AZTEC OIL & GAS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
NOTE 2 - EQUITY
During the quarter ended November 30, 2006, Aztec issued 337,345 shares of common stock valued at $46,500 for consulting services and directors' fees.
During the quarter ended February 28, 2007, Aztec issued 295,712 shares of common stock valued at $31,275 for services. Additionally, under the agreement of the PPM, Aztec issued 255,852 warrants valued at $4,902.
NOTE 3 - INVESTMENT IN DRILLING PARTNERSHIP
During December 2006, Aztec Oil & Gas, Inc. completed the funding of its first new drilling partnership, the Aztec Oil & Gas 2006 Oil & Gas Drilling Partnership, with 22 outside investors. The new multi-well drilling program based in the Doddridge County area of West Virginia commenced in February 2007. Four wells have been spudded as of the date of this report.
In this new Partnership, Aztec, through its wholly-owned subsidiary, Aztec Energy, LLC, will retain thirty percent ownership and will act as the Managing General Partner. Another Aztec subsidiary, Aztec Drilling & Operating, LLC, will serve as the Partnership’s drilling company and operator.
As of February 28, 2007, Aztec had raised $1,132,384 net of related fees and fair value of warrants associated with the private placement from outside investors toward funding the partnership.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
As used in this Form 10-QSB, references to the “Aztec”, the “Company”, the “Registrant”, “we”, “our”, or “us” refer to Aztec Oil & Gas, Inc. unless the context otherwise indicates.
Forward-Looking Statements
This Form 10-QSB includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-QSB which address activities, events or developments which Aztec expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), finding suitable merger or acquisition candidates, expansion and growth of the Aztec’s business and operations, and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Aztec in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances.
However, whether actual results or developments will conform with the Aztec’s expectations and predictions is subject to a number of risks and uncertainties, general economic market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Aztec.
This Form10-QSB contains statements that constitute “forward-looking statements.” These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” “will,” or similar terms. These statements appear in a number of places in this Registration and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company’s financial condition or results of operations for its limited history; (ii) the Company’s business and growth strategies; and, (iii) the Company’s financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could adversely affect actual results and performance include, among others, the Company’s limited operating history, dependence on continued growth in the irrigation industry, potential fluctuations in quarterly operating results and expenses, government regulation dealing with irrigation systems, technological change and competition.
Consequently, all of the forward-looking statements made in this Form 10-QSB are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
Overview
Aztec’s business plan calls for purchasing interests in producing oil and gas properties with undeveloped reserves. Aztec’s growth strategy is partially based on participation, as it intends to team up with outside participation investors who will assume the costs associated with the drilling of additional wells in exchange for a part of the revenues derived from the wells they finance. Once the well hard costs are repaid to those participation investors, the Company expects that any working interest revenues would be split approximately 50-50 between those participation investors and Aztec and other lease interest holders. The Company expects that implementation of this strategy should allow a reduction in the financial risks for Aztec in drilling new wells, while Aztec would still be receiving income from present field production in addition to income from any successful new drilling.
The Company has a limited operating history with oil and gas properties, upon which an evaluation of the Company, its current business and its prospects can be based, each of which must be considered in light of the risks, expenses and problems frequently encountered by all companies in the early stages of development, and particularly by such companies entering new areas of business. The Company’s prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of a new business plan, particularly companies involved in the highly competitive oil and gas industry. Such risks include, without limitation, the ability of the Company to manage its operations, including the amount and timing of capital expenditures and other costs relating to the expansion of the company’s operations, direct and indirect competitors of the Company, including those with greater financial, technical and marketing resources, the inability of the Company to attract, retain and motivate qualified personnel and general economic conditions.
Recent Event
During December 2006, Aztec Oil & Gas, Inc. completed the funding of its first new drilling partnership, the Aztec Oil & Gas 2006 Oil & Gas Drilling Partnership (the “Partnership”), with approximately 20 outside investors. As of February 28, 2007, Aztec had raised $1,132,384 net of related fees and fair value of warrants associated with the private placement from investors toward funding the partnership.
In this Partnership, Aztec Oil & Gas, Inc., through its wholly-owned subsidiary, Aztec Energy, LLC, will retain thirty percent ownership and will act as the Managing General Partner. Another Aztec subsidiary, Aztec Drilling & Operating, LLC, will serve as the Partnership’s drilling company and operator. The new multi-well drilling program based in the Doddridge County area of West Virginia commenced drilling in February. There are four wells in the program and all have been spudded as of the date of this report.
Results of Operations
For the three months ended February 28, 2007, the Company recognized oil and gas revenue of $5,395 as compared to $2,134 for the same period last year. Oil and Gas Expenses were $1,865 for the three month period as compared to $3,244 for the same period last year. Depletion expense was $1,622 as compared to $0 for the same period in the prior year. General and administrative expenses for the three months ended February 28, 2007 were $235,856 as compared to $198,361 for the same period last year. For the three months ended February 28, 2007, the Company recognized interest income of $0 as compared to $1,677 interest income for the same period last year.
For the six months ended February 28, 2007, the Company recognized oil and gas revenue of $22,701 as compared to $3,346 for the same period last year. Oil and Gas Expenses were $4,910 for the six month period as compared to $4,599 for the same period last year. Depletion expense was $1,622 as compared to $0 for the same period in the prior year. General and administrative expenses for the six months ended February 28, 2007 were $537,117 as compared to $391,771 for the same period last year. For the six months ended February 28, 2007, the Company recognized interest income of $485 as compared to $7,290 interest income for the same period last year.
During the previous quarter ended November 30, 2006, the Company evaluated the production history of its McCoy well and its Putnam-Lange well and determined that the wells will not generate future cash flow sufficient to cover the costs incurred by the Company in drilling such wells. As a result, the cost of drilling such wells, in the amount of $72,948, was expensed by the Company as an impairment write off.
Results of operations for the interim periods are not indicative of annual results.
Plan of Operation
Aztec's business plan calls for purchasing interests in producing oil and gas properties with undrilled reserves. Aztec's growth strategy is partially based on participation, as it intends to team up with outside participation investors who will assume the costs associated with the drilling of additional wells in exchange for a part of the revenues derived from the wells they finance. Once the well hard costs are repaid to those participation investors, Aztec expects that any working interest revenues would be split approximately 50-50 between those participation investors and Aztec and other lease interest holders. Aztec expects that implementation of this strategy should allow a reduction in the financial risks for Aztec in drilling new wells, while Aztec would still be receiving income from present field production in addition to income from any successful new drilling.
Phase two of Aztec's business plan calls for investing in various drilling prospects with industry professionals. Aztec has participated in ten drilling projects in Texas, Oklahoma, and Louisiana. Four of the wells have been completed, three are awaiting evaluation and completion, and three have been plugged and abandoned. Aztec is also participating in a forty well project in Pennsylvania. This project has drilled thirty eight of the forty wells. To date, nineteen wells have been completed.
Aztec participated in a minority participation interest in a two-well drilling program in the Deep Lake Field in Cameron Parish, Louisiana (State Lease 2038). Under the terms of the participation agreement, Aztec is participating as a minority interest holder in drilling and completion of two wells in excess of 13,500 feet each. The first well (Deep Lake Well No. 2), which cost approximately $3.5 million to drill to a vertical depth of approximately 14,300 feet, had a spud (start) date of April 15, 2005. The second well (Deep Lake Well No. 1) was drilled to an approximate vertical depth of 13,600 feet. According to the program's operator and several consulting geologists, both well sites targeted formations that are considered to contain natural gas plus some condensate. Both wells have been drilled and completed into target zones. The wells were connected to the pipeline during Aztec’s fourth quarter of 2006. As of February 28, 2007, both of the wells are producing.
On October 26, 2005, Aztec announced that it has taken a minority working interest in a program to drill up to 40 natural gas wells located in Cambria, Clearfield and Potter counties in Pennsylvania. To date, thirty eight wells have been drilled. Currently, twenty-one wells are producing and five are waiting on connections to pipelines. Additionally, twelve wells are currently under evaluation.
Management is in the process of seeking other businesses to acquire so that it can expand its operations. The analysis of new businesses opportunities and evaluating new business strategies will be undertaken by or under the supervision of Aztec’s directors. In analyzing prospective businesses opportunities, management will consider, to the extent applicable, the available technical, financial and managerial resources of any given business venture. Management will also consider the nature of present and expected competition; potential advances in research and development or exploration; the potential for growth and expansion; the likelihood of sustaining a profit within given time frames; the perceived public recognition or acceptance of products, services, trade or service marks; name identification; and other relevant factors. Aztec anticipates that the results of operations of a specific business venture may not necessarily be indicative of the potential for future earnings, which may be impacted by a change in marketing strategies, business expansion, modifying product emphasis, changing or substantially augmenting management, and other factors.
Management will analyze all relevant factors and make a determination based on a composite of available information, without reliance on any single factor. The period within which Aztec will decide to participate in a given business venture cannot be predicted and will depend on certain factors, including the time involved in identifying businesses, the time required for Aztec to complete its analysis of such businesses, the time required to prepare appropriate documentation and other circumstances.
Should Aztec pursue other potential business opportunities, it anticipates that they will be referred from various sources, including its officers and directors, professional advisors, and its shareholders, who may present unsolicited proposals. Aztec does not plan to engage in any general solicitation or advertising for a business opportunity, and would rely upon personal contacts of its officers, as well as indirect associations with other business and professional people. Management's reliance on "word of mouth" may limit the number of potential business opportunities identified. While it is not presently anticipated that Aztec will engage unaffiliated professional firms specializing in business acquisitions or reorganizations, such firms may be retained if management deems it in the best interest of Aztec.
Aztec will not restrict its search to any particular business, industry, or geographical location. Management reserves the right to evaluate and enter into any type of business in any location. In seeking a business venture, the decision of management will not be controlled by an attempt to take advantage of any anticipated or perceived appeal of a specific industry, management group, product, or industry, but will be based on the business objective of seeking long-term capital appreciation. Aztec may participate in a newly organized business venture or in a more established business. Participation in a new business venture entails greater risks since, in many instances, management of such a venture may not have a proven track record; the eventual market for such venture's product or services will likely not be established; and the profitability of the venture will be untested and impossible to accurately forecast. Should Aztec participate in a more established venture that is experiencing financial difficulty, risks may stem from Aztec's inability to generate sufficient funds to manage or reverse the circumstances causing such financial problems.
Aztec has not demonstrated a successful business plan or profitability to date, and Aztec anticipates that it will continue to incur net losses for the foreseeable future. The extent of these losses will depend, in part, on the amount of expenditures Aztec earmarks to execute its new business strategy. As of February 28, 2007, Aztec had an accumulated deficit of $3,320,003. Aztec expects that its operating expenses will increase as it defines its new business strategy, especially in the areas of acquisitions.
Thus, Aztec will need to generate revenues to achieve profitability. To the extent that increases in its operating expenses precede or are not subsequently followed by commensurate increases in revenues, or that Aztec is unable to adjust operating expense levels accordingly, Aztec’s business, results of operations and financial condition would be materially and adversely affected. There can be no assurances that Aztec can achieve or sustain profitability or that Aztec’s operating losses will not increase in the future.
Liquidity and Capital Resources
During six months ended February 28, 2007 Aztec issued 633,057 shares of common stock valued at $77,775. Additionally, under the agreement of the PPM, Aztec issued 255,852 warrants valued at $4,902.
At quarter end Aztec has three consultants who are paid a total of $16,100 in stock on a monthly basis. For one consultant, the number of shares is determined using an average closing price of the last five days each month. For the other consultants, the number of shares is determined by using the average value of the shares traded during the month. An additional consultant is paid monthly in stock based on 2/3 of his total hours times billing rate. The remaining 1/3 is paid in cash.
At quarter end, Aztec had two directors who are paid a total of $13,000 in stock on a quarterly basis. The number of shares for one is determined by using the average value of the shares traded during the last month. The number of shares for the other is determined by using the average closing price of the last five days of the quarter.
As of February 28, 2007, Aztec had $113,212 in cash. Aztec believes it has enough monies to sustain itself for the next twelve months.
Aztec has an agreement with CSI Energy, LP (“CSI”) wherein CSI has agreed to provide the Company with funds as needed to permit the Company to meet its monthly operating expenses and other obligations as they become due over the twelve month period following August 31, 2006. Other than the CSI agreement, the Company does not have any preliminary agreements or understandings between the Company and its officers and directors with respect to loans or financing to operate the Company.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)).
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”). Our principal financial and accounting officer have reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Company’s Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) within the end of the period covered by this report and have concluded that the disclosure controls and procedures are not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner. Specifically, our independent auditors identified deficiencies in our disclosure controls and procedures with respect to the accounting for the issuance and amortization of certain warrants. We are undertaking efforts to improve and strengthen our disclosure control processes and procedures to fully remedy these deficiencies. Our management and directors will continue to work with our auditors to ensure that our controls and procedures are adequate and effective.
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management has worked with all personnel to make certain that all documents receive wide circulation within the company so that information is available for the preparation of financial statements.
PART II OTHER INFORMATION
There are no pending legal proceedings to which Aztec is a party or in which any director, officer or affiliate of Aztec, any owner of record or beneficially of more than 5% of any class of voting securities of Aztec, or security holder is a party adverse to Aztec or has a material interest adverse to Aztec. Aztec’s property is not the subject of any pending legal proceedings.
None.
None.
There were no matters submitted to a vote of security holders during the fiscal quarter ended February 28, 2007.
ITEM 5. Other Information
