|
95,455,759
|
12,083,333
|
63,043,998
|
4,903,297
|
|||||||||
|
Weighted
average number of shares - Diluted
|
130,612,674
|
12,083,333
|
98,200,913
|
4,903,297
|
|||||||||
See
accompanying Notes to the Financial Statements
F-1
|
Gran
Tierra Energy Inc.
Condensed
Consolidated Balance Sheets (Unaudited)
Stated
in US dollars
|
|||||||
|
September
30,
2006
$
|
December
31,
2005
$
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
|
|||||||
|
Cash
and cash equivalents
|
18,796,084
|
2,221,456
|
|||||
|
Restricted
cash
|
12,617,263
|
400,427
|
|||||
|
Accounts
receivable
|
7,137,920
|
808,960
|
|||||
|
Inventory
|
586,943
|
447,012
|
|||||
|
Prepaid
expenses
|
247,073
|
42,701
|
|||||
|
Total
Current Assets
|
39,385,283
|
3,920,556
|
|||||
|
Taxes
Receivable
|
165,919
|
108,139
|
|||||
|
Property
Plant and Equipment (Note 5)
|
|||||||
|
Proven
oil and gas properties, net
|
25,859,978
|
7,886,914
|
|||||
|
Unproven
oil and gas properties not amortized
|
18,292,211
|
-
|
|||||
|
Other,
net
|
499,146
|
426,294
|
|||||
|
Goodwill
|
15,005,083
|
-
|
|||||
|
Deferred
Income Taxes
|
-
|
29,228
|
|||||
|
99,207,620
|
12,371,131
|
||||||
|
LIABILITIES
|
|||||||
|
CURRENT
|
|||||||
|
Accounts
payable
|
6,486,464
|
1,142,930
|
|||||
|
Accrued
liabilities
|
1,367,368
|
121,122
|
|||||
|
Taxes
Payable
|
1,708,955
|
-
|
|||||
|
9,562,787
|
1,264,052
|
||||||
|
Long
term Payables
|
76,147
|
-
|
|||||
|
Asset
Retirement Obligation (Note 7)
|
121,655
|
67,732
|
|||||
|
Deferred
Income Taxes (Note 8)
|
7,849,421
|
-
|
|||||
|
Deferred
Remittance Taxes
|
1,385,849
|
-
|
|||||
|
Total
Liabilities
|
18,995,859
|
1,331,784
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Share
capital (Note 6)
|
95,455
|
43,285
|
|||||
|
Additional
Paid in Capital
|
71,361,463
|
11,807,313
|
|||||
|
Warrants
(Note 6)
|
12,831,553
|
1,408,429
|
|||||
|
Deficit
|
(4,076,711
|
)
|
(2,219,680
|
)
|
|||
|
80,211,760
|
11,039,347
|
||||||
|
99,207,620
|
12,371,131
|
||||||
See
accompanying Notes to the Financial Statements
F-2
|
Gran
Tierra Energy Inc.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Stated
in US dollars
|
|||||||
|
Nine
Months ended September 30,
2006
$
|
For
the Period from January 26, 2005 to September 30,
2005
$
|
||||||
|
CASH
FLOWS RELATED TO THE
|
|||||||
|
FOLLOWING
ACTIVITIES:
|
|||||||
|
OPERATING:
|
|||||||
|
Net
(loss) earnings
|
(1,857,032
|
)
|
(546,160
|
)
|
|||
|
Adjustments
for:
|
|||||||
|
Depreciation,
Depletion and Accretion
|
2,324,158
|
115,209
|
|||||
|
Stock-based
compensation
|
203,306
|
-
|
|||||
|
Deferred
Income Taxes
|
123,193
|
-
|
|||||
|
Asset
Retirement Obligation, settled
|
(9,218
|
)
|
-
|
||||
|
Taxes
Receivable
|
(57,780
|
)
|
-
|
||||
|
Changes
in non-cash working capital (Note 9)
|
1,497,304
|
(192,732
|
)
|
||||
|
2,223,931
|
(623,683
|
)
|
|||||
|
FINANCING
|
|||||||
|
Short
term loan
|
-
|
6,655,223
|
|||||
|
Proceeds
from issuance of common shares and warrants, net of issuance
costs
|
70,826,137
|
1,713,412
|
|||||
|
70,826,137
|
8,368,635
|
||||||
|
INVESTING
|
|||||||
|
Property
and equipment additions, net of asset retirement obligation
assumed
|
(6,011,735
|
)
|
(6,934,542
|
)
|
|||
|
Other
|
(28,940
|
)
|
-
|
||||
|
Business
Combination, net of cash acquired (Note 3)
|
(38,217,930
|
)
|
-
|
||||
|
Restricted
Cash
|
(12,216,835
|
)
|
(377,491
|
)
|
|||
|
(56,475,440
|
)
|
(7,312,033
|
)
|
||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
16,574,628
|
432,919
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
2,221,456
|
-
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
18,796,084
|
432,919
|
|||||
See
accompanying Notes to the Financial Statements
F-3
|
GRAN
TIERRA ENERGY INC.
Condensed
Consolidated Statement of Shareholders’ Equity
(unaudited)
Stated
in US dollars
|
|||||||
|
September
30, 2006
$
|
December
31, 2005
$
|
||||||
|
Share
Capital
|
|||||||
|
Balance
beginning of period
|
43,285
|
-
|
|||||
|
Issue
of common shares
|
52,170
|
43,285
|
|||||
|
Balance
end of period
|
95,455
|
43,285
|
|||||
|
Additional
paid-in-capital
|
|||||||
|
Balance
beginning of period
|
11,807,313
|
-
|
|||||
|
Issue
of common shares
|
59,350,844
|
11,754,402
|
|||||
|
Stock-based
compensation expense
|
203,306
|
52,911
|
|||||
|
Balance
end of period
|
71,361,463
|
11,807,313
|
|||||
|
Warrants
|
|||||||
|
Balance
beginning of period
|
1,408,429
|
-
|
|||||
|
Issue
of warrants
|
11,476,118
|
1,408,429
|
|||||
|
Redemption
of warrants
|
(52,994
|
)
|
-
|
||||
|
Balance
end of period
|
12,831,553
|
1,408,429
|
|||||
|
Deficit
|
|||||||
|
Balance
beginning of period
|
(2,219,680
|
)
|
-
|
||||
|
Net
loss
|
(1,857,032
|
)
|
(2,219,680
|
)
|
|||
|
Balance
end of period
|
(4,076,712
|
)
|
(2,219,680
|
)
|
|||
(See
notes to the consolidated financial statements)
F-4
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
1. DESCRIPTION
OF BUSINESS AND GOING CONCERN
Gran
Tierra Energy Inc. (the “Company”) is a publicly traded oil and gas exploration
and production company with operations in Argentina and Colombia.
The
Company’s ability to continue as a going concern is dependent upon obtaining the
necessary financing to acquire oil and natural gas interests and generating
profitable operations from its oil and natural gas interests in the future.
The
Company’s financial statements as at and for the nine month period ended
September 30, 2006 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities
and
commitments in the normal course of business. The Company incurred a net
loss of
$1,857,032 for the period ended September 30, 2006, and, as at September
30,
2006, had a deficit of $4,076,711. The Company expects to incur substantial
expenditures to further its capital investment programs and the Company’s cash
and cash flow from operating activities may not be sufficient to satisfy
its
current obligations and meet its capital investment programs.
To
address the above, management of the Company completed a sale and issuance
of
common shares during the second quarter of 2006. A total of $75,000,000
was
raised through the sale of 50,000,000 units. Issue costs totalled $6,000,077,
for net proceeds of $68,999,923. A portion of these proceeds was used to
acquire
producing and exploration assets in Colombia which add immediate cash flow,
and
provide exploration opportunities.
In
addition, management of the Company is pursuing the following:
|
·
|
raise
additional capital through issuance of debt. The Company is currently
negotiating a debt facility that would provide capital for future
expansion activities.
|
|
·
|
build
a portfolio of production, development, and exploration opportunities
using additional capital raised and cash provided by future operating
activities.
|
Should
the going concern assumption not be appropriate and the Company not be
able to
realize its assets and settle its liabilities and commitments in the normal
course of operations, these consolidated financial statements would require
adjustments to the amounts and classifications of assets and
liabilities.
2. SIGNIFICANT
ACCOUNTING POLICIES
These
interim consolidated financial statements have been prepared in accordance
with
generally accepted accounting principles in the United States of America
(“GAAP”). The preparation of financial statements in accordance with GAAP
requires the use of estimates and assumptions that affect the reported
amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the interim consolidated financial statements, and revenues
and
expenses during the reporting period. The company believes that the information
and disclosures presented are adequate to make the information presented
not
misleading.
The
note
disclosure requirements of annual consolidated financial statements provide
additional disclosures to that required for interim consolidated financial
statements. Accordingly, these interim consolidated financial statements
should
be read in conjunction with our consolidated financial statements as at
and for
the year ended December 31, 2005 included in the Company’s 2005 Annual Report on
Form 10-KSB. The accounting policies followed are described in note 2 of
the
consolidated financial statements included in the
Company’s
2005 Annual Report on Form 10-KSB.
F-5
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Goodwill
Goodwill
represents the excess of purchase price of business combinations over the
fair
value of net assets acquired and is tested for impairment at least
annually.
The
impairment test requires allocating goodwill and all other assets and
liabilities to assigned reporting units. The fair value of each reporting
unit
is estimated and compared to the net book value of the reporting unit.
If the
estimated fair value of the reporting unit is less than the net book value,
including goodwill, then the goodwill is written down to the implied fair
value
of the goodwill through a charge to expense. Because quoted market prices
are
not available for Gran Tierra’s reporting units, the fair values of the
reporting units are estimated based upon several valuation analyses, including
comparable companies, comparable transactions and premiums paid. The goodwill
on
Gran Tierra’s financial statements was a result of the Argosy acquisition, and
relates entirely to the Colombia reporting segment.
New
Accounting Pronouncements
In
September 2005, the Emerging Issues Task Force (EITF) reached a consensus
on
Issue No. 04-13, Accounting
for Purchases and Sales of Inventory with the Same Counterparty.
This
issue addresses the question of when it is appropriate to measure purchase
and
sales of inventory at fair value and record them in cost of sales and revenues
and when they should be recorded as exchanges measured at the book value
of the
item sold. The EITF concluded that purchases and sales of inventory with
the
same counterparty that are entered into in contemplation of one another
should
be combined and recorded as exchanges measured at the book value of the
item
sold. The consensus has been applied to new arrangements entered into and
modifications or renewals of existing agreements, beginning in the second
quarter of 2006. The adoption of this statement did not have a material
impact
on our results of operations or financial position.
In
February 2006, the Financial Accounting Standards Board (FASB) issued statement
155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
no.
133 and 140.
This
statement resolves issues addressed in Statement 133 Implementation Issue
no. D1
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” This implementation guidance indicated that entities could continue to
apply guidance related to accounting for beneficial interests in paragraphs
14
and 362 of Statement 140, which indicate that any security that can be
contractually prepaid or otherwise settled in such a way that the holder
of the
security would not recover substantially all of its recorded investment
should
be subsequently measured like investments in debt securities classified
as
available for sale or trading, and may not be classified as held to maturity.
Also, Implementation issue D1 indicated that holders of beneficial interests
in
securitized financial assets that are not subject to paragraphs 14 and
362 of
Statement 140 are not required to apply Statement 133 to those beneficial
interests, pending further guidance. Statement 155 eliminates the exemption
from
Statement 133 for interests in securitized financial assets. It also allows
the
preparer to elect fair value measurement at acquisition, at issuance or
when a
previously recognized financial instrument is subject to a remeasurement
event.
We do not expect the adoption of this statement will have a material impact
on
our results of operations or financial position.
F-6
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollarsIn
March
2006, the FASB issued statement 156 Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140.
Under
statement 140, servicing assets and servicing liabilities are amortized
over the
expected period of estimated net servicing income or loss and assessed
for
impairment or increased obligation at each reporting date. This statement
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. Subsequent
measurement of servicing assets and servicing liabilities at fair value
is
permitted, but not required. If derivatives are used to mitigate risks
inherent
in servicing assets and servicing liabilities, those derivatives must be
accounted for at fair value. Servicing assets and servicing liabilities
subsequently measured at fair value must be presented separately in the
statement of financial position and there are additional disclosures for
all
separately recognized servicing assets and servicing liabilities. We do
not
expect the adoption of this statement will have a material impact on our
results
of operations or financial position.
In
June
2006, the FASB issued interpretation no 48 Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109.
This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with FASB Statement
No. 109. Recognition of a tax position should be based on whether it is
more
likely than not that a tax position will be sustained. The tax position
is
measured at the largest amount of benefit that is greater than 50% likely
of
being realized upon settlement. This interpretation is effective for fiscal
years beginning after December 15, 2006. We do not expect the adoption
of this
interpretation will have material impact on our results of operations or
financial position.
In
September 2006, the Securities and Exchange Commission (SEC) release Staff
Accounting Bulletin (SAB) No. 108 regarding the effects of prior year
misstatements in considering current year misstatements for the purpose
of a
materiality assessment. The opinion in SAB 108 is that in the case of an
error
that has occurred and been immaterial in a number of previous years, the
cumulative effect should be considered in assessing the materiality of
the error
in the current year. If the cumulative effect of the error is material,
then the
current year statements, as well as prior year statements should be restated.
In
the case of restated prior year statements, previously filed reports do
not need
to be amended, if the error was considered immaterial to previous year’s
financial statements. However the statements should be amended the next
time
they are filed. The effects of this guidance should be applied cumulatively
to
fiscal years ending after November 15, 2006. Additional disclosure should
be
made regarding any cumulative adjustments made in the current year financial
statements. We do not expect the adoption of this SAB will have material
impact
on our results of operations or financial position.
|
3.
|
BUSINESS
COMBINATION
|
Gran
Tierra entered into a Securities Purchase Agreement dated May 25, 2006
with
Crosby Capital LLC (“Crosby”) to acquire all of the limited partnership
interests of Argosy Energy International (“Argosy) and all of the issued and
outstanding capital stock of Argosy Energy Corp. On June 20, 2006 Gran
Tierra
closed the Argosy acquisition and paid consideration to Crosby consisting
of
$37.5 million cash, 870,647 shares of the Company’s common stock and overriding
and net profit interests in certain of Argosy’s assets valued at $1 million. The
value of the overriding and net profit interests was based on present value
of
expected future cash flows. All of Argosy Energy International’s assets are in
Colombia.
F-7
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
acquisition has been accounted for using the purchase method, and the results
of
Argosy Energy International have been consolidated with Gran Tierra Energy
from
June 20, 2006. The following table shows the allocation of the purchase
price
based on the fair values of the assets and liabilities
acquired:
|
$
|
||||
|
Cash
Paid, net
|
36,414,385
|
|||
|
Common
Shares Issued
|
1,305,971
|
|||
|
Transaction
Costs
|
497,574
|
|||
|
Total
Purchase Price
|
38,217,930
|
|||
|
Purchase
Price allocated:
|
||||
|
Oil
and Gas Assets
|
32,553,211
|
|||
|
Goodwill
(1)
|
15,005,083
|
|||
|
Accounts
Receivable
|
5,361,887
|
|||
|
Inventories
|
567,355
|
|||
|
Long
Term Investments
|
6,772
|
|||
|
Accounts
Payable and Accrued Liabilities
|
(6,085,109
|
)
|
||
|
Long
Term Liabilities
|
(49,763
|
)
|
||
|
Deferred
Tax Liabilities
|
(9,141,506
|
)
|
||
|
Total
Purchase Price allocated
|
38,217,930
|
|||
(1) Goodwill
is not deductible for tax purposes.
The
purchase price allocation has changed from the preliminary allocation performed
on June 21, 2006. At June 21, 2006, the company was awaiting the results
of an
independent reserve audit, and relied on the information provided by Argosy
for
the preliminary allocation . The reserve report was received in September,
2006
and resulted in a reallocation of the purchase price. The changes are as
follows:
|
$
|
||||
|
Oil
and Gas assets (Decrease)
|
(8,005,709
|
)
|
||
|
Goodwill
Increase
|
1,411,303
|
|||
|
Deferred
Tax Liabilities Decrease
|
6,097,406
|
|||
|
Inventories
Increase
|
497,000
|
|||
|
Total
Change
|
-
|
|||
F-8
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
Argosy acquisition added 1,182,000 barrels of proven oil reserves to Gran
Tierra
(net after royalty) as of June 30, 2006.
The
unaudited pro forma results for the year ended December 31, 2005 and the
period
ended September 30, 2006 are shown below, as if the acquisition had occurred
on
January 1, 2005. Pro forma results are not indicative of actual results
or
future performance.
|
2006
|
2005
|
||||||
|
Revenue
|
15,780,000
|
12,950,000
|
|||||
|
Net
Income (loss)
|
865,000
|
1,569,000
|
|
||||
|
Earnings
per share (Basic)
|
0.01
|
0.04
|
|
||||
|
Earnings
per share (diluted)
|
0.01
|
0.03
|
|
||||
4. SEGMENT
AND GEOGRAPHIC REPORTING
The
Company’s reportable segments are Argentina and Colombia. The Company is
primarily engaged in the exploration and production of oil and natural
gas. The
accounting policies for the segments are the same as those described in
Note 2
of the Notes to the Consolidated Financial Statements on the Company’s form
10-KSB for 2005.
The
Colombia assets were acquired in the second quarter of 2006, and the Argentina
assets were acquired on September 1, 2005. Therefore the comparable segmented
information for 2005 includes only one month of operations for Argentina,
and
there is no comparable 2005 information for Colombia.
The
following tables present information on the Company’s reportable geographic
segments:
|
Third
Quarter, 2006
|
Nine
months ended September 30, 2006
|
||||||||||||||||||
|
Colombia
|
Argentina
|
Total
|
Colombia
|
Argentina
|
Total
|
||||||||||||||
|
Revenues
|
3,616,833
|
1,602,474
|
5,219,308
|
4,077,035
|
4,281,885
|
8,358,921
|
|||||||||||||
|
Depreciation,
Depletion and Accretion
|
1,042,234
|
394,520
|
1,436,755
|
1,164,560
|
1,125,302
|
2,289,863
|
|||||||||||||
|
Segment
Income (loss) before income taxes
|
1,385,561
|
88,950
|
1,474,511
|
1,560,233
|
270,492
|
1,830,725
|
|||||||||||||
|
Segment
Capital Expenditures
|
3,741,500
|
844,563
|
4,586,063
|
3,818,500
|
2,086,063
|
5,904,563
|
|||||||||||||
F-9
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
Third
Quarter, 2005
|
Nine
months ended September 30, 2005
|
||||||||||||||||||
|
Colombia
|
Argentina
|
Total
|
Colombia
|
Argentina
|
Total
|
||||||||||||||
|
Revenues
|
-
|
349,263
|
349,263
|
-
|
349,263
|
349,263
|
|||||||||||||
|
Depreciation,
Depletion and Accretion
|
-
|
113,000
|
113,000
|
-
|
113,000
|
113,000
|
|||||||||||||
|
Segment
Income before income taxes
|
-
|
21,055
|
21,055
|
-
|
21,055
|
21,055
|
|||||||||||||
|
Segment
Capital Expenditures
|
-
|
6,884,426
|
6,884,426
|
-
|
6,884,426
|
6,884,426
|
|||||||||||||
|
September
30, 2006
|
December
31, 2005
|
||||||||||||||||||
|
Colombia
|
Argentina
|
Total
|
Colombia
|
Argentina
|
Total
|
||||||||||||||
|
Property,
Plant and Equipment, net
|
35,211,746
|
9,234,430
|
44,446,176
|
-
|
8,209,556
|
8,209,556
|
|||||||||||||
|
Goodwill
|
15,005,083
|
-
|
15,005,083
|
-
|
-
|
-
|
|||||||||||||
The
following is a reconciliation of income before income taxes for reportable
segments to consolidated income before income taxes:
|
Third
Quarter, 2006
|
Nine
months ended September 30, 2006
|
||||||
|
Income
before income taxes for reportable segments
|
1,474,511
|
1,830,725
|
|||||
|
Corporate
Expenses
|
(830,449
|
)
|
(2,839,557
|
)
|
|||
|
Consolidated
income (loss) before income taxes
|
644,062
|
(1,008,832
|
)
|
||||
|
Third
Quarter, 2005
|
Period
from January 26, 2005 to September 30, 2005
|
||||||
|
Income
before income taxes for reportable segments
|
21,055
|
21,055
|
|||||
|
Corporate
Expenses
|
294,328
|
555,844
|
|||||
|
Consolidated
income (loss) before income taxes
|
(273,273
|
)
|
(534,789
|
)
|
|||
The
following is a reconciliation of capital expenditures for reportable segments
to
consolidated capital expenditures:
|
Third
Quarter, 2006
|
Nine
months ended September 30, 2006
|
||||||
|
Total
capital expenditures for reportable segments
|
4,586,063
|
5,904,563
|
|||||
|
Corporate
capital expenditures
|
31,845
|
107,172
|
|||||
|
Consolidated
capital expenditures
|
4,617,908
|
6,011,735
|
|||||
F-10
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
Third
Quarter,
2005 |
Period
from
January 26, 2005 to September 30, 2005 |
||||||
|
Total
capital expenditures for reportable segments
|
6,884,426
|
6,884,426
|
|||||
|
Corporate
capital expenditures
|
50,116
|
50,116
|
|||||
|
Consolidated
capital expenditures
|
6,934,542
|
6,934,542
|
|||||
The
following is a reconciliation of reportable net property, plant and equipment
to
consolidated net property, plant and equipment:
|
September
30, 2006
|
December
31, 2005
|
||||||
|
Property,
Plant and Equipment, net for reportable segments
|
44,446,176
|
8,209,556
|
|||||
|
Corporate
property, plant and equipment, net
|
205,158
|
103,652
|
|||||
|
Consolidated
property, plant and equipment, net
|
44,651,335
|
8,313,208
|
|||||
5.
CAPITAL ASSETS
|
September
30, 2006
|
||||||||||
|
Cost
$
|
Accumulated
Depletion
and Depreciation
$
|
Net
Book Value
$
|
||||||||
|
Oil
and natural gas properties
|
|
|
|
|
||||||
|
Proven
|
28,307,817
|
(2,682,656
|
)
|
25,625,161
|
||||||
|
Unproven
|
18,292,211
|
-
|
18,292,211
|
|||||||
|
Materials
and supplies
|
234,817
|
-
|
234,817
|
|||||||
|
Furniture
and Fixtures
|
656,192
|
(461,461
|
)
|
194,731
|
||||||
|
Computer
equipment
|
485,763
|
(205,167
|
)
|
280,596
|
||||||
|
Automobiles
|
43,901
|
(20,082
|
)
|
23,819
|
||||||
|
48,020,701
|
(3,369,366
|
)
|
44,651,335
|
|||||||
F-11
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
December
31, 2005
|
||||||||||
|
Cost
$
|
Accumulated
Depletion
and Depreciation
$
|
Net
Book Value
$
|
||||||||
|
Oil
and natural gas properties
|
8,331,767
|
(444,853
|
)
|
7,886,914
|
||||||
|
Materials
and supplies
|
300,177
|
-
|
300,177
|
|||||||
|
Furniture
and Fixtures
|
20,167
|
(4,805
|
)
|
15,362
|
||||||
|
Computer
equipment
|
73,682
|
(2,649
|
)
|
71,033
|
||||||
|
Automobiles
|
49,534
|
(9,812
|
)
|
39,722
|
||||||
|
8,775,327
|
(462,119
|
)
|
8,313,208
|
|||||||
Following
is a description of properties and projects in unproven oil and gas properties,
which are not currently subject to amortization
|
Block
|
Description
|
Acquisition
Cost
|
Exploration
Cost
|
Transfer
to Amortizable
|
Total
|
Timing
of Amortization
|
|||||||||||||
|
Rio
Magdelena
|
Popa
Exploration well
|
1,000,000
|
3,500,000
|
4,500,000
|
Q1
2007
|
||||||||||||||
|
Rio
Magdelena
|
Exploration
Land
|
4,052,301
|
(55,000
|
)
|
3,997,301
|
2008
|
|||||||||||||
|
Talora
|
Exploration
Land
|
402,720
|
20,000
|
(6,000
|
)
|
416,720
|
2008
|
||||||||||||
|
Chaza
|
Exploration
Land
|
2,588,912
|
38,000
|
2,626,912
|
2008
|
||||||||||||||
|
Mecaya
|
Exploration
Land
|
381,799
|
29,000
|
410,799
|
2008
|
||||||||||||||
|
Primavera
|
Exploration
Land
|
282,427
|
54,000
|
336,427
|
2008
|
||||||||||||||
|
Santana
|
Linda
Probable reserves
|
378,378
|
378,378
|
Q4
2007
|
|||||||||||||||
|
Santana
|
Mary
Probable reserves
|
1,010,077
|
1,010,077
|
Q4
2007
|
|||||||||||||||
|
Santana
|
Miraflor
Probable reserves
|
96,198
|
96,198
|
Q4
2007
|
|||||||||||||||
|
Santana
|
G&G
data
|
380,000
|
(380,000
|
)
|
-
|
||||||||||||||
|
Guayuyaco
|
Exploration
Land
|
3,791,841
|
67,000
|
3,858,841
|
2008
|
||||||||||||||
|
Guayuyaco
|
Probable
reserves
|
693,558
|
(33,000
|
)
|
660,558
|
Q4
2007
|
|||||||||||||
|
Guayuyaco
|
G&G
Data
|
1,044,000
|
(1,044,000
|
)
|
-
|
||||||||||||||
|
Guayuyaco
|
Seismic
|
431,000
|
(431,000
|
)
|
-
|
||||||||||||||
|
New
Projects
|
390,000
|
(390,000
|
)
|
-
|
|||||||||||||||
|
Total
|
16,923,211
|
3,708,000
|
(2,339,000
|
)
|
18,292,211
|
||||||||||||||
All
fields are in Colombia.
F-12
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
6. SHARE
CAPITAL
|
Number
of Shares
|
Amount
$
|
||||||
|
Balance,
January 1, 2006
|
43,285,112
|
43,285
|
|||||
|
Common
shares issued, at par value of $0.001 per share
|
52,170,647
|
52,170
|
|||||
|
Balance,
September 30, 2006
|
95,455,759
|
95,455
|
|||||
Share
capital
Share
capital consists of 78,471,632 common voting shares of the Company and
16,984,127 exchangeable shares of Goldstrike Exchange Co. (collectively,
“common
stock”). Each exchangeable share is exchangeable only into one common voting
share of the Company. The holders of common stock are entitled to one vote
for
each share on all matters submitted to a stockholder vote and are entitled
to
share in all dividends that the board of directors, in its discretion,
declares
from legally available funds. The holders of common stock have no pre-emptive
rights, no conversion rights, and there are no redemption provisions applicable
to the common stock.
Warrants
At
September 30, 2006, the Company had 14,472,622 warrants outstanding to
purchase
7,236,311 common shares for $1.25 per share and 55,841,208 warrants outstanding
to purchase 27,920,604 common shares for $1.75 per share.
Registration
Rights Payments
The
shares and warrants have registration rights associated with their issuance.
The
15,047,606 units issued in the fourth quarter of 2005 and first quarter
of 2006
have liquidated damages payable in the amount of 1% of the purchase price
of the
unit per month payable each month the registration statement is not declared
effective beyond the mandatory effective date (July 10th,
2006).
Total amount accrued to September 30, 2006 for these liquidated damages
is
$261,182.
The
50,000,000 units issued in June 2006 have liquidated damages payable each
month
the registration statement is not declared effective beyond the mandatory
effective date, being 120 days after the closing date of June 20, 2006
or 150
days if the registration statement is subsequently reviewed by the Securities
Exchange Commission:
-
1% of
the purchase price for the 1st
month
after the mandatory effective date
-
1.5% of
the purchase price for the 2nd
and
3rd
month
after the mandatory effective date
-
2% of
the purchase price for the 4th
and
5th
months
after the mandatory effective date and
-
½%
increase each quarter thereafter
F-13
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
total
amount of liquidated damages shall not exceed 25% of the purchase price
for the
units. Under these provisions the maximum payment the company would make
would
be $18,750,000.
Stock
options
The
Company has granted options to purchase common shares to certain directors,
officers, employees and consultants. Each option permits the holder to
purchase
one common share at the stated exercise price. The options vest over three
years
and have a term of ten years, or end of service to the Company, which ever
occurs first. At the time of grant, the exercise price equals the market
price.
The following options have been granted:
|
Number
of
Options
|
Weighted
Average Exercise Price ($/option)
|
||||||
|
Outstanding,
January 1, 2006
|
1,940,000
|
1.12
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Cancelled
|
(110,000
|
)
|
1.12
|
||||
|
Balance,
September 30, 2006
|
1,830,000
|
1.12
|
|||||
The
table
below summarizes unexercised stock options at September 30,
2006:
|
Exercise
Price ($/option)
|
Number
of Options Outstanding
|
Weighted
Average Expiry (years)
|
|||||
|
$0.80
|
1,580,000
|
9.1
|
|||||
|
$2.62
|
250,000
|
9.2
|
|||||
|
Total
|
1,830,000
|
9.1
|
|||||
No
stock
options were exercisable at September 30, 2006.
Total
stock-based compensation expense included in general and administrative
expense
was $203,306. The Black-Scholes option pricing model was used to determine
the
fair value of the option grants with the following assumptions:
F-14
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
Dividend
yield ($ per share)
|
0.00
|
|||
|
Volatility
(%)
|
57.0
|
|||
|
Risk-free
interest rate (%)
|
2.33
|
|||
|
Expected
life (years)
|
3.0
|
|||
|
Forfeiture
percentage (% per year)
|
10.0
|
The
weighted average fair value per option is $0.35.
7. ASSET
RETIREMENT OBLIGATION
Changes
in the carrying amounts of the asset retirement obligations associated
with our
oil and natural gas properties are as follows:
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
$
|
$
|
||||||
|
Balance
beginning of period
|
67,732
|
-
|
|||||
|
Obligations
assumed with property acquisitions
|
57,682
|
66,931
|
|||||
|
Expenditures
made on asset retirements
|
(9,218
|
)
|
-
|
||||
|
Accretion
|
5,459
|
801
|
|||||
|
Balance,
end of period
|
121,655
|
67,732
|
|||||
8. INCOME
TAXES
The
Company has losses of approximately $5,331,000 that can be carried forward
and
applied against future taxable income. A valuation allowance has been taken
for
the potential income tax benefit associated with the losses incurred by
the
Company, due to uncertainty of utilisation of the tax losses.
The
income tax expense (recovery) reported differs from the amount computed
by
applying the statutory rate to loss before income taxes for the following
reasons:
F-15
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
September
30,
|
September
30,
|
||||||
|
2006
|
2005
|
||||||
|
$
|
$
|
||||||
|
Loss
before income taxes
|
(1,008,832
|
)
|
(534,789
|
)
|
|||
|
Statutory
income tax rate
|
34
|
%
|
34
|
%
|
|||
|
Income
tax benefit expected
|
(343,003
|
)
|
(181,828
|
)
|
|||
|
Stock-based
compensation
|
69,124
|
-
|
|||||
|
Tax
losses in other jurisdictions, not recognized
|
1,122,079
|
189,197
|
|||||
|
Income
tax expense
|
848,200
|
7,369
|
|||||
The
deferred income tax liability of $7,849,421 on the balance sheet is related
entirely to Colombia operations, for the following items:
|
September
30,
2006
$
|
||||
|
Property,
Plant and Equipment
|
8,006,421
|
|||
|
Other
long term assets and liabilities
|
(157,000
|
)
|
||
|
Total
|
7,849,421
|
|||
9. CHANGES
IN NON-CASH WORKING CAPITAL
The
changes in non-cash working capital are comprised of the following:
|
September
30,
|
September
30,
|
||||||
|
2006
|
2005
|
||||||
|
$
|
$
|
||||||
|
Increase
in Accounts receivable
|
(986,272
|
)
|
(423,914
|
)
|
|||
|
Increase
in Prepaids
|
(185,586
|
)
|
-
|
||||
|
Decrease
in Inventory
|
110,073
|
-
|
|||||
|
Increase
in Accounts payable
|
1,032,811
|
147,176
|
|||||
|
Increase
in Accrued liabilities
|
568,874
|
76,637
|
|||||
|
Increase
in Taxes Payable
|
957,404 | 7,369 |
|
||||
|
Net
Change in Non-cash Working Capital
|
1,497,304
|
(192,732
|
)
|
||||
10. COMMITMENTS
The
Company entered into a lease beginning February 2006 for office space in
Calgary, Canada that expires January 31, 2011 for $6,824 per month, and
a lease
beginning March 2006 for office space in Buenos Aires, Argentina that expires
February 29, 2008 for $2,000 per month. In Colombia, the Company holds
leases on
3 cars, one expiring September 27, 2007 for $2,264 per month, one expiring
May
3, 2009 for $932 per month and one expiring September 25, 2008 for $1,496.
There
are also a two office leases expiring April 1, 2009 and February 28, 2007
for
$696 and $2,326 respectively, and one housing accommodation lease for $1,739
expiring June 1, 2007. These leases are operating leases.
F-16
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Future
minimum lease payments under these leases at September 30, 2006 are as
follows:
|
$
|
||||
|
2006
|
54,831
|
|||
|
2007
|
177,097
|
|||
|
2008
|
118,887
|
|||
|
2009
|
89,330
|
|||
|
2010
|
81,888
|
|||
|
2011
|
6,824
|
|||
|
Total
minimum lease payments
|
528,857
|
|||
The
company entered into four capital leases in February March and June 2006
for office equipment in Calgary. The length of the leases range from
expiration in February 2008 until February 2011. At September 30, 2006
capital assets included $34,405 related to assets under capital leases
and total
monthly payments are approximately $1,140.
Future
minimum lease payments under these leases at September 30, 2006 are as
follows:
|
$
|
||||
|
2006
|
3,420
|
|||
|
2007
|
13,680
|
|||
|
2008
|
8,958
|
|||
|
2009
|
4,366
|
|||
|
2010
|
3,874
|
|||
|
2011
|
646
|
|||
|
Total
minimum lease payments
|
34,944
|
|||
Interest
expense incurred under these capital leases to September 30, 2006 was
$910.
F-17
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Guarantees
Corporate
indemnities have been provided by the Company to directors and officers
for
various items including, but not limited to, all costs to settle suits
or
actions due to their association with the Company and its subsidiaries
and/or
affiliates, subject to certain restrictions. The Company has purchased
directors’ and officers’ liability insurance to mitigate the cost of any
potential future suits or actions. Each indemnity, subject to certain
exceptions, applies for so long as the indemnified person is a director
or
officer of one of the Company’s subsidiaries and/or affiliates. The maximum
amount of any potential future payment cannot be reasonably
estimated.
The
Company may provide indemnifications in the normal course of business that
are
often standard contractual terms to counterparties in certain transactions
such
as purchase and sale agreements. The terms of these indemnifications will
vary
based upon the contract, the nature of which prevents the Company from
making a
reasonable estimate of the maximum potential amounts that may be required
to be
paid. Management believes the resolution of these matters would not have
a
material adverse impact on the Company’s liquidity, consolidated financial
position or results of operations.
11. Disagreement
with Ecopetrol
As
of
September 30, 2006 the contracting parties of Guayuyaco Association Contract,
Ecopetrol and Argosy Energy International, consulted with their legal advisors
to clarify the procedure for allocation of oil produced and sold during
the long
term test of the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has advised
Argosy
of a material difference in the interpretation of the procedure established
in
the Clause 3.5 of Attachment-B of the Guayuyaco association Contract. Ecopetrol
interprets the contract to provide that the extend test production up to
a value
equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s
account only and serves as reimbursement of its 30% back in to the Guayuyaco
discovery. Argosy’s contention is that this amount is merely the recovery of 30%
of the direct exploration costs of the wells and not exclusively for benefit
of
Ecopetrol. While Argosy believes its interpretation of the Guayuyaco Association
Contract is correct, the resolution of this issue is still pending of agreement
between the parties or determination through legal proceedings.
The
estimated value of disputed production is $2,361,188 which possible loss
is
shared 50% ($1,180,594) with Solana Petroleum Exploration (Colombia) S.A.
partner in the contract and 50% Argosy. No amount has been accrued in the
financial statements related to this disagreement.
12.
Subsequent Events
On
February 22, 2006, the Company filed a Current Report on Form 8-K disclosing
that the Company had made an offer to acquire certain interests of Compañía
General de Combustibles S.A. (“CGC”). The Company offered to purchase CGC’s
participation interests in a total of eight properties in Argentina. As
disclosed in the Company’s Current Report on Form 8-K filed on August 8, 2006
the transaction is subject to Argentinean court approvals, the potential
exercise of rights of first refusal and the need to obtain third-party
consents.
F-18
Gran
Tierra Energy Inc.
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
Company has received evidence that court approval in Argentina has now
been
granted. On November 2, 2006 the Company purchased interests in four properties
(a 93.18% participation in the Valle Morado Block, a 100% interest in the
Santa
Victoria Block and the remaining 50% interests in the Nacatimbay and Ipaguazu
Blocks (in which the Company currently holds 50% interests)) for a total
consideration of $2.1 million. The Company is considering its options whether
to
acquire the interests in the remaining four properties, which interests
remain
subject to rights of first refusal among joint venture partners and other
third
party consents.
Gran
Tierra signed a License Contract for the Exploration and Exploitation of
Hydrocarbons covering Block 122 in Peru on June 8, 2006. Terms of the License
define a seven-year exploration term with four periods, each with minimum
work
obligations. Final ratification by the government of Peru occurred on November
3, 2006. The minimum commitment for the first work period of 18 months,
which is
mandatory, is $0.5 million. The subsequent three work periods are optional
to
the Company.
F-19
Report
of Independent Registered Chartered Accountants
To
the
Board of Directors of Gran Tierra Energy, Inc.:
We
have
audited the consolidated balance sheet of Gran Tierra Energy, Inc. as
at
September 30, 2006 and the consolidated statements of operations, shareholders’
equity and cash flows the nine month period ended September 30, 2006.
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 audit.
We
conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight
Board
(United States). These standards require that we plan and perform an
audit to
obtain reasonable assurance whether the financial statements are free
of
material misstatement. An audit includes examining, on a test basis,
evidence
supporting the amounts and disclosures in the financial statements. An
audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our
opinion.
In
our
opinion, these consolidated financial statements present fairly, in all
material
respects, the financial position of Gran Tierra Energy, Inc. as at September
30,
2006 and the results of its operations and its cash flows for the nine
month
period ended September 30, 2006 in accordance with accounting principles
generally accepted in the United States of America.
The
Company 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.
/s/
Deloitte & Touche LLP
Independent
Registered Chartered Accountants
Calgary,
Alberta, Canada
November
17, 2006
Comments
by Independent Registered Chartered Accountants on Canada-United States
of
America Reporting Difference
The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph when the financial statements
are affected by conditions and events that cast substantial doubt on
the
Company’s ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Although we conducted our audit in
accordance with both Canadian generally accepted auditing standards and
the
standards of the Public Company Accounting Oversight Board (United States),
our
report to the Board of Directors dated November 17, 2006 is expressed
in
accordance with Canadian reporting standards which do not permit a reference
to
such conditions and events in the auditors’ report when these are adequately
disclosed in the financial statements.
/s/
Deloitte & Touche LLP
Independent
Registered Chartered Accountants
Calgary,
Alberta, Canada
November
17, 2006
F-20
|
Gran
Tierra Energy Inc.
Consolidated
Statement of Operations
Stated
in US dollars
|
||||
|
Nine
months ended
September
30, 2006
|
||||
|
$
|
||||
|
REVENUE
|
|
|||
|
Oil
and natural gas sales
|
8,358,921
|
|||
|
Interest
Revenue
|
195,816
|
|||
|
8,554,737
|
||||
|
EXPENSES
|
||||
|
Operating
Expenses
|
2,702,507
|
|||
|
General
and Administrative
|
4,256,303
|
|||
|
Interest
Expenses
|
3,075
|
|||
|
Depreciation,
Depletion and Accretion
|
2,324,158
|
|||
|
Foreign
Exchange (gain)/loss
|
277,526
|
|||
|
9,563,569
|
||||
|
INCOME/(LOSS)
BEFORE INCOME TAXES
|
(1,008,832
|
)
|
||
|
Income
Taxes (Note 8)
|
848,200
|
|||
|
NET
INCOME/(LOSS)
|
(1,857,032
|
)
|
||
|
NET
EARNINGS/(LOSS) PER SHARE
|
(0.03
|
)
|
||
|
Basic
|
(0.03
|
)
|
||
|
Diluted
|
(0.03
|
)
|
||
|
Weighted
average number of shares - Basic
|
63,043,998
|
|||
|
Weighted
average number of shares - Diluted
|
98,200,913
|
|||
See
accompanying Notes to the Financial Statements
F-21
|
Gran
Tierra Energy Inc.
Consolidated
Balance Sheet
Stated
in US dollars
|
|
September
30,
2006
$
|
||||
|
ASSETS
|
||||
|
CURRENT
|
||||
|
Cash
and cash equivalents
|
18,796,084
|
|||
|
Restricted
cash
|
12,617,263
|
|||
|
Accounts
receivable
|
7,137,920
|
|||
|
Inventory
|
586,943
|
|||
|
Prepaid
expenses
|
247,073
|
|||
|
Total
Current Assets
|
39,385,283
|
|||
|
Taxes
Receivable
|
165,919
|
|||
|
Property
Plant and Equipment (Note 5)
|
||||
|
Proven
oil and gas properties, net
|
25,859,978
|
|||
|
Unproven
oil and gas properties not amortized
|
18,292,211
|
|||
|
Other,
net
|
499,146
|
|||
|
Goodwill
|
15,005,083
|
|||
|
Deferred
Income Taxes
|
-
|
|||
|
99,207,620
|
||||
|
LIABILITIES
|
||||
|
CURRENT
|
||||
|
Accounts
payable
|
6,486,464
|
|||
|
Accrued
liabilities
|
1,367,368
|
|||
|
Taxes
Payable
|
1,708,955
|
|||
|
9,562,787
|
||||
|
Long
term Payables
|
76,147
|
|||
|
Asset
Retirement Obligation (Note 7)
|
121,655
|
|||
|
Deferred
Income Taxes (Note 8)
|
7,849,421
|
|||
|
Deferred
Remittance Taxes
|
1,385,849
|
|||
|
Total
Liabilities
|
18,995,859
|
|||
|
SHAREHOLDERS’
EQUITY
|
||||
|
Share
capital (Note 6)
|
95,455
|
|||
|
Additional
Paid in Capital
|
71,361,463
|
|||
|
Warrants
(Note 6)
|
12,831,553
|
|||
|
Deficit
|
(4,076,711
|
)
|
||
|
80,211,760
|
||||
|
99,207,620
|
||||
See
accompanying Notes to the Financial Statements
F-22
|
Gran
Tierra Energy Inc.
Consolidated
Statements of Cash Flows
Stated
in US dollars
|
||||
|
Nine
Months ended September 30,
2006
$
|
||||
|
CASH
FLOWS RELATED TO THE
|
||||
|
FOLLOWING
ACTIVITIES:
|
||||
|
OPERATING:
|
||||
|
Net
(loss) earnings
|
(1,857,032
|
)
|
||
|
Adjustments
for:
|
||||
|
Depreciation,
Depletion and Accretion
|
2,324,158
|
|||
|
Stock-based
compensation
|
203,306
|
|||
|
Deferred
Income Taxes
|
123,193
|
|||
|
Asset
Retirement Obligation, settled
|
(9,218
|
)
|
||
|
Taxes
Receivable
|
(57,780
|
)
|
||
|
Changes
in non-cash working capital (Note 9)
|
1,497,304
|
|||
|
2,223,931
|
||||
|
FINANCING
|
||||
|
Proceeds
from issuance of common shares and warrants, net of issuance
costs
|
70,826,137
|
|||
|
70,826,137
|
||||
|
INVESTING
|
||||
|
Property
and equipment additions, net of asset retirement obligations
assumed
|
(6,011,735
|
)
|
||
|
Other
|
(28,940
|
)
|
||
|
Business
Combination, net of cash acquired (Note 3)
|
(38,217,930
|
)
|
||
|
Restricted
Cash
|
(12,216,835
|
)
|
||
|
(56,475,440
|
)
|
|||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
16,574,628
|
|||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
2,221,456
|
|||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
18,796,084
|
|||
|
Supplemental
Cash Flow Information
|
||||
|
Cash
paid for interest
|
3,075
|
|||
|
Cash
paid for taxes
|
408,569
|
|||
See
accompanying Notes to the Financial Statements
F-23
|
GRAN
TIERRA ENERGY INC.
Condensed
Consolidated Statement of Shareholders’ Equity
Stated
in US dollars
|
|
September
30, 2006
$
|
||||
|
Share
Capital
|
||||
|
Balance
beginning of period
|
43,285
|
|||
|
Issue
of common shares
|
52,170
|
|||
|
Balance
end of period
|
95,455
|
|||
|
Additional
paid-in-capital
|
||||
|
Balance
beginning of period
|
11,807,313
|
|||
|
Issue
of common shares
|
59,350,844
|
|||
|
Stock-based
compensation expense
|
203,306
|
|||
|
Balance
end of period
|
71,361,463
|
|||
|
Warrants
|
||||
|
Balance
beginning of period
|
1,408,429
|
|||
|
Issue
of warrants
|
11,476,118
|
|||
|
Redemption
of warrants
|
(52,994
|
)
|
||
|
Balance
end of period
|
12,831,553
|
|||
|
Deficit
|
||||
|
Balance
beginning of period
|
(2,219,680
|
)
|
||
|
Net
loss
|
(1,857,032
|
)
|
||
|
Balance
end of period
|
(4,076,712
|
)
|
||
(See
notes to the consolidated financial statements)
F-24
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
1.
DESCRIPTION OF BUSINESS AND GOING CONCERN
Gran
Tierra Energy Inc. (the “Company”) is a publicly traded oil and gas exploration
and production company with operations in Argentina and Colombia.
The
Company’s ability to continue as a going concern is dependent upon obtaining the
necessary financing to acquire oil and natural gas interests and generating
profitable operations from its oil and natural gas interests in the future.
The
Company’s financial statements as at and for the nine month period ended
September 30, 2006 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities
and
commitments in the normal course of business. The Company incurred a net
loss of
$1,857,032 for the period ended September 30, 2006, and, as at September
30,
2006, had a deficit of $4,076,711. The Company expects to incur substantial
expenditures to further its capital investment programs and the Company’s cash
and cash flow from operating activities may not be sufficient to satisfy
its
current obligations and meet its capital investment programs.
To
address the above, management of the Company completed a sale and issuance
of
common shares during the second quarter of 2006. A total of $75,000,000
was
raised through the sale of 50,000,000 units. Issue costs totalled $6,000,077,
for net proceeds of $68,999,923. A portion of these proceeds was used to
acquire
producing and exploration assets in Colombia which add immediate cash flow,
and
provide exploration opportunities.
In
addition, management of the Company is pursuing the following:
|
·
|
raise
additional capital through issuance of debt. The Company is currently
negotiating a debt facility that would provide capital for future
expansion activities.
|
|
·
|
build
a portfolio of production, development, and exploration opportunities
using additional capital raised and cash provided by future operating
activities.
|
Should
the going concern assumption not be appropriate and the Company not be
able to
realize its assets and settle its liabilities and commitments in the normal
course of operations, these consolidated financial statements would require
adjustments to the amounts and classifications of assets and
liabilities.
2. SIGNIFICANT
ACCOUNTING POLICIES
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The
company believes that the information and disclosures presented are adequate
to
make the information presented not misleading.
The
significant accounting policies are:
F-25
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Basis
of consolidation
These
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries. All intercompany accounts and transactions have
been
eliminated. The Company will proportionately consolidate its undivided
interest
in oil and gas exploration and development joint ventures.
Use
of estimates
The
preparation of financial statements in conformity with 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 financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign
currency translation
The
functional currency the Company, including its subsidiaries in Argentina
and
Colombia, is the United States dollar. The balance sheet accounts of the
Company’s foreign operations that use different functional currencies are
translated into US dollars at the period-end exchange rates, while income,
expenses and cash flows are translated at the average exchange rates for
the
period. Translation gains or losses related to net assets will be included
as a
component of accumulated other comprehensive income in shareholders’ equity.
Gains and losses resulting from foreign currency transactions, which are
transactions denominated in a currency other than the entity’s functional
currency, are included in the consolidated statement of operations and
deficit.
Fair
value of financial instruments
The
Company’s financial instruments are cash, accounts receivable and accounts
payable and accrued liabilities. The fair values of these financial instruments
approximate their carrying values due to their immediate or short-term
nature.
Cash
Equivalents
The
Company considers all highly liquid debt instruments purchased with an
original
maturity of three months or less to be cash equivalents. These investments
are
carried at cost, which approximates fair value.
Restricted
cash
Restricted
cash consists of short term investments that are held in trust to secure
various
obligations of the Company including letters of credit and obligations
to joint
venture partners, in addition to funds raised from financing subject to
release
conditions and accumulated interest.
F-26
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Inventory
Crude
oil
inventory is valued at lower of cost or market value. The cost of inventory
is
determined using the weighted average method. Inventory costs include
expenditures directly or indirectly incurred in bringing the inventory
to its
existing condition.
Oil
and natural gas properties
The
Company uses the full cost method of accounting for its investment in oil
and
natural gas properties. Under this method, the Company capitalizes all
acquisition, exploration and development costs incurred for the purpose
of
finding oil and natural gas reserves, including salaries, benefits and
other
internal costs directly attributable to these activities. Costs associated
with
production and general corporate activities, however, are expensed in the
period
incurred. Interest costs related to unproved properties and properties
under
development are also capitalized to oil and natural gas properties. Unless
a
significant portion of the Company’s proved reserve quantities in a particular
country are sold (greater than 25 percent), proceeds from the sale of oil
and
natural gas properties are accounted for as a reduction to capitalized
costs,
and gains and losses are not recognized.
The
Company computes depletion of oil and natural gas properties on a quarterly
basis using the unit-of-production method based upon production and estimates
of
proved reserve quantities. Unproved properties are excluded from the amortizable
base until evaluated. The cost of exploratory dry wells is transferred
to proved
properties and thus subject to amortization immediately upon determination
that
a well is dry in those countries where proved reserves exist. In countries
where
the Company has not booked proved reserves, all costs associated with a
prospect
or play are considered quarterly for impairment upon full evaluation of
such
prospect or play. This evaluation considers among other factors, seismic
data,
requirements to relinquish acreage, drilling results, remaining time in
the
commitment period, remaining capital plans, and political, economic, and
market
conditions. Geological and geophysical (“G&G”) costs are recorded in proved
property and therefore subject to amortization as incurred in mature
basins.
In
exploration areas, G&G costs are capitalized in unproved property and
evaluated as part of the total capitalized costs associated with a prospect
or
play. Future development costs are added to the amortizable base.
In
performing its quarterly ceiling test, the Company limits, on a
country-by-country basis, the capitalized costs of proved oil and natural
gas
properties, net of accumulated depletion and deferred income taxes, to
the
estimated future net cash flows from proved oil and natural gas reserves
discounted at ten percent, net of related tax effects, plus the lower of
cost or
fair value of unproved properties included in the costs being amortized.
If
capitalized costs exceed this limit, the excess is charged as additional
depletion expense. The Company calculates future net cash flows by applying
end-of-the-period prices except in those instances where future natural
gas or
oil sales are covered by physical contract terms providing for higher or
lower
amounts.
F-27
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Unproved
properties will be assessed quarterly for possible impairments or reductions
in
value. If a reduction in value has occurred, the impairment is transferred
to
proved properties. For international operations where a reserve base has
not yet
been established, the impairment is charged to earnings.
Asset
retirement obligations
The
Company provides for future asset retirement obligations on its oil and
natural
gas properties based on estimates established by current legislation and
industry practices. The asset retirement obligation is initially measured
at
fair value and capitalized to capital assets 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 cost is amortized
over the useful life of the underlying capital assets.
The
amortization of the asset retirement cost and the accretion of the asset
retirement obligation will be 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 as a gain or loss in the period of
settlement.
Capital
assets
Capital
assets are recorded at cost upon acquisition. Depreciation is provided
using the
declining-balance-basis at the following annual rates:
|
Computer
equipment
|
30
|
%
|
||
|
Furniture
and Fixtures
|
30
|
%
|
||
|
Automobiles
|
30
|
%
|
Revenue
recognition
Oil
and
gas revenues are recognized when production is sold to a purchaser at a
fixed or
determinable price, when delivery has occurred and title has transferred,
and if
collectibility of the revenue is probable.
Income
taxes
Deferred
income taxes are recognized using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards.
Valuation
allowances are provided if, after considering available evidence, it is
more
likely than not that some or all of the deferred tax assets will not be
realized.
F-28
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Taxes
receivable are recognized for cash taxes paid which are creditable against
taxes
expected to be incurred within the next twelve months.
Loss
per share
Basic
loss per share calculations are based on the net income (loss) attributable
to
common shareholders for the period divided by the weighted average number
of
common shares issued and outstanding during the period. The diluted earnings
(loss) per share calculations are based on the weighed average number of
common
shares outstanding during the period, plus the effects of dilutive common
share
equivalents. This method requires that the dilutive effect of outstanding
options and warrants issued should be calculated using the treasury stock
method. This method assumes that all common share equivalents have been
exercised at the beginning of the period (or at the time of issuance, if
later),
and that the funds obtained thereby were used to purchase common shares
of the
Company at the average trading price of common shares during the
period.
Stock-based
compensation
The
Company follows the fair-value method of accounting for stock options granted
to
directors, officer and employees. Stock-based compensation expense is included
in general and administrative expense with a corresponding increase to
contributed surplus. Compensation expense for options granted is based
on the
estimated fair values at the time of grant and the expense is recognized
over
the expected life of the option.
Goodwill
Goodwill
represents the excess of purchase price of business combinations over the
fair
value of net assets acquired and is tested for impairment at least
annually.
The
impairment test requires allocating goodwill and all other assets and
liabilities to assigned reporting units. The fair value of each reporting
unit
is estimated and compared to the net book value of the reporting unit.
If the
estimated fair value of the reporting unit is less than the net book value,
including goodwill, then the goodwill is written down to the implied fair
value
of the goodwill through a charge to expense. Because quoted market prices
are
not available for Gran Tierra’s reporting units, the fair values of the
reporting units are estimated based upon several valuation analyses, including
comparable companies, comparable transactions and premiums paid. The goodwill
on
Gran Tierra’s financial statements was a result of the Argosy acquisition, and
relates entirely to the Colombia reporting segment.
F-29
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
New
Accounting Pronouncements
In
September 2005, the Emerging Issues Task Force (EITF) reached a consensus
on
Issue No. 04-13, Accounting
for Purchases and Sales of Inventory with the Same Counterparty.
This
issue addresses the question of when it is appropriate to measure purchase
and
sales of inventory at fair value and record them in cost of sales and revenues
and when they should be recorded as exchanges measured at the book value
of the
item sold. The EITF concluded that purchases and sales of inventory with
the
same counterparty that are entered into in contemplation of one another
should
be combined and recorded as exchanges measured at the book value of the
item
sold. The consensus has been applied to new arrangements entered into and
modifications or renewals of existing agreements, beginning in the second
quarter of 2006. The adoption of this statement did not have a material
impact
on our results of operations or financial position.
In
February 2006, the Financial Accounting Standards Board (FASB) issued statement
155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
no.
133 and 140.
This
statement resolves issues addressed in Statement 133 Implementation Issue
no. D1
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” This implementation guidance indicated that entities could continue to
apply guidance related to accounting for beneficial interests in paragraphs
14
and 362 of Statement 140, which indicate that any security that can be
contractually prepaid or otherwise settled in such a way that the holder
of the
security would not recover substantially all of its recorded investment
should
be subsequently measured like investments in debt securities classified
as
available for sale or trading, and may not be classified as held to maturity.
Also, Implementation issue D1 indicated that holders of beneficial interests
in
securitized financial assets that are not subject to paragraphs 14 and
362 of
Statement 140 are not required to apply Statement 133 to those beneficial
interests, pending further guidance. Statement 155 eliminates the exemption
from
Statement 133 for interests in securitized financial assets. It also allows
the
preparer to elect fair value measurement at acquisition, at issuance or
when a
previously recognized financial instrument is subject to a remeasurement
event.
We do not expect the adoption of this statement will have a material impact
on
our results of operations or financial position.
In
March
2006, the FASB issued statement 156 Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140.
Under
statement 140, servicing assets and servicing liabilities are amortized
over the
expected period of estimated net servicing income or loss and assessed
for
impairment or increased obligation at each reporting date. This statement
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. Subsequent
measurement of servicing assets and servicing liabilities at fair value
is
permitted, but not required. If derivatives are used to mitigate risks
inherent
in servicing assets and servicing liabilities, those derivatives must be
accounted for at fair value. Servicing assets and servicing liabilities
subsequently measured at fair value must be presented separately in the
statement of financial position and there are additional disclosures for
all
separately recognized servicing assets and servicing liabilities. We do
not
expect the adoption of this statement will have a material impact on our
results
of operations or financial position.
F-30
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
In
June
2006, the FASB issued interpretation no 48 Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109.
This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with FASB Statement
No. 109. Recognition of a tax position should be based on whether it is
more
likely than not that a tax position will be sustained. The tax position
is
measured at the largest amount of benefit that is greater than 50% likely
of
being realized upon settlement. This interpretation is effective for fiscal
years beginning after December 15, 2006. We do not expect the adoption
of this
interpretation will have material impact on our results of operations or
financial position.
In
September 2006, the Securities and Exchange Commission (SEC) release Staff
Accounting Bulletin (SAB) No. 108 regarding the effects of prior year
misstatements in considering current year misstatements for the purpose
of a
materiality assessment. The opinion in SAB 108 is that in the case of an
error
that has occurred and been immaterial in a number of previous years, the
cumulative effect should be considered in assessing the materiality of
the error
in the current year. If the cumulative effect of the error is material,
then the
current year statements, as well as prior year statements should be restated.
In
the case of restated prior year statements, previously filed reports do
not need
to be amended, if the error was considered immaterial to previous year’s
financial statements. However the statements should be amended the next
time
they are filed. The effects of this guidance should be applied cumulatively
to
fiscal years ending after November 15, 2006. Additional disclosure should
be
made regarding any cumulative adjustments made in the current year financial
statements. We do not expect the adoption of this SAB will have material
impact
on our results of operations or financial position.
|
3.
|
BUSINESS
COMBINATION
|
Gran
Tierra entered into a Securities Purchase Agreement dated May 25, 2006
with
Crosby Capital LLC (“Crosby”) to acquire all of the limited partnership
interests of Argosy Energy International (“Argosy) and all of the issued and
outstanding capital stock of Argosy Energy Corp. On June 20, 2006 Gran
Tierra
closed the Argosy acquisition and paid consideration to Crosby consisting
of
$37.5 million cash, 870,647 shares of the Company’s common stock and overriding
and net profit interests in certain of Argosy’s assets valued at $1 million. The
value of the overriding and net profit interests was based on present value
of
expected future cash flows. All of Argosy Energy International’s assets are in
Colombia.
The
primary reasons for the acquisition and the principal factors contributing
to a
purchase price resulting in the recognition of goodwill were entry into
the
Colombian market, Argosy’s status as an oil and gas operator in Colombia,
Argosy’s good reputation in Colombia, and the future growth opportunities
presented by Argosy’s portfolio of land holdings.
The
acquisition has been accounted for using the purchase method, and the results
of
Argosy Energy International have been consolidated with Gran Tierra Energy
from
June 20, 2006. The following table shows the allocation of the purchase
price
based on the fair values of the assets and liabilities acquired:
F-31
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
$
|
||||
|
Cash
Paid, net
|
36,414,385
|
|||
|
Common
Shares Issued
|
1,305,971
|
|||
|
Transaction
Costs
|
497,574
|
|||
|
Total
Purchase Price
|
38,217,930
|
|||
|
Purchase
Price allocated:
|
||||
|
Oil
and Gas Assets
|
32,553,211
|
|||
|
Goodwill
(1)
|
15,005,083
|
|||
|
Accounts
Receivable
|
5,361,887
|
|||
|
Inventories
|
567,355
|
|||
|
Long
Term Investments
|
6,772
|
|||
|
Accounts
Payable and Accrued Liabilities
|
(6,085,109
|
)
|
||
|
Long
Term Liabilities
|
(49,763
|
)
|
||
|
Deferred
Tax Liabilities
|
(9,141,506
|
)
|
||
|
Total
Purchase Price allocated
|
38,217,930
|
|||
(1) Goodwill
is not deductible for tax purposes.
The
purchase price allocation has changed from the preliminary allocation performed
on June 21, 2006. At June 21, 2006, the company was awaiting the results
of an
independent reserve audit, and relied on the information provided by Argosy
for
the preliminary allocation . The reserve report was received in September,
2006
and resulted in a reallocation of the purchase price. The changes are as
follows:
|
$
|
||||
|
Oil
and Gas assets (Decrease)
|
(8,005,709
|
)
|
||
|
Goodwill
Increase
|
1,411,303
|
|||
|
Deferred
Tax Liabilities Decrease
|
6,097,406
|
|||
|
Inventories
Increase
|
497,000
|
|||
|
Total
Change
|
-
|
|||
The
Argosy acquisition added 1,182,000 barrels of proven oil reserves to Gran
Tierra
(net after royalty) as of June 30, 2006.
The
pro
forma results for the year ended December 31, 2005 and the period ended
September 30, 2006 are shown below, as if the acquisition had occurred
on
January 1, 2005. Pro forma results are not indicative of actual results
or
future performance.
|
2006
|
2005
|
||||||
|
Revenue
|
15,780,000
|
12,950,000
|
|||||
|
Net
Income (loss)
|
865,000
|
1,569,000
|
|||||
|
Earnings
per share (Basic)
|
0.01
|
0.04
|
|||||
|
Earnings
per share (diluted)
|
0.01
|
0.03
|
|||||
F-32
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
4. SEGMENT
AND GEOGRAPHIC REPORTING
The
Company’s reportable segments are Argentina and Colombia. The Company is
primarily engaged in the exploration and production of oil and natural
gas. The
accounting policies for the segments are the same as those described in
Note 2
of the Notes to the Consolidated Financial Statements.
The
Colombia assets were acquired in the second quarter of 2006, and the Argentina
assets were acquired on September 1, 2005.
The
following tables present information on the Company’s reportable geographic
segments:
|
Nine
months ended September 30, 2006
|
||||||||||
|
Colombia
|
Argentina
|
Total
|
||||||||
|
Revenues
|
4,077,035
|
4,281,885
|
8,358,921
|
|||||||
|
Depreciation,
Depletion and Accretion
|
1,164,560
|
1,125,302
|
2,289,863
|
|||||||
|
Segment
Income (loss) before income taxes
|
1,560,233
|
270,492
|
1,830,725
|
|||||||
|
Segment
Capital Expenditures
|
3,818,500
|
2,086,063
|
5,904,563
|
|||||||
|
September
30, 2006
|
||||||||||
|
Colombia
|
Argentina
|
Total
|
||||||||
|
Property,
Plant and Equipment, net
|
35,211,746
|
9,234,430
|
44,446,176
|
|||||||
|
Goodwill
|
15,005,083
|
-
|
15,005,083
|
|||||||
The
following is a reconciliation of income before income taxes for reportable
segments to consolidated income before income taxes:
|
Nine
months ended
September
30, 2006
|
||||
|
Income
before income taxes for reportable segments
|
1,830,725
|
|||
|
Corporate
Expenses
|
(2,839,557
|
)
|
||
|
Consolidated
(loss) before income taxes
|
(1,008,832
|
)
|
||
The
following is a reconciliation of capital expenditures for reportable segments
to
consolidated capital expenditures:
F-33
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
Nine
months ended
September
30, 2006
|
||||
|
Total
capital expenditures for reportable segments
|
5,904,563
|
|||
|
Corporate
capital expenditures
|
107,172
|
|||
|
Consolidated
capital expenditures
|
6,011,735
|
|||
The
following is a reconciliation of reportable net property, plant and equipment
to
consolidated net property, plant and equipment:
|
September
30, 2006
|
||||
|
Property,
Plant and Equipment, net for reportable segments
|
44,446,176
|
|||
|
Corporate
property, plant and equipment, net
|
205,158
|
|||
|
Consolidated
property, plant and equipment, net
|
44,651,335
|
|||
|
5.
|
CAPITAL
ASSETS
|
|
September
30, 2006
|
||||||||||
|
Cost
$
|
Accumulated
Depletion
and Depreciation
$
|
Net
Book Value
$
|
||||||||
|
Oil
and natural gas properties
|
||||||||||
|
Proven
|
28,307,817
|
(2,682,656
|
)
|
25,625,161
|
||||||
|
Unproven
|
18,292,211
|
-
|
18,292,211
|
|||||||
|
Materials
and supplies
|
234,817
|
-
|
234,817
|
|||||||
|
Furniture
and Fixtures
|
656,192
|
(461,461
|
)
|
194,731
|
||||||
|
Computer
equipment
|
485,763
|
(205,167
|
)
|
280,596
|
||||||
|
Automobiles
|
43,901
|
(20,082
|
)
|
23,819
|
||||||
|
48,020,701
|
(3,369,366
|
)
|
44,651,335
|
|||||||
Following
is a description of properties and projects in unproven oil and gas properties,
which are not currently subject to amortization
|
Block
|
Description
|
Acquisition
Cost
|
Exploration
Cost
|
Transfer
to Amortizable
|
Total
|
Timing
of Amortization
|
|||||||||||||
|
Rio
Magdelena
|
Popa
Exploration well
|
1,000,000
|
3,500,000
|
4,500,000
|
Q1
2007
|
||||||||||||||
|
Rio
Magdelena
|
Exploration
Land
|
4,052,301
|
(55,000
|
)
|
3,997,301
|
2008
|
|||||||||||||
|
Talora
|
Exploration
Land
|
402,720
|
20,000
|
(6,000
|
)
|
416,720
|
2008
|
||||||||||||
|
Chaza
|
Exploration
Land
|
2,588,912
|
38,000
|
2,626,912
|
2008
|
||||||||||||||
F-34
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
|
Mecaya
|
Exploration
Land
|
381,799
|
29,000
|
410,799
|
2008
|
||||||||||||||
|
Primavera
|
Exploration
Land
|
282,427
|
54,000
|
336,427
|
2008
|
||||||||||||||
|
Santana
|
Linda
Probable reserves
|
378,378
|
378,378
|
Q4
2007
|
|||||||||||||||
|
Santana
|
Mary
Probable reserves
|
1,010,077
|
1,010,077
|
Q4
2007
|
|||||||||||||||
|
Santana
|
Miraflor
Probable reserves
|
96,198
|
96,198
|
Q4
2007
|
|||||||||||||||
|
Santana
|
G&G
data
|
380,000
|
(380,000
|
)
|
-
|
||||||||||||||
|
Guayuyaco
|
Exploration
Land
|
3,791,841
|
67,000
|
3,858,841
|
2008
|
||||||||||||||
|
Guayuyaco
|
Probable
reserves
|
693,558
|
(33,000
|
)
|
660,558
|
Q4
2007
|
|||||||||||||
|
Guayuyaco
|
G&G
Data
|
1,044,000
|
(1,044,000
|
)
|
-
|
||||||||||||||
|
Guayuyaco
|
Seismic
|
431,000
|
(431,000
|
)
|
-
|
||||||||||||||
|
New
Projects
|
390,000
|
(390,000
|
)
|
-
|
|||||||||||||||
|
Total
|
16,923,211
|
3,708,000
|
(2,339,000
|
)
|
18,292,211
|
All
fields are in Colombia.
6. SHARE
CAPITAL
|
Number
of Shares
|
Amount
$
|
||||||
|
Balance,
January 1, 2006
|
43,285,112
|
43,285
|
|||||
|
Common
shares issued, at par value of $0.001 per share
|
52,170,647
|
52,170
|
|||||
|
Balance,
September 30, 2006
|
95,455,759
|
95,455
|
|||||
Share
capital
Share
capital consists of 78,471,632 common voting shares of the Company and
16,984,127 exchangeable shares of Goldstrike Exchange Co. (collectively,
“common
stock”). Each exchangeable share is exchangeable only into one common voting
share of the Company. The holders of common stock are entitled to one vote
for
each share on all matters submitted to a stockholder vote and are entitled
to
share in all dividends that the board of directors, in its discretion,
declares
from legally available funds. The holders of common stock have no pre-emptive
rights, no conversion rights, and there are no redemption provisions applicable
to the common stock.
Warrants
At
September 30, 2006, the Company had 14,472,622 warrants outstanding to
purchase
7,236,311 common shares for $1.25 per share and 55,841,208 warrants outstanding
to purchase 27,920,604 common shares for $1.75 per share.
F-35
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
Registration
Rights Payments
The
shares and warrants have registration rights associated with their issuance.
The
15,047,606 units issued in the fourth quarter of 2005 and first quarter
of 2006
have liquidated damages payable in the amount of 1% of the purchase price
of the
unit per month payable each month the registration statement is not declared
effective beyond the mandatory effective date (July 10th,
2006).
Total amount accrued to September 30, 2006 for these liquidated damages
is
$261,182.
The
50,000,000 units issued in June 2006 have liquidated damages payable each
month
the registration statement is not declared effective beyond the mandatory
effective date, being 120 days after the closing date of June 20, 2006
or 150
days if the registration statement is subsequently reviewed by the Securities
Exchange Commission:
-
1% of
the purchase price for the 1st
month
after the mandatory effective date
-
1.5% of
the purchase price for the 2nd
and
3rd
month
after the mandatory effective date
-
2% of
the purchase price for the 4th
and
5th
months
after the mandatory effective date and
-
½%
increase each quarter thereafter
The
total
amount of liquidated damages shall not exceed 25% of the purchase price
for the
units. Under these provisions the maximum payment the company would make
would
be $18,750,000.
Stock
options
The
Company has granted options to purchase common shares to certain directors,
officers, employees and consultants. Each option permits the holder to
purchase
one common share at the stated exercise price. The options vest over three
years
and have a term of ten years, or end of service to the Company, which ever
occurs first. At the time of grant, the exercise price equals the market
price.
The following options have been granted:
|
Number
of Options
|
Weighted
Average Exercise Price ($/option)
|
||||||
|
Outstanding,
January 1, 2006
|
1,940,000
|
1.12
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Cancelled
|
(110,000
|
)
|
1.12
|
||||
|
Balance,
September 30, 2006
|
1,830,000
|
1.12
|
|||||
F-36
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
table
below summarizes unexercised stock options at September 30, 2006:
|
Exercise
Price ($/option)
|
Number
of Options Outstanding
|
Weighted
Average Expiry (years)
|
|||||
|
$0.80
|
1,580,000
|
9.1
|
|||||
|
$2.62
|
250,000
|
9.2
|
|||||
|
Total
|
1,830,000
|
9.1
|
|||||
No
stock
options were exercisable at September 30, 2006.
Total
stock-based compensation expense included in general and administrative
expense
was $203,306. The Black-Scholes option pricing model was used to determine
the
fair value of the option grants with the following assumptions:
|
Dividend
yield ($ per share)
|
0.00
|
|||
|
Volatility
(%)
|
57.0
|
|||
|
Risk-free
interest rate (%)
|
2.33
|
|||
|
Expected
life (years)
|
3.0
|
|||
|
Forfeiture
percentage (% per year)
|
10.0
|
The
weighted average fair value per option is $0.35.
7. ASSET
RETIREMENT OBLIGATION
Changes
in the carrying amounts of the asset retirement obligations associated
with our
oil and natural gas properties are as follows:
|
September
30,
|
||||
|
2006
|
||||
|
$
|
||||
|
Balance
beginning of period
|
67,732
|
|||
|
Obligations
assumed with property acquisitions
|
57,682
|
|||
|
Expenditures
made on asset retirements
|
(9,218
|
)
|
||
|
Accretion
|
5,459
|
|||
|
Balance,
end of period
|
121,655
|
|||
F-37
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
8. INCOME
TAXES
The
Company has losses of approximately $5,331,000 that can be carried forward
and
applied against future taxable income. A valuation allowance has been taken
for
the potential income tax benefit associated with the losses incurred by
the
Company, due to uncertainty of utilisation of the tax losses.
The
income tax expense (recovery) reported differs from the amount computed
by
applying the statutory rate to loss before income taxes for the following
reasons:
|
September
30,
|
|
|
2006
|
|
|
$
|
|
|
Loss
before income taxes
|
(1,008,832)
|
|
Statutory
income tax rate
|
34%
|
|
Income
tax benefit expected
|
(343,003)
|
|
Stock-based
compensation
|
69,124
|
|
Tax
losses from other jurisdictions not recognized
|
1,122,079
|
|
Income
tax expense
|
848,200
|
The
deferred income tax liability of $7,849,421 on the balance sheet is related
entirely to Colombia operations, for the following items:
|
September
30,
2006
$
|
||||
|
Property,
Plant and Equipment
|
8,006,421
|
|||
|
Other
long term assets and liabilities
|
(157,000
|
)
|
||
|
Total
|
7,849,421
|
|||
F-38
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
9. CHANGES
IN NON-CASH WORKING CAPITAL
The
changes in non-cash working capital are comprised of the
following:
|
September
30,
|
||||
|
2006
|
||||
|
$
|
||||
|
Increase
in Accounts receivable
|
(986,272
|
)
|
||
|
Increase
in Prepaids
|
(185,586
|
)
|
||
|
Decrease
in Inventory
|
110,073
|
|||
|
Increase
in Accounts payable
|
1,032,811
|
|||
|
Increase
in Accrued liabilities
|
568,874
|
|||
|
Increase
in Taxes Payable
|
957,404
|
|||
|
Net
Change in Non-cash Working Capital
|
1,497,304
|
10. COMMITMENTS
The
Company entered into a lease beginning February 2006 for office space in
Calgary, Canada that expires January 31, 2011 for $6,824 per month, and
a lease
beginning March 2006 for office space in Buenos Aires, Argentina that expires
February 29, 2008 for $2,000 per month. In Colombia, the Company holds
leases on
3 cars, one expiring September 27, 2007 for $2,264 per month, one expiring
May
3, 2009 for $932 per month and one expiring September 25, 2008 for $1,496.
There
are also a two office leases expiring April 1, 2009 and February 28, 2007
for
$696 and $2,326 respectively, and one housing accommodation lease for $1,739
expiring June 1, 2007. These leases are operating leases.
Future
minimum lease payments under these leases at September 30, 2006 are as
follows:
|
$
|
||||
|
2006
|
54,831
|
|||
|
2007
|
177,097
|
|||
|
2008
|
118,887
|
|||
|
2009
|
89,330
|
|||
|
2010
|
81,888
|
|||
|
2011
|
6,824
|
|||
|
Total
minimum lease payments
|
528,857
|
|||
F-39
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
The
company entered into four capital leases in February March and June 2006
for office equipment in Calgary. The length of the leases range from
expiration in February 2008 until February 2011. At September 30, 2006
capital assets included $34,405 related to assets under capital leases
and total
monthly payments are approximately $1,140.
Future
minimum lease payments under these leases at September 30, 2006 are as
follows:
|
$
|
||||
|
2006
|
3,420
|
|||
|
2007
|
13,680
|
|||
|
2008
|
8,958
|
|||
|
2009
|
4,366
|
|||
|
2010
|
3,874
|
|||
|
2011
|
646
|
|||
|
Total
minimum lease payments
|
34,944
|
|||
Interest
expense incurred under these capital leases to September 30, 2006 was
$910.
Guarantees
Corporate
indemnities have been provided by the Company to directors and officers
for
various items including, but not limited to, all costs to settle suits
or
actions due to their association with the Company and its subsidiaries
and/or
affiliates, subject to certain restrictions. The Company has purchased
directors’ and officers’ liability insurance to mitigate the cost of any
potential future suits or actions. Each indemnity, subject to certain
exceptions, applies for so long as the indemnified person is a director
or
officer of one of the Company’s subsidiaries and/or affiliates. The maximum
amount of any potential future payment cannot be reasonably
estimated.
The
Company may provide indemnifications in the normal course of business that
are
often standard contractual terms to counterparties in certain transactions
such
as purchase and sale agreements. The terms of these indemnifications will
vary
based upon the contract, the nature of which prevents the Company from
making a
reasonable estimate of the maximum potential amounts that may be required
to be
paid. Management believes the resolution of these matters would not have
a
material adverse impact on the Company’s liquidity, consolidated financial
position or results of operations.
F-40
Gran
Tierra Energy Inc.
Notes
to the Consolidated Financial Statements
For
the Nine Month Period Ended September 30, 2006
Stated
in US dollars
11. Disagreement
with Ecopetrol
As
of
September 30, 2006 the contracting parties of Guayuyaco Association Contract,
Ecopetrol and Argosy Energy International, consulted with their legal advisors
to clarify the procedure for allocation of oil produced and sold during
the long
term test of the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has advised
Argosy
of a material difference in the interpretation of the procedure established
in
the Clause 3.5 of Attachment-B of the Guayuyaco association Contract. Ecopetrol
interprets the contract to provide that the extend test production up to
a value
equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s
account only and serves as reimbursement of its 30% back in to the Guayuyaco
discovery. Argosy’s contention is that this amount is merely the recovery of 30%
of the direct exploration costs of the wells and not exclusively for benefit
of
Ecopetrol. While Argosy believes its interpretation of the Guayuyaco Association
Contract is correct, the resolution of this issue is still pending of agreement
between the parties or determination through legal proceedings.
The
estimated value of disputed production is $2,361,188 which possible loss
is
shared 50% ($1,180,594) with Solana Petroleum Exploration (Colombia) S.A.
partner in the contract and 50% Argosy. No amount has been accrued in the
financial statements related to this disagreement.
12.
Subsequent Events
On
February 22, 2006, the Company filed a Current Report on Form 8-K disclosing
that the Company had made an offer to acquire certain interests of Compañía
General de Combustibles S.A. (“CGC”). The Company offered to purchase CGC’s
participation interests in a total of eight properties in Argentina. As
disclosed in the Company’s Current Report on Form 8-K filed on August 8, 2006
the transaction is subject to Argentinean court approvals, the potential
exercise of rights of first refusal and the need to obtain third-party
consents.
The
Company has received evidence that court approval in Argentina has now
been
granted. On November 2, 2006 the Company purchased interests in four properties
(a 93.18% participation in the Valle Morado Block, a 100% interest in the
Santa
Victoria Block and the remaining 50% interests in the Nacatimbay and Ipaguazu
Blocks (in which the Company currently holds 50% interests)) for a total
consideration of $2.1 million. The Company is considering its options whether
to
acquire the interests in the remaining four properties, which interests
remain
subject to rights of first refusal among joint venture partners and other
third
party consents.
Gran
Tierra signed a License Contract for the Exploration and Exploitation of
Hydrocarbons covering Block 122 in Peru on June 8, 2006. Terms of the License
define a seven-year exploration term with four periods, each with minimum
work
obligations. Final ratification by the government of Peru occurred on November
3, 2006. The minimum commitment for the first work period of 18 months,
which is
mandatory, is $0.5 million. The subsequent three work periods are optional
to
the Company.
F-41
Report
of Independent Registered Chartered Accountants
To
the
Board of Directors and Shareholders of
Gran
Tierra Energy Inc.
We
have
audited the consolidated balance sheet of Gran Tierra Energy Inc. as
at
December 31, 2005 and the consolidated statements of operations,
cash flows and
shareholders’ equity for the period from incorporation on January 26, 2005
to December 31, 2005. 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 audit.
We
conducted our audit in accordance with Canadian generally accepted
auditing
standards and 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 misstatement. An audit includes examining, on a test basis,
evidence
supporting the amounts and disclosures in the financial statements.
An audit
also includes assessing the accounting principles used and significant
estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our
opinion.
In
our
opinion, these consolidated financial statements present fairly,
in all material
respects, the financial position of Gran Tierra Energy Inc. as at
December 31,
2005 and the results of its operations and its cash flows for the
period from
incorporation on January 26, 2005 to December 31, 2005 in accordance
with
accounting principles generally accepted in the United States of
America.
The
Company 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.
| Calgary, Alberta, Canada | /s/ Deloitte & Touche LLP | ||
| March 3, 2006 | Independent Registered Chartered Accountants | ||
Comments
by Independent Registered Chartered Accountants on Canada-United
States of
America Reporting Differences
The
standards of the Public Company Accounting Oversight Board (United
States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when the consolidated financial statements are affected
by conditions
and events that cast a substantial doubt on the Company’s ability to continue as
a going concern, such as those described in Note 1 to the consolidated
financial
statements. Our report to the board of directors and shareholders
of Gran Tierra
Energy Inc., dated March 3, 2006, is expressed in accordance with
Canadian
reporting standards, which do not require a reference to such conditions
and
events in the auditors’ report when these are adequately disclosed in the
financial statements.
| Calgary, Alberta, Canada |
/s/
Deloitte & Touche
LLP
|
| March 3, 2006 |
Independent
Registered Chartered
Accountants
|
F-42
|
GRAN
TIERRA ENERGY INC.
Consolidated
Statement of Operations
Period
from Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
|
|
$
|
||||
|
REVENUES
|
1,059,297
|
|||
|
EXPENSES
|
||||
|
Operating
|
395,287
|
|||
|
General
and administrative
|
2,482,070
|
|||
|
Depletion,
depreciation and accretion
|
462,119
|
|||
|
Foreign
exchange gain
|
(31,271
|
)
|
||
|
3,308,205
|
||||
|
LOSS
BEFORE INCOME TAXES
|
(2,248,908
|
)
|
||
|
INCOME
TAXES
|
29,228
|
|||
|
NET
LOSS
|
(2,219,680
|
)
|
||
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
(0.16
|
)
|
||
|
WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED
|
13,538,149
|
|||
(See
notes to the consolidated financial statements)
F-43
|
GRAN
TIERRA ENERGY INC.
Consolidated
Balance Sheet
December
31, 2005
(Stated
in US dollars)
|
||||
|
$
|
||||
|
ASSETS
|
||||
|
CURRENT
|
||||
|
Cash
|
2,221,456
|
|||
|
Restricted
cash
|
400,427
|
|||
|
Accounts
receivable
|
808,960
|
|||
|
Prepaid
expenses and deposits
|
42,701
|
|||
|
Inventory
|
447,012
|
|||
|
3,920,556
|
||||
|
Taxes
receivable
|
108,139
|
|||
|
Capital
assets (Note 3)
|
8,313,208
|
|||
|
Deferred
income taxes (Note 6)
|
29,228
|
|||
|
12,371,131
|
||||
|
LIABILITIES
|
||||
|
CURRENT
|
||||
|
Accounts
payable
|
1,142,930
|
|||
|
Accrued
liabilities
|
121,122
|
|||
|
1,264,052
|
||||
|
Asset
retirement obligations (Note 5)
|
67,732
|
|||
|
SHAREHOLDERS’
EQUITY
|
||||
|
Share
capital (Note 4)
(24,554,953
common shares and 18,730,159 exchangeable shares, par value $0.001
per
share, issued and outstanding)
|
43,285
|
|||
|
Additional
paid-in-capital
|
11,807,313
|
|||
|
Warrants
|
1,408,429
|
|||
|
Deficit
|
(2,219,680
|
)
|
||
|
11,039,347
|
||||
|
12,371,131
|
||||
(See
notes to the consolidated financial statements)
F-44
|
GRAN
TIERRA ENERGY INC.
Consolidated
Statement of Cash Flows
Period
from Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
|
||||
|
$
|
||||
|
CASH
FLOWS RELATED TO THE FOLLOWING
ACTIVITIES:
|
||||
|
OPERATING
|
||||
|
Net
loss
|
(2,219,680
|
)
|
||
|
Add
(deduct) items not involving cash:
|
||||
|
Depletion,
depreciation and accretion
|
462,119
|
|||
|
Deferred
income taxes
|
(29,228
|
)
|
||
|
Stock-based
compensation
|
52,911
|
|||
|
Tax
receivable
|
(108,139
|
)
|
||
|
Changes
in non-cash working capital (Note 7)
|
|
|
||
|
Increase
in accounts receivable
|
(808,960 | ) | ||
|
Increase
in prepaid expenses
|
(42,701 | ) | ||
|
Increase
in inventory
|
(447,012 | ) | ||
|
Increase
in accounts payable
|
1,142,930 | |||
|
Increase
in accrued liabilities
|
121,122 | |||
|
(1,876,638
|
)
|
|||
|
FINANCING
|
||||
|
Proceeds
from issuance of common shares and warrants, net of issuance
costs
|
13,206,116
|
|||
|
INVESTING
|
||||
|
Purchase
of capital assets
|
(8,707,595
|
)
|
||
|
Restricted
cash
|
(400,427
|
)
|
||
|
(9,108,022
|
)
|
|||
|
NET
INCREASE IN CASH
|
2,221,456
|
|||
|
CASH,
BEGINNING OF PERIOD
|
-
|
|||
|
CASH,
END OF PERIOD
|
2,221,456
|
|||
|
Supplemental
cash flow disclosures:
|
||||
|
Cash
paid for interest
|
-
|
|||
|
Cash
paid for taxes
|
-
|
|||
(See
notes to the consolidated financial statements)
F-45
|
GRAN
TIERRA ENERGY INC.
Consolidated
Statement of Shareholders’ Equity
Period
from Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
|
||||
|
$
|
||||
|
Share
Capital
|
||||
|
Balance
beginning of period
|
-
|
|||
|
Issue
of common shares
|
43,285
|
|||
|
Balance
end of period
|
43,285
|
|||
|
Additional
paid-in-capital
|
||||
|
Balance
beginning of period
|
-
|
|||
|
Issue
of common shares
|
11,754,402
|
|||
|
Stock-based
compensation expense
|
52,911
|
|||
|
Balance
end of period
|
11,807,313
|
|||
|
Warrants
|
||||
|
Balance
beginning of period
|
-
|
|||
|
Issue
of warrants
|
1,408,429
|
|||
|
Balance
end of period
|
1,408,429
|
|||
|
Deficit
|
||||
|
Balance
beginning of period
|
-
|
|||
|
Net
loss
|
(2,219,680
|
)
|
||
|
Balance
end of period
|
(2,219,680
|
)
|
||
(See
notes to the consolidated financial statements)
F-46
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
1.
DESCRIPTION
OF BUSINESS AND GOING CONCERN
Gran
Tierra Energy Inc. is the successor company to Goldstrike Inc. On November
10,
2005 (the “Closing Date”), Goldstrike Inc. (“Goldstrike”), the previous public
reporting entity, Gran Tierra Energy Inc., a privately held Canadian corporation
(“Gran Tierra Canada”) and the holders of Gran Tierra Canada’s capital stock
entered into a share purchase agreement, and Goldstrike and Gran Tierra
Goldstrike, Inc. (“Goldstrike Exchange Co.”), a Canadian subsidiary of
Goldstrike, entered into an assignment agreement. In these two transactions,
the
holders of Gran Tierra Canada’s capital stock acquired shares of either
Goldstrike common stock or exchangeable shares of Goldstrike Exchange Co.,
and
Goldstrike Exchange Co. acquired substantially all of Gran Tierra Canada’s
capital stock. Immediately following these transactions , Goldstrike Exchange
Co. acquired the remaining shares of Gran Tierra Canada outstanding after
the
initial share exchange for shares of common stock of Gran Tierra Energy Inc.
using the same exchange ratio as used in the initial exchange transaction.
This two-step process was a part of a single transaction, whereby Gran Tierra
Canada became a wholly-owned subsidiary of Goldstrike Inc. Additionally,
Goldstrike changed its name to Gran Tierra Energy Inc. (or the “Company”) and
adopted the management and business operations of Gran Tierra Canada, remaining
incorporated in the State of Nevada.
This
transaction is accounted for as a reverse takeover of Goldstrike Inc. by
Gran
Tierra Canada. Gran Tierra Canada shareholders, as a group, immediately before
the transaction held the majority of the voting rights of the combined
corporation subsequent to the share exchange. As Gran Tierra Canada did not
carry on operations prior to January 25, 2005, no comparative figures are
provided. Goldstrike Inc. did not have any assets or liabilities at the date
of
acquisition.
The
Company’s ability to continue as a going concern is dependent upon obtaining the
necessary financing to acquire oil and natural gas interests and generate
profitable operations from its oil and natural gas interests in the future.
The
Company’s financial statements as at and for the period ended December 31, 2005
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal
course
of business. The Company incurred a net loss of $2.2 million for the period
ended December 31, 2005, negative cash flows from operations of $1.9 million,
and, as at December 31, 2005, had a deficit of $2.2 million. The Company
expects
to incur substantial expenditures to further its capital investment programs
and
the Company’s cash flow from operating activities may not be sufficient to
satisfy its current obligations and meet its capital investment
objectives.
F-47
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Management
of the Company plans to address the above as follows:
| · |
raise
additional capital through the sale and issuance of common shares.
The
Company closed a private offering of common stock on February
2, 2006 for
762,500 shares of common stock and warrants to acquire 381,250
shares of
common stock, for proceeds of $610,000;
and
|
| · |
build
a portfolio of production, development, step-out and more speculative
exploration opportunities using additional capital raised and
cash
provided by future operating activities.
|
Should
the going concern assumption not be appropriate and the Company not be able
to
realize its assets and settle its liabilities in the normal course of
operations, these consolidated financial statements would require adjustments
to
the amounts and classifications of assets and liabilities.
2.
SIGNIFICANT
ACCOUNTING POLICIES
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The
significant accounting policies are:
Basis
of consolidation
These
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries. All intercompany accounts and transactions have
been
eliminated. The Company will proportionately consolidate its undivided interest
in oil and gas exploration and development joint ventures.
Use
of estimates
The
preparation of financial statements in conformity with 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 financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-48
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Foreign
currency translation
The
functional currency of the Company, including its subsidiary in Argentina,
is
the United States dollar. The balance sheet accounts of the Company’s foreign
operations that use different functional currencies are translated into US
dollars at the period-end exchange rates, while income, expenses and cash
flows
are translated at the average exchange rates for the period. Gains and losses
resulting from foreign currency transactions, which are transactions denominated
in a currency other than the entity’s functional currency, are included in the
consolidated statement of operations and deficit.
Fair
value of financial instruments
The
Company’s financial instruments are cash, accounts receivable, taxes receivable,
accounts payable and accrued liabilities. The fair values of these financial
instruments, other than taxes receivable, approximate their carrying values
due
to their immediate or short-term nature. The carrying value of taxes receivable
is not expected to differ significantly from its realized value.
Restricted
cash
Restricted
cash consists of amounts held in trust until October 2006 in favour of the
Company’s joint venture partners, in case the Company is unable to fund future
cash calls of the joint venture.
Inventory
All
inventory is crude oil in tanks and is valued at lower of cost or market
value. The cost of inventory is determined using the weighted average
method. Inventory costs include expenditures and other costs directly or
indirectly incurred in bringing the inventory to its existing
condition.
Taxes
receivable
The
Company calculates minimum presumed income for its subsidiary in Argentina
by
applying the current one percent tax rate to taxable assets as of the end
of the
period. If the tax on minimum presumed income exceeds income tax during a
tax
year, such excess may be computed as a prepayment of any income tax excess
over
the tax on minimum presumed income that may be generated in the next ten
years.
F-49
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Oil
and natural gas properties
The
Company uses the full cost method of accounting for its investment in oil
and
natural gas properties. Under this method, the Company capitalizes all
acquisition, exploration and development costs incurred for the purpose of
finding oil and natural gas reserves, including salaries, benefits and other
internal costs directly attributable to these activities. Costs associated
with
production and general corporate activities, however, are expensed in the
period
incurred. Interest costs related to unproved properties and properties under
development are also capitalized to oil and natural gas properties. Unless
a
significant portion of the Company’s proved reserve quantities in a particular
country are sold (greater than 25 percent), proceeds from the sale of oil
and
natural gas properties are accounted for as a reduction to capitalized costs,
and gains and losses are not recognized.
The
Company computes depletion of oil and natural gas properties on a quarterly
basis using the unit-of-production method based upon production and estimates
of
proved reserve quantities. Unproved properties are excluded from the amortizable
base until evaluated. The cost of exploratory dry wells is transferred to
proved
properties and thus subject to amortization immediately upon determination
that
a well is dry in those countries where proved reserves exist. In countries
where
the Company has not booked proved reserves, all costs associated with a prospect
or play are considered quarterly for impairment upon full evaluation of such
prospect or play. This evaluation considers among other factors, seismic
data,
requirements to relinquish acreage, drilling results, remaining time in the
commitment period, remaining capital plans, and political, economic, and
market
conditions. Geological and geophysical (“G&G”) costs are recorded in proved
properties for development projects and therefore subject to amortization
as
incurred.
In
exploration areas, G&G costs are capitalized in unproved property and
evaluated as part of the total capitalized costs associated with a prospect
or
play. Future development costs are added to the amortizable base.
In
performing its quarterly ceiling test, the Company limits, on a
country-by-country basis, the capitalized costs of proved oil and natural
gas
properties, net of accumulated depletion and deferred income taxes, to the
estimated future net cash flows from proved oil and natural gas reserves
discounted at ten percent, net of related tax effects, plus the lower of
cost or
fair value of unproved properties included in the costs being amortized.
If
capitalized costs exceed this limit, the excess is charged as additional
depletion expense. The Company calculates future net cash flows by applying
end-of-the-period prices except in those instances where future natural gas
or
oil sales are covered by physical contract terms providing for higher or
lower
amounts.
F-50
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Unproved
properties will be assessed quarterly for possible impairments or reductions
in
value. If a reduction in value has occurred, the impairment is transferred
to
proved properties. For international operations where a reserve base has
not yet
been established, the impairment is charged to earnings.
Asset
retirement obligations
The
Company provides for future asset retirement obligations on its oil and natural
gas properties based on estimates established by current legislation and
industry practices. The asset retirement obligation is initially measured
at
fair value and capitalized to capital assets 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 cost is amortized
over the useful life of the underlying capital assets.
The
amortization of the asset retirement cost and the accretion of the asset
retirement obligation will be 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 as a gain or loss in the period of
settlement.
Capital
assets
Capital
assets, including additions and replacements, are recorded at cost upon
acquisition. The cost of repairs and maintenance is charged to expense as
incurred. Depreciation is provided using the declining-balance-basis at the
following annual rates:
|
Computer
equipment
|
30%
|
|
Furniture
and Fixtures
|
30%
|
|
Automobiles
|
30%
|
Revenue
recognition
Oil
and
gas revenues are recognized when production is sold to a purchaser at a fixed
or
determinable price, when delivery has occurred and title has transferred,
and if
collectibility of the revenue is probable.
F-51
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Income
taxes
Deferred
income taxes are recognized using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards. Valuation
allowances are provided if, after considering available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Loss
per share
Basic
loss per share calculations are based on the loss attributable to common
shareholders for the period divided by the weighted average number of common
shares issued and outstanding during the period. The diluted loss per share
calculations are based on the weighed average number of common shares
outstanding during the period, plus the effects of dilutive common share
equivalents. This method requires that the dilutive effect of outstanding
options and warrants issued should be calculated using the treasury stock
method. This method assumes that all common share equivalents have been
exercised at the beginning of the period (or at the time of issuance, if
later),
and that the funds obtained thereby were used to purchase common shares of
the
Company at the average trading price of common shares during the period.
At
December 31, 2005, 1,940,000 options and 14,285,122 warrants to purchase
7,142,561 common shares were excluded from the diluted loss per share
calculation as the instruments were anti-dilutive.
Stock-based
compensation
The
Company follows the fair-value method of accounting for stock options granted
to
directors, officer and employees pursuant to Financial Accounting Standards
Board Statement 123 (Revised). Stock-based compensation expense is included
in
general and administrative expense with a corresponding increase to contributed
surplus. Compensation expense for options granted is based on the estimated
fair
values at the time of grant and the expense is recognized over the expected
life
of the option.
F-52
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
New
Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement 151, Inventory
Costs.
This
statement amends Accounting Research Bulletin (“ARB”) 43 to clarify
that:
| · |
abnormal
amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) should be recognized as current-period charges;
and
|
| · |
the
allocation of fixed production overhead to inventory based on the
normal
capacity of the production facilities is
required.
|
The
provisions of this statement are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not expect the adoption
of
this statement will have any material impact on our results of operations
or
financial position.
In
December 2004, the FASB issued Statement 153, Exchanges
of Nonmonetary Assets,
an
amendment of Accounting Principles Board (“APB”) Opinion 29, Accounting
for Nonmonetary Transactions.
This
amendment eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of
nonmonetary assets that do not have commercial substance. Under Statement
153,
if a nonmonetary exchange of similar productive assets meets a
commercial-substance test and fair value is determinable, the transaction
must
be accounted for at fair value resulting in the recognition of any gain or
loss.
This statement is effective for nonmonetary transactions in fiscal periods
that
begin after June 15, 2005. We do not expect the adoption of this statement
will
have any material impact on our results of operations or financial
position.
In
March
2005, the FASB issued Financial Interpretation 47, Accounting
for Conditional Asset Retirement Obligations
(FIN
47). FIN 47 clarifies that the term conditional asset retirement obligation
as
used in FASB Statement No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event
that
may or may not be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though uncertainty exists
about the timing and (or) method of settlement. Thus, the timing and (or)
method
of settlement may be conditional on a future event. Accordingly, an entity
is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The adoption of this statement has not had a material
impact on our results of operations or financial position.
F-53
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
In
June
2005, the FASB issued Statement 154, Accounting
Changes and Error Corrections,
which
replaces APB Opinion 20 and FASB Statement 3. Statement 154 changes the
requirements for the accounting and reporting of a change in accounting
principle. Opinion 20 previously required that most voluntary changes in
accounting principles be recognized by including the cumulative effect of
the
new accounting principle in net income of the period of the change. In the
absence of explicit transition provisions provided for in new or existing
accounting pronouncements, Statement 154 now requires retrospective application
of changes in accounting principle to prior period financial statements,
unless
it is impracticable to do so. The Statement is effective for fiscal years
beginning after December 15, 2005. We do not expect the adoption of this
statement will have a material impact on our results of operations or financial
position.
In
September 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on
Issue No. 04-13, Accounting
for Purchases and Sales of Inventory with the Same Counterparty.
This
issue addresses the question of when it is appropriate to measure purchase
and
sales of inventory at fair value and record them in cost of sales and revenues
and when they should be recorded as exchanges measured at the book value
of the
item sold. The EITF concluded that purchases and sales of inventory with
the
same counterparty that are entered into in contemplation of one another should
be combined and recorded as exchanges measured at the book value of the item
sold. The consensus should be applied to new arrangements entered into and
modifications or renewals of existing agreements, beginning with the second
quarter of 2006. We do not expect the adoption of this statement will have
a
material impact on our results of operations or financial position.
3.
CAPITAL ASSETS
|
2005
|
||||||||||
|
Cost
$
|
Accumulated
Depletion
and Depreciation
$
|
Net
Book Value
$
|
||||||||
|
Oil
and natural gas properties
|
8,331,767
|
(444,853
|
)
|
7,886,914
|
||||||
|
Materials
and supplies
|
300,177
|
-
|
300,177
|
|||||||
|
Furniture
and Fixtures
|
20,167
|
(4,805
|
)
|
15,362
|
||||||
|
Computer
equipment
|
73,682
|
(2,649
|
)
|
71,033
|
||||||
|
Automobiles
|
49,534
|
(9,812
|
)
|
39,722
|
||||||
|
8,775,327
|
(462,119
|
)
|
8,313,208
|
|||||||
Materials
and supplies will be used in drilling capital projects in the Palmar Largo
oil
fields and are classified as capital assets. Materials and supplies are
not depreciated because they have not yet been used.
F-54
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
4.
SHARE
CAPITAL
|
Number
of Shares
|
Amount
$
|
||||||
|
Balance,
beginning of period
|
-
|
-
|
|||||
|
Shares
acquired at closing of share exchange, at par value of $0.001 per
share
|
42,491,462
|
42,491
|
|||||
| Shares acquired subsequent to closing of share exchange, at par value $0.001 per share | 793,650 | 794 | |||||
|
Balance,
end of period
|
43,285,112
|
43,285
|
|||||
Share
capital
Share
capital consists of 24,554,953 common voting shares of the Company and
18,730,159 exchangeable shares of Goldstrike Exchange Co. (collectively,
“common
stock”). Each exchangeable share is exchangeable only into one common voting
share of the Company. The holders of common stock are entitled to one vote
for
each share on all matters submitted to a stockholder vote and are entitled
to
share in all dividends that the board of directors, in its discretion, declares
from legally available funds. The holders of common stock have no pre-emptive
rights, no conversion rights, and there are no redemption provisions applicable
to the common stock. The holders of exchangeable shares have the same rights
and
preferences as holders of our common stock.
Warrants
Beginning
August 31, 2005, the Company completed a series of private placements for
proceeds of approximately $11.4 million from the issuance of approximately
14.3
million units, each unit consisting of one common share for $0.80 per share
and
one warrant to purchase one-half at $.625 per one-half share. The proceeds
from
the issuance of the units were allocated between common shares and warrants
based on the relative value at the date of issue. The fair value of each
warrant
was estimated to be $0.106 per warrant using the Black-Scholes option pricing
model with the following assumptions:
|
Dividend
yield ($ per share)
|
0.00
|
|
|
Volatility
(%)
|
57.0
|
|
|
Risk-free
interest rate (%)
|
2.33
|
|
|
Expected
life (years)
|
3.0
|
At
December 31, 2005, the Company had 14,285,122 warrants outstanding to purchase
7,142,561 common shares for $0.625 per one-half share. The warrants are
exercisable during the period ending five years from the date of grant.
F-55
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Stock
options
The
Company has granted options to purchase common shares to directors, officers
and
employees. Each option permits the holder to purchase one common share at
the
stated exercise price. The options vest over three years and have a term
of ten
years, or end of service to the Company, which ever occurs first. At the
time of
grant, the exercise price equals the market price. The following options
have
been granted:
|
Number
of Options
|
Weighted
Average Exercise Price ($/option)
|
||||||
|
Outstanding,
beginning of period
|
-
|
-
|
|||||
|
Granted
|
1,940,000
|
1.12
|
|||||
|
Balance,
end of period
|
1,940,000
|
1.12
|
|||||
The
table
below summarizes unexercised stock options at December 31, 2005:
|
Exercise
Price ($/option)
|
Number
of Options Outstanding
|
Weighted
Average Expiry (years)
|
|
|
$0.80
|
1,600,000
|
9.9
|
|
|
$2.62
|
340,000
|
10.0
|
|
|
Total
Options
|
1,940,000
|
9.9
|
No
stock
options were exercisable at December 31, 2005.
Total
stock-based compensation expense included in general and administrative expense
was $52,911. The Black-Scholes option pricing model was used to determine
the
fair value of the option grants with the following assumptions:
|
Dividend
yield ($ per share)
|
0.00
|
|||
|
Volatility
(%)
|
57.0
|
|||
|
Risk-free
interest rate (%)
|
2.33
|
|||
|
Expected
life (years)
|
3.0
|
|||
|
Forfeiture
percentage (% per year)
|
10.0
|
The
weighted average fair value per option is $0.35.
F-56
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
5. ASSET RETIREMENT OBLIGATIONS
Changes
in the carrying amounts of the asset retirement obligations associated with
our
oil and natural gas properties are as follows:
|
2005
|
||||
|
$
|
||||
|
Balance
beginning of period
|
-
|
|||
|
Obligations
assumed with property acquisitions
|
66,931
|
|||
|
Expenditures
made on asset retirements
|
-
|
|||
|
Accretion
|
801
|
|||
|
Revisions
to estimates
|
-
|
|||
|
Balance,
end of period
|
67,732
|
|||
6.
INCOME
TAXES
The
Company has losses of approximately $2,180,000 that can be carried forward
and
applied against future taxable income. The entire operating loss expires
December 31, 2010. The Company does not have any income tax liabilities during
the current period and, accordingly, no income taxes are recorded. A valuation
allowance has been taken for the potential income tax benefit associated
with
the loss incurred by the Company in the period, due to uncertainty of
utilisation of the tax loss. The deferred tax asset relates to Company’s
activities in Argentina.
The
income tax expense (recovery) reported differs from the amount computed by
applying the statutory rate to loss before income taxes for the following
reasons:
|
2005
|
||||
|
$
|
||||
|
Loss
before income taxes
|
(2,248,908
|
)
|
||
|
Statutory
income tax rate
|
34
|
%
|
||
|
Income
tax benefit
|
(764,628
|
)
|
||
|
Stock-based
compensation
|
17,990
|
|||
|
Valuation
allowance
|
717,410
|
|||
|
Deferred
income tax recovery and deferred tax asset
|
(29,228
|
)
|
||
Taxes
receivable of $108,139 relate to Argentine alternative minimum tax assessed
for
2006. Management believes it is more likely than not that this receivable
will
be realized in the next 12 months as a credit against income tax payable.
The
income tax benefit and expense for this receivable net against each other
in the
Statement of Operations.
F-57
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
7.
CHANGES
IN NON-CASH WORKING CAPITAL
The
changes in non-cash working capital are comprised of the following:
|
2005
|
||||
|
$
|
||||
|
Increase
in accounts receivable
|
(808,960
|
)
|
||
|
Increase
in prepaid expenses
|
(42,701
|
)
|
||
|
Increase
in inventory
|
(447,012
|
)
|
||
|
Increase
in accounts payable
|
1,142,930
|
|||
|
Increase
in accrued liabilities
|
121,122
|
|||
|
(34,621
|
)
|
|||
8.
COMMITMENTS
The
Company leases an automobile under a capital lease that expires on April
30,
2006. At December 31, 2005, capital assets include $30,392 related to the
capital lease.
The
future minimum lease payments under the capital lease at December 31, 2005
are
as follows:
|
$
|
||||
|
2006
|
7,578
|
|||
|
Total
minimum lease payments
|
7,578
|
|||
Subsequent
to December 31, 2005, the Company entered into a lease beginning February
2006
for office space in Calgary, Canada that expires January 31, 2011 for $6,824
per
month, and a lease beginning March 2006 for office space in Buenos Aires,
Argentina that expires February 29, 2008 for $2,000 per month. Minimum lease
payments under these office leases are as follows:
|
$
|
||||
|
2006
|
88,240
|
|||
|
2007
|
105,888
|
|||
|
2008
|
85,888
|
|||
|
2009
|
81,888
|
|||
|
2010
|
81,888
|
|||
|
2011
|
6,824
|
|||
|
Total
minimum lease payments
|
450,616
|
|||
F-58
GRAN
TIERRA ENERGY INC.
Notes
to the Consolidated Financial Statements
Period
From Incorporation on January 26, 2005 to December 31,
2005
(Stated
in US dollars)
Guarantees
Corporate
indemnities have been provided by the Company to directors and officers for
various items including, but not limited to, all costs to settle suits or
actions due to their association with the Company and its subsidiaries and/or
affiliates, subject to certain restrictions. The Company has purchased
directors’ and officers’ liability insurance to mitigate the cost of any
potential future suits or actions. Each indemnity, subject to certain
exceptions, applies for so long as the indemnified person is a director or
officer of one of the Company’s subsidiaries and/or affiliates. The maximum
amount of any potential future payment cannot be reasonably
estimated.
The
Company may provide indemnifications in the normal course of business that
are
often standard contractual terms to counterparties in certain transactions
such
as purchase and sale agreements. The terms of these indemnifications will
vary
based upon the contract, the nature of which prevents the Company from making
a
reasonable estimate of the maximum potential amounts that may be required
to be
paid. Management believes the resolution of these matters would not have
a
material adverse impact on the Company’s liquidity, consolidated financial
position or results of operations.
F-59
GRAN
TIERRA ENERGY INC.
Supplementary
Data (unaudited)
OIL
AND GAS PRODUCING ACTIVITIES
The
following oil and gas information for Gran Tierra Energy Inc. (the “Company”) is
provided in accordance with the Financial Accounting Standards Board Statement
No. 69 Disclosures
about Oil and Gas Producing Activities.
All
oil
and gas producing activities and related capitalized costs are in
Argentina.
A.
Reserve
Quantity Information - Period ended December 31, 2005
The
Company’s proved reserves and changes in those reserves for its operations are
disclosed below. The proved reserves represent management’s best estimate of
proved oil and natural gas reserves. Reserve estimates for each property
are
assessed each year by independent qualified reserves consultants. Results
are
presented net of royalties of 12%.
Estimates
of crude oil and natural gas proved reserves are determined through analysis
of
geological and engineering data, and demonstrate reasonable certainty that
they
are recoverable from known reservoirs under economic and operating conditions
that existed at year end. See Critical
Accounting Estimates
in
management’s discussion and analysis for a description of the reserves
estimation process.
|
Oil
|
Gas
|
||||||
|
(barrels)
|
(thousand
cubic feet) |
||||||
|
Proved
developed and undeveloped reserves, beginning of period
|
-
|
-
|
|||||
|
Revisions
of previous estimates
|
-
|
-
|
|||||
|
Improved
recovery
|
-
|
-
|
|||||
|
Purchase
of reserves in place
|
618,703
|
84,693
|
|||||
|
Extensions
and discoveries
|
-
|
-
|
|||||
|
Production
|
(36,011
|
)
|
(60,229
|
)
|
|||
|
Sales
of reserves in place
|
-
|
-
|
|||||
|
Proved
developed and undeveloped reserves, end of period
|
582,692
|
24,464
|
|||||
|
Proved
developed reserves, end of period
|
463,892
|
24,464
|
|||||
F-60
Supplementary
Data (unaudited)
B.
Capitalized
Costs - December 31, 2005
|
$
|
||||
|
Unproved
oil and gas properties
|
12,588
|
|||
|
Proved
oil and gas properties
|
8,319,179
|
|||
|
8,331,767
|
||||
|
Accumulated
depletion, depreciation and amortization
|
(444,853
|
)
|
||
|
Capitalized
costs
|
7,886,914
|
|||
C. Costs
Incurred - Period Ended December 31, 2005
|
$
|
||||
|
Property
acquisition costs
|
||||
|
Proved
|
7,087,858
|
|||
|
Unproved
|
12,588
|
|||
|
Exploration
costs
|
-
|
|||
|
Development
costs
|
1,231,321
|
|||
| Loans Incurred |
8,331,767
|
|||
D. Results
of Operations for Producing Activities - Period Ended December 31,
2005
|
$
|
||||
|
Net
sales
|
1,059,297
|
|||
|
Production
costs
|
395,287
|
|||
|
Depletion,
depreciation and accretion
|
444,853
|
|||
|
219,157
|
||||
|
Income
taxes
|
76,705
|
|||
|
Results
of operations for producing activities
|
142,452
|
|||
F-61
GRAN
TIERRA ENERGY INC.
Supplementary
Data (unaudited)
E.
Standardized
Measure of Discounted Future Net Cash Flows - December 31,
2005
Future
cash inflows are computed by applying year-end prices to the Company’s share of
estimated annual future production from proved oil and gas reserves. Future
development and production costs to be incurred in producing and further
developing the proved reserves are based on year-end cost indicators. Future
income taxes are computed by applying year-end statutory-tax rates. These
rates
reflect allowable deductions and tax credits, and are applied to the estimated
pre-tax future net cash flows.
Discounted
future net cash flows are calculated using 10% mid-period discount factors.
The
calculations assume the continuation of existing economic, operating and
contractual conditions. However, such arbitrary assumptions have not proved
to
be the case in the past. Other assumptions could give rise to substantially
different results.
Management
believes this information does not in any way reflect the current economic
value
of our oil and gas producing properties or the present value of their estimated
future cash flows as:
| · |
no
economic value is attributed to probable and possible
reserves;
|
| · |
use
of a 10% discount rate is arbitrary;
and
|
| · |
prices
change constantly from year-end
levels.
|
|
$
|
||||
|
Future
cash inflows
|
25,445,000
|
|||
|
Future
production and development costs
|
(11,965,000
|
)
|
||
|
Future
income taxes
|
(1,575,000
|
)
|
||
|
Future
net cash flows
|
11,905,000
|
|||
|
10%
discount factor
|
(2,725,000
|
)
|
||
|
Standardized
measure
|
9,180,000
|
|||
F-62
GRAN
TIERRA ENERGY, INC.
PRO
FORMA FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND THE YEAR ENDED DECEMBER
31,
2005
On
June
20, 2006, Gran Tierra Energy acquired all of the limited partnership
interest of
Argosy Energy International (“Argosy”) and all of the issued and outstanding
capital stock of Argosy Energy Corp (“AEC”), a Delaware corporation and the
general partner of Argosy. Gran Tierra paid US $37.5
million in cash, issued 870,647 shares of our common stock
and granted
participation rights (including overriding royalty interests
and net profits
interests) in Argosy’s assets valued at $1,000,000. The value of the royalty and
net profits interests was deemed appropriate by both parties
based on the
present value of expected future cash flows.
The
accompanying unaudited pro forma consolidated financial statements
(“pro forma
statements”) reflect the above acquisition as well as the acquisition
of the
Palmar Largo Property which occurred on September 1, 2005
for $6,969,659,
assuming they occurred on January 1, 2005.
The
pro
forma statements have been prepared for inclusion in a Current Report on
Form 8-K to be filed by the Company and have been prepared from,
and should be read in conjunction with, the following:
| · |
Gran
Tierra Energy’s audited consolidated financial statements for the
period
from incorporation on January 26, 2005 to December
31,
2005.
|
| · |
Gran
Tierra Energy’s unaudited consolidated financial statements for
the nine months ended September 30,
2006.
|
| · |
Argosy’s
audited financial statements for the year ended December
31,
2005;
|
| · |
Audited
schedules of revenues, royalties and operating costs
of the Palmar Largo
Property for the eight months ended August 31,
2005.
|
F-63
|
Gran
Tierra Energy Inc.
Pro
Forma Statement of Operations (unaudited)
For
the period January 1 to September 30, 2006
Stated
in thousands of US dollars
|
|
Gran
Tierra Energy
|
Argosy
Energy
|
Pro
forma Adjustments
|
Pro
forma Consolidated
|
||||||||||
|
Revenue
|
|||||||||||||
|
Oil
and Natural Gas Sales
|
8,359
|
7,226
|
--
|
15,585
|
|||||||||
|
Interest
Revenue
|
196
|
--
|
--
|
196
|
|||||||||
|
8,555
|
7,226
|
--
|
15,780
|
||||||||||
|
Expenses
|
|||||||||||||
|
Operating
|
2,703
|
891
|
--
|
3,594
|
|||||||||
|
General
and Administrative
|
4,256
|
520
|
--
|
4,776
|
|||||||||
|
Other
Income and expenses, net
|
--
|
(235
|
)
|
--
|
(235
|
)
|
|||||||
|
Interest
Expense
|
3
|
--
|
--
|
3
|
|||||||||
|
Depletion,
depreciation and accretion (Note 2a)
|
2,324
|
372
|
1,523
|
4,219
|
|||||||||
|
Foreign
exchange gain
|
278
|
--
|
--
|
278
|
|||||||||
|
9,564
|
1,548
|
1,523
|
12,635
|
||||||||||
|
Earnings
(loss) before income taxes
|
(1,009
|
)
|
5,678
|
(1,523
|
)
|
3,145
|
|||||||
|
Provision
for income taxes (Note 2b)
|
(848
|
)
|
(1,966
|
)
|
533
|
(2,281
|
)
|
||||||
|
Net
Earnings (loss) for the period
|
(1,857
|
)
|
3,712
|
(990
|
)
|
865
|
|||||||
|
Basic
Earnings (loss) per share
|
(0.02
|
)
|
0.01
|
||||||||||
|
Diluted
Earnings (loss) per share
|
(0.02
|
)
|
0.01
|
||||||||||
|
Weighted
Average Shares - Basic
|
63,043,998
|
25,870,647
|
88,914,645
|
||||||||||
|
Weighted
Average Shares - Diluted
|
98,200,913
|
25,870,647
|
124,071,560
|
||||||||||
F-64
|
Gran
Tierra Energy Inc.
Pro
Forma Statement of Operations (unaudited)
For
the period January 1 to December 31, 2005
Stated
in thousands of US dollars
|
|
|
Gran
Tierra Energy
|
Argosy
Energy |
Pro
Forma Adjustment
|
Pro
Forma Consolidated
Subtotal
|
Palmar
Largo Property
|
Pro
Forma Consolidated
|
|||||||||||||
|
Revenue
|
1,059
|
11,891
|
-
|
12,950
|
2,560
|
15,510
|
|||||||||||||
|
Operating
Expense (Note 2c)
|
395
|
2,452
|
-
|
2,847
|
1,081
|
3,928
|
|||||||||||||
|
664
|
9,439
|
-
|
10,103
|
1,479
|
11,582
|
||||||||||||||
|
Other
Expenses
|
|
||||||||||||||||||
|
General
and Administrative
|
2,482
|
1,082
|
-
|
3,564
|
-
|
-
|
|||||||||||||
|
Depreciation,
Depletion and Accretion (Note 2d)
|
462
|
697
|
2,322
|
3,481
|
-
|
-
|
|||||||||||||
|
Foreign
Exchange Gain
|
(31
|
)
|
(31
|
)
|
-
|
-
|
|||||||||||||
|
Other
Income, Net
|
(449
|
)
|
-
|
(449
|
)
|
-
|
-
|
||||||||||||
|
2,913
|
1,330
|
2,322
|
6,565
|
-
|
-
|
||||||||||||||
|
Earnings
(Loss) Before Income Taxes
|
(2,249
|
)
|
8,109
|
(2,322
|
)
|
3,538
|
-
|
-
|
|||||||||||
|
Provision
For Income and Remittance Taxes (Note 2e)
|
29
|
(2,892
|
)
|
894
|
(1,969
|
)
|
-
|
-
|
|||||||||||
|
Earnings
(Loss) for the period
|
(2,220
|
)
|
5,217
|
(1,428
|
)
|
1,569
|
-
|
-
|
|||||||||||
|
Basic
Earnings Per Share (Note 4)
|
(0.06
|
)
|
-
|
-
|
0.04
|
-
|
-
|
||||||||||||
|
Diluted
Earnings Per Share (Note 4)
|
(0.06
|
)
|
-
|
-
|
0.03
|
-
|
-
|
||||||||||||
|
Weighted
Average Shares - Basic
|
13,538,149
|
25,870,647
|
39,408,796
|
||||||||||||||||
|
Weighted
Average Shares - Diluted
|
20,680,702
|
25,870,647
|
46,551,349
|
F-65
|
GRAN
TIERRA ENERGY, INC.
Notes
to the Pro forma Consolidated Financial Statements
For
the Nine-Month Period Ended September 30, 2006 and
the
Year
Ended December 31, 2005
(Unaudited)
(Tabular
amounts expressed in thousands of US dollars)
|
1.
BASIS OF PRESENTATION
These
pro
forma consolidated financial statements have been prepared in
accordance with
generally accepted accounting principles in the United States
of America
(“GAAP”) and Gran Tierra Energy’s accounting policies, as disclosed in Note 2 of
the audited financial statements of Gran Tierra Energy for the
period ended
December 31, 2005.
The
pro
forma consolidated financial statements are based on the estimates
and
assumptions included in these notes and include all adjustments
necessary for
the fair presentation of the transactions in accordance with
GAAP.
Omitted
Financial Information - Historical financial statements reflecting
financial
position, results of operations and cash flows required by accounting
principles
generally accepted in the United States of America are not presented
for the
Palmar Largo property as such information is not available on
an individual
property basis and not meaningful to the Palmar Largo Properties.
Historically,
no allocation of general and administrative, interest, corporate
taxes accretion
of asset retirement obligations, depreciation, depletion and
amortization was
made to the Palmar Largo Property. Accordingly, the statements
of revenue,
royalty and operating expenses are presented in lieu of the financial
statements
required under Rule 3-01 of the Securities and Exchange Commission
Regulation
S-X.
The
accompanying audited statements of revenues, royalties and operating
expenses
were derived from historical accounting records and reflect the
revenues,
royalties and direct operating expenses of the Palmar Largo property.
Production
and direct operating cost information was acquired from Plus
Petrol, the
operator. Price, royalty, transportation and selling cost information
was
acquired from Dong Won Corporation (the seller). Such amounts
may not be
representative of future operations. The statements do not include
depreciation,
depletion and amortization, general and administrative expenses,
income taxes or
interest expense as these costs may not be comparable to the
expenses expected
to be incurred by the Company on a prospective basis
These
pro
forma consolidated financial statements are not intended to reflect
results from
operations or the financial position which would have actually
resulted had the
acquisition been effected on the dates indicated. These pro forma
statements do
not include any cost savings or other synergies that may result
from the
transaction. Moreover, these pro forma statements are not intended
to be
indicative of the results of operations or financial position
which may be
obtained in the future.
F-66
|
GRAN
TIERRA ENERGY, INC.
Notes
to the Pro forma Consolidated Financial Statements
For the
Nine-Month Period Ended September 30, 2006 and the
Year
Ended December 31, 2005
(Unaudited)
(Tabular
amounts expressed in thousands of US dollars)
|
|
2.
|
PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED STATEMENTS
OF
OPERATIONS
|
The
following adjustments have been made to reflect the transactions
described above
as if the transactions had occurred on January 1, 2005
for purposes of the pro
forma consolidated statement of operations for the nine
months ended September
30, 2006:
| a. |
Depreciation,
depletion and accretion expense (DD&A) has been increased by $1,523
thousand to reflect the additional DD&A from the Argosy asset purchase
from January 1 to June 20, 2006. Additional
DD&A is due to the increased cost basis of Argosy
assets from
recording them at full value on the acquisition
date (of January 1, 2005
for pro forma purposes.)
|
| b. |
Provision
for income taxes has been decreased by $533 thousand
to account for the
tax effects of operating income and DD&A adjustment related to the
Argosy acquisition.
|
The
following adjustments have been made to reflect the transactions
described above
as if the transactions had occurred on January 1, 2005
for purposes of the pro
forma consolidated statement of operations for the period
January 1 to December
31, 2005:
| c. |
Costs
incurred to operate and maintain wells and related
equipment and
facilities.
|
| d. |
DD&A
has been adjusted to reflect the effect of the
Argosy acquisition in the
amount of $2,322 thousand. An adjustment of $704
thousand would be
associated with the Palmar Largo acquisition. Additional
DD&A is due to the increased cost basis of Argosy
and Palmar Largo
assets from recording them at full value on the
acquisition date (of
January 1, 2005 for pro forma
purposes.)
|
| e. |
Provision
for income taxes has been decreased by $894 thousand
to account for the
tax effects of operating income and DD&A adjustment related to the
Argosy acquisition.
|
|
3.
|
PURCHASE PRICE
ALLOCATION
|
The
total
purchase price has been allocated to the Palmar Largo and Argosy
Assets based on
their estimated fair values.
F-67
GRAN
TIERRA ENERGY, INC.
Notes
to the Pro forma Consolidated Financial Statements
For
the Nine-Month Period Ended September 30, 2006 and the
Year
Ended December 31, 2005
(Unaudited)
(Tabular
amounts expressed in thousands of US dollars)
Argosy
Acquisition:
|
$
|
||||
|
Cash
paid, net of cash acquired
|
36,414
|
|||
|
Shares
issued
|
1,306
|
|||
|
Transaction
costs
|
498
|
|||
| 38,218 | ||||
|
Purchase
Price Allocated
|
||||
|
Oil
& natural gas assets
|
32,553
|
|||
|
Goodwill
|
15,005
|
|||
|
Accounts
Receivable
|
5,362
|
|||
|
Inventories
|
568
|
|||
|
Long
term investments
|
7
|
|||
|
Accounts
Payable and Accrued Liabilities
|
(6,085
|
)
|
||
|
Long
term Payable
|
(50
|
)
|
||
|
Deferred
Tax Liabilities
|
(9,142
|
)
|
||
|
38,218
|
||||
The
purchase price allocation has changed from the preliminary allocation
performed
on June 21, 2006 as the Company was awaiting the results of an independent
reserve audit which was received in September 2006.
Palmar
Largo Acquisition:
|
$
|
||||
|
Cash
paid
|
7,000
|
|||
|
Purchase
price allocated
|
||||
|
Oil
and natural gas properties
|
7,110
|
|||
|
Asset
retirement obligations
|
(110
|
)
|
||
|
7,000
|
||||
|
4.
|
BASIC
AND DILUTED EARNINGS PER
SHARE
|
Basic
earnings per share are calculated using 88,914,645 shares of common stock
at September 30, 2006 and 39,408,796 shares of common stock at December
31,
2005. Diluted earnings per share are calculated using 124,071,560 shares of
common stock at September 30, 2006 and 46,551,349 shares of common stock
at
December 31, 2005. This includes 25,870,647 shares valued at $1.50 per
share, issued in conjunction with the Argosy Acquisition, added as if they
were issued on January 1, 2005.
F-68
ARGOSY
ENERGY INTERNATIONAL, LP
Financial
Statements
March
31,
2006 and the period ended March 31, 2006 (Unaudited)
F-69
|
ARGOSY
ENERGY INTERNATIONAL, LP
|
||||||||||||
|
Statements
of Income (Unaudited)
|
||||||||||||
|
For
the Three Months Ended March 31, 2006 and 2005
|
||||||||||||
|
(Expressed
in thousands of US dollars)
|
|
2006
|
2005
|
||||||
|
Oil
sales to Ecopetrol
|
$
|
3,575
|
1,521
|
||||
|
Operating
cost (note 8)
|
367
|
364
|
|||||
|
Depreciation,
depletion and amortization
|
190
|
80
|
|||||
|
General
and administrative expenses
|
282
|
148
|
|||||
|
839
|
592
|
||||||
|
Operating
profit
|
2,736
|
929
|
|||||
|
Other
income, net
|
79
|
116
|
|||||
|
Income
before income and remittance taxes
|
2,815
|
1,045
|
|||||
|
Current
income tax (note 9)
|
1,017
|
370
|
|||||
|
Deferred
remittance tax
|
109
|
42
|
|||||
|
Total
income and remittance taxes
|
1,126
|
412
|
|||||
|
Net
income
|
$
|
1,689
|
633
|
||||
|
See
accompanying notes to unaudited financial statements.
|
F-70
|
ARGOSY
ENERGY INTERNATIONAL, LP
|
||||||||||||
|
Balance
Sheets (Unaudited)
|
||||||||||||
|
March
31, 2006 and December 31, 2005
|
||||||||||||
|
(Expressed
in thousands of US dollars)
|
|
Assets
|
March
31,
2006
|
December
31,
2005
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents (note 3)
|
$
|
2,670
|
7,124
|
||||
|
Accounts
receivable, net (note 4)
|
3,898
|
951
|
|||||
|
Accounts
receivable reimbursement Ecopetrol
|
1,186
|
1,186
|
|||||
|
Inventories:
|
|||||||
|
Crude
oil
|
211
|
218
|
|||||
|
Materials
and supplies
|
626
|
557
|
|||||
|
837
|
775
|
||||||
|
Total
current assets
|
8,591
|
10,036
|
|||||
|
Other
long-term assets
|
25
|
16
|
|||||
|
Property,
plant and equipment (note 5):
|
|||||||
|
Unproved
properties
|
3,831
|
3,622
|
|||||
|
Proved
properties
|
5,305
|
5,401
|
|||||
|
9,136
|
9,023
|
||||||
|
Total
assets
|
$
|
17,752
|
19,075
|
||||
|
Liabilities
and Partners' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
4,852
|
4,979
|
|||||
|
Tax
payable
|
1,721
|
1,326
|
|||||
|
Employee
benefits
|
97
|
103
|
|||||
|
Accrued
liabilities
|
547
|
522
|
|||||
|
Total
current liabilities
|
7,217
|
6,930
|
|||||
|
Long-term
accounts payable (note 10)
|
686
|
686
|
|||||
|
Deferred
income tax
|
473
|
475
|
|||||
|
Deferred
remittance tax
|
1,210
|
1,104
|
|||||
|
Pension
plan
|
-
|
-
|
|||||
|
Total
liabilities
|
9,586
|
9,195
|
|||||
|
Partners'
equity (note 7)
|
8,166
|
9,880
|
|||||
|
Total
liabilities and partners' equity
|
$
|
17,752
|
19,075
|
||||
|
See
accompanying notes to unaudited financial statements.
|
F-71
|
ARGOSY
ENERGY INTERNATIONAL, LP
|
||||||||||||
|
Statements
of Cash Flows (Unaudited)
|
||||||||||||
|
For
the Three Months Ended March 31, 2006 and 2005
|
||||||||||||
|
(Expressed
in thousands of US dollars)
|
|
2006
|
2005
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
1,689
|
633
|
||||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
provided
by operating activities:
|
|||||||
|
Depreciation,
depletion and amortization
|
190
|
80
|
|||||
|
Deferred
remittance tax
|
109
|
42
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(3,147
|
)
|
(839
|
)
|
|||
|
Inventories
|
(62
|
)
|
58
|
||||
|
Accounts
payable
|
(127
|
)
|
202
|
||||
|
Tax
payable
|
395
|
99
|
|||||
|
Employee
benefits
|
(6
|
)
|
48
|
||||
|
Accrued
Liabilities
|
25
|
491
|
|||||
|
Deferred
income tax
|
(2
|
)
|
1
|
||||
|
Deferred
remittance tax
|
(3
|
)
|
4
|
||||
|
Pensions
|
-
|
(5
|
)
|
||||
|
Net
cash (used in) provided by operating activities
|
(939
|
)
|
814
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Increase
in long term investments
|
(9
|
)
|
(1
|
)
|
|||
|
Payments
from Petroleum Equipment International - Talora
|
200
|
-
|
|||||
|
Additions
to property, plant and equipment
|
(303
|
)
|
(767
|
)
|
|||
|
Net
cash used in investing activities
|
(112
|
)
|
(768
|
)
|
|||
|
|
|||||||
|
Cash
flows from financial activities:
|
|||||||
|
Bank
overdrafts
|
-
|
106
|
|||||
|
Distributions
to partners
|
(3,250
|
)
|
-
|
||||
|
Aviva
redemption shares
|
(153
|
)
|
-
|
||||
|
Net
cash (used in) provided by financial activities
|
(3,403
|
)
|
106
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
(4,454
|
)
|
152
|
||||
|
Cash
and cash equivalents at beginning of year
|
7,124
|
6,954
|
|||||
|
Cash
and cash equivalents at end of the period
|
$
|
2,670
|
7,106
|
||||
|
See
accompanying notes to unaudited financial statements.
|
F-72
|
ARGOSY
ENERGY INTERNATIONAL, LP
|
|||||||
|
Statements
of Partners' Equity (Unaudited)
|
|||||||
|
For
the Three Months Ended March 31, 2006 and the Year Ended
December 31,
2005
|
|||||||
|
(Expressed
in thousands of US dollars)
|
|
|
Limited
|
General
|
Total
|
|||||||
|
partners'
|
partners'
|
partners'
|
||||||||
|
capital
|
capital
|
equity
|
||||||||
|
Balance
as of December 31, 2005
|
9,810
|
70
|
9,880
|
|||||||
|
Redemption
of partnership payments interest -
Aviva
Overseas Inc. (note 10)
|
(152
|
)
|
(1
|
)
|
(153
|
)
|
||||
|
Distributions
to partners
|
(3,227
|
)
|
(23
|
)
|
(3,250
|
)
|
||||
|
Net
income
|
1,677
|
12
|
1,689
|
|||||||
|
Balance
as of March 31, 2006
|
$
|
8,108
|
58
|
8,166
|
||||||
|
See
accompanying notes to unaudited financial statements.
|
F-73
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
March
31,
2006 and 2005
(Expressed
in thousands of US dollars)
(1) Business
Activities
Argosy
Energy International, LP is a Utah (USA) Limited Partnership, which
established
a Colombian Branch in 1983.
Argosy
Energy International, LP is engaged in the business of exploring
for, developing
and producing oil and gas. The principal properties and operations
are located
in Colombia, which are carried out through its Colombian Branch
in the Putumayo,
Cauca, Tolima and Cundinamarca Provinces. The oil production is
sold to Empresa
Colombiana de Petróleos, the Colombian National Oil Company,
(“Ecopetrol”).
There
are
risks involved in conducting oil and gas activities in remote,
rugged and
primitive regions of Colombia. The guerrillas have operated within
Colombia for
many years and expose the Company’s operations to potentially detrimental
activities. The guerrillas are present in the Putumayo and Río Magdalena areas
where the Company's properties are located. Since 1998, the Company
has only
experienced minor attacks on pipelines and equipment.
Operations
As
of
March 31, 2006, Argosy was participating in the following Association
Contracts
signed with Ecopetrol and Exploration and Exploitation Contracts
signed with the
Hydrocarbons National Agency - ANH.
|
Contract
|
Participation
|
Operator
|
Phase
|
|||||||
|
Santana
|
35
|
%
|
ARGOSY
|
Exploitation
|
||||||
|
Guayuyaco
|
70
|
%
|
ARGOSY
|
Exploitation
|
||||||
|
Aporte
Putumayo
|
100
|
%
|
ARGOSY
|
Abandonment
|
||||||
|
Río
Magdalena
|
70
|
%
|
ARGOSY
|
Exploration
|
||||||
|
Talora
|
20
|
%
|
ARGOSY
|
Exploration
|
||||||
|
Chaza
|
50
|
%
|
ARGOSY
|
Exploration
|
||||||
The
first
four contracts have been signed with ECOPETROL and the last two
with ANH.
An
association contracts are those where the Government participate
as partner of
the field through the national oil company - ECOPETROL.
Exploration
and production contracts (E&P) are those signed with the ANH - “Agencia
Nacional de Hidrocarburos” (National Agency for Hydrocarbons) in which the
Government only receive royalties and taxes for the rights of exploration
and
production but there is not a participation from the national oil
company -
ECOPETROL or any other government entity.
(Continued)
F-74
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
The
main
terms of the above-mentioned contracts are as follows:
Santana
Association Contract
On
May
27, 1987 (effective date July 27, 1987), Argosy Energy International,
LP signed
this association contract to explore for and produce oil, in the
area called
Santana. The contract is in its 19th year and the Company reduced
the area to a
5 kilometer reserve area around each field. The remaining contract
area is
approximately 1,100 acres.
Under
the
terms of the contract with Ecopetrol, a minimum of 25% of all revenues
from oil
sold to Ecopetrol is paid in Colombian pesos, which may only be
utilized in
Colombia. However, this proportion can be modified through parties
agreement.
Aporte
Putumayo - Association Contract
The
Aporte Putumayo area has been returned to the Government. Such
devolution is
subject to the approval of the environmental restoration of the
region by the
Environmental Ministry and the wells abandonment have to be approved
by
Ecopetrol and the Ministry of Mines.
Río
Magdalena Association Contract
On
December 10, 2001 (effective date February 8, 2002), Argosy Energy
International, LP and Ecopetrol signed this Association Contract,
to explore and
produce oil, in the area called Río Magdalena of approximately 145,000 acres,
located in the Middle Magdalena Valley of Colombia in the provinces
of
Cundinamarca and Tolima.
The
contract has a maximum duration of 28 years distributed as follows:
an
exploration period of 6 years and a production period of 22 years
starting on
the date of termination of the exploration period. The exploratory
well, Popa-1
was drilled during June and July, 2006 and is on the completion
stage.
Upon
finalization of each phase, Argosy has the option to relinquish
the contract,
once completed the obligations for each phase.
BT
Letter Agreement
On
February 27, 2001 Argosy Energy International, LP signed a letter
agreement with
BT Operating Company for the acquisition and management of the
Río Magdalena
Exploration Area. BT and Argosy mutually agreed to pay their 50%
share of costs
under the terms of the Ecopetrol Association contract and provide
certain
services toward management and compliance of the obligations.
As
of
March 31, 2006 BT had not paid their obligations under this agreement
and
outstanding accounts receivable of $355 related to their share
of cost related
to the Río Magdalena Association Contract were provisioned as bad debts.
(Continued)
F-75
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
Guayuyaco
Association Contract
On
August
2, 2002 (effective date September 30, 2002) Argosy Energy International,
LP
signed this association contract with Ecopetrol, to explore and
produce oil, in
the area called Guayuyaco. This Association contract gives Argosy
the right to
explore potential reserves in prospects adjacent to the existing
Santana oil
field. The block is located in the Putumayo and Cauca provinces
and covers
approximately 52.000 acres originally held under the Santana Risk
Sharing
Agreement.
The
Guayuyaco contract has a maximum duration of 27.5 years with an
exploration
period of 5.5 years and a production period of 22 years, which
starts upon
termination of the exploration period.
During
the second exploration phase, two wells were drilled (Guayuyaco-1
and
Guayuyaco-2) which were successful. Therefore, on December 28,
2005 Ecopetrol
accepted the Commerciality of the field.
Solana
Petroleum Exploration Commercial Agreement
Argosy
and Solana Petroleum Exploration entered into a commercial agreement
in 2003
whereby, Solana through fulfillment of certain obligations could
earn a
participating interest in the Inchiyaco Well Prospect (Santana
Association
Contract) and have an option to enter the next exploration prospect
under the
Guayuyaco Association Contract. Inchiyaco-1 was drilled and completed
as a
producing well in 2003 resulting in Solana’s sharing 26.21% interest in Argosy’s
net share of the prospect.
The
commercial agreement was revised in 2004, giving Solana the right
to share a 50%
interest in Argosy’s net share of the Guayuyaco association contract by paying
66.7% of two exploratory wells (Guayuyaco-1 and Juanambu-1) and
50% for a new
seismic program and additional projects.
Talora
Exploration and Exploitation Contract
On
September 16, 2004 (effective date) Argosy and the National Hydrocarbons
Agency
(ANH) signed the Talora Exploration and Exploitation Contract to
explore and
produce oil, in an area of approximately 108,000 acres located
in Tolima and
Cundinamarca Provinces.
The
contract has a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon the
date in which
Argosy receives the oil field commerciality declaration from ANH.
The
contract may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
(Continued)
F-76
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
Argosy
and Petroleum Equipment International (PEI) signed a commercial
agreement on
March 9, 2006. Through fulfillment of certain obligations PEI could
earn an 80%
of Argosy’s interest under the ANH contract on the Talora Block. In conjunction
with such assignment, Argosy shall designate PEI as the operator
previous
approval of the ANH.
Contractual
Commitments:
|
Phase
|
Starting
date
|
Obligations
|
|||||
|
3
|
December
16, 2006
|
One
exploratory well.
|
|||||
|
4
|
December
16, 2007
|
One
exploratory well.
|
|||||
|
5
|
December
16, 2008
|
One
exploratory well.
|
|||||
|
6
|
December
16, 2009
|
One
exploratory well.
|
|||||
The
contract may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
Chaza
Exploration and Exploitation Contract
On
June
27, 2005 (effective date) Argosy and the National Hydrocarbons
Agency (ANH)
signed the Chaza Exploration and Exploitation Contract to explore
and produce
oil, in an area of approximately 80,000 acres located in Putumayo
and Cauca
Provinces.
The
contract has a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon the
date in which
Argosy receives the oil field commerciality declaration from ANH.
The
ANH’s
Resolution 0217, dated September 13, 2005, approved the 2005 assignment
of 50%
interest of the contract to Solana Petroleum Exploration.
Contractual
Commitments:
|
Phase
|
Starting
date
|
Obligations
|
|||||
|
2
|
June
27, 2006
|
One
exploratory well.
|
|||||
|
3
|
June
27, 2007
|
One
exploratory well.
|
|||||
|
4
|
December
27, 2008
|
One
exploratory well.
|
|||||
|
5
|
December
27, 2009
|
One
exploratory well.
|
|
||||
|
6
|
December
27, 2010
|
One
exploratory well.
|
|||||
The
contract may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
(Continued)
F-77
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
(2) Summary
of Significant Accounting Policies and Practices
(a) Foreign
Currency Translation
The
transactions and accounts of the Company's operations denominated
in currencies
other than US dollars are re-measured into United States dollars
in accordance
with Statement of Financial Accounting Standards FAS 52. The United
States
dollar is used as the functional currency. Exchange adjustments
resulting from
foreign currency balances are recognized in expense or income in
the current
period.
(b) Cash
Equivalents
Cash
equivalents are highly liquid investments purchased with an original
maturity of
three months or less.
(c) Inventories
Inventories
consist of crude oil and materials and supplies and are stated
at the lower of
cost or market.
(d) Property,
Plant and Equipment
The
Company follows the full cost method to account for exploration
and development
of oil and gas reserves whereby all productive and nonproductive
costs are
capitalized. The only cost center is Colombia. All capitalized
costs plus the
undiscounted future development costs of proved reserves are depleted
using the
unit of production method based on total proved reserves applicable
to the
country.
Proved
oil and gas reserves are the estimated quantities of crude oil
that geological
and engineering data demonstrate with reasonable certainty can
be recovered in
future years from known reservoirs under existing economic and
operating
conditions considering future production and development costs.
Costs
related to initial exploration activities with no proved reserves
are initially
capitalized and periodically evaluated for impairment. The Company
capitalizes
internal costs directly identified with exploration and development
activities.
The net capitalized costs of oil properties are subject to a ceiling
test, which
limits such pooled costs to the aggregate of the present value
of future net
revenues attributable to proved oil and gas reserves discounted
at 10% plus the
lower of cost or market value of unproved properties. If capitalized
costs
exceed this limit, the excess is charged to expense and reflected
as additional
accumulated depreciation, depletion and amortization.
While
the
quantities of proved reserves require substantial judgment, the
associated
prices of oil reserves that are included in the discounted present
value of the
reserves are objectively determined. The ceiling test calculation
requires use
of prices and costs in effect as of the last day of the accounting
period, which
are generally held constant for the life of the properties. As
a result, the
present value is not necessarily an indication of the fair value
of the
reserves. Oil and gas prices have historically been volatile and
the prevailing
prices at any given time may not reflect our Partnership’s or the industry’s
forecast of future prices.
(Continued)
F-78
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
Gain
or
loss on the sale or other disposition of oil and gas properties
is not
recognized, unless the gain or loss would significantly alter the
relationship
between capitalized costs and proved reserves of oil and gas attributable
to a
country.
Support
equipment and facilities are depreciated using the unit of production
method
based on total reserves of the field related to the support equipment
and
facilities.
(e) Environmental
Liabilities and Expenditures
Argosy
accrues for losses associated with environmental remediation obligations
when
such losses are probable and can be reasonably estimated. These
accruals are
adjusted as further information develops or circumstances change.
Costs of
future expenditures for environmental remediation obligations are
not discounted
to their present value.
(f) Asset
Retirement Obligations
Liability
for asset retirement obligation is considered to be negligible
at this time,
based on projected production profiles, expiry dates and terms
of the
Association Contracts for current operations. However, the Company
has accrued
the costs related to environmental remediation and abandonment
of the wells
belonging to Aporte Putumayo Contract.
(g) Concentration
of Credit Risks
All
of
the Company’s production is sold to Ecopetrol; the sale price is agreed between
both parts, according to local regulations in Colombia.
(h) Income
Taxes
Deferred
income taxes are accounted for under the asset and liability method.
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
and operating
loss. Deferred tax assets and liabilities are measured using 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 the enactment date.
(Continued)
F-79
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
(i) Financial
Instruments Fair Value
The
carrying amounts of cash and cash equivalents approximate fair
value because of
the short maturity of those instruments. The carrying value of
other
on-balance-sheet financial instruments approximates fair value,
and the cost, if
any, to terminate off-balance-sheet financial instruments is not
significant.
(j) Employee
Benefits
The
Company recognizes the obligations with its employees in accordance
with the
current Colombian labor law. These obligations include the severance
indemnity
and the legal service bonus each one equivalent to a monthly salary
per year and
interest on severance at the rate of 12% on the balance of severance
indemnities
paid. The relevant liability for these two concepts is shown under
the "Employee
benefits" account as current liabilities at the closing of the
period.
(k) Defined
Benefit Pension Plan
The
Company has a defined benefit pension plan covering one employee.
The benefits
are based on years of service, age and the employee’s compensation. Currently,
the cost of this program is not being funded. The actuarial study
is performed
at the end of each year in accordance with the guidelines established
by FAS
87.
(l) Use
of Estimates
The
preparation of financial statements in conformity with generally
accepted
accounting principles requires management to make estimates and
assumptions that
affect the reported amounts of assets and liabilities, disclosure
of contingent
assets and liabilities at the date of the financial statements
and reported
amounts of revenues and expenses during the reporting period.
(m) Revenue
Recognition
The
Company recognizes revenue when the crude oil is delivered to
Ecopetrol.
Ecopetrol
pays the oil sales invoicing 25% in local currency and the 75%
in US Dollars,
according to the terms of the Oil Sales Contract executed between
Ecopetrol and
Argosy, through which the oil sale price is fixed, with expiration
dated
November 1, 2006.
(n) Management
Fee
The
Company accounts for the management fees received from its partners
as operator
of the contracts as a less value of the operating costs.
(Continued)
F-80
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
(o) Comprehensive
Income
For
each
period presented in the accompanying statements of income, comprehensive
income
and net income are the same amount.
(3) Cash
and Cash Equivalents
The
following is a summary of cash and cash equivalents as of March
31, 2006 and
December 31, 2005:
|
March
31,
2006
|
December
31,
2005
|
||||||
|
Held
in United States dollars
|
$
|
2,040
|
6,329
|
||||
|
Held
in Colombian pesos
|
157
|
394
|
|||||
|
Short-term
investments
|
473
|
401
|
|||||
|
$
|
2,670
|
7,124
|
|||||
(4) Accounts
Receivable
The
following is a summary of accounts receivable as of March 31, 2006
and December
31, 2005:
|
March
31,
2006
|
December
31,
2005
|
||||||
|
Trade
|
$
|
3,248
|
675
|
||||
|
B.T.O.
Río Magdalena Agreement
|
355
|
355
|
|||||
|
Vendor
Advances
|
177
|
172
|
|||||
|
Petroleum
Equipment Investments - Talora
|
300
|
-
|
|||||
|
Other
|
173
|
104
|
|||||
|
4,253
|
1,306
|
||||||
|
Less
allowance for bad debts
|
(355
|
)
|
(355
|
)
|
|||
|
$
|
3,898
|
951
|
|||||
(5) Property,
Plant and Equipment
The
following is a summary of property, plant and equipment as of March
31, 2006 and
December 31, 2005:
|
March
31,
2006
|
December
31,
2005
|
||||||
|
Oil
properties:
|
|||||||
|
Unproved
|
$
|
3,831
|
3,622
|
||||
|
Proved
|
59,190
|
59,096
|
|||||
|
|
|
|
63,021
|
|
|
62,718
|
|
|
Less
accumulated depreciation, depletion, and amortization
|
53,885
|
53,695
|
|||||
|
$
|
9,136
|
9,023
|
|||||
|
Capitalized
Cost Unproved
|
|||||||||||
|
Excluded
From the Capitalized Cost Being
Amortized
|
|
Month
Anticipated
|
||||||||||||||||||||||||||||
|
Exploration
Cost
|
Cost
Incurred
|
to
be included
|
||||||||||||||||||||||||||
|
AFE
|
Contract
|
Detail
|
Dec-04
|
Dec-05
|
Mar-06
|
2004
|
2005
|
2006
|
in
Amortization
|
|||||||||||||||||||
|
MARY
WELLWEST PROSPECT
|
Santana
|
Geological
& Geophysical Data
|
287
|
287
|
287
|
287
|
Dec-06
|
|||||||||||||||||||||
|
MARY
WEST WELL TESTING
|
Santana
|
Geological
& Geophysical Data
|
93
|
93
|
93
|
93
|
Dec-06
|
|||||||||||||||||||||
|
Expl.
100% NEW PROJECTS
|
New
Projects
|
Geological
& Geophysical Data
|
253
|
363
|
375
|
253
|
110
|
12
|
Dec-06
|
|||||||||||||||||||
|
Expl.
100% SANTANA
|
Guayuyaco
|
Geological
& Geophysical Data
|
1,044
|
1,044
|
1,044
|
1,044
|
Dec-06
|
|||||||||||||||||||||
|
Expl.
100% RIO MAGDALENA
|
Rio
Magdalena
|
Seismic
Program
|
634
|
808
|
889
|
634
|
174
|
81
|
Mar-07
|
|||||||||||||||||||
|
TALORA
PROJECT
|
Talora
|
Seismic
Program
|
1
|
89
|
134
|
1
|
88
|
44
|
Sep-07
|
|||||||||||||||||||
|
SEISMIC
GUAYUYACO
|
Guayuyaco
|
Seismic
Program
|
0
|
431
|
431
|
431
|
Dec-06
|
|||||||||||||||||||||
|
SEISMIC
CHAZA
|
Chaza
|
Seismic
Program
|
0
|
505
|
538
|
505
|
33
|
Sep-07
|
||||||||||||||||||||
|
POPA-1
WELL EXPLORATORY
|
Rio
Magdalena
|
Road
and Location Well
|
0
|
0
|
32
|
32
|
Mar-07
|
|||||||||||||||||||||
|
JUANAMBU-1
WELL EXPLORATORY
|
Guayuyaco
|
Road
and Location Well
|
0
|
2
|
8
|
2
|
6
|
Jun-07
|
||||||||||||||||||||
|
0
|
0
|
|||||||||||||||||||||||||||
|
Total
Unproved Exploration Costs
|
2,312
|
3,622
|
3,831
|
2,312
|
1,310
|
208
|
||||||||||||||||||||||
All
capital excluded from capital costs being amortized relates
to exploration cost.
No acquisition costs, development costs or capitalized interest
costs
are identified.
(Continued)
F-81
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
(6) Pension
Plan
The
following is a detail of the components of pension cost as of March
31, 2006 and
2005:
|
March
31,
2006 |
March
31,
2005 |
||||||
|
Interest
cost
|
$
|
8
|
8
|
||||
|
Expected
return of assets
|
(13
|
)
|
(6
|
)
|
|||
|
Amortization
of unrecognized net transition obligation (asset)
|
1
|
1
|
|||||
|
Net
periodic pension cost
|
$
|
(4
|
)
|
3
|
|||
(7) Equity
Stockholders’
Capital
The
following is a detail of the stockholders’ participation in the capital as of
March 31, 2006 and December 31, 2005:
|
Stockholder
|
March
31,
2006
|
December
31,
2005
|
|||||
|
Crosby
Capital L.L.C.
|
$
|
98.75
|
98.75
|
||||
|
Argosy
Energy Corp. **
|
0.71
|
0.71
|
|||||
|
Dale
E. Armstrong
|
0.41
|
0.41
|
|||||
|
Richard
S. McKnight
|
0.13
|
0.13
|
|||||
|
$
|
100.0
|
100.00
|
|||||
**
Argosy
Energy Corp. is a general partner interest. All others are limited
partnership
interests. Net income is allocated according to the participation
of each
stockholder in the Company’s capital.
Foreign
Exchange Restrictions
In
accordance with current legislation in Colombia, the branches of
foreign
companies in the oil industry are not under the obligation to refund
to the
Colombian exchange market the proceeds from their foreign currency
sales either
inside or outside the country. The net proceeds from oil exports
may be used by
the branches of oil companies to reimburse abroad the capital and
profits from
the operation in Colombia. As a result of this foreign exchange
liberation, the
branch cannot purchase foreign currency in the Colombian exchange
market to
remit profits, repatriate capital, repay external debt or pay foreign
currency
expenses.
Distributions
to Partners
On
March
30, 2006 the partners of Argosy Energy International resolved,
with the majority
vote of its partners, distribute the amount of $2,500 on March
1, 2006 and $750
on March 30, 2006, ratably to each of its partners.
(Continued)
F-82
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
(8) Operating
Cost
The
following is a summary of operating cost incurred for the period
ended March 31,
2006 and 2005:
|
March
31,
2006 |
March
31,
2005 |
||||||
|
Direct
labor
|
$
|
111
|
86
|
||||
|
Maintenance,
materials and lubricants
|
86
|
49
|
|||||
|
Repairs
- third party
|
123
|
196
|
|||||
|
General
expenses - other
|
47
|
33
|
|||||
|
$
|
367
|
364
|
|||||
(9) Income
Taxes
All
of
the income and income tax was derived from activities of the Branch
in
Colombia.
Deferred
Remittance Tax
Deferred
remittance tax is calculated based upon commercial net income.
Commercial net
income of Colombian branches of foreign companies derived from
exploration,
development or production of hydrocarbons is levied an additional
remittance tax
of 7%.
The
law
establishes that when this income is reinvested in the country
for five years,
the payment of the remittance tax will be deferred, after which
time the payment
of this tax will be exonerated.
Under
the
law, reinvestment occurs when the net income remains five years
within the
equity of the entity.
Tax
Reconciliation
Income
tax expense attributable to income from continuing operations was
$1,126 and
$412 for the periods ended March 31, 2006 and 2005, and differed
from the
amounts computed by applying the Colombian income tax rate of 35%
(the statutory
tax rate of the partnership’s Branch) to pretax income from continuing
operations as a result of the following:
|
|
March
31, 2006
|
March
31, 2005
|
|||||||||||
|
Amount
|
%
|
Amount
|
%
|
||||||||||
|
Income
before taxes
|
$
|
2,815
|
100.00
|
1,045
|
100.00
|
||||||||
|
Computed
“Expected” tax expense
|
985
|
35.00
|
366
|
35.00
|
|||||||||
|
Tax
expense
|
1,126
|
40.00
|
412
|
39.43
|
|||||||||
|
Difference
|
$
|
141
|
5.00
|
46
|
4.43
|
||||||||
(Continued)
F-83
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
|
|
March
31, 2006
|
March
31, 2005
|
|||||||||||||||||
|
Basis
|
Amount
|
%
|
Basis
|
Amount
|
%
|
||||||||||||||
|
Explanation:
|
|||||||||||||||||||
|
Difference
in principles and translation
|
$
|
(312
|
)
|
(109
|
)
|
(3.88
|
)
|
(86
|
)
|
(30
|
)
|
(2.87
|
)
|
||||||
|
Surcharge
tax (10%)
|
92
|
3.28
|
34
|
3.25
|
|||||||||||||||
|
Remitance
tax expense (7%)
|
146
|
5.19
|
42
|
4.02
|
|||||||||||||||
|
Inflation
adjustment
|
(23
|
)
|
(8
|
)
|
(0.28
|
)
|
-
|
-
|
|||||||||||
|
No
deductible expenses
|
9
|
3
|
0.11
|
-
|
-
|
||||||||||||||
|
No
deductible taxes (Industry
and
commerce, stamp tax )
|
41
|
14
|
0.51
|
-
|
-
|
||||||||||||||
|
Assessments
to financial movements
|
6
|
2
|
0.07
|
-
|
-
|
||||||||||||||
|
Income
not taxable
|
4
|
1
|
0.00
|
-
|
|||||||||||||||
|
$
|
|
141
|
5.00
|
46
|
4.43
|
||||||||||||||
The
deferred tax is originated in the following temporary differences
as of March
31, 2006 and December 31, 2005:
|
March
31,
2006
|
December
31,
2005
|
||||||
|
Accrued
liabilities
|
$
|
201
|
201
|
||||
|
Property,
plant and equipment
|
(674
|
)
|
(676
|
)
|
|||
|
Net
deferred tax liability
|
$
|
(473
|
)
|
(475
|
)
|
||
|
Roll
forward of deferred taxes:
|
|||||||
|
Beginning
balance
|
475
|
223
|
|||||
|
Increase
in year
|
-
|
352
|
|||||
|
Translation
|
(2
|
)
|
(100
|
)
|
|||
|
$
|
473
|
475
|
|||||
In
assessing the realizability of deferred tax assets, management
considers whether
it is more likely than not some portion or all of the deferred
tax assets will
not be realized. The ultimate realization of deferred tax assets
is dependent
upon the generation of future taxable income during the periods
in which those
temporary differences become deductible and tax carryforwards utilizable.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in
making this
assessment. Based upon the level of historical taxable income and
projections
for future taxable income over the periods in which the deferred
tax assets are
deductible, management believes it is more likely than not that
the branch will
realize the benefits of these deductible differences, net of the
existing
valuation allowances at March 31, 2006. The amount of the deferred
tax asset
considered realizable, however, could be reduced in the near term
if estimates
of future taxable income during the carryforward period are reduced.
(Continued)
F-84
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
Major
Changes Introduced by Law 863 (December 29, 2003)
| 1) |
An
equity tax was created for fiscal years 2004, 2005 and
2006. Such tax must
be liquidated applying at 0.3 % over the net equity at
January
1st
of
each year. This applies to equities of 3.000 million
pesos in 2004, 3.183
million pesos in 2005 and 3.344 million pesos in 2006.
|
| 2) |
The
financial transaction tax increased from 3 per thousand
to 4 per thousand
and it is applicable through the year
2007.
|
| 3) |
Paid
taxes are not deductible except for 80% of industrial
and commercial and
Property Taxes.
|
| 4) |
The
10% income tax surcharge (3.5%) is applicable for years
2003 through 2006.
This payment is not deductible for tax
purposes.
|
(10) Settlement
Agreement with Aviva Overseas Inc.
Effective
August 19, 2005 Argosy Energy International, LP, Argosy Energy
Corp., Crosby
Capital, LLC, and Aviva Overseas, Inc. entered into a settlement
agreement which
principal terms are as follows:
| 1. |
The
parties agreed that the agreement is a negotiated resolution
of various
disputes between the parties.
|
| 2. |
Aviva
Overseas, Inc. assigned and transferred all interests
in the partnership,
corresponding to 29.6196%, to Argosy Energy International,
LP as a
redemption of such interests.
|
| 3. |
Argosy
Energy International, LP is required to make the following
payments to
Aviva Overseas, Inc.: an initial cash payment of $300
as reimbursement to
Aviva Overseas, Inc. for a portion of its cost incurred
in connection with
the disputes, a 90 day promissory note amounted to $3,050,
a two year
promissory note in the amount of $1,125 (the “Note”, represented for 8
quarterly payments of $153 beginning in November 2005,
including interest
at 8%), and an additional payment (described below) accrued
in the amount
of $329 as of the agreement date. As of March 31, 2006,
amounts
outstanding under the agreement include $990 due on the
Note and $310
accrued for the additional payment. The outstanding amount
is payable as
follows: $614 in 2006 and $686 in
2007.
|
The
additional payment is calculated as follows: after the earlier
of i) The date
Argosy Energy makes final payment of the “Note”, or (ii) after the occurrence of
an event of default, Argosy shall make a payment in cash in an
amount equal to
(i) $56,250 multiplied by the numeric amount by which the average
daily closing
price of the New York Mercantile Exchange nearby month contract
for West Texas
Intermediate crude oil over the note term exceeds $55 per barrel,
reduced by
(ii) all interest paid by Argosy on the principal of the Note.
The additional
payment was recorded at the date of the settlement agreement based
on a
calculation of the required payment at that date.
(Continued)
F-85
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements (Unaudited)
Crosby
Capital, LLC has guaranteed the payments required by Argosy Energy
International, LP.
The
new
ownership percentages in Argosy Energy International L.P., after
the redemption
of the partnership interest held by Aviva Overseas Inc. are as
follows:
|
Partner
|
Interest
|
Type
of interest
|
|||||
|
Crosby
Capital L.L.C.
|
98.7491
|
%
|
Limited
Partner
|
||||
|
Argosy
Energy Corporation
|
0.7104
|
%
|
General
Partner
|
||||
|
Dale
E. Armstrong
|
0.4122
|
%
|
Limited
Partner
|
||||
|
Richard
S. McKnight
|
0.1283
|
%
|
Limited
Partner
|
||||
|
Total
|
100.0000
|
%
|
|||||
(11) Disagreement
Between Argosy Energy International and Ecopetrol
As
of
March 31, 2006 the contracting parties of Guayuyaco Association
Contract,
Ecopetrol and Argosy Energy International, consulted with their
legal advisors
to clarify the procedure for allocation of oil produced and sold
during the long
term test of the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has
advised Argosy
of a material difference in the interpretation of the procedure
established in
the Clause 3.5 of Attachment-B of the Guayuyaco association Contract.
Ecopetrol
interprets the contract to provide that the extend test production
up to a value
equal to 30% of the direct exploration costs of the wells is for
Ecopetrol’s
account only and serves as reimbursement of its 30% back in to
the Guayuyaco
discovery. Argosy’s contention is that this amount is merely the recovery of 30%
of the direct exploration costs of the wells and not exclusively
for benefit of
Ecopetrol. While Argosy believes its interpretation of the Guayuyaco
Association
Contract is correct, the resolution of this issue is still pending
of agreement
between the parties or determination through legal proceedings.
The
estimated value of disputed production is $2,361,188 which possible
loss is
shared 50% ($1,180,594) with Solana Petroleum Exploration (Colombia)
S.A.
partner in the contract and 50% Argosy.
At
this time no amount has been accrued in the
financial statements.
(12) Subsequent
Events
| • |
The
Company signed in May and June, 2006 two new exploration
and production
contracts with the National Hydrocarbons Agency (ANH)
called Primavera and
Mecaya, to explore and produce oil, respectively.
|
These
contracts have a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon the
date in which
Argosy receives the oil field commerciality declaration from ANH.
The
contracts may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
| • |
On
April 1, 2006 the partners of the partnership entered
into a redemption
agreement pursuant to which all of Dale E. Armstrong
interest and Richard
S. McKnight interest.
|
| • |
On
June 21, 2006 Gran Tierra Energy Inc. acquired all of
the outstanding
partnership interest in the Company.
|
(Continued)
F-86
ARGOSY
ENERGY INTERNATIONAL, LP
Financial
Statements
December
31, 2005 and 2004
With
Independent Auditors’ Report Thereon
F-87
INDEPENDENT
AUDITORS’ REPORT
Partners
of
Argosy
Energy International, LP:
We
have
audited the accompanying balance sheets of Argosy Energy International,
LP as of
December 31, 2005 and 2004, and the related statements of income,
partner’s
equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United
States of
America. Those standards require that we plan and perform the audit
to obtain
reasonable assurance about whether the financial statements are free
of material
misstatement. An audit includes 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 includes examining,
on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, the financial statements referred to above present fairly,
in all
material respects, the financial position of Argosy Energy International,
LP as
of December 31, 2005 and 2004, and the results of its operations
and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
KPMG
Ltda
Bogotá,
Colombia
July
28,
2006
(Continued)
F-88
ARGOSY
ENERGY INTERNATIONAL, LP
Statements
of Income
Years
ended December 31, 2005 and 2004
(Expressed
in thousands of US dollars)
|
2005
|
2004
|
||||||
|
Oil
sales to Ecopetrol
|
$
|
11,891
|
6,393
|
||||
|
Operating
cost (note 9)
|
2,452
|
2,060
|
|||||
|
Depreciation,
depletion and amortization
|
697
|
357
|
|||||
|
General
and administrative expenses
|
1,082
|
859
|
|||||
|
4,231
|
3,276
|
||||||
|
Operating
profit
|
7,660
|
3,117
|
|||||
|
Other
income, net (note 10)
|
449
|
225
|
|||||
|
Income
before income and remittance taxes
|
8,109
|
3,342
|
|||||
|
Current
income tax (note 11)
|
2,187
|
1,026
|
|||||
|
Deferred
income tax
|
352
|
245
|
|||||
|
Deferred
remittance tax
|
353
|
146
|
|||||
|
Total
income and remittance taxes
|
2,892
|
1,417
|
|||||
|
Net
Income
|
$
|
5,217
|
1,925
|
See
accompanying notes to financial statements.
(Continued)
F-89
ARGOSY
ENERGY INTERNATIONAL, LP
Balance
Sheets
December
31, 2005 and 2004
(Expressed
in thousands of US dollars)
|
Assets
|
2005
|
2004
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents (note 3)
|
$
|
7,124
|
6,954
|
||||
|
Accounts
receivable, net (note 4)
|
951
|
584
|
|||||
|
Accounts
receivable reimbursement Ecopetrol
|
1,186
|
-
|
|||||
|
Inventories:
|
|||||||
|
Crude
oil
|
218
|
154
|
|||||
|
Materials
|
557
|
248
|
|||||
|
|
775
|
402
|
|||||
|
Total
current assets
|
10,036
|
7,940
|
|||||
|
|
|||||||
|
Other
long-term assets
|
16
|
10
|
|||||
|
Property,
plant and equipment (note 5):
|
|||||||
|
Unproved
properties
|
3,622
|
2,312
|
|||||
|
Proved
properties, net
|
5,401
|
3,211
|
|||||
|
|
9,023
|
5,523
|
|||||
|
Total
assets
|
$
|
19,075
|
13,473
|
||||
|
|
|||||||
|
|
|||||||
|
Liabilities
and Partners' Equity
|
|||||||
|
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
4,979
|
1,745
|
|||||
|
Tax
payable
|
1,326
|
826
|
|||||
|
Employee
benefits
|
103
|
88
|
|||||
|
Accrued
liabilities
|
522
|
375
|
|||||
|
Total
current liabilities
|
6,930
|
3,034
|
|||||
|
Long-term
accounts payable (note 6)
|
686
|
-
|
|||||
|
Deferred
income tax
|
475
|
223
|
|||||
|
Deferred
remmittance tax
|
1,104
|
714
|
|||||
|
Pension
plan (note 7)
|
-
|
35
|
|||||
|
Total
liabilities
|
9,195
|
4,006
|
|||||
|
Partners'
equity (note 8)
|
9,880
|
9,467
|
|||||
|
Total
liabilities and Partners' equity
|
$
|
19,075
|
13,473
|
See
accompanying notes to financial statements.
(Continued)
F-90
ARGOSY
ENERGY INTERNATIONAL, LP
Statements
of Cash Flows
Years
ended December 31, 2005 and 2004
(Expressed
in thousands of US dollars)
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
5,217
|
1,925
|
||||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
provided
by operating activities:
|
|||||||
|
Depreciation,
depletion and amortization
|
697
|
357
|
|||||
|
Bad
debt allowance
|
116
|
239
|
|||||
|
Deferred
income tax
|
352
|
245
|
|||||
|
Deferred
remittance tax
|
353
|
146
|
|||||
|
Pensions
|
24
|
59
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(1,669
|
)
|
(191
|
)
|
|||
|
Inventories
|
(373
|
)
|
339
|
||||
|
Accounts
payable
|
2,620
|
1,245
|
|||||
|
Tax
payable
|
500
|
|
716
|
|
|||
|
Employee
benefits
|
15
|
28
|
|||||
|
Accrued
liabilities
|
147
|
102
|
|||||
|
Deferred
income tax
|
(100
|
)
|
(4
|
)
|
|||
|
Deferred
remmittance tax
|
37
|
58
|
|||||
|
Net
cash provided by operating activities
|
7,936
|
5,264
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Increase
in long term investments
|
(65
|
)
|
(70
|
)
|
|||
|
Additions
to property, plant and equipment
|
(4,197
|
)
|
(748
|
)
|
|||
|
Net
cash used in investing activities
|
(4,262
|
)
|
(818
|
)
|
|||
|
|
|||||||
|
Cash
flows used in financial activities - Redemption of partnership
|
|||||||
|
interest
- Aviva Overseas Inc.
|
(3,504
|
)
|
-
|
||||
|
Net
increase in cash and cash equivalents
|
170
|
4,446
|
|||||
|
Cash
and cash equivalents at beginning of year
|
6,954
|
2,508
|
|||||
|
Cash
and cash equivalents at end of year
|
$
|
7,124
|
6,954
|
See
accompanying notes to financial statements.
(Continued)
F-91
ARGOSY
ENERGY INTERNATIONAL, LP
Statements
of Partners' Equity
Years
ended December 31, 2005 and 2004
(Expressed
in thousands of US dollars)
|
|
Limited
|
General
|
Total
|
|||||||
|
|
partners'
|
partners'
|
partners'
|
|||||||
|
|
capital
|
capital
|
equity
|
|||||||
|
|
||||||||||
|
Balance
as of December 31, 2003
|
$
|
7,504
|
38
|
7,542
|
||||||
|
Net
income
|
1,915
|
10
|
1,925
|
|||||||
|
Balance
as of December 31, 2004
|
9,419
|
48
|
9,467
|
|||||||
|
Net
income
|
5,180
|
37
|
5,217
|
|||||||
|
Redemption
of partnership interest -
|
||||||||||
|
Aviva
Overseas Inc. (note 6)
|
(4,789
|
)
|
(15
|
)
|
(4,804
|
)
|
||||
|
Balance
as of December 31, 2005
|
$
|
9,810
|
70
|
9,880
|
See
accompanying notes to financial statements.
(Continued)
F-92
|
ARGOSY
ENERGY INTERNATIONAL, LP
|
||||
|
|
||||
|
Notes
to Financial Statements
|
||||
|
|
||||
|
December
31, 2005 and 2004
|
||||
|
|
||||
|
(Expressed
in thousands of US dollars)
|
||||
(1) Business
Activities
Argosy
Energy International, LP is a Utah (USA) Limited Partnership, which
established
a Colombian Branch in 1983.
Argosy
Energy International, LP is engaged in the business of exploring for,
developing
and producing oil and gas. The principal properties and operations
are located
in Colombia, which are carried out through its Colombian Branch in
the Putumayo,
Cauca, Tolima and Cundinamarca Provinces. The oil production is sold
to Empresa
Colombiana de Petróleos, the Colombian National Oil Company, (“Ecopetrol”).
There
are
risks involved in conducting oil and gas activities in remote, rugged
and
primitive regions of Colombia. The guerrillas have operated within
Colombia for
many years and expose the Company’s operations to potentially detrimental
activities. The guerrillas are present in the Putumayo and Río Magdalena areas
where the Company's properties are located. Since 1998, the Company
has only
experienced minor attacks on pipelines and equipment.
Operations
As
of
December 31, 2005, Argosy was participating in the following Association
Contracts signed with Ecopetrol and Exploration and Exploitation Contracts
signed with the Hydrocarbons National Agency - ANH.
|
Contract
|
Participation
|
Operator
|
Phase
|
|||||||
|
Santana
|
35
|
%
|
ARGOSY
|
Exploitation
|
||||||
|
Guayuyaco
|
70
|
%
|
ARGOSY
|
Exploitation
|
||||||
|
Aporte
Putumayo
|
100
|
%
|
ARGOSY
|
Abandonment
|
||||||
|
Río
Magdalena
|
70
|
%
|
ARGOSY
|
Exploration
|
||||||
|
Talora
|
20
|
%
|
ARGOSY
|
Exploration
|
||||||
|
Chaza
|
50
|
%
|
ARGOSY
|
Exploration
|
The
first
four contracts have been signed with ECOPETROL and the last two with
ANH.
An
association contracts are those where the Government participate as
partner of
the field through the national oil company - ECOPETROL.
Exploration
and production contracts (E&P) are those signed with the ANH - “Agencia
Nacional de Hidrocarburos” (National Agency for Hydrocarbons) in which the
Government only receive royalties and taxes for the rights of exploration
and
production but there is not a participation from the national oil company
-
ECOPETROL or any other government entity.
(Continued)
F-93
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
The
main
terms of the above-mentioned contracts are as follows:
Santana
Association Contract
On
May
27, 1987 (effective date July 27, 1987), Argosy Energy International,
LP signed
this association contract to explore for and produce oil, in the
area called
Santana. The contract is in its 19th year and the Company reduced
the area to a
5 kilometer reserve area around each field. The remaining contract
area is
approximately 1,100 acres.
Under
the
terms of the contract with Ecopetrol, a minimum of 25% of all revenues
from oil
sold to Ecopetrol is paid in Colombian pesos, which may only be utilized
in
Colombia. However, this proportion can be modified through parties
agreement.
Aporte
Putumayo - Association Contract
The
Aporte Putumayo area has been returned to the Government. Such devolution
is
subject to the approval of the environmental restoration of the region
by the
Ministry of Environment and the treatment of the abandonment of the
wells agreed
with Ecopetrol and the Ministry of Mines.
Río
Magdalena Association Contract
On
December 10, 2001 (effective date February 8, 2002), Argosy Energy
International, LP and Ecopetrol signed this Association Contract,
to explore and
produce oil, in the area called Río Magdalena of approximately 145,000 acres,
located in the Middle Magdalena region of Colombia in the provinces
of
Cundinamarca and Tolima.
The
contract has a maximum duration of 28 years distributed as follows:
an
exploration period of 6 years and a production period of 22 years
starting on
the date of termination of the exploration period. The exploratory
well, Popa-1
was drilled during June and July and is on the completion stage.
Upon
finalization of each phase, Argosy has the option to cancel the contract
having
previously completed the obligations agreed for each phase.
BT
Letter Agreement
On
February 27, 2001 Argosy Energy International, LP signed a letter
agreement with
BT Operating Company for the acquisition and management of the Río Magdalena
Exploration Area. BT and Argosy mutually agreed to pay their 50%
share of costs
under the terms of the Ecopetrol Association contract and provide
certain
services toward management and compliance of the obligations. As
of December 31,
2005 BT had not met their obligations under this agreement and outstanding
accounts receivable of $355 related to their share of costs related
to the Río
Magdalena Association Contract were provisioned as bad debts.
(Continued)
F-94
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
Guayuyaco
Association Contract
On
August
2, 2002 (effective date September 30, 2002) Argosy Energy International,
LP
signed this association contract with Ecopetrol, to explore and
produce oil, in
the area named Guayuyaco. This Association contract gives Argosy
the right to
explore potential reserves in prospects adjacent to the existing
Santana oil
field. The block is located in the Putumayo and Cauca provinces
and covers
approximately 52.000 acres originally held under the Santana Risk
Sharing
Agreement.
The
Guayuyaco contract has a maximum duration of 27.5 years with an
exploration
period of 5.5 years and a production period of 22 years, which
starts upon
termination of the exploration period.
Argosy
has the obligation of carry out the exploration work in two phases,
which were
completed. In the first phase, the Branch drilled the Inchiyaco
-1 exploration
well which was successful. During the second exploration phase,
two wells were
drilled, Guayuyaco-1 and Guayuyaco-2, which were successful. Therefore,
on
December 28, 2005, Ecopetrol accepted the Commerciality of the
field.
Solana
Petroleum Exploration Commercial Agreement
Argosy
and Solana Petroleum Exploration entered into a commercial agreement
in 2003
whereby, Solana through fulfillment of certain obligations could
earn a
participating interest in the Inchiyaco Prospect and have an option
to enter the
next exploration prospect under the Guayuyaco Association Contract.
Inchiyaco-1
was drilled and completed as a producing well in 2003 resulting
in Solana’s
sharing 26.21% interest in Argosy’s net share of the prospect.
The
commercial agreement was revised in 2004, giving Solana the right
to share a 50%
interest in Argosy’s net share of the Guayuyaco association contract by paying
66.7% of two exploratory wells (Guayuyaco-1 and Juanambu-1) and
50% for a new
seismic program and additional projects.
Talora
Exploration and Exploitation Contract
On
September 16, 2004, (effective date), Argosy and the National Hydrocarbons
Agency (ANH) signed the Talora exploration and exploitation contract
to explore
and produce oil, in an area of approximately 108,000 acres located
in Tolima and
Cundinamarca Provinces.
The
contract has a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon the
date in which
Argosy receives the oil field commerciality declaration from
ANH.
(Continued)
F-95
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
Contractual
Commitments:
| Phase | Starting date | Obligations |
|
|
||
| 3 | December 16, 2006 | One exploratory well. |
| 4 | December 16, 2007 | One exploratory well. |
| 5 | December 16, 2008 | One exploratory well. |
| 6 | December 16, 2009 | One exploratory well. |
The
contract may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
Chaza Exploration and Exploitation Contract
On
June
27, 2005 (effective date) Argosy and the National Hydrocarbons
Agency (ANH)
signed the Chaza exploration and exploitation contract to explore
and produce
oil, in an area of approximately 80,000 acres located in Putumayo
and Cauca
Provinces.
The
contract has a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon the
date in which
Argosy receives the oil field commerciality declaration from ANH.
The
ANH
Resolution 0217, dated September 13, 2005, approved the 2005 assignment
of 50%
interest of the contract to Solana Petroleum Exploration.
Contractual
Commitments:
| Phase | Starting date | Obligations |
|
|
||
| 2 | June 27, 2006 | One exploratory well. |
| 3 | June 27, 2007 | One exploratory well. |
| 4 | December 16, 2008 | One exploratory well. |
| 5 | December 16, 2009 | One exploratory well. |
| 6 | December 16, 2010 | One exploratory well. |
The
contract may be relinquished at the end of each phase after fulfillment
of the
agreed obligations.
(Continued)
F-96
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(2) Summary
of Significant Accounting Policies and Practices
(a) Foreign
Currency Translation
The
transactions and accounts of the Company's operations denominated in
currencies
other than US dollars are re-measured into United States dollars in
accordance
with Statement of Financial Accounting Standards FAS 52. The United
States
dollar is used as the functional currency. Exchange adjustments resulting
from
foreign currency balances are recognized in expense or income in the
current
period.
(b) Cash
Equivalents
Cash
equivalents are highly liquid investments purchased with an original
maturity of
three months or less.
(c) Inventories
Inventories
consist of crude oil and materials and supplies and are stated at the
lower of
cost or market.
(d) Property,
Plant and Equipment
The
Company follows the full cost method to account for exploration and
development
of oil and gas reserves whereby all productive and nonproductive costs
are
capitalized. The only cost center is Colombia. All capitalized costs
plus the
undiscounted future development costs of proved reserves are depleted
using the
unit of production method based on total proved reserves applicable
to the
country.
Proved
oil and gas reserves are the estimated quantities of crude oil that
geological
and engineering data demonstrate with reasonable certainty can be recovered
in
future years from known reservoirs under existing economic and operating
conditions considering future production and development costs.
Costs
related to initial exploration activities with no proved reserves are
initially
capitalized and periodically evaluated for impairment. The Company
capitalizes
internal costs directly identified with exploration and development
activities.
The net capitalized costs of oil properties are subject to a ceiling
test, which
limits such pooled costs to the aggregate of the present value of future
net
revenues attributable to proved oil and gas reserves discounted at
10% plus the
lower of cost or market value of unproved properties. If capitalized
costs
exceed this limit, the excess is charged to expense and reflected as
additional
accumulated depreciation, depletion and amortization.
F-97
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
While
the
quantities of proved reserves require substantial judgment, the associated
prices of oil reserves that are included in the discounted present
value of our
reserves are objectively determined. The ceiling test calculation requires
use
of prices and costs in effect as of the last day of the accounting
period, which
are generally held constant for the life of the properties. As a result,
the
present value is not necessarily an indication of the fair value of
the
reserves. Oil and gas prices have historically been volatile and the
prevailing
prices at any given time may not reflect our Partnership’s or the industry’s
forecast of future prices.
Gain
or
loss on the sale or other disposition of oil and gas properties is
not
recognized, unless the gain or loss would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas attributable
to a
country.
Support
equipment and facilities are depreciated using the unit of production
method
based on total reserves of the field related to the support equipment
and
facilities.
(e) Environmental
Liabilities and Expenditures
Argosy
accrues for losses associated with environmental remediation obligations
when
such losses are probable and can be reasonably estimated. These accruals
are
adjusted as further information develops or circumstances change. Costs
of
future expenditures for environmental remediation obligations are not
discounted
to their present value.
(f)
Asset
Retirement Obligations
Liability
for asset retirement obligation is considered to be negligible at this
time,
based on projected production profiles, expiry dates and terms of the
Association Contracts for current operations. However, the Company
has accrued
the costs related to environmental remediation and abandonment of the
wells
belonging to Aporte Putumayo Contract.
(g) Concentration
of Credit Risks
All
of
the company’s production is sold to Ecopetrol in which the sale price is agreed
between both parts, according to local regulations in Colombia.
(h) Income
Taxes
Deferred
Income taxes are accounted for under the asset and liability method.
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 and
operating
loss.
F-98
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
Deferred
tax assets and liabilities are measured using 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 the enactment date.
(i) Financial
Instruments Fair Value
The
carrying amounts of cash and cash equivalents approximate fair value
because of
the short maturity of those instruments. The carrying value of other
on-balance-sheet financial instruments, approximates fair value, and
the cost,
if any, to terminate off-balance-sheet financial instruments is not
significant.
(j) Employee
Benefits
The
Company recognizes the obligations with its employees in accordance
with the
current Colombian labor law. These obligations include the severance
indemnity
and the legal service bonus each one equivalent to a monthly salary
per year and
interest on severance at the rate of 12% on the balance of severance
indemnities
paid. The relevant liability for these two concepts is shown under
the "Employee
benefits" account as current liabilities at the closing of the period.
(k) Defined
Benefit Pension Plan
The
Company has a defined benefit pension plan covering one employee. The
benefits
are based on years of service, age and the employee’s compensation. Currently,
the cost of this program is not being funded. The actuarial study is
performed
at the end of each year in accordance with the guidelines established
by FAS
87.
(l) Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosure of
contingent
assets and liabilities at the date of the financial statements and
reported
amounts of revenues and expenses during the reporting period.
(m)
Revenue
Recognition
The
Company recognizes revenue when the crude oil is delivered to
Ecopetrol.
Ecopetrol
pays the oil sales invoicing 25% in local currency and the 75% in US
Dollars,
according to the terms of the Oil Sales Contract executed between Ecopetrol
and
Argosy, through which the oil sale price is fixed, with expiration
dated
November 1, 2006.
F-99
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(n) Management
Fee
The
Company accounts for the management fees received from its partners
as operator
of the contracts as a less value of the operating costs.
(o)
Comprehensive
Income
For
each
period presented in the accompanying statements of income, comprehensive
income
and net income are the same amount.
(3) Cash
and Cash Equivalents
The
following is a summary of cash and cash equivalents as of December
31:
|
2005
|
2004
|
||||||
|
Held
in United States dollars
|
$
|
6,329
|
6,454
|
||||
|
Held
in Colombian pesos
|
394
|
185
|
|||||
|
Short-term
investments
|
401
|
315
|
|||||
|
$
|
7,124
|
6,954
|
|||||
(4) Accounts
Receivable
The
following is a summary of accounts receivable as of December 31:
|
2005
|
2004
|
||||||
|
Trade
|
$
|
675
|
81
|
||||
|
B.T.
Río Magdalena Agreement
|
355
|
239
|
|||||
|
Vendor
advances
|
172
|
60
|
|||||
|
Solana
joint account
|
-
|
324
|
|||||
|
Other
|
104
|
119
|
|||||
|
1,306
|
823
|
||||||
|
Less
allowance for bad debts
|
(355
|
)
|
(239
|
)
|
|||
|
$
|
951
|
584
|
|||||
F-100
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(5) Property,
Plant and Equipment
The
following is a summary of property, plant and equipment as of December
31:
|
2005
|
2004
|
||||||
|
Oil
properties:
|
|||||||
|
Unproved
|
$
|
3,622
|
2,312
|
||||
|
Proved
|
59,096
|
56,218
|
|||||
|
62,718
|
58,530
|
||||||
|
Less
accumulated depreciation, depletion,
|
|||||||
|
and
amortization
|
53,695
|
53,007
|
|||||
|
$
|
9,023
|
5,523
|
|||||
|
Capitalized
Cost Unproved
|
|||||||||
|
Excluded
From the Capitalized Cost Being
Amortized
|
|
Month
Anticipated
|
||||||||||||||||||||||
|
Exploration
Cost
|
Cost
Incurred
|
to
be included
|
||||||||||||||||||||
|
AFE
|
Contract
|
Detail
|
Dec-04
|
Dec-05
|
2004
|
2005
|
in
Amortization
|
|||||||||||||||
|
MARY
WELLWEST PROSPECT
|
Santana
|
Geological
& Geophysical Data
|
287
|
287
|
287
|
Dec-06
|
||||||||||||||||
|
MARY
WEST WELL TESTING
|
Santana
|
Geological
& Geophysical Data
|
93
|
93
|
93
|
Dec-06
|
||||||||||||||||
|
EXPL.
100% NEW PROJECTS
|
New
Projects
|
Geological
& Geophysical Data
|
253
|
363
|
253
|
110
|
Dec-06
|
|||||||||||||||
|
EXPL.
100% SANTANA
|
Guayuyaco
|
Geological
& Geophysical Data
|
1,044
|
1,044
|
1,044
|
Dec-06
|
||||||||||||||||
|
EXPL.
100% RIO MAGDALENA
|
Rio
Magdalena
|
Sesimic
Program
|
634
|
808
|
634
|
174
|
Mar-07
|
|||||||||||||||
|
TALORA
PROJECT
|
Talora
|
Seismic
Program
|
1
|
89
|
1
|
88
|
Sep-07
|
|||||||||||||||
|
SEISMIC
GUAYUYACO
|
Guayuyaco
|
Seismic
Program
|
0
|
431
|
431
|
Dec-06
|
||||||||||||||||
|
SEISMIC
CHAZA
|
Chaza
|
Seismic
Program
|
0
|
505
|
505
|
Sep-07
|
||||||||||||||||
|
POPA-1
WELL EXPLORATORY
|
Rio
Magdalena
|
Road
and Location Well
|
0
|
0
|
Mar-07
|
|||||||||||||||||
|
JUANAMBU-1
WELL EXPLORATORY
|
Guayuyaco
|
Road
and Location Well
|
0
|
2
|
2
|
Jun-07
|
||||||||||||||||
|
0
|
||||||||||||||||||||||
|
Total
Unproved Exploration Costs
|
2,312
|
3,622
|
2,312
|
1,310
|
||||||||||||||||||
All
capital excluded from capitalized cost being amortized relates to exploration
cost. No acquisition costs, development costs or capitalized interest
costs are
identified.
(6) Settlement
Agreement with Aviva Overseas Inc
Effective
August 19, 2005 Argosy Energy International, LP, Argosy Energy Corp.,
Crosby
Capital, LLC, and Aviva Overseas, Inc. entered into a settlement agreement
which
principal terms are as follows:
1.
The
parties agreed that the agreement is a negotiated resolution of various
disputes
between the parties.
2.
Aviva
Overseas, Inc. assigned and transferred all interests in the partnership,
corresponding to 29.6196%, to Argosy Energy International, LP as a
redemption of
such interests.
3.
Argosy
Energy International, LP is required to make the following payments
to Aviva
Overseas, Inc.: an initial cash payment of $300 as reimbursement to
Aviva
Overseas, Inc. for a portion of its cost incurred in connection with
the
disputes, a 90 day promissory note amounted to $3,050, a two year promissory
note in the amount of $1,125 (the “Note”, represented for 8 quarterly payments
of $153 beginning in November 2005, including interest at 8%), and
an additional
payment (described below) accrued in the amount of $329 as of the agreement
date. As of December 31, 2005, amounts outstanding under the agreement
include
$990 due on the Note and $310 accrued for the additional payment. The
outstanding amount is payable as follows: $614 in 2006 and $686 in
2007.
F-101
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
The
additional payment is calculated as follows: after the earlier of
i) The date
Argosy Energy makes final payment of the “Note”, or (ii) after the occurrence of
an event of default, Argosy shall make a payment in cash in an amount
equal to
(i) $56,250 multiplied by the numeric amount by which the average
daily closing
price of the New York Mercantile Exchange nearby month contract for
West Texas
Intermediate crude oil over the note term exceeds $55 per barrel,
reduced by
(ii) all interest paid by Argosy on the principal of the Note. The
additional
payment was recorded at the date of the settlement agreement based
on a
calculation of the required payment at that date.
Crosby
Capital, LLC has guaranteed the payments required by Argosy Energy
International, LP.
The
new
ownership percentages in Argosy Energy International L.P., after
the redemption
of the partnership interest held by Aviva Overseas Inc. is as
follows:
|
Partner
|
Interest
|
Type
of interest
|
|||||
|
Crosby
Capital L.L.C.
|
98.7491
|
%
|
Limited
Partner
|
||||
|
Argosy
Energy Corporation
|
0.7104
|
%
|
General
Partner
|
||||
|
Dale
E. Armstrong
|
0.4122
|
%
|
Limited
Partner
|
||||
|
Richard
S. McKnight
|
0.1283
|
%
|
Limited
Partner
|
||||
|
Total
|
100.0000
|
%
|
|||||
(7) Pension
Plan
Costs
of
the retirement plan are accrued based on various assumptions and
discount rates,
as described below. The actuarial assumptions used could change in
the near term
as a result of changes in expected future trends and other factors,
which
depending on the nature of the changes, could cause increases or
decreases in
the liabilities accrued.
The
components of pension cost as of December 31 are:
|
2005
|
2004
|
||||||
|
Interest
cost
|
$
|
34
|
31
|
||||
|
Expected
return of assets
|
(48
|
)
|
(30
|
)
|
|||
|
Amortization
of unrecognized net transition obligation
(asset)
|
3
|
3
|
|||||
|
Net
periodic pension cost
|
$
|
(11
|
)
|
4
|
|||
|
Changes
in plan assets:
|
|||||||
|
Fund
assets at beginning of year
|
300
|
232
|
|||||
|
Interest
earned
|
61
|
68
|
|||||
|
Fund
assets at end of year
|
$
|
361
|
300
|
F-102
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
|
2005
|
2004
|
||||||
|
Funded
status:
|
|||||||
|
Projected
benefit obligation
|
359
|
335
|
|||||
|
Assets
at fair value
|
361
|
300
|
|||||
|
Funded
status
|
2
|
(35
|
)
|
||||
|
Unrecognized
net transaction obligation remaining
|
31
|
32
|
|||||
|
Unrecognized
prior service cost
|
-
|
-
|
|||||
|
Adjustment
additional minimum liability
|
(2
|
)
|
(5
|
)
|
|||
|
Unrecognized
net loss or (gain)
|
(29
|
)
|
(27
|
)
|
|||
|
Prepaid
(unfunded accrued) pension cost
|
$
|
2
|
(35
|
)
|
The
Company’s fund asset to cover pension benefits is represented in a mutual
fund
amounting to $361 and $300, in 2005 and 2004, respectively.
|
2005
|
2004
|
||||||
|
Change
in benefit obligation
|
|||||||
|
Benefit
obligation at beginning of year
|
335
|
276
|
|||||
|
Interest
Cost
|
34
|
31 | |||||
|
Benefits
Paid
|
(24
|
) | (22 | ) | |||
|
Foreign
Currency Exchange
|
14
|
50
|
|||||
|
Total
Activity
|
24
|
59
|
|||||
|
Benefit
obligation at end of year
|
359
|
335
|
|||||
The
weighted-average assumptions used to determine benefit obligations
at December
31 are as follows:
|
2005
%
|
2004
%
|
||||||
|
|
|||||||
|
Discount
rate
|
9.3
|
10.5
|
|||||
|
Rate
of compensation increase
|
4.7
|
6.0
|
Estimated
future benefit payments are expected to be paid as follows:
|
Year
|
Amount
|
|||
|
2006
|
25
|
|||
|
2007
|
23
|
|||
|
2008
|
22
|
|||
|
2009
|
20
|
|||
|
2010
|
19
|
|||
|
2011-
2016
|
250
|
No
expected contributions will be made to the plan during the year
2006.
F-103
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(8) Equity
Stockholders’
Capital
The
following is a detail of the stockholders’ participation in the
capital:
|
Stockholders
|
2005
%
|
2004
%
|
|||||
|
|
|||||||
|
Crosby
Capital L.L.C.
|
98.75
|
69.50
|
|||||
|
Argosy
Energy Corp. .**
|
0.71
|
0.50
|
|||||
|
Aviva
Overseas, Inc
|
-
|
29.62
|
|||||
|
Dale
E. Armstrong
|
0.41
|
0.29
|
|||||
|
Richard
S. McKnight
|
0.13
|
0.09
|
|||||
|
100.00
|
100.00
|
**
Argosy
Energy Corp. is a general partner interest. All others are limited
partnership
interests. Net income is allocated according to the participation
of each
stockholder in the Company’s capital.
Foreign
Exchange Restrictions
In
accordance with current legislation in Colombia, the branches of
foreign
companies in the oil industry are not under the obligation to refund
to the
Colombian exchange market the proceeds from their foreign currency
sales either
inside or outside the country. The net proceeds from oil exports
may be used by
the branches of oil companies to reimburse abroad the capital and
profits from
the operation in Colombia. As a result of this foreign exchange liberation,
the
branch cannot purchase foreign currency in the Colombian exchange
market to
remit profits, repatriate capital, repay external debt or pay foreign
currency
expenses.
(9) Operating
Cost
The
following is a summary of operating cost incurred as of December
31:
|
2005
|
2004
|
||||||
|
Direct
labor
|
$
|
383
|
316
|
||||
|
Maintenance,
materials and lubricants
|
417
|
417
|
|||||
|
Repairs
- third party
|
700
|
752
|
|||||
|
General
expenses - others
|
952
|
575
|
|||||
|
$
|
2,452
|
2,060
|
F-104
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(10)
Other
Income and Expenses, net
The
following is a summary of other income and expenses, net as of
December
31:
|
2005
|
2004
|
||||||
|
Oil
transportation
|
$
|
18
|
146
|
||||
|
Financial
income
|
171
|
65
|
|||||
|
Insurance
reimbursement
|
126
|
-
|
|||||
|
Other
income
|
217
|
162
|
|||||
|
Foreign
translation gain (loss)
|
33
|
(148
|
)
|
||||
|
Allowance
for bad debts
|
(116
|
)
|
-
|
||||
|
$
|
449
|
225
|
(11) Income
Taxes
All
of
the income and income tax was derived from activities of the branch
in
Colombia.
Deferred
Remittance Tax
Deferred
remittance tax is calculated based upon commercial net income.
Commercial net
income of Colombian branches of foreign companies derived from
exploration,
development or production of hydrocarbons is levied an additional
remittance tax
of 7%.
The
law
establishes that when this income is reinvested in the country
for five years,
the payment of the remittance tax will be deferred, after which
time the payment
of this tax will be exonerated.
Under
the
law, reinvestment occurs when the net income remains five years
within the
equity of the entity.
Tax
reconciliation
Income
tax expense attributable to income from continuing operations
was $2,892 and
$1,417 for the years ended December 31, 2005 and 2004, respectively,
and
differed from the amounts computed by applying the Colombian
income tax rate of
35% (the statutory tax rate of the partnership’s Branch) to pretax income from
continuing operations as a result of the following:
|
2005
|
2004
|
||||||||||||
|
|
Basis
Amount %
|
|
Basis
Amount %
|
||||||||||
|
Income
before taxes
|
$
|
8,109
|
100.00
|
3,342
|
100.00
|
||||||||
|
Computed
“Expected” tax expense
|
2,838
|
35.00
|
1,170
|
35.00
|
|||||||||
|
Tax
expense
|
2,892
|
35.66
|
1,417
|
42.40
|
|||||||||
|
Difference
|
$
|
54
|
0.66
|
247
|
7.40
|
||||||||
F-105
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
|
2005
|
2004
|
||||||||||||||||||
|
Basis
|
|
Amount
|
%
|
Basis
|
Amount
|
%
|
|||||||||||||
|
Explanation:
|
|||||||||||||||||||
|
Difference
in principles
|
$
|
(593
|
)
|
(207
|
)
|
(2.56
|
)
|
(49
|
)
|
(17
|
)
|
(0.51
|
)
|
||||||
|
Surcharge
tax (10%)
|
199
|
2.45
|
93
|
2.79
|
|||||||||||||||
|
Remittance
tax expense (7%)
|
353
|
4.35
|
146
|
4.37
|
|||||||||||||||
|
Inflation
adjustment
|
(53
|
)
|
(19
|
)
|
(0.23
|
)
|
(21
|
)
|
(7
|
)
|
(0.22
|
)
|
|||||||
|
No
deductible expense
|
32
|
11
|
0.14
|
16
|
6
|
0.17
|
|||||||||||||
|
No
deductible tax (Stamp tax)
|
130
|
46
|
0.56
|
57
|
20
|
0.60
|
|||||||||||||
|
Assessments
to financial
|
|||||||||||||||||||
|
movements
|
45
|
16
|
0.19
|
13
|
4
|
0.13
|
|||||||||||||
|
Equity
tax
|
25
|
9
|
0.11
|
31
|
11
|
0.33
|
|||||||||||||
|
Deduction
fixed real productive
|
|||||||||||||||||||
|
assets
|
(1,014
|
)
|
(355
|
)
|
(4.38
|
)
|
|||||||||||||
|
Income
not taxable
|
4
|
1
|
0.03
|
(23
|
)
|
(9
|
)
|
(0.26
|
)
|
||||||||||
|
$
|
|
54
|
0.66
|
247
|
7.40
|
||||||||||||||
|
The
deferred tax is the following:
|
|
2005
|
2004
|
||||||
|
Accrued
liabilities
|
$
|
201
|
183
|
||||
|
Property,
plant and equipment
|
(676
|
)
|
(406
|
)
|
|||
|
Net
deferred tax liability
|
$
|
(475
|
)
|
(223
|
)
|
||
|
Roll
forward of deferred taxes:
|
|||||||
|
Net
deferred tax to December 31:
|
|||||||
|
Beginning
balance
|
223
|
(18
|
)
|
||||
|
Increase
in year
|
352
|
245
|
|||||
|
Translation
|
(100
|
)
|
(4
|
)
|
|||
|
$
|
475
|
223
|
|||||
In
assessing the realizability of deferred tax assets, management
considers whether
it is more likely than not some portion or all of the deferred
tax assets will
not be realized. The ultimate realization of deferred tax assets
is dependent
upon the generation of future taxable income during the periods
in which those
temporary differences become deductible and tax carryforwards
utilizable.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies
in making this
assessment. Based upon the level of historical taxable income
and projections
for future taxable income over the periods in which the deferred
tax assets are
deductible, management believes it is more likely than not that
the branch will
realize the benefits of these deductible differences, net of
the existing
valuation allowances at December 31, 2005 and 2004. The amount
of the deferred
tax asset considered realizable, however, could be reduced in
the near term if
estimates of future taxable income during the carryforward period
are reduced.
F-106
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
Major
Changes Introduced by Law 863 (December 29, 2003)
| 1) |
An
equity tax was created for fiscal years 2004, 2005
and 2006. Such tax must
be liquidated applying at 0.3 % over the net equity
at January
1st
of
each year. This applies to equities of 3.000 millions
pesos in 2004, 3.183
millions pesos in 2005 and 3.344 millions pesos in
2006.
|
| 2) |
The
financial transaction tax increased from 3 per thousand
to 4 per thousand
and it is applicable through the year
2007.
|
| 3) |
Paid
taxes are not deductible except for 80% of industrial
and commercial and
property Taxes.
|
| 4) |
The
10% income tax surcharge (3.5%) is applicable for years
2003 through 2006.
This payment is not deductible for tax
purposes.
|
(12) Disagreement
Between Argosy Energy International and Ecopetrol
As
of
December 31, 2005 the contracting parties of the Guayuyaco
Association Contract,
Ecopetrol and Argosy, consulted with their legal advisors to
clarify the
procedure for allocation of oil produced and sold during the
long-term test of
the Guayuyaco-1 and Guayuyaco-2 wells. Ecopetrol has advised
Argosy of a
material difference in the interpretation of the procedure
established in Clause
3.5 of Attachment-B to the Guayuyaco Association Contract.
Ecopetrol interprets
the contract to provide that the extended test production up
to a value equal to
30% of the direct exploration costs of the wells is for Ecopetrol’s account only
and serves as reimbursement of its 30% back-in to the Guayuyaco
discovery.
Argosy’s contention is that this amount is merely the recovery of
30% of the
direct exploration costs of the wells and not exclusively for
the benefit of
Ecopetrol. While Argosy believes its interpretation of the
Guayuyaco Association
Contract is correct, the resolution of this issue is pending
agreement of the
parties or determination through legal proceedings. At this time no amount
has been accrued in the financial statements as it is not considered
probable
that a loss will be incurred.
The
estimated value of the disputed production is US$2,361,188,
which possible loss
is shared 50% (US$1,180,594) with the Argosy’s Guayuyaco partner, Solana
Petroleum Exploration (Colombia) S.A.
F-107
ARGOSY
ENERGY INTERNATIONAL, LP
Notes
to
Financial Statements
(13) Subsequent
Events
| • |
The
Company signed in May and June, 2006 two new exploration
and production
contracts with the National Hydrocarbons Agency (ANH)
called Primavera and
Mecaya, to explore and produce oil, respectively.
|
These
contracts have a maximum duration of 30 years with an exploration
period of 6
years and a production period of 24 years, which starts upon
the date in which
Argosy receives the oil field commerciality declaration from
ANH.
The
contracts may be relinquished at the end of each phase after
fulfillment of the
agreed obligations.
| • |
On
April 1, 2006 the partners of the partnership entered
into a redemption
agreement pursuant to which all of Dale E. Armstrong
interest and Richard
S. McKnight interest.
|
| • |
On
June 21, 2006 Gran Tierra Energy Inc. acquired all
of the outstanding
partnership interest in the Company.
|
F-108
Supplemental
Oil and Gas Information (Unaudited)
The
following tables set forth Argosy´s net interests in quantities of proved
developed and undeveloped reserves of crude oil. Crude oil
reserves represent
the Argosy-own oil reserves projected for properties located
in Colombia. The
reserves are stated after applicable royalties. These estimates
include reserves
in which Argosy holds an economic interest under production-sharing
contracts.
The studies to estimated proved oil reserves for the years
2003, 2004 and 2005
were prepared by Huddleston & Co., Inc.
In
accordance with SFAS No. 69 and Securities and Exchange Commission (“SEC”)
rules and regulations, the following information is presented
with regard oil
proved reserves, all of which are located in Colombia. These
rules require
inclusion as a supplement to the basic financial statements
a standardized
measure of discounted future net cash flows relating to proved
oil and gas
reserves. The standardized measure, in management’s opinion, should be examined
with caution. The bases for these disclosures are independent
petroleum
engineer’s reserve studies which contains imprecise estimates of quantities
and
rates of production of reserves. Revision of prior year estimates
can have a
significant impact on the results. Also, exploration and
production improvement
costs in one year may significantly change previous estimates
of proved reserves
and their valuation. Values of unproved properties and anticipated
future price,
and cost increases or decreases are not considered. Therefore,
the standardized
measure is not necessarily a “best estimate” of the fair value of oil and gas
properties or of future net cash flows.
F-109
|
I-Oil
Reserves Information
|
|||||||
|
(In
barrels)
|
|||||||
|
Proved
Developed and Undeveloped Reserves
|
|||||||
|
Balance
at December 31, 2003
|
1,845,654
|
||||||
|
Revision
of previous estimates
|
168,766
|
||||||
|
Improved
recovery
|
-
|
||||||
|
Purchases
of proved reserves
|
-
|
||||||
|
Extension
and discoveries
|
-
|
||||||
|
Production
|
(197,027
|
)
|
|||||
|
Sales
|
-
|
||||||
|
Balance
at December 31, 2004
|
1,817,393
|
||||||
|
Revision
of previous estimates
|
(18,936
|
)
|
|||||
|
Improved
recovery
|
-
|
||||||
|
Purchases
of proved reserves
|
-
|
||||||
|
Extension
and discoveries
|
822,007
|
||||||
|
Production
|
(283,795
|
)
|
|||||
|
Sales
|
-
|
||||||
|
Balance
at December 31, 2005
|
2,336,669
|
||||||
|
Proved
developed reserves
|
|||||||
|
December
31, 2004
|
1,817,393
|
||||||
|
December
31, 2005
|
2,336,669
|
||||||
F-110
|
II-
Capitalized
Costs Relating to Oil And Gas Producing
Activities
|
|||||
|
(In
thousands)
|
|||||
|
As
of December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Oil
& gas properties:
|
|||||||
|
Unproved
|
$
|
3,622
|
2,312
|
||||
|
Proved
|
59,096
|
56,218
|
|||||
|
Accumulated
depreciation, depletion and amortization
|
(53,695
|
)
|
(53,007
|
)
|
|||
|
Net
capitalized costs
|
$
|
9,023
|
5,523
|
||||
|
III-
Cost Incurred in Oil And Gas Property Acquisition,
|
|||||
|
Exploration
and Development Activities
|
|||||
|
(In
thousands)
|
|||||
|
For
the year ended
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Property
acquisitions costs
|
$
|
-
|
-
|
||||
|
Exploration
costs
|
1,310
|
405
|
|||||
|
Development
costs
|
2,878
|
45
|
|||||
|
Costs
incurred
|
$
|
4,188
|
450
|
||||
F-111
|
IV- Results
of operations for producing
activities
|
|||||||
|
(In
thousands)
|
|||||||
|
For
the year ended
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Revenues
- Oil sales
|
$
|
11,891
|
6,393
|
||||
|
Production
costs
|
(2,452
|
)
|
(2,060
|
)
|
|||
|
Depreciation,
depletion and amortization
|
(697
|
)
|
(357
|
)
|
|||
|
Income
tax expenses
|
(2,892
|
)
|
(1,417
|
)
|
|||
|
Results
of operations
|
$
|
5,850
|
2,559
|
||||
|
V- Standardized
Measure of Discounted Future Net Cash Flows
|
|||||
|
(In
thousands)
|
|||||
|
As
of December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Future
cash inflows
|
$
|
112,721
|
64,626
|
||||
|
Future
production and development costs
|
(26,756
|
)
|
(21,553
|
)
|
|||
|
Future
income tax expense
|
(31,844
|
)
|
(15,952
|
)
|
|||
|
Future
net cash flows
|
54,121
|
27,121
|
|||||
|
10%
Annual discount factor
|
(15,688
|
)
|
(8,188
|
)
|
|||
|
Standardized
measure
|
$
|
38,433
|
18,933
|
||||
F-112
|
Changes
in the Standardized Measure of Discounted Future
|
||||
|
Net
Cash Flows From Proved Reserve Quantities During
2005
|
||||
|
Balance
as of December 31, 2004
|
$
|
18,933
|
||
|
Sales
and transfers of oil and gas produced, net of production
costs
|
(9,439
|
)
|
||
|
Net
changes in prices and production costs
|
20,115
|
|||
|
Extensions,
discoveries and improved recover, net of related costs
|
25,626
|
|||
|
Development
costs incurred during the period
|
0
|
|
||
|
Revision
of previous quantity estimates
|
(702
|
)
|
||
|
Accretion
of discount
|
1,175
|
|
||
|
Net
change in income taxes
|
(15,892
|
)
|
||
|
Other
|
(1,383
|
)
|
||
|
Balance
as of December 31, 2005
|
$
|
38,433
|
||
F-113
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors of Dong Won Corporation and Gran Tierra Energy
Inc.
We
have
audited the accompanying schedule of revenues, royalties and operating
cost (the
“financial statements”) corresponding to the 14% interest in the Palmar Largo
joint venture (representing the 14% working interest acquired by Gran
Tierra
Energy Inc. through its wholly owned subsidiary Gran Tierra Energy
Argentina
S.A. in the “YPF S.A. - Pluspetrol S.A. - Compañía General de Combustibles S.A.
- Dong Won Corporation - Palmar Largo Unión Transitoria de Empresas” (the
“Palmar Largo joint venture”)) for the eight-month period ended August 31, 2005
(the “Schedule of Revenues, Royalties and Operating Cost”). The Schedule of
Revenues, Royalties and Operating Cost is the responsibility of Dong
Won
Corporation’s management. Our responsibility is to express an opinion on this
Schedule of Revenues, Royalties and Operating Cost based on our
audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. Dong Won Corporation
is not
required to have, nor were we engaged to perform, an audit of their
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 purposes of expressing
an
opinion on the effectiveness of Dong Won Corporation'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. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statements presentation. We believe
that our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements present fairly, in all material respects,
the
revenues, royalties and operating cost corresponding to the 14% interest
in the
Palmar Largo joint venture on the basis of accounting described in
Notes 1 and 2
for the eight-month period ended August 31, 2005, in conformity with
accounting
principles generally accepted in the United States of America.
Buenos
Aires, Argentina
November
7, 2005
Deloitte
& Co. S.R.L.
/s/
Ricardo C. Ruiz
Ricardo
C. Ruiz
Partner
F-114
Schedule
of Revenues, Royalties and Operating Cost corresponding to the 14%
interest
in the Palmar Largo joint venture for the eight-month period ended
August
31, 2005 (audited) (Note 1)
(Amounts expressed in U.S. Dollars - Note 2)
|
Eight-month
period ended
|
||||
|
August
31, 2005
|
||||
|
Revenues
|
2,913,532
|
|||
|
Royalties
|
(353,228
|
)
|
||
|
Operating
costs
|
(1,081,085
|
)
|
||
|
1,479,219
|
||||
F-115
Schedule
of Revenues, Royalties and Operating Cost corresponding to the 14%
interest
in the Palmar Largo joint venture for the eight-month period ended
August
31, 2005 (audited)
1.
Basis
of Presentation.
The
accompanying Schedule of Revenues, Royalties and Operating Cost includes
the
revenues, royalties and operating cost for the eight-month period ended
August
31, 2005, corresponding to the 14% working interest in the “YPF S.A. -
Pluspetrol S.A. - Compañía General de Combustibles S.A. - Dong Won Corporation -
Palmar Largo Unión Transitoria de Empresas” (the “Palmar Largo joint venture”)
acquired on September 1, 2005 by Gran Tierra Energy Inc. through its
wholly
owned subsidiary Gran Tierra Energy Argentina S.A. from Dong Won Corporation.
The Schedule of Revenues, Royalties and Operating Cost does not include
any cost
related to indirect general and administrative costs, income and capital
taxes
or any provisions related to depletion, depreciation or asset retirement
obligation.
The
Palmar Largo joint venture was formed on November 24, 1992 under the
method
foreseen in Chapter III, Section II of Argentine Law No. 19.550 (volume
1984 and
their modifications). The Palmar Largo joint venture aims at exploring,
exploiting and developing the hydrocarbons of the “Palmar Largo” Area.
On
December 18, 1992, by Decree 2.444/92 of the Argentine Federal Executive,
the
production and exploration concession corresponding to “Palmar Largo” Area -
Northwest Basin- Provinces of Salta and Formosa offered by the International
Public Bidding No 14-280/92 was awarded to Y.P.F S.A., Pluspetrol Exploración y
Producción S.A., Norcen Argentina S.A., Compañía General de Combustibles S.A.
and Dong Won Co Ltd. According to Argentine laws, production concessions
have a
term of 25 years, which may be extended for an additional ten-year
term, in
accordance with the corresponding applicable legislation.
The
concession is managed through the joint venture´s partners through a
formal
joint venture operating agreement.
After
giving effect to the acquisition of the 14% interest in the Palmar
Largo joint
venture by Gran Tierra Energy Argentina S.A. as mentioned in the first
paragraph, the interest of each of the companies making up the joint
venture are
as follows: YPF S.A.: 30%, Pluspetrol S.A. (joint venture’s Operator): 38.15%,
Compañía General de Combustibles S.A.: 17.85% and Gran Tierra Energy Argentina
S.A.: 14%.
Since
the
Palmar Largo joint venture's partners are the holders of the hydrocarbons
produced in the Palmar Largo area, each of them withdraws the production
that
the Operator assigns in the measurement and delivery point.
The
accompanying schedule of revenues, royalties and operating cost only
represents
the revenues, royalties and operating cost corresponding to the Palmar
Largo
joint venture's production assigned to and commercialized by Dong Won
Corporation for the eight-month period ended August 31, 2005, representing
its
14% interest in the Palmar Largo joint venture's assigned production
for such
period.
F-116
Schedule
of Revenues, Royalties and Operating Cost corresponding to the 14%
interest
in the Palmar Largo joint venture for the eight-month period ended
August
31, 2005 (audited)
2.
Significant
Accounting Policies
The
schedule of revenues, royalties and operating cost has been prepared
in
accordance with generally accepted accounting principles in the United
States of
America (“U.S. GAAP”) as follows:
Revenues
|
Revenues
from the sale of product are recognized upon delivery to
purchasers.
|
Royalties
|
A
12% royalty is payable on the estimated value at the wellhead
of crude oil
production and the natural gas volumes commercialized.
The estimated value
is calculated based upon the actual sale price of the crude
oil and gas
produced, less the costs of transportation and storage.
|
Operating
cost
Operating
cost includes amounts incurred on extraction of product to the surface,
gathering, field processing, treating, field storage and
transportation.
Translation
to U.S. dollars
|
In
preparing the Schedule of Revenues, Royalties and Operating
Cost, the
results have been translated from Argentine pesos to U.S.
dollars using
the average exchange rate for the eight-month period ended
August 31,
2005. The average exchange rates from Argentine pesos to
U.S. dollars was
Argentine peso 2.9015 to U.S. dollar for the eight-month
period ended
August 31, 2005.
|
F-117
|
RESERVES
QUANTITY INFORMATION
|
||||
|
FOR
THE PERIOD ENDED AUGUST 31, 2005
|
||||
|
Proved
developed and undeveloped reserves:
|
||||
|
Beginning
of year, January 1, 2005
|
733,857
|
|||
|
Revisions
of previous estimates
|
(37,381
|
)
|
||
|
Production
|
(80,091
|
)
|
||
|
|
|
|||
|
End
of year, August 31, 2005*
|
616,385
|
|||
|
Proved
Developed Reserves:
|
||||
|
Beginning
of year, January 1, 2005
|
577,321
|
|||
|
End
of year, August 31, 2005*
|
497,585
|
|||
|
*Denotes
the date at which Gran Tierra Energy purchased the assets
of Palmar
Largo.
|
||||
STANDARDIZED
MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES
AT
AUGUST 31, 2005
|
Palmar
Largo
|
||||
|
Future
Cash Inflows*
|
27,000,420
|
|||
|
Future
Production and Development Costs*
|
(14,226,418
|
)
|
||
|
Future
Income Tax Expense*
|
(1,080,530
|
)
|
||
|
Future
Net Cash Flows
|
11,693,472
|
|||
|
10%
annual discount for estimated timing of cash flows
|
(3,476,304
|
)
|
||
|
Standardized
Measure of discounted future net cash flows
|
8,217,168
|
|||
The
following are the principal sources of change in the standardized measure
of
discounted future net cash flows during 2005:
|
Sales
and transfers of oil and gas produced, net of production
costs
|
(1,848,790
|
)
|
||
|
Net
changes in prices, volumes and production costs
|
2,590,816
|
|||
|
Extentions,
discoveries and improved recovery, less related costs
|
656,101
|
|||
|
Accretion
of Discount
|
902,368
|
|||
|
Net
change in income taxes
|
(1,429,504
|
)
|
||
|
Total
Explained Variance
|
870,991
|
|||
*
Future net cash flows were computed using year-end prices and costs,
and
year-end statutory tax rates (adjusted for permanent differences) that
relate to
existing proved oil and gas reserves in which the enterprise has mineral
interests, including those mineral interests related to long-term supply
agreements with governments for which the enterprise serves as the
producer of
the reserves.
F-118
Report
of
Independent Registered
Public
Accounting Firm
To
the
Board of Directors of
Dong
Won
Corporation and Gran Tierra Energy Inc.
We
have
audited the accompanying schedule of revenues, royalties and operating
cost (the
"financial statements") corresponding to the 14% interest in the
Palmar Largo
joint venture (representing the 14% working interest acquired by
Gran Tierra
Energy Inc. through its wholly owned subsidiary Gran Tierra Energy
Argentina
S.A. in the "YPF S.A. - Pluspetrol S.A. - Compania General de Combustibles
S.A.
- Dong Won Corporation - Palmar Largo Union Transitoria de Empresas"
(the
"Palmar Largo joint venture")) for the years ended December 31, 2004
and 2003
(the "Schedule of Revenues, Royalties and Operating Cost"). The Schedule
of
Revenues, Royalties and Operating Cost is the responsibility of Dong
Won
Corporation's management. Our responsibility is to express an opinion
on this
Schedule of Revenues, Royalties and Operating Cost 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 the audit to obtain reasonable assurance about whether
the financial
statement is free of material misstatement. Dong Won Corporation
is not required
to have, nor were we engaged to perform, an audit of their internal
control over
financial reporting. Our audits 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 purposes of expressing
an
opinion on the effectiveness of Dong Won Corporation'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 statement. An audit also includes 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, the financial statement presents fairly, in all material
respects, the
revenues, royalties and operating cost corresponding to the 14% interest
in the
Palmar Largo joint venture on the basis of accounting described in
Notes 1 and 2
for the years ended December 31, 2004 and 2003, in conformity with
accounting
principles generally accepted in the United States of America.
Buenos
Aires, Argentina
November
7, 2005
Deloitte
& Co. S.R.L.
/s/Ricardo
C. Ruiz
Ricardo
C. Ruiz
Partner
F-119
Schedule
of Revenues, Royalties and Operating Cost corresponding to the
14% interest
in
the Palmar Largo joint venture for the years ended December 31,
2004 and 2003
(audited) and
for
the
six months ended June 30, 2005 and 2004 (unaudited) (Note
1)
|
(Amounts
expressed in U.S. Dollars - Note
2)
|
|
Six-month
period ended
|
Year
ended
|
||||||||||||
|
June
30, 2005
|
June
30, 2004
|
2004
|
2003
|
||||||||||
|
(unaudited)
|
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
|
Revenues
|
2,065,587
|
2,036,454
|
4,703,136
|
4,422,688
|
|||||||||
|
Royalties
|
(258,716
|
)
|
(239,111
|
)
|
(492,535
|
)
|
(457,293
|
)
|
|||||
|
Operating
costs
|
(837,524
|
)
|
(635,088
|
)
|
(1,424,152
|
)
|
(1,297,260
|
)
|
|||||
|
969,347
|
1,162,255
|
2,786,449
|
2,668,135
|
||||||||||
F-120
Schedule
of Revenues, Royalties and Operating Cost corresponding to the 14%
interest
in
the Palmar Largo joint venture for the years ended December 31, 2004
and 2003
(audited) and
for
the
six months ended June 30, 2005 and 2004 (unaudited)
1.
Basis
of
Presentation
The
accompanying Schedule of Revenues, Royalties and Operating Cost includes
the
revenues, royalties and operating costs for the years ended December
31, 2004
and 2003 and
for
the six months ended June 30, 2005 and
2004
(unaudited), corresponding to the 14% working interest in the “YPF
S.A. –
Pluspetrol
S.A. –
Compañía
General de
Combustibles S.A. –
Dong
Won
Corporation -
Palmar
Largo Unión
Transitoria de Empresas”
(the “Palmar Largo joint venture”)
acquired on
September 1,
2005
by Gran Tierra Energy Inc. through
its wholly owned subsidiary Gran Tierra Energy Argentina S.A. from
Dong
Won Corporation. The Schedule
of Revenues, Royalties and Operating Cost does not include any cost
related to
indirect general and administrative costs, income and capital taxes
or any
provisions related to depletion, depreciation or asset retirement
obligation.
The
interim financial information for the six months ended June 30, 2005
and 2004 is
unaudited and has been prepared
on the same basis as the audited financial statement. In
the
opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation
of the interim information. The results for the six months ended
June 30, 2005 are not necessarily indicative of the results that
may be expected
for the year ending December 31, 2005.
The
Palmar Largo joint venture was formed on November 24, 1992 under
the
method
foreseen in Chapter III, Section II of Argentine Law No. 19.550
(volume
1984 and their modifications). The Palmar Largo joint venture aims
at
exploring, exploiting and developing the hydrocarbons of the “Palmar
Largo”
Area.
On
December 18, 1992, by Decree 2.444/92 of the Argentine Federal Executive,
the
production and exploration concession
corresponding to “Palmar Largo” Area - Northwest Basin - Provinces of Salta and
Formosa offered by the International Public Bidding No. 14-280/92
was awarded to
Y.P.F., S.A., Pluspetrol
Exploración
y
Producción S.A., Norcen Argentina S.A., Compañía
General de
Combustibles S.A.
and
Dong Won Co. Ltd. According
to Argentine laws, production concessions have a term of 25 years,
which may be
extended for an additional ten-year term, in accordance with the
corresponding
applicable legislation.
The
concession is managed through the joint venture’s partners through a
formal
joint venture operating agreement.
After given effect to the acquisition of the 14% interest in the
Palmar
Largo joint venture by Gran Tierra
Energy Argentina S.A. as
mentioned
in the first paragraph, the interest of each of the companies making
up
the
joint venture are as follows: YPF S.A.: 30%,
Pluspetrol S.A. (joint venture's Operator): 38.15%, Compañía
General de
Combustibles S.A.: 17.85% and Gran Tierra Energy Argentina S.A.:
14%.
Since
the
Palmar Largo joint venture’s partners are the holders of the hydrocarbons
produced
in the Palmar Largo
area, each of them withdraws the production that the Operator assigns
in the
measurement and delivery point.
The
accompanying schedule of revenues, royalties and operating cost only
represents
the revenues, royalties and operating cost corresponding to the Palmar
Largo
joint venture’s production assigned to and commercialized by Dong
Won
Corporation for the years ended December 31, 2004 and 2003 and
for
the six months ended June 30, 2005
and
2004 (unaudited), representing its 14% interest in the Palmar Largo
joint
venture’s
assigned
production for
such
years.
F-121
Schedule
of Revenues, Royalties and Operating Cost corresponding to the
14% interest
in
the Palmar Largo joint venture for the years ended December 31,
2004 and 2003
(audited) and
for
the
six months ended June 30, 2005 and 2004 (unaudited)
2.
Significant Accounting Policies
The
schedule of revenues, royalties and operating cost has been prepared
in
accordance with generally accepted accounting principles in the
United States of
America (“U.S. GAAP”) as follows:
Revenues
Revenues
from the sale of product are recognized upon delivery to
purchasers.
Royalties
A
12%
royalty is payable on the estimated value at the wellhead of crude
oil
production and the natural gas volumes commercialized. The estimated
value is
calculated based upon the actual sale price of the crude oil and gas produced,
less the costs of transportation and storage.
Operating
cost
Operating
cost include amounts incurred on extraction of product to the surface,
gathering, field processing, treating, field storage and
transportation.
Translation
to U.S. dollars
In
preparing the Schedule of Revenues, Royalties and Operating Cost,
the results
have been translated from Argentine pesos to U.S. dollars using
the average
exchange rate for each year. The average exchange rates from Argentine
pesos to
U.S. dollars were Argentine peso 2.9416 and 2.9492 to U.S. dollar
for the years
ended December 31, 2004 and 2003, respectively and Argentine peso
2.9108 and
2.9069 to U.S. dollar for the six months ended June 30, 2005 and
2004,
respectively.
F-122
|
RESERVES
QUANTITY INFORMATION
|
||||
|
FOR
THE PERIOD ENDED DECEMBER 31, 2004
|
||||
|
Proved
developed and undeveloped reserves:
|
||||
|
Beginning
of year, January 1, 2004
|
868,477
|
|||
|
Revisions
of previous estimates
|
||||
|
Production
|
(134,620
|
)
|
||
|
|
|
|||
|
End
of year, December 31, 2004
|
733,857
|
|||
|
Proved
Developed Reserves:
|
||||
|
Beginning
of year, January 1, 2004
|
711,941
|
|||
|
End
of year, December 31, 2004
|
577,321
|
|||
STANDARDIZED
MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES
AT
DECEMBER 31, 2004
|
Palmar
Largo
|
||||
|
Future
Cash Inflows*
|
22,909,244
|
|||
|
Future
Production and Development Costs*
|
(13,469,358
|
)
|
||
|
Future
Income Tax Expense*
|
348,974
|
|||
|
Future
Net Cash Flows
|
9,788,860
|
|||
|
10%
annual discount for estimated timing of cash flows
|
(2,442,683
|
)
|
||
|
Standardized
Measure of discounted future net cash flows
|
7,346,177
|
|||
The
following are the principal sources of change in the standardized
measure of
discounted future net cash flows during 2004:
|
Sales
and transfers of oil and gas produced, net of production
costs
|
(369,103
|
)
|
||
|
Net
changes in prices, volumes and production costs
|
(191,468
|
)
|
||
|
Extentions,
discoveries and improved recovery, less related costs
|
1,590,000
|
|||
|
Accretion
of Discount
|
717,305
|
|||
|
Net
change in income taxes
|
(798,956
|
)
|
||
|
Other
|
(23,518
|
)
|
||
|
Total
Explained Variance
|
924,259
|
*
Future net cash flows were computed using year-end prices and costs,
and
year-end statutory tax rates (adjusted for permanent differences)
that relate to
existing proved oil and gas reserves in which the enterprise has
mineral
interests, including those mineral interests related to long-term
supply
agreements with governments for which the enterprise serves as the
producer of
the reserves.
F-123
RESERVES
QUANTITY INFORMATION
FOR
THE PERIOD ENDED DECEMBER 31, 2003
|
Proved
developed and undeveloped reserves:
|
||||
|
Beginning
of year, January 1, 2003
|
1,017,857
|
|||
|
Revisions
of previous estimates
|
||||
|
Production
|
(149,380
|
)
|
||
|
|
||||
|
End
of year, December 31, 2003
|
868,477
|
|||
|
Proved
Developed Reserves:
|
||||
|
Beginning
of year, January 1, 2003
|
861,321
|
|||
|
End
of year, December 31, 2003
|
711,941
|
|||
STANDARDIZED
MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES
THEREIN RELATING TO PROVED OIL AND GAS RESERVES
AT
DECEMBER 31, 2003
|
Palmar
Largo
|
||||
|
Future
Cash Inflows*
|
24,990,646
|
|||
|
Future
Production and Development Costs*
|
(16,949,292
|
)
|
||
|
Future
Income Tax Expense*
|
1,147,930
|
|||
|
Future
Net Cash Flows
|
9,189,284
|
|||
|
10%
annual discount for estimated timing of cash flows
|
(2,767,366
|
)
|
||
|
Standardized
Measure of discounted future net cash flows
|
6,421,918
|
|||
F-124
17,572,745
Shares of Common Stock
Gran
Tierra Energy Inc.
PROSPECTUS
March
6,
2007