UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-53877
LA CORTEZ ENERGY, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 20-5157768 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
Calle 67 #7-35, Oficina 409
Bogotá, Colombia
(Address of principal executive offices)
+57-941-870-5433
(Registrant’s telephone number, including area code)
N.A.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | | | | Accelerated filer ¨ |
Non-accelerated filer ¨ | | | | Smaller reporting company þ |
| (Do not check if a smaller reporting company) | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 14, 2011, there were 46,467,849 shares of the registrant’s common stock, par value $0.001 per share, issued and outstanding. Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts included in this Report including, without limitation, statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should,” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements including, but not limited to: (i) our ability to identify and exploit available corporate acquisition, farm-in and/or joint venture opportunities in the energy sector in Colombia and, more generally, in Latin America; (ii) our ability to establish technical and managerial infrastructure; (iii) our ability to raise required capital on acceptable terms and conditions; (iv) our ability to take advantage of, and successfully participate in such opportunities; (v) our ability to successfully operate, or influence our joint venture partners’ operation of, the projects in which we participate in a cost effective and efficient way; and (vi) future economic conditions, political and regulatory stability and changes and volatility in energy prices. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2011.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
LA CORTEZ ENERGY, INC.
| | Page |
| Part I – Financial Information | |
| | |
| Item 1 | | Financial Statements | 4 |
| | |
| | | Condensed Consolidated Balance Sheets (Unaudited) – September 30, 2011 and December 31, 2010 | 4 |
| | | | |
| | | Condensed Consolidated Statements of Operations (Unaudited) - For the three and nine months ended September 30, 2011 and 2010 | 5 |
| | | | |
| | | Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) - For the nine months ended September 30, 2011 | 6 |
| | | | |
| | | Condensed Consolidated Statements of Cash Flows (Unaudited) - For the nine months ended September 30, 2011 and 2010 | 7 |
| | | | |
| | | Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 |
| | | | |
| Item 2 | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 |
| | | | |
| Item 3 | | Qualitative and Quantitative Disclosure About Market Risk | 42 |
| | |
| Item 4 | | Controls and Procedures | 42 |
| | |
| Part II – Other Information | |
| | |
| Item 1 | | Legal Proceedings | 43 |
| | |
| Item 1A | | Risk Factors | 43 |
| | | | |
| Item 2 | | Unregistered Sales of Equity Securities and Use of Proceeds | 43 |
| | | | |
| Item 3 | | Defaults Upon Senior Securities | 43 |
| | | | |
| Item 4 | | (Removed and Reserved) | 44 |
| | | | |
| Item 5 | | Other Information | 44 |
| | | | |
| Item 6 | | Exhibits | 44 |
| | |
| Signatures | 46 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA CORTEZ ENERGY, INC.
Condensed Consolidated Balance Sheets
September 30, 2011 and December 31, 2010
(Unaudited)
| | | September 30, | | | December 31, | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Assets | | | | | | |
| Cash and cash equivalents | | $ | 4,618,746 | | | $ | 8,327,020 | |
| Accounts receivable, net | | | 107,033 | | | | - | |
| Employee advances and other receivables | | | - | | | | 14,603 | |
| Prepaid expenses | | | 281,656 | | | | 119,887 | |
| Total current assets | | | 5,007,435 | | | | 8,461,510 | |
| Oil properties, at cost, using the full cost method of accounting: | | | | | | | | |
| Proved | | | 11,201,553 | | | | 11,249,087 | |
| Unproved | | | 12,180,600 | | | | 11,897,508 | |
| Accumulated depletion and impairment | | | (10,526,002 | ) | | | (10,476,624 | ) |
| | | | 12,856,151 | | | | 12,669,971 | |
| Other property and equipment, net of accumulated depreciation of $241,693 and $175,309, respectively | | | 123,211 | | | | 181,121 | |
| Goodwill | | | 5,591,422 | | | | 5,591,422 | |
| Restricted cash | | | 2,697,010 | | | | 2,777,057 | |
| Total assets | | $ | 26,275,229 | | | $ | 29,681,081 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| Liabilities: | | | | | | | | |
| Accounts payable | | $ | 185,707 | | | $ | 1,048,573 | |
| Accrued liabilities | | | 638,517 | | | | 371,927 | |
| Other liabilities - current portion | | | 238,683 | | | | - | |
| Derivative warrant instruments | | | 150,858 | | | | 7,457,125 | |
| Total current liabilities | | | 1,213,765 | | | | 8,877,625 | |
| Other liabilities - non-current portion | | | 366,601 | | | | - | |
| Asset retirement obligation | | | 92,647 | | | | 127,606 | |
| Total liabilities | | | 1,673,013 | | | | 9,005,231 | |
| Commitments and contingencies (Note 11) | | | | | | | | |
| Shareholders' equity: | | | | | | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding | | | - | | | | - | |
Common stock, $.001 par value; 300,000,000 shares authorized; 46,467,849 and 46,190,910 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively | | | 46,467 | | | | 46,190 | |
| Additional paid-in capital | | | 39,338,727 | | | | 38,744,339 | |
| Accumulated deficit | | | (14,782,978 | ) | | | (18,114,679 | ) |
| Total shareholders' equity | | | 24,602,216 | | | | 20,675,850 | |
| Total liabilities and shareholders' equity | | $ | 26,275,229 | | | $ | 29,681,081 | |
See accompanying notes to unaudited condensed consolidated financial statements.
LA CORTEZ ENERGY, INC.
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2011 and 2010
(Unaudited)
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Revenues: | | | | | | | | | | | | |
| Oil revenues | | $ | 623,135 | | | $ | 251,266 | | | $ | 1,626,009 | | | $ | 417,540 | |
| Total revenues | | | 623,135 | | | | 251,266 | | | | 1,626,009 | | | | 417,540 | |
| | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Operating costs | | | 500,144 | | | | 281,309 | | | | 946,980 | | | | 1,124,563 | |
| Depreciation, depletion, accretion and amortization | | | 38,384 | | | | 87,607 | | | | 128,338 | | | | 181,582 | |
| Impairment of oil properties | | | - | | | | - | | | | - | | | | 273,318 | |
| General and administrative | | | 888,923 | | | | 1,235,879 | | | | 4,470,802 | | | | 3,906,248 | |
| Total costs and expenses | | | 1,427,451 | | | | 1,604,795 | | | | 5,546,120 | | | | 5,485,711 | |
| Loss from operations | | | (804,316 | ) | | | (1,353,529 | ) | | | (3,920,111 | ) | | | (5,068,171 | ) |
| | | | | | | | | | | | | | | | | |
| Non-operating income (expense): | | | | | | | | | | | | | | | | |
| Unrealized gain on fair value of derivative warrant instruments, net | | | 909,749 | | | | 1,046,452 | | | | 7,306,267 | | | | 944,429 | |
| Interest and other income | | | 25,230 | | | | 17,355 | | | | 82,059 | | | | 50,178 | |
| Interest expense | | | (32,488 | ) | | | - | | | | (106,537 | ) | | | - | |
| Total non-operating income (expense) | | | 902,491 | | | | 1,063,807 | | | | 7,281,789 | | | | 994,607 | |
| Income (loss) before income taxes | | | 98,175 | | | | (289,722 | ) | | | 3,361,678 | | | | (4,073,564 | ) |
| | | | | | | | | | | | | | | | | |
| Income taxes | | | (8,474 | ) | | | (39,757 | ) | | | (29,977 | ) | | | (39,757 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 89,701 | | | $ | (329,479 | ) | | $ | 3,331,701 | | | $ | (4,113,321 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted earnings (loss) per share | | $ | 0.00 | | | $ | (0.01 | ) | | $ | 0.07 | | | $ | (0.10 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted weighted average common shares outstanding | | | 46,335,623 | | | | 45,980,198 | | | | 46,280,383 | | | | 40,386,748 | |
See accompanying notes to unaudited condensed consolidated financial statements.
LA CORTEZ ENERGY, INC.
Condensed Consolidated Statement of Changes in Shareholders’ Equity
For the nine months ended September 30, 2011
(Unaudited)
| | | | | | | | | Additional | | | | | | | |
| | | Common Stock | | | Paid-in | | | Accumulated | | | | |
| | | Shares | | | Par Value | | | Capital | | | Deficit | | | Total | |
| Balance at December 31, 2010 | | | 46,190,910 | | | $ | 46,190 | | | $ | 38,744,339 | | | $ | (18,114,679 | ) | | $ | 20,675,850 | |
| Common stock for services | | | 137,500 | | | | 138 | | | | 108,875 | | | | - | | | | 109,013 | |
| Stock-based compensation and vested restricted stock unit awards | | | 139,439 | | | | 139 | | | | 485,513 | | | | - | | | | 485,652 | |
| Net income | | | - | | | | - | | | | - | | | | 3,331,701 | | | | 3,331,701 | |
| Balance at September 30, 2011 | | | 46,467,849 | | | $ | 46,467 | | | $ | 39,338,727 | | | $ | (14,782,978 | ) | | $ | 24,602,216 | |
See accompanying notes to unaudited condensed consolidated financial statements.
LA CORTEZ ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2011 and 2010
(Unaudited)
| | | Nine Months Ended | |
| | | September 30, | |
| | | 2011 | | | 2010 | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 3,331,701 | | | $ | (4,113,321 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | |
| Depreciation, depletion, accretion and amortization | | | 128,338 | | | | 181,582 | |
| Impairment of oil properties | | | - | | | | 273,318 | |
| Stock-based compensation and vested restricted stock unit awards | | | 485,652 | | | | 428,392 | |
| Unrealized gain on fair value of derivative warrant instruments, net | | | (7,306,267 | ) | | | (944,429 | ) |
| Common stock for services | | | 109,013 | | | | 213,500 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable, net | | | (107,033 | ) | | | 193,488 | |
| Employee advances and other receivables | | | 14,603 | | | | (28,036 | ) |
| Prepaid expenses and other assets | | | (161,769 | ) | | | (46,309 | ) |
| Accounts payable | | | (862,866 | ) | | | (1,954,886 | ) |
| Accrued liabilities | | | 266,590 | | | | 175,462 | |
| Other liabilities | | | 605,284 | | | | - | |
| Net cash used in operating activities | | | (3,496,754 | ) | | | (5,621,239 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Acquisition of Avante, net of cash received | | | - | | | | 289,937 | |
| Investments in unproved oil properties | | | (283,092 | ) | | | (2,969,395 | ) |
| Restricted cash | | | 80,047 | | | | - | |
| Purchases of other property and equipment | | | (8,475 | ) | | | - | |
| Net cash used in investing activities | | | (211,520 | ) | | | (2,679,458 | ) |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from the sale of common stock and derivative warrant instruments | | | - | | | | 17,833,964 | |
| Payments for offering costs | | | - | | | | (1,002,381 | ) |
| Net cash provided by financing activities | | | - | | | | 16,831,583 | |
| Net change in cash and cash equivalents | | | (3,708,274 | ) | | | 8,530,886 | |
| Cash and cash equivalents, beginning of period | | | 8,327,020 | | | | 2,376,585 | |
| Cash and cash equivalents, end of period | | $ | 4,618,746 | | | $ | 10,907,471 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Income taxes | | $ | 41,008 | | | $ | 23,282 | |
| Interest | | $ | - | | | $ | - | |
| Non-cash investing and financing transactions: | | | | | | | | |
| Change in asset retirement obligation estimate | | $ | (47,534 | ) | | $ | 135,395 | |
| Issuance of common stock in connection with acquisition of Avante for: | | | | | | | | |
| Acquisition of accounts receivable | | $ | - | | | $ | 3,653 | |
| Acquisition of prepaid expenses and other current assets | | $ | - | | | $ | 43,001 | |
| Acquisition of unproved oil properties | | $ | - | | | $ | 9,808,470 | |
| Acquisition of goodwill | | $ | - | | | $ | 5,591,422 | |
| Acquisition of other property and equipment | | $ | - | | | $ | 48,743 | |
| Assumption of accounts payable | | $ | - | | | $ | 240,445 | |
| Assumption of accrued liabilities | | $ | - | | | $ | 72,626 | |
| Assumption of asset retirement obligation | | $ | - | | | $ | 187,155 | |
See accompanying notes to unaudited condensed consolidated financial statements.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
| (1) | Organization, Basis of Presentation and Summary of Significant Accounting Policies |
Organization and Basis of Presentation
La Cortez Energy, Inc. (“LCE,” “La Cortez” or the “Company”), together with its 100% owned subsidiaries, La Cortez Energy Colombia, Inc., a Cayman Islands corporation (“LA Cortez Colombia”), La Cortez Energy Colombia, E.U., a Colombia corporation in process of liquidation (“Colombia E.U.”) and Avante Colombia, Inc. (“Avante Colombia”), is an international oil and gas exploration and production (“E&P”) company concentrating on opportunities in South America. As discussed in Note 3 below, LCE acquired Avante Colombia on March 2, 2010.
The Company was incorporated under the name of La Cortez Enterprises, Inc. on June 9, 2006 in the State of Nevada. This entity was originally formed to create, market and sell gourmet chocolates wholesale and retail throughout Mexico, as more fully described in its registration statement on Form SB-2 as filed with the SEC on November 7, 2006 (the “Legacy Business”). This business has been discontinued. On February 8, 2008, the Company changed its name from La Cortez Enterprises, Inc. to La Cortez Energy, Inc.
Interim Financial Statements
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations presented for the three and nine months ended September 30, 2011, are not necessarily indicative of the results to be expected for the year. Interim financial data presented herein are unaudited.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates which are particularly significant to the condensed consolidated financial statements include estimates of oil reserves, future cash flows from oil properties, depreciation, depletion, amortization, asset retirement obligations and accrued revenues and effects of purchase price allocations and calculations related to derivative warrant instruments.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed government insured limits. The Company has never experienced any losses related to these balances. All of its non-interest bearing cash balances were fully insured at September 30, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The Company had cash and cash equivalents of approximately $4.6 million and $8.3 million at September 30, 2011 and December 31, 2010, respectively.
Goodwill
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired businesses. The Company’s goodwill results from the acquisition of 100% of the outstanding stock of Avante Colombia (as defined below). In order to determine the fair value of goodwill on the Avante Colombia acquisition, the Company allocated the fair value (determined with the assistance of independent consultants) of all Avante Colombia’s assets and liabilities against an increase of Avante Colombia equity. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the fair value of goodwill. As a result, the Company recorded goodwill in the amount of approximately $5.6 million at March 2, 2010 as a non-current asset.
In accordance with guidance of the FASB ASC - Topic no. 350-10, Goodwill and Other, the Company tests goodwill for impairment in the first quarter of each fiscal year or at any other time when impairment indicators exist by comparing the fair value of the reporting unit, generally based on discounted future cash flows, with its carrying amount including goodwill. Examples of such indicators, which would cause the Company to test goodwill for impairment between annual tests, include a significant change in the business climate, significant unexpected competition, significant deterioration in market share, and/or a loss of key personnel. If goodwill is determined to be impaired, the loss is measured by the excess of the carrying amount of the reporting unit over its fair value. The Company’s annual goodwill impairment test derived no adjustment to its operating results.
Warrant derivative instruments
FASB ASC Topic No. 815 – 40’s requires accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Downward provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. The Company evaluated whether warrants issued during various private placement offerings contained provisions that protect holders from declines in the Company’s stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant or preferred stock agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40.
In accordance with FASB ASC Topic No. 815 – 40, the Company recognized the warrants that contain these down round provisions as liabilities at their respective fair values on each reporting date.
Income Taxes
The Company accounts for income taxes under the provisions of FASB ASC Topic No. 740, Income Taxes, which provides for an asset and liability approach in accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
In recording deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be realizable. The Company considers the scheduled reversal of deferred income tax liabilities and projected future taxable income for this determination. The Company established a full valuation allowance and reduced its net deferred tax asset, principally related to the Company’s net operating loss carryovers, to zero as of September 30, 2011 and December 31, 2010. The Company will continue to assess the valuation allowance against deferred income tax assets considering all available information obtained in future reporting periods. If the Company achieves profitable operations in the future, it may reverse a portion of the valuation allowance in an amount at least sufficient to eliminate any tax provision in that period. The valuation allowance has no impact on the Company’s net operating loss (“NOL”) position for tax purposes, and if the Company generates taxable income in future periods prior to expiration of such NOLs, it will be able to use its NOLs to offset taxes due at that time.
Earnings (Loss) per Common Share
The Company accounts for earnings (loss) per share in accordance with FASB ASC Topic No. 260 – 10, Earnings Per Share, which establishes the requirements for presenting earnings per share (“EPS”). FASB ASC Topic No. 260 – 10 requires the presentation of “basic” and “diluted” EPS on the face of the statement of operations. Basic EPS amounts are calculated using the weighted-average number of common shares outstanding during each period. Diluted EPS assumes the exercise of all stock options and warrants having exercise prices less than the average market price of the common stock during the periods, using the treasury stock method. When a loss from operations exists, potential common shares are excluded from the computation of diluted EPS because their inclusion would result in an anti-dilutive effect on per share amounts.
For the nine months ended September 30, 2011, the Company had potentially dilutive shares outstanding, including 2,459,000 options to purchase shares of common stock, warrants to purchase 15,515,203 shares of common stock, and restricted stock units issued to key directors and employees that enable grantees to obtain 278,872 shares of common stock. There was no difference between basic and diluted earnings per share for the three months ended September 30, 2011 as the average stock price of the Company’s common shares during the period did not exceed the exercise price of any of Company’s outstanding options and warrants to purchase shares of common stock. There was no difference between basic and diluted earnings per share for the nine months ended September 30, 2011 as the effect of all of the potentially dilutive common shares outstanding were anti-dilutive. For the nine months ended September 30, 2010, the Company had potentially dilutive shares outstanding, including 2,401,667 options to purchase shares of common stock, warrants to purchase 15,515,203 shares of common stock, and restricted stock units issued to key directors and employees that enable grantees to obtain 410,123 shares of common stock. There was no difference between basic and diluted loss per share for the three and nine months ended September 30, 2010 as the effect of these potential common shares were anti-dilutive due to the net loss during the three and nine months ended September 30, 2010.
The following is a summary of the Company’s potentially dilutive securities as of and for the three and nine months ended September 30, 2011 and 2010:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Potentially dilutive shares excluded: | | | | | | | | | | | | |
| Outstanding stock options | | | 2,459,000 | | | | 2,401,667 | | | | 2,459,000 | | | | 2,401,667 | |
| Outstanding warrants to purchase common stock | | | 15,515,203 | | | | 15,515,203 | | | | 15,515,203 | | | | 15,515,203 | |
| Outstanding and unvested restricted stock units | | | 278,872 | | | | 410,123 | | | | 278,872 | | | | 410,123 | |
| | | | 18,253,075 | | | | 18,326,993 | | | | 18,253,075 | | | | 18,326,993 | |
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accrued oil receivables, accounts payable, accrued expenses and other liabilities associated with the Colombian equity-based tax approximates fair value due to the short term nature of these accounts.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Foreign Currency Translation
For the three and nine months ended September 30, 2011 and 2010, cumulative translation gains (losses) and foreign currency transaction gains (losses) were not significant.
Recently Issued Accounting Pronouncements
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations, which addresses the diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amended guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, the amended guidance expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company adopted the amended guidance on January 1, 2011, the adoption of which is not expected to impact the Company’s consolidated results of operations, cash flows or financial position as this guidance provides only disclosure requirements.
In December of 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 amends ASC Topic 350. ASU 2010-28 clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. Early adoption is not permitted. This new guidance did not impact the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), which amends ASC 820, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards (IFRSs). ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company is still evaluating whether adoption of ASU 2011-04 will have an impact on the Company’s 2012 consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)-Presentation of Comprehensive Income. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to impact the Company’s consolidated results of operations, cash flows or financial position.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other”. ASU 2011-08 allows a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test for that reporting unit would be performed. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company’s adoption of ASU 2011-08 during and as of the quarter ended September 30, 2011 did not have a significant impact to the Company’s consolidated financial position or results of operations.
At September 30, 2011, the Company had cash and cash equivalents of $4,618,746 and a working capital of $3,793,670. The Company believes that its existing capital resources may not be adequate to enable it to execute its business plan. The Company estimates that it will require additional cash resources after January 2012 based upon its current operating plan.
Through September 30, 2011, the Company has been primarily engaged in development activities and raising capital, as well as in evaluating viable investment prospects and recruiting personnel. In the course of its development activities, the Company has sustained operating losses and expects such operating losses to continue through at least the next twelve months from the filing date of this report. The Company anticipates that after January 2012, it will need to obtain additional capital to cover its administrative expenses and for general working capital to continue to execute its business plan and build its operations. The Company expects to finance its operations primarily through its existing cash and any future financing. However, there exists substantial doubt about the Company’s ability to continue as a going concern because the Company will be required to obtain additional capital in the future to continue its operations and there is no assurance that it will be able to obtain such capital through equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support the Company’s growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations would be materially negatively impacted.
The Company’s ability to complete additional offerings is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependent on the status of its oil and gas exploration activities, which cannot be predicted. There is no assurance that capital in any form would be available to the Company, and if available, on terms and conditions that are acceptable.
As a result of the above discussed conditions, and in accordance with generally accepted accounting principles in the United States of America, there exists substantial doubt about the Company’s ability to continue as a going concern, and the Company’s ability to continue as a going concern is contingent upon its ability to secure additional adequate financing or capital during the coming year. If the Company is unable to obtain additional sufficient funds during this time, the Company might lose its interest in the Petronorte, Emerald, Rio de Oro and Puerto Barco projects described in Note 4 below. This action would have an adverse effect on the Company’s future operations, the realization of its assets and the timely satisfaction of its liabilities. The Company’s condensed consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that the Company is unable to continue as a going concern.
Additionally, the Company’s independent auditors included an explanatory paragraph in their report on La Cortez’s consolidated financial statements included in its Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on April 1, 2011, that raises substantial doubt about La Cortez’s ability to continue as a going concern.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
| (3) | Acquisition of Avante Colombia |
On March 2, 2010 (the “Closing Date”), the Company entered into a Stock Purchase Agreement (the “SPA”) with Avante Petroleum S.A., a Luxembourg public limited liability company (“Avante”), which closed on the same date. Pursuant to the terms of the SPA, La Cortez acquired all of the outstanding capital stock (the “Acquisition”) of Avante’s wholly-owned subsidiary, Avante Colombia S.à.r.l., a Luxembourg private limited liability company (“Avante Colombia”), in exchange for 10,285,819 newly issued shares of its common stock (the “Purchase Price Shares”).
Avante Colombia currently has a 50% participation interest (acquired in late 2005) in, and is the operator of, the Rio de Oro and Puerto Barco production contracts with Ecopetrol S.A. in the Department of North Santander in the Catatumbo region of northeastern Colombia, under an operating joint venture with Vetra Exploración y Producción Colombia S.A. Both production contracts are for a ten-year term expiring at the end of 2013. The acquisition of Avante Colombia will provide new exploration opportunities. The oil and gas properties derived from this acquisition have been classified as unproved on the condensed consolidated financial statements as of September 30, 2011.
Under the terms of the SPA, the Company and Avante have also agreed to pursue certain opportunities in the Catatumbo area on a joint venture basis. If the Company enters into such a joint venture with Avante, then the Company would own 70% of the joint venture and commit to pay 70% of the geological and geophysical costs, and Avante would own 30% of the joint venture and commit to pay 30% of the geological and geophysical costs, up to a maximum commitment by Avante of $1,500,000. If the total costs of the venture exceed $5,000,000, then Avante may elect either (a) not to pay any additional costs of the venture and incur dilution of its ownership percent from future payments by the Company, (b) to continue to pay additional costs of the venture at 30% or (c) to pay a larger proportion of the costs of the venture, in which case Avante’s ownership percentage would be increased in proportion to the percentage of total venture costs paid by each party, up to a maximum ownership interest for Avante of 50%.
In connection with the Acquisition, on the Closing Date, La Cortez and Avante entered into a Subscription Agreement (the “Avante Subscription Agreement”), pursuant to which Avante purchased 2,857,143 shares of La Cortez’s common stock (the “Avante Shares”) and three-year warrants to purchase 2,857,143 shares of its common stock at an exercise price of $3.00 per share (the “Avante Warrants”), for an aggregate purchase price of $5,000,000 (or $1.75 per share of common stock purchased).
Lock-Up
The SPA provided that, without the Company’s prior written consent, Avante would not have been able to offer, sell, contract to sell, grant any option to purchase, hypothecate, pledge, transfer title to or otherwise dispose of any of Purchase Price Shares, Avante Shares or Avante Warrants or any of the shares issuable upon exercise of Avante Warrants (the “Avante Warrant Shares”) until September 2, 2011 (the “Lock-Up Period”). The SPA also provides that, during such period, Avante may not effect or agree to effect any short sale or certain related transactions with respect to the Company’s common stock.
Share Escrow
In connection with the Acquisition, La Cortez entered into a Share Escrow Agreement with Avante, and an escrow agent, pursuant to which 1,500,000 of the 10,285,819 Purchase Price Shares are being held in escrow to secure certain indemnification obligations of Avante under the SPA. Such escrowed shares will be released to Avante after March 2, 2012.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The SPA permits Avante to satisfy any indemnification obligations thereunder in whole or in part by surrender of shares of the Company’s common stock (including the shares held in escrow) in lieu of cash. In addition, the SPA allows the Company to elect to receive Avante’s escrowed shares of Company common stock in lieu of cash to satisfy Avante’s indemnification obligations with respect to certain environmental matters. Any shares of common stock surrendered to satisfy Avante’s indemnification obligations under the SPA shall be valued based on the volume-weighted average sale prices of the Company’s common stock for the 60 most recent trading days on which sales have occurred ending on the trading day immediately prior to the relevant date of determination. The Company is not liable for any indemnification obligations as of the date of filing of this report.
Registration Rights Agreement
Pursuant to the SPA, the Company entered into a Registration Rights Agreement with Avante, dated as of March 2, 2010 (the “Avante RRA”). The Avante RRA grants Avante certain “piggyback” registration rights with respect to the Purchase Price Shares, the Avante Shares and the Avante Warrant Shares; provided that in exercising such piggyback registration rights with respect to any proposed registration statement, Avante may not request inclusion in such registration statement of more than 10% of the number of shares of the Company’s common stock outstanding at such time.
The Avante RRA grants Avante one demand registration right covering the Avante Shares and the Avante Warrant Shares, exercisable if (a) the Company fails to either file a registration statement on which Avante can piggyback or to complete a listing of its common stock on a United States or Canadian national securities exchange within 180 days of April 19, 2010, which is the final closing of the Company’s private placement offering (“PPO”) during 2010, and (b) a Total Investment Majority (as defined in the Avante RRA) joins in such demand. The Total Investment Majority may include holders of the Company’s securities purchased pursuant to the Avante Subscription Agreement as well as securities purchased pursuant to the PPO and pursuant to warrants purchased pursuant to either, taken together on an aggregate basis. As this condition on (a) above was not satisfied, the demand registration rights are exercisable; however, no demand has been received to date. Registrable PPO Shares are not subject to the PPO RRA if they may be immediately sold under the Securities Act (whether pursuant to Rule 144 thereunder or otherwise). The PPO RRA contains customary cutback, discontinuation and indemnification provisions.
The Avante RRA provides an additional demand registration, exercisable following the Lock-Up Period, if Avante (or its successors and permitted assignees under the Avante RRA) is an “affiliate” of the Company (within the meaning of Rule 144) at such time. Each of the Avante Warrant Shares, the Avante Shares and the Purchase Price Shares will cease to be registrable under the Avante RRA if and for so long as they may be sold publicly in the United States without being subject to volume limitations (whether pursuant to Rule 144 or otherwise). The Avante RRA contains customary cutback, discontinuation and indemnification provisions. There has been no request for a additional demand registration as of September 30, 2011.
Stockholder Agreement
In connection with the Acquisition, La Cortez entered into a Stockholder Agreement with Avante; Nadine Smith, the Company’s Chairman of the Board; and Andrés Gutierrez, the Company’s Chief Executive Officer, dated as of March 2, 2010 (the “Stockholder Agreement”).
Pursuant to the Stockholder Agreement, upon the closing of the SPA, the Company’s Board increased the number of directors constituting the entire Board by one and appointed Avante’s nominee to fill the vacancy on the Board so created, to serve until the next annual meeting of the Company’s shareholders or until his successor is duly elected and qualified or his earlier death, resignation or removal in accordance with the Company’s By-Laws. The Stockholder Agreement provides that Avante shall continue to nominate one individual reasonably satisfactory to the Company at the next and subsequent annual meetings of its shareholders, and at any special meeting of its shareholders at which directors are to be elected (any “Election Meeting”) as long as Avante and/or its affiliates own outstanding shares representing 10% or more of the votes entitled to be cast at the applicable Election Meeting. Avante’s nominee will be subject to election and re-election by the Company’s shareholders as provided in its By-Laws. If Avante’s nominee is not elected by the Company’s shareholders, then Avante shall have the right to designate the same or another person as its nominee at the next Election Meeting, provided that Avante and/or its affiliates own outstanding voting shares representing 10% or more of the votes entitled to be cast at the applicable Election Meeting.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The Stockholder Agreement provides that each of Avante, Ms. Smith and Mr. Gutierrez shall vote any shares of the Company’s capital stock owned by such party, or cause any shares of the Company’s capital stock owned by any immediate family member or affiliate of such party to be voted, in favor of Avante’s nominee at any Election Meeting.
In addition, for so long as Avante is entitled to name a nominee for election as a director, as provided in the Stockholder Agreement, Avante shall have the right to appoint one additional non-voting observer to attend meetings of the Board, and said observer shall have the right to visit the Company’s offices, to have interaction with its management and to receive information and documents pertaining to the Company as reasonably requested, subject to the confidentiality provisions of the Stockholder Agreement.
The Stockholder Agreement provided that, for a period ending on the earlier of (i) September 2, 2011 or (ii) the first date on which Avante and/or its affiliates no longer own outstanding voting shares representing ten percent (10%) or more of the votes entitled to be cast at any annual or special meeting of shareholders (if a record date for such a meeting were established on any day), in the event that the Company (or its Board) should propose to: (a) merge or consolidate with or into any other corporation (if the holders of the Company’s voting capital stock immediately prior to the transaction would not hold a majority of the voting stock or other voting equity of the surviving entity immediately after completion of the transaction), or sell, assign, lease or otherwise dispose of all or substantially all of the Company’s assets, or recommend to the Company’s shareholders a third-party tender offer for a majority of its outstanding voting capital stock; or (b) acquire a business (whether by merger, stock purchase or asset purchase) in a transaction that would result in the issuance of a number of shares of the Company’s voting capital stock equal to or exceeding thirty percent (30%) of its voting capital stock outstanding after giving effect to the proposed transaction; or (c) appoint a new Chief Executive Officer (any of the foregoing, a “Covered Transaction”), then the Company’s Board would have been required to establish a special committee of the Board pursuant to the By-Laws, which committee would consist of Avante’s nominated director (or if there is no Avante nominee then serving on the Board, Avante’s observer), the Company’s Chairman of the Board, and the Company’s Chief Executive Officer (the “Special Committee”). The Covered Transaction would have required the unanimous approval of all of the members of the Special Committee before it could be submitted to the full Board for consideration; provided, however, that the foregoing requirement were made expressly subject and subordinate to the fiduciary duties of each director and any other restrictions under applicable law and the listing standards of any exchange on which the Company’s securities were then listed.
Description of Assets of Avante Colombia
Immediately following the Acquisition, Avante Colombia became La Cortez’s wholly-owned subsidiary.
Avante Colombia currently has a 50% participation interest (acquired in late 2005) in, and is the operator of, the Rio de Oro and Puerto Barco production contracts with Ecopetrol S.A. (“Ecopetrol”) in the Department of North Santander in the Catatumbo region of northeastern Colombia, under an operating joint venture with Vetra Exploración y Producción S.A. Colombia (“Vetra” ). Both production contracts are for a ten-year term expiring at the end of 2013.
Under the Puerto Barco production contract, Ecopetrol has a 6% production participation, Vetra a 47% working interest and Avante Colombia a 47% working interest, in each case after royalties. Royalties payable are 20% of audited production. The operator is Avante Colombia. Production on the field began in 1958 and was stopped in July 2008, as a result of insurgent activity.
Under the Rio de Oro production contract, Ecopetrol has a 12% production participation, Vetra a 44% working interest and Avante Colombia a 44% working interest, in each case after royalties. Royalties payable are 20% of audited production. The operator is Avante Colombia. Production on the field began in 1950 and was stopped in June 1999, as a result of insurgent activity.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
In the Rio de Oro field, the remediation of certain historical environmental conditions generated prior to the Acquisition will be the responsibility of previous operators. In addition to the contractual responsibility of previous operators for these liabilities, Avante has agreed in the SPA to indemnify the Company for 50% of any environmental losses it incurs, up to a maximum of $2.5 million.
The following table reflects the unaudited pro forma results of operations as though the Avante Acquisition had occurred on January 1, 2010. The pro forma amounts are not necessarily indicative of the results that may be reported in the future:
| | | Nine Months | |
| | | Ended | |
| | | September 30, 2010 | |
| Revenues | | $ | 417,540 | |
| | | | | |
| Net loss | | $ | (4,153,269 | ) |
| | | | | |
| Loss per share - basic and diluted: | | $ | (0.10 | ) |
| | | | | |
| Weighted average shares outstanding: | | | | |
| basic & diluted | | | 42,685,045 | |
The following table reflects the results of operations of Avante Colombia since the Closing Date that are included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2010:
| | | Nine Months | |
| | | Ended | |
| | | September 30, 2010 | |
| Revenues | | $ | - | |
| | | | | |
| Net loss | | $ | (191,454 | ) |
The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves are capitalized. Under full cost accounting rules, capitalized costs, less accumulated depletion and amortization, shall not exceed an amount (the ceiling) equal to the sum of: (i) the present value of estimated future net revenues less future production, development, site restoration, and abandonment costs derived based on current costs assuming continuation of existing economic conditions and computed using a discount factor of ten percent; (ii) the cost of properties not being amortized; and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized. If unamortized costs capitalized within the cost pool exceed the ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts required to be written off are not reinstated for any subsequent increase in the cost center ceiling. The Company recorded no impairment associated with its proved oil properties for the three and nine month periods ended September 30, 2011. For the three and nine month periods ended September 30, 2010, the Company incurred $0 and $273,318, respectively, of impairment on its proved oil properties.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.
Depreciation, depletion, and amortization is provided using the unit-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. In arriving at depletion rates under the unit-of-production method, the quantities of recoverable oil reserves are established based on estimates made by the Company’s geologists and engineers which require significant judgment as does the projection of future production volumes and levels of future costs, including future development costs. The amortizable base includes estimated future development costs and where significant, dismantlement, restoration and abandonment costs, net of estimated salvage value. In addition, considerable judgment is necessary in determining when unproved properties become impaired and in determining the existence of proved reserves once a well has been drilled. All of these judgments may have significant impact on the calculation of depletion and impairment expense.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss would be recognized in the statement of operations.
As discussed in Note 6, asset retirement costs are recognized when the asset is placed in service, and are included in the amortization base and amortized over proved reserves using the units of production method. Asset retirement costs are estimated by management using existing regulatory requirements and anticipated future inflation rates.
Maranta Block
On February 6, 2009, the Company entered into a farm-in agreement (the “Farm-In Agreement”) with Emerald Energy Plc Sucursal Colombia (“Emerald”), a Colombian branch of Emerald Energy Plc. (“Emerald Energy”), a company existing under the laws of the United Kingdom, for a 20% participating interest (the “Participating Interest”) in the Maranta exploration and production block (“Maranta”).
On February 4, 2010, the Company signed a joint operating agreement with Emerald with respect to the Maranta Block, and the Company has asked Emerald to submit a request to the Agencia Nacional de Hidrocarburos (“ANH”) to approve the assignment of the Company’s 20% participating interest to the Company. If the ANH does not approve this assignment, Emerald and the Company have agreed to use their best efforts to seek, in good faith, a legal way to enter into an agreement with terms equivalent to the Farm-In Agreement and the joint operating agreement, that shall privately govern the relations between the parties with respect to the Maranta Block and which will not require ANH approval.
Emerald has filed a request with the ANH for the assignment of the 20% working interest in the Maranta Block to La Cortez. In order to qualify as a contractor with the ANH, the Company has submitted, on April 15, 2011, legal, operating, technical and financial information, including prior years’ audited financial statements, to be reviewed by the ANH. On July 12, 2011, the Company was informed by Emerald that the request for transfer of the 20% interest was not approved because the ANH determined that the submitted information did not comply with the financial requirements demanded by the contract signed between the ANH and Emerald. The Company plans to discuss the financial information with the ANH, including the accounting for the derivative warrant instruments liability, and send a new request for the assignment. Non-approval by the ANH does not affect the current joint operating agreement between Emerald and La Cortez. The Company plans to submit a new set of financial information to the ANH shortly after filing with the SEC its Form 10-Q for the period ended September 30, 2011.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Emerald, the operator of the Maranta Block, completed drilling operations of the Mirto-2 exploratory well on August 15, 2010, after having conducted a sidetrack on the well. Mirto-2 production tests were initiated on September 23, 2010, for a 5-day period on the Villeta U sand. The well was put back on an extended production test on October 16, 2010 until December 10, 2010, and was then placed on long-term production testing in January 2011. The capitalized costs associated with the Mirto 2 well were categorized as proved properties as of December 31, 2010 and September 30, 2011 and were subject to depletion and impairment.
The workover on the Mirto-1 well resulted in a long-term production test on the Villeta N sand, which commenced on August 23, 2011, until October 5, 2011, when the Electro Submersible Pump (ESP) failed to operate. A well service rig was transported to the site and a well service work to replace the pump was conducted. The work was completed on November 1, 2011, and the well is currently back in production, together with the Mirto-2 well.
Phase 3 of the initial exploration program was completed last year with the drilling of the Mirto-2 well. Both Emerald and the Company have complied with the exploration obligations on this block in accordance with the contract signed with the ANH. Under the contract terms and conditions, and after completion of this phase, both the Company and Emerald have relinquished 50% of the area of the block, as selected by both parties, and exercised the option to continue exploration activities in the remaining 50% of the area by committing to additional exploration activities with the ANH, such as new seismic acquisition or drilling a new exploration well. This is a normal procedure and in accordance with the standard contract with the ANH. Emerald has received approval from the ANH, which was dated April 11, 2011, on the additional exploration program and has signed the amendment to the contract. Phase 1 of the subsequent exploratory program requires both Emerald and La Cortez to comply with the acquisition of 120 km of 2D seismic or the drilling of an exploration well on or before August 2012, with an optional Phase 2 of the subsequent exploratory program requiring another acquisition of 120 km of 2D seismic or the drilling of an exploratory well on or before August 2014. Emerald and the Company are in the final stages to determine the activity plan for the year 2012, which includes drilling of at least one more exploration well (Agapanto-1) in the Maranta Block, which is a commitment to the Colombian government. This activity will be targeting the Villeta formation N, U, and T sands, which are producing areas within the Mirto field.
The Company has reimbursed Emerald a total of $15.1 million as of September 30, 2011 for the Maranta Block, including production and development costs for the Mirto wells. $1.78 million of these Maranta Block costs remain in unproved oil and gas properties as of September 30, 2011.
Putumayo 4 Block
On December 22, 2008, the Company entered into a memorandum of understanding (the “MOU”) with Petroleos del Norte S.A. (“Petronorte”), a Colombian subsidiary of Petrolatina Energy Plc., that entitles the Company to a 50% net working interest in the Putumayo 4 block (the “Putumayo 4 Block”). According to the MOU, the Company will have the exclusive right to a 50% net participation interest in the Putumayo 4 Block and in the exploration and production contract (the “E&P Contract”) after ANH production participation. Petronorte signed an E&P Contract with the ANH in February 2009. Petronorte will be the “operator” of the E&P Contract.
Petronorte and the Company have been conducting the community consultation process for the seismic acquisition in the northern part of the Putumayo 4 Block. This process was recently completed, and the bidding process has been initiated, in which more than 10 seismic service companies were invited to participate for the acquisition of 104.8 km of 2d seismic in the area which is part of the work commitment to the ANH. An additional 45 - 50 km of 2d seismic will also be acquired as part of the additional investment commitment of $ 1.6 million made to the ANH during the 2008 bidding round. It is expected that the seismic acquisition bidding process will be finalized by the end of November 2011, and immediately thereafter, initiate acquisition activities during December 2011. The seismic acquisition process is expected to take no longer than 3 months.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Petronorte and the Company are also working on the community consultation process for the drilling of the first exploration well in 2012, in addition to working in preparing the Environmental Impact Study or Estudio de Impacto Ambiental (EIA), to be presented to the Colombian authorities in order to obtain the exploration well drilling license. This exploration well will also be targeting the Villeta formation N, U, and T sands as well as the Caballos formation. Other companies are currently producing from these sands in fields located near the Putumayo 4 Block.
Under the terms of the contract signed with the ANH, the Company must complete the acquisition of at least 103 km of seismic, the drilling of an exploratory well and additional work for a value of $1.6 million before August 25, 2012, when the 3-year term of Phase I ends. In response to delays associated with the community consultation process on the block, Petronorte sent a letter to the ANH on May 23, 2011 asking for a suspension of the contract for about seven months, thereby possibly extending the Phase I completion date to March 25, 2013, due to delays on availability of the Ministry of Interior representative to carry on with the consultation process with communities. Petronorte is asking that an additional seven months be added to the original commitment in order to compensate for the impact on the original schedule. The ANH answered the initial correspondence letter on June 20, 2011, with indications that they were studying this request, but did not give any indication on their final decision. Petronorte and the Company continue to wait for a formal answer to the seven month suspension request from the ANH.
Petronorte has filed a request with the ANH for the assignment of the 50% working interest in the Putumayo 4 Block to the Company. In order to qualify as a contractor with the ANH, the Company has submitted, legal, operating, technical and financial information, including prior years’ audited financial statements, to be reviewed by the ANH. The ANH has requested for additional information that has been provided on a timely basis. No official reply has been obtained from the ANH.
Under the MOU and the joint operating agreement, the Company will be responsible for fifty percent (50%) of the costs incurred under the E&P Contract, entitling it to fifty percent (50%) of the revenues originated from the Putumayo 4 Block, net of royalty and production participation interest payments to the ANH, except that the Company will be responsible for paying two-thirds (2/3) of the costs originated from the first 103 kilometers of 2D seismic to be performed in the Putumayo 4 Block, in accordance with the expected Phase 1 minimum exploration program under the E&P Contract. If a prospective Phase 1 well in a prospect in the Putumayo 4 Block proves productive, Petronorte will reimburse the Company for its share of these seismic costs paid by the Company (which is one-sixth (1/6) share) with their revenues from production from the Putumayo 4 Block.
Rio de Oro and Puerto Barco Fields
La Cortez’ acquisition of Avante Colombia was in exchange for common stock of La Cortez. The purchase includes Avante Colombia’s Colombian branch, Avante Colombia Ltd. Sucursal. Avante Colombia currently has a 50% participation interest and is the operator of the Rio de Oro and Puerto Barco production contracts with Ecopetrol S.A. in the Catatumbo area, under an operating joint venture with Vetra Exploración y Producción Colombia S.A. Under the terms of the stock purchase agreement, La Cortez and Avante have also agreed to enter into a joint venture to develop further exploration opportunities in Colombia.
La Cortez, through its subsidiary Avante Colombia Inc., has initiated operating activities in the Puerto Barco Field. On August 15, 2011, Phase I (La Gabarra town to the Puerto Barco Field / Timbas Station) road upgrades were initiated. To date, the work has advanced in this sector, and is expected to be completed in less than three weeks. Phase II (upgrading of critical points on 23 kilometers of road from Tibu town to La Gabarra town) has not been initiated, pending final agreement with the Colombian government which is expected to be completed in the next two weeks.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Additional field information has been gathered and field inspection of the existing wells has been conducted. It is now planned to conduct a well service in the Puerto Barco-2 and Puerto Barco-3 wells during early December 2011, with rig mobilization expected to begin shortly thereafter if well testing results are favorable. The Company has approved the initial Authorization for Expenditure (AFE) for the first work-over well, and related activities (civil work, social work, facilities upgrading and security). Historical production in the Puerto Barco field has yielded high quality, light crude oil.
The Company continues to be actively engaged with Ecopetrol regarding opportunities to amend the existing contract terms, though the final outcome of such discussions remains unknown at this point. The first well intervention in Puerto Barco-2 and Puerto Barco-3 wells is considered to be a strategic milestone event that will give Ecopetrol the opportunity to evaluate the Company’s ability to implement exploration and development activity in the block beyond 2013.
| (5) | Related Party Transactions |
Common Stock Sales
On March 2, 2010, as part of a closing of its private placement offering, the Company sold 58,000 Units, at a price of $1.75 per Unit, for total consideration of $101,500 to the Company’s Chairman of the Board and Interim Chief Financial Officer, on the same terms as to other investors in the offering.
| (6) | Asset Retirement Obligation |
ASC 410-20 (formerly FAS No. 143), requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units-of-production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon the Company’s quarterly review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using the Company’s credit-adjusted-risk-free rate. The carrying value of the asset retirement obligation is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost related to oil property accounts. During the nine months ended September 30, 2011, a revision was made to the Company’s estimates to reflect the effects of updated anticipated plugging date estimates, mainly arising from increased production and its effect on reserve estimates.
The following table reflects the changes in the ARO during the nine months ended September 30, 2011.
| | | Amount | |
| Asset retirement obligation - beginning of period | | $ | 127,606 | |
| Current period revision to previous estimates | | | (47,534 | ) |
| Current period accretion | | | 12,575 | |
| Asset retirement obligation - end of period | | $ | 92,647 | |
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The following table reflects the changes in the ARO during the year ended December 31, 2010.
| | | Amount | |
| Asset retirement obligation - beginning of year | | $ | 3,860 | |
| Liabilities incurred in connection with Avante acquisition | | | 187,155 | |
| Current year revision to previous estimates | | | (71,292 | ) |
| Liabilities incurred with properties drilled | | | 4,799 | |
| Current year accretion | | | 3,084 | |
| Asset retirement obligation - end of year | | $ | 127,606 | |
The credit-adjusted-risk-free rate used in calculating ARO was approximately 18% at September 30, 2011 and December 31, 2010. This rate approximates the Company’s borrowing rate.
As of September 30, 2011 and December 31, 2010, there were 46,467,849 and 46,190,910 shares, respectively, of common stock and no shares of preferred stock issued and outstanding.
Registration Rights on Common Stock Sales
2008 Unit Offering
On July 23, 2008, the Board of Directors authorized the Company to offer up to a maximum of 10,000,000 units (the “2008 Unit Offering”) at an offering price of $1.25 per Unit. Each Unit consisted of one share of common stock and a common stock purchase warrant to purchase one-half share of common stock, exercisable for a period of five years at an exercise price of $2.25 per share. On September 10, 2008, the Company issued 4,784,800 shares of common stock as the result of the sale of 4,784,800 Units, and warrants to purchase 2,392,400 shares of common stock.
Investors in the 2008 Unit Offering have “piggyback” registration rights for the shares of common stock issued in the Unit Offering included in the Units and underlying the warrants included in the Units.
Additionally, investors in the 2008 Unit Offering have “demand” registration rights with respect to the shares of Common Stock included in the Units if the Company does not file a registration statement with the SEC in which the investors can exercise their ‘piggyback’ registration rights within six months of the Closing of the 2008 Unit Offering (which the Company did not do). Therefore, at any time on or after the date that is six months after the Closing, one or more of the investors that in the aggregate beneficially own at least 50% of the Shares issued in the Unit Offering may make a demand that the Company effect the registration of all or part of the investors’ Shares (a "Demand Registration"). Investors have the right to one Demand Registration pursuant to these provisions.
The Company would be required to prepare a Registration Statement following receipt of the required investor demand, to be filed with the SEC and to become effective within two hundred ten (210) days from the receipt of the demand notice, registering for resale all shares of Common Stock issued in the 2008 Unit Offering included in the Units of those investors who choose to participate in such Demand Registration. The Company will pay monetary penalties to these investors equal to one and one-quarter percent (1.25%) of the gross proceeds of the 2008 Unit Offering for each full month that the registration statement is late in being declared effective; provided, that in no event shall the aggregate of any such penalties exceed fifteen percent (15%) of the gross proceeds of the Unit Offering. No penalties shall accrue with respect to any shares of Common Stock removed from the registration statement in respect to a comment from the SEC limiting the number of shares of Common Stock which may be included in the registration statement. The holders of any common stock removed from the registration statement as a result of a comment from the SEC shall continue to have “piggyback” registration rights with respect to these shares. There has been no request for a Demand Registration as of September 30, 2011.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
2009 Mid-Year Unit Offering
On May 11, 2009, the Board of Directors authorized the Company to offer up to a maximum of 12,000,000 units (the “2009 Mid-Year Unit Offering”) at an offering price of $1.25 per Unit. Each Unit consisted of one share of common stock and a common stock purchase warrant to purchase one share of common stock, exercisable for a period of five years at an exercise price of $2.00 per share. On June 19, 2009 (“Initial Closing’), the Company issued 4,860,000 shares of common stock as the result of the sale of 4,860,000 Units, and warrants to purchase 4,860,000 shares of common stock. On July 31, 2009, the Company completed its final closing (the “Final Closing”) of the 2009 Mid-Year Unit Offering and closed on the sale of 205,000 Units. At the Final Closing, the Company issued 205,000 shares of common stock, and warrants to purchase 205,000 shares of common stock. The 2009 Mid-Year Unit Offering was terminated on July 31, 2009.
The Company entered into a registration rights agreement with the investors purchasing Units in the 2009 Mid-Year Unit Offering. The registration rights agreement requires that the Company prepare and file with the SEC a registration statement on Form S-1 covering the resale of all shares of common stock issued in the Offering (the “Registrable Shares”). Shares of common stock underlying the Warrants included in the Units carry “piggyback” registration rights. The registration rights agreement provides certain deadlines for the filing and effectiveness of the registration statement, including that the registration statement be declared effective by the SEC within 240 days after the final closing of the Offering. If the Company is unable to comply with this deadline, the Company will be required to pay as partial liquidated damages to the investors a cash sum equal to 1% of any unregistered Registrable Shares for every month in which such registration statement has not been declared effective, up to maximum liquidated damages of 10% of each investor’s aggregate investment amount. The Company obtained a waiver of these penalties from a majority in interest of the investors in the offering.
December 2009 and 2010 Private Placement Offerings
In December 2009, January 2010, March 2010 and April 2010, the Company closed on a Private Placement Offering (“PPO”). The details of the PPO which occurred during December 2009 and the year 2010 are as follows: (a) On December 29, 2009, the Company closed on the sale of 1,428,571 PPO Units; (b) on January 29, 2010, the Company closed on the sale of 571,428 PPO Units; (c) on March 2, 2010, the Company closed on the sale of 857,144 PPO Units, and (d) on April 19, 2010, the Company conducted the fourth and final closing of its PPO for an additional 5,905,121 PPO Units. Each “PPO Unit” was sold at a price of $1.75 and consists of (i) one share of the Company’s common stock, and (ii) a warrant representing the right to purchase one-half (1/2) of one share of its common stock, for a period of three years commencing on the final closing date of the PPO, at an exercise price of $3.00 per whole share (the “PPO Warrants”).
The Company has entered into a registration rights agreement (the “PPO RRA”) with the investors in the PPO. The PPO RRA provide such investors with “piggyback” registration rights with respect to the PPO Shares and the shares of its common stock issuable upon exercise of the PPO Warrants (collectively, the “Registrable PPO Shares”). The PPO RRA grants the holders of a majority of the Registrable PPO Shares subject to the PPO RRA with the right to demand registration of such shares if the Company fails to either file a registration statement on which they can piggyback or complete a listing of its common stock on a United States or Canadian national securities exchange (or, in the case of the investors in the December 29, 2009 closing, on the TSX Venture Exchange) within 180 days of the final closing of the PPO. Registrable PPO Shares are not subject to the PPO RRA if they may be immediately sold under the Securities Act (whether pursuant to Rule 144 thereunder or otherwise). The PPO RRA contains customary cutback, discontinuation and indemnification provisions.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Stock Option Awards
On March 28, 2011, the Company granted under the Amended and Restated 2008 Plan, options to purchase 24,000 shares of its common stock to a consultant. These options have a 10-year term, and 4,000 options vested at the date of grant and on the ninth day of each month beginning on April 9, 2011. They were granted with an exercise price equal to $0.99. The Company recognized compensation expense of $3,471 and $5,181 for the three and nine months ended September 30, 2011, respectively. As of September 30, 2011, all options granted to the consultant had fully vested.
On July 13, 2011, the Company granted under the Amended and Restated 2008 Plan, options to purchase 200,000 shares of its common stock to its Production and Operations Manager. These options vest pro-rata in three annual installments beginning on the first anniversary of the date of grant and have a 10 year term. They were granted with an exercise price equal to $0.46. The Company recognized compensation expense of $3,699 for the three and nine months ended September 30, 2011.
A summary of stock option activity during the nine months ended September 30, 2011 covering options granted to the Company���s employees and directors is presented in the table below:
| | | Number of Shares | | | Weighted- average Exercise Price | | | Weighted- average Remaining Contractual Term (years) | | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2010 | | | 2,475,000 | | | $ | 2.04 | | | | 7.93 | | | $ | — | |
| Granted | | | 200,000 | | | | 0.46 | | | | 9.79 | | | | — | |
| Exercised | | | — | | | | — | | | | — | | | | — | |
| Forfeited | | | (400,000 | ) | | | 1.44 | | | | — | | | | — | |
| Expired | | | — | | | | — | | | | — | | | | — | |
| Outstanding at September 30, 2011 | | | 2,275,000 | | | $ | 2.00 | | | | 7.26 | | | $ | — | |
Of the above employee options outstanding at September 30, 2011, 1,841,668 options are vested or exercisable. During the three and nine months ended September 30, 2011, the Company recognized stock-based compensation expense of approximately $36,000 and $329,000 related to stock options, including approximately $35,000 and $324,000, respectively, related to options granted to employees. As of September 30, 2011, there was approximately $162,000 of total unrecognized compensation cost related to non-vested stock options ($162,000 of which is related to employee options), which is expected to be recognized over a weighted-average period of approximately 0.26 years.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
A summary of stock option activity during the nine months ended September 30, 2011 covering options granted to the Company’s non-employees and non-directors is presented in the table below:
| | | Number of Shares | | | Weighted- average Exercise Price | | | Weighted- average Remaining Contractual Term (years) | | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2010 | | | 160,000 | | | $ | 2.00 | | | | 8.46 | | | $ | — | |
| Granted | | | 24,000 | | | | 0.99 | | | | 9.50 | | | | — | |
| Exercised | | | — | | | | — | | | | — | | | | — | |
| Forfeited | | | — | | | | — | | | | — | | | | — | |
| Expired | | | — | | | | — | | | | — | | | | — | |
| Outstanding at September 30, 2011 | | | 184,000 | | | $ | 1.87 | | | | 7.95 | | | $ | — | |
The fair value of the options granted during 2011 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Estimated market value of stock on grant date (1) | | $ | 0.44 - 0.70 | |
| Risk-free interest rate (2) | | | 2.18% - 2.23 | % |
| Dividend yield (3) | | | 0.00 | % |
| Volatility factor (4) | | | 68% - 71 | % |
| Expected life (5) | | 5.25 years | |
| Expected forfeiture rate (6) | | | 10 | % |
| | (1) | The estimated market value of the stock on the date of grant was based on the reported public market prices. |
| | (2) | The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant. |
| | (3) | Management determined the dividend yield to be 0% based upon its expectation that there will not be earnings available to pay dividends in the near term. |
| | (4) | The volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region, because the Company does not have adequate trading history to determine its historical volatility. |
| | | The expected life was estimated by management as the midpoint between the vesting date and the expiration date of the options. |
| | | Management estimated that the forfeiture rate at 10% based on its experience with companies in similar industries and regions. |
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
Restricted Stock Units
Restricted stock unit activity during the nine months ended September 30, 2011 is as follows:
| | | Number of Restricted Stock Shares | | | Weighted- average Grant Price | | | Weighted- average Remaining Contractual Term (years) | |
| Outstanding at December 31, 2010 | | | 422,940 | | | $ | 1.68 | | | | 2.73 | |
| Granted | | | 10,000 | | | | 1.08 | | | | — | |
| Exercised | | | — | | | | — | | | | — | |
| Forfeited | | | (14,629 | ) | | | 1.68 | | | | — | |
| Expired | | | — | | | | — | | | | — | |
| Outstanding at September 30, 2011 | | | 418,311 | | | $ | 1.66 | | | | 1.98 | |
As of September 30, 2011, 139,439 of the above restricted stock units were vested, and there was approximately $414,000 of unrecognized compensation cost related to non-vested restricted stock unit compensation arrangements granted under the 2008 Equity Incentive Plan. That cost is expected to be recognized over a weighted-average period of 1.98 years. The Company recognized compensation expense related to these restricted stock units amounting to $52,694 and $156,705 during the three and nine months ended September 30, 2011, respectively and $3,954 for the three and nine months ended September 30, 2010.
| (8) | Derivative Warrant Instruments (Liabilities) |
During the three and nine months ended September 30, 2011, the fair value of the warrant derivative instruments liability decreased by $909,749 and $7,306,267, respectively, and were recorded as unrealized gain on fair value of derivative warrant instruments in the accompanying condensed consolidated statements of operations.
Activity for derivative warrant instruments during the nine months ended September 30, 2011 was as follows:
| | | | | | | | | Decrease in | | | | |
| | | | | | Activity | | | Fair Value of | | | | |
| | | December 31, | | | during the | | | Derivative | | | September 30, | |
| | | 2010 | | | period | | | Liability | | | 2011 | |
| Derivative warrant instruments | | $ | 7,457,125 | | | $ | - | | | $ | (7,306,267 | ) | | $ | 150,858 | |
| | | $ | 7,457,125 | | | $ | - | | | $ | (7,306,267 | ) | | $ | 150,858 | |
Activity for derivative warrant instruments during the nine months ended September 30, 2010 was as follows:
| | | | | | | | | Decrease in | | | | |
| | | | | | Activity | | | Fair Value of | | | | |
| | | December 31, | | | during the | | | Derivative | | | September 30, | |
| | | 2009 | | | period | | | Liability | | | 2010 | |
| Derivative warrant instruments | | $ | 7,500,138 | | | $ | 5,766,703 | | | $ | (944,429 | ) | | $ | 12,322,412 | |
| | | $ | 7,500,138 | | | $ | 5,766,703 | | | $ | (944,429 | ) | | $ | 12,322,412 | |
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The fair value of the derivative warrant instruments is estimated using a probability-weighted scenario analysis model with the following assumptions as of September 30, 2011 and 2010:
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | |
| Common stock issuable upon exercise of warrants | | | 15,510,203 | | | | 15,510,203 | |
| Estimated market value of common stock on measurement date | | $ | 0.20 | (1) | | $ | 1.67 | (2) |
| Exercise price | | $ | 1.25 to $3.00 | | | $ | 1.25 to $3.00 | |
| Risk free interest rate (3) | | | 0.19% - 0.69 | % | | | 0.53% - 1.27 | % |
| Warrant lives in years | | | 1.25 - 3.55 | | | | 2.25 - 4.55 | |
| Expected volatility (4) | | | 61 | % | | | 71 | % |
| Expected dividend yields (5) | | None | | | None | |
| | (1) | The estimated market value of the stock is measured each period-end and is based on the reported public market prices. |
| | (2) | The estimated market value of the stock is measured each period end and is based on a calculation by management after consideration of price per share received in private offerings and reported public market prices and adjusted for the effect of previously issued warrants. |
| | (3) | The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the warrant on date of grant. |
| | (4) | The volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region, because the Company does not have adequate trading history to determine its historical volatility. |
| | | Management determined the dividend yield to be 0% based upon its expectation that there will not be earnings available to pay dividends in the near term. |
| (9) | Fair Value Measurements |
As defined in FASB ASC Topic No. 820 – 10 (formerly SFAS 157, Fair Value Measurements), fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820 – 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
| Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that La Cortez values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace. |
| Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). La Cortez’s valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. La Cortez does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2. |
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
As required by FASB ASC Topic No. 820 – 10 (formerly SFAS 157), financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative warrant instruments was calculated using a probability-weighted scenario analysis model (see Note 8).
Fair Value on a Recurring Basis
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011:
| | | Fair Value Measurements at September 30, 2011 | |
| | | Quoted Prices | | | | | | | | | | |
| | | In Active | | | Significant | | | | | | Total | |
| | | Markets for | | | Other | | | Significant | | | Carrying | |
| | | Identical | | | Observable | | | Unobservable | | | Value as of | |
| | | Assets | | | Inputs | | | Inputs | | | September 30, | |
| Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2011 | |
| Derivative warrant instruments | | $ | - | | | $ | - | | | $ | 150,858 | | | $ | 150,858 | |
| Total | | $ | - | | | $ | - | | | $ | 150,858 | | | $ | 150,858 | |
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010:
| | | Fair Value Measurements at September 30, 2010 | |
| | | Quoted Prices | | | | | | | | | | |
| | | In Active | | | Significant | | | | | | Total | |
| | | Markets for | | | Other | | | Significant | | | Carrying | |
| | | Identical | | | Observable | | | Unobservable | | | Value as of | |
| | | Assets | | | Inputs | | | Inputs | | | September 30, | |
| Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2010 | |
| Derivative warrant instruments | | $ | - | | | $ | - | | | $ | 12,322,412 | | | $ | 12,322,412 | |
| Total | | $ | - | | | $ | - | | | $ | 12,322,412 | | | $ | 12,322,412 | |
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as level 3 in the fair value hierarchy:
| | | Significant Unobservable Inputs (Level 3) | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Beginning balance | | $ | (1,060,607 | ) | | $ | (13,368,864 | ) | | $ | (7,457,125 | ) | | $ | (7,500,138 | ) |
| Total gains (losses) | | | 909,749 | | | | 1,046,452 | | | | 7,306,267 | | | | 944,429 | |
| Settlements | | | - | | | | - | | | | - | | | | - | |
| Additions | | | - | | | | - | | | | - | | | | (5,766,703 | ) |
| Transfers | | | - | | | | - | | | | - | | | | - | |
| Ending balance | | $ | (150,858 | ) | | | (12,322,412 | ) | | $ | (150,858 | ) | | $ | (12,322,412 | ) |
| | | | | | | | | | | | | | | | | |
Change in unrealized gains included in earnings relating to derivatives still held as of September 30, 2011 and 2010 | | $ | 909,749 | | | $ | 1,046,452 | | | $ | 7,306,267 | | | $ | 944,429 | |
Fair Value on a Non-Recurring Basis
On January 1, 2009, the Company adopted the provisions of ASC 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. As it relates to the Company, the adoption applies to certain nonfinancial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; impaired unproved oil and gas property assessments; and the initial recognition of asset retirement obligations for which fair value is used.
| (10) | Sales to Major Customers |
The Company, through its 20% interest in the Maranta field production, sold oil representing 10% or more of total revenues for the nine month periods ended September 30, 2011 and 2010 to the customers shown below:
| | | September 30, | | | September 30, | |
| | | 2011 | | | 2010 | |
| Customer A | | | - | | | | 4 | % |
| Customer B | | | 32 | % | | | 18 | % |
| Customer C | | | 12 | % | | | - | |
| Customer D | | | 6 | % | | | 8 | % |
| Customer E | | | 50 | % | | | 63 | % |
| Customer F | | | - | | | | 7 | % |
In the oil and gas industry, production is often sold to a relatively few customers. Substantially all of the Company’s customers are concentrated in the oil industry and revenue can be materially affected by current economic conditions, the price of certain commodities such as crude oil and natural gas and the availability of alternate purchasers. The Company believes that the loss of any of its major purchasers would not have a long-term material adverse effect on its operations.
LA CORTEZ ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (Unaudited)
| (11) | Commitments and Contingencies |
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, the Company is not currently a party to any proceeding that management believes, if determined in a manner adverse to the Company, could have a potential material adverse effect on its consolidated financial condition, results of operations or cash flows.
On October 25, 2010, the Alabama Securities Commission (“ASC”) issued a Cease and Desist (“C&D”) naming the Company and certain other parties. ASC alleged that securities in the Company’s 2010 private placement of units were sold to Alabama residents in violation of the Alabama securities laws, in that the securities were not sold by a broker dealer or registered representative who was registered in the State of Alabama. The Company has cooperated with the ASC and responded to the requests for information. As of the date of filing of this report, the ASC has not taken any further action against the Company. Although there can be no assurance as to the ultimate outcome, based on information currently available, the Company believes the amount, or range, of reasonably possible losses (if any) in connection with this matter will not be material to its consolidated financial condition or cash flows. The total proceeds received from these Alabama residents associated with the private placement of units were approximately $160,000.
Additionally, the Company is subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of the Company could be adversely affected.
Effective May 1, 2010, the Company entered into a consulting agreement with a third party for the third party entity to provide investor relations services to the Company for a monthly fee of $15,000 and 25,000 shares of the Company’s common stock during the first twelve months of the agreement, and $10,000 and 20,000 shares of the Company’s common stock thereafter. This agreement expired in May 2011. On April 25, 2011, the Company entered into a consulting agreement with another third party for such third party entity to provide investor relations services to the Company for a monthly fee of $10,000 and 12,500 shares of the Company’s common stock during the term of the agreement covering a period of three months. This agreement expired in July 2011.
Colombian Equity-Based Tax
The Colombian government recently enacted a tax reform act which, among other things, adopted a one-time, net-worth tax for all Colombian entities. For purposes of this tax, the net worth of an entity was assessed on January 1, 2011, and is payable in eight semi-annual installments from 2011 through 2014. Based on the Company’s Colombian entities’ net equity, the Company’s total net-worth gross tax obligation was approximately $1.1 million. The Company recognized the related expense arising from this tax obligation of approximately $779,000 (the present value of all future payments as of January 1, 2011) as a component of general and administrative expenses in the condensed consolidated statement of operations during the three and nine months ended September 30, 2011, and recorded $32,488 and $106,537 as interest expense during the three and nine months ended September 30, 2011, respectively. The present value of this obligation as of September 30, 2011 (using a discount rate of 18%, which approximates the Company’s borrowing rate) is reflected as other liabilities in the Company’s condensed consolidated balance sheet as of September 30, 2011.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above and “Risk Factors” included in our Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2011 (the “2010 Form 10-K”), for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.
The following discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared on the accrual basis of accounting, whereby revenues are recognized when earned, and expenses are recognized when incurred. These condensed consolidated financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, are unaudited. In the opinion of management, such financial statements include the adjustments and accruals necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in these financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, pursuant to the rules and regulations of the SEC.
You should read this discussion and analysis together with such financial statements and the notes thereto.
Overview and Going Concern
We are an international, early stage oil and gas exploration and production company focusing our business in South America, and have established a corporate headquarters in Bogotá, Colombia. We have entered into two initial working interest agreements, with Petronorte and with Emerald, and have acquired a private company, Avante Colombia. We continue to diligently evaluate additional investment prospects, companies and existing exploration and production opportunities in Colombia, while remaining alert for opportunities in other South American countries.
We were initially incorporated in the State of Nevada on June 9, 2006 under the name La Cortez Enterprises, Inc. to pursue certain business opportunities in Mexico. During 2008, our Board of Directors decided to redirect the Company’s efforts towards identifying and pursuing business in the oil and gas sector in South America. As a reflection of this change in our strategic direction, we changed our name to La Cortez Energy, Inc.
Going Concern
In the course of our development activities, we have sustained losses and expect such losses to continue through at least the next twelve months from the filing date of this report. We expect to finance our operations primarily through our existing cash, our existing oil production and any future financing. However, there exists substantial doubt about our ability to continue as a going concern because we will be required to obtain additional capital in the future to continue our operations and there is no assurance that we will be able to obtain such capital, through equity or debt financing, or any combination thereof, or on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet our ultimate capital needs and to support our growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted. Therefore, there is substantial doubt as to our ability to continue as a going concern for a period longer than the next twelve months. Additionally, our independent auditors included an explanatory paragraph in their report on our consolidated financial statements included in our Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on April 1, 2011, that raises substantial doubt about our ability to continue as a going concern. Our ability to complete additional rounds of financing is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception of the Company and offering terms. In addition, our ability to complete an offering may be dependent on the status of our oil and gas exploration activities, which cannot be predicted. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which implies we will continue to meet our obligations and continue our operations for the next twelve months from the date of filing of this report. Realization values may be substantially different from carrying values as shown, and our condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of this uncertainty.
Operational Update
Maranta Block – Mirto Field
On February 6, 2009, we entered into a farm-in agreement (the “Farm-In Agreement”) with Emerald Energy Plc Sucursal Colombia (“Emerald”), a Colombian branch of Emerald Energy Plc. (“Emerald Energy”), a company existing under the laws of the United Kingdom, for a 20% participating interest (the “Participating Interest”) in the Maranta exploration and production block (“Maranta”), which covers 90,458 acres (36,608 hectares) in the Putumayo Basin in Southwest Colombia.
On February 4, 2010, we signed a joint operating agreement with Emerald with respect to the Maranta Block, and we have asked Emerald to submit a request to the Agencia Nacional de Hidrocarburos (“ANH”) to approve the assignment of our 20% participating interest to us. If the ANH does not approve this assignment, Emerald and La Cortez have agreed to use our best endeavors to seek in good faith a legal way to enter into an agreement with terms equivalent to the Farm-In Agreement and the joint operating agreement, that shall privately govern the relations between the parties with respect to the Maranta Block and which will not require ANH approval.
Emerald has filed a request with the ANH for the assignment of the 20% working interest in the Maranta Block to La Cortez. In order to qualify as a contractor with the ANH, we have submitted, on April 15, 2011, legal, operating, technical and financial information, including prior years’ audited financial statements, to be reviewed by the ANH. On July 12, 2011, we were informed by Emerald that the request for transfer of the 20% interest was not approved because the ANH determined that the submitted information did not comply with the financial requirements demanded by the contract signed between the ANH and Emerald. We plan to discuss the financial information with the ANH, including the accounting for the derivative warrant instruments liability, and send a new request for the assignment. Non-approval by the ANH does not affect the current joint operating agreement between Emerald and La Cortez. We plan to submit a new set of financial information to the ANH shortly after filing with the SEC our Form 10-Q for the period ended September 30, 2011.
Emerald, the operator of the Maranta Block, completed drilling operations of the Mirto-2 exploratory well on August 15, 2010, after having conducted a sidetrack on the well. Mirto-2 production tests were initiated on September 23, 2010, for a 5-day period on the Villeta U sand. The well was put back on an extended production test on October 16, 2010 until December 10, 2010, and was then placed on long-term production testing from a different zone (the Villeta N sand) in January 2011, and continues to produce at an average rate (January 9 to November 2, 2011) of 467 bopd gross (93 bopd net to La Cortez before royalties) of 15.6 degrees API oil with an average Base Sediment and Water (BS & W) of 0.62%. The capitalized costs associated with the Mirto 2 well were categorized as proved properties as of December 31, 2010 and September 30, 2011 and were subject to depletion and impairment.
The workover on the Mirto-1 well resulted in a long-term production test on the Villeta N sand, which commenced on August 23, 2011, during which the well was producing at an average rate of 341 bopd gross before royalties (68.1 bopd net to La Cortez before royalties) until October 5, 2011, when the Electro Submersible Pump (ESP) failed to operate. A well service rig was transported to the site and a well service work to replace the pump was conducted. The work was completed on November 1, 2011, and the well is currently back in production, and producing at a rate of 321 bopd gross with 0.71% Base Sediment and Water (BS&W). It is expected to reach an average of 350 bopd gross with a 0.30% water cut.
Current production from the Mirto-1 and Mirto-2 wells is 659 bopd gross before royalties, or 132 bopd net before royalties to La Cortez.
Phase 3 of the initial exploration program was completed last year with the drilling of the Mirto-2 well. Both Emerald and La Cortez have complied with the exploration obligations on this block in accordance with the contract signed with the ANH. Under the contract terms and conditions, and after completion of this phase, both La Cortez and Emerald have relinquished 50% of the area of the block, as selected by both parties, and exercised the option to continue exploration activities in the remaining 50% of the area by committing to additional exploration activity with the ANH, such as new seismic acquisition or drilling a new exploration well. This is a normal procedure and in accordance with the standard contract with the ANH. Emerald has received approval from the ANH, which was dated April 11, 2011, on the additional exploration program and has signed the amendment to the contract. Phase 1 of the subsequent exploratory program requires both Emerald and La Cortez to comply with the acquisition of 120 km of 2D seismic or the drilling of an exploration well on or before August 2012, with an optional Phase 2 of the subsequent exploratory program requiring another acquisition of 120 km of 2D seismic or the drilling of an exploratory well on or before August 2014. Emerald and La Cortez are in the final stages to determine the activity plan for the year 2012, which includes drilling of at least one more exploration well (Agapanto-1) in the Maranta Block, which is a commitment to the Colombian government. This activity will be targeting the Villeta formation N, U, and T sands, which are producing areas within the Mirto field.
Putumayo 4 Block
On December 22, 2008, the Company entered into a memorandum of understanding (the “MOU”) with Petroleos del Norte S.A. (“Petronorte”), a Colombian subsidiary of Petrolatina Energy Plc., that entitles the Company to a 50% net working interest in the Putumayo 4 block, which covers 126,845 acres (51,333 hectares) in the Putumayo Basin (the “Putumayo 4 Block”). According to the MOU, the Company will have the exclusive right to a 50% net participation interest in the Putumayo 4 Block and in the exploration and production contract (the “E&P Contract”) after ANH production participation. Petronorte signed an E&P Contract with the ANH in February 2009. Petronorte will be the “operator” of the E&P Contract.
Petronorte and La Cortez have been conducting the community consultation process for the seismic acquisition in the northern part of the Putumayo 4 Block. This process was recently completed, and the bidding process has been initiated, in which more than 10 seismic service companies were invited to participate for the acquisition of 104.8 km of 2d seismic in the area which is part of the work commitment to the ANH. An additional 45-50 km of 2d seismic will also be acquired as part of the additional investment commitment of $ 1.6 million made to the ANH during the 2008 bidding round. It is expected that the seismic acquisition bidding process will be finalized by the end of November 2011, and immediately thereafter, initiate acquisition activities during December 2011. The seismic acquisition process is expected to take no longer than 3 months.
Petronorte and La Cortez are also working on the community consultation process for the drilling of the first exploration well in 2012, in addition to working in preparing the Environmental Impact Study or Estudio de Impacto Ambiental (EIA), to be presented to the Colombian authorities in order to obtain the exploration well drilling license. It is expected that drilling operations will be initiated by the third quarter of 2012, as soon as all permits are obtained. This exploration well will also be targeting the Villeta formation N, U, and T sands as well as the Caballos formation. Other companies are currently producing from these sands in fields located near the Putumayo 4 Block.
Under the terms of the contract signed with the ANH, we must complete the acquisition of at least 103 km of seismic, the drilling of an exploratory well and additional work for a value of $1.6 million before August 25, 2012, when the 3-year term of Phase I ends. In response to delays associated with the community consultation process on the block, Petronorte sent a letter to the ANH on May 23, 2011 asking for the suspension of the contract for about seven months, thereby possibly extending the Phase I completion date to March 25, 2013, due to delays on availability of the Ministry of Interior representative to carry on with the consultation process with communities. Petronorte is asking that an additional seven months be added to the original commitment in order to compensate for the impact on the original schedule. The ANH answered the initial correspondence letter on June 20, 2011, with indications that they were studying this request, but did not give any indication on their final decision. Petronorte and La Cortez continue to wait for a formal answer to the seven month suspension request from the ANH.
Petronorte has filed a request with the ANH for the assignment of the 50% working interest in the Putumayo 4 Block to La Cortez. In order to qualify as a contractor with the ANH, we have submitted, legal, operating, technical and financial information, including prior years’ audited financial statements, to be reviewed by the ANH. The ANH has requested for additional information that has been provided on a timely basis. No official reply has been obtained from the ANH.
The Putumayo 4 Block covers 126,845 acres (51,333 hectares) located in the Putumayo Basin.
Rio de Oro and Puerto Barco Fields
Through our subsidiary Avante Colombia, we have initiated operating activities in the Puerto Barco Field. On August 15, 2011, Phase I (La Gabarra town to the Puerto Barco Field / Timbas Station) road upgrades were initiated. To date, the work has advanced in this sector, and is expected to be completed in less than 3 weeks. Phase II (upgrading of critical points on 23 kilometers of the road Tibu town to La Gabarra town) has not been initiated, pending final agreement with the Colombian government, which is expected to be completed in the next two weeks.
Additional field information has been gathered and field inspection of the existing wells has been conducted. It is now planned to conduct well service operations in the Puerto Barco-2 and Puerto Barco-3 wells during early December 2011, with rig mobilization expected to begin shortly thereafter if well testing results are favorable. We have approved the initial Authorization for Expenditure (AFE) for the first work-over well, and related activities (civil work, social work, facilities upgrading and security) which is estimated to cost $1.87 million net to La Cortez. Initial production is expected in late December, with production rates estimated to reach 50 - 75 bopd net. Historical production in the Puerto Barco field has yielded high quality, light crude oil exceeding 40 degrees API.
We continue to be actively engaged with Ecopetrol regarding opportunities to amend the existing contract terms, though the final outcome of such discussions remains unknown at this point. The first well intervention in Puerto Barco-2 and Puerto Barco-3 wells is considered to be a strategic milestone that will give Ecopetrol the opportunity to evaluate our ability to successfully implement exploration and development activity in the block beyond 2013.
La Cortez Energy Inc., through our subsidiary, Avante Colombia Inc., currently has a 50% participation interest and is the operator of the Rio de Oro and Puerto Barco production contracts with Ecopetrol S.A. in the Department of North Santander in the Catatumbo region of northeastern Colombia, under an operating joint venture with Vetra Exploracion y Produccion Colombia S.A.
Listing Application
We have applied to list our common stock on the TSX Venture Exchange (“Exchange”). However, the application is subject to Exchange review and to our fulfilling all of the listing requirements of the Exchange. There can be no assurance that our application will be accepted.
Results of Operations
Three Months Ended September 30, 2011, Compared with Three Months Ended September 30, 2010
A summary of our results for the three month periods ended September 30, 2011 and 2010 is as follows:
| | | Three Months Ended September 30, | | | Percentage Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | |
| | | | | | | | | | |
| Revenues | | $ | 623,135 | | | $ | 251,266 | | | | 148 | % |
| Costs and expenses | | | (1,427,451 | ) | | | (1,604,795 | ) | | | (11 | )% |
| Non-operating income, net | | | 902,491 | | | | 1,063,807 | | | | (15 | )% |
| Income tax expense | | | (8,474 | ) | | | (39,757 | ) | | | (79 | )% |
| Net income (loss) | | $ | 89,701 | | | $ | (329,479 | ) | | | (127 | )% |
Revenues
We earned oil revenues of $623,135 for the three months ended September 30, 2011, compared to $251,266 for the three months ended September 30, 2010. The increase in revenues is primarily due to the successful results of the workover conducted in the Mirto-2 well and the production testing initiated on January 9, 2011, as well as the re-initiation of production during the third quarter of 2011 from the Mirto-1 well. Revenues recognized for the three months ended September 30, 2010 are related to the Mirto-1 well which started producing during the fourth quarter of 2009 and continued producing until the fourth quarter of 2010.
Costs and Expenses
Our operating costs and expenses for the three months ended September 30, 2011 and 2010, consisted of the following:
| | | Three Months Ended September 30, | | | Percentage Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | |
| | | | | | | | | | |
| Operating costs | | $ | 500,144 | | | $ | 281,309 | | | | 78 | % |
| Depreciation, depletion, accretion and amortization | | | 38,384 | | | | 87,607 | | | | (56 | )% |
| General and administrative | | | 888,923 | | | | 1,235,879 | | | | (28 | )% |
| Total | | $ | 1,427,451 | | | $ | 1,604,795 | | | | (11 | )% |
Operating costs
Our operating costs for the three months ended September 30, 2011 amounted to $500,144, which mainly pertain to workover costs and costs incurred in our production activities on the Mirto-1 well. Our operating costs during the third quarter of 2010 included costs incurred in our production activities on the Mirto-1 well.
Depreciation, Depletion, Accretion, and Amortization Expenses
The decrease in our depreciation, depletion, accretion, and amortization expenses for the three months ended September 30, 2011 as compared to 2010 is mainly attributed to the increase in the estimated quantities of our proved reserves in 2011 as a result of the change in production estimates.
General and Administrative Expenses
We incurred total general and administrative expenses of $888,923 for the three months ended September 30, 2011 compared to $1,235,879 for the three months ended September 30, 2010. This was primarily due to a decrease in professional fees to $288,505 for the three months ended September 30, 2011 from $600,374 for the three months ended September 30, 2010; a decrease in travel expense to $44,705 for the three months ended September 30, 2011 from $48,742 for the comparable period of 2010; and a decrease in other expenses to $103,530 for the three months ended September 30, 2011 from $138,605 for the 2010 period. This decrease was partially offset by an increase in payroll expenses to $418,103 in the 2011 period from $415,537 during the three months ended September 30, 2010; and an increase in rent expense to $34,080 for the three months ended September 30, 2011 from $32,621 for the comparable period of 2010. In particular, the decrease in professional fees and other general and administrative expenses during the 2011 period as compared to the 2010 period is primarily due to higher reserve engineer, executive search, and investor relations consultancy expenses incurred during the 2010 period.
Non-operating Income, Net
Net non-operating income for the three months ended September 30, 2011, was $902,491, compared to $1,063,807 for the three months ended September 30, 2010. During the three months ended September 30, 2011, we recognized an unrealized gain from the decrease in the fair value of derivative warrant instruments liability of $909,749 compared to an unrealized gain of $1,046,452 during the three months ended September 30, 2010. The decrease in the derivative warrant instruments’ fair value was due to several factors, the most significant of which was due to the larger decrease in the market value of our common stock measured from June 30, 2011 to September 30, 2011 as compared to the market value of our common stock measured from June 30, 2010 to September 30, 2010. We estimate our derivative warrant instruments liability calculations using a probability-weighted scenario analysis model.
Net Income (Loss)
Our net income for the three months ended September 30, 2011 was $89,701 compared to a net loss of $329,479 for the three months ended September 30, 2010. The increase in net income is mainly due to an increase in our revenues as well as a decrease in general and administrative expenses in the 2011 period from the 2010 period.
Adjusted EBITDA
In evaluating our business, we consider earnings before interest income, taxes, depreciation, depletion, accretion and amortization, impairment expenses on oil properties, and unrealized gains and loss on fair value of derivative warrants instruments (“Adjusted EBITDA”) as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We believe Adjusted EBITDA presents a more realistic picture of our performance than income from operations or cash flow from operations as presented in our consolidated financial statements and a more meaningful measure of our current liquidity. We believe that this measure may also be useful to investors for the same purpose and as an indication of our ability to generate cash flow at a level that can sustain or support our operations and capital investment program. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. generally accepted accounting principles (“GAAP”), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies.
Adjusted EBITDA for the three months ended September 30, 2011 and 2010 is calculated as follows:
| | | Three months ended September 30, | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Net income (loss) | | $ | 89,701 | | | $ | (329,479 | ) |
| Adjustments: | | | | | | | | |
| Depreciation, depletion, accretion and amortization | | | 38,384 | | | | 87,607 | |
| Income taxes | | | 8,474 | | | | 39,757 | |
| Unrealized gain on fair value of derivative warrant instruments, net | | | (909,749 | ) | | | (1,046,452 | ) |
| Common stock for services | | | 4,763 | | | | 127,000 | |
| Stock-based compensation expense | | | 88,471 | | | | 248,878 | |
| Interest expense (income), net | | | 7,258 | | | | (17,355 | ) |
| Adjusted EBITDA | | $ | (672,698 | ) | | $ | (890,044 | ) |
Adjusted EBITDA for the three months ended September 30, 2011 was a loss of $0.7 million, compared to a loss of $0.9 million for the three months ended September 30, 2010. The decrease in the loss was primarily caused by the increase in our revenues for the three months ended September 30, 2011 as compared to the 2010 period.
Nine Months Ended September 30, 2011, Compared with Nine Months Ended September 30, 2010
A summary of our results for the nine month periods ended September 30, 2011 and 2010 is as follows:
| | | Nine Months Ended September 30, | | | Percentage Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | |
| | | | | | | | | | |
| Revenues | | $ | 1,626,009 | | | $ | 417,540 | | | | 289 | % |
| Costs and expenses | | | (5,546,120 | ) | | | (5,485,711 | ) | | | 1 | % |
| Non-operating income, net | | | 7,281,789 | | | | 994,607 | | | | 632 | % |
| Income tax expense | | | (29,977 | ) | | | (39,757 | ) | | | (25 | )% |
| Net income (loss) | | $ | 3,331,701 | | | $ | (4,113,321 | ) | | | (181 | )% |
Revenues
We earned oil revenues of $1,626,009 for the nine months ended September 30, 2011, compared to $417,540 for the nine months ended September 30, 2010. The increase in revenues is primarily due to the successful results of the workover conducted in the Mirto-2 well and the production testing initiated on January 9, 2011, as well as the re-initiation of production during the third quarter of 2011 from the Mirto-1 well. Revenues recognized for the nine months ended September 30, 2010 are related to the Mirto-1 well which started producing during the fourth quarter of 2009 and continued producing until the fourth quarter of 2010.
Costs and Expenses
Our operating costs and expenses for the nine months ended September 30, 2011 and 2010, consisted of the following:
| | | Nine Months Ended September 30, | | | Percentage Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | |
| | | | | | | | | | |
| Operating costs | | $ | 946,980 | | | $ | 1,124,563 | | | | (16 | )% |
| Depreciation, depletion, accretion and amortization | | | 128,338 | | | | 181,582 | | | | (29 | )% |
| Impairment expense | | | - | | | | 273,318 | | | | - | |
| General and administrative | | | 4,470,802 | | | | 3,906,248 | | | | 14 | % |
| Total | | $ | 5,546,120 | | | $ | 5,485,711 | | | | 1 | % |
Operating costs
Our operating costs for the nine months ended September 30, 2011 amounted to $946,980, pertaining to our costs incurred in production activities for the Mirto-2 well, which began producing in January 2011, as well as workover costs and costs incurred in our production activities on the Mirto-1 well during the third quarter of 2011. Our operating costs during the 2010 period included significant costs to work over the Mirto-1 well which were not capitalizable. Workover activities were performed on the Mirto-1 well during the third quarter of 2011 which resulted to its current production at a rate of 292 bopd gross with 6% Base Sediment and Water (BS&W).
Depreciation, Depletion, Accretion, and Amortization Expenses
The decrease in our depreciation, depletion, accretion, and amortization expenses for the nine months ended September 30, 2011 as compared to 2010 is mainly attributed to the increase in the estimated quantities of our proved reserves in 2011 as well as a reduction in the amortization base in 2011 due to the impairment recorded in 2010.
Impairment Expenses
There was no impairment expense on our oil properties during the nine months ended September 30, 2011, as compared to $273,318 during the same 2010 period. These reflected the results of our ceiling test calculations and our reserve estimates at the end of each quarter.
General and Administrative Expenses
We incurred total general and administrative expenses of $4,470,802 for the nine months ended September 30, 2011 compared to $3,906,248 for the nine months ended September 30, 2010. This was primarily due to an increase in payroll expenses to $1,441,503 in the 2011 period from $1,307,001 during the nine months ended September 30, 2010; an increase in travel expense to $157,487 for the nine months ended September 30, 2011 from $124,231 for the comparable period of 2010; an increase in rent expense to $99,843 for the nine months ended September 30, 2011 from $92,350 for the comparable period of 2010; and an increase in other expenses to $1,218,840 for the nine months ended September 30, 2011 (which includes approximately $779,000 arising from an equity-based tax during the nine months ended September 30, 2011, as discussed below) from $386,324 for the 2010 period. These increases were partially offset by a decrease in professional fees to $1,553,129 for the nine months ended September 30, 2011 from $1,996,342 for the nine months ended September 30, 2010. In particular, the increase in other general and administrative expenses during the 2011 period as compared to the 2010 period is primarily due to an expense recognized during the 2011 period of approximately $779,000 arising from an equity-based tax effective January 1, 2011 by the Colombian tax authorities on all Colombian entities.
Non-operating Income, Net
Net non-operating income for the nine months ended September 30, 2011, was $7,281,789, compared to net non-operating expense of $994,607 for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, we recognized an unrealized gain from the decrease in the fair value of derivative warrant instruments liability of $7,306,267 compared to $944,429 during the nine months ended September 30, 2010. The decrease in the derivative warrant instruments’ fair value was due to several factors, the most significant of which was due to the larger decrease in the market value of our common stock measured from December 31, 2010 to September 30, 2011 as compared to the market value of our common stock measured from December 31, 2009 to September 30, 2010. We estimate our derivative warrant instruments liability calculations using a probability-weighted scenario analysis model.
Net Income (Loss)
Our net income for the nine months ended September 30, 2011 was $3,331,701 compared to a net loss of $4,113,321 for the nine months ended September 30, 2010. The increase in net income is mainly due to an increase in both our revenues and in our non-operating income in the 2011 period from the 2010 period.
Adjusted EBITDA
In evaluating our business, we consider earnings before interest income, taxes, depreciation, depletion, accretion and amortization, impairment expenses on oil properties, and unrealized gains and loss on fair value of derivative warrants instruments (“Adjusted EBITDA”) as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We believe Adjusted EBITDA presents a more realistic picture of our performance than income from operations or cash flow from operations as presented in our consolidated financial statements and a more meaningful measure of our current liquidity. We believe that this measure may also be useful to investors for the same purpose and as an indication of our ability to generate cash flow at a level that can sustain or support our operations and capital investment program. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. generally accepted accounting principles (“GAAP”), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies.
Adjusted EBITDA for the nine months ended September 30, 2011 and 2010 is calculated as follows:
| | | Nine months ended September 30, | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Net income (loss) | | $ | 3,331,701 | | | $ | (4,113,321 | ) |
| Adjustments: | | | | | | | | |
| Depreciation, depletion, accretion and amortization | | | 128,338 | | | | 181,582 | |
| Impairment expense | | | - | | | | 273,318 | |
| Income taxes | | | 29,977 | | | | 39,757 | |
| Unrealized loss (gain) on fair value of derivative warrant instruments, net | | | (7,306,267 | ) | | | (944,429 | ) |
| Common stock for services | | | 109,013 | | | | 213,500 | |
| Stock-based compensation expense | | | 485,652 | | | | 428,392 | |
| Interest expense (income), net | | | 24,478 | | | | (50,178 | ) |
| Adjusted EBITDA | | $ | (3,197,108 | ) | | $ | (3,971,379 | ) |
Adjusted EBITDA for the nine months ended September 30, 2011 was a loss of $3.2 million, compared to a loss of $4.0 million for the nine months ended September 30, 2010. The decrease in the loss was primarily due to the increase in our revenues for the nine months ended September 30, 2011 as compared to the 2010 period.
Liquidity and Capital Resources
Our cash and cash equivalents balance as of September 30, 2011, was $4,618,746 compared to $8,327,020 as of December 31, 2010. This decrease was mainly due to payments for our administrative expenses during the nine months ended September 30, 2011.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity.
For further discussion on going concern, please see Overview and Going Concern section above.
We have entered into a memorandum of understanding and joint operating agreement with Petronorte for the Putumayo-4 Block and a farm-in agreement and joint operating agreement with Emerald for the Maranta Block.
In November 2009, we deposited $2.7 million into a trust account as our portion of the ANH-required performance guarantee under Petronorte’s E&P contract. These funds will not be able to be used for other corporate purposes during the life of the guarantee.
In accordance with the terms of the Emerald farm-in agreement, we have borne 65% ($1.2 million) of the currently estimated $1.8 million Mirto-1 completion costs. We made this $1.2 million payment to Emerald on July 27, 2009. Additional Phase 2 costs were paid by us as needed, following cash calls by Emerald, as follows: $948,044 for seismic on the Mirto-1 well (equivalent to 60% share) and $7,440,354 for drilling on the Mirto-1 well (equivalent to 65% share), totaling $8,388,398. With Phase 2 work completed, we will pay 20% of all subsequent costs related to the Maranta Block.
While the purchase price for Avante Colombia consisted solely of shares of our common stock, Avante Colombia currently has a 50% participation interest and is the operator of the Rio de Oro and Puerto Barco exploration and production contracts with Ecopetrol in the Catatumbo area in eastern Colombia. Accordingly, we will incur operating expenses in connection with Avante Colombia’s projects going forward. Moreover, our agreement with Avante also provides that we and Avante could enter into a joint venture to develop another exploration opportunity in Colombia, which will require further commitment of our capital if the joint venture goes forward.
We are currently utilizing cash of approximately $399,000 per month in the day-to-day operations of our business, including payroll, professional fees and office expenses. We expect this rate of cash utilization to increase over the next twelve months.
Over the next twelve months, we expect to use approximately:
| | · | $9.41 million in order to bear our share of commitments with respect to the Putumayo 4 Block, related to Phase 1 seismic acquisition, permitting activities and exploration activities (although we have until August 2012 to complete the work); |
| | · | $1.48 million to carry out our proposed activities on Avante Colombia’s projects, and on Puerto Barco, related to road and facilities upgrading and existing well workovers; |
| | · | $2.36 million of additional investment in the Maranta Block; and |
| | · | Up to an additional $4.86 million to cover our administrative expenses and for general working capital to continue to execute our business plan and build our operations. |
Since costs on certain of our projects are calculated in Colombian pesos, changes in the exchange rate, among other things, could cause our capital commitments in U.S. dollars to differ materially from the amounts that we have budgeted. We have not to date engaged in any formal hedging activity with regard to foreign currency risk.
Additionally, foreign exchange gains/losses result from the fluctuation of the U.S. dollar to the Colombian peso due to our deferred tax liability, a monetary liability, which is mainly denominated in the local currency of the Colombian foreign operations. As a result, a foreign exchange gain/loss must be calculated upon conversion to the U.S. dollar functional currency. A strengthening in the Colombian peso against the U.S. dollar results in foreign exchange losses, estimated at $0.0005 for each one-peso decrease in the exchange rate of the Colombian peso to one U.S. dollar.
Further, local operations may require funding that exceeds operating cash flow, and there may be restrictions on expatriating proceeds and/or adverse tax consequences associated with such funding. To the extent that funding is required, there may be exchange controls limiting such funding. In addition, taxes and exchange controls may affect the dividends that we receive from foreign subsidiaries.
In the course of our development activities, we have sustained losses and expect such losses to continue through at least August 2012. We expect to finance our operations primarily through our existing cash, revenues from current production and future financing. Note 2 to the audited consolidated financial statements contained in the 2010 Form 10-K reported that as of the date of the filing of the 2010 Form 10-K on April 1, 2011, there existed substantial doubt about our ability to continue as a going concern, and the Report of Independent Registered Public Accounting Firm included in our 2010 Form 10-K included an explanatory paragraph with respect thereto.
If we fulfill our obligations for $9.41 million under Petronorte’s E&P contract, upon completion of the first exploration well to be drilled on Putomayo-4, which is required to be completed by August 2012, the $2.7 million we deposited into a trust account as our portion of the ANH-required performance guarantee will become available for our use.
We anticipate that after January 2012, we will need to obtain additional capital for the purposes described above. In addition, the listing standards of the TSX Venture Exchange require that we demonstrate that we have adequate working capital and financial resources to carry out our stated work program or execute our business plan for the 12 month period following listing, plus $100,000 in unallocated funds. We estimate that (based on current oil production levels only) we will need to raise at least $10 million of additional capital to fund our work program and obligations and to cover our administrative expenses and general working capital needs over the next twelve months. In order to obtain capital, we may need to sell additional shares of our equity or debt securities, or borrow funds from private or institutional lenders. Because of the recent volatility in the credit, stock, and commodities markets, and our status as an early stage company, there can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide disclosure under this Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2011. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2011, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and interim principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control over Financial Reporting
During the quarterly period ended September 30, 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended December 31, 2010, for a complete description of certain proceedings previously reported by us; there have been no significant subsequent developments in such proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as described in the Form 10-K, there are no material pending legal proceedings to which we or any of our subsidiaries is a party or of which any of our or their property is the subject, and, as far as we are aware, no governmental authority is contemplating any such proceeding.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in our 2010 Form 10-K under Part I, Item 1A, therein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have not sold any of our equity securities during the period covered by this Report that were not registered under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of (or are furnished with, as indicated below) this Quarterly Report or, where indicated, were heretofore filed and are hereby incorporated by reference.
In reviewing the agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:
| | · | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
| | · | have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
| | · | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
| | · | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about us may be found elsewhere in this Quarterly Report on Form 10-Q and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
Exhibit Number | | SEC Report Reference Number | | Description |
| | | | | |
| 31.1* | | | | Certification of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | | | |
| 31.2* | | | | Certification of Interim Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | | | |
| 32.1*§ | | | | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | | |
| 32.2*§ | | | | Certification of Interim Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | | | |
| 101*§§ | | | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2011 and 2010, (iii) the Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine-month period ended September 30, 2011, (iv) the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010, and (v) Notes to Condensed Consolidated Financial Statements. |
| § | This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
| §§ | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 14, 2011 | LA CORTEZ ENERGY, INC. |
| | | |
| | By: | /s/ Andres Gutierrez Rivera |
| | | Name: Andres Gutierrez Rivera Title: Chief Executive Officer (Principal Executive Officer) |
| | | |
| | By: | /s/ Nadine C. Smith |
| | | Name: Nadine C. Smith |
| | | Title: Interim Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
Exhibit Number | | Description |
| | | |
| 31.1 | | Certification of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 31.2 | | Certification of Interim Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.1§ | | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 32.2§ | | Certification of Interim Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 101*§§ | | The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2011 and 2010, (iii) the Condensed Consolidated Statement of Changes in Shareholders’ Equity for the nine-month period ended September 30, 2011, (iv) the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2011 and 2010, and (v) Notes to Condensed Consolidated Financial Statements. |
| § | This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
| §§ | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings. |
