U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2008.
o TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-32015
Aztec Oil & Gas, Inc.
(Exact name of small business issuer as specified in its charter)
| 90-0251902 | ||
(state or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Riverway, Suite 1700
Houston, Texas 77056
(Address of principal executive offices)
Issuers telephone number: (713) 840-6444
| Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or 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 þ No o
| 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 o Accelerated Filer o
Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No þ
As of January 14, 2009, the issuer had 33,284,385 shares of common stock outstanding.
Page 1
| Page | |
| PART I. FINANCIAL INFORMATION | |
| Item 1. Financial Statements | |
| Consolidated Balance Sheets (unaudited) | 3 |
| Consolidated Statements of Operations (unaudited) | 4 |
| Consolidated Statements of Cash Flows (unaudited) | 5 |
| Notes to Financial Statements (unaudited) | 6 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 12 |
| Item 4. Controls and Procedures | 12 |
| PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 13 |
| Item 1A. Risk Factors | 13 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
| Item 3. Defaults upon Senior Securities | 13 |
| Item 4. Submission of Matters to a Vote of Security Holders | 13 |
| Item 5. Other Information | 13 |
| Item 6. Exhibits and Reports on Form 8-K | 13 |
| Signatures | 14 |
Page 2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| ASSETS | November 30,2008 | August 31, 2008 | |
| Current assets: | |||
| Cash | $ 91,901 | $ 290,323 | |
| Accounts receivable | 40,141 | 175,559 | |
| Prepaid expenses and other current assets | 51,898 | 8,597 | |
| Total current assets | 183,940 | 474,479 | |
Oil and natural gas properties, successful efforts method of accounting net of accumulated depreciation, depletion, amortization and impairment of $1,536,108 and $962,280 | 1,550,898 | 2,124,314 | |
| Computers and equipment, net of accumulated depreciation of $1,009 and $674, respectively | 3,719 | 4,054 | |
| TOTAL ASSETS | $ 1,738,557 | $ 2,602,847 | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||
| Current liabilities: | |||
| Accounts payable and accrued liabilities | $ 202,409 | $ 206,115 | |
| Accounts payable and accrued liabilities – related party | 291,728 | 229,538 | |
| Salary payable | 105,523 | 59,296 | |
| Line of credit | 400,000 | 400,000 | |
| Note payable | 20,700 | - | |
| Refundable subscriptions | - | 200,000 | |
| Common stock payable | 12,167 | 12,167 | |
| Notes payable to related parties | 703,560 | 595,560 | |
| Total current liabilities | 1,736,087 | 1,702,676 | |
| Asset retirement obligations | 31,228 | 30,812 | |
| Total Liabilities | 1,767,315 | 1,733,488 | |
| Minority Interest | 1,939,125 | 2,375,973 | |
| Stockholders’ Deficit: | |||
| Preferred stock, Series A, $.001 par value, 100,000 shares authorized, issued and outstanding | 100 | 100 | |
Common stock, $.001 par value, 100,000,000 shares authorized, 33,192,799 and 32,468,427 shares issued and outstanding, respectively | 33,192 | 32,468 | |
| Additional paid-in capital | 4,603,041 | 4,537,525 | |
| Accumulated deficit | (6,604,216) | (6,076,707) | |
| Total Stockholders’ Deficit | (1,967,883) | (1,506,614) | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ 1,738,557 | $ 2,602,847 |
The accompanying notes are an integral part of these financial statements.
Page 3
AZTEC OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended November 30, | |||
| 2008 | 2007 | ||
| Oil and gas revenue | $ 80,033 | $ 44,045 | |
| Operating expenses: | |||
| General and administrative | 353,573 | 200,661 | |
| Oil and gas expenses | 47,316 | 24,670 | |
| Depreciation, depletion, amortization and accretion | 44,068 | 5,520 | |
| Impairment of oil and gas properties | 530,511 | - | |
| Total operating expenses | 975,468 | (230,851) | |
| Other income (expense) | |||
| Interest expense | (23,745) | (16,261) | |
| Interest income | - | 22 | |
| Total other income / (expense) | (23,745) | (16,239) | |
| NET LOSS BEFORE MINORITY INTEREST | (919,180) | (203,045) | |
| Minority Interest | 391,671 | (7,825) | |
| NET LOSS | $ (527,509) | $ (210,870) | |
| Net loss per share - basic and diluted | $ (0.02) | $ (0.01) | |
| Weighted average shares outstanding – basic and diluted | 32,728,720 | 30,829,862 | |
The accompanying notes are an integral part of these financial statements.
Page 4
AZTEC OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three Months Ended November 30, | |||
| 2008 | 2007 | ||
| Cash flows from operating activities: | |||
| Net loss | $ (527,509) | $ (210,870) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||
| Share-based compensation | 66,240 | 26,860 | |
| Depletion, depreciation, amortization and accretion | 44,068 | 5,520 | |
| Impairment of properties | 530,511 | ||
| Minority Interest | (391,671) | 7,825 | |
| Warrant costs related to private placement | - | 3,644 | |
| Changes in: | |||
| Accounts receivable | 135,418 | 42,565 | |
| Prepaid expenses | (43,301) | (25,781) | |
| Accounts payable | (3,706) | 28,339 | |
| Accounts payable – related party | 62,190 | 47,287 | |
| Accrued expenses | - | 4,413 | |
| Salary payable | 46,227 | - | |
| Net cash used in operating activities | (81,533) | (70,198) | |
| Cash flows from investing activities: | |||
| Acquisition of oil and gas properties | (412) | (827,174) | |
| Prepaid well costs | - | 5,171 | |
| Refunded subscriptions | (200,000) | - | |
| Net cash used in investing activities | (200,412) | (822,003) | |
| Cash flows from financing activities: | |||
| Proceeds from limited partners, net | - | 77,924 | |
| Distributions to limited partners | (45,177) | - | |
| Proceeds from notes payable and line of credit | 27,482 | 95,320 | |
| Proceeds from notes payable – related party | 108,000 | - | |
| Payments on notes payable | (6,782) | (7,078) | |
| Net cash provided by financing activities | 83,523 | 166,166 | |
| Net decrease in cash | (198,422) | (726,035) | |
| Cash at beginning of period | 290,323 | 744,771 | |
| Cash at end of period | $ 91,901 | $ 18,736 | |
| Cash paid during the period for: | |||
| Interest | $ 8,107 | $ 16,261 | |
| Income taxes | - | - | |
| Non-cash investing and financing transactions | |||
| Subscriptions receivable | $ - | $ 6,623 | |
The accompanying notes are an integral part of these financial statements.
Page 5
AZTEC OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Aztec Oil & Gas, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Aztec’s Annual Report filed with the SEC on Form 10-KSB for the year ended August 31, 2008. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2008 as reported in the Form 10-KSB have been omitted.
NOTE 2 – GOING CONCERN
As shown in the accompanying consolidated financial statements, Aztec incurred a net loss of $527,509 for the three months ended November 30, 2008, has an accumulated deficit of $6,604,216 and a working capital deficit of $1,552,147 as of November 30, 2008. These conditions raise substantial doubt as to Aztec’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if Aztec is unable to continue as a going concern.
CSI Energy, LP, a company controlled by our Chief Executive Officer, has committed to funding any operating deficits for the current year.
The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company is in the process of establishing a sufficient ongoing source of revenues to cover its operating costs. The ability of the Company to continue as a going concern is dependent on the Company’s ability to fulfill its business plan.
NOTE 3 - INVESTMENT IN DRILLING PARTNERSHIP
Aztec has a controlling financial interest in the 2006A LP, 2006B LP and 2007A LP therefore, the financial statements of all three partnerships’ are consolidated with those of Aztec and the other partners’ equity is recorded as minority interest. At November 30, 2008, minority interest was $1,939,125. Minority interest share of net loss was $391,671 for the three months ended November 30, 2008.
During the three months ended August 31, 2008 Aztec received $200,000 from prospective investors for the Aztec Private Placement Memorandum (the “Memorandum”). However, this Program expired on August 31, 2008. The terms of the Memorandum required a minimum investment of $1 million to form a limited partnership. At that time the Company opted not to extend the Program any further as it would interfere with any new offering, even though an extension would allow additional investments necessary in order to meet the minimum $1 million investment. Therefore, during the three months ended November 30, 2008, the Company returned the investments to the investors as per the terms of the Memorandum.
NOTE 4 – OIL AND GAS PROPERTIES
Oil and gas properties at November 30, 2008 and August 31, 2008 consisted of the following:
| November 30, 2008 | August 31, 2008 | ||
| Proved leasehold costs | $ 109,189 | $ 109,189 | |
| Unproved leasehold costs | 190,764 | 190,764 | |
| Costs of wells and development | 2,757,578 | 2,757,166 | |
| Capitalized asset retirement costs | 29,475 | 29,475 | |
| Total cost of oil and gas properties | 3,087,006 | 3,086,594 | |
| Accumulated depletion, depreciation, amortization and impairment | (1,536,108) | (962,280) | |
| Oil and gas properties, net | $ 1,550,898 | $ 2,124,314 |
Aztec reviews proved oil and natural gas properties and other long-lived assets for impairment. These reviews are performed at least annually and more frequently if events and circumstances, (such as downward revision of the reserve estimates or commodity prices) indicate a decline in the recoverability of the carrying value of such properties. Aztec estimates the undiscounted future cash flows expected in connection with the properties and compares such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production, future capital expenditures and a risk-adjusted discount rate. There were asset impairments of $530,511 and $0 recorded for the three months ended November 30, 2008 and 2007, respectively.
NOTE 5 – NOTES PAYABLE AND LINE OF CREDIT
Aztec has an agreement with CSI Energy, LP (“CSI”), a company controlled by our Chief Executive Officer, wherein CSI has agreed to provide Aztec with funds as needed to permit Aztec to meet its monthly operating expenses and other obligations as they become due over the twelve month period following November 30, 2008. As part of this arrangement, Aztec holds notes totaling $343,560, payable to CSI. The notes bear interest at a rates ranging from 2% to 9% per annum and all notes due prior to January 31, 2009 were extended to January 31, 2009. All notes are due between January 31, 2009 and February 18, 2009.
Aztec holds notes totaling $360,000 payable to our Chief Executive Officer for funds advanced to Aztec. The notes bear interest rates ranging from 2% to 9% per annum and are due in full on January 31, 2009.
Aztec financed its directors’ and officers’ insurance policy in the amount of $27,482 on September 1, 2008, of which $20,700 remains outstanding as of November 30, 2008. The note bears an interest rate of 9.12% and matures on August 31, 2009.
On May 31, 2007, Aztec executed a loan agreement establishing a line of credit with Amegy Bank National Association. The line of credit agreement was amended on February 14, 2008 to increase the amount of the line of credit from $200,000 to $400,000. Interest on any outstanding balances is charged at one-half of one percent above the Amegy Bank National Association prime rate. At November 30, 2008, the prime rate was four percent (4.00%), making the loan rate four and one-half percent (4.50%). As of November 30, 2008, the amount outstanding under this facility was $400,000. Our Chief Executive Officer has personally guaranteed any amount in excess of the original $200,000 amount. On August 31, 2008, Aztec extended the line of credit through February 28, 2009.
NOTE 6 - ASSET RETIREMENT OBLIGATIONS
The following is a description of the changes to the Company's asset retirement obligations for the three months ended November 30, 2008 and 2007:
| Three months ended November 30, | |||
| 2008 | 2007 | ||
| Asset retirement obligations at beginning of quarter | $ 30,812 | $ - | |
| Additions | - | - | |
| Accretion expense | 416 | - | |
| Asset retirement obligations at end of quarter | $ 31,228 | $ - | |
NOTE 7 - EQUITY
During the quarter ended November 30, 2008, Aztec issued 169,256 shares of common stock valued at $7,686 for consulting services and 55,116 shares of common stock valued at $5,500 for directors’ fees all of which were for services received prior to the current quarter. Of these shares, 55,116 common shares were previously reflected as a stock payable. Aztec also issued 500,000 shares of common stock valued at $20,000 and 1,000,000 warrants valued at $33,054 (based on the Black Scholes valuation model, with inputs consisting of an exercise price of $.20 per share of common stock; a term of two years; volatility of 243.83%; a discount rate of 1.27%; and a dividend yield of 0%) to the President of Aztec for services rendered. In December, 2008, Aztec issued 91,586 shares of common stock valued at $5,500 for directors’ fees for services received during the current quarter. All 91,856 shares of common stock were reflected as stock payable as of November 30, 2008.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Form 10-Q, references to “Aztec”, the “Company”, the “Registrant”, “we”, “our”, or “us” refer to Aztec Oil & Gas, Inc. unless the context otherwise indicates.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and the notes thereto.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.
Overview
The Company was originally organized under the name Aztec Communications Group as a Utah corporation (“Aztec Communications”). Aztec Communication’s original principal business objective involved its participation in the broadcast and television business through its then wholly-owned subsidiaries, Lloyd Communications, Inc., an Illinois corporation (“Lloyd”), and Golden Circle Broadcasting Inc., a Tennessee corporation (“Golden Circle”). As a result of adverse business circumstances, in 1990, the Company sold Lloyd and Golden Circle and ceased its business operations in the broadcast and television business. No material business operations were conducted by the Company from 1990 until 2004. In 2004, the Company changed its name from Aztec Communications Group, Inc. to Aztec Oil & Gas, Inc. and reorganized under the laws of the State of Nevada. Since 2004, Aztec’s business plan has been to purchase, manage and participate in oil and gas interests utilizing strategies that seek to manage and reduce the risks associated with traditional exploration and production operations.
On August 13, 2004, the Registrant effectuated a 3-for-1 forward stock split.
Aztec is a Houston-based, oil and gas exploration and production company focusing on numerous areas in the U.S.
Plan of Operation
Phase one of Aztec's business plan called for purchasing working interests in proved oil & gas properties with undrilled reserves and also participating in working interest in drilling projects. Aztec's growth strategy is partially based on participation, as it intends to team up with outside participation investors who will assume part or all of the costs associated with the drilling of additional wells in exchange for a part of the revenues derived from the wells they finance. 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 called for investing in various drilling prospects with industry professionals. Aztec has participated in drilling projects in Texas, Oklahoma, and Louisiana. Seven of the wells have been completed, one is awaiting evaluation and three have been plugged and abandoned. In 2005, before implementing Phase two, Aztec also participated as a minority working interest owner in a multi-well project in Pennsylvania. As of November 30, 2008, there are 29 wells in production.
Phase three of Aztec’s business plan calls for originating, developing and managing balanced, low risk, highly focused developmental drilling projects with investors in areas with low drilling costs and high success rates where the process can be repeated in a relatively consistent manner. This stage further balances Aztec’s approach to profitable energy asset development through low-risk, highly focused, predominantly “development” drilling projects in which Aztec seeks participation from multiple individual and entity investors.
Aztec is currently in its third stage of its business plan. In this stage, Aztec focuses on drilling in basins, such as in North Central Texas and the Appalachian region of the United States. The latter is near the high energy usage “northeastern corridor” of the United States. We participate in such regions with a select number of local, highly experienced operators who have access to leases located in geological trends that have demonstrated substantial historical production, plus potential remaining reserves which have the potential to be exploited in a low-risk, systematic fashion. Such local operators have been, and will in the future be selected by Aztec on the basis of their demonstrated track records.
In order to execute our business plan, we have entered into consulting agreements with several of our officers and directors to provide services to the Company. The Company plans to retain consultants with respect to current and proposed properties and operations. The Company, from time to time, may retain independent engineering and geological consultants and the services of lease brokers and geophysicists in connection with its operations.
Limited Partnerships
As of the date of this report Aztec has formed three Limited Partnerships; Aztec 2006A Oil & Gas Limited Partnership (“Aztec 2006A LP”), Aztec 2006B Oil & Gas Limited Partnership (“Aztec 2006B LP”) and Aztec 2007A Oil & Gas Limited Partnership (“Aztec 2007A LP”). For all three partnerships, Aztec, through its wholly-owned subsidiary, Aztec Energy, LLC (“Aztec Energy”), acts as the Managing General Partner and retains thirty percent ownership interest in each Limited Partnership (for which interest Aztec contributed all leases and paid all tangible drilling costs). Investors receive 70% - 85% of the cash profits, defined as revenue in excess of expenses, from successful wells drilled within the partnership, with the percentage dependent on the rate of return to investors during the first five years of the partnership. After three years from the date of the first distribution, investors in the partnerships may request that the Managing General Partner, subject to a 10% of total limitation, financial ability and other terms, repurchase their units at a price equal to three times cash flow for the preceding twelve months. Another Aztec subsidiary, Aztec Drilling & Operating, LLC, (“ADO LLC”) serves the Partnerships as turnkey drilling contractor and operator.
Aztec has a controlling financial interest in Aztec 2006A LP, Aztec 2006B LP and Aztec 2007A LP, therefore, the partnerships’ financial statements are consolidated with those of Aztec and the other partners’ equity is recorded as minority interest.
Aztec 2006A Oil & Gas Limited Partnership
During December 2006, Aztec Oil & Gas, Inc. completed the funding of its first drilling partnership, Aztec 2006A Oil & Gas Limited Partnership (“Aztec 2006A LP”), with 22 outside investors. The multi-well drilling program based in the Doddridge County area of West Virginia commenced drilling in February 2007. The drilling of all four wells was completed in March 2007. Perforating, completion and equipment setting was completed on all four wells during March and April 2007 and the wells came on line and started producing May 2007 with a contract in place for both oil and gas sales. Aztec raised $1,132,384, net of related fees of $242,128 and fair value of warrants associated with the private placement, from outside investors toward funding the partnership.
Aztec 2006B Oil & Gas Limited Partnership
During November 2007, Aztec completed the funding of its second drilling limited partnership, Aztec 2006B Oil & Gas Limited Partnership (“Aztec 2006B LP”). Aztec 2006B LP raised total gross proceeds of $1,012,267 (net $888,724) from 16 outside “accredited” investors. The two well drilling program based in the Doddridge County area of West Virginia commenced drilling in December 2007 and was completed in early 2008.
Aztec 2007A Oil & Gas Limited Partnership (“Aztec 2007A LP”)
In December 2007, Aztec completed the funding of its third drilling partnership, Aztec 2007A Oil & Gas Limited Partnership (“Aztec 2007A LP”), with 18 outside investors and raised total gross proceeds of $1,087,000 (net $956,560) from its outside investors. The two wells, Williams #1 and Williams #2, are located in the Doddridge County area of West Virginia. Both were perforated and completed and equipment was set, with both wells producing with a market rate sales contract in place for oil and gas sales.
Aztec is focused on drilling known producing regions such as North Central Texas and the Appalachian region of the United States. We intend to participate in such regions with a select number of local, highly experienced operators who have access to leases located in geological trends that have demonstrated substantial historical production, plus potential remaining reserves which have the potential to be exploited in a low-risk, systematic fashion. Such local operators have been, and will in the future be selected by Aztec on the basis of their demonstrated track records for exploiting known oil and natural gas reserves in a timely and cost-effective manner. Additionally Aztec independently acquires leases and will operate them with its teaming agreement partner, Resaca Resources.
Results of Operations
The Three Months Ended November 30, 2008 Compared to the Three Months Ended November 30, 2007
Oil and Gas Revenues
For the three months ended November 30, 2008, the Company had oil and gas revenues of $80,033 as compared to $44,045 for the same period in 2007.
Oil and Gas Expenses
For the three months ended November 30, 2008, the Company had oil and gas expenses of $47,316 as compared to $24,670 for the same period in 2007.
The increase in both oil and gas revenues and oil and gas expenses between the two periods is due to an increase in the number of producing wells and expenses associated with operations. The increase in oil and gas revenues was also due to the four wells in Doddridge County, West Virginia. These wells had less than one month of production in the quarter ending November 30, 2007 versus a full three months of production in the period ending November 30, 2008.
Depreciation, Depletion and Accretion
Depreciation, depletion and accretion expenses for the three months ended November 30, 2008 and 2007 was $44,068 and $5,520, respectively. The increase was due to our increase in oil and gas assets and related production.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties for the three months ended November 30, 2008 and 2007 was $530,511 and $0, respectively. The increase was due to a downward revision of the reserve estimates based on the recent decline in oil and gas prices, which indicated a decline in the recoverability of the carrying value of such properties.
General and Administrative Expenses
General and administrative expenses for the three months ended November 30, 2008 and 2007 was $353,573 and $200,661, respectively. The increase in general and administrative expenses was due to the increase in salaries, marketing and public relations, and legal fees.
Interest Expense
Interest expense for the three months ended November 30, 2008 and 2007 was $23,745 and $16,261, respectively. The increase is due to increased borrowing related to funding the Company’s drilling operations and overhead.
Net Loss
Our net loss for the three months ended November 30, 2008 and 2007 was $527,509 and $210,870, respectively. The increase was primarily attributable to the increase in general and administrative expenses and impairment on oil and gas properties.
Liquidity and Capital Resources
As of November 30, 2008, we had $91,901 in cash as compared to $290,323 as of August 31, 2008.
The Company has limited financial resources available, which has had an adverse impact on the Company’s liquidity, activities and operations. These limitations have adversely affected the Company’s ability to obtain certain projects and pursue additional business. We may have to borrow money from shareholders or issue debt or equity or enter into a strategic arrangement with a third party. There can be no assurance that additional funds will be available to us.
Aztec has not demonstrated profitability to date and 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 the Company incurs in executing its business strategy. As of November 30, 2008, Aztec had an accumulated deficit of $6,604,216 and expects that its operating expenses will increase as it hones its new business strategy, especially in the areas of acquisitions.
Thus, Aztec will need to generate additional 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, the Company’s business, results of operations and financial condition would be materially and adversely affected. There can be no assurances that the Company can achieve or sustain profitability or that the Company’s operating losses will not increase in the future.
During the three months ended August 31, 2008 Aztec received $200,000 from prospective investors for the Aztec Private Placement Memorandum (the “Memorandum”). However, this Program expired on August 31, 2008. The terms of the Memorandum required a minimum investment of $1 million to form a limited partnership. At that time the Company opted not to extend the Program any further as it would interfere with any new offering dated September 14, 2008, even though an extension would allow additional investments necessary in order to meet the minimum $1 million investment. Therefore, during the three months ended November 30, 2008, the Company returned the investments to the investors as per the terms of the Memorandum.
Aztec has an agreement with CSI Energy, LP (“CSI”), a company controlled by our Chief Executive Officer, wherein CSI has agreed to provide Aztec with funds as needed to permit Aztec to meet its monthly operating expenses and other obligations as they become due over the twelve month period following November 30, 2008. As part of this arrangement, Aztec holds notes totaling $343,560, payable to CSI. The notes bear interest at a rates ranging from 2% to 9% per annum and all notes due prior to January 31, 2009 were extended to January 31, 2009. All notes are due between January 31, 2009 and February 18, 2009.
Aztec holds notes totaling $360,000 payable to our Chief Executive Officer for funds advanced to Aztec. The notes bear interest rates ranging from 2% to 9% per annum and are due in full on January 31, 2009.
Aztec financed its directors’ and officers’ insurance policy in the amount of $27,482 on September 1, 2008, of which $20,700 remains outstanding as of November 30, 2008. The note bears an interest rate of 9.12% and matures on August 31, 2009.
On May 31, 2007, Aztec executed a loan agreement establishing a line of credit with Amegy Bank National Association. The line of credit agreement was amended on February 14, 2008 to increase the amount of the line of credit from $200,000 to $400,000. Interest on any outstanding balances is charged at one-half of one percent above the Amegy Bank National Association prime rate. At November 30, 2008, the prime rate was four percent (4.00%), making the loan rate four and one-half percent (4.50%). As of November 30, 2008, the amount outstanding under this facility was $400,000. Our Chief Executive Officer has personally guaranteed any amount in excess of the original $200,000 amount. On August 31, 2008, Aztec extended the line of credit through February 28, 2009.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We are exposed to risks related to increases in the prices of fuel and raw materials consumed in exploration, development and production. We do not engage in commodity price hedging activities.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
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 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) during the period covered by this report and have concluded that the disclosure controls and procedures were effective in ensuring that material information relating to us is recorded, processed, summarized, and reported in a timely manner.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending material legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended November 30, 2008, Aztec issued 169,256 shares of common stock valued at $7,686 for consulting services and 55,116 shares of common stock valued at $5,500 for directors’ fees all of which were for services received prior to the current quarter. Of these shares, 55,116 common shares were previously reflected as a stock payable. Aztec also issued 500,000 shares of common stock valued at $20,000 and 1,000,000 warrants valued at $33,054 (based on the Black Scholes valuation model, with inputs consisting of an exercise price of $.20 per share of common stock; a term of two years; volatility of 243.83%; a discount rate of 1.27%; and a dividend yield of 0%) to the President of Aztec for services rendered. In December, 2008, Aztec issued 91,586 shares of common stock valued at $5,500 for directors’ fees for services received during the current quarter. All 91,856 shares of common stock were reflected as stock payable as of November 30, 2008.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fiscal quarter ended November 30, 2008.
Item 5. Other Information
None.
Item 6. Exhibits.
| Description of Exhibit | |
| 31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
AZTEC OIL & GAS, INC. | |
| Date: January 14, 2009 | By: /s/ Franklin C Fisher, Jr. |
| Name: Franklin C Fisher, Jr. | |
Title: CEO & Chairman (Principal Executive Officer) | |
| Dated: January 14, 2009 | By: /s/Larry A. Hornbrook |
| Name: Larry A. Hornbrook | |
Title: Chief Financial Officer (Principal Financial Officer) |