Attached files
file | filename |
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EX-5.1 - La Cortez Energy, Inc. | v165061_ex5-1.htm |
EX-23.3 - La Cortez Energy, Inc. | v165061_ex23-3.htm |
EX-23.2 - La Cortez Energy, Inc. | v165061_ex23-2.htm |
As filed
with the Securities and Exchange Commission on November 6, 2009
Registration
No. 333-______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
LA
CORTEZ ENERGY, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
1311
|
20-5157768
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
Calle
67 #7-35 Oficina 409
Bogotá,
Colombia
(941)
870-5433
(Address,
including zip code, and telephone number, including area code,
of
registrant’s principal executive offices)
Andres
Gutierrez Rivera
President
La
Cortez Energy, Inc.
c/o
Gottbetter & Partners, LLP
488
Madison Avenue, 12th Floor
New
York, NY 10022
(212)
400-6900
(Name,
address, including zip code, and
telephone
number, including area code, of agent for service)
Copy
to:
Adam
S. Gottbetter, Esq.
Gottbetter
& Partners, LLP
488
Madison Avenue, 12th Floor
New
York, NY 10022
(212)
400-6900
Approximate
date of commencement of proposed sale to the public: From time to time after the effective
date of this registration statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. 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
¨
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
(Do not
check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
|
Amount to be
Registered(1)
|
Proposed
Maximum
Offering
Price
Per Unit(2)
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount of
Registration Fee
|
||||||||||
Common
stock, par value $0.001 per share
|
11,107,200 shares
|
$
|
2.30
|
$
|
25,546,560
|
$
|
1,457.00
|
(1)
|
Consists
of 9,039,800 issued and outstanding shares of our common stock plus
2,067,400 shares of our common stock issuable upon the exercise of
outstanding warrants. This registration statement shall also
cover any additional shares of our common stock that shall become issuable
by reason of any stock dividend, stock split, recapitalization or other
similar transaction effected without the receipt of consideration that
results in an increase in the number of the outstanding shares of our
common stock.
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, based on the
last sale price of the registrant’s common stock as reported by the OTC
Bulletin Board on November 4, 2009. The shares offered
hereunder may be sold by the selling stockholders from time to time in the
open market, through privately negotiated transactions or a combination of
these methods, at market prices prevailing at the time of sale or at
negotiated prices.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. The selling stockholders may not sell these securities until
the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and the selling stockholders are not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject
to completion, dated ________ __, 2009
LA
CORTEZ ENERGY, INC.
Prospectus
11,107,200
Shares
Common
Stock
This
prospectus relates to the sale of up to 9,039,800 issued and outstanding shares
of our common stock, par value $0.001 per share, and 2,067,400 shares of our
common stock issuable upon the exercise of outstanding warrants, by the selling
stockholders of La Cortez Energy, Inc., a Nevada corporation, listed in this
prospectus. The shares offered by this prospectus may be sold by the
selling stockholders from time to time in the open market, through privately
negotiated transactions or a combination of these methods, at market prices
prevailing at the time of sale or at negotiated prices.
We are
registering the offer and sale of the common stock to satisfy registration
rights we have granted to the selling stockholders. The distribution
of the shares by the selling stockholders is not subject to any underwriting
agreement. We will not receive any proceeds from the sale of the
shares by the selling stockholders. However, we may receive the
proceeds from the exercise of the warrants held by the selling stockholders, to
the extent the warrants are not exercised on a cashless basis. We will bear
all expenses of registration incurred in connection with this offering, but all
selling and other expenses incurred by the selling stockholders will be borne by
them.
Our
common stock is traded on the OTC Bulletin Board under the symbol “LCTZ.OB”.
On _________ __, 2009, the last reported sale price for our common stock
was $____ per share.
Investing
in our common stock involves a high degree of risk. Before making any
investment in our securities, you should read and carefully consider risks
described in the “Risk Factors” section beginning on page 6 of this
prospectus.
You
should rely only on the information contained in this prospectus or any
prospectus supplement or amendment thereto. We have not authorized anyone to
provide you with different information. This prospectus may only be used where
it is legal to sell these securities. The information in this prospectus is only
accurate on the date of this prospectus, regardless of the time of any sale of
securities.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
This
prospectus is dated _______, 2009.
TABLE
OF CONTENTS
Page
|
||
SUMMARY
|
1
|
|
THE
OFFERING
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5
|
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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5
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RISK
FACTORS
|
6
|
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SELLING
STOCKHOLDERS
|
20
|
|
USE
OF PROCEEDS
|
25
|
|
DETERMINATION
OF OFFERING PRICE
|
25
|
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
25
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
27
|
|
DESCRIPTION
OF BUSINESS
|
35
|
|
DESCRIPTION
OF PROPERTIES
|
44
|
|
LEGAL
PROCEEDINGS
|
49
|
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
|
49
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
54
|
|
EXECUTIVE
COMPENSATION
|
57
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
61
|
|
PLAN
OF DISTRIBUTION
|
62
|
|
DESCRIPTION
OF SECURITIES
|
64
|
|
LEGAL
MATTERS
|
68
|
|
EXPERTS
|
68
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
68
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
68
|
|
GLOSSARY
OF SELECTED OIL AND GAS TERMS
|
69
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-1
|
i
SUMMARY
The
following summary highlights information contained elsewhere in this
prospectus. Potential investors should read the entire prospectus
carefully, including the more detailed information regarding our business
provided below in the “Description of Business” section, the risks of purchasing
our common stock discussed under the “Risk Factors” section, and our
consolidated financial statements and the accompanying notes to the consolidated
financial statements.
Unless
the context indicates otherwise, all references in this registration statement
to “La Cortez Energy” “the Company,” “we,” “us” and “our” refer to La Cortez
Energy, Inc. and its subsidiaries.
Overview
We are an
international, development stage oil and gas exploration and production company
focusing our business in South America. We have established an operating branch
in Colombia, we have entered into two initial working interest agreements, with
Petroleos del Norte S.A. (“Petronorte”), a Colombian subsidiary of Petrolatina
Plc. (AIM: PELE), and with Emerald Energy Plc Sucursal Colombia (“Emerald”), a
Colombian branch of Emerald Energy Plc.1
(discussed below), and we are currently evaluating additional investment
prospects, companies and existing exploration and production opportunities in
Colombia and Peru, while keeping alert for opportunities in other South American
countries.
We expect
to explore investment opportunities in oil and gas exploration and development
as well as in associated infrastructure (e.g., storage tanks, processing
facilities and/or pipelines). The scope of our activities in this regard may
include, but not be limited to, the acquisition of or assignment of rights to
develop exploratory acreage under concessions with government authorities and
other private or public exploration and production (“E&P”) companies, the
purchase of oil and gas producing properties, farm-in and farm-out opportunities
(i.e., the assumption of or assignment of obligations to fund the cost of
drilling and development), and/or the purchase of debt or equity in, and/or
assets of, existing oil and gas exploration and development companies currently
conducting activities in Colombia and Peru.
We are
currently evaluating ways to optimize our business structure in each
jurisdiction where we conduct and where we intend to develop our business, in
order to comply with local regulations while optimizing our tax, legal and
operational flexibility. To this end, we have recently established an operating
branch in Bogotá, Colombia where we will engage in our initial business
ventures.
Business
Developments
As part
of the execution of our business strategy discussed above, we have taken the
following steps:
|
·
|
Hired
Andres Gutierrez Rivera as our President and Chief Executive
Officer. Mr. Gutierrez brings more than 20 years of industry
experience to the Company;
|
|
·
|
We
have entered into two definitive agreements for working interests in two
exploratory blocks in south Colombia in the highly prolific Putumayo Basin
where La Cortez Energy now holds certain E&P rights in approximately
217,000 gross acres;
|
|
·
|
We
have raised approximately US $14.7 million in two private placements in
2008 and one private placement in 2009 of our securities from, among
others, investors familiar with E&P activities in Colombia and who
have been involved with other early stage South American oil and gas
E&P companies. Both of our private placements conducted in
2008 were completed prior to our having either of the Petronorte or
Emerald agreements signed, or having our full complement of our Board of
Directors or management in place;
|
|
·
|
We
began assembling an experienced and qualified management team with the
capacity to search out opportunities, evaluate proposals and execute on
projects that we determine are appropriate for our goals and
objectives. To date, we have hired eight employees including an
exploration manager and a production and operations
manager;
|
1. Emerald Energy Plc. was acquired by Sinochem Resources UK Limited, a wholly owned subsidiary of Sinochem Group, a Chinese state-owned conglomerate, effective October 12, 2009 and Emerald’s listing on the London Stock Exchange (AIM) was cancelled effective as of October 13, 2009.
1
|
·
|
We
have recruited our Board of Directors which is now comprised of six
members and which we may increase to seven members within the next few
months. We have a diversity of professional backgrounds such as
(but not limited to) geologists, engineers, oil business men and capital
market experts within our Board of
Directors;
|
|
·
|
We
are evaluating ways to optimize our business structure in each
jurisdiction where we intend to conduct our business, and we have
established our headquarters office in Bogotá, Colombia, which will serve
as our operational headquarters, to direct and manage all of our business
activities in South America; and
|
|
·
|
We
are currently evaluating additional prospects in Colombia and Peru. To
that end, we have begun investigating project leads and have held a number
of meetings with other oil and gas companies operating in the region,
although we have not yet finalized decisions to pursue any such particular
opportunities.
|
Capital
Needs
As
further discussed below under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources,” we recently completed a unit offering of our securities in
which we raised $6,331,164. We will need to obtain additional capital
to meet our financial commitments to Emerald and Petronorte, and to continue to
execute our business plan, build our operations and become
profitable.
About
This Offering
This
prospectus relates to the public offering, which is not being underwritten, of
up to 9,039,800 outstanding shares of our common stock plus 2,067,400 shares of our common stock
issuable upon the exercise of our
outstanding warrants by the selling stockholders listed in this
prospectus. The shares offered by this prospectus may be sold by the
selling stockholders from time to time in the open market, through negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices. We will receive none of the proceeds from the sale
of the shares by the selling stockholders. However, we may receive
the proceeds from the exercise of the warrants held by the selling stockholders,
to the extent the warrants are not exercised on a cashless basis. We will
bear all expenses of registration incurred in connection with this offering, but
all selling and other expenses incurred by the selling stockholders will be
borne by them.
The
shares of common stock being offered by this prospectus relate to (i) 4,134,800
shares sold by us in our 2008 unit offering, (ii) 4,905,000 shares sold by us in
our 2009 unit offering and (iii) 2,067,400 shares that may be issued upon
exercise of warrants issued to the investors in our 2008 unit offering
.
The
number of shares being offered by this prospectus (including the shares issuable
upon exercise of our outstanding warrants) represents approximately 46.3% of our
outstanding shares of common stock as of November 5, 2009 (giving effect to the
exercise of the outstanding warrants).
Corporate
Information and History
We were
incorporated in the State of Nevada on June 9, 2006 under the name La Cortez
Enterprises, Inc. to pursue certain gourmet chocolate business opportunities in
Mexico2. In
early 2008 after we terminated our chocolate business, our new Board of
Directors decided to redirect our efforts towards identifying and pursuing
opportunities 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.
In
connection with the discontinuation of our former business, we decided to sell
all of the assets and liabilities of our former chocolate business to Maria de
la Luz, our founding stockholder.
2. La
Cortez Enterprises, Inc. was originally formed to create, market and sell
gourmet chocolates wholesale and retail throughout Mexico, as more fully
described in our registration statement on Form SB-2 as filed with the
Securities and Exchange Commission (the “SEC”) on November 7, 2006.
2
As of
August 15, 2008, we assigned all of our assets and property and all of our
liabilities relating to the former chocolate business, accrued, contingent or
otherwise to our newly organized, wholly owned subsidiary, de la Luz Gourmet
Chocolates, Inc., a Nevada corporation. Additionally, we sold all the
outstanding capital stock of de la Luz Gourmet Chocolates, Inc. to Ms. de la Luz
in exchange for 9,000,000 shares of our common stock previously surrendered by
Ms. de la Luz and all of our common stock that Ms. de la Luz then owned, an
additional 2,250,000 shares. As of the closing of this transaction,
Ms. de la Luz was no longer one of our stockholders.
Pursuant
to the terms of this arrangement, Ms. de la Luz agreed to indemnify us and our
officers and directors against any third party claims relating to our former
chocolate business.
As part
of this transaction, and also effective as of August 15, 2008, we entered into a
General Release Agreement with de la Luz Gourmet Chocolates, Inc. and Ms. de la
Luz, whereby de la Luz Gourmet Chocolates, Inc. and Ms. de la Luz pledged not to
sue us from any and all claims, actions, obligations, liabilities and the like,
incurred by de la Luz Gourmet Chocolates, Inc. or Ms. de la Luz arising from any
fact, event, transaction, action or omission that occurred or failed to occur on
or prior to August 15, 2008 and related to our former chocolate
business.
Our
principal executive offices are located at Calle 67 #7-35, Oficina 409, Bogotá,
Colombia, and our telephone number at our principal executive offices is (941)
870-5433, or +57-1-485-2020. Our website address is www.lacortezenergy.com. Our
fiscal year end is December 31.
3
Summary
Financial Information
The
following tables summarizes historical financial data regarding our business and
should be read together with the information in the section titled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our consolidated financial statements and the related notes included in this
prospectus.
Year Ended
December 31,
|
Six Months
Ended June 30,
|
|||||||||||||||
2008
|
2007
|
2009
|
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
Statement of Operations
Data
|
||||||||||||||||
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Loss
from Operations
|
$
|
(2,649,312
|
)
|
$
|
(28,836
|
)
|
$
|
(1,551,981
|
)
|
$
|
(1,365,199
|
)
|
||||
Net
loss
|
$
|
(2,580,529
|
)
|
$
|
(28,836
|
)
|
$
|
(1,061,992
|
)
|
$
|
(1,357,058
|
)
|
||||
Basic
and diluted loss per share
|
$
|
(0.15
|
)
|
$
|
(0.00
|
)
|
$
|
(0.06
|
)
|
$
|
(0.08
|
)
|
||||
Statement of Cash Flows
Data
|
||||||||||||||||
Net
cash used in operating activities
|
$
|
(1,135,942
|
)
|
$
|
(31,436
|
)
|
$
|
(1,072,512
|
)
|
$
|
(353,546
|
)
|
||||
Net
cash used in investing activities
|
$
|
(270,323
|
)
|
$
|
-
|
$
|
(5,900,473
|
)
|
$
|
(45,847
|
)
|
|||||
Net
cash provided by financing activities
|
$
|
8,138,621
|
$
|
12,600
|
$
|
5,244,279
|
$
|
2,461,500
|
||||||||
Cash
and cash equivalents, end of period
|
$
|
6,733,381
|
$
|
1,025
|
$
|
5,004,675
|
$
|
2,063,132
|
At December 31,
|
At June 30
|
|||||||||||||||
2008
|
2007
|
2009
|
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
Balance Sheet Data
|
||||||||||||||||
Total
current assets
|
$
|
6,753,513
|
$
|
1,525
|
$
|
5,087,888
|
$
|
2,111,888
|
||||||||
Total
assets
|
$
|
6,985,117
|
$
|
1,525
|
$
|
11,192,032
|
$
|
2,156,888
|
||||||||
Total
current liabilities
|
$
|
156,792
|
$
|
15,600
|
$
|
3,989,069
|
$
|
51,599
|
||||||||
Total
liabilities
|
$
|
156,792
|
$
|
15,600
|
$
|
3,989,069
|
$
|
51,599
|
||||||||
Total
shareholders’ equity (deficit)
|
$
|
6,828,325
|
$
|
(14,075
|
)
|
$
|
7,202,963
|
$
|
2,105,289
|
4
THE
OFFERING
Common
stock currently outstanding
|
24,000,244
shares (1)
|
|
Common
stock offered by the Company
|
None
|
|
Common
stock offered by the selling stockholders
|
11,107,200
shares (2)
|
|
Use
of proceeds
|
We
will not receive any of the proceeds from the sales of our common stock by
the selling stockholders. However, we may receive the proceeds
from the exercise of the warrants held by the selling stockholders, to the
extent the warrants are not exercised on a cashless
basis.
|
|
OTCBB
symbol
|
LCTZ.OB
|
|
Risk
Factors
|
You
should carefully consider the information set forth in this prospectus
and, in particular, the specific factors set forth in the “Risk Factors”
section beginning on page 6 of this prospectus before deciding
whether or not to invest in shares of our common
stock.
|
(1)
|
As of November 5,
2009.
|
(2)
|
Consists of 9,039,800 issued and
outstanding shares of common stock and 2,067,400 shares of common stock
issuable upon the exercise of outstanding
warrants.
|
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
Various
statements in this prospectus, including those that express a belief,
expectation or intention, as well as those that are not statements of historical
fact, are forward-looking statements. The forward-looking statements may include
projections and estimates concerning the timing and success of specific
projects, revenues, income and capital spending. We generally identify
forward-looking statements with the words “believe,” “intend,” “expect,” “seek,”
“may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project”
or their negatives, and other similar expressions. All statements we make
relating to our estimated and projected earnings, margins, costs, expenditures,
cash flows, growth rates, financial results and project developments and
acquisitions or to our expectations regarding future industry or economic trends
are forward-looking statements.
These
forward-looking statements are subject to risks and uncertainties that may
change at any time, and, therefore, our actual results may differ materially
from those that we expected. The forward-looking statements contained in this
prospectus are largely based on our expectations, which reflect many estimates
and assumptions made by our management. These estimates and assumptions reflect
our best judgment based on currently known market conditions and other factors.
Although we believe such estimates and assumptions are reasonable, we caution
that it is very difficult to predict the impact of known factors and it is
impossible for us to anticipate all factors that could affect our actual
results. In addition, management’s assumptions about future events may prove to
be inaccurate. Management cautions all readers that the forward-looking
statements contained in this prospectus are not guarantees of future
performance, and we cannot assure any reader that such statements will be
realized or the forward looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied in the
forward-looking statements due to the factors listed in the “Risk Factors”
section and elsewhere in this prospectus. All forward-looking statements are
based upon information available to us on the date of this prospectus. We
undertake no obligation to update or revise any forward-looking statements as a
result of new information, future events or otherwise, except as otherwise
required by law. These cautionary statements qualify all forward-looking
statements attributable to us, or persons acting on our behalf.
5
RISK
FACTORS
An
investment in shares of our common stock is highly speculative and involves a
high degree of risk. We face a variety of risks that may affect our
operations or financial results and many of those risks are driven by factors
that we cannot control or predict. Before investing in our common
stock you should carefully consider the following risks, together with the
financial and other information contained in this prospectus. If any
of the following risks actually occurs, our business, prospects, financial
condition and results of operations could be materially adversely
affected. In that case, the trading price of our common stock would
likely decline and you may lose all or a part of your
investment. Only those investors who can bear the risk of loss of
their entire investment should participate in this offering.
RISKS
RELATED TO THE BUSINESS AND FINANCIAL CONDITION
We
are a development stage company with no operating history for you to evaluate
our business. We may never attain profitability.
We are a
development stage company and have not yet begun any oil or natural gas
operations. We have been a shell company with no operating history and no assets
other than cash and we have just recently begun to redirect our business focus
towards the oil and gas industry in South America. We do not have a
full management team in place and we are still building our Board of
Directors. As an early stage oil and gas exploration and development
company with no operating history, it is difficult for potential investors to
evaluate our business. Our proposed operations are therefore subject to all of
the risks inherent in light of the expenses, difficulties, complications and
delays frequently encountered in connection with the formation of any new
business, as well as those risks that are specific to the oil and gas industry
and to that industry in South America, in particular. Investors should evaluate
us in light of the delays, expenses, problems and uncertainties frequently
encountered by companies developing markets for new products, services and
technologies. We may never overcome these obstacles.
Our
senior management team is new to our company and may not be able to develop and
execute a successful business strategy.
Although
our Chief Executive Officer is experienced in the oil and gas industry in South
America, he is new to our Company which itself is new to this
business. Our Chief Executive Officer is in the process of developing
a business strategy for the Company including, for example, the possible
acquisition of oil and gas resources or the participation in joint exploration
and production ventures. If our Chief Executive Officer is not able to develop a
business strategy that is appropriate for our Company and which we can execute
in a successful manner, our business could fail and we could lose all of our
money.
We
may be unable to obtain development rights that we need to build our business,
and our financial condition and results of operations may
deteriorate.
Our
business plan focuses on international exploration and production opportunities
in South America, initially in Colombia and Peru. Thus far, we have signed two
participation interest agreements with partners in Colombia, only one of which
(Emerald) is operational. In the event that these two initial projects do not
proceed successfully or we do not succeed in negotiating any other property
acquisitions, our future prospects will likely be substantially limited, and our
financial condition and results of operations may deteriorate.
Our
business is speculative and dependent upon the implementation of our business
plan and our ability to enter into agreements with third parties for the rights
to exploit potential oil and gas reserves on terms that will be commercially
viable for us.
Our
lack of diversification will increase the risk of an investment in our common
stock.
Our
business will focus on the oil and gas industry in a limited number of
properties, initially in Colombia, with the intention of expanding elsewhere in
South America. Larger companies have the ability to manage their risk by
diversification. However, we will lack diversification, in terms of both the
nature and geographic scope of our business. As a result, factors affecting our
industry or the regions in which we operate will likely impact us more acutely
than if our business were more diversified.
6
Strategic
relationships upon which we may rely are subject to change, which may diminish
our ability to conduct our operations.
Our ability
to successfully bid on and acquire properties, to discover reserves, to
participate in drilling opportunities and to identify and enter into commercial
arrangements with customers will depend on developing and maintaining close
working relationships with industry participants and on our ability to select
and evaluate suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and may impair La
Cortez Energy’s ability to grow.
To
develop our business, we will endeavor to use the business relationships of our
management and our Board of Directors to enter into strategic relationships,
which may take the form of joint ventures with other private parties or with
local government bodies, or contractual arrangements with other oil and gas
companies, including those that supply equipment and other resources that we
will use in our business. We may not be able to establish these strategic
relationships, or if established, we may not be able to maintain them. In
addition, the dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise be inclined
to in order to fulfill our obligations to these partners or maintain our
relationships. If our strategic relationships are not established or maintained,
our business prospects may be limited, which could diminish our ability to
conduct our operations.
Our
strategic partners may change ownership or senior management and this may
negatively affect our business relationships with these partners and our results
of operations.
We have a working interest agreement in
Colombia with Emerald (as discussed elsewhere in this
prospectus). Emerald’s parent, Emerald Energy Plc, was recently
acquired by Sinochem Resources UK Limited, a United Kingdom subsidiary of
Sinochem Group, a Chinese state owned energy and chemicals
conglomerate. At this time, we do not know what impact this
acquisition will have on the management and corporate policies of Emerald in
Colombia or on the future operation of our joint relationship with Emerald. It
is possible that the change of ownership at Emerald could have a negative impact
on our relationship with Emerald and, because we have invested a substantial
amount of capital in the Emerald project, we stand to lose our investment and
suffer considerable losses if Emerald chooses to discontinue our relationship or
its operations in Colombia. Similarly, a change of ownership or
management in any of our current or future strategic partners could negatively
impact our operations.
Competition
in obtaining rights to explore and develop oil and gas reserves and to market
our production may impair our business.
The oil
and gas industry is extremely competitive. Present levels of competition for oil
and gas resources in South America, and particularly in Colombia and Peru, are
high. Significant amounts of capital are being raised world-wide and
directed towards the South American markets and more and more companies are
pursuing the same opportunities. Other oil and gas companies with
greater resources than ours will compete with us by bidding for exploration and
production licenses and other properties and services we will need to operate
our business in the countries in which we expect to
operate. Additionally, other companies engaged in our line of
business may compete with us from time to time in obtaining capital from
investors. Competitors include larger, foreign owned companies, which, in
particular, may have access to greater financial resources than us, may be more
successful in the recruitment and retention of qualified employees and may
conduct their own refining and petroleum marketing operations, which may give
them a competitive advantage. In addition, actual or potential competitors may
be strengthened through the acquisition of additional assets and
interests. Because of some or all of these factors, we may not be
able to compete.
7
We
may be unable to obtain additional capital that we will require to implement our
business plan, which could restrict our ability to grow.
Our
current capital and our other existing financial resources may not be sufficient
to enable us to execute our business plan. We may not have funds
sufficient for any initial investments we might want to
undertake. Currently, we are not generating any revenues although we
have sufficient working capital to continue our start-up operations for the near
future. We will require additional capital to continue to operate our business
beyond the initial phase, and we may need additional capital to acquire initial
properties in Colombia or Peru, and to develop and expand our exploration and
development programs. We may be unable to obtain the additional capital
required. Furthermore, inability to obtain capital may damage our reputation and
credibility with industry participants in the event we cannot close previously
announced transactions.
We have
signed a joint operating agreement with Petronorte (as discussed below) and we
expect to require approximately US $2.3 million for Phase 1 seismic reprocessing
and acquisition activities in the Putumayo 4 Block during the remainder of 2009
and early 2010. Regarding our commitments to Emerald, we have already
made payments to Emerald of US $0.948 million and US $2.433 million during the
first quarter of 2009 and made additional Phase 2 payments to Emerald in the
amount of US $2.433 million and $1.2285 million in May 2009 and July 2009,
respectively. We also paid Emerald cash calls of $0.1445 million in
July 2009 and $0.2433 million in August 2009 for overhead costs. We
do not, at present, have the funds to make additional expected payments to
Emerald and Petronorte for the remainder of the year. If we are not
able to raise the required funds from other sources, we will not be able to meet
our funding commitments to Emerald and Petronorte. As a result, we
may lose our interests in these projects and all previously invested
capital.
Because
we are a development stage company with limited resources, we may not be able to
compete in the capital markets with much larger, established companies that have
ready access to large sums of capital.
Future
acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries,
insurance expenses and general overhead expenses, as well as legal compliance
costs and accounting expenses) will require a substantial amount of additional
capital and cash flow.
We will
require such additional capital in the near term and we plan to pursue sources
of such capital through various financing transactions or arrangements,
including joint venturing of projects, debt financing, equity financing or other
means. We may not be successful in locating suitable financing transactions in
the time period required or at all, and we may not obtain the capital we require
by other means. If we do succeed in raising additional capital, the capital
received may not be sufficient to fund our operations going forward without
obtaining further, additional capital financing. Furthermore, future financings
are likely to be dilutive to our stockholders, as we will most likely issue
additional shares of our common stock or other equity to investors in future
financing transactions. In addition, debt and other mezzanine financing may
involve a pledge of assets and may be senior to interests of equity
holders.
Our
ability to obtain needed financing may be impaired by such factors as conditions
in the capital markets (both generally and in the oil and gas industry in
particular), our status as a new enterprise without a demonstrated operating
history, the location of our prospective oil and natural gas properties in
developing countries and prices of oil and natural gas on the commodities
markets (which will impact the amount of asset-based financing available to us)
and/or the loss of key management. Further, if oil and/or natural gas prices on
the commodities markets decrease, then our potential revenues will likely
decrease, and such decreased future revenues may increase our requirements for
capital. Some of the contractual arrangements governing our operations may
require us to maintain minimum capital, and we may lose our contract rights
(including exploration, development and production rights) if we do not have the
required minimum capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs (even to the extent that we reduce our
operations), we may be required to cease our operations.
We
may be unable to meet our capital requirements in the future, causing us to
curtail future growth plans or cut back existing operations.
We will
need additional capital in the future, which may not be available to us on
reasonable terms or at all. The raising of additional capital may dilute our
stockholders’ interests. We may need to raise additional funds through public or
private debt or equity financings in order to meet various objectives, including
but not limited to:
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·
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Complying
with funding obligations under our existing contractual
commitments;
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8
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·
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pursuing
growth opportunities, including more rapid
expansion;
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·
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acquiring
complementary businesses;
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·
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making
capital improvements to improve our
infrastructure;
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·
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hiring
qualified management and key
employees;
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·
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responding
to competitive pressures;
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·
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complying
with licensing, registration and other requirements;
and
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·
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maintaining
compliance with applicable laws.
|
Any
additional capital raised through the sale of equity may dilute stockholders’
ownership percentage in us. This could also result in a decrease in the fair
market value of our equity securities because our assets would be owned by a
larger pool of outstanding equity. The terms of securities we issue in future
capital transactions may be more favorable to our new investors, and may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and issuances of incentive awards under equity employee
incentive plans, which may have a further dilutive effect.
Furthermore,
any additional financing we may need may not be available on terms favorable to
us, or at all. If we are unable to obtain required additional financing, we may
be forced to curtail our growth plans or cut back our existing
operations.
We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which will adversely impact
our financial condition.
We
may not be able to effectively manage our growth, which may harm our
profitability.
Our
strategy envisions building and expanding our business. If we fail to
effectively manage our growth, our financial results could be adversely
affected. Growth may place a strain on our management systems and resources. We
must continue to refine and expand our business development capabilities, our
systems and processes and our access to financing sources. As we grow, we must
continue to hire, train, supervise and manage new employees. We cannot assure
you that we will be able to:
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·
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expand
our systems effectively or efficiently or in a timely
manner;
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optimally
allocate our human resources;
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·
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identify
and hire qualified employees or retain valued employees;
or
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incorporate
effectively the components of any business that we may acquire in our
effort to achieve growth.
|
If we are
unable to manage our growth and our operations, our financial results could be
adversely affected by inefficiency, which could diminish our
profitability.
9
Our
business may suffer if we do not attract and retain talented
personnel.
Our
success will depend in large measure on the abilities, expertise, judgment,
discretion, integrity and good faith of our management and other personnel in
conducting the business of La Cortez Energy. We are in the process of building
our management team which currently consists of Andres Gutierrez, our President
and Chief Executive Officer, Nadine C. Smith, our Chairman, Vice President,
Interim Chief Financial Officer and Interim Treasurer, Carlos Lombo, our
Exploration Manager, and William Giron, our Production and Operations Manager,
as well as an accountant, one business development analyst and an administrative
assistant. We need to hire a Chief Financial Officer. The loss of any
of these individuals or our inability to hire a professional Chief Financial
Officer or attract suitably qualified staff could materially adversely impact
our business. We may also experience difficulties in certain jurisdictions in
our efforts to obtain suitably qualified staff and retaining staff who are
willing to work in that jurisdiction. We do not currently carry life insurance
for our key employees.
Our
success depends on the ability of our management and employees to interpret
market and geological data correctly and to interpret and respond to economic
market and other conditions in order to locate and adopt appropriate investment
opportunities, monitor such investments and ultimately, if required,
successfully divest such investments. Further, our key personnel may not
continue their association or employment with La Cortez Energy and we may not be
able to find replacement personnel with comparable skills. We have sought to and
will continue to ensure that management and any key employees are appropriately
compensated; however, their services cannot be guaranteed. If we are unable to
attract and retain key personnel, our business may be adversely
affected.
If
we are unable to hire a chief financial officer with public company experience,
our ability to adequately manage the company’s finance function may be
compromised.
Nadine C. Smith is currently serving as
our interim Chief Financial Officer. Although Ms. Smith has
experience as a private company chief financial officer and qualifies as an
“audit committee financial expert”, she needs to dedicate a considerable portion
of her time and energy to her functions as Chairman of our Board of
Directors. We intend to hire a new Chief Financial Officer as soon as
possible but if we are not able to do so, the Company may not be able to comply
with ongoing regulatory internal financial control and reporting
requirements. Additionally, without an experienced public company
Chief Financial Officer, the Company may not be able to adequately manage its
finance function with respect to capital management, cost control and cash flow
and as a result, its financial performance may suffer.
Our
management team does not have extensive experience in U.S. public company
matters, which could impair our ability to comply with U.S. legal and regulatory
requirements.
Although
our management team has senior management experience with companies based in
Colombia, which were subsidiaries of large, foreign public reporting E&P
entities, it has had limited U.S. public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements in the U.S., such as the Sarbanes-Oxley Act of 2002 and
applicable federal securities laws, including filing required reports and other
information required on a timely basis. Our management may not be able to
implement and affect programs and policies in an effective and timely manner
that adequately respond to increased legal, regulatory compliance and reporting
requirements imposed by such laws and regulations. Our failure to comply with
such laws and regulations could lead to the imposition of fines and penalties
and further result in the deterioration of our business.
The
potential profitability of oil and gas ventures in South America depends upon
factors beyond our control.
The
potential profitability of oil and gas properties in South America is dependent
upon many factors beyond our control. For instance, world prices and markets for
oil and gas are unpredictable, highly volatile, potentially subject to
governmental fixing, pegging, controls, or any combination of these and other
factors, and respond to changes in domestic, international, political, social,
and economic environments. Additionally, due to worldwide economic uncertainty
and greater competition among unprecedented numbers of market participants, the
availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. These changes and events
may materially affect our financial performance.
10
Oil
and gas operations are subject to comprehensive regulation which may cause
substantial delays or require capital outlays in excess of those anticipated,
causing an adverse effect on our company.
Oil and
gas operations are subject to national and local laws in South America relating
to the protection of the environment, including laws regulating removal of
natural resources from the ground and the discharge of materials into the
environment. Oil and gas operations are also subject to national and local laws
and regulations in South America which seek to maintain health and safety
standards by regulating the design and use of drilling methods and equipment.
Environmental standards imposed by national or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date, because we have had no
operations, we have not been required to spend any amounts on compliance with
environmental regulations. However, we may be required to expend substantial
sums in the future and this may affect our ability to develop, expand or
maintain our operations.
Any
change to government regulation/administrative practices may have a negative
impact on our ability to operate and profitability.
The laws,
regulations, policies or current administrative practices of any government
body, organization or regulatory agency in Colombia or Peru or any other
jurisdiction where we might conduct our business activities, may be changed,
applied or interpreted in a manner which will fundamentally alter the ability of
our company to carry on our business.
The
actions, policies or regulations, or changes thereto, of any government body or
regulatory agency, or other special interest groups, may have a detrimental
effect on us. Any or all of these situations may have a negative impact on our
ability to operate profitably.
We
may not be able to repatriate our earnings.
We will be conducting all of our
operations in South America through branches or subsidiaries of one or more
wholly owned, offshore subsidiaries that we will establish for this
purpose. Therefore, we will be dependent on the cash flows of our
South American branches (or subsidiaries, as the case may be) and our offshore
subsidiaries to meet our obligations. Our ability to receive such
cash flows may be constrained by taxation levels in the jurisdictions where our
branches (or subsidiaries) operate and by the introduction of exchange controls
and/or repatriation restrictions in the jurisdictions where we intend to
operate. Currently there are no such restrictions in Colombia on
local earnings of foreign entities, but we cannot assure you that exchange or
repatriation restrictions will not be imposed in the future.
RISKS
RELATED TO OUR INDUSTRY AND REGIONAL FOCUS
Current
volatile market conditions and significant fluctuations, generally downward, in
energy prices may continue indefinitely, negatively affecting our business
prospects and viability.
Commodities
and capital markets have been under great stress and volatility during the past
year in part due to the credit crisis affecting lenders and borrowers on a
worldwide basis. As a result of this crisis, crude oil prices have tumbled from
highs of nearly $150 per barrel in mid 2008 to a low of around $45 per barrel in
2009, causing companies to re-think existing strategies and new business
ventures. We are vigilant of the situation unfolding and are adjusting our
strategy to reflect these new market conditions. Nonetheless, we will not be
immune to lower commodities prices and significantly more restrictive credit
market conditions. Our ability to enter into exploration and
production projects may be compromised, and in a continuing environment of lower
crude oil and natural gas prices, our future results of operations and market
value could be affected negatively.
Difficult
conditions in the global capital markets may significantly affect our ability
and that of our strategic partners to raise additional capital and begin
operations.
The
ongoing worldwide financial and credit crisis may continue
indefinitely. Because of severely reduced market liquidity, we may
not be able to raise additional capital when we need it. Because the
future of our business will depend on the completion of one or more investment
transactions for which, most likely, we will need additional capital, we may not
be able to complete such transactions or acquire revenue producing
assets. As a result, we may not be able to generate income and, to
conserve capital, we may be forced to curtail our current business activities or
cease operations entirely.
11
Our
exploration for oil and natural gas is risky and may not be commercially
successful, impairing our ability to generate revenues from our
operations.
Oil and
natural gas exploration involves a high degree of risk. These risks are more
acute in the early stages of exploration. Our expenditures on exploration may
not result in new discoveries of oil or natural gas in commercially viable
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions,
such as over pressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof. If exploration costs exceed our estimates, or
if our exploration efforts do not produce results which meet our expectations,
our exploration efforts may not be commercially successful, which could
adversely impact our ability to generate revenues from our
operations.
We
may not be able to develop oil and gas reserves on an economically viable
basis.
To the
extent that we succeed in discovering or acquiring oil and/or natural gas
reserves, we cannot assure that these reserves will be capable of production
levels we project or in sufficient quantities to be commercially viable. On a
long-term basis, our viability depends on our ability to find or acquire,
develop and commercially produce oil and gas reserves. Our future reserves will
depend not only on our ability to develop then-existing properties, but also on
our ability to identify and acquire additional suitable producing properties or
prospects, to find markets for the oil and natural gas we develop and to
effectively distribute our production into our markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-downs of connected wells resulting from extreme weather
conditions, problems in storage and distribution and adverse geological and
mechanical conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be able
to eliminate them completely in any case. Therefore, these conditions could
diminish our future revenue and cash flow levels and result in the impairment of
our oil and natural gas interests.
Estimates
of oil and natural gas reserves that we make may be inaccurate and our future
actual revenues may be lower than our financial projections.
With
respect to any oil and gas properties that we may acquire, we will make
estimates of oil and natural gas reserves, upon which we will base our financial
projections. We will make these reserve estimates using various assumptions,
including assumptions as to oil and natural gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. Some of these
assumptions are inherently subjective, and the accuracy of our reserve estimates
relies in part on the ability of our management team, engineers and other
advisors to make accurate assumptions. Economic factors beyond our control, such
as interest rates and exchange rates, will also impact the value of our
reserves. The process of estimating oil and gas reserves is complex, and will
require us to use significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
property. As a result, our reserve estimates will be inherently imprecise.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially from those we estimate. If actual
production results vary substantially from our reserve estimates, this could
materially reduce our revenues and result in the impairment of our oil and
natural gas interests.
12
A
shortage of drilling rigs and other equipment and geophysical service crews
could hamper our ability to exploit any oil and gas resources we may
acquire.
Because
of the increased oil and gas exploration activities in South America and in
Colombia in particular, competition for available drilling rigs and related
services and equipment has increased significantly and these rigs and related
items have become substantially more expensive and harder to
obtain. If we do acquire properties and related rights to drill
wells, we may not be able to procure the necessary drill rigs and related
services and equipment, or the cost of such items may be
prohibitive. Our ability to comply with future license obligations or
otherwise generate revenues from the production of operating oil and gas wells
could be hampered as a result of this, and our business could
suffer. Additionally, a shortage of crews available to shoot and
process seismic activity could cause us to breach our obligations to Petronorte
with respect to the Putumayo 4 Block.
Drilling
wells could result in liabilities, which could endanger our interests in our
prospective properties and assets.
There are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, craterings, sour gas releases, fires and spills. The
occurrence of any of these events could significantly reduce our future revenues
or cause substantial losses, impairing our future operating results. We may
become subject to liability for pollution, blow-outs or other hazards. We will
obtain insurance with respect to these hazards as appropriate to our activities,
but such insurance has limitations on liability that may not be sufficient to
cover the full extent of such liabilities. The payment of such liabilities could
reduce the funds available to us or could, in an extreme case, result in a total
loss of our properties and assets. Moreover, we may not be able to maintain
adequate insurance in the future at rates that are considered reasonable. Oil
and natural gas production operations are also subject to all the risks
typically associated with such operations, including premature decline of
reservoirs and the invasion of water into producing formations.
Decommissioning
costs are unknown and may be substantial; unplanned costs could divert resources
from other projects.
We may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we may use for production of oil and gas
reserves. Abandonment and reclamation of these facilities and the costs
associated therewith is often referred to as “decommissioning.” We have not yet
established a cash reserve account for these potential costs because currently
we do not own any properties or facilities. We may establish such an
account, however, for properties in which we have a participation interest. If
decommissioning is required before economic depletion of our future properties
or if our estimates of the costs of decommissioning exceed the value of the
reserves remaining at any particular time to cover such decommissioning costs,
we may have to draw on funds from other sources to satisfy such costs. The use
of other funds to satisfy such decommissioning costs could impair our ability to
focus capital investment in other areas of our business.
Our
inability to obtain necessary facilities could hamper our
operations.
Oil and
natural gas exploration and development activities are dependent on the
availability of drilling and related equipment, transportation, power and
technical support in the particular areas where these activities will be
conducted, and our access to these facilities may be limited. To the extent that
we conduct our activities in remote areas, needed facilities may not be
proximate to our operations, which will increase our expenses. Demand for such
limited equipment and other facilities or access restrictions may affect the
availability of such equipment to us and may delay exploration and development
activities. The quality and reliability of necessary facilities may also be
unpredictable and we may be required to make efforts to standardize our
facilities, which may entail unanticipated costs and delays. Shortages and/or
the unavailability of necessary equipment or other facilities will impair our
activities, either by delaying our activities, increasing our costs or
otherwise.
We
may have difficulty distributing our production, which could harm our financial
condition.
In order
to sell the oil and natural gas that we may produce in the future, we would have
to make arrangements for storage and distribution to the market. We will rely on
local infrastructure and the availability of transportation for storage and
shipment of our products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This could be
particularly problematic to the extent that our operations are conducted in
remote areas that are difficult to access, such as areas that are distant from
shipping and/or pipeline facilities. These factors may affect our ability to
explore and develop properties and to store and transport our oil and gas
production and may increase our expenses.
13
Furthermore,
future instability in one or more of the countries in which we will operate,
weather conditions or natural disasters, actions by companies doing business in
those countries, labor disputes or actions taken by the international community
may impair the distribution of oil and/or natural gas and in turn diminish our
financial condition or ability to maintain our operations.
Prices
and markets for oil and natural gas are unpredictable and tend to fluctuate
significantly, which could reduce profitability, growth and the value of our
company.
Oil and
natural gas are commodities whose prices are determined based on world demand,
supply and other factors, all of which are beyond our control. World prices for
oil and natural gas have fluctuated widely in recent years. The average price
for West Texas Intermediate oil in 1999 was $22 per barrel. In 2002 it was $27
per barrel. In 2005, it was $57 per barrel, in June 2008, it was $133 per
barrel, and in January 2009, it was $41 per barrel. We expect that prices will
fluctuate in the future. Price fluctuations will have a significant impact upon
our revenue, the return from our reserves and on our financial condition
generally. Price fluctuations for oil and natural gas commodities may also
impact the investment market for companies engaged in the oil and gas industry.
Although during 2008 market prices for oil and natural gas have risen to record
levels, these prices may not remain at current levels. Future decreases in the
prices of oil and natural gas may have a material adverse effect on our
financial condition, the future results of our operations and quantities of
reserves recoverable on an economic basis.
Increases
in our operating expenses will impact our operating results and financial
condition.
Exploration,
development, production, marketing (including distribution costs) and regulatory
compliance costs (including taxes) will substantially impact the net revenues we
derive from the oil and gas that we may produce. These costs are subject to
fluctuations and variation in different locales in which we will operate, and we
may not be able to predict or control these costs. If these costs exceed our
expectations, this may adversely affect our results of operations. In addition,
we may not be able to earn net revenue at our predicted levels, which may impact
our ability to satisfy our obligations.
Penalties
we may incur could impair our business.
Failure
to comply with government regulations could subject us to civil and criminal
penalties, could require us to forfeit property rights, and may affect the value
of our assets. We may also be required to take corrective actions, such as
installing additional equipment or taking other actions,
each of which could require us to make substantial capital expenditures. We
could also be required to indemnify our employees in connection with any
expenses or liabilities that they may incur individually in connection with
regulatory action against them. As a result, our future business prospects could
deteriorate due to regulatory constraints, and our profitability could be
impaired by our obligation to provide such indemnification to our
employees.
Environmental
risks may adversely affect our business.
All
phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and federal, provincial and municipal laws and
regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases or emissions of various
substances produced in association with oil and gas operations. The legislation
also requires that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with such legislation can require significant expenditures and a
breach may result in the imposition of fines and penalties, some of which may be
material. Environmental legislation is evolving in a manner we expect may result
in stricter standards and enforcement, larger fines and liability and
potentially increased capital expenditures and operating costs. The discharge of
oil, natural gas or other pollutants into the air, soil or water may give rise
to liabilities to foreign governments and third parties and may require us to
incur costs to remedy such discharge. The application of environmental laws to
our business may cause us to curtail our production or increase the costs of our
production, development or exploration activities.
14
Managing
local community relations where we and our partners operate could be
problematic.
We or our
operating partners may be required to present our operational plans to local
communities or indigenous populations living in the area of a proposed project
before project activities can be initiated. Additionally, working with local
communities will be an essential part of our work program for the development of
any of our E&P projects in the region. If we or our partners fail
to manage any of these community relationships appropriately, our operations
could be delayed or interrupted and we or our partners could lose rights to
operate in these areas, resulting in a negative impact on our business, our
reputation and, possibly, our share price.
Our
insurance may be inadequate to cover liabilities we may incur.
Our
involvement in the exploration for and development of oil and natural gas
properties may result in our becoming subject to liability for pollution,
blow-outs, property damage, personal injury or other hazards. Although we will
obtain insurance in accordance with industry standards to address such risks,
such insurance has limitations on liability that may not be sufficient to cover
the full extent of such liabilities. In addition, such risks may not, in all
circumstances be insurable or, in certain circumstances, we may choose not to
obtain insurance to protect against specific risks due to the high premiums
associated with such insurance or for other reasons. The payment of such
uninsured liabilities would reduce the funds available to us. If we suffer a
significant event or occurrence that is not fully insured, or if the insurer of
such event is not solvent, we could be required to divert funds from capital
investment or other uses towards covering our liability for such
events.
Civil
liabilities may not be able to be enforced against us.
Substantially
all of our assets and certain of our officers and directors will be located
outside of the United States. As a result of this, it may be
difficult or impossible to enforce judgments awarded by a court in the United
States against our assets or those of our officers and directors.
Our
business is subject to local legal, political and economic factors which are
beyond our control, which could impair our ability to build and expand our
operations or operate profitably.
We expect
to operate our business in Colombia and other South American countries. We
believe that Colombia’s legal system is sufficiently developed, its political
environment is sufficiently supportive and its economic condition is
sufficiently stable to enable us to plan and implement our operations, and we
expect that these conditions in other countries in which we plan to conduct
business will be hospitable to us.
However,
there are risks that economic and political conditions will change in a manner
adverse to our interests. These risks include, but are not limited to,
terrorism, military repression, interference with private contract rights (such
as privatization), extreme fluctuations in currency exchange rates, high rates
of inflation, exchange controls and other laws or policies affecting
environmental issues (including land use and water use), workplace safety,
foreign investment, foreign trade, investment or taxation, as well as
restrictions imposed on the oil and natural gas industry, such as restrictions
on production, price controls and export controls. Any changes in oil and gas or
investment and tax regulations and policies or a shift in political attitudes in
Colombia or other countries in which we intend to operate are beyond our control
and may significantly hamper our ability to build and expand our operations or
operate our business at a profit.
For
instance, changes in laws in the jurisdiction in which we operate or expand into
with the effect of favoring local enterprises, changes in political views
regarding the exploitation of natural resources and economic pressures may make
it more difficult for us to negotiate agreements on favorable terms, obtain
required licenses, comply with regulations or effectively adapt to adverse
economic changes, such as increased taxes, higher costs, inflationary pressure
and currency fluctuations.
Additionally,
Colombia has been the site of South America’s largest and longest political and
military insurgency and has experienced uncontrolled criminal activity relating
to drug trafficking. While the situation has improved dramatically in recent
years, there can be no guarantee that the situation will improve further or that
it will not deteriorate. Any increase in kidnapping and/or terrorist
activity in Colombia may disrupt our operations in that country, hamper our
ability to hire and keep qualified personnel and hinder or shut off our access
to sources of capital. Any such changes are beyond our control and
may adversely affect our business.
15
Local
legal and regulatory systems in which we operate may create uncertainty
regarding our rights and operating activities, which may harm our ability to do
business.
We are a
company organized under the laws of the State of Nevada and are subject to
United States laws and regulations. The jurisdictions in which we intend to
operate our exploration, development and production activities may have
different or less developed legal systems than the United States, which may
result in risks such as:
|
·
|
effective
legal redress in the courts of such jurisdictions, whether in respect of a
breach of law or regulation, or, in an ownership dispute, being more
difficult to obtain;
|
|
·
|
a
higher degree of discretion on the part of governmental
authorities;
|
|
·
|
the
lack of judicial or administrative guidance on interpreting applicable
rules and regulations;
|
|
·
|
inconsistencies
or conflicts between and within various laws, regulations, decrees, orders
and resolutions; and
|
|
·
|
relative
inexperience of the judiciary and courts in such
matters.
|
In
certain jurisdictions the commitment of local business people, government
officials and agencies and the judicial system to abide by legal requirements
and negotiated agreements may be more uncertain, creating particular concerns
with respect to licenses and agreements for business. These licenses and
agreements may be susceptible to revision or cancellation and legal redress may
be uncertain or delayed. Property right transfers, joint ventures, licenses,
license applications or other legal arrangements pursuant to which we operate
may be adversely affected by the actions of government authorities and the
effectiveness of and enforcement of our rights under such arrangements in these
jurisdictions may be impaired.
Our
business will suffer if we or our strategic partners cannot obtain or maintain
necessary licenses.
Our
operations will require licenses, permits and in some cases renewals of licenses
and permits from various governmental authorities. Our ability to obtain,
sustain or renew such licenses and permits on acceptable terms is subject to
change in regulations and policies and to the discretion of the applicable
governments, among other factors. Our inability to obtain, or our loss of or
denial of extension to any of these licenses or permits could hamper our ability
to produce revenues from our operations.
The
ANH may not approve Emerald’s assignment of rights to our Colombia operating
subsidiary under our farm-in agreement with Emerald and, as a result, our
operating subsidiary may not be able to legally protect its rights under this
farm-in agreement.
Once La
Cortez Energy Colombia, Inc. (“La Cortez Colombia”) has completed paying all of
its Phase 2 commitments on the Maranta block (its Phase 1 reimbursement payment
was already made), Emerald will assign and transfer to La Cortez Colombia the
agreed upon 20% participating interest in the Maranta block, subject to ANH
approval. If the ANH does not approve this assignment, Emerald and La
Cortez Colombia have agreed that they will use their best endeavors to seek in
good faith a legal way to enter into an agreement with terms equivalent to their
farm-in agreement and joint operating agreement, that shall privately govern the
relations between the parties and which will not require ANH approval. If
Emerald and La Cortez Colombia are not able to do this, La Cortez Colombia may
not be able to legally protect or enforce its rights under the farm-in
agreement, resulting, possibly, in capital and income losses to us.
16
Foreign
currency exchange rate fluctuations may affect our financial
results.
We expect
to sell any future oil and natural gas production under agreements that will be
denominated in United States dollars and foreign currencies. Many of the
operational and other expenses we incur will be paid in the local currency of
the country where we perform our operations. As a result, fluctuations in the
United States dollar against the local currencies in jurisdictions where we
operate could result in unanticipated and material fluctuations in our financial
results.
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.
We
will rely on technology to conduct our business and our technology could become
ineffective or obsolete.
We will
rely on technology, including geographic and seismic analysis techniques and
economic models, to develop reserve estimates and to guide our planned
exploration and development and production activities. We will be required to
continually enhance and update our technology to maintain its efficacy and to
avoid obsolescence. The costs of doing so may be substantial, and may be higher
than the costs that we anticipate for technology maintenance and development. If
we are unable to maintain the efficacy of our technology, our ability to manage
our business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient.
RISKS
RELATED TO OUR SECURITIES
There
is not now, and there may not ever be, an active market for our common
stock.
There currently is a limited public
market for our common stock. Further, although our common stock is
currently quoted on the OTC Bulletin Board (the “OTCBB”), trading of our common
stock may be extremely sporadic. For example, several days may pass
before any shares may be traded. As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations of the price of, our
common stock. Accordingly, investors must assume they may have to
bear the economic risk of an investment in our common stock for an indefinite
period of time. There can be no assurance that a more active market
for our common stock will develop, or if one should develop, there is no
assurance that it will be sustained. This severely limits the
liquidity of our common stock, and would likely have a material adverse effect
on the market price of our common stock and on our ability to raise additional
capital.
We
cannot assure you that our common stock will become liquid or that it will be
listed on a securities exchange.
Until our common stock is listed on a
national securities exchange such as the New York Stock Exchange or the Nasdaq
National Market, we expect our common stock to remain eligible for quotation on
the OTCBB, or on another over-the-counter quotation system, or in the “pink
sheets.” In those venues, however, an investor may find it difficult to obtain
accurate quotations as to the market value of our common stock. In
addition, if we fail to meet the criteria set forth in SEC regulations, various
requirements would be imposed by law on broker-dealers who sell our securities
to persons other than established customers and accredited
investors. Consequently, such regulations may deter broker-dealers
from recommending or selling our common stock, which may further affect the
liquidity of our common stock. This would also make it more difficult
for us to raise capital.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading
market in our common stock is limited, which makes transactions in our common
stock cumbersome and may reduce the value of an investment in the
stock.
The SEC
has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
·
|
that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
|
·
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the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
17
In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
·
|
obtain
financial information and investment experience objectives of the person;
and
|
·
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form sets forth:
·
|
the
basis on which the broker or dealer made the suitability determination;
and
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the
transaction.
|
Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
common stock and cause a decline in the market value of stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
The
price of our common stock may become volatile, which could lead to losses by
investors and costly securities litigation.
The trading price of our common stock
is likely to be highly volatile and could fluctuate in response to factors such
as:
|
·
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actual
or anticipated variations in our operating
results;
|
|
·
|
announcements
of developments by us, our strategic partners or our
competitors;
|
|
·
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
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adoption
of new accounting standards affecting our Company’s
industry;
|
|
·
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additions
or departures of key personnel;
|
|
·
|
sales
of our common stock or other securities in the open market;
and
|
|
·
|
other
events or factors, many of which are beyond our
control.
|
The stock market is subject to
significant price and volume fluctuations. In the past, following periods of
volatility in the market price of a company’s securities, securities class
action litigation has often been initiated against the company. Litigation
initiated against us, whether or not successful, could result in substantial
costs and diversion of our management’s attention and resources, which could
harm our business and financial condition.
We
do not anticipate dividends to be paid on our common stock, and investors may
lose the entire amount of their investment.
Cash dividends have never been declared
or paid on our common stock, and we do not anticipate such a declaration or
payment for the foreseeable future. We expect to use future earnings, if any, to
fund business growth. Therefore, stockholders will not receive any funds absent
a sale of their shares. We cannot assure stockholders of a positive return on
their investment when they sell their shares, nor can we assure that
stockholders will not lose the entire amount of their investment.
18
If
securities analysts do not initiate coverage or continue to cover our common
stock or publish unfavorable research or reports about our business, this may
have a negative impact on the market price of our common stock.
The trading market for our common stock
may be affected by, among other things, the research and reports that securities
analysts publish about our business and the Company. We do not have any control
over these analysts. There is no guarantee that securities analysts will cover
our common stock. If securities analysts do not cover our common stock, the lack
of research coverage may adversely affect its market price. If we are covered by
securities analysts, and our stock is the subject of an unfavorable report, our
stock price and trading volume would likely decline. If one or more of these
analysts ceases to cover the Company or fails to publish regular reports on the
Company, we could lose visibility in the financial markets, which could cause
our stock price or trading volume to decline.
You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock.
In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present stockholders
and the purchasers of our common stock offered hereby. We are
currently authorized to issue an aggregate of 310,000,000 shares of capital stock
consisting of 300,000,000 shares of
common stock and 10,000,000 shares of preferred stock with preferences and
rights to be determined by the our Board of Directors. As
of November 5, 2009, there were 24,000,244 shares of our
common stock and no shares of our preferred stock outstanding. There
are 4,000,000
shares of our common stock reserved for issuance under our 2008 Equity Incentive
Plan. These numbers do not include shares of our common stock
issuable upon the exercise of outstanding warrants. We may also issue
additional shares of our common stock or other securities that are convertible
into or exercisable for our common stock in connection with hiring or retaining
employees, future acquisitions, future sales of its securities for capital
raising purposes, or for other business purposes. The future issuance
of any such additional shares of our common stock may create downward pressure
on the trading price of the common stock. We will need to raise
additional capital in the near future to meet our working capital needs and
there can be no assurance that we will not be required to issue additional
shares, warrants or other convertible securities in the future in conjunction
with these capital raising efforts, including at a price (or exercise prices)
below the price at which shares of our common stock are currently traded on the
OTCBB.
19
SELLING
STOCKHOLDERS
This
prospectus covers the resale from time to time by the selling stockholders
identified in the table below of up to 9,039,800 issued and outstanding shares
of our common stock and 2,067,400 shares of our common stock issuable upon the
exercise of outstanding warrants, comprising:
·
|
4,
134,800 shares sold by us in our 2008 unit offering;
|
·
|
4,905,000 shares
sold by us in our 2009 unit offering; and
|
·
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2,067,400
shares that may be issued upon exercise of warrants issued to the
investors in our 2008 unit
offering.
|
On March
14, 2008, we closed a private placement in which we sold 2,400,000 shares of our
common stock at a price of $1.00 per share for total proceeds of $2,314,895, net
after expenses. We are not registering for resale under this
prospectus any of the shares sold in that 2008 private placement.
On
September 10, 2008, we closed our unit offering under which we sold 4,784,800
units at a price of $1.25 per unit, for an aggregate offering price of
$5,981,000, or $5,762,126 after offering expenses. Each of these units consisted
of (i) one share of our common stock and (ii) a common stock purchase warrant to
purchase one-half share of our common stock, exercisable for a period of five
years at an exercise price of $2.25 per share. We are registering for
resale under this prospectus shares, and shares issuable upon the exercise of
warrants, contained in the units sold in that 2008 unit offering, pursuant to
piggyback registration rights granted to the investors in that
offering.
In our
unit offering completed in July 2009, investors purchased units of our
securities, with each unit consisting of one share of our common stock and a
warrant to purchase one share of our common stock, exercisable for a period of
five years at an exercise price of $2.00 per share. This offering was
conducted with two closings: 4,860,000 units were sold on June 19,
2009 for an aggregate cash consideration of $6,074,914; and 205,000 units were
sold on July 31, 2009 for an aggregate cash consideration of
$256,250. We are registering for resale under this prospectus shares
contained in the units sold in that 2009 unit offering, pursuant to mandatory
registration rights granted to the investors in that offering. We are
not registering any of the shares issuable upon the exercise of warrants
contained in the units sold in the 2009 unit offering or granted to certain
placement agents who placed units sold in that offering.
Pursuant
to registration rights agreements executed in connection with the 2009 unit
offering, we have filed with the Securities and Exchange Commission a
registration statement on Form S-1, of which this prospectus forms a part, under
the Securities Act to register the shares of common stock included in the
units. The selling stockholders identified in the table below may
from time to time offer and sell under this prospectus any or all of the shares
of common stock described under the column “Shares of Common Stock Being
Offered” in the table below.
Certain
selling stockholders may be deemed to be “underwriters” as defined in the
Securities Act. Any profits realized by such selling stockholder may be deemed
to be underwriting commissions.
The table
below has been prepared based upon the information furnished to us by the
selling stockholders as of the date of this prospectus. The selling stockholders
identified below may have sold, transferred or otherwise disposed of some or all
of their shares since the date on which the information in the following table
is presented in transactions exempt from or not subject to the registration
requirements of the Securities Act. Information concerning the selling
stockholders may change from time to time and, if necessary, we will amend or
supplement this prospectus accordingly. We cannot give an estimate as to the
number of shares of common stock that will actually be held by the selling
stockholders upon termination of this offering because the selling stockholders
may offer some or all of their common stock under the offering contemplated by
this prospectus or acquire additional shares of common stock. The total number
of shares that may be sold hereunder will not exceed the number of shares
offered hereby. Please read the section entitled “Plan of Distribution” in this
prospectus.
20
The
following table sets forth the name of each selling stockholder, the number of
shares of our common stock beneficially owned by such stockholder before this
offering, the number of shares to be offered for such stockholder’s account
and the number and (if one percent or more) the percentage of the class to be
beneficially owned by such stockholder after completion of the offering. The
number of shares owned are those beneficially owned, as determined under the
rules of the Securities and Exchange Commission, and such information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares of our common stock as to which
a person has sole or shared voting power or investment power and any shares of
common stock which the person has the right to acquire within 60 days after the
date of this prospectus through the exercise of any option, warrant or right,
through conversion of any security or pursuant to the automatic termination of a
power of attorney or revocation of a trust, discretionary account or similar
arrangement, and such shares are deemed to be beneficially owned and outstanding
for computing the share ownership and percentage of the person holding such
options, warrants or other rights, but are not deemed outstanding for computing
the percentage of any other person. Beneficial ownership percentages are
calculated based on 24,000,244 shares of our common stock outstanding as of
November 5, 2009.
Unless
otherwise set forth below, based upon the information furnished to us, (a) the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite the selling stockholder’s
name, subject to community property laws, where applicable, (b) no selling
stockholder had any position, office or other material relationship within the
past three years, with us or with any of our predecessors or affiliates, and (c)
no selling stockholder is a broker-dealer. Selling stockholders who are
affiliates of a broker-dealer are indicated by footnote. We have been advised
that these affiliates of broker-dealers purchased our common stock and warrants
in the ordinary course of business, not for resale, and at the time of purchase,
did not have any agreements or understandings, directly or indirectly, with any
person to distribute the related common stock.
Selling Stockholder
|
Shares of
Common
Stock
Owned
Before the
Offering
|
Shares of
Common
Stock Being
Offered
|
Shares of
Common
Stock
Owned Upon
Completion
of the
Offering (1)
|
Percentage
of Common
Stock
Outstanding
Upon
Completion
of the
Offering
|
||||||||||||
Affaires
Financieres SA (2)
|
960,000 | 960,000 | – | |||||||||||||
Andean
Capital Management, Ltd. (3)
|
966,000 | 400,000 | 566,000 | 2.32 | % | |||||||||||
Thor
Anderson (4)
|
400,000 | 200,000 | 200,000 | * | ||||||||||||
Asset
Protection Fund Ltd.
(5)
|
2,250,000 | 2,250,000 | – | |||||||||||||
Barclay
Armitage (6)
|
50,000 | 25,000 | 25,000 | * | ||||||||||||
Bank
Julius Baer & Co. Ltd.
(7)
|
750,444 | 150,000 | 600,444 | 2.44 | % | |||||||||||
BonAnno
Family Partnership, LP (8)
|
960,000 | 480,000 | 480,000 | 1.96 | % | |||||||||||
Bradley
Resources Co., LLC (9)
|
120,000 | 60,000 | 60,000 | * | ||||||||||||
Elliot
Braun (10)
|
56,000 | 28,000 | 28,000 | * | ||||||||||||
W.
Sam Chandoha (11)
|
120,000 | 60,000 | 60,000 | * | ||||||||||||
Clarion
Finanz AG (12)
|
840,000 | 840,000 | – | |||||||||||||
John
and Wendy Cotter (13)
|
160,000 | 80,000 | 80,000 | * | ||||||||||||
Steven
Denstman (14)
|
160,000 | 80,000 | 80,000 | * | ||||||||||||
Ron
Eller & Beth Eller (15)
|
24,000 | 12,000 | 12,000 | * | ||||||||||||
Jose
Facuseh (16)
|
7,200 | 7,200 | – | |||||||||||||
Andrew
Fisher (17)
|
48,000 | 24,000 | 24,000 | * | ||||||||||||
Gibralt
Capital Corporation (18)
|
800,000 | 400,000 | 400,000 | – | ||||||||||||
Huntley
Resources Ltd.
(19)
|
120,000 | 120,000 | – | |||||||||||||
LBLux
Sicav-FIS Junior Mining (20)
|
40,000 | 20,000 | 20,000 | * | ||||||||||||
James
J. Lucey (21)
|
40,000 | 20,000 | 20,000 | * | ||||||||||||
LW
Securities, Ltd.
(22)
|
1,500,000 | 750,000 | 750,000 | 3.03 | % | |||||||||||
Lyall
Family Trust§ (23)
|
200,000 | 100,000 | 100,000 | – |
21
Selling Stockholder
|
Shares of
Common
Stock
Owned
Before the
Offering
|
Shares of
Common
Stock Being
Offered
|
Shares of
Common
Stock
Owned Upon
Completion
of the
Offering (1)
|
Percentage
of Common
Stock
Outstanding
Upon
Completion
of the
Offering
|
||||||||||||
Mouton
Family Living Trust, dated 12/10/1993 as amended (24)
|
40,000 | 20,000 | 20,000 | * | ||||||||||||
Richard
Neustadter (25)
|
480,000 | 240,000 | 240,000 | * | ||||||||||||
Bruce
Nurse (26)
|
75,000 | 75,000 | – | |||||||||||||
Pacific
Lng Operations Ltd.
(27)
|
480,000 | 240,000 | 240,000 | * | ||||||||||||
Professional
Trading Services SA (28)
|
1,950,000 | 1,950,000 | – | |||||||||||||
William
R. Sauey (29)
|
40,000 | 20,000 | 20,000 | * | ||||||||||||
Bernard
L. Schwartz (30)
|
2,000,000 | 1,000,000 | 1,000,000 | 4.00 | % | |||||||||||
Clayton
Strave§
(31)
|
48,000 | 24,000 | 24,000 | * | ||||||||||||
John
Tognetti§ (32)
|
400,000 | 200,000 | 200,000 | * | ||||||||||||
Vimo
Limited (33)
|
400,000 | 200,000 | 200,000 | * | ||||||||||||
Craig
Whited (34)
|
144,000 | 72,000 | 72,000 | * | ||||||||||||
Totals
|
16,628,644 | 11,107,200 | 5,521,444 |
* Less
than 1%
§
Affiliated with a Broker Dealer
|
(1)
|
Assumes
all of the shares of common stock to be registered on the registration
statement of which this prospectus is a part, including all shares of
common stock underlying options or warrants held by the selling
stockholders, are sold in the offering and that shares of common stock
beneficially owned by such selling stockholder but not being registered by
this prospectus are not sold.
|
|
(2)
|
Luciano
Bassi and Werner Wagmann, as Directors of Affaires Financieres SA, have
the power to vote and dispose of these shares. Includes 320,000
shares of common stock issuable upon exercise of warrants currently
exercisable or exercisable within 60
days.
|
|
(3)
|
Daniel
Osorio, as President of Andean Capital Management, Ltd., has the power to
vote and dispose of these shares. Includes 400,000 shares of
common stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
|
(4)
|
Thor
Anderson has the power to vote and dispose of these
shares. Includes 200,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
|
(5)
|
David
Dawes, as Director of Asset Protection Fund Ltd., has the power to vote
and dispose of these shares. Includes 750,000 shares of common
stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
|
(6)
|
Barclay
Armitage has the power to vote and dispose of these
shares. Includes 25,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
|
(7)
|
Christoph
Honegger, as Associate Director, and Roland Mader, as Director, of Bank
Julius Baer & Co. Ltd., each has the power to vote and dispose of
these shares. Includes 150,000 shares of common stock issuable
upon exercise of warrants currently exercisable or exercisable within 60
days.
|
22
|
(8)
|
Raymond
J. BonAnno, as General Manager of BonAnno Family Partnership, LLP, has the
power to vote and dispose of these shares. Includes 480,000
shares of common stock issuable upon exercise of warrants currently
exercisable or exercisable within 60
days.
|
|
(9)
|
George
Holbrook, as Managing Member of Bradley Resources Co., LLC, has the power
to vote and dispose of these shares. Includes 60,000 shares of
common stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(10)
|
Elliot
Braun has the power to vote and dispose of these
shares. Includes 28,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(11)
|
W.
Sam Chandoha has the power to vote and dispose of these
shares. Includes 60,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(12)
|
Carlo
Civelli, as Director of Clarion Finanz AG, has the power to vote and
dispose of these shares. Includes 280,000 shares of common
stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(13)
|
John
and Wendy Cotter, JTWROS, have the power to vote and dispose of these
shares. Includes 80,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(14)
|
Steven
Denstman has the power to vote and dispose of these
shares. Includes 80,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(15)
|
Ron
Eller & Beth Eller, JTWROS, have the power to vote and dispose of
these shares. Includes 12,000 shares of common stock issuable
upon exercise of warrants currently exercisable or exercisable within 60
days.
|
(16)
|
Jose
Facuseh has the power to vote and dispose of these
shares. Includes 2,400 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(17)
|
Andrew
Fisher has the power to vote and dispose of these
shares. Includes 24,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(18)
|
Samuel
Belzberg, as President of Gibralt Capital Corporation, has the power to
vote and dispose of these shares. Includes 400,000 shares of
common stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(19)
|
Alberto
Furmanski, as President of Huntley Resources Ltd., has the power to vote
and dispose of these shares. Includes 40,000 shares of common
stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(20)
|
Margo Busch, Klaus
Groβkreutz, Peter Lenz and Ruth Naujok of LBLux Sicav-FIS Junior
Mining have the power to vote and dispose of these
shares. Includes 20,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(21)
|
James
J. Lucey has the power to vote and dispose of these
shares. Includes 20,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(22)
|
Omar
Salinas, as President of LW Securities, Ltd., has the power to vote and
dispose of these shares. Includes 750,000 shares of common
stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
23
(23)
|
David
Lyall, as Trustee of Lyall Family Trust, has the power to vote and dispose
of these shares. Includes 100,000 shares of common stock
issuable upon exercise of warrants currently exercisable or exercisable
within 60 days.
|
(24)
|
Melvin
L. Mouton and Betty H. Mouton of Mouton Family Living Trust, dated
12/10/1993 as amended, have the power to vote and dispose of these
shares. Includes 20,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(25)
|
Richard
Martin Neustadter has the power to vote and dispose of these
shares. Includes 240,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(26)
|
Bruce
Nurse has the power to vote and dispose of these
shares. Includes 25,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(27)
|
Carlo
Civelli, Director of Pacific Lng Operations Ltd., has the power to vote
and dispose of these shares. Includes 240,000 shares of common
stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(28)
|
Dr.
Rene Simon, as Director of Professional Trading Services SA, has the power
to vote and dispose of these shares. Includes 650,000 shares of
common stock issuable upon exercise of warrants currently exercisable or
exercisable within 60 days.
|
(29)
|
William
R. Sauey has the power to vote and dispose of these
shares. Includes 20,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(30)
|
Bernard
L. Schwartz has the power to vote and dispose of these
shares. Includes 1,000,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(31)
|
Clayton
Strave has the power to vote and dispose of these
shares. Includes 24,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(32)
|
John
Tognetti has the power to vote and dispose of these
shares. Includes 200,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
(33)
|
Hans
Kuepfer, as President of Vimo Limited, has the power to vote and dispose
of these shares. Includes 200,000 shares of common stock
issuable upon exercise of warrants currently exercisable or exercisable
within 60 days.
|
(34)
|
Craig
Whited has the power to vote and dispose of these
shares. Includes 72,000 shares of common stock issuable upon
exercise of warrants currently exercisable or exercisable within 60
days.
|
24
USE
OF PROCEEDS
We will
not receive proceeds from the sale of common stock under this prospectus. We
could, however, receive proceeds from the selling stockholders if and when they
exercise warrants the common stock underlying which is covered by this
prospectus. We would use any proceeds received for working capital and general
corporate purposes. The warrant holders may exercise their warrants at any time
until their expiration, by cash payment of the exercise price or, under certain
circumstances, by “cashless exercise,” as further described below under
“Description of Securities.” If the warrants are exercised in full, the
estimated proceeds from such exercise would be between $Nil (if all of the
warrants which can be exercised by a cashless exercise are so exercised) and
$4,888,072 (if all of the warrants are exercised through the payment of cash to
the Company). Because the warrant holders may exercise the warrants in their own
discretion, if at all, we cannot plan on specific uses of proceeds beyond
application of proceeds to general corporate purposes. We have agreed
to bear the expenses (other than any underwriting discounts or commissions or
agent’s commissions) in connection with the registration of the common stock
being offered hereby by the selling stockholders, but all selling and other
expenses incurred by the selling stockholders will be borne by
them.
DETERMINATION
OF OFFERING PRICE
There
currently is a limited public market for our common stock. The selling
stockholders will determine at what price they may sell the offered shares, and
such sales may be made at prevailing market prices or at privately negotiated
prices. See “Plan of Distribution” below for more information.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information and Holders
As of
November 5, 2009, there were 24,000,244 shares of our common stock issued and
outstanding and 7,927,900 shares issuable upon exercise of outstanding
warrants. On that date, there were approximately 46 holders of record
of shares of our common stock. As of that date, there
are 11,107,200 outstanding shares of our common stock and shares issuable
upon exercise of outstanding warrants that could be sold under Rule 144 (subject
to our compliance with applicable reporting obligations) or as to which we have
agreed to file a registration statement under the Securities Act.
Our
common stock is listed on the OTCBB under the symbol “LCTZ.OB.”
The
following table sets forth the high and low closing bid prices for our common
stock for the fiscal quarters indicated as reported on the OTCBB. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
Period
|
High
(1)
|
Low
(1)
|
||||||
Fiscal Year Ended December 31,
2007:
|
||||||||
First
Quarter(2)
|
$ | 0.02 | $ | 0.02 | ||||
Second
Quarter
|
0.05 | 0.02 | ||||||
Third
Quarter
|
0.06 | 0.05 | ||||||
Fourth
Quarter
|
0.06 | 0.06 | ||||||
Fiscal Year Ended December 31,
2008:
|
||||||||
First
Quarter
|
$ | 2.00 | $ | 0.06 | ||||
Second
Quarter
|
2.50 |
(3)
|
2.00 | |||||
Third
Quarter
|
2.90 |
(3)
|
1.01 | |||||
Fourth
Quarter
|
1.50 |
(3)
|
1.01 | |||||
Fiscal
Year Ending December 31, 2009:
|
||||||||
First
Quarter
|
$ | 1.75 | $ | 1.50 | ||||
Second
Quarter
|
1.95 | 1.75 | ||||||
Third
Quarter
|
2.10 | 1.50 |
25
(1)
|
All
quotations give retroactive effect to our 5:1 forward stock split which
was effected on February 27, 2008.
|
(2)
|
From
January 11, 2007, the first available date during this
quarter. Although our common stock was quoted on the OTCBB
since January 11, 2007, the first trade did not take place until April 11,
2008.
|
(3)
|
During
this period, our common stock traded on the OTCBB above this closing bid
price. Our common stock is thinly traded and, thus, pricing of our common
stock on the OTCBB does not necessarily represent its fair market
value.
|
Dividends
We have
never declared any cash dividends with respect to our common
stock. Future payment of dividends is within the discretion of our
Board of Directors and will depend on our earnings, capital requirements,
financial condition and other relevant factors. Although there are no
material restrictions limiting, or that are likely to limit, our ability to pay
dividends on our common stock, we presently intend to retain future earnings, if
any, for use in our business and have no present intention to pay cash dividends
on our common stock.
Securities
Authorized for Issuance under Equity Compensation Plans
We
adopted our 2008 Equity Incentive Plan on February 7, 2008 and amended and
restated the 2008 Equity Incentive Plan as of November 7, 2008. The 2008 Equity
Incentive Plan was approved by our Board and a majority of the outstanding
shares of our common stock3 and
allows for awards of up to an aggregate of 4,000,000 shares of our common stock,
subject to adjustment under certain circumstances. If an incentive award granted
under the 2008 Equity Incentive Plan expires, terminates, is unexercised or is
forfeited, or if any shares are surrendered to us in connection with an
incentive award, the shares subject to such award and the surrendered shares
will become available for further awards under the 2008 Equity Incentive Plan.
As of June 30, 2009, we have granted option awards under the 2008 Equity
Incentive Plan exercisable for a net aggregate of 2,385,000 shares of our common
stock. We have not maintained any other equity compensation plans since our
inception.
See
“Executive Compensation” for information regarding individual equity
compensation arrangements received by our executive officers pursuant to their
employment agreements with us.
3.
|
Our November 7, 2008
amendment to increase the size of our equity incentive plan from 2,000,000
shares to 4,000,000 shares was approved by our majority stockholders as of
October 12, 2009.
|
26
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks, uncertainties
and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors discussed in “Risk Factors” and
elsewhere in this prospectus.
The
following discussion and analysis of the Company’s financial condition and
results of operations are based on our 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. The condensed
consolidated financial statements as of June 30, 2009 and for the three and six
months ended June 30, 2009 and 2008 are unaudited. In the opinion of
management, such financial statements include the adjustments and accruals which
are 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 consolidated financial statements as of June 30, 2009 and for
the three and six months ended June 30, 2009 and 2008.
Overview
and Going Concern
We are an
international, development stage oil and gas exploration and production company
focusing our business in South America. We have established an operating branch
in Colombia. We have entered into two initial working interest
agreements, with Petroleos del Norte S.A. (“Petronorte”) and with Emerald Energy
Plc Sucursal Colombia (“Emerald”), and we are currently evaluating additional
investment prospects, companies and existing exploration and production
opportunities in Colombia and Peru, while keeping alert for opportunities in
other South American countries.
We were
incorporated in the State of Nevada on June 9, 2006 under the name La Cortez
Enterprises, Inc. to pursue certain business opportunities in Mexico4. 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 its development activities, the Company has sustained losses and
expects such losses to continue through at least June 30, 2010. 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. Therefore, there is substantial doubt as
to the Company’s 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, 2008 filed with
the SEC on April 10, 2009 that raises substantial doubt about our ability
to continue as a going concern. 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.
4.
|
We
were originally formed to create, market and sell gourmet chocolates
wholesale and retail throughout Mexico, as more fully described in our
registration statement on Form SB-2 as filed with the Securities and
Exchange Commission (the “SEC”) on November 7,
2006.
|
27
Our
condensed consolidated unaudited financial statements and our consolidated
audited 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. Realization values may be substantially different from carrying
values as shown, and our 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 the going concern uncertainty.
Recent
Developments
Emerald,
the operator of the Maranta Block reached the intended total depth of 11,578
feet on the Mirto-1 exploration well, with oil and gas recorded across the
target reservoirs. We will hold a 20% participating interest in the
Maranta Block through our operating subsidiary, La Cortez Energy Colombia, Inc.
(“La Cortez Colombia”).
On July
23, 2009, based on the preliminary results of the drilling of the Mirto-1 well,
we decided to participate with Emerald in the completion and evaluation of
Mirto-1. In accordance with the terms of the Maranta Block Farm-In
Agreement, La Cortez Colombia will bear 65% of the Maranta Block Phase 2
exploration costs, including 65% (U.S. $1.2285 million) of the currently
estimated U.S. $1.8 million Mirto-1 completion costs. La Cortez
Colombia made this U.S. $1.2285 million payment to Emerald on July 27,
2009. 65% of any additional Phase 2 costs will be paid by La Cortez
Colombia as needed, following cash calls by Emerald. On August 4,
2009, La Cortez Colombia paid an additional U.S. $243,300 to Emerald for
overhead costs, representing 5% of total expenditures, in accordance with the
farm-in agreement.
After the
Phase 2 work is completed (drilling and completion of the Mirto-1 exploratory
well), La Cortez Colombia will pay 20% of all subsequent costs related to the
Maranta block. Once the Company has the final Mirto-1 evaluation results, La
Cortez Energy Colombia will ask Emerald to file a request with the ANH, to have
its agreed to 20% participating interest in the Maranta Block officially
assigned from Emerald to La Cortez Colombia.
Evaluation
of the Mirto-1 exploratory well across all of the target reservoirs has been
completed. Following the completion of operations in the Mirto-1
well, the drilling rig has been released from the location. Currently, a
production test from the Villeta U sand interval is being
conducted. Depending on the results of this production test, Emerald,
as operator of the Maranta block, may determine to enter the phase 3 exploration
work commitment in the Maranta block, which would entail the drilling of an
additional exploratory/appraisal well and the acquisition of 30 kilometers of 3D
seismic.
La Cortez
Colombia expects to sign a joint operating agreement with Emerald with respect
to the Maranta Block once the Mirto-1 final cash call is
made. Following that payment, we will ask Emerald to submit a request
to the ANH to approve the assignment of our 20% participating interest to La
Cortez Colombia. If the ANH does not approve this assignment, Emerald
and La Cortez Colombia have agreed that they will use their 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.
Effective
October 12, 2009, Emerald’s parent, Emerald Energy Plc, was acquired by Sinochem
Resources UK Limited, a United Kingdom subsidiary of Sinochem Group, a Chinese
state owned energy and chemicals conglomerate. At this time, we do
not know what impact this acquisition will have on the management and corporate
policies of Emerald in Colombia or on the future operation of our joint
relationship with Emerald.
28
As
discussed in more detail elsewhere in this prospectus, on October 14, 2009, we
executed our joint operating agreement with Petronorte for joint development of
the Putumayo 4 Block in Colombia. This joint operating agreement
governs our working relationship with Petronorte with respect to the Putumayo 4
Block, based on the terms of our agreement with Petronorte set forth in our
memorandum of understanding with Petronorte dated December 4,
2008. We expect that our capital commitments to Petronorte will be
approximately U.S. $2.3 million in 2009 and 2010 for Phase 1 seismic
reprocessing and acquisition activity costs.
Results
of Operations
We are
still in our development stage and have generated no operating revenues to
date.
Six
Months Ended June 30, 2009 Compared with Six Months Ended June 30,
2008
General
and Administrative Expenses
We
incurred total expenses of $1,551,981 for the six month period ended June 30,
2009 compared to $1,365,199 for the six month period ended June 30, 2008. Our
payroll expenses decreased to $789,761 for the six month period ended June 30,
2009 from $1,071,819 for the six month period ended June 30, 2008; professional
fees increased to $498,292 for the six month period ended June 30, 2009 from
$160,796 for the six month period ended June 30, 2008; travel expenses increased
to $77,459 for the six month period ended June 30, 2009 from $69,021 for the six
month period ended June 30, 2008; rent expense increased to $46,637 for the six
month period ended June 30, 2009 from $600 for the six month period ended June
30, 2008; and other expenses increased to $111,889 for the six month period
ended June 30, 2009 from $62,963 for the six month period ended June 30, 2008.
The increase in expenses for the six month period ended June 30, 2009 as
compared to the same period in 2008 is attributable primarily to increased
general, administrative and legal expenses incurred in connection with our new
business activities in South America and administrative costs. In
particular, excluding the effects of non-cash compensation expenses of
$1,000,000 during the six month period ended June 30, 2008, the increase in our
payroll expenses is due to the Company not having employees during the first
quarter of 2008 and for the most part of the second quarter of 2008, and the
increase in professional fees during the six month period ended June 30, 2009 as
compared to the six month period ended June 30, 2008 is primarily due to
increased audit, accounting, legal and consultancy expenses arising from our
administrative exploration activities and growth in our operations during the
current 2009 period. Also, the increase in our rent expense during
the six month period ended June 30, 2009 is due to us entering into a long-term
lease commencing on August 2008 at approximately $7,400 a
month. Prior to entering into this lease, we were only leasing
commercial space for approximately $200 per month. Further, the
increase in other expenses includes the increase in depreciation expense during
the six month period ended June 30, 2009 as compared to the six month period
ended June 30, 2008 as we had only acquired a minimal amount of property and
equipment as of June 30, 2008.
Non-operating
Income (Expense), Net
Net
non-operating income for the six months ended June 30, 2009, was $489,989
compared to net interest income of $8,141 for the six months ended June 30,
2008. Interest income in the amount of $20,670 was earned on our cash deposits
resulting from our 2008 private placement, our 2008 unit offering and our 2009
unit offering for the six months ended June 30, 2009. Also, during
the six month ended June 30, 2009, we recognized an unrealized gain from the
decrease in the fair value of the derivative warrant instruments liability of
$469,319.
Net
Loss
Our net
loss for the six months ended June 30, 2009 was $1,061,992 compared to
$1,357,058 for the six month period ended June 30, 2008. The decrease is due to
the increase in our general and administrative expenses, which was offset by
both the increase in the unrealized gain in fair value of our derivative warrant
instruments liability and non-cash compensation expenses of $1,000,000 during
the six month period ended June 30, 2008.
Fiscal
year Ended December 31, 2008 compared to 2007
We
generated no revenues in either of our fiscal years ended December 31, 2008 and
2007.
29
General
and Administrative Expenses
We
incurred total expenses of $2,649,312 for the twelve month period ended December
31, 2008 compared to $28,836 for the twelve month period ended December 31,
2007. Our payroll expenses increased to $505,783 for the twelve month period
ended December 31, 2008 from zero for the twelve month period ended December 31,
2007; stock-based compensation increased to $1,246,153 for the twelve month
period ended December 31, 2008 from zero for the twelve month period ended
December 31, 2007; professional fees increased to $441,683 for the twelve month
period ended December 31, 2008 from $19,695 for the twelve month period ended
December 31, 2007; travel expenses increased to $168,812 for the twelve month
period ended December 31, 2008 from zero for the twelve month period ended
December 31, 2007; rent expense increased to $56,012 for the twelve month period
ended December 31, 2008 from $2,400 for the twelve month period ended December
31, 2007; and other expenses increased to $230,869 for the twelve month period
ended December 31, 2008 from $6,741 for the twelve month period ended December
31, 2007. The increase in expenses for the twelve month period ended December
31, 2008 is attributable primarily to increased general, administrative and
legal expenses incurred in connection with our new business activities in South
America and administrative costs related to the 2008 private placement and the
2008 unit offering.
Other
Income (Expense), Net
Net other
income (expense) for the twelve months ended December 31, 2008, was $68,783
compared to no interest income for the twelve months ended December 31, 2007.
Interest income in the amount of $69,005 was earned on our cash deposits
resulting from our 2008 private placement and our 2008 unit offering for the
twelve months ended December 31, 2008.
Net
Losses
Our net
loss for the twelve months ended December 31, 2008 was $(2,580,529) compared to
$(28,836) for the twelve month period ended December 31, 2007.
Liquidity
and Capital Resources
Our cash
and cash equivalents balance as of June 30, 2009 was $5,004,675 compared to
$6,733,381 as of December 31, 2008. This decrease was due to payments
of approximately $5,868,000 for unproved oil and gas properties during the six
month period ended June 30, 2009 offset by the receipt of capital from the
initial closing of our 2009 unit offering discussed below.
On March
14, 2008, we closed a private placement of our common stock. In this
private placement, we offered our shares of common stock at a price of $1.00 per
share and we derived total proceeds of $2,314,895, net after expenses, from the
sale of 2,400,000 shares of our common stock.
On
September 10, 2008, we closed a private placement of units each unit consisted
of (i) one share of our common stock and (ii) 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. We offered these units at a price of
$1.25 per unit and we derived total proceeds of $5,981,000 ($5,762,126 net after
expenses) from the sale of 4,784,800 units.
On June
19, 2009, we conducted an initial closing of an additional private placement of
units. Each of these units consisted of (i) one share of our common
stock and (ii) 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. We offered these units at a price of $1.25 per unit and we derived total
proceeds at the initial closing of $6,074,914 ($5,244,279 net after expenses)
from the sale of 4,860,000 units. On July 31, 2009, we completed the
final closing of this unit offering. At the final closing, we
received gross proceeds of $256,250 from the sale of 205,000 of these
units. In the aggregate, we received gross proceeds of
$6,331,164 in this unit offering on the sale of a total of 5,065,000
units. This unit offering terminated on July 31, 2009.
30
We
presently do not have any available credit, bank financing or other external
sources of liquidity, other than the remaining net proceeds from the private
placement and our two unit offerings. Due to our brief history and
historical operating losses, our operations have not been a source of
liquidity.
We
entered into a memorandum of understanding on December 2, 2008, and a joint
operating agreement on October 14, 2009, with Petronorte and the Farm-In
Agreement with Emerald. According to the memorandum of understanding
and joint operating agreement with Petronorte, we will have the exclusive right
to a fifty percent (50%) net participation interest in the Putumayo 4 Block and
in the exploration and production contract (the “E&P Contract”) after ANH
royalties and an ANH one percent (1%) production participation, and will execute
an assignment agreement with Petronorte relating to the Putumayo 4 Block, which
Petronorte will present to the ANH for their approval once we have met our
financial obligations to Petronorte with respect to our joint development of the
Putumayo 4 Block. We expect that our capital commitments to
Petronorte will be approximately U.S. $2.3 million in 2009 and 2010 for Phase 1
seismic reprocessing and acquisition activity costs. In accordance
with the terms of the Emerald Farm-In Agreement, we paid Emerald U.S. $0.948
million on February 12, 2009, as a reimbursement of Emerald’s Phase 1 sunk
costs5, U.S. $
2.433 million on February 18, 2009, as the first installment on Emerald’s Phase
2 exploratory well costs, an additional U.S. $ 2.433 million on May 15, 2009, as
the second installment on Emerald’s Phase 2 exploratory well costs (when the
drill rig was mobilized to begin drilling on the Maranta block Mirto-1
exploratory well), and U.S. $ 1.2285 million on July 27, 2009, as our estimated
share of Emerald’s Phase 2 Mirto-1 exploratory well completion
costs. On August 4, 2009, La Cortez Colombia paid an additional U.S.
$243,300 to Emerald for overhead costs, representing 5% of total expenditures,
in accordance with the Farm-In Agreement. We believe that we have sufficient
funds to cover our operational overhead for the next few months, but not to make
all of the remaining Emerald and expected Petronorte payments.
We are
currently utilizing cash of approximately $180,000 per month in the day-to-day
operations of our business, including payroll, professional fees and office
expenses. Because we will not be the operator in either of our
Petronorte or Emerald projects and assuming no other material changes in our
operations, we expect this rate of cash utilization to increase slightly over
the next twelve months.
We will
need to obtain additional capital in order to meet our working needs and our
commitments to Emerald and Petronorte, and to continue to execute our business
plan, build our operations and become profitable. In order to obtain capital, we
may need to sell additional shares of our Common Stock or debt securities, or
borrow funds from private or institutional lenders. Because of recent problems
in the credit markets, steep stock market declines, financial institution
failures, government bail-outs, the sharp decline in oil and natural gas prices
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. If we are unable to raise additional funding as
necessary, which the Company is actively seeking, we may have to suspend our
operations temporarily or cease operations entirely.
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.
Subsequent
Events
In
connection with the reissuance of our financial statements for inclusion in this
prospectus, we have assessed subsequent events through November 5,
2009.
Effective
October 12, 2009, Emerald’s parent, Emerald Energy Plc, was acquired by Sinochem
Resources UK Limited, a United Kingdom subsidiary of Sinochem Group, a Chinese
state owned energy and chemicals conglomerate. At this time, we do
not know what impact this acquisition will have on the management and corporate
policies of Emerald in Colombia or on the future operation of our joint
relationship with Emerald.
5.
All costs
on this project are calculated in Colombian pesos and paid in US
dollars. Because of changes in exchange rates, our capital
commitments in US dollars may be more or less than originally calculated and
budgeted.
31
On
October 14, 2009, we executed our joint operating agreement with Petronorte for
joint development of the Putumayo 4 Block in Colombia. This joint
operating agreement governs our working relationship with Petronorte with
respect to the Putumayo 4 Block, based on the terms of our agreement with
Petronorte set forth in our memorandum of understanding with Petronorte dated
December 4, 2008.
Critical
Accounting Policies
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States (“GAAP”). GAAP
represents a comprehensive set of accounting and disclosure rules and
requirements. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, however, in the past the
estimates and assumptions have been materially accurate and have not required
any significant changes. Should we experience significant changes in
the estimates or assumptions which would cause a material change to the amounts
used in the preparation of our financial statements, material quantitative
information will be made available to investors as soon as it is reasonably
available.
The
Company believes the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:
Consolidation. The accompanying
financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries, including La Cortez Energy Colombia, Inc., a Cayman
Islands corporation, and La Cortez Energy Colombia, E.U., a Colombia
corporation, an international, early stage oil and gas exploration and
production (“E&P”) company concentrating on opportunities in South
America. All significant inter-company transactions and balances are
eliminated in consolidation.
Cash
and Cash Equivalents. We consider all highly liquid debt
instruments with original maturities of three months or less when acquired to be
cash equivalents.
Oil and Gas
Properties. We follow the full cost method of accounting for our oil
and natural gas properties, whereby all costs incurred in connection with the
acquisition, exploration for and development of petroleum and natural gas
reserves are capitalized. Such costs include lease acquisition, geological and
geophysical activities, rentals on non-producing leases, drilling, completing
and equipping of oil and gas wells and administrative costs directly
attributable to those activities and asset retirement costs. Disposition of oil
and gas properties are accounted for as a reduction of capitalized costs, with
no gain or loss recognized unless such adjustment would significantly alter the
relationship between capital costs and proved reserves of oil and gas, in which
case the gain or loss is recognized to income. Depletion and depreciation
of proved oil and gas properties will be calculated on the units-of-production
method based upon estimates of proved reserves. Such calculations include the
estimated future costs to develop proved reserves. Costs of unproved properties
are not included in the costs subject to depletion. These costs are assessed
periodically for impairment.
Impairment of
Long-Lived Assets. We periodically review the carrying amounts
of our property and equipment and its finite-lived intangible assets to
determine whether current events or circumstances indicate that such carrying
amounts may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. If it is determined
that an impairment loss has occurred, the loss is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair
value.
32
Stock-Based
Compensation. We
account for stock-based compensation issued to employees and non-employees by
recording stock-based compensation expense ratably over the requisite service
period based on the fair value of the awards determined at the grant date (net
of estimated forfeitures) utilizing the Black-Scholes-Merton pricing model for
options and warrants. Key assumptions include (1) expected
volatility (2) expected term (3) discount rate and (4) expected dividend
yield.
Derivative
Liabilities. We evaluate our
equity-linked financial instruments to determine whether these financial
instruments are not indexed to our common stock and therefore should be treated
as derivatives. As a result, beginning on January 1, 2009, we
recognized our September 2008 private placement warrants as derivative
liabilities at their respective fair values on each reporting date.
The Company also determined that warrants to purchase shares of common stock
issued in the June 2009 private placement were not indexed to the Company’s own
stock and were recognized as derivative warrant instruments and measured at fair
value at each reporting period. These common stock purchase warrants do not
trade in an active securities market, and as such, we estimate the fair value of
these warrants using the Black-Scholes option pricing model.
Foreign Currency
Translation. We conduct our operations in two primary
functional currencies: the U.S. dollar and the Colombian peso. Balance sheet
accounts of our Colombian subsidiary are translated from foreign currencies into
U.S. dollars at period-end exchange rates while income and expenses are
translated at average exchange rates during the period. Cumulative translation
gains or losses related to net assets located outside the U.S. are shown as a
component of shareholders’ equity. Gains and losses resulting from foreign
currency transactions, which are denominated in a currency other than the
entity’s functional currency, are included in the consolidated statements of
operations.
New
Accounting Pronouncements
In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting (“Modernization”). The new disclosure requirements include provisions
that permit the use of new technologies to determine proved reserves if those
technologies have been demonstrated empirically to lead to reliable conclusions
about reserves volumes. The new requirements also will allow companies to
disclose their probable and possible reserves to investors. In addition, the new
disclosure requirements require companies to: (a) report the independence and
qualifications of its reserves preparer or auditor; (b) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and (c) report oil and natural gas reserves using an average price based
upon the prior 12-month period rather than period-end prices. The use of average
prices will affect future impairment and depletion calculations. The new
disclosure requirements are effective for annual reports on Form 10-K for fiscal
years ending on or after December 31, 2009. The SEC is coordinating
with the FASB to obtain the revisions necessary to provide consistency with the
Modernization. The Company is currently assessing the impact that
adoption of this rule will have on its financial statements and disclosures
which will vary depending on changes in commodity prices.
In
April 2009, the FASB issued FASB Staff Position SFAS 157-4, “Determining the Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”). FSP 157-4 clarified the application of
SFAS 157 providing additional guidance for estimating fair value in accordance
with FASB Statement No. 157, Fair Value Measurements,
when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This FSP shall be
effective for interim and annual reporting periods ending after June 15,
2009, and shall be applied prospectively. Early adoption is permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending
before March 15, 2009, is not permitted. If a reporting entity elects to
adopt early either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB
28-1, Interim Disclosures
about Fair Value of Financial Instruments, the reporting entity also is
required to adopt early this FSP. Additionally, if the reporting entity elects
to adopt early this FSP, FSP FAS 115-2 and FAS 124-2 also must be adopted early.
This FSP does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. In periods after initial adoption,
this FSP requires comparative disclosures only for periods ending after initial
adoption. Revisions resulting from a change in valuation technique or its
application shall be accounted for as a change in accounting estimate (paragraph
19 of FASB Statement No. 154, Accounting Changes and Error
Corrections). In the period of adoption, a reporting entity shall
disclose a change, if any, in valuation technique and related inputs resulting
from the application of this FSP, and quantify the total effect of the change in
valuation technique and related inputs, if practicable, by major category. The
Company does not anticipate that this pronouncement will have a material impact
on its results of operations or financial position.
33
In June
2009, the FASB issued
SFAS No. 168, “The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 168” (“SFAS 168”). The
FASB Accounting Standards
Codification TM , (“Codification”) will become the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company will adopt the requirements of SFAS 168 in the third quarter of fiscal
year 2009.
34
DESCRIPTION
OF BUSINESS
Overview
We are an
international, development stage oil and gas exploration and production company
focusing our business in South America. We have established an operating branch
in Colombia, we have entered into two initial working interest agreements, with
Petroleos del Norte S.A. (“Petronorte”), a Colombian subsidiary of Petrolatina
Plc. (AIM: PELE), and with Emerald Energy Plc Sucursal Colombia (“Emerald”), a
Colombian branch of Emerald Energy Plc6.
(discussed below), and we are currently evaluating additional investment
prospects, companies and existing exploration and production opportunities in
Colombia and Peru, while keeping alert for opportunities in other South American
countries.
We expect
to explore investment opportunities in oil and gas exploration and development
as well as in associated infrastructure (e.g., storage tanks, processing
facilities and/or pipelines). The scope of our activities in this regard may
include, but not be limited to, the acquisition of or assignment of rights to
develop exploratory acreage under concessions with government authorities and
other private or public exploration and production (“E&P”) companies, the
purchase of oil and gas producing properties, farm-in and farm-out opportunities
(i.e., the assumption of or assignment of obligations to fund the cost of
drilling and development), and/or the purchase of debt or equity in, and/or
assets of, existing oil and gas exploration and development companies currently
conducting activities in Colombia and Peru.
We are
currently evaluating ways to optimize our business structure in each
jurisdiction where we conduct and where we intend to develop our business, in
order to comply with local regulations while optimizing our tax, legal and
operational flexibility. To this end, we have recently established an operating
branch in Bogotá, Colombia where we will engage in our initial business
ventures.
Industry
Introduction
The oil
and gas industry is a complex, multi-discipline sector that varies greatly
across geographies. As a heavily regulated industry, operating conditions are
subject to political regimes and changing legislation. Governments can either
induce or deter investment in exploration and production, depending on legal
requirements, fiscal and royalty structures, and regulation. Beyond the
political considerations, exploration and production for hydrocarbons is an
extremely risky business with countless perils, both endogenous and exogenous to
the core business. Exploration and production wells require substantial amounts
of investment and are long-term projects, sometimes exceeding twenty to thirty
years. Regardless of the efforts spent on an exploration or production prospect,
success is difficult to attain. Even though modern equipment including seismic
and advanced software has helped geologists find producing sands and map
reservoirs, they do not guarantee any particular outcome. Early oil & gas
explorers relied on surface indicators to find reservoirs. Drilling is the only
method to determine whether a prospect will be productive, and even then many
complications can arise during drilling (e.g., those relating to drilling
depths, pressure, porosity, weather conditions, permeability of the formation
and rock hardness). Typically, there is a significant probability that a
particular prospect will turn-up a dry-well, leaving investors with the cost of
seismic and a dry well which during current times can total in the millions of
dollars. Even if oil is produced from a particular well, there is always the
possibility that treatment, at additional cost, may be required to make
production commercially viable. Furthermore, most
production profiles decline over time, which hinders any cost-benefit analysis.
In sum, oil and gas is an industry with high risks and high entry barriers but
significant potential for success.
6. Emerald
Energy Plc. was acquired by Sinochem Resources UK Limited, a wholly owned
subsidiary of Sinochem Group, a Chinese state-owned conglomerate, effective
October 12, 2009 and Emerald’s listing on the London Stock Exchange (AIM) was
cancelled effective as of October 13, 2009.
35
Oil and
gas prices determine the commercial feasibility of a project. Certain
projects may become feasible with higher prices or, conversely, may falter with
lower prices. Volatility in the pricing of oil, gas, and other commodities has
sharpened during the last few years, and particularly in the last year,
complicating the practicability of a proper assessment of revenue
projections. Most governments have enforced strict regulations to
uphold the highest standards of environmental awareness, thus, holding companies
to the highest degree of responsibility and sensibility vis a vis protecting the
environment. Aside from such environmental factors, oil and gas drilling is
often conducted in populated areas. For a company to be successful in its
drilling endeavors, working relationships with local communities are crucial, to
promote its business strategies and to avoid any repercussions of disputes that
might arise over local business operations.
Global
Recession, Volatility and Crude Oil Prices
Aside
from operational and regulatory issues that affect E&P companies, every
major market has been affected by the global recession during the past year. The
energy sector is no exception. West Texas Intermediate (“WTI”) crude prices, the
standard oil benchmark for the western hemisphere, have tumbled from over one
hundred forty dollars ($140) per barrel to less than forty dollars ($40) per
barrel in a short time-frame. The new price threshold makes many previously
economically viable opportunities completely unfeasible. We are
currently re-evaluating opportunities to reflect this new market environment.
Furthermore, the volatility in crude oil prices increases the risks involved. We
cannot be sure that the projections we use in evaluating investment
opportunities will be valid and in effect as conditions in the oil markets
rapidly change. We compensate for this uncertainty by increasing the range of
values for our assumptions and by working with numerous sensitivities that might
be in line with the situation in the marketplace.
Additionally,
under current economic conditions, financing activity in both the equity and
debt capital markets, the most common financing vehicles for E&P companies
like ours, has virtually disappeared. Companies are struggling to find
investors, forcing them, in some instances, to abandon risky ventures and, in
other instances, to sell their companies in distressed sales. Nonetheless,
companies that are able to secure financing from existing and financially sound
investor bases are in a privileged position to take advantage of the crisis
affecting most companies.
New
Opportunities for Smaller Companies
In
today’s energy market, there are significant opportunities for smaller
companies. The greatest opportunity exists in countries where small scale
resource opportunities have been overlooked or have been considered immaterial
or uneconomic by medium to larger companies, and/or where local governments are
promoting the development of small reservoirs to increase production to satisfy
internal demand as well as export needs. To accomplish this
governmental purpose, certain of the regional governing bodies have modified
their oil and gas E&P contracting terms and conditions making them more
attractive for the oil industry in general, and in some cases, for smaller
companies as well.
Business
Plan & Strategic Outlook
We plan to build a successful oil and
gas exploration and production company focused in select countries in South
America. We will concentrate our efforts initially in Colombia and
Peru, where, we believe, good E&P opportunities exist with straight forward
oil and gas contracting terms and conditions. At a later stage, we
will turn to opportunities in other regional countries if we deem the relevant
considerations (see list of factors below) to merit our investment. Within the
spectrum of the oil and gas business, we plan to focus on a blend between
exploration and production of hydrocarbons through a variety of transactions.
Our initial plan is to acquire oil and gas production and to start to build a
reserves base.
An integral part of our strategy is our
focus on continuing to build a competent and professional management and
operations team to enable us to successfully carry out our business plan. We
have hired experienced personnel including technical specialists (e.g.,
geologists, geophysicists and petroleum and facilities engineers, as required by
the scope of our operations), administrators and financial experts and we plan
to hire functional specialists in fields such as environment, industrial
protection and community relations, to encompass the different areas that are
critical to our business. Because the focus of our business is in South America,
the majority of our staff will be hired locally and will live in the
region. This will provide us with a significant base of relevant oil
and gas business experience in the region.
36
We are
motivating our employees through a positive, team oriented work environment and
an incentive stock ownership plan. We believe that employee ownership, which is
encouraged through our 2008 Equity Incentive Plan, is essential for attracting,
retaining and motivating qualified personnel.
We have established a time-line for our
expansion into new geographies to avoid overextending our reach and to focus on
immediate prospects. We have initially concentrated our efforts in Colombia and
Peru. Both countries have similar E&P contract terms and conditions as well
as business opportunities that are appropriate for a small, early stage company
such as La Cortez Energy. Our second and subsequent development phases will
focus on exploration and production opportunities in other South American
countries as we explore investment opportunities in these locales. We plan to
adhere to this time-line but reserve the option of being flexible if the right
investment presents itself.
Acquisition
Strategy
We intend
to acquire producing oil and gas properties (and/or fields) where we believe
significant value exists or where additional value can be created. Our senior
management is primarily interested in developmental properties where some
combination of the following factors exist:
(1)
|
Opportunities
for medium to long term production life with clear understandings of
production mechanisms and output levels;
|
|
(2)
|
Geological
formations with multiple producing
horizons;
|
(3)
|
Substantial
upside potential; and
|
|
(4)
|
Relatively
low capital investment and production
costs.
|
We will
also pursue joint ventures or farm-ins in exploration ventures with limited
risk, in areas where nearby oil discoveries have been found.
Phased
Approach
· |
Phase 1 –
We will concentrate our initial efforts in Colombia and Peru where
opportunities as well as operating terms and conditions are perceived in
the industry to be appropriate for small, early stage oil and gas E&P
companies. In these markets we will
pursue:
|
–
|
Acquisitions
of established oil and gas exploration and production fields and/or
companies, which will enable us to establish base production with upside
potential;
|
–
|
Joint
ventures and farm-ins on exploration projects with up to a 25% to 50%
maximum participation interest; and
|
–
|
Participation
in bidding processes for property operator opportunities, in conjunction
with established E&P companies or independently, if allowed under
local regulations.
|
· |
Phase 2 –
Once we have established our business in Colombia and Peru, we will turn
our attention to new opportunities in other South American countries. We
intend to take advantage of promising opportunities in these additional
markets while we consolidate our E&P activities in our Phase 1
countries. In these markets, we intend to search for the following market
environments and types of projects:
|
–
|
Frontier
exploration areas (Joint ventures with up to a 25% ownership
participation) where limited competition
exists;
|
–
|
Acquisitions
with significant upside potential;
|
–
|
Political
stability; and
|
–
|
Supportive
local oil and gas industry regulatory
environments.
|
The
following is a list of some of the factors we take into account when considering
potential investments in any country:
|
l
|
Stable
political regimes:
|
37
|
|
Countries
that exhibit a desire to uphold stability and progress in their
legislation, striving towards open markets and a global approach to best
business practices.
|
|
l
|
Clear
fiscal/taxation/royalty terms.
|
|
l
|
Manageable
security in and around production and exploration areas and
facilities.
|
|
l
|
Openness
to foreign direct investment.
|
|
l
|
Good
oil and gas E&P prospects:
|
|
|
Where
despite the presence of large multi-national integrated oil companies,
there are open acreage opportunities as well as farm-in, joint venture,
and direct block negotiation opportunities, as well producing fields
and/or company acquisition possibilities, with some access to local
capital.
|
|
l
|
Potential
for underexploited hydrocarbon formations with promising upside
potential:
|
|
|
We
are searching for investment opportunities in countries where there are
regions with limited seismic coverage within hydrocarbon prospective
areas.
|
La Cortez
Energy can engage in any of the following types of transactions to achieve our
strategic goals:
|
l
|
Exploration
and Production (E&P):
|
|
|
Direct
government concessions in blocks with specific exploration and development
plans.
|
|
l
|
Technical
Evaluation Agreements.
|
|
l
|
Farm-ins
and Farm-outs:
|
|
|
The
assumption of or assignment of obligations to fund the cost of exploration
and/or drilling and/or development for a participating interest in a
particular block.
|
|
l
|
Corporate
Transactions:
|
|
Acquisitions
of producing fields;
|
|
Acquisitions
of exploration acreage;
|
|
Corporate
acquisitions; and
|
|
Asset
based acquisitions (e.g., blocks and concession
rights).
|
|
l
|
Joint
Ventures:
|
|
|
Partnering
with other established oil and gas companies will allow us to access
certain government concession rounds, benefit from technical and market
expertise from our potential partners and provide liquidity to our
partners.
|
Role
of Our Board of Directors
Our Board of Directors will be an
essential component of our successful operation and growth, serving in various
support capacities. Because our Board of Directors is comprised of senior
industry executives and experienced capital market professionals, we believe
that our directors have the experience and skills necessary to effectively
assist our management in the execution of our strategy. We expect
that our Board of Directors will be able to provide an informed view as to the
commercial, technical and financial viability of our business
prospects.
Through
the establishment of relevant committees (Audit and Evaluation and Reserves, to
date), the Board of Directors will provide an independent view into all of our
operations, providing feedback and guidance on the quality of the projects we
may invest in. Additionally, our Board of Directors will regularly
confer with senior management to help us ensure that all relevant and required
controls are in place and operating appropriately. Our Board of Directors will
serve as a means of confirming the integrity of senior management's estimates
with respect to valuations, reserve estimates and other crucial components of
our business.
Aside
from the functions enumerated above, we believe that our Board of Directors will
serve as an integral element of our business development efforts. We expect that
our Board of Directors will provide both invaluable insight and access to their
business relationships in the region, as well as augment the technical,
financial, accounting and other expertise of our management team.
Execution
of our Strategy and Recent Developments
In
February 2008, Nadine C. Smith became the Chairman of our Board of Directors
(sometimes referred to hereinafter as the “Board”). Ms. Smith also became our
Interim Chief Financial Officer and Vice President at that time. Ms.
Smith most recently served as a director of another publicly traded oil and gas
exploration and production company, Gran Tierra Energy, Inc. (“Gran Tierra”),
which also operates in South America.
38
On March
14, 2008, we closed a private placement of our Common Stock at a price of $1.00
per share pursuant to which we raised $2,400,000, or $2,314,895 net of offering
expenses.
On
September 10, 2008, we closed a private placement of 4,784,800 units at a price
of $1.25 per unit, for an aggregate offering price of $5,981,000, or $5,762,126
after offering expenses. Each of these units consisted of (i) one share of our
common stock and (ii) a common stock purchase warrant to purchase one-half share
of our common stock, exercisable for a period of five years at an exercise price
of $2.25 per share.
On June
1, 2008, Andres Gutierrez Rivera became our President and Chief Executive
Officer and a member of our Board of Directors. Mr. Gutierrez recently served as
the senior executive officer of Lewis Energy Colombia Inc. and a vice president
of Hocol, S.A. Both of these companies operate in the oil and gas
sector in South America.
On June
19, 2009, we conducted an initial closing of a private placement of
units. Each unit consisted of (i) one share of our common stock and
(ii) a common stock purchase warrant to purchase one share of our common stock,
exercisable for a period of five years at an exercise price of $2.00 per share.
We offered these units at a price of $1.25 per unit and we derived total
proceeds at the initial closing of $6,074,914 ($5,244,279 net after expenses)
from the sale of 4,860,000 units. On July 31, 2009, we completed the
final closing of this unit offering. At the final closing, we
received gross proceeds of $256,250 from the sale of 205,000
units. In the aggregate, we received gross proceeds of
$6,331,164 in this unit offering on the sale of a total of 5,065,000
units. This unit offering terminated on July 31, 2009.
We have
been using the funds raised in the 2008 private placement, the 2008 unit
offering and the 2009 unit offering (net after offering expenses) to
begin the building of our administrative and operations infrastructure and to
invest in our initial oil and gas development project in South America and have
taken the following steps in our ramping-up process:
·
|
Added
the following independent directors to our Board of Directors: Jaime Ruiz
Llano, a former Colombian senator and a member of the Board of Directors
of the World Bank, Jaime Navas Gaona, an experienced oil industry
executive, Richard G. Stevens, an “audit committee financial expert,” and
Jose Fernando Montoya Carrillo, a 27-year veteran of the oil industry in
South America and former President of Hocol,
S.A.;
|
·
|
Established
a wholly owned subsidiary in the Cayman Islands, La Cortez Energy
Colombia, Inc., to own our operating branch in
Colombia;
|
·
|
Established
and organized a branch office in Colombia to conduct local operations and,
to this end, opened and began staffing our headquarter offices in Bogotá,
Colombia;
|
·
|
Hired
an Exploration Manager, Carlos Lombo, and a Production and Operations
Manager, William Giron, as well as business development and administrative
personnel;
|
·
|
Signed
a memorandum of understanding and joint operating agreement with one oil
and gas exploration and production company in Colombia and a farm-in
agreement with another, as further discussed below;
and
|
·
|
Have
begun identifying, investigating, evaluating and finalizing our
participation in oil and gas investment opportunities in Colombia and
Peru.
|
Additionally,
in the coming months, we expect to:
·
|
Appoint
one additional independent director to our Board of
Directors;
|
·
|
Hire
a Chief Financial Officer, additional geologists and a petroleum engineer,
to form a strong technical team, as well as additional finance and
administrative personnel; and
|
39
·
|
Enter
into one or more additional agreements to acquire oil and gas exploration
and/or production rights in Colombia and/or Peru. (Although we have not
yet finalized decisions to pursue any such particular opportunities, we
have begun to identify and evaluate potential
prospects.)
|
Petronorte
Memorandum of Understanding and Joint Operating Agreement
On
December 22, 2008, we entered into a memorandum of understanding with Petronorte
that entitles us to a 50% net working interest in the Putumayo 4 block located
in the south of Colombia (the “Putumayo 4 Block”). We executed a
related joint operating agreement with Petronorte on October 14, 2009, effective
as of February 23, 2009.
Petronorte
was the successful bidder on the Putumayo 4 Block in the Colombia Mini Round
2008 conducted by the Agencia
Nacional de Hidrocarburos (the “ANH”), Colombia’s hydrocarbon regulatory
agency, and signed an exploration and production contract (an “E&P
Contract”) with the ANH on February 23, 2009. According to our
memorandum of understanding and the joint operating agreement with Petronorte,
we are entitled to the exclusive right to a fifty percent (50%) net
participation interest in the Putumayo 4 Block and in the E&P Contract
(subject to approval by the ANH), after ANH royalties and an ANH one percent
(1%) production participation. Petronorte will be the “operator” of
the E&P Contract.
The
Putumayo 4 Block covers an area of 126,845 acres (51,333 hectares) located in
the Putumayo Basin in southern Colombia and has over 1000 Km of pre-existing 2D
seismic through which we and Petronorte have identified promising leads. We and
Petronorte plan to reprocess any relevant seismic information before conducting
our own seismic campaign to better direct the positioning of our seismic program
within the block. During this initial stage, we and Petronorte plan to begin
environmental and community consultations to expedite some of these timely
processes.
Under the
terms of the E&P Contract, Petronorte will shoot 103 Km of 2D seismic and
will drill an exploratory well in the first three years of our work program in
the Block. The E&P Contract will consist of two three-year exploration
phases and a twenty-four year production phase.
As
criteria for awarding blocks in the 2008 Mini Round, the ANH considered proposed
additional work commitments, comprised of capital expenditures and an additional
production revenue payment after royalties, called the “X Factor.” We and
Petronorte offered to invest US $1.6 million in additional seismic work in the
Putumayo 4 Block and to pay ANH a 1% of net production revenues X Factor.
Under the
memorandum of understanding and the joint operating agreement, we will be
responsible for fifty percent (50%) of the costs incurred under the E&P
Contract, entitling us 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 we 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 us for its share of these seismic costs paid by us (one-sixth (1/6))
with their revenues from production from the Putumayo 4 Block. We
expect that our capital commitments to Petronorte will be approximately U.S.
$2.3 million in 2009 and 2010 for Phase 1 seismic reprocessing and acquisition
activity costs.
Provided
that we have satisfactorily complied with all ANH legal, financial and technical
requirements for being a partner in an E&P contract (which we expect to be
the case shortly) and we have made the required payment relating to our share of
all costs incurred to the date of our request, Petronorte will submit a request
to the ANH to have our 50% interest in the E&P Contract officially assigned
to us and will assist us in obtaining such assignment through reasonable
means.
40
Emerald
Farm-In Agreement
On
February 6, 2009, La Cortez Energy Colombia, Inc., our wholly owned Cayman
Islands operating subsidiary, entered into a farm-in agreement with Emerald for
a 20% participating interest in the Maranta exploration and production
(“E&P”) block (“Maranta”) in the Putumayo Basin in Southwest
Colombia.
Emerald
signed an E&P Contract for the Maranta block with the ANH on September 12,
2006. La Cortez Colombia expects to execute a joint operating
agreement with Emerald with respect to the Maranta block once it has met its
Phase 1 and Phase 2 (drilling and completion of the Mirto-1 exploratory well)
payment obligations described below and the ANH has approved Emerald’s
assignment of the participating interest to La Cortez Colombia. Under
the farm-in agreement and the joint operating agreement, Emerald will remain the
operator for the block. If the ANH does not approve the assignment of
this participating interest to La Cortez Colombia, Emerald and La Cortez
Colombia have agreed that they will use their 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.
The
Maranta block covers an area of 90,459 acres (36,608 hectares) in the foreland
of the Putumayo Basin in southwest Colombia. Emerald completed the first phase
exploratory program for the Maranta block by acquiring 71 square kilometers of
new 2D seismic and reprocessing 40 square kilometers of existing 2D seismic,
identifying several promising prospects and leads. Emerald has identified the
Mirto prospect, namely the Mirto 1 well, as the first exploratory well in the
Maranta block. The Maranta block is adjacent to Gran Tierra’s Chaza
block and close to both the Orito and Santana crude oil receiving stations,
allowing transportation by truck directly to either station (depending on going
rates and capacity), and consequently tying into the pipeline to Colombia’s
Pacific Ocean port at Tumaco.
As
consideration for its 20% participating interest, La Cortez Colombia reimbursed
Emerald US $0.948 million of its Phase 1 sunk costs. This amount was
paid to Emerald on February 12, 2009. Additionally, La Cortez
Colombia will bear 65% of the Maranta block Phase 2 costs, of which the “dry
hole” costs7 are
currently estimated at approximately US $4.875 million, US $2.433 million of
which La Cortez Colombia paid to Emerald on February 18, 2009 and US $2.433
million of which La Cortez Colombia paid to Emerald on May 15,
2009.
Emerald
reached the intended total depth of 11,578 feet on the Mirto-1 exploration well,
with oil and gas recorded across the target reservoirs. On July 23,
2009, based on the preliminary results of the drilling of the Mirto-1 well, we
decided to participate with Emerald in the completion and evaluation of
Mirto-1. In accordance with the terms of the Farm-In Agreement, La
Cortez Colombia will bear 65% (U.S. $1.2285 million) of the currently estimated
U.S. $1.8 million Mirto-1 completion costs. La Cortez Colombia made
this U.S. $1.2285 million payment to Emerald on July 27, 2009. 65% of
any additional Phase 2 costs will be paid by La Cortez Colombia as needed,
following cash calls by Emerald.
After the
Phase 2 work is completed, La Cortez Colombia will pay 20% of all subsequent
costs related to the Maranta block.
Evaluation
of the Mirto-1 exploratory well across all of the target reservoirs has been
completed. Following the completion of operations in the Mirto No.1
well, the drilling rig was released from the location. Currently a production
test from the Villeta U sand interval is being conducted8. Depending on the results
of this production test, Emerald, as operator of the Maranta block, may
determine to enter the Phase 3 exploration commitment in the Maranta block,
which would entail the drilling of an additional exploratory well or the
acquisition of a 70 kilometers of 3D seismic.
7.
|
Costs
of getting to the abandon or complete decision
point.
|
8.
For a
discussion of the Mirto-1 evaluation results, see “Description of Properties –
Maranta Block Testing Update - Mirto-1 Exploratory Well,”
below.
41
Once the
Company has the final Mirto-1 evaluation results, La Cortez Energy Colombia will
ask Emerald to file a request with the ANH to have the
participating interest in the Maranta Block officially assigned from Emerald to
La Cortez Colombia. On August 4, 2009, La Cortez Colombia paid an
additional U.S. $243,300 to Emerald for overhead costs, representing 5% of total
expenditures, in accordance with the terms of the farm-in
agreement.
On August
13, 2009 it was reported in the press that Sinochem Corp., a chemicals trading
company organized in China (“Sinochem”), will acquire Emerald Energy Plc and
that Emerald Energy Plc’s board of directors has recommended to its shareholders
that they accept Sinochem’s offer. We cannot determine at this time
what impact, if any, a Sinochem acquisition of Emerald Energy Plc would have on
our working interest agreement with Emerald.
Plan
of Operation for the Remainder of 2009 and the First Half of 2010
We plan
to use our currently available cash for work programs in our Maranta and
Putumayo 4 Blocks, for corporate transactions and/or acquisitions, as well as
for general working capital purposes. The current work program for our Putumayo
4 Block is comprised of the reprocessing of the existing 1,300 kilometers of 2D
seismic, the acquisition of an additional 103 kilometers of new 2D seismic in
early 2010 and, subsequently, the drilling of an exploratory well. We plan to
reprocess the available seismic information to validate the existence of the 7
initial leads we have identified to date and thus redirect our new seismic
campaign of 103Km of 2D or equivalent 3D seismic in a more efficient manner.
Under Petronorte’s contractual obligations with the ANH, we have approximately
three years, until August 23, 2012, to complete Phase 1 commitments comprised of
seismic acquisition and the drilling of an exploratory well. A complete
evaluation of the project’s impact on the indigenous peoples in the area of the
Putumayo 4 Block is also being conducted at this time.
In our Maranta Block, we have begun to
fund our share of the costs of the Mirto 1 exploratory well which is now in a
production testing stage. We will use some of our working capital to continue
funding the completion of Mirto 1, and, should it prove productive, the drilling
of one or more appraisal wells in 2010. A small 2D or 3D seismic acquisition is
being evaluated in the Mirto field to better determine the extent of the
reservoir before drilling the appraisal wells which are planned for the first
half on 2010.
Additionally,
we are actively identifying and pursuing an active portfolio of corporate and
acquisition opportunities that, if completed, would add production and proven
reserves to our current project portfolio. With the changes in current market
conditions, the number of potential opportunities has increased in quantity and
in quality. Even though we have not finalized any additional acquisition or
corporate transactions, we are actively pursuing potential opportunities and
expect to enter into at least one more definitive agreement by the end of the
first half of 2010. We believe that current market conditions, e.g., current WTI
crude prices, are optimal for entering into corporate transactions and/or
acquisitions and we plan to aggressively execute this strategy during the
remainder of 2009 and the first half of 2010.
Governmental
Regulation
The oil
and gas industry in Colombia and Peru is broadly regulated. Rights and
obligations with regard to exploration, development and production activities
are explicit for each project; economics are governed by a royalty/tax regime.
Various government approvals are required for acquisitions and transfers of
exploration and exploitation rights, including, meeting financial, operational,
legal and technical qualification criteria. Oil and gas concessions
are typically granted for fixed terms with opportunity for
extension.
Colombia
In
Colombia, state owned Ecopetrol S.A. (“Ecopetrol”) was formerly responsible for
all activities related to the exploration, production, refining, transportation
and marketing of oil for export. Historically, all oil and gas exploration and
production was governed by agreements granted to local and foreign operators,
under Association or Shared Risk Contracts with companies and joint ventures
which generally provided Ecopetrol with back-in rights that allowed for
Ecopetrol to acquire a working interest share in any commercial discovery by
paying its share of the costs for that discovery. Alternatively,
exploration and production of certain areas and of those areas relinquished by
operators, were operated directly by Ecopetrol.
42
Effective
January 1, 2004, the regulatory regime in Colombia underwent a significant
change with the formation of the Agencia Nacional de Hidrocarburos - ANH. The
ANH is now exclusively responsible for regulating the Colombian oil industry,
including managing all exploration areas not subject to a previously existing
Association contract and collecting royalty payments on behalf of the Colombian
government. The former state oil company, Ecopetrol, maintains title to
agreements executed before January 1, 2004 and its own operated exploration,
production, refining and transportation activities across the
country. It also continues to internationally market its oil related
products and has become a direct competitor of private operators in E&P
projects.
Ecopetrol
is a Mixed Economy Company (private and public equity), established as a stock
corporation, with a commercial orientation.
In
conjunction with this change, the ANH developed a new exploration risk contract
that took effect during the first quarter of 2005. This exploration and
production contract has significantly changed the way the industry views
Colombia. In place of the earlier Association contracts in which Ecopetrol had a
direct co-management of the contract together with the associate and an
immediate back-in to production, the new ANH agreement provides full risk/reward
benefits for the contractor. Under the terms of the contract, the E&P
operator retains the rights to all reserves, production and income from any new
exploration block, subject to an existing royalty (variable royalty from 8% to
25% depending upon daily production rates) and an additional royalty for the
ANH, payable beginning when total production reaches 5 MBBLS.
E&P
companies have to comply with certain minimum requirements (legal, operational,
financial, and technical) to become eligible to be granted an ANH Exploration
and Production contract. Companies can also apply for Technical Evaluation
Agreements (TEA). Domiciled and non domiciled oil companies may
participate in the various bidding rounds for E&P contracts on and offshore
in Colombia. In a bidding round, the companies that offer greater investment
programs in the initial exploration phase (Phase 1) and, in some cases, that
provide ANH with a higher participation in production will be the ones to be
awarded E&P contracts.
Colombia,
in the last few years has become very attractive to foreign oil, gas and mining
investors as a result of political and regulation stability, perceived good
contract terms and conditions and improved security. It is, therefore, a
competitive environment for us, with good business opportunities
available.
43
Description
of Properties
Source: La
Cortez Energy, Inc.
The Putumayo 4 Block
Source: La Cortez Energy,
Inc.
44
On
December 22, 2008, we entered into the MOU with Petronorte that entitles us to a
50% net working interest in the Putumayo 4 Block. We executed the
joint operating agreement with Petronorte relating to the Putumayo 4 Block on
October 14, 2009, effective retroactively to February 23,
2009.
The Block
covers an area of 126,845 acres (51,333 hectares) located in the Putumayo Basin
in southern Colombia and has over 400 Km of pre-existing 2D seismic through
which Petronorte has identified promising leads.
There are
four existing wells in the Putumayo 4 Block that date back to the 1970’s. Even
though information is scarce, these wells intended to reach the Caballos
formation and in doing so, oil shows were recorded from the Villeta formation,
our primary objective. Furthermore, neighboring and close fields, including
Nancy-Burdine-Maxine, Costayaco and Orito, have been prolific hydrocarbon
producers, partially affirming our reserve expectations in the
block.
Infrastructure
in the Putumayo region has been rapidly improving. Several important
discoveries, including one competitor’s discovery in Costayaco, have resulted in
an influx of companies into the region, resulting in a reduction in oil services
fees and improving security in the area. Specifically, the Putumayo 4 Block is
located near the Orito field, run by Ecopetrol, which is a receiving station for
a pipeline to the port Tumaco on the Colombian Pacific. Transportation of
potential crude production from the Putumayo 4 Block could be trucked easily to
Orito through the paved roads in the area.
The Maranta Block
Source: Emerald
Energy, Plc.; La Cortez Energy, Inc.
45
On
February 6, 2009, La Cortez Colombia entered into the Farm-In Agreement with
Emerald for a 20% Participating Interest in the Maranta E&P block in the
Putumayo Basin in Southwest Colombia. The Maranta block covers an
area of 90,459 acres (36,608 hectares) in the foreland of the Putumayo
Basin. The Maranta block is adjacent to the recent 20 million barrel
proven discovery of the Costayaco field made by Gran Tierra Energy, Inc. (AMEX:
GTE).
Emerald was awarded the Maranta block
E&P Contract by the ANH on September 12, 2006. The E&P
Contract granted Emerald a 100% working interest in the block for an exploration
period of up to six years with an initial production period of up to 24
years.
The first
phase of the Emerald’s exploration period lasted 18 months with a minimum work
program that was comprised of the acquisition of 30 square kilometers of new 2D
seismic data and the re-processing of 40 square kilometers of existing 2D
seismic data. Emerald extended its work program and shot an additional 41 square
kilometers of 2D seismic to better map out the geological structures in the
block.
The
Maranta block is adjacent to nearby producing oil fields and close to recent
discoveries that have tested oil up to 7,000 barrels per day. Emerald identified
a number of prospects and leads at an estimate depth of some 11,000 ft from the
existing seismic data, each with an unrisked prospective resource potential
estimated to be between 5 and 15 million barrels.
The
Umbria #1 well was drilled in the Maranta block in 1967 and encountered oil in
the Villeta formation. There may also be potential to re-enter this well
to further test the formation productivity9.
A 2D
seismic program was acquired by Emerald in 2007 with the aim of maturing the
identified prospects and leads to a drill-ready status. In March 2008, Emerald
elected to enter the second phase of the exploration period, with a duration of
12 months and a minimum work program comprising the drilling of 1 well, planned
to commence by the second quarter of 2009.
Maranta Block Testing Update – Mirto-1
Exploration Well
Emerald
reached the intended total depth of 11,578 ft on the Mirto-1 exploration well,
with oil and gas shows recorded across the four target reservoirs. All of the
four potentially hydrocarbon bearing intervals have been flow tested with the
Villeta U and N sand intervals flowing at an initial oil rate of 731 BOPD and
247 BOPD, respectively.
The
Caballos formation interval was flow tested with only formation water recovered
at an average rate of 112 barrels per day. The Villeta T sand interval was also
flow tested with an average oil rate of 8 barrels per day with a very high water
production (water cut of 97%).
The
Villeta U sand interval (encountered at a depth of 11,030 feet) produced an
average oil rate of 731 barrels per day of 32.5o API
crude over a 48
hour period with a low average water production (water cut of 26 %). An interval
of 20 feet at the top of the sand was flow tested through a 128/64 inch choke,
under artificial lift using a jet pump.
Flow testing operations have been
completed in the Cretaceous aged Villeta N sands, the shallowest of four sands
flow tested in this well. The 7 feet interval at 10,410 feet produced 15 degrees
API oil at an average rate of 247 barrels per day over a 48 hour period, under
artificial lift using a jet pump and through a 128/64 inch choke, with an
average water cut of 64%.
Currently, the Villeta U sand interval
is being production tested at an average rate of 450 BOPD (gross) of good
quality oil, 31.5 degrees API, with an average BS&W (Basic Sediment and
Water) of 50% . Depending on the results of this production test, Emerald, as
operator of the Maranta block, may determine to enter the Phase 3 exploration
commitment in the Maranta block, which would entail the drilling of an
additional exploratory/appraisal well and the acquisition of 30 kilometers of 3D
seismic.
9.
|
Source: Emerald
Energy Plc
|
46
Peru
The hydrocarbon industry in Peru is
regulated by the Organic Hydrocarbons Law # 26221 (the “Hydrocarbon Law”) dated
August 20, 1993, modified by Law 27391 of 2000. The Hydrocarbon Law
serves as the basis for regulation although other laws exist for specific
components of the hydrocarbon industry (e.g., transportation and
refining). In general, under the Hydrocarbon Law, concessions are
open to any person or institution that establishes a domicile in Lima with a
Peruvian chief executive officer and that meets certain financial and technical
criteria. Concessions are tailored in Peru to promote responsible E&P
activities.
Hydrocarbons in Peru are regulated by
the Ministry of Energy and Mines (“Ministerio de Energía y Minas” or “MEM”)
through the OSINERG (“Organismo Supervisor de la Inversiónen Energía y
Minería”), the supervising entity for investment in energy and mines, which
handles hydrocarbon investment and financial matters. More
importantly, the industry is regulated through Perupetro S.A., the state-owned
company formed in 2000, regulated by private law and owner of the nation’s
hydrocarbons, whose purpose is to promote investment in E&P projects,
negotiate, administer and supervise most aspects of granted concessions, grant
and oversee Technical Evaluation Agreements, and maintain a central database for
all oil and gas technical and production figures. Concession holders must keep
Perupetro S.A. informed of every material aspect of their operations. The
Ministry of Energy and Mines is responsible for the legislative component
pertaining to the hydrocarbon industry in Peru. The hydrocarbon industry in Peru
is heavily regulated in part because all hydrocarbon reserves are owned by the
national government. As a result of this regulatory environment, numerous
reports, technical evaluations, work programs, work updates, time-lines, and
other requirements are mandatory and must be prepared on a frequent basis.
Violations of the regulations may result in fines, contract terminations and/or
other legal actions.
Petroperu, formed in 1969, is a
state-owed company under private law originally engaged in the operation and
maintenance of oil facilities. Presently, Petroperu engages in
transportation of fuels and other petroleum derived products, refinery,
distribution and trading.
Exploration contracts in Peru have a
term of up to seven (7) years and production contracts have thirty (30) year
terms, with the possibility for extension. Royalties in Peru are calculated
based on a sliding scale related to daily production. In general, for a daily
production equal to or less than 5,000 barrels of petroleum per day (“BOPD”), a
5% royalty applies while production above 100,000 BOPD requires an up to 25%
capped royalty. Peru produced an average of 113,869 BOPD in 2007.
(Source: Peruvian Ministry of Energy and Mines Production Yearbook
2007.)
See “Risk Factors” for information
regarding the regulatory risks that we face.
Environmental
Regulation – Community Relations
Our
activities will be subject to existing laws and regulations governing
environmental quality and pollution control in the foreign countries where we
expect to maintain operations. Our activities with respect to exploration,
drilling and production from wells, facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing crude oil and other products, will be subject to
stringent environmental regulation by regional, provincial and federal
authorities in Colombia and Peru. Such regulations relate to, for example,
environmental impact studies, permissible levels of air and water emissions,
control of hazardous wastes, construction of facilities, recycling requirements
and reclamation standards. Risks are inherent in oil and gas exploration,
development and production operations, and we can give no assurance that
significant costs and liabilities will not be incurred in connection with
environmental compliance issues. There can be no assurance that all licenses and
permits which we may require to carry out exploration and production activities
will be obtainable on reasonable terms or on a timely basis, or that such laws
and regulations would not have an adverse effect on any project that we may wish
to undertake.
47
In some
countries in South America, it is usually required for oil and gas E&P
companies to present their operational plans to local communities or indigenous
populations living in the area of a proposed project before project activities
can be initiated. Usually, E&P companies try to benefit the community in
which they are operating by hiring local, unskilled labor or contracting locally
for services such as workers’ transportation. For La Cortez Energy, working with
local communities will be an essential part of our work program for the
development of any of our E&P projects in the region.
Competition
The oil
and gas industry is highly competitive. We face competition from both local and
international companies in matters such as acquiring properties, contracting for
drilling equipment and securing trained personnel. Many of these competitors
have financial and technical resources that exceed ours, and we believe that
these companies have a competitive advantage in these areas. Others are smaller,
and we believe our technical and managerial capabilities give us a competitive
advantage over these companies.
Employees
We
currently have eight full time employees, all of whom, including our Chief
Executive Officer, Andres Gutierrez, our Exploration Manager, Mr. Carlos Lombo,
and our Production and Operations Manager, William Giron, are based in our
executive offices in Bogotá, Colombia.
We intend
to continue to build an experienced leadership team of energy industry veterans
with direct exploration and production experience in the region combined with an
efficient managerial and administrative staff, to enable us to achieve our
strategic and operational goals.
Additionally,
we expect to maintain a highly competitive assembly of experienced and
technically proficient employees, motivating them through a positive, team
oriented work environment and our incentive stock ownership plan. We believe
that employee ownership, which is encouraged through our 2008 Equity Incentive
Plan, is essential for attracting, retaining and motivating qualified
personnel.
Legacy
Business Formation and Split-Off
The
Company was incorporated in the State of Nevada on June 9, 2006 under the name
La Cortez Enterprises, Inc. to pursue certain business opportunities in Mexico.
(La Cortez Enterprises, Inc. was originally formed to create, market and sell
gourmet chocolates wholesale and retail throughout Mexico, as more fully
described in our registration statement on Form SB-2 as filed with the
Securities and Exchange Commission (the “SEC”) on November 7, 2006 (the “Legacy
Business”)). In early 2008 after the Legacy Business terminated, our new 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.
In
connection with the discontinuation of our Legacy Business, we decided to sell
all of the assets and liabilities of the Legacy Business (the “Split-Off”) to
Maria de la Luz, our founding stockholder.
As of
August 15, 2008, we assigned all of our assets and property and all of our
liabilities relating to the Legacy Business, accrued, contingent or otherwise to
our newly organized, wholly owned subsidiary, de la Luz Gourmet Chocolates,
Inc., a Nevada corporation (“Split-Off Sub”). Additionally, we sold all the
outstanding capital stock of Split-Off Sub to Ms. de la Luz in exchange for
9,000,000 shares of our common stock previously surrendered by Ms. de la Luz and
all of our common stock that Ms. de la Luz then owned, an additional 2,250,000
shares.
Pursuant
to the terms of the Split-Off, Ms. de la Luz agreed to indemnify us and our
officers and directors against any third party claims relating to the Legacy
Business.
As of
August 15, 2008, Ms. de la Luz is no longer a stockholder in the Company.
48
In
conjunction with the Split-Off Agreement and effective as of August 15, 2008, we
entered into a General Release Agreement with Split-Off Sub and Ms. de la Luz,
whereby Split-Off Sub and Ms. de la Luz pledged not to sue us from any and all
claims, actions, obligations, liabilities and the like, incurred by Split-Off
Sub or Ms. de la Luz arising from any fact, event, transaction, action or
omission that occurred or failed to occur on or prior to August 15, 2008 and
related to the Legacy Business.
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. We are currently not aware of
any such legal proceedings or claims that we believe will have, individually or
in the aggregate, a material adverse affect on business, financial condition or
operating results.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive
Officers and Directors
Below are
the names and certain information regarding the Company’s current executive
officers and directors:
Name
|
Age
|
Title
|
Date First Appointed
|
|||
Nadine
C. Smith
|
51
|
Director
and Chairman of the Board, Vice President and Interim Chief Financial
Officer
|
February
7, 2008
|
|||
Andres
Gutierrez Rivera
|
50
|
President,
Chief Executive Officer and Director
|
June
1, 2008
|
|||
Jose
Fernando Montoya Carrillo
|
55
|
Director
|
October
15, 2008
|
|||
Jaime
Navas Gaona
|
69
|
Director
|
July
23, 2008
|
|||
Jaime
Ruiz Llano
|
53
|
Director
|
July
1, 2008
|
|||
Richard
G. Stevens
|
61
|
Director
|
July
23,
2008
|
Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified. Officers are elected by
the Board of Directors and serve until their successors are appointed by the
Board of Directors.
Biographical
resumes of each officer and director of the Company are set forth
below.
Nadine C. Smith became a
director and our Chairman of the Board of Directors on February 7, 2008. On
February 19, 2008, Ms. Smith was appointed our Vice President and on June 1,
2008 she assumed the positions of Interim Chief Financial Officer and Interim
Treasurer. Ms. Smith was recently appointed as the Chairman of Loreto
Resources Corporation, a publicly held, early stage independent company that
plans to be involved in the mining sector in South America. Ms. Smith
has previously served as a director of Gran Tierra Energy, Inc., an oil and gas
exploration and production company operating in South America, Patterson-UTI
Energy Inc. and American Retirement Corporation, all public companies.
Ms. Smith has been a private investor and business consultant since
1990.
49
Andres Gutierrez Rivera was
appointed our President and Chief Executive Officer on June 1,
2008. Mr. Gutierrez was most recently (from January 2007 to June
2008) the senior executive of Lewis Energy Colombia Inc. In this role
he was responsible for all aspects of Lewis Energy’s operational management and
its business development initiatives in Colombia. Prior to joining
Lewis Energy, Mr. Gutierrez was briefly a consultant with Upside Energy &
Mining Services, in charge of the execution of various consulting projects
related to the oil and gas divisions of several multinational
companies.
From 2001
to 2006, Mr. Gutierrez was employed with Hocol, S.A., an oil and gas exploration
and production (E&P) company based in Bogotá, Colombia with operations in
Colombia and Venezuela. From 2004, Mr. Gutierrez served as one of
three Vice Presidents reporting directly to the President of
Hocol. As Vice President Finance Administration, Human Talent and
Operations, Mr. Gutierrez participated in defining Hocol’s long term strategy
and company direction. In 2005, Mr. Gutierrez participated in the
development and execution of the divestiture of Hocol to Maurel & Prom for
approximately $460 million.
Mr.
Gutierrez obtained a bachelor degree in Civil Engineering from the Escuela
Colombia de Ingenieria in 1982 in Bogotá, Colombia and a MSCE from Georgia
Institute of Technology in March 1985 in Atlanta, Georgia.
Jose Fernando Montoya Carrillo
began his career in the oil and gas industry 27 years ago at Shell and held
various management positions over 19 years with the company and its Latin
American subsidiaries. During this time, Mr. Montoya's positions included
Corporate Planning and Business Development Manager, Operations Manager, Oil
Marketing Director and General Manager of Shell Downstream
Paraguay.
In 1997,
Mr. Montoya joined Hocol S.A. (a Colombian company previously owned by Shell)
where he held various executive management positions, including Business
Development Manager, Chief Financial Officer, Chief Operating Officer, President
and Chief Executive Officer until September 2007. Mr. Montoya continued to be a
board member and consultant to the management of Hocol S.A., a subsidiary of the
French group Maurel & Prom (M&P) until September 2008. Mr. Montoya is
currently a partner-owner of the energy consultant firm Upside - Energy and
Marketing Services and a founding partner of The Leadership and Management
Center. Both of these companies are located in Bogotá, Columbia.
Mr.
Montoya holds a Bachelors Degree in Chemistry Engineering from the National
University of Colombia.
Jaime Navas Gaona began his
career as a geologist with Exxon in Colombia, where he was employed for 27
years, serving in a number of capacities including Exploration
Manager. Mr. Navas retired from Exxon as Production Geology Manager
in 1992. From 1993 to 1996, Mr. Navas worked as Senior Exploration
Advisor with Maxus Energy in Bolivia.
From 1998
to 2002, Mr. Navas was a member of the Strategic Team and Mentor of the
Exploration and New Ventures teams for Hocol, S.A. Mr. Navas was one
of five members of Hocol’s Management Team, accountable for the overall business
results of the company. His responsibilities at Hocol included the development
and implementation of strategies for the achievement of Hocol’s exploration
goals and objectives, collaboration in managing government relations and
securing approvals for the company’s exploration activities.
In 2002,
Mr. Navas co-founded AGN-Exploration, an exploration consulting firm based in
Bogotá, Colombia, where he currently acts as the company’s
President. In 2005, Mr. Navas was appointed as one of the five
members of the Investment Committee of LAEFM (Latin America Enterprise Fund
Manager), the first hydrocarbon investment fund established in
Colombia.
Mr. Navas
holds a Masters in Science of Petroleum Geology from the Colorado School of
Mines and a degree in Geology and Geophysics from Universidad Nacional, Bogotá,
Colombia.
50
Jaime Ruiz Llano became our
director on July 1, 2008. Mr. Ruiz has been involved in government
affairs in Colombia for the past 20 years. Mr. Ruiz has held various
high level government positions throughout his career. In 1991, Mr.
Ruiz was elected as a Senator in the Colombian Congress. He served in that
capacity until 1994. From 1998 to 1999, Mr. Ruiz held the position of
Director for the Colombian National Planning Department, the government entity
controlling the national budgeting and government planning strategies; in 1999
he served as Special Presidential Advisor for Government Affairs to the
President of Colombia.
From 2000
to 2002, Mr. Ruiz served as Executive Director - Member of the Board of
Directors of the World Bank. The Executive Directors oversee the
World Bank's business, including approval of loans and guarantees, new policies,
the administrative budget, country assistance strategies and borrowing and
financial decisions.
In 2006,
Mr. Ruiz served as Deputy Chief of Mission in the Colombian embassy in
Washington, D.C. During the periods when he was not serving in the Colombian
government, Mr. Ruiz held the position of President of his family-owned
construction business. Additionally, Mr. Ruiz has served on the Board
of Directors of Ecopetrol, Colombia’s state-run oil company.
Mr. Ruiz
received a Masters in Civil Engineering from the University of Kansas and a
Masters in Development Studies from the Institute of Social Studies, The Hague,
The Netherlands.
Richard G. Stevens is the
founder and managing director of Hunter Stevens, a professional services firm
that Mr. Stevens organized in 1995. Prior to forming Hunter Stevens,
Mr. Stevens served as a partner with Ernst & Young LLP and Coopers &
Lybrand LLP (now known as PricewaterhouseCoopers, LLP), both of which are public
accounting firms.
Since
2006, Mr. Stevens has been a director of Chordiant Software, Inc. and currently
is their lead independent director. Mr. Stevens previously served as
Chairman of the Audit Committee of Verity, Inc., a software firm based in
Sunnyvale, CA and at Pain Therapeutics, Inc., a bioscience company in South San
Francisco.
Mr.
Stevens holds a Bachelor of Science Degree with honors from the University of
San Francisco, and is a licensed Certified Public Accountant in the States of
California and New York, and a Certified Fraud Examiner.
Non-Executive
Senior Management
The
following sets forth information regarding certain of our senior
managers:
Exploration Manager - Mr. Carlos
Lombo: Carlos Lombo has more than 23 years of oil and gas
industry experience. Mr. Lombo was most recently an external geological
consultant (from 2003 to 2008) with numerous oil and gas companies and
government entities including: Occidental Petroleum Colombia (OXY), Nexen
Petroleum, Ecopetrol, ANH, and Solana Resources Ltd amongst many others. As a
consultant, Mr. Lombo was responsible for all aspects of seismic interpretation,
prospect and geological evaluations, assessment of exploration opportunities and
other tasks. Prior to this period, Mr. Lombo was an Exploration Geologist
Project Manager with Ecopetrol, the Colombia, state-owned oil and gas company,
from 1986 to 2003. Mr. Lombo served over 17 years in this capacity, working
extensively throughout every basin of the Colombian topography across numerous
exploration projects. Mr. Lombo earned a Bachelor of Arts degree in Mathematics
from the District University in Bogotá and a Masters degree in Geology from the
National University of Colombia.
Production and Operations Manager – William Giron: Mr. Girón
brings over 26 years of oil and gas experience to La Cortez. Most recently, from
2007 to date, Mr. Girón was the Production Manager for Hocol’s Magdalena Valley
assets where he was responsible for production in excess of 18,000 BOED (Barrels
of Oil Equivalent per day), a capital expenditure budget exceeding US $130
million, and relationships with Ecopetrol, the Colombian state-controlled oil
company, the Colombian Ministry of Mines, local government officials and third
party private partners. Mr. Girón also performed in other capacities at Hocol as
field asset manager for the heavy crude oil of La Hocha field, as a reservoir
engineer and a field development manager.
51
Prior to
joining Hocol, Mr. Girón was employed by Texas Petroleum Company (Texaco) from
1982 to 1995. He was an independent consultant from 1996 to 1997. At Texaco, Mr.
Girón held various posts as a production and reservoir engineer and as an
assistant superintendent. He was involved in activities including budgeting and
planning, reservoir management, production enhancement and pipeline operations
management. Mr. Girón has a B.S. in Petroleum Engineering from the Universidad
de America in Bogotá.
Business and Technical
Advisors
We expect
to recruit a number of experienced and highly regarded professionals to provide
advice to us in their areas of specialization or expertise. These advisors will
enter into agreements with us to serve for fixed terms ranging from one to three
years. We will generally grant these advisors options to purchase our Common
Stock as partial payment for their services. In addition, these advisors will
receive cash compensation in connection with services rendered and will be
reimbursed for their reasonable out-of-pocket expenses.
Director
Independence
We are
not currently subject to listing requirements of any national securities
exchange or inter-dealer quotation system which has requirements that a majority
of the board of directors be “independent” and, as a result, we are not at this
time required to have our Board of Directors comprised of a majority of
“Independent Directors.” Nevertheless, our Board of Directors has
determined that four of our six directors, Messrs. Ruiz Llano, Navas Gaona,
Stevens and Montoya Carrillo, including all of our audit committee members (see
below), are “independent” within the definition of independence provided in the
Marketplace Rules of The Nasdaq Stock Market.
Board
Committees
Our Board
currently maintains a standing audit committee and an evaluation and reserves
committee.
Audit
Committee
Our Board
of Directors, by unanimous consent, established an audit committee (the “Audit
Committee”) in October 2008. The initial members of this committee
are Messrs. Montoya, Ruiz and Stevens. Our Board of Directors has
determined that Mr. Stevens is an “audit committee financial expert”, as defined
in Item 407 of Regulation S-K, and is the Chairman of the Audit
Committee. Although the Audit Committee has not yet adopted a formal
charter, the Board resolution establishing the Audit Committee authorized the
Audit Committee to operate with the customary responsibilities and authority
typically granted to a public company audit committee. During the
fiscal year ended December 31, 2008, the Audit Committee held two meetings, both
of which were telephonic. All of the Audit Committee members attended both of
the Audit Committee meetings held during the fiscal year ended December 31,
2008.
Evaluation
and Reserves Committee
In
October 2008, our Board of Directors, by unanimous consent, also established an
evaluation and reserves committee. The initial members of this
committee are Messrs. Gutierrez, Montoya and Navas. This committee
was established to, among other things, fulfill the Board’s oversight
responsibilities with respect to evaluating and reporting on our oil and gas
reserves and reviewing and approving non-binding proposals, indications of
interest, bids, memoranda of understanding and the like with respect to
potential business prospects of and investments and acquisitions by
us. The evaluation and reserves committee currently does not operate
under a charter although its authority and powers has been enumerated by the
Board.
Other
Committees
The
Company currently has not established an executive committee, a compensation
committee or a nominating committee. We are not a "listed company"
under SEC rules and are therefore not required to have a compensation committee
or a nominating committee.
52
Compensation
Committee
Our Board
of Directors believes that it is not necessary to have a standing compensation
committee at this time. Because of the early stage of our development
and our limited operations, the functions of such committee are adequately
performed by the Board of Directors. Currently, the non-management
members of our Board of Directors administer and approve all elements of
compensation and awards for our executive officers. These independent members of
our Board have the responsibility to review and approve the business goals and
objectives relevant to each executive officer’s compensation, evaluate
individual performance of each executive in light of those goals and objectives,
and determine and approve each executive’s compensation based on this
evaluation.
Shareholder
Communications
Currently,
we do not have a policy with regard to the consideration of any director
candidates recommended by security holders. To date, no security
holders have made any such recommendations.
Code
of Ethics
We have
adopted a written code of ethics (the “Code of Ethics”) that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, and persons performing similar functions. We believe that
the Code of Ethics is reasonably designed to deter wrongdoing and promote honest
and ethical conduct; provide full, fair, accurate, timely and understandable
disclosure in public reports; comply with applicable laws; ensure prompt
internal reporting of code violations; and provide accountability for adherence
to the code. To request a copy of the Code of Ethics, please make
written request to our President, c/o La Cortez Energy, Inc. at Calle 67 #7-35,
Oficina 409, Bogotá, Colombia.
53
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth
information with respect to the beneficial ownership of our common stock known
by us as of November 5, 2009 by:
|
·
|
each
person or entity known by us to be the beneficial owner of more than 5% of
our common stock;
|
|
·
|
each
of our directors;
|
|
·
|
each
of our executive officers; and
|
|
·
|
all
of our directors and executive officers as a
group.
|
Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of our common stock owned by them, except to
the extent such power may be shared with a spouse.
Unless
otherwise indicated in the following table, the address for each person named in
the table is c/o La Cortez Energy, Inc., Calle 67 #7-35, Oficina 409, Bogotá,
Colombia.
Name and Address
of Beneficial Owner
|
Title of Class
|
Amount and Nature
of
Beneficial Ownership(1)
|
Percent of Class (2)
|
|||||||
Nadine
C. Smith
1266
1st
Street, Suite 4
Sarasota,
FL 34236
|
Common Stock
|
2,820,000 | (3) | 11.6 | % | |||||
Andres
Gutierrez Rivera
|
Common Stock
|
408,334 | (4) | 1.7 | % | |||||
Jaime
Ruiz Llano
|
Common Stock
|
33,334 | (5) | * | % | |||||
Jaime
Navas Gaona
|
Common Stock
|
33,334 | (6) | * | % | |||||
Richard
G. Stevens
|
Common Stock
|
33,334 | (6) | * | % | |||||
Jose
Fernando Montoya Carrillo
|
Common Stock
|
333,334 | (7) | 1.4 | % | |||||
All
directors and executive officers
as
a group (6 persons)
|
Common Stock
|
3,661,670 | 14.7 | % | ||||||
Professional
Trading Services SA
Gerbergasse
5
CH
8001 Zurich, Switzerland
|
Common Stock
|
2,600,000 | (8) | 10.5 | % | |||||
Asset
Protection Fund Ltd.
|
Common Stock
|
2,250,000 | (9) | 9.1 | % | |||||
3076
Sir Francis Drake’s Highway
|
||||||||||
Road
Town, Tortola, BVI
|
||||||||||
Clarion
Finanz AG
|
Common Stock
|
1,590,000 | (10) | 6.5 | % | |||||
Gerbergasse
5
|
||||||||||
CH
8001 Zurich, Switzerland
|
54
LW
Securities, Ltd.
Centro
San Ignacio, Torre Copernico
Piso
7, Ofic 702, Urb. La Castellana
Caracas,
Venezuela
|
Common Stock
|
1,500,000 | (11) | 6.1 | % | |||||
Bernard
L. Schwartz
944
5th Ave.
New
York, NY 10021
|
Common Stock
|
1,500,000 | (11) | 6.1 | % | |||||
VP
Bank
Bleicherweg
50
CH-8027
Zurich
|
Common Stock
|
1,250,000 | 5.2 | % | ||||||
Mark
Tompkins
Villa
Principe Leopoldo Hotel
Via
Montalbano 5
6900
Lugano, Switzerland
|
Common Stock
|
1,250,000 | 5.2 | % | ||||||
Tangocorp,
Inc.
802
Grand Pavilion
PO
Box 10335 APO
West
Bay Rd.
Grand
Cayman, Cayman Islands
|
Common Stock
|
1,250,000 | 5.2 | % | ||||||
Paramount
Strategy Corp.
PO
BOX 802
West
Bay Rd.
Cayman
Islands
KYI-1303
|
Common Stock
|
1,250,000 | 5.2 | % | ||||||
Adrien
Ellul
SOHO
Square
21
Lyndhurst Terrace
Central,
Hong Kong
Hong
Kong SAR
|
Common Stock
|
1,250,000 | 5.2 | % |
* Less
than 1%.
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to options or warrants currently
exercisable or convertible, or exercisable or convertible within 60 days
of November 5, 2009 are deemed outstanding for computing the percentage of
the person holding such option or warrant but are not deemed outstanding
for computing the percentage of any other
person.
|
(2)
|
Percentage
based upon 24,000,244 shares of our common stock outstanding as of
November 5, 2009.
|
(3)
|
Includes
360,000 shares of our common stock issuable within 60 days upon the
exercise of warrants.
|
(4)
|
Includes
25,000 shares of our common stock issuable within 60 days upon the
exercise of warrants. Includes 333,334 shares of our common
stock issuable within 60 days upon the exercise of vested options granted
under our 2008 Equity Incentive Plan; does not include 666,666 shares of
our common stock issuable upon the exercise of options granted under the
2008 Equity Incentive Plan, which vest in two equal annual installments
beginning on July 1, 2010.
|
(5)
|
Includes
33,334 shares of our common stock issuable within 60 days upon the
exercise of vested options granted under our 2008 Equity Incentive Plan;
does not include 66,666 shares of our common stock issuable upon the
exercise of options granted under the 2008 Equity Incentive Plan, which
vest in two equal annual installments beginning on July 1,
2010.
|
55
(6)
|
Includes
33,334 shares of our common stock issuable within 60 days upon the
exercise of vested options granted under our 2008 Equity Incentive Plan;
does not include 66,666 shares of our common stock issuable upon the
exercise of options granted under the 2008 Equity Incentive Plan, which
vest in two equal annual installments beginning on July 23,
2010.
|
(7)
|
Includes
200,000 shares of our common stock held by Jade & Adamo Associates
(“JAA”) and 100,000 shares of our common stock issuable within 60 days
upon the exercise of warrants held by JAA. Mr. Montoya owns
sixty-five percent (65%) of JAA and disclaims beneficial ownership of
thirty-five percent (35%) of our common stock held by and issuable to
JAA. Includes 33,334 shares of our common stock issuable within
60 days upon the exercise of options which vest on November 7, 2009,
granted under our 2008 Equity Incentive Plan; does not include 66,666
shares of our common stock issuable upon the exercise of options granted
under the 2008 Equity Incentive Plan, which vest in two equal annual
installments beginning on November 7,
2010.
|
(8)
|
Includes
650,000 shares of our common stock issuable within 60 days upon the
exercise of warrants.
|
(9)
|
Includes
750,000 shares of our common stock issuable within 60 days upon the
exercise of warrants.
|
(10)
|
Includes
280,000 shares of our common stock issuable within 60 days upon the
exercise of warrants.
|
(11)
|
Includes
750,000 shares of our common stock issuable within 60 days upon the
exercise of warrants.
|
56
EXECUTIVE
COMPENSATION
The
following table sets forth information concerning the total compensation paid or
accrued by us during the last two fiscal years ended December 31, 2008 to (i)
all individuals that served as our principal executive officer or acted in a
similar capacity for us at any time during the fiscal year ended December 31,
2008; (ii) all individuals that served as our principal financial officer or
acted in a similar capacity for us at any time during the fiscal year ended
December 31, 2008; and (iii) all individuals that served as executive officers
of ours at any time during the fiscal year ended December 31, 2008 that received
annual compensation during the fiscal year ended December 31, 2008 in excess of
$100,000.
Summary
Compensation Table
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
(1) ($)
|
Non-
Equity
Incentive
Plan
Compen-
sation ($)
|
Change
in
Pension
Value
and Non-
qualified
Deferred
Compen-
sation
Earnings
($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Andres
Gutierrez Rivera,
Chief
Executive Office (2)
|
2008
|
145,833 | 72,915 | 0 | 130,969 | 0 | 0 | 0 | 349,717 | |||||||||||||||||||||||||
Maria
de la Luz, Chief
|
2008
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
Executive
Officer (2)
|
2007
|
6,000 | 0 | 0 | 0 | 0 | 0 | 0 | 6,000 | |||||||||||||||||||||||||
Nadine
C. Smith, Vice
President
and Interim Chief
Financial
Officer (3)
|
2008
|
0 | 0 | 0 | 22,919 | 0 | 0 | 0 | 22,919 |
|
(1)
|
Option
Awards expense as reported here and in our financial statements has been
recorded in accordance with SFAS 123(R), “Share-Based
Payment.”
|
|
(2)
|
Effective
June 1, 2008, Ms. de la Luz resigned as our President and Chief Executive
Officer and Mr. Gutierrez was appointed our President and Chief Executive
Officer.
|
|
(3)
|
Ms.
Smith was appointed Interim Chief Financial Officer on June 1,
2008. Ms. Smith receives no compensation in her capacities as
Vice President and Interim Chief Financial Officer. However,
for accounting purposes, we imputed compensation of $23,333 for her
contributed services for the year ended December 31, 2008. The
Option Awards value reflects option grants made to Ms. Smith in her
capacity as director and Chairman.
|
We have
not issued any stock options or maintained any stock option or other incentive
plans other than our 2008 Equity Incentive Plan. (See “Item 5. Market for Common
Equity and Related Stockholder Matters – Securities Authorized for Issuance
under Equity Compensation Plans” above.) We have no plans in place and have
never maintained any plans that provide for the payment of retirement benefits
or benefits that will be paid primarily following retirement including, but not
limited to, tax qualified deferred benefit plans, supplemental executive
retirement plans, tax-qualified deferred contribution plans and nonqualified
deferred contribution plans.
We paid
Ms. de la Luz a fee of $500 per month for her services to us as officer and
director. We are paying Mr. Gutierrez Rivera for his services to us
as President and Chief Executive Officer according to his employment agreement
with us. We have no other contracts, agreements, plans or
arrangements, whether written or unwritten, that provide for payments to the
named executive officers listed above, other that our Board approved director
compensation plan which includes the reimbursement to all directors of
reasonable out-of-pocket expenses incurred in attending Board of Directors and
committee meetings.
57
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information regarding stock options held by the
Company's Named Executive Officers at December 31, 2008.
Option Awards
|
||||||||||||||||||||
Name and
Principal Position
|
Number of
securities
underlying
unexercised
options
exercisable
(#)
|
Number of
securities
underlying
unexercised
options
unexercisable
(#)
|
Equity
incentive plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
|
Option
plan
exercise
price
($)
|
Option expiration
date
|
|||||||||||||||
Andres
Gutierrez Rivera,
Chief
Executive Officer (1)
|
- | - | 1,000,000 | $ | 2.20 |
July
1, 2018
|
||||||||||||||
Maria
de la Luz, Chief
Executive
Officer (1)
|
- | - | - | N/A | N/A | |||||||||||||||
Nadine
Smith, Vice
President
and Interim
Chief
Financial Officer (2)
|
- | - | 175,000 | $ | 2.20 |
July
1, 2018
|
(1)
|
Effective
June 1, 2008, Ms. de la Luz resigned as our President and Chief Executive
Officer and Mr. Gutierrez was appointed our President and Chief Executive
Officer.
|
(2)
|
Ms.
Smith was appointed Interim Chief Financial Officer on June 1,
2008. Ms. Smith receives no compensation in her capacities as
Vice President and Interim Chief Financial Officer. The Option
Awards value reflects option grants made to Ms. Smith in her capacity as
director and Chairman.
|
58
Equity Compensation Plan
Information
The
following table sets forth information about the Company’s equity compensation
plans as of December 31, 2008:
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
|
|||||||||
Equity
compensation plans approved by security holders
|
2,000,000 | $ | 2.23 | - | ||||||||
Equity
compensation plans not approved by security holders
|
25,000 | $ | 1.71 | 1,975,000 | ||||||||
Total
|
2,025,000 | $ | 2.22 | 1,975,000 |
Employment
Agreements with Executive Officers
The
Company has entered into an employment agreement effective as of June 1, 2008
(the “Employment Agreement”) with Andres Gutierrez pursuant to which Mr.
Gutierrez was appointed as our President and Chief Executive Officer, with the
following terms:
Pursuant
to the Employment Agreement, Mr. Gutierrez’s base annual compensation has
been set at $250,000, which amount shall be paid in accordance with our
customary payroll practices and may be increased annually at the discretion of
the Board. This annual compensation shall be paid in equal monthly installments
in Colombian Pesos (“COP”). The exchange rate used to calculate Mr.
Gutierrez’s monthly salary payment will be calculated each month and shall
neither exceed a maximum of COP 2,400 nor be less than a minimum of COP 1,600.
This minimum/maximum range will be adjusted at the end of each calendar year
based upon changes in the consumer price index in Colombia.
In
addition, Mr. Gutierrez is eligible to receive an annual cash bonus of up to
fifty percent (50%) of his applicable base salary. Mr. Gutierrez’s annual bonus
(if any) shall be in such amount (up to the limit stated above) as the Board may
determine in its sole discretion, based upon Mr. Gutierrez’s achievement of
certain performance milestones to be established annually by the Board in
discussion with Mr. Gutierrez (the “Milestones”). For the first year of
employment, in the event the Board and Mr. Gutierrez are unable to agree to
Milestones acceptable to both, the amount of Mr. Gutierrez’s bonus shall be
determined by the Board on a discretionary basis. As of December 31,
2008, we had accrued a bonus payable to Mr. Gutierrez in the amount of
$72,915.
On July
1, 2008, and in accordance with his employment agreement, we granted Mr.
Gutierrez an option to purchase an aggregate of 1,000,000 shares of our Common
Stock under our 2008 Equity Incentive Plan. This option vests in three equal
annual installments beginning on June 1, 2009 and is exercisable at a price
equal to the fair market value our Common Stock on the date of grant, as
determined by the Board.
The
initial term of the Employment Agreement expired on June 1, 2009; however, the
Employment Agreement automatically renews for additional one (1) year terms
thereafter, unless either party provides notice to the other party of its intent
not to renew such Employment Agreement not less than thirty (30) days prior
to the expiration of the then-current term or unless the Employment Agreement is
terminated earlier in accordance with its terms. No such notice was provided
prior to the end of the initial one year term.
59
In
the event of a termination of employment “without cause” by the Company during
the first 12 months following June 1, 2008, Mr. Gutierrez shall receive:
(i) twelve (12) months of his base salary; plus (ii) to the
extent the Milestones are achieved or, in the absence of Milestones, the Board
has, in its sole discretion, otherwise determined an amount for Mr. Gutierrez’s
bonus for the initial 12 months of his employment, a pro rata portion of his
annual bonus for the initial 12 months of his employment, to be paid to him on
the date such annual bonus would have been payable to him had he remained
employed by the Company; plus (iii) any other accrued compensation and
Benefits, as defined in the Employment Agreement. In the event of a termination
of employment by Mr. Gutierrez for “good reason”, as defined in the Employment
Agreement, Mr. Gutierrez shall receive: (i) twelve (12) months of his
then in effect base salary, subject to his compliance with the non-competition,
non-solicitation and confidentiality provisions of the Employment Agreement. All
of the foregoing shall be payable in accordance with the Company’s customary
payroll practices then in effect.
Further,
in the event of the termination of Mr. Gutierrez’s employment in connection with
a Change of Control, as defined in the Employment Agreement, without cause by
the Company within 12 months of the Effective Date, or by Mr. Gutierrez for good
reason, any options then held by Mr. Gutierrez that have not already vested in
accordance with their terms shall immediately vest and become exercisable as of
the date of such termination and Mr. Gutierrez shall have nine (9) months
from the date of termination to exercise any or all such options.
The
Employment Agreement also provides that Mr. Gutierrez shall not: (i) during
his employment and for a period of one (1) year following the termination
of his employment, unless such employment is terminated by us for cause or by
him for no reason, directly or indirectly engage or invest in, own, manage,
operate, finance, control or participate in the ownership, management,
operation, financing, or control of, be employed by, associated with, or in any
manner connected with, lend any credit to, or render services or advice to, any
business, firm, corporation, partnership, association, joint venture or other
entity that engages or conducts any business the same as or substantially
similar to the business or currently proposed to be engaged in or conducted by
the Company and/or any of its affiliates, including its Colombia subsidiary, in
South America or included in the future strategic plan of the business of the
Company, anywhere within the United States of America or South America; provided, however, that Mr.
Gutierrez may own less than 5% of the outstanding shares of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) including those engaged in the oil and gas
business, other than any such enterprise with which the Company competes or is
currently engaged in a joint venture, if such securities are listed on any
national or regional securities exchange or have been registered under Section
12(g) of the Exchange Act; (ii) during his employment and for a period of one
(1) year following the termination of his employment, solicit any of our
current and/or future employees to leave our employ, or solicit or attempt to
take away any customers of the Company or any of its affiliates; or
(iii) during his employment and thereafter, disclose, directly or
indirectly, any confidential information of the Company to any third party,
except as may be required by applicable law or court order, in which case the
executive must promptly notify the Company so as to allow it to seek a
protective order if the Company so elects.
The
employment agreement with Mr. Gutierrez including its terms of compensation were
negotiated in an arm’s length transaction between Mr. Gutierrez and us and was
approved by Ms. Smith our Chairman and sole director at the time of Mr.
Gutierrez’s hire.
Compensation
of Non-Employee Directors
Our Board
of Directors currently consists of four non-employee directors and two executive
officers. We do not provide cash or incentive compensation for the
services of executive officers as directors. Our Board of Directors,
on July 23, 2008, approved a compensation package for our non-employee
directors10. This
compensation package provides for the grant of stock options to purchase
100,000 shares of our Common Stock to each new non-employee director upon
his or her appointment or election to the Board of Directors. These options will
have an exercise price equal to or greater than the fair market value of the
Common Stock on the date of grant of an option award and will fully vest in
equal, one-third installments over three years. In addition, each non-employee
director will receive annual cash compensation of $12,000. The
chairman of the Audit Committee will also receive additional annual compensation
of $15,000 and the chairmen of the Compensation, Reserves and Nominating and
Corporate Governance Committees of our Board of Directors will also each receive
additional annual cash compensation of $5,000. Each non-employee director will
receive $1,000 for attendance at each committee meeting of the Board of
Directors, or $500 for telephonic attendance. Directors are also reimbursed for
reasonable out-of-pocket expenses incurred in attending Board of Directors and
committee meetings.
10.
|
On July 23, 2008,
our Board of Directors approving our non-director compensation plan
consisted of Nadine Smith, Andres Gutierrez, Jaime Ruiz and Richard
Stevens.
|
60
Until we
establish a compensation committee, amendments to our director compensation
package must be approved by a majority of our independent
directors.
The
following table sets forth information regarding compensation accrued to the
Company's non-employee directors at December 31, 2008.
Director
Compensation
Name
|
Fees
earned or
paid in
cash
($)
|
Stock
awards
($)
|
Option
awards (1)
($)
|
Non-equity
incentive
plan
compen-
sation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All other
compen-
sation
($)
|
Total
($)
|
|||||||||||||||||||||
Jaime
Ruiz Llano
|
$ | 7,000 | $ | - | $ | 13,097 | $ | - | $ | - | $ | - | $ | 20,097 | ||||||||||||||
Jaime
Navas Gaona
|
$ | 5,267 | $ | - | $ | 11,965 | $ | - | $ | - | $ | - | $ | 17,232 | ||||||||||||||
Richard
G. Stevens
|
$ | 8,267 | $ | - | $ | 11,965 | $ | - | $ | - | $ | - | $ | 20,232 | ||||||||||||||
Jose
Fernando Montoya Carrillo
|
$ | 3,533 | $ | - | $ | 3,933 | $ | - | $ | - | $ | - | $ | 7,466 |
(1)
|
Option
awards expense as reported here and in our financial statements has been
recorded in accordance with SFAS 123(R), “Share-Based
Payment.”
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Other
than as disclosed below and in this prospectus, there have been no transactions,
or currently proposed transactions, in which we were or are to be a participant
and the amount involved exceeds the lesser of $120,000 or 1% of the average of
our total assets at year end for the last two completed fiscal years and in
which any of our directors, executive officers or beneficial holders of more
than 5% of our outstanding common stock, or any of their respective immediate
family members, has had or will have any direct or material indirect
interest.
On June
16, 2007, May 17, 2007 and July 28, 2006, our former president, chief executive
officer and majority stockholder, Ms. de la Luz, advanced $10,000, $2,700 and
$2,000, respectively, to us for working capital purposes. These advances carried
no interest rate and were contributed to the Company as of June 30,
2008. As of August 15, 2008, we completed the Split-Off of the Legacy
Business to Ms. de la Luz in exchange for 11,250,000 shares of our Common Stock
which she surrendered to us.
On
February 7, 2008, we sold 1,150,000 shares of our restricted common stock to our
Chairman, Nadine C. Smith, in consideration of cash in the amount of $0.05 per
share, for a total of $11,500.
On March
14, 2008, we closed our 2008 private placement in which we sold 500,000 shares
of our restricted common stock to our Chairman, Nadine C. Smith, in
consideration of cash in the amount of $1.00 per share, for a total of
$500,000.
61
On
September 10, 2008, we closed our 2008 unit offering in which we sold 400,000
units to our Chairman, Nadine C. Smith, and 50,000 units to our President and
Chief Executive Officer, Andres Gutierrez Rivera, in consideration of cash in
the amount of $1.25 per unit, for a total of $500,000 and $62,500,
respectively. As part of this closing, we also sold 200,000 units to
Jade & Adamo Associates, in consideration of cash in the amount of $1.25 per
unit, for a total of $250,000. Jose Fernando Montoya Carrillo, one of
our directors, owns sixty-five percent (65%) of Jade & Adamo Associates and
disclaims beneficial ownership of thirty-five percent (35%) of the units held by
Jade & Adamo Associates.
On June
19, 2009, as part of the initial closing of our 2009 unit offering, we sold
160,000 units to our Chairman, Nadine C. Smith, in consideration of cash in the
amount of $1.25 per unit, for a total of $200,000.
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their shares of
our common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. If the shares of common stock are
sold through underwriters, the selling stockholders will be responsible for
underwriting discounts or commissions or agent’s commissions. All selling
stockholders who are broker-dealers are deemed to be underwriters. These sales
may be at fixed prices, at prevailing market prices at the time of the sale, at
varying prices determined at the time of sale or at negotiated prices. The
selling stockholders may use any one or more of the following methods when
selling shares:
·
|
any national securities exchange
or quotation service on which the securities may be listed or quoted at
the time of sale;
|
·
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
·
|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
·
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
·
|
transactions other than on these
exchanges or systems or in the over-the-counter
market;
|
·
|
through the writing of options,
whether such options are listed on an options exchange or
otherwise;
|
·
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
·
|
privately negotiated
transactions;
|
·
|
short
sales;
|
·
|
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
|
·
|
a combination of any such methods
of sale; and
|
·
|
any other method permitted
pursuant to applicable law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
62
The
selling stockholders may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder. The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
In
connection with the sale of the shares of our common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the shares of common stock in the
course of hedging in positions they assume. The selling stockholders may also
sell shares of common stock short and deliver shares of common stock covered by
this prospectus to close out short positions and to return borrowed shares in
connection with such short sales. The selling stockholders may also loan or
pledge shares of common stock to broker-dealers that in turn may sell such
shares.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of our common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of our common stock from time to time
under this prospectus after we have filed an amendment to this prospectus under
Rule 424(b)(3) or other applicable provision of the Securities Act amending the
list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgees, transferees or other successors in
interest as selling stockholders under this prospectus. The selling stockholders
also may transfer and donate the shares of common stock in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
paid, or any discounts or concessions allowed to, such broker-dealers or agents
and any profit realized on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act. At
the time a particular offering of the shares of common stock is made, a
prospectus supplement, if required, will be distributed which will set forth the
aggregate amount of shares of common stock being offered and the terms of the
offering, including the name or names of any broker-dealers or agents, any
discounts, commissions and other terms constituting compensation from the
selling stockholders and any discounts, commissions or concessions allowed or
re-allowed or paid to broker-dealers. Under the securities laws of some states,
the shares of common stock may be sold in such states only through registered or
licensed brokers or dealers. In addition, in some states the shares of common
stock may not be sold unless such shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and is complied with. There can be no assurance that any selling
stockholder will sell any or all of the shares of our common stock registered
pursuant to the shelf registration statement, of which this prospectus forms a
part.
63
Each
selling stockholder has informed us that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute our common
stock. None of the selling stockholders who are affiliates of broker-dealers,
other than the initial purchasers in private transactions, purchased the shares
of common stock outside of the ordinary course of business or, at the time of
the purchase of the common stock, had any agreements, plans or understandings,
directly or indirectly, with any person to distribute the
securities.
We are
required to pay all fees and expenses incident to the registration of the shares
of common stock. Except as provided for indemnification of the selling
stockholders, we are not obligated to pay any of the expenses of any attorney or
other advisor engaged by a selling stockholder. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
If we are
notified by any selling stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of shares of common stock, we
will file a post-effective amendment to the registration statement. If the
selling stockholders use this prospectus for any sale of the shares of our
common stock, they will be subject to the prospectus delivery requirements of
the Securities Act.
The
anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
stockholders, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in passive market-making
activities with respect to the shares of common stock. Passive market making
involves transactions in which a market maker acts as both our underwriter and
as a purchaser of our common stock in the secondary market. All of the foregoing
may affect the marketability of the shares of common stock and the ability of
any person or entity to engage in market-making activities with respect to the
shares of common stock.
Once sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
Our
common stock is currently quoted on the OTCBB and trades below $5.00 per share;
therefore, the common stock is considered a “penny stock” and subject to SEC
rules and regulations which impose limitations upon the manner in which such
shares may be publicly traded. These regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks. Under these regulations, certain
brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
have the effect of limiting the trading activity of the common stock and
reducing the liquidity of an investment in the common stock.
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
Our
amended and restated Articles of Incorporation provide for the issuance of
310,000,000 shares of capital stock, of which 300,000,000 are shares of common
stock, par value $0.001 per share, and 10,000,000 are blank-check preferred
stock, par value $0.001 per share.
Equity
Securities Issued and Outstanding
As of
November 5, 2009, there were issued and outstanding:
|
·
|
24,000,244
shares of our common stock;
|
|
·
|
No
shares of our preferred stock are issued and
outstanding;
|
64
|
·
|
Options
to purchase 2,385,000 shares of our Common Stock of which 705,001 options
are currently exercisable; and
|
|
·
|
Warrants
to purchase 7,932,900 shares of our common stock, of which warrants to
purchase 7,932,900 shares are currently
exercisable.
|
Description
of Common Stock
Holders
of our common stock are entitled to one vote for each share on all matters
submitted to a stockholder vote. Holders of common stock do not have cumulative
voting rights. Therefore, holders of a majority of the shares of common stock
voting for the election of directors can elect all of the directors. Holders of
our common stock representing a majority of the voting power of our capital
stock issued, outstanding and entitled to vote, represented in person or by
proxy, are necessary to constitute a quorum at any meeting of stockholders. A
vote by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to our certificate of incorporation.
Holders
of our common stock are entitled to share in all dividends that our Board of
Directors, in its discretion, declares from legally available funds. In the
event of a liquidation, dissolution or winding up, each outstanding share of our
common stock entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock. Our common stock has no
pre-emptive, subscription or conversion rights and there are no redemption
provisions applicable to our common stock.
Description
of Preferred Stock
We are
authorized to issue 10,000,000 shares of “blank check” preferred stock, par
value $0.001 per share, none of which as of the date hereof is designated or
outstanding. Our Board of Directors is vested with authority to
divide the shares of preferred stock into series and to fix and determine the
relative rights and preferences of the shares of any such
series. Once authorized, the dividend or interest rates, conversion
rates, voting rights, redemption prices, maturity dates and similar
characteristics of preferred stock will be determined by our Board of Directors,
without the necessity of obtaining approval of the stockholders.
Description
of Options
The Board
of Directors and stockholders of the Company adopted the 2008 Equity Incentive
Plan on February 7, 2008 and the Board of Directors approved an amendment and
restatement of the 2008 Equity Incentive Plan on November 7,
2008. The 2008 Equity Incentive Plan, as amended and restated,
reserves a total of 4,000,000 shares of our common stock for issuance under the
2008 Equity Incentive Plan. Our stockholders approved the increase in
reserved shares from 2,000,000 to 4,000,000, as of October 12,
2009. If an incentive award granted under the 2008 Equity Incentive
Plan expires, terminates, is unexercised or is forfeited, or if any shares are
surrendered to us in connection with an incentive award, the shares subject to
such award and the surrendered shares will become available for further awards
under the 2008 Equity Incentive Plan.
As of
June 30, 2009, we had issued 2,385,000 nonqualified stock options under the 2008
Equity Incentive Plan, at a weighted average value exercise price of $2.15 per
share. For all option grants, our Board of Directors set the exercise
price of the options at a price equal to or greater than the fair market value
of our common stock on the date of grant of the options. Most of the
options under the 2008 Equity Incentive Plan vest pro-rata in three annual
installments beginning on the first anniversary of the date of grant and have a
10 year term.
We may
grant options to purchase up to an additional 1,615,000 shares of common stock
pursuant to the 2008 Plan. See “Market for Common Equity and Related Stockholder
Matters— Securities
Authorized for Issuance under Equity Compensation Plans” above and Note 5,
Shareholders’ Equity – Stock Option Awards, of Notes to Consolidated
Financial Statements as of June 30, 2009 and December 31, 2008, and for the
three months and six months ended June 30, 2009 and June 30, 2008
below.
65
Description
of Warrants
There are
currently warrants to purchase 7,932,900 shares of our common stock, of which
7,932,900 are currently exercisable, as follows:
Number of Shares
|
Exercise Price
|
Expiration Date
|
||||
2,392,400
|
$ |
2.25
|
September
9, 2013
|
|||
5,000
|
2.05
|
February
15, 2014
|
||||
4,860,000
|
2.00
|
June
18, 2014
|
||||
450,000
|
1.25
|
June
18, 2014
|
||||
205,000
|
2.00
|
July
30, 2014
|
||||
20,500
|
1.25
|
July
30, 2014
|
||||
7,932,900
|
|
All of
these warrants, at the option of the holders, may be exercised by cash payment
of the exercise price, or (except for the 5,000 warrants expiring on February
15, 2014) by “cashless exercise” if we default in honoring the piggyback
registration rights that are attached to the shares of our common stock
underlying the warrants. A “cashless exercise” means that in lieu of
paying the aggregate purchase price for the shares being purchased upon exercise
of the warrants in cash, the holder will forfeit a number of shares underlying
the warrants with a “fair market value” equal to such aggregate exercise price.
We will not receive additional proceeds to the extent that warrants are
exercised by cashless exercise.
The
exercise price and number of shares of common stock issuable on exercise of the
warrants may be adjusted in certain circumstances including in the event of a
stock dividend, or our recapitalization, reorganization, merger or
consolidation.
Registration
Rights
At the
closing of the 2009 unit offering, we entered into a registration rights
agreement, under the terms of which we committed to file with the SEC a
registration statement, and to use commercially reasonable efforts to cause such
registration statement to become effective no later than 240 days after the
final closing of the 2009 unit offering, which took place on July 31, 2009. We
also agreed to use commercially reasonable efforts to maintain the effectiveness
of this registration statement through the first anniversary of the date it is
declared effective by the SEC, or until Rule 144 under the Securities Act is
available to investors in the 2009 unit offering with respect to all of their
shares, whichever is earlier.
Under this registration rights
agreement, we have agreed to pay monetary penalties to these investors equal to
one percent (1%) of the gross proceeds of the 2009 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 ten
percent (10%) of the gross proceeds of the 2009 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.
Additionally,
investors in the 2009 unit offering are entitled to “piggyback” registration
rights for the shares of common stock underlying the warrants included in the
units issued in the 2009 unit offering. Also, certain agents are entitled to
“piggyback” registration rights with respect to shares of common stock
underlying agent warrants they have received in connection with their placement
of units sold in the 2009 unit offering.
66
Investors
in the 2008 unit offering were granted “piggyback” registration rights for the
shares of common stock included in the units and the shares of common stock
issuable upon exercise of the warrants included in the units sold in the 2008
unit offering. Additionally, these investors were granted contingent
“demand” registration rights, with respect to the shares of common stock
included in the Units, that are triggered if the Company does not file a
registration statement with the SEC in which the investors can exercise their
‘piggyback’ registration rights by March 10, 2009, six months after the closing
of the 2008 unit offering, but only if investors holding a majority of the
shares issued in the 2008 unit offering (including shares issuable upon exercise
of the warrants contained in the units issued in the 2008 unit offering) request
such demand registration in writing. To date, no such written
requests have been made.
Anti-Takeover
Effects of Provisions of Nevada State Law
We may be
or in the future we may become subject to Nevada’s control share
laws. A corporation is subject to Nevada’s control share law if it
has more than 200 stockholders, at least 100 of whom are stockholders of record
and residents of Nevada, and if the corporation does business in Nevada,
including through an affiliated corporation. This control share law
may have the effect of discouraging corporate takeovers. We currently
have approximately 400 stockholders.
The
control share law focuses on the acquisition of a “controlling interest,” which
means the ownership of outstanding voting shares that would be sufficient, but
for the operation of the control share law, to enable the acquiring person to
exercise the following proportions of the voting power of the corporation in the
election of directors: (1) one-fifth or more but less than one-third; (2)
one-third or more but less than a majority; or (3) a majority or
more. The ability to exercise this voting power may be direct or
indirect, as well as individual or in association with others.
The
effect of the control share law is that an acquiring person, and those acting in
association with that person, will obtain only such voting rights in the control
shares as are conferred by a resolution of the stockholders of the corporation,
approved at a special or annual meeting of stockholders. The control
share law contemplates that voting rights will be considered only once by the
other stockholders. Thus, there is no authority to take away voting
rights from the control shares of an acquiring person once those rights have
been approved. If the stockholders do not grant voting rights to the
control shares acquired by an acquiring person, those shares do not become
permanent non-voting shares. The acquiring person is free to sell the
shares to others. If the buyer or buyers of those shares themselves
do not acquire a controlling interest, the shares are not governed by the
control share law.
If
control shares are accorded full voting rights and the acquiring person has
acquired control shares with a majority or more of the voting power, any
stockholder of record, other than the acquiring person, who did not vote in
favor of approval of voting rights, is entitled to demand fair value for such
stockholder’s shares.
In
addition to the control share law, Nevada has a business combination law, which
prohibits certain business combinations between Nevada corporations and
“interested stockholders” for three years after the interested stockholder first
becomes an interested stockholder, unless the corporation’s Board of Directors
approves the combination in advance. For purposes of Nevada law, an
interested stockholder is any person who is: (a) the beneficial owner, directly
or indirectly, of 10% or more of the voting power of the outstanding voting
shares of the corporation, or (b) an affiliate or associate of the corporation
and at any time within the previous three years was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the
then-outstanding shares of the corporation. The definition of
“business combination” contained in the statute is sufficiently broad to cover
virtually any kind of transaction that would allow a potential acquirer to use
the corporation’s assets to finance the acquisition or otherwise to benefit its
own interests rather than the interests of the corporation and its other
stockholders.
The
effect of Nevada’s business combination law is to potentially discourage parties
interested in taking control of our Company from doing so if it cannot obtain
the approval of our Board of Directors.
67
Transfer
Agent
The
transfer agent for our common stock is Continental Stock Transfer & Trust
Company. The transfer agent’s address is 17 Battery Place, New York,
New York 10004, and its telephone number is (212) 845-3217.
LEGAL
MATTERS
The
validity of the common stock offered hereby will be passed upon for us by
Gottbetter & Partners, LLP, 488 Madison Avenue, 12th Floor, New York, New
York 10022-5718.
EXPERTS
The
consolidated financial statements for the fiscal year ended December 31, 2008,
included in this prospectus and in the registration statement have been audited
by BDO Seidman, LLP, an independent registered public accounting firm, to the
extent and for the periods set forth in its report appearing elsewhere herein
and in the registration statement, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and
accounting.
The
consolidated financial statements for the fiscal year ended December 31, 2007,
included in this prospectus and in the registration statement have been audited
by Cordovano and Honeck LLP, an independent registered public accounting firm,
to the extent and for the periods set forth in its report appearing elsewhere
herein and in the registration statement, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
WHERE
YOU CAN FIND MORE INFORMATION
After the
effectiveness of the registration statement of which this prospectus is a part,
we will be required to file annual reports, quarterly reports, current reports
and other information with the SEC. You may read or obtain a copy of
these reports at the SEC’s public reference room at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. You may obtain information on the
operation of the public reference room and their copy charges by calling the SEC
at 1-800-SEC-0330. The SEC maintains a website that contains
registration statements, reports, proxy information statements and other
information regarding registrants that file electronically with the
SEC. The address of the website is http://www.sec.gov.
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
to register the shares offered by this prospectus. The term
“registration statement” means the original registration statement and any and
all amendments thereto, including the schedules and exhibits to the original
registration statement or any amendment. This prospectus is part of
that registration statement. This prospectus does not contain all of
the information set forth in the registration statement or the exhibits to the
registration statement. For further information with respect to us
and the shares we are offering pursuant to this prospectus, you should refer to
the registration statement and its exhibits. Statements contained in
this prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other documents filed as an exhibit to the registration
statement. You may read or obtain a copy of the registration
statement at the SEC’s public reference facilities and Internet site referred to
above.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Under the
Nevada Revised Statutes, our directors and officers are not individually liable
to us or our stockholders for any damages as a result of any act or failure to
act in their capacity as an officer or director unless it is proven
that:
68
· His act or failure to act constituted a
breach of his fiduciary duty as a director or officer; and
· His breach of these duties involved
intentional misconduct, fraud or a knowing violation of law.
Nevada
law allows corporations to provide broad indemnification to its officers and
directors. At the present time, our Articles of Incorporation and
Bylaws also provide for broad indemnification of our current and former
directors, trustees, officers, employees and other agents.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
GLOSSARY
OF OIL AND GAS TERMS
The
following are definitions of some of the oil and gas industry terms used in this
prospectus.
2D seismic
data: (two-dimensional seismic data) Geophysical data that
depicts the subsurface strata in two dimensions. A vertical section of seismic
data consisting of numerous adjacent traces acquired sequentially.
ANH: National
Hydrocarbon Agency of Colombia (Agencia Nacional de Hidrocarburos)
API gravity
scale: a gravity scale devised by the American Petroleum
Institute.
association
contract: Prior to 2003, the type of contract in association
with Ecopetrol in Colombia, regulating the exploration, production and
development of hydrocarbons. Association contracts give Ecopetrol the right to
back-in into any block. After 2003 with the creation of the ANH, Colombia
adopted an international E&P (exploration and production)
contract.
basin: A depression of the
earth's surface into which sediments are deposited, usually characterized by
sediment accumulation over a long interval; a broad area of the earth beneath
which layers of rock are inclined, usually from the sides toward the
center.
block: Subdivision
of an area for the purpose of licensing to a company or companies for
exploration/production rights.
BOPD: Abbreviation
for barrels of oil per day, a common unit of measurement for volume of crude
oil. The volume of a barrel is equivalent to 42 US gallons.
BS&W:
Basic sediment and water.
completion: The
installation of permanent equipment for the production of oil or natural gas, or
in the case of a dry hole, the reporting of abandonment to the appropriate
agency.
concession:
Usually
used in foreign operations and refers to a large block of acreage granted to the
operator by the host government for a certain time and under certain government
conditions which allows the operator to conduct exploratory and/or development
operations. The Concession Agreement assures the holder of certain rights under
the law.
crude oil:
A general term for unrefined petroleum or liquid petroleum.
69
dry
hole: A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
would exceed production expenses and taxes.
E&P: Exploration
and production.
Ecopetrol: The Colombian
state-controlled oil company.
exploration: The
initial phase in petroleum operations that includes generation of a prospect or
play or both, and drilling of an exploration well. Appraisal,
development and production phases follow successful exploration.
exploratory
well: A well drilled to find and produce oil and gas reserves
that is not a development well.
field: An
area consisting of either a single reservoir or multiple reservoirs, all grouped
on or related to the same individual geological structural feature and/or
stratigraphic condition.
formation: An
identifiable layer of rocks named after the geographical location of its first
discovery and dominant rock type.
hydrocarbon: A
naturally occurring organic compound comprising hydrogen and carbon.
Hydrocarbons can be as simple as methane [CH4], but many
are highly complex molecules, and can occur as gases, liquids or solids. The
molecules can have the shape of chains, branching chains, rings or other
structures. Petroleum is a complex mixture of hydrocarbons. The most common
hydrocarbons are natural gas, oil and coal.
lead: a possible
prospect.
operator: The
individual or company responsible for the exploration and/or exploitation and/or
production of an oil or gas well or lease.
participation
interest: The proportion of exploration and production costs
each party will bear and the proportion of production each party will receive,
as set out in an operating agreement.
Perupetro: The Peruvian hydrocarbon
agency.
play: An
area in which hydrocarbon accumulations or prospects of a given type
occur.
production: The phase that
occurs after successful exploration and development and during which
hydrocarbons are drained from an oil or gas field.
prospect: A
specific geographic area, which based on supporting geological, geophysical or
other data and also preliminary economic analysis using reasonably anticipated
prices and costs, is deemed to have potential for the discovery of commercial
hydrocarbons.
reservoir: A subsurface,
porous, permeable rock formation in which oil and gas are found.
royalty: A
percentage share of production, or the value derived from production, paid, in
cash or kind, from a producing well.
seismic: Pertaining
to waves of elastic energy, such as that transmitted by P-waves and S-waves, in
the frequency range of approximately 1 to 100 Hz. Seismic energy is studied by
scientists to interpret the composition, fluid content, extent and geometry of
rocks in the subsurface. "Seismic," used as an adjective, is preferable to
"seismics," although "seismics" is used commonly as a noun.
spud,
to: To commence drilling operations.
sunk
costs: Costs that cannot be recovered once they have been
incurred.
70
West Texas
Intermediate (“WTI”): Light, sweet crude oil with high API
gravity and low sulfur content used as the benchmark for U.S. crude oil refining
and trading. WTI is deliverable at Cushing, Oklahoma to fill NYMEX
futures contracts for light, sweet crude oil.
working
interest: The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and to
receive a share of production.
X factor:
The payment to the ANH of a percentage of net production revenues over
and above the standard royalties.
71
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
LA
CORTEZ ENERGY, INC.
Unaudited Condensed
Consolidated Financial Statements as
of June 30, 2009
and December 31, 2008, and for the Periods Ended June 30, 2009 and June
30, 2008
|
|
Condensed Consolidated Balance
Sheets (unaudited)
- as of June
30, 2009 and December 31, 2008
|
F-2
|
Condensed
Consolidated Statements of Operations (unaudited) - Three and six months
ended June 30, 2009 and June 30, 2008, and from June 9, 2006 (Inception)
through June 30, 2009
|
F-3
|
Condensed
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
(unaudited) - From June 9, 2006 (Inception) through June 30,
2009
|
F-4
|
Condensed
Consolidated Statements of Cash Flows (unaudited) - Six months ended June
30, 2009 and June 30, 2008, and from June 9, 2006 (Inception) through June
30, 2009
|
F-5
|
Notes
to Consolidated Financial Statements (unaudited)
|
F-6
|
Audited
Consolidated Financial Statements as of, and for the Fiscal Years Ended,
December 31, 2008 and December 31, 2007
|
|
Reports
of Independent Registered Public Accounting
Firms
|
F-22
|
Consolidated
Balance Sheets as of December 31, 2008 and December 31,
2007
|
F-24
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
December 31, 2007 and for the period from June 9, 2006 (Inception) through
December 31, 2008
|
F-25
|
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) for the period
from June 9, 2006 (Inception) through December 31, 2008
|
F-26
|
Consolidated
Statements of Cash Flows for the Fiscal Years Ended December 31, 2008 and
December 31, 2007 and for the period from June 9, 2006 (Inception) through
December 31, 2008
|
F-27
|
Notes
to Consolidated Financial Statements
|
F-28
|
F-1
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Condensed
Consolidated Balance Sheets
(Unaudited)
June
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
5,004,675
|
$
|
6,733,381
|
||||
Employee
advances and other receivables
|
38,769
|
-
|
||||||
Prepaid
expenses
|
44,444
|
20,132
|
||||||
Total
current assets
|
5,087,888
|
6,753,513
|
||||||
Property
and equipment, net of accumulated depreciation of $66,652 and $38,719,
respectively
|
235,354
|
231,604
|
||||||
Unproved
oil and natural gas properties, full cost method
|
5,868,790
|
-
|
||||||
Total
assets
|
$
|
11,192,032
|
$
|
6,985,117
|
||||
Liabilities
and Shareholders' Equity
|
||||||||
Liabilities:
|
||||||||
Accounts
payable
|
$
|
114,694
|
$
|
29,685
|
||||
Accrued
liabilities
|
211,400
|
127,107
|
||||||
Derivative
warrant instruments
|
3,662,975
|
-
|
||||||
Total
current liabilities
|
3,989,069
|
156,792
|
||||||
Commitments
and contingencies (Note 10)
|
||||||||
Shareholders'
equity:
|
||||||||
Common
stock, $.001 par value; 300,000,000 shares authorized; 23,795,244 and
18,935,244 shares issued and outstanding at June 30, 2009 and December 31,
2008, respectively
|
23,795
|
18,935
|
||||||
Additional
paid-in capital
|
11,260,404
|
9,431,994
|
||||||
Deficit
accumulated during the development stage
|
(4,081,236
|
)
|
(2,622,604
|
)
|
||||
Total
shareholders' equity
|
7,202,963
|
6,828,325
|
||||||
Total
liabilities and shareholders' equity
|
$
|
11,192,032
|
$
|
6,985,117
|
See
accompanying notes to condensed consolidated financial statements.
F-2
LA
CORTEZ ENERGY, INC.
(A
Development Stage Company)
Condensed
Consolidated Statements of Operations
(Unaudited)
June 9, 2006
|
||||||||||||||||||||
(Inception)
|
||||||||||||||||||||
Three Months Ended
|
Six Months Ended
|
through
|
||||||||||||||||||
June 30,
|
June 30,
|
June 30,
|
||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
||||||||||||||||
Expenses:
|
||||||||||||||||||||
General
and administrative
|
$ | 756,758 | $ | 244,421 | $ | 1,551,981 | $ | 1,365,199 | $ | 4,243,368 | ||||||||||
Loss
from operations
|
(756,758 | ) | (244,421 | ) | (1,551,981 | ) | (1,365,199 | ) | (4,243,368 | ) | ||||||||||
Non-operating
income (expense):
|
||||||||||||||||||||
Unrealized
gain on fair value of derivative warrant instruments, net
|
411,945 | - | 469,319 | - | 469,319 | |||||||||||||||
Interest
income
|
3,147 | 7,710 | 20,670 | 8,363 | 89,675 | |||||||||||||||
Interest
expense
|
- | - | - | (222 | ) | (222 | ) | |||||||||||||
Loss
before income taxes
|
(341,666 | ) | (236,711 | ) | (1,061,992 | ) | (1,357,058 | ) | (3,684,596 | ) | ||||||||||
Income
taxes
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
$ | (341,666 | ) | $ | (236,711 | ) | $ | (1,061,992 | ) | $ | (1,357,058 | ) | $ | (3,684,596 | ) | |||||
Basic
and diluted loss per share
|
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.08 | ) | ||||||||
Basic
and diluted weighted average common shares outstanding
|
19,522,717 | 16,400,444 | 19,230,603 | 17,071,746 |
See
accompanying notes to condensed consolidated financial statements
F-3
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Condensed
Consolidated Changes in Shareholders’ Equity (Deficit)
From June 9, 2006 (Inception) through
June 30, 2009
(Unaudited)
Deficit
|
||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||
Additional
|
During
|
|||||||||||||||||||||
Common Stock
|
Paid-in
|
Development
|
||||||||||||||||||||
Shares
|
Par Value
|
Capital
|
Stage
|
Total
|
||||||||||||||||||
Balance
at June 9, 2006 (inception)
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||||||
July
2006, common stock sold to president/ sole director at $.0008 per
share
|
*
|
11,250,000
|
11,250
|
(2,250
|
)
|
—
|
9,000
|
|||||||||||||||
December
2006, common stock sold pursuant to a SB-2 registered offering at
$.002/share
|
*
|
9,500,000
|
9,500
|
9,500
|
—
|
19,000
|
||||||||||||||||
Net
loss, period ended December 31, 2006
|
—
|
—
|
—
|
(13,239
|
)
|
(13,239
|
)
|
|||||||||||||||
Balance
at December 31, 2006
|
*
|
20,750,000
|
20,750
|
7,250
|
(13,239
|
)
|
14,761
|
|||||||||||||||
Net
loss, year ended December 31, 2007
|
—
|
—
|
—
|
(28,836
|
)
|
(28,836
|
)
|
|||||||||||||||
Balance
at December 31, 2007
|
*
|
20,750,000
|
20,750
|
7,250
|
(42,075
|
)
|
(14,075
|
)
|
||||||||||||||
February
2008, common stock sold to an officer at $.01 per share
|
*
|
1,150,000
|
1,150
|
10,350
|
—
|
11,500
|
||||||||||||||||
February
2008, common stock issued to a consultant in exchange for services at
$1.00 per share
|
*
|
1,000,000
|
1,000
|
999,000
|
—
|
1,000,000
|
||||||||||||||||
February
2008, cancellation of former officer's shares
|
(9,000,000
|
)
|
(9,000
|
)
|
9,000
|
—
|
—
|
|||||||||||||||
February
2008, common stock issued in exchange for extinguishment of debt and
accrued interest at $.50 per share
|
100,444
|
100
|
50,122
|
—
|
50,222
|
|||||||||||||||||
March
2008, common stock sold in private placement offering at $1.00 per share,
less offering costs totaling $85,105
|
2,400,000
|
2,400
|
2,312,495
|
—
|
2,314,895
|
|||||||||||||||||
June
2008, indebtedness forgiven by related party
|
—
|
—
|
14,700
|
—
|
14,700
|
|||||||||||||||||
August
2008, cancellation of former officer's shares
|
(2,250,000
|
)
|
(2,250
|
)
|
2,250
|
—
|
—
|
|||||||||||||||
September
2008, common stock and warrants sold in private placement offering at
$1.25 per share, less offering costs totaling $218,874
|
4,784,800
|
4,785
|
5,757,341
|
—
|
5,762,126
|
|||||||||||||||||
Contributed
services by interim CFO
|
—
|
—
|
23,333
|
—
|
23,333
|
|||||||||||||||||
Stock
based compensation
|
—
|
—
|
246,153
|
—
|
246,153
|
|||||||||||||||||
Net
loss, year ended December 31, 2008
|
—
|
—
|
—
|
(2,580,529
|
)
|
(2,580,529
|
)
|
|||||||||||||||
Balance
at December 31, 2008
|
18,935,244
|
18,935
|
9,431,994
|
(2,622,604
|
)
|
6,828,325
|
||||||||||||||||
Cumulative
effect of reclassification of warrants (unaudited)
|
—
|
—
|
(1,253,242
|
)
|
(396,640
|
)
|
(1,649,882
|
)
|
||||||||||||||
Balance
at January 1, 2009, as adjusted
|
18,935,244
|
18,935
|
8,178,752
|
(3,019,244
|
)
|
5,178,443
|
||||||||||||||||
June
2009, common stock and warrants sold in private placement offering at
$1.25 per share, less offering costs totaling $830,635
(unaudited)
|
4,860,000
|
4,860
|
2,757,007
|
—
|
2,761,867
|
|||||||||||||||||
Stock
based compensation (unaudited)
|
—
|
—
|
324,645
|
—
|
324,645
|
|||||||||||||||||
Net
loss, six months ended June 30, 2009 (unaudited)
|
—
|
—
|
—
|
(1,061,992
|
)
|
(1,061,992
|
)
|
|||||||||||||||
Balance
at June 30, 2009 (unaudited)
|
23,795,244
|
$
|
23,795
|
$
|
11,260,404
|
$
|
(4,081,236
|
)
|
$
|
7,202,963
|
*
Restated for 5:1 forward stock split.
See
accompanying notes to condensed consolidated financial statements.
F-4
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
June 9, 2006
|
||||||||||||
(Inception)
|
||||||||||||
Six Months Ended
|
through
|
|||||||||||
June 30,
|
June 30,
|
|||||||||||
2009
|
2008
|
2009
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$
|
(1,061,992
|
)
|
$
|
(1,357,058
|
)
|
$
|
(3,684,596
|
)
|
|||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
|
27,933
|
847
|
66,652
|
|||||||||
Stock-based
compensation
|
324,645
|
1,000,000
|
1,570,798
|
|||||||||
Contributed
services
|
-
|
-
|
23,333
|
|||||||||
Common
stock issued in exchange for interest expense
|
-
|
222
|
222
|
|||||||||
Unrealized
gain on fair value of derivative warrant instruments, net
|
(469,319
|
)
|
-
|
(469,319
|
)
|
|||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Employee
advances and other receivables
|
(38,769
|
)
|
-
|
(38,769
|
)
|
|||||||
Prepaid
expenses
|
(24,312
|
)
|
(48,756
|
)
|
(44,444
|
)
|
||||||
Deposit
|
-
|
500
|
-
|
|||||||||
Accounts
payable
|
85,009
|
22,785
|
114,694
|
|||||||||
Accrued
liabilities
|
84,293
|
27,814
|
211,400
|
|||||||||
Indebtedness
to related party
|
-
|
100
|
-
|
|||||||||
Net
cash used in operating activities
|
(1,072,512
|
)
|
(353,546
|
)
|
(2,250,029
|
)
|
||||||
Cash
flows from investing activities:
|
||||||||||||
Investments
in unproved oil and natural gas properties
|
(5,868,790
|
)
|
-
|
(5,868,790
|
)
|
|||||||
Purchases
of property and equipment
|
(31,683
|
)
|
(45,847
|
)
|
(302,006
|
)
|
||||||
Net
cash used in investing activities
|
(5,900,473
|
)
|
(45,847
|
)
|
(6,170,796
|
)
|
||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from the sale of common stock
|
6,074,914
|
2,411,500
|
14,495,414
|
|||||||||
Payments
for offering costs
|
(830,635
|
)
|
-
|
(1,134,614
|
)
|
|||||||
Proceeds
from issuance of note payable
|
-
|
50,000
|
50,000
|
|||||||||
Proceeds
from related party debt
|
-
|
-
|
14,700
|
|||||||||
Net
cash provided by financing activities
|
5,244,279
|
2,461,500
|
13,425,500
|
|||||||||
Net
change in cash
|
(1,728,706
|
)
|
2,062,107
|
5,004,675
|
||||||||
Cash,
beginning of period
|
6,733,381
|
1,025
|
-
|
|||||||||
Cash,
end of period
|
$
|
5,004,675
|
$
|
2,063,132
|
$
|
5,004,675
|
||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Income
taxes
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Interest
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Non-cash
financing transactions:
|
||||||||||||
Common
stock issued in exchange for extinguishment of note
|
||||||||||||
payable
|
$
|
-
|
$
|
(50,000
|
)
|
$
|
(50,222
|
)
|
||||
Contributed
capital associated with forgiveness of debt by
|
||||||||||||
related
party
|
$
|
-
|
$
|
14,700
|
$
|
14,700
|
||||||
Cumulative
effect of reclassification of warrants (EITF 07-05)
|
$
|
1,649,882
|
$
|
-
|
$
|
1,649,882
|
See
accompanying notes to condensed consolidated financial statements.
F-5
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(1) 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”) and La Cortez Energy Colombia, E.U., a Colombia corporation
(“Colombia E.U.”), is an international, development stage oil and gas
exploration and production (“E&P”) company concentrating on opportunities in
South America.
LCE had
established Colombia E.U. in Colombia to explore E&P opportunities in
Colombia and Peru. On April 30, 2009, LCE elected to dissolve
Colombia E.U. The operations of Colombia E.U. were transferred to La
Cortez Colombia. The Colombian activities are being operated through
a branch of La Cortez Colombia which was established during the quarter ended
March 31, 2009.
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 7, 2008, the Company changed its name from La Cortez
Enterprises, Inc. to La Cortez Energy, Inc.
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 the financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America, 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, 2008. The
results of operations presented for the three and six months ended June 30, 2009
are not necessarily indicative of the results to be expected for the
year. Interim financial data presented herein are
unaudited.
The
Company is in the development stage and consequently its financial statements
have been prepared in accordance with Statement of Financial Accounting
Standards (“SFAS”) No.7, “Accounting and Reporting by Development Stage
Enterprises”.
Split-off
of Legacy Business
In
connection with the discontinuation of the Company’s Legacy Business and the
redirecting of its business strategy to focus on oil and gas exploration and
production opportunities in South America, the Company split off and sold all of
the assets and liabilities of the Legacy Business (the “Split-Off”) to Maria de
la Luz, LCE’s founding stockholder. The Split Off closed on August 21, 2008. As
more fully described in a Form 8-K filed by the Company with the SEC on August
21, 2008, the Company contributed all of its assets and liabilities relating to
the Legacy Business, whether accrued, contingent or otherwise, and whether known
or unknown, to a newly organized, wholly owned subsidiary, de la Luz Gourmet
Chocolates, Inc., a Nevada corporation (“Split-Off Sub”), and immediately
thereafter sold all of the outstanding capital stock of Split-Off Sub to Ms. de
la Luz in exchange for 9,000,000 shares of the Company’s common stock, $0.001
par value per share (the “Common Stock”) previously surrendered by Ms. de la Luz
and all of the Company’s Common Stock that Ms. de la Luz then owned, 2,250,000
shares. The 11,250,000 shares surrendered by Ms. de la Luz have been
cancelled.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles 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.
F-6
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Recently
Issued Accounting Standards and Developments
Effective
January 1, 2009, the Company adopted Emerging Issues Task Force Issue No.
07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock
(“EITF 07-5”). The adoption of EITF 07-5’s requirements can affect the
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 these warrants 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 EITF 07-5. The Company determined that
warrants to purchase 2,392,400 shares of common stock, issued in the September
2008 private placement, contained such provisions thereby concluding they were
not indexed to the
Company’s own stock.
In
accordance with EITF 07-5, the Company, beginning on January 1, 2009, recognized
the September 2008 private placement warrants as liabilities at their respective
fair values on each reporting date. The cumulative effect of the change in
accounting for these instruments of $396,640 was recognized as an adjustment to
the opening balance of accumulated deficit at January 1, 2009 and the transfer
of the fair value of derivative warrant instruments as of January 1, 2009 from
additional paid-in capital to derivative warrant instruments liability of
$1,253,242. The cumulative effect adjustment of $396,640 was the
difference between the amounts representing the fair value of warrants to
purchase 2,392,400 shares of common stock recognized in the consolidated balance
sheet before initial adoption of EITF 07-5 and the amounts recognized in the
consolidated balance sheet upon the initial application of EITF 07-5. The
amounts recognized in the consolidated balance sheet as a result of the initial
application of EITF 07-5 on January 1, 2009 were determined based on the amounts
that would have been recognized if EITF 07-5 had been applied from the issuance
date of the instruments. EITF 07-5 also requires that such instruments be
measured at fair value at each reporting period. The Company measured
the fair value of these instruments as of June 30, 2009, and recorded $553,384
and $610,758 unrealized gain to the statement of operations for the three months
and six months ended June 30, 2009, respectively. The Company determined the
fair values of these securities using a Black-Scholes valuation
model.
The
Company also determined that warrants to purchase a total of 5,310,000 shares of
common stock issued in the June 2009 private placement 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 EITF 07-5. As a result,
these warrants were not indexed to the Company’s own
stock. The fair value of these June 2009 warrants was recognized as
derivative warrant instruments and will be measured at fair value at each
reporting period. The Company measured the fair value of these
instruments as of June 30, 2009, and recorded $141,439 unrealized loss to the
statement of operations for both the three months and six months ended June 30,
2009. The Company determined the fair values of these securities using a
Black-Scholes valuation model.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority interests
will be re-characterized as non-controlling interests and classified as a
component of equity. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This Statement is effective as of the beginning of
an entity’s first fiscal year beginning after December 15, 2008. Effective
January 1, 2009, the Company adopted SFAS 160; however, the adoption did not
have a material impact on the Company’s consolidated financial
statements.
F-7
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161, Disclosures about Derivative Instruments
and Hedging Activities (“SFAS 161”). SFAS 161 amends and expands the
disclosure requirements of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (“SFAS 133”) . SFAS 161
requires disclosures related to objectives and strategies for using derivatives;
the fair-value amounts of, and gains and losses on, derivative instruments; and
credit-risk-related contingent features in derivative agreements. This Statement
is effective as of the beginning of an entity’s fiscal year beginning after
December 15, 2008, which will be the Company’s fiscal year 2009. The effect on
the Company’s disclosures for derivative instruments as a result of the adoption
of SFAS 161 in 2009 was not significant since the Company does not account for
any of its derivatives as cash flow hedges.
In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that permit the
use of new technologies to determine proved reserves if those technologies have
been demonstrated empirically to lead to reliable conclusions about reserves
volumes. The new requirements also will allow companies to disclose their
probable and possible reserves to investors. In addition, the new disclosure
requirements require companies to: (a) report the independence and
qualifications of its reserves preparer or auditor; (b) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and (c) report oil and natural gas reserves using an average price based
upon the prior 12-month period rather than period-end prices. The use of average
prices will affect future impairment and depletion calculations. The new
disclosure requirements are effective for annual reports on Form 10-K for fiscal
years ending on or after December 31, 2009. The Company is currently
assessing the impact that adoption of this rule will have on its financial
statements and disclosures which will vary depending on changes in commodity
prices.
In April
2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 141(R)-1 Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies. This FSP amends and clarifies SFAS No. 141 (revised 2007),
Business Combinations, to address application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. This FSP was
effective for assets or liabilities arising from contingencies in 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, 2008. The
Company has not made any acquisitions during the six months ended June 30, 2009
that would require such disclosures.
In
April 2009, the FASB issued FASB Staff Position SFAS 157-4, “Determining the Fair Value of a
Financial Asset When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”). FSP 157-4 clarified the application of SFAS 157
providing additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair
Value Measurements, when the volume and level of activity for the asset
or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
shall be effective for interim and annual reporting periods ending after
June 15, 2009, and shall be applied prospectively. Early adoption is
permitted for periods ending after March 15, 2009. Earlier adoption for
periods ending before March 15, 2009, is not permitted. If a reporting
entity elects to adopt early either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1
and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, the reporting
entity also is required to adopt early this FSP. Additionally, if the reporting
entity elects to adopt early this FSP, FSP FAS 115-2 and FAS 124-2 also must be
adopted early. This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial
adoption, this FSP requires comparative disclosures only for periods ending
after initial adoption. Revisions resulting from a change in valuation technique
or its application shall be accounted for as a change in accounting estimate
(paragraph 19 of FASB Statement No. 154, Accounting Changes and Error
Corrections). In the period of adoption, a reporting entity shall
disclose a change, if any, in valuation technique and related inputs resulting
from the application of this FSP, and quantify the total effect of the change in
valuation technique and related inputs, if practicable, by major category. The
Company does not anticipate that this pronouncement will have a material impact
on its results of operations or financial position.
F-8
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1”).
FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. This FSP shall be effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, and FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments . This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
Company adopted FSP-107-1 on June 30, 2009 and the adoption did not have a
material impact on its consolidated financial statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this
Statement sets forth: (1) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; (2)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. In accordance with SFAS 165, an entity
should apply the requirements to interim or annual financial periods ending
after June 15, 2009. The Company adopted SFAS 165 effective June 30, 2009 and
the adoption did not have a material impact on its consolidated financial
statements. The date through which subsequent events have been evaluated is
August 14, 2009, the date on which the financial statements were issued. See
Note 11, Subsequent Events,
for further discussion.
In
connection with the reissuance of the Company’s financial statements for
inclusion in this prospectus, the Company’s subsequent events have been assessed
through November 5, 2009.
In June
2009, the FASB issued
SFAS No. 168, “The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS
168”). The FASB Accounting
Standards Codification TM, (“Codification”) will become the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company will adopt the requirements of SFAS 168 in the third quarter of fiscal
year 2009.
(2) Going
Concern
At June
30, 2009, the Company had cash and cash equivalents of $5,004,675 and working
capital of $1,098,819. 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 during 2009
based upon its current operating plan and condition.
F-9
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Through
June 30, 2009, the Company has been primarily engaged in locating viable
investment prospects and recruiting personnel. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through at least June 30, 2010. 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 and Emerald projects
described in Note 3 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, 2008 filed with the SEC on
April 10, 2009 that raises substantial doubt about La Cortez’s ability to
continue as a going concern.
(3) Oil and Gas
Properties
The
Company follows the full cost method of accounting for its oil and natural gas
properties, whereby all costs incurred in connection with the acquisition,
exploration for and development of petroleum and natural gas reserves are
capitalized. Such costs include lease acquisition, geological and geophysical
activities, rentals on non-producing leases, drilling, completing and equipping
of oil and gas wells and administrative costs directly attributable to those
activities and asset retirement costs. Disposition of oil and gas properties are
accounted for as a reduction of capitalized costs, with no gain or loss
recognized unless such adjustment would significantly alter the relationship
between capital costs and proved reserves of oil and gas, in which case the gain
or loss is recognized to income.
Depletion
and depreciation of proved oil and gas properties will be calculated on the
units-of-production method based upon estimates of proved reserves. Such
calculations include the estimated future costs to develop proved reserves.
Costs of unproved properties are not included in the costs subject to depletion.
These costs are assessed periodically for impairment. As of June 30,
2009, all of the Company’s oil and natural gas properties were unproved and were
not subject to depletion.
F-10
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Agreement
with Petronorte
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., a company existing under the laws of the United
Kingdom, that entitles it to a 50% net working interest in the Putumayo 4 block
located in the south of Colombia (the “Putumayo 4 Block”). Petronorte
was the successful bidder on the Putumayo 4 Block in the Colombia Mini Round
2008 run by the Agencia Nacional de
Hidrocarburos (the “ANH”), Colombia’s hydrocarbon regulatory
agency. According to the MOU, the Company will have the exclusive
right to a fifty percent (50%) net participation interest in the Putumayo 4
Block and in the exploration and production contract (the “E&P Contract”)
after ANH production participation, and will execute an assignment agreement and
a joint operating agreement (the “Definitive Agreements”) with Petronorte
relating to the Putumayo 4 Block by no later than August 30, 2009.
Petronorte signed an E&P Contract with the ANH in February
2009. Petronorte will be the “operator” of the E&P
Contract.
The
Definitive Agreements are expected to provide that each of La Cortez and
Petronorte will have a fifty percent (50%) working interest in the Putumayo 4
Block, responsible for fifty percent (50%) of the costs incurred under the
E&P Contract, and a fifty percent (50%) revenue interest entitling La Cortez
to fifty percent (50%) of the revenues originated from the Putumayo 4 Block, net
of La Cortez’s and Petronorte’s royalty payments to the ANH, except that La
Cortez 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 Block, in
accordance with the expected Phase 1 minimum exploration program under the
E&P Contract. The Company expects to fund approximately U.S. $2.3 million
for Phase 1 seismic reprocessing and acquisition activities in the Putumayo 4
Block during the remainder of 2009. If a prospective Phase 1 well in
a prospect in the Putumayo 4 Block proves productive, Petronorte will reimburse
La Cortez for its share of these seismic costs paid by La Cortez in excess of La
Cortez’ agreed-upon 50% share of total costs, with production from the Putumayo
4 Block. La Cortez has not been involved with any activity with
regards to the Putumayo 4 Block during the three and six months ended June 30,
2009.
Provided
that the Company has satisfactorily complied with payment requirements relating
to its share of all costs incurred to the date of its request, Petronorte will
submit a request to the ANH to assign a 50% interest in the E&P Contract to
La Cortez and will assist it in obtaining such assignment through reasonable
means.
Emerald
Farm-In Agreement
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”) in the
Putumayo Basin in Southwest Colombia.
As
consideration for its 20% participating interest, the Company reimbursed Emerald
$948,000 of its Phase 1 sunk costs. This amount was paid to Emerald
on February 12, 2009 and was capitalized as part of oil and natural gas
properties. Additionally, the Company will bear 65% of the Maranta
block Phase 2 costs, of which the Company’s portion of the exploratory well
drilling costs were estimated at approximately U.S. $4.875 million, U.S. $2.433
million of which La Cortez paid to Emerald on February 18, 2009 (capitalized as
part of oil and natural gas properties) and U.S. $2.433 million of which La
Cortez paid to Emerald on May 15, 2009.
On July
23, 2009, based on the preliminary results of the drilling of the Mirto-1 well,
the Company decided to participate with Emerald in the completion and evaluation
of Mirto-1. In accordance with the terms of the Maranta Block Farm-In
Agreement, the Company will bear 65% of the Maranta Block Phase 2 costs,
including 65% (U.S. $1.2285 million) of the currently estimated U.S. $1.8
million Mirto-1 completion costs. The Company made this U.S. $1.2285
million payment to Emerald on July 27, 2009. 65% of any additional
Phase 2 costs will be paid by the Company as needed, following cash calls by
Emerald. If La Cortez Colombia fails to make required payments in a
timely way, it could be subject to a reduction in its 20% Participating
Interest, depending on the circumstances. After the Phase 2 work is
completed, La Cortez Colombia will pay 20% of all subsequent costs related to
the Maranta block. Once the Company has the final Mirto-1 evaluation results,
the Company will ask Emerald to file a request with the ANH to have the
Participating Interest in the Maranta Block officially assigned from Emerald to
La Cortez Energy Colombia (the “Assignment”). On August 4, 2009, La
Cortez Colombia paid an additional U.S. $243,300 to Emerald for overhead costs,
representing 5% of total expenditures, in accordance with the Farm-In
Agreement. The Company expects that the evaluation of the Mirto-1
exploratory well across all of the target reservoirs should be completed in
approximately two to three weeks.
F-11
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
La Cortez
Colombia expects to sign a joint operating agreement (the “JOA”) with Emerald
with respect to the Maranta Block once the ANH has approved the
Assignment. If the ANH does not approve the Assignment, Emerald and
the Company have agreed that they will use their 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 JOA, that shall privately govern the relations between
the parties with respect to the Maranta Block and which will not require ANH
approval.
(4) Related Party
Transactions
Forgiveness
of indebtedness to related party
During
2006 and 2007, the then sole officer and director of the Company advanced a
total of $14,700 to the Company for working capital. All of these advances bore
no interest and were payable on demand. On June 30, 2008, the former sole
officer and director forgave the total outstanding advances of $14,700 with no
interest and no penalty. Accordingly, the Company eliminated the
$14,700 payable and treated the debt forgiveness as a capital contribution and
recorded the amount as additional paid in capital during 2008.
Common
Stock sales
On July
28, 2006, the Company sold 11,250,000 (after giving effect to the common stock
split referred to in Note 5 below) shares of its Common Stock to its then sole
officer and director for $9,000, or $.0008 (post-split) per share.
On
February 7, 2008, the Company sold 1,150,000 (after giving effect to the common
stock split referred to in Note 5 below) shares of its Common Stock to its newly
appointed, then sole officer and director for $11,500, or $.01 (post-split) per
share.
On
September 10, 2008, as part of its 2008 Unit Offering, the Company sold 400,000
Units (see Note 5), at a price of $1.25 per Unit, for a total of $500,000 to its
Chairman and Vice President and 50,000 Units for a total of $62,500 to its
President and Chief Executive Officer.
On June
19, 2009, as part of its 2009 Unit Offering, the Company sold 160,000 Units (see
Note 5), at a price of $1.25 per Unit, for a total of $200,000 to its Chairman
and Vice President.
Contributed
services
During
the year ended December 31, 2008, the Company’s Chairman of the Board and
interim CFO contributed services for which the Company determined the fair value
to be $23,333, and, accordingly, recognized such amount as compensation
expense.
(5) Shareholders’
Equity
Common
Stock split
On
February 8, 2008, the articles of incorporation of LCE were amended to increase
the authorized capital stock of LCE to 310,000,000 shares, of which 300,000,000
are common stock with a par value of $0.001 per share and 10,000,000 shares are
preferred stock with a par value $0.001 per share. The Board of
Directors is authorized to fix or alter the designation, powers, preferences and
rights of the preferred stock. The Board of Directors has made no
such designation as of June 30, 2009.
On
February 7, 2008, the Company’s Board of Directors approved a 5-for-1 forward
stock split on each share of its common stock issued and outstanding at the
close of business on February 21, 2008. Shares issued prior to February 21, 2008
have been retroactively restated to reflect the impact of the stock
split.
F-12
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Common
Stock issued for services
On
February 7, 2008, the Company issued 1,000,000 (post-split) shares of its common
stock in exchange for consulting services, which included assisting the Chairman
in building the Board of Directors and senior management team for the Company.
The transaction was valued in accordance with EITF 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.” Management determined
the fair value of the stock issued to the consultant at $1.00 (post-split) per
share based on the stock price received in the Offering (defined below) on March
14, 2008. Accordingly, stock-based compensation expense of $1,000,000 was
recognized in the accompanying condensed consolidated statement of operations
for the six months ended June 30, 2008.
Common
Stock sales
On July
28, 2006, the Company sold 11,250,000 (post-split) shares of Common Stock to its
then sole officer and director for $9,000, or $.0008 (post split) per
share.
On
December 12, 2006, the Company sold 9,500,000 (post split) shares of Common
Stock at a price of $.002 (post split) per share for total proceeds of $19,000
($13,845 net after offering expenses). The offering was made pursuant to the
Company’s SB-2 registration statement that became effective on December 4,
2006.
On
February 7, 2008, the Company sold 1,150,000 (post split) shares of Common Stock
to its then newly appointed sole officer and director for $11,500, or $.01
(post-split) per share.
On
February 19, 2008 the Board of Directors authorized the Company to offer up to
2,000,000 shares of Common Stock to a limited number of accredited investors
and/or non-U.S persons at a price of $1.00 per share, in a private placement
offering (the “Offering”) pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act, Regulation S under the
Securities Act and/or Section 4(2) of the Securities Act. Because the offering
was oversubscribed, the Company’s Board of Directors further authorized to
increase the size of the Offering to up to 3,000,000 shares of Common Stock. On
March 14, 2008, the Company issued a total of 2,400,000 shares of Common Stock
for total proceeds to the Company of $2,400,000 ($2,314,895 net after offering
expenses).
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. The Units were
offered to a limited number of accredited investors and non-U.S persons, in a
private placement offering pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”), Regulation S under the Securities Act and/or Section 4(2) of
the Securities Act. 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, for total proceeds
to the Company of $5,981,000 ($5,762,126 net after offering expenses), 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. That is, at any time on or after the date
that is six months after the Closing, and only if the Company has not filed a
registration statement enabling the investors to exercise their “piggyback”
registration rights, 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.
F-13
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company expects 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 shall 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 June 30, 2009.
On May
11, 2009 the Board of Directors authorized the Company to offer up to a maximum
of 12,000,000 units (the “2009 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. The Units were offered to
a limited number of accredited investors and non-U.S persons, in a private
placement offering pursuant to the exemption from registration provided by Rule
506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”), Regulation S under the Securities Act and/or Section 4(2) of
the Securities Act. 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,
for total proceeds to the Company of $6,074,914 ($5,244,279 net after offering
expenses), and warrants to purchase 4,860,000 shares of Common
stock. The Company offered the Units directly and through finders
(the “Finders”). Also at the Initial Closing, the Company paid
Finders a commission in cash of ten percent (10%) of the principal amount of
each Unit sold by them in the Offering, for an aggregate amount of $562,500,
plus 450,000 five-year warrants exercisable at a price of $1.25 per
share.
The
Company determined that warrants to purchase a total of 5,310,000 shares of
common stock issued in the 2009 Unit Offering 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 EITF 07-5. As a result,
these warrants were not indexed to the Company’s own
stock. On June 19, 2009, the fair value of these warrants was
determined to be approximately $2,482,412, which was recorded as a derivative
warrant instruments liability. The Company also recorded $4,860 as
par value to common stock and $2,757,007 to additional paid in capital as part
of the 2009 Unit Offering transaction.
The table
below reflects the breakdown of the components of gross proceeds from the
Company’s Initial Closing of its 2009 Unit Offering:
Par
value of common stock issued
|
$
|
4,860
|
||
Paid-in
capital
|
2,757,007
|
|||
Derivative
warrant instruments
|
2,482,412
|
|||
Offering
expenses
|
830,635
|
|||
Total
gross proceeds
|
$
|
6,074,914
|
F-14
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company entered into a registration rights agreement with the investors
purchasing Units in the Initial Closing. The registration rights
agreement requires that the Company prepare and file with the Securities and
Exchange Commission (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.
Common
Stock issued to extinguish debt
On
February 8, 2008, the Corporation issued a $50,000 promissory note to Milestone
Enhanced Fund Ltd. (“Milestone”) in exchange for Milestone’s $50,000 working
capital loan to the Company. The note was due within one year of its date of
issuance and carried a 9% annual interest rate. On February 25, 2008, the
Company issued 100,444 shares of Common Stock in exchange for full payment of
the note and accrued interest. This transaction was valued by the Company’s
Board of Directors at the fair value of the Common Stock issued, or 100,000
shares at $.50/share for the principal and 444 shares at $.50/share for the
accrued interest which amounted to $222.
Common
Stock cancelled
On
February 26, 2008, 9,000,000 shares of LCE Common Stock owned by the founding
stockholder were surrendered to LCE and cancelled.
On August
21, 2008, 2,250,000 shares of LCE common stock owned by the founding director,
were surrendered in exchange for her interest in a split-off subsidiary of LCE,
as more fully described in a Form 8-K of the same date filed by the Company with
the SEC. The net assets of the Split-Off Subsidiary were $Nil as of
August 21, 2008. Therefore, this transaction was valued at
$Nil.
2008
Equity Incentive Plan
The
Company’s 2008 Equity Incentive Plan (the “2008 Plan”) provides for the grant of
incentive stock options to employees of the Company and non-statutory stock
options, restricted stock and stock appreciation rights to employees, directors
and consultants of the Company and of an affiliate or subsidiary of the Company.
A maximum of 4,000,000 shares of common stock are available for issuance under
the 2008 Plan. The 2008 Plan, originally adopted and approved by the Company’s
Board of Directors and majority stockholders on February 7, 2008 to enable
grants to issue up to 2,000,000 shares of our Common Stock, was amended and
restated by approval of the Company’s Board of Directors on November 7, 2008 to,
among other things, increase the number of shares that may be issued under the
2008 Plan to 4,000,000. The Company’s stockholders have not yet
approved this increase. As of June 30, 2009, options had been granted
under the 2008 Plan exercisable for an aggregate of 2,385,000 shares of common
stock.
The
Company determines the fair value of stock option awards on the date of grant in
accordance with Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment.
Stock
Option Awards
On July
1, 2008, the Company granted options to purchase (i) 1,000,000 shares of its
Common Stock to the Company’s President and Chief Executive Officer, (ii)
175,000 shares of its Common Stock to the Company’s Chairman and Vice President,
(iii) 100,000 shares of its Common Stock to a newly appointed director, and (iv)
an additional 175,000 shares of its Common Stock to three employees of its
Colombian subsidiary. The 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 $2.20.
F-15
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On July
23, 2008, the Company granted options to purchase (i) 100,000 shares of its
Common Stock to each of two newly appointed directors, and (ii) 150,000 shares
to a consultant to the Company. These were granted with an exercise price equal
to $2.47. An additional 75,000 options to purchase shares of its
Common Stock was granted on August 1, 2008 to one employee of its Colombian
subsidiary, with an exercise price equal to $2.57. The options vest pro-rata in
three annual installments beginning on the first anniversary of the date of
grant and have a 10 year term.
On
November 7, 2008, the Company granted options to purchase (i) 100,000 shares of
its common stock to a newly appointed director, and (ii) 50,000 shares to one
employee. The 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 $1.71. The 50,000
options granted to the employee were forfeited during the three months ended
March 31, 2009.
On
January 7, 2009, the Company granted options to purchase 200,000 shares of its
common stock to the Company’s new Production and Operations
Manager. The 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 $1.50.
On May 1,
2009, the Company granted options to purchase 50,000 shares of its Common Stock
to its geologist. 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 $1.59.
On June
16, 2009, the Company granted options to purchase 160,000 shares of its Common
Stock to a consultant to the Company. These were granted with an exercise price
equal to $2.00 per share, with one-third of the options vesting on grant date
and the remaining options to vest pro-rata over a period of twelve
months.
Stock
option activity summary 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, 2007
|
—
|
—
|
||||||||||||||
Granted
|
2,025,000
|
$
|
2.22
|
|||||||||||||
Exercised
|
—
|
—
|
||||||||||||||
Forfeited
|
—
|
—
|
||||||||||||||
Expired
|
—
|
—
|
||||||||||||||
Outstanding
at December 31, 2008
|
2,025,000
|
$
|
2.22
|
9.54
|
$
|
—
|
||||||||||
Granted
|
410,000
|
$
|
1.71
|
|||||||||||||
Exercised
|
—
|
—
|
||||||||||||||
Forfeited
|
(50,000
|
)
|
$
|
1.71
|
||||||||||||
Expired
|
—
|
—
|
||||||||||||||
Outstanding
at June 30, 2009
|
2,385,000
|
$
|
2.15
|
9.16
|
$
|
—
|
Except
for 53,334 options granted to a consultant on June 16, 2009 which vested on
grant date, none of the options outstanding at June 30, 2009 are vested or
exercisable. During the six months ended June 30, 2009, the Company
recognized stock-based compensation expense of $318,953 related to stock
options. As of June 30, 2009, there was approximately $1,296,240 of
total unrecognized compensation cost related to non-vested stock options which
is expected to be recognized over a weighted-average period of approximately
2.15 years.
F-16
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The fair
value of the options granted during 2008 and the six month period ended June 30,
2009 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)
|
$1.17
- $1.37
|
|||
Risk-free
interest rate (2)
|
2.02
– 3.77
|
%
|
||
Dividend
yield (3)
|
0.00
|
%
|
||
Volatility
factor (4)
|
79.85%
- 90.00
|
%
|
||
Expected
life (5)
|
6.5
years
|
|||
Expected
forfeiture rate (6)
|
10
|
%
|
(1)
|
The estimated market value of the
stock on the date of grant was based on a calculation by management after
consideration of price per share received in the private offerings and
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.
|
(5)
|
The expected life was estimated
by management as the midpoint between the vesting date and the expiration
date of the options.
|
(6)
|
Management estimated that the
forfeiture rate at 10% based on its experience with companies in similar
industries and regions.
|
Warrants
for Services
During
the six months ended June 30, 2009, as compensation for services received, the
Company issued warrants to purchase 5,000 shares of common stock at an exercise
price of approximately $1.49. The warrants are exercisable at any
time starting from the date of issuance and have a five year
term. During the six months ended June 30, 2009, the Company
recognized stock-based compensation expense of $5,692 related to these warrants
based on the Black-Scholes option pricing model.
(6) Derivative Warrant Instruments
(Liabilities)
In the
September 2008 and June 2009 private placements, the Company incurred
liabilities for the estimated fair value of derivative warrant instruments in
the form of warrants (see Note 1). The estimated fair value of the
derivative warrant instruments was calculated using the Black-Scholes model and
such estimates were revalued at each balance sheet date, with changes in value
recorded as unrealized gains or losses in non-operating income
(expense).
During
the three and six months ended June 30, 2009, a $411,945 and $469,319 decrease,
respectively, in the fair value of the derivative liabilities was recorded as
unrealized gain on fair value of derivative warrant instruments in the
accompanying condensed consolidated statement of operations.
Activity
for derivative warrant instruments during the six months ended June 30, 2009 and
as of December 31, 2008 and June 30, 2009 was as follows:
F-17
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
December
31, 2008
|
Cumulative Effect
of Change in
Accounting
Principle
|
Activity
during the
period
|
Increase
(Decrease) in
Fair Value of
Derivative
Liability
|
June 30, 2009
|
||||||||||||||||
Derivative
instruments – warrants
|
$
|
—
|
$
|
1,649,882
|
$
|
2,482,412
|
$
|
(469,319)
|
$
|
3,662,975
|
||||||||||
$
|
—
|
$
|
1,649,882
|
$
|
2,482,412
|
$
|
(469,319)
|
$
|
3,662,975
|
The fair
value of the derivative warrant instruments is estimated using the Black-Scholes
option pricing model with the following assumptions as of June 30,
2009:
Common
stock issuable upon exercise of warrants
|
7,702,400
|
|||
Estimated
market value of common stock on measurement date (1)
|
$0.86
|
|||
Exercise
price
|
$1.25
- $2.05
|
|||
Risk
free interest rate (2)
|
3.19
|
%
|
||
Warrant
lives in years
|
4.20
– 4.97
|
|||
Expected
volatility (3)
|
90.00
|
%
|
||
Expected
dividend yields (4)
|
None
|
(1)
|
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.
|
(2)
|
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.
|
(3)
|
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.
|
(4) 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.
(7) Fair Value
Measurements
As
defined in SFAS 157, 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. SFAS 157 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:
Level
1:
|
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.
|
Level
2:
|
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.
|
F-18
LA CORTEZ ENERGY,
INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Level
3:
|
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 instruments
related to the warrants valued in accordance with EITF
07-05. La Cortez does not have sufficient corroborating
evidence to support classifying these assets and liabilities as Level 1 or
Level 2.
|
As
required by 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 the Black-Scholes model (see Note 6).
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 June 30, 2009:
|
|
Fair Value Measurements at June 30, 2009 Using
|
||||||||||||||
|
|
Quoted Prices
in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total Carrying
Value as of
|
|
||||
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
June 30, 2009
|
|
||||
|
|
(In thousands)
|
||||||||||||||
Derivative
instruments – warrants
|
$
|
-
|
$
|
-
|
$
|
3,662,975
|
$
|
3,662,975
|
||||||||
Total
|
$
|
-
|
$
|
-
|
$
|
3,662,975
|
$
|
3,662,975
|
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
|
Six Months Ended
|
||||||||||||||
|
June 30,
|
June 30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
(In thousands)
|
(In thousands)
|
||||||||||||||
Beginning balance
|
$
|
(1,592,508
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||
Total
gains or (losses)
|
411,945
|
-
|
469,319
|
-
|
||||||||||||
Settlements
|
-
|
-
|
-
|
-
|
||||||||||||
Additions
|
(2,482,412
|
)
|
-
|
(2,482,412
|
)
|
-
|
||||||||||
Transfers
(1)
|
-
|
(1,649,882
|
)
|
-
|
||||||||||||
Ending
balance
|
$
|
(3,662,975
|
)
|
$
|
-
|
$
|
(3,662,975
|
)
|
$
|
-
|
||||||
Change
in unrealized gains (losses) included in earnings
relating to derivatives still held as of June 30, 2009 and
2008
|
$
|
411,945
|
$
|
-
|
$
|
469,319
|
$
|
-
|
F-19
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
(1)
|
Represents the $1,649,882
cumulative effect change in accounting principle as a result of the
Company adopting EITF 07-5 effective January 1,
2009.
|
(8) Income Taxes
The
Company accounts for income taxes under the provisions of SFAS
No. 109, Accounting for
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.
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 June 30, 2009. 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.
(9) Earnings (Loss) Per
Share
The
Company accounts for earnings (loss) per share in accordance with SFAS
No. 128, Earnings per
Share, which establishes the requirements for presenting earnings per
share (“EPS”). SFAS No. 128 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, warrants and convertible securities 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 continuing operations exists, as in the
periods presented in these condensed consolidated financial statements,
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
six months ended June 30, 2009, the Company had potentially dilutive shares
outstanding, including 2,385,000 options to purchase shares of common stock,
warrants to purchase 7,702,400 shares of common stock, and warrants to purchase
5,000 shares of common stock. For the six months ended June 30,
2009, there was no difference between basic and diluted loss per shares as the
effect of these potential common shares were anti-dilutive due to the net loss
during the period. There were no dilutive shares outstanding as of June 30,
2008.
(10) 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 it
believes, if determined in a manner adverse to La Cortez, could have a potential
material adverse effect on its financial condition, results of operations or
cash flows.
Additionally,
La Cortez 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 La Cortez could be adversely affected.
F-20
LA
CORTEZ ENERGY, INC.
(a
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Employment
Agreement
The
Company has entered into an employment agreement effective as of June 1, 2008
(the “Employment Agreement”) with Andres Gutierrez pursuant to which Mr.
Gutierrez was appointed as its President and Chief Executive Officer, Pursuant
to the Employment Agreement, Mr. Gutierrez’s base annual compensation has
been set at U.S. $250,000, which amount may be increased annually at the
discretion of the Board of Directors. This annual compensation is paid in
Colombian Pesos, which may result in foreign exchange rate fluctuations. The
Company expects that such exchange rate fluctuations to be
immaterial.
In
addition, Mr. Gutierrez is eligible to receive an annual cash bonus of up to
fifty percent (50%) of his applicable base salary. Mr. Gutierrez’s annual bonus
(if any) shall be in such amount (up to the limit stated above) as the Board of
Directors may determine in its sole discretion, based upon Mr. Gutierrez’s
achievement of certain performance milestones to be established annually by the
Board of Directors in discussion with Mr. Gutierrez (the
“Milestones”).
Under the
Employment Agreement, the Company agreed to grant Mr. Gutierrez an option to
purchase an aggregate of 1,000,000 shares of our common stock under our 2008
Equity Incentive Plan (the “2008 Plan”) as of June 1, 2008. The option was
granted on July 1, 2008. This option vests in three equal annual installments
beginning on July 1, 2009 and is exercisable at $2.20 per share.
The
initial term of the Employment Agreement expired on June 1, 2009, and was
automatically extended by one year, until May 31, 2010. In the event of a
termination of employment “without cause” by the Company during the first 12
months following June 1, 2008, Mr. Gutierrez shall receive: (i) twelve
(12) months of his base salary; plus (ii) to the extent the Milestones
are achieved or, in the absence of Milestones, the Board of Directors has, in
its sole discretion, otherwise determined an amount for Mr. Gutierrez’s bonus
for the initial 12 months of his employment, a pro rata portion of his annual
bonus for the initial 12 months of his employment, to be paid to him on the date
such annual bonus would have been payable to him had he remained employed by the
Company; plus (iii) any other accrued compensation and Benefits, as defined
in the Employment Agreement. In the event of a termination of employment by Mr.
Gutierrez for “good reason”, as defined in the Employment Agreement, Mr.
Gutierrez shall receive: (i) twelve (12) months of his then in effect
base salary, subject to his compliance with the non-competition,
non-solicitation and confidentiality provisions of the Employment
Agreement. As of June 30, 2009, the Company has accrued a bonus
payable to Mr. Gutierrez in the amount of $135,416 representing thirteen
months bonus accrual.
(11) Subsequent Events
On July
1, 2009, the Company granted under the Amended and Restated 2008 Plan options to
purchase 100,000 shares of its Common Stock to its exploration 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 $1.65.
On July
31, 2009, the Company completed its final closing (the “Final Closing”) of the
2009 Unit Offering. At the Final Closing, the Company closed on the
sale of 205,000 Units and received aggregate gross proceeds of $256,250
($230,530 net after offering expenses) from the sale of these
Units. The offering was also terminated on July 31,
2009.
On August
13, 2009 it was reported in the press that Sinochem Corp., a chemicals trading
company organized in China (“Sinochem”), will acquire Emerald Energy and that
Emerald Energy’s board of directors has recommended to its shareholders that
they accept Sinochem’s offer. The Company cannot determine at this
time what impact, if any, a Sinochem acquisition of Emerald Energy would have on
its working interest agreement with Emerald.
F-21
Report
of Independent Registered Public Accounting Firm
Board of
Directors
La Cortez
Energy, Inc.
Bogotá,
Colombia
We have
audited the consolidated balance sheet of La Cortez Energy, Inc. (a Nevada
corporation in the development stage) as of December 31, 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the year ended December 31, 2008 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the period from inception
(June 9, 2006) to December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
consolidated financial statements of La Cortez Energy, Inc. for the period from
inception (June 9, 2006) to December 31, 2007. Such statements are
included in the cumulative inception to December 31, 2008 totals of the
consolidated statements of operations and cash flows and reflect a net loss of
0.01% of the related cumulative totals. Those consolidated statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts for the period from inception (June 9, 2006) to
December 31, 2007 included in the cumulative totals, is based solely upon
the report of the other auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit and the
report of other auditors provide a reasonable basis for our
opinion.
In our
opinion, based on our audit and the report of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of La Cortez Energy, Inc. at December 31, 2008 and the
results of its operations and its cash flows for the year then ended and for the
period from inception (June 9, 2006) to December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage with limited
operating history, no revenues and no historical profitability, and has limited
available funds that raise substantial doubt about its ability to continue as a
going concern. Management’s plan in regard to these matters is also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
BDO Seidman, LLP
Houston,
Texas
April 8,
2009
F-22
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders:
La Cortez
Enterprises, Inc.
We have
audited the balance sheet of La Cortez Enterprises, Inc. (a development stage
company) as of December 31, 2007, and the related statements of operations,
changes in shareholders’ deficit and cash flows for the year ended December 31,
2007, the period from June 9, 2006 (inception) through December 31, 2006, and
the period from June 9, 2006 (inception) through December 31, 2007 (not
separately included herein). These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of La Cortez Enterprises, Inc. as of
December 31, 2007, and the results of its operations and its cash flows for the
year ended December 31, 2007, the period from June 9, 2006 (inception) through
December 31, 2006, and the period from June 9, 2006 (inception) through December
31, 2007 in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered operating losses since inception and has a limited
operating history, which raises a substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Cordovano and Honeck LLP
Cordovano
and Honeck LLP
Englewood,
Colorado
February
11, 2008
F-23
LA
CORTEZ ENERGY, INC.
(A
Development Stage Company)
Consolidated
Balance Sheets
December 31,
|
||||||||
2008
|
2007
|
|||||||
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
6,733,381
|
$
|
1,025
|
||||
Prepaid
expenses and other
|
20,132
|
500
|
||||||
Total
current assets
|
6,753,513
|
1,525
|
||||||
Property
and equipment, net of accumulated depreciation of $38,719 and $-,
respectively
|
231,604
|
—
|
||||||
$
|
6,985,117
|
$
|
1,525
|
|||||
Liabilities
and Stockholders’ Equity (Deficit)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
29,685
|
$
|
—
|
||||
Accrued
liabilities
|
127,107
|
1,000
|
||||||
Indebtedness
to related party
|
—
|
14,600
|
||||||
Total
liabilities
|
156,792
|
15,600
|
||||||
Commitments
(Note 8)
|
-
|
-
|
||||||
Stockholders’
equity (deficit):
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or
outstanding
|
-
|
-
|
||||||
Common
stock, $0.001 par value; 300,000,000 and 300,000,000 shares authorized,
respectively, and 18,935,244 and 20,750,000 shares issued and outstanding,
respectively
|
18,935
|
20,750
|
||||||
Additional
paid-in capital
|
9,431,994
|
7,250
|
||||||
Deficit
accumulated during development stage
|
(2,622,604
|
)
|
(42,075
|
)
|
||||
Total
stockholders’ equity (deficit)
|
6,828,325
|
(14,075
|
)
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
6,985,117
|
$
|
1,525
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-24
LA
CORTEZ ENERGY, INC.
(A
Development Stage Company)
Consolidated
Statements of Operations
For
the years ended December 31, 2008 and 2007 and
For
the period from June 9, 2006 (Inception) through December 31, 2008
For the Years Ended December 31,
|
From
June 9, 2006
(Inception)
Through
December 31,
|
|||||||||||
2008
|
2007
|
2008
|
||||||||||
Expenses
|
||||||||||||
General
and administrative
|
$
|
2,649,312
|
$
|
28,836
|
$
|
2,691,387
|
||||||
Loss
from operations
|
(2,649,312
|
)
|
(28,836
|
)
|
(2,691,387
|
)
|
||||||
Other
income (expense):
|
||||||||||||
Interest
income
|
69,005
|
—
|
69,005
|
|||||||||
Interest
expense
|
(222
|
)
|
—
|
(222
|
)
|
|||||||
Net
loss
|
$
|
(2,580,529
|
)
|
$
|
(28,836
|
)
|
$
|
(2,622,604
|
)
|
|||
Basic
and diluted loss per share
|
$
|
(0.15
|
)
|
$
|
(0.00
|
)
|
N/A
|
|||||
Basic
and diluted weighted average common shares outstanding
|
17,730,971
|
20,750,000
|
N/A
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-25
LA
CORTEZ ENERGY, INC.
(A
Development Stage company)
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)
For
the period from June 9, 2006 (Inception) through December 31, 2008
Deficit
|
||||||||||||||||||
Accumulated
|
||||||||||||||||||
Additional
|
During
|
|||||||||||||||||
Common Stock
|
Paid-in
|
Development
|
||||||||||||||||
Shares
|
Par Value
|
Capital
|
Stage
|
Total
|
||||||||||||||
Balance
at June 9, 2006 (inception)
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||||
July
2006, common stock sold to president/ sole director at $.0008 per
share
|
*
|
11,250,000
|
11,250
|
(2,250
|
)
|
—
|
9,000
|
|||||||||||
December
2006, common stock sold pursuant to a SB-2 registered offering at
$.002/share
|
*
|
9,500,000
|
9,500
|
9,500
|
—
|
19,000
|
||||||||||||
Net
loss, inception through December 31, 2006
|
—
|
—
|
—
|
(13,239
|
)
|
(13,239
|
)
|
|||||||||||
Balance
at December 31, 2006
|
*
|
20,750,000
|
20,750
|
7,250
|
(13,239
|
)
|
14,761
|
|||||||||||
Net
loss, year ended December 31, 2007
|
—
|
—
|
—
|
(28,836
|
)
|
(28,836
|
)
|
|||||||||||
Balance
at December 31, 2007
|
*
|
20,750,000
|
20,750
|
7,250
|
(42,075
|
)
|
(14,075
|
)
|
||||||||||
February
2008, common stock sold to an officer at $.01 per share
|
*
|
1,150,000
|
1,150
|
10,350
|
—
|
11,500
|
||||||||||||
February
2008, common stock issued to a consultant in exchange for services at
$1.00 per share
|
*
|
1,000,000
|
1,000
|
999,000
|
—
|
1,000,000
|
||||||||||||
February
2008, cancellation of former officer's shares
|
(9,000,000
|
)
|
(9,000
|
)
|
9,000
|
—
|
—
|
|||||||||||
February
2008, common stock issued in exchange for extinguishment of debt and
accrued interest at $.50 per share
|
100,444
|
100
|
50,122
|
—
|
50,222
|
|||||||||||||
March
2008, common stock sold in private placement offering at $1.00 per share,
less offering costs totaling $85,105
|
2,400,000
|
2,400
|
2,312,495
|
—
|
2,314,895
|
|||||||||||||
June
2008, indebtedness forgiven by related party
|
—
|
—
|
14,700
|
—
|
14,700
|
|||||||||||||
August
2008, cancellation of former officer's shares
|
(2,250,000
|
)
|
(2,250
|
)
|
2,250
|
—
|
—
|
|||||||||||
September
2008, common stock sold in private placement offering at $1.25 per share,
less offering costs totaling $218,874
|
4,784,800
|
4,785
|
5,757,341
|
—
|
5,762,126
|
|||||||||||||
Stock
based compensation
|
—
|
—
|
246,153
|
—
|
246,153
|
|||||||||||||
Contributed
services by interim CFO
|
—
|
—
|
23,333
|
—
|
23,333
|
|||||||||||||
Net
loss, year ended December 31, 2008
|
—
|
—
|
—
|
(2,580,529
|
)
|
(2,580,529
|
)
|
|||||||||||
Balance
at December 31, 2008
|
18,935,244
|
$
|
18,935
|
$
|
9,431,994
|
$
|
(2,622,604
|
)
|
$
|
6,828,325
|
The
accompanying notes are an integral part of these consolidated financial
statements.
*
Restated for 5:1 forward stock split (see Note 6).
F-26
LA
CORTEZ ENERGY, INC.
(A
Development Stage company)
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2008 and 2007 and
for
the period from June 9, 2006 (Inception) through December 31, 2008
Year Ended December 31,
|
From
June 9, 2006
(Inception)
through
December 31,
|
|||||||||||
2008
|
2007
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$
|
(2,580,529
|
)
|
$
|
(28,836
|
)
|
$
|
(2,622,604
|
)
|
|||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
|
38,719
|
—
|
38,719
|
|||||||||
Stock-based
compensation
|
1,246,153
|
—
|
1,246,153
|
|||||||||
Contributed
services by interim CFO
|
23,333
|
—
|
23,333
|
|||||||||
Common
stock issued in exchange for interest expense
|
222
|
—
|
222
|
|||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Prepaid
expenses and other
|
(19,632
|
)
|
—
|
(20,132
|
)
|
|||||||
Accounts
payable
|
29,685
|
(500
|
)
|
29,685
|
||||||||
Accrued
liabilities
|
126,107
|
(2,100
|
)
|
127,107
|
||||||||
Net
cash used in operating activities
|
(1,135,942
|
)
|
(31,436
|
)
|
(1,177,517
|
)
|
||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of property and equipment
|
(270,323
|
)
|
—
|
(270,323
|
)
|
|||||||
Net
cash used in investing activities
|
(270,323
|
)
|
—
|
(270,323
|
)
|
|||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from the sale of common stock
|
8,392,500
|
—
|
8,420,500
|
|||||||||
Payments
for common stock offering costs
|
(303,979
|
)
|
—
|
(303,979
|
)
|
|||||||
Proceeds
from issuance of note payable
|
50,000
|
—
|
50,000
|
|||||||||
Proceeds
from officer advances
|
100
|
12,600
|
14,700
|
|||||||||
Net
cash provided by financing activities
|
8,138,621
|
12,600
|
8,181,221
|
|||||||||
Net
increase (decrease) in cash
|
6,732,356
|
(18,836
|
)
|
6,733,381
|
||||||||
Cash,
beginning of period
|
1,025
|
19,861
|
—
|
|||||||||
Cash,
end of period
|
$
|
6,733,381
|
$
|
1,025
|
$
|
6,733,381
|
||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Income
taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Non-cash
financing transactions:
|
||||||||||||
Common
stock issued in exchange for extinguishment of note payable and accrued
interest
|
$
|
(50,222
|
)
|
$
|
—
|
$
|
(50,222
|
)
|
||||
Contributed
capital associated with forgiveness of debt by related
party
|
$
|
14,700
|
$
|
—
|
$
|
14,700
|
The
accompanying notes are an integral part of these consolidated financial
statements..
F-27
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
1 – Organization, Basis of Presentation and Summary of Significant Accounting
Policies
Organization
and Basis of Presentation
La Cortez
Energy, Inc. (“LCE,” and together with its subsidiaries, La Cortez Energy
Colombia, Inc., a Cayman Islands corporation (“La Cortez Colombia”), and La
Cortez Energy Colombia, E.U., a Colombia corporation, the “Company” or “La
Cortez”) is an international, early stage oil and gas exploration and production
(“E&P”) company concentrating on opportunities in South America. The Company
had established a subsidiary in Colombia to explore E&P opportunities in
Colombia and Peru. Subsequent to year end, the Company elected to
dissolve its Colombian subsidiary. The assets of the Colombian entity
will be retained by La Cortez Colombia and the Company operations in Colombia
will be operated through a branch of La Cortez Colombia.
LCE was
incorporated on June 9, 2006 in the State of Nevada. LCE 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 7, 2008, LCE changed its name from La Cortez
Enterprises, Inc. to La Cortez Energy, Inc.
Development
Stage
The
consolidated financial statements presented herein have been prepared by the
Company in accordance with U.S. generally accepted accounting principles
(“GAAP”) and the accounting policies set forth in these financial statements.
The Company is in the development stage and consequently its financial
statements have been prepared in accordance with Statement of Financial
Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by Development
Stage Enterprises”.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles 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.
Split-off
of Legacy Business
In
connection with the discontinuation of the Company’s Legacy Business and the
redirecting of its business strategy to focus on oil and gas exploration and
production opportunities in South America, the Company split off and sold all of
the assets and liabilities of the Legacy Business (the “Split-Off”) to Maria de
la Luz, the Company’s founding stockholder. The Split Off closed on August 21,
2008. As more fully described in a Form 8-K filed by the Company with the SEC on
August 21, 2008, the Company contributed all of its assets and liabilities
relating to the Legacy Business, whether accrued, contingent or otherwise, and
whether known or unknown, to a newly organized, wholly owned subsidiary, de la
Luz Gourmet Chocolates, Inc., a Nevada corporation (“Split-Off Subsidiary”), and
immediately thereafter sold all of the outstanding capital stock of Split-Off
Subsidiary to Ms. de la Luz in exchange for 9,000,000 shares of the Company’s
common stock, $0.001 par value per share (the “Common Stock”) previously
surrendered by Ms. de la Luz and all of the Company’s Common Stock that Ms. de
la Luz then owned, 2,250,000 shares. The 11,250,000 shares surrendered by Ms. de
la Luz have been cancelled.
F-28
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
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. The Company places
its cash and cash equivalents with financial institutions that are insured by
the Federal Deposit Insurance Corporation (“FDIC”) up to
$100,000. From time to time, the Company’s cash balances exceeded
FDIC insured limits. In October 2008, the Federal government temporarily
increased the FDIC insured limits up to a maximum of $250,000 per depositor
until December 31, 2009, after which time the insured limits will return to
$100,000. The Company mitigates this concentration of credit risk by
monitoring the credit worthiness of financial institutions and its
customers. The Company had no cash equivalents at December 31,
2008.
Property
and equipment, net
Property
and equipment consists primarily of office furniture and equipment and is stated
at cost. Depreciation is computed on a straight-line basis over the
estimated useful lives ranging from five to ten years. Depreciation
expense for the year ended December 31, 2008 was $38,719. There was
no depreciation expense for the year ended December 31, 2007.
Oil
and gas properties
As of
December 31, 2008, the Company had no oil and gas properties, although it
expected to acquire such properties during 2009. The Company is
currently evaluating whether to follow the successful efforts or full cost
method of accounting for oil and gas properties. This decision could
have a material impact on the Company’s disclosures, operating results,
financial position and cash flows.
Income
Taxes
Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the recorded book basis and the tax basis of
assets and liabilities for financial and income tax reporting. Deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes.
Organization
Costs
Costs
related to the organization of the Company have been expensed as
incurred.
Loss
per Common Share
The
Company reports net loss per share using a dual presentation of basic and
diluted loss per share. Basic net loss per share excludes the impact of common
stock equivalents. Diluted net loss per share utilizes the average market price
per share when applying the treasury stock method in determining common stock
equivalents. At December 31, 2008, there were no variances between the basic and
diluted loss per share as the effect of all common stock equivalents would have
been anti-dilutive.
Fair
value of financial instruments
The
carrying value of cash and cash equivalents, accounts payable and accrued
expenses and other liabilities approximates fair value due to the short term
nature of these accounts.
Fiscal
year-end
The
Company’s year-end is December 31.
F-29
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Reclassifications
Certain
prior year amounts have been reclassified to conform to current year
presentation.
Foreign
Currency Translation
The
Company conducts its operations in two primary functional currencies: the U.S.
dollar and the Colombian peso. Balance sheet accounts of the Company’s Colombian
subsidiary are translated from foreign currencies into U.S. dollars at
period-end exchange rates while income and expenses are translated at average
exchange rates during the period. Cumulative translation gains or losses related
to net assets located outside the U.S. are shown as a component of shareholders’
equity. Gains and losses resulting from foreign currency transactions, which are
denominated in a currency other than the entity’s functional currency, are
included in the consolidated statements of operations. For the years
ended December 31, 2008 and 2007, cumulative translation gains (losses) and
foreign currency transaction gains (losses) were immaterial.
New
accounting pronouncements
On
December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in the existing oil and gas rules to make them consistent
with the petroleum resource management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include changes to the pricing used to
estimate reserves utilizing a 12-month average price rather than a single day
spot price which eliminates the ability to utilize subsequent prices to the end
of a reporting period when the full cost ceiling was exceeded and subsequent
pricing exceeds pricing at the end of the reporting period, the ability to
include nontraditional resources in reserves, the use of new technology for
determining reserves, and permitting disclosure of probable and possible
reserves. The SEC will require companies to comply with the amended disclosure
requirements for registration statements filed after January 1, 2010, and for
annual reports on Form 10-K for fiscal years ending on or after December 15,
2009. Early adoption is not permitted. The Company is currently assessing the
impact that the adoption will have on the Company’s disclosures, operating
results, financial position and cash flows.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS No. 162”), which identifies a consistent
framework for selecting accounting principles to be used in preparing financial
statements for nongovernmental entities that are presented in conformity with
United States generally accepted accounting principles (GAAP). The current GAAP
hierarchy was criticized due to its complexity, ranking position of FASB
Statements of Financial Accounting Concepts and the fact that it is directed at
auditors rather than entities. SFAS No. 162 was effective November 15, 2008,
which was 60 days following the United States Securities and Exchange
Commission’s (SEC’s) approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The FASB did not expect that SFAS No.
162 will result in a change in current practice, and the adoption of SFAS No.
162 did not have an impact on the Company’s operating results, financial
position or cash flows.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment of FASB Statement No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No.
133”). SFAS No. 161 requires entities to provide qualitative disclosures about
the objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged but
not required. SFAS No. 161 will be effective for the Company on January 1, 2009.
SFAS No. 161 also requires entities to disclose more information about the
location and amounts of derivative instruments in financial statements, how
derivatives and related hedges are accounted for under SFAS No. 133 and how the
hedges affect the entity’s financial position, financial performance, and cash
flows. The Company does not believe that the adoption of SFAS 161 will have an
impact on its financial position or results of operations.
F-30
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations”,
however it retains the fundamental requirements that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS No. 141(R) requires an acquirer
to recognize the assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, be measured at their fair
values as of that date, with specified limited exceptions. Changes subsequent to
that date are to be recognized in earnings, not goodwill. Additionally, SFAS No.
141 (R) requires costs incurred in connection with an acquisition be expensed as
incurred. Restructuring costs, if any, are to be recognized separately from the
acquisition. The acquirer in a business combination achieved in stages must also
recognize the identifiable assets and liabilities, as well as the noncontrolling
interests in the acquiree, at the full amounts of their fair values. SFAS No.
141(R) is effective for business combinations occurring in fiscal years
beginning on or after December 15, 2008. The Company will apply the requirements
of SFAS No. 141(R) upon its adoption on January 1, 2009 and is currently
evaluating whether SFAS No. 141(R) will have an impact on its financial position
and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits companies to elect to measure many financial instruments and certain
other items at fair value. Upon adoption of SFAS No. 159, a company may elect
the fair value option for eligible items that exist at the adoption date.
Subsequent to the initial adoption, the election of the fair value option should
only be made at initial recognition of the asset or liability or upon a
remeasurement event that gives rise to new-basis accounting. The decision about
whether to elect the fair value option is applied on an instrument-by-instrument
basis, is irrevocable and is applied only to an entire instrument and not only
to specified risks, cash flows or portions of that instrument. SFAS No. 159 does
not affect any existing accounting standards that require certain assets and
liabilities to be carried at fair value nor does it eliminate disclosure
requirements included in other accounting standards. The Company adopted SFAS
No. 159 effective January 1, 2008 and did not elect the fair value option for
any existing eligible items.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS
No. 157 does not impose fair value measurements on items not already accounted
for at fair value; rather it applies, with certain exceptions, to other
accounting pronouncements that either require or permit fair value measurements.
Under SFAS No. 157, fair value refers to the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants in the principal or most advantageous market. The standard
clarifies that fair value should be based on the assumptions market participants
would use when pricing the asset or liability. In February 2008, the FASB issued
FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP
FAS 157-2”), which delays the effective date of SFAS 157 for all non-financial
assets and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008. These non-financial items include assets and
liabilities such as non-financial assets and liabilities assumed in a business
combination, reporting units measured at fair value in a goodwill impairment
test and asset retirement obligations initially measured at fair value.
Effective January 1, 2008, the Company adopted SFAS No. 157 for fair value
measurements not delayed by FSP FAS No. 157-2. The adoption had no impact on the
Company’s financial condition or results of operations. The Company will adopt
SFAS No. 157 for non-financial assets and liabilities effective
January 1, 2009. The adoption of this statement is not
expected to have a significant impact on the Company’s financial condition or
results of operations.
In June
2008, the FASB’s Emerging Issues Task Force reached a consensus regarding EITF
Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 outlines a two-step
approach to evaluate the instrument’s contingent exercise provisions, if any,
and to evaluate the instrument’s settlement provisions when determining whether
an equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008 and must be applied to outstanding instruments as of the
beginning of the fiscal year of adoption as a cumulative-effect adjustment to
the opening balance of retained earnings. Early adoption is not permitted. The
Company will adopt EITF 07-5 on January 1, 2009 and is currently
evaluating the impact of the adoption of EITF 07-5.
F-31
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
2 – Going Concern
At
December 31, 2008, the Company had cash and cash equivalents of $6,733,381
and working capital of $6,596,721. 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 during 2009 based upon its current operating plan and
condition.
Through
December 31, 2008, the Company has been primarily engaged in locating
viable investment prospects and recruiting personnel. In the course of its
development activities, the Company has sustained losses and expects such losses
to continue through at least 2009. 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. The Company will be required to obtain additional capital in the future
to continue its operations. There is no assurance that the Company will be able
to obtain any such additional capital as it needs to finance these efforts,
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 and Emerald projects
described in Note 3 below. This action would have an adverse effect
on the Company’s operations, the realization of its assets and the timely
satisfaction of its liabilities. The Company’s 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 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.
Note
3 – Oil and gas properties
Agreement
with Petronorte
On
December 22, 2008, the Company entered into a memorandum of understanding (the
“MOU”) with Petroleos del Norte S.A. (“Petronorte”), a subsidiary of Petrolatina
Plc., that entitles it to a 50% net working interest in the Putumayo 4 block
located in the south of Colombia (the “Putumayo 4 Block”). Petronorte
was the successful bidder on the Putumayo 4 Block in the Colombia Mini Round
2008 run by the Agencia
Nacional de Hidrocarburos (the “ANH”), Colombia’s hydrocarbon regulatory
agency. According to the MOU, the Company will have the exclusive
right to a fifty percent (50%) net participation interest in the Putumayo 4
Block and in the exploration and production contract (the “E&P Contract”)
after ANH production participation, and will execute an assignment agreement and
a joint operating agreement (the “Definitive Agreements”) with Petronorte
relating to the Putumayo 4 Block by no later than April 30, 2009.
Petronorte signed an E&P Contract with the ANH in February
2009. Petronorte will be the “operator” of the E&P
Contract.
F-32
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
The
Definitive Agreements are expected to provide that each of La Cortez and
Petronorte will have a fifty percent (50%) working interest in the Putumayo 4
Block, responsible for fifty percent (50%) of the costs incurred under the
E&P Contract, and a fifty percent (50%) revenue interest entitling us to
fifty percent (50%) of the revenues originated from the Putumayo 4 Block, net of
royalty payments to the ANH, except that La Cortez 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 Block, in accordance with the expected Phase 1
minimum exploration program under the E&P Contract. The Company expects to
require approximately US $2.3 million for Phase 1 seismic reprocessing and
acquisition activities in the Putumayo 4 Block during the remainder of
2009. If a prospective Phase 1 well in a prospect in the Putumayo 4
Block proves productive, Petronorte will reimburse La Cortez for its share of
these seismic costs paid by La Cortez with production from the Putumayo 4
Block.
Provided
that the Company has satisfactorily complied with payment requirements relating
to its share of all costs incurred to the date of its request, Petronorte will
submit a request to the ANH to assign a 50% interest in the E&P Contract to
La Cortez and will assist it in obtaining such assignment through reasonable
means.
Emerald
Farm-In Agreement
On
February 6, 2009, the Company entered into a farm-in agreement (the “Farm-In
Agreement”) with Emerald Energy Plc Sucursal Colombia (“Emerald”), a branch of
Emerald Energy Plc., for a 20% participating interest (the “Participating
Interest”) in the Maranta exploration and production block (“Maranta”) in the
Putumayo Basin in Southwest Colombia.
As
consideration for its 20% participating interest, the Company reimbursed Emerald
$948,000 of its Phase 1 sunk costs. This amount was paid to Emerald
on February 12, 2009. Additionally, the Company will bear 65% of the
Maranta block Phase 2 costs, of which the exploratory well drilling costs1 are
currently estimated at approximately US $4.875 million, US $2.433 million of
which La Cortez paid to Emerald on February 18, 2009 and US $2.433 million of
which La Cortez will pay to Emerald no later than 12 days after the start of
mobilization of the drill rig for an exploratory well to be drilled on the Mirto
prospect in the Maranta block. If Emerald determines that the
exploratory well should be completed and La Cortez agrees with this decision, La
Cortez will pay 65% of the completion costs, that is, La Cortez will pay an
amount currently estimated at approximately US $1.17 million required to
complete and test the exploratory well, no later than five days after the
decision to complete the well has been made by Emerald. 65% of any
additional Phase 2 costs will be paid by La Cortez as needed, following cash
calls by Emerald. If La Cortez does not agree with Emerald’s decision
to proceed with completion of the exploratory well, its obligations under the
Farm-In Agreement will cease and the Farm-In Agreement will
terminate.
After the
Phase 2 work is completed, La Cortez will pay 20% of all subsequent costs
related to the Maranta block.
Once La
Cortez has completed paying all of its Phase 2 commitments on the Maranta block,
Emerald will assign and transfer to La Cortez the Participating Interest in the
Maranta block, subject to ANH approval. If the ANH does not approve
the Assignment, Emerald and La Cortez have agreed that they will use their 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 JOA, that shall privately
govern the relations between the Parties and which will not require ANH
approval.
1. These are the costs that will be required to drill the exploratory well to the abandon (“dry hole”) or complete decision point.
F-33
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Note
4 – Related Party Transactions
Forgiveness
of indebtedness to related party
On July
28, 2006, the then sole officer and director of the Company advanced $2,000 to
the Company for working capital. On June 16, 2007, the then sole officer and
director advanced $10,000 to the Company for working capital. On May 17, 2007,
the then sole officer and director advanced $2,700 to the Company for working
capital. All of these advances bore no interest and were payable on demand.
These advances are included in the accompanying consolidated balance sheet at
December 31, 2007, as “Indebtedness to related party”. On June 30, 2008, the
former sole officer and director forgave the total amount of the advances.
Accordingly, the Company eliminated the $14,700 payable and treated the debt
forgiveness as a capital contribution and recorded the amount as additional paid
in capital.
Common
Stock sales
On July
28, 2006, the Company sold 11,250,000 (after giving effect to the common stock
split referred to in Note 5 below) shares of its Common Stock to its then sole
officer and director, Maria de la Luz, for $9,000, or $.0008 (post-split) per
share.
On
February 7, 2008, the Company sold 1,150,000 (post-split) shares of its Common
Stock to its newly appointed, then sole officer and director, Nadine C. Smith,
for $11,500, or $.01 (post-split) per share.
On
September 10, 2008 as part of its Unit offering described in Note 6, the Company
sold 400,000 Units (defined below), at a price of $1.25 per Unit, for a total of
$500,000 to its Chairman and Vice President, Nadine C. Smith, and 50,000 Units
for a total of $62,500 to its President and Chief Executive Officer, Andres
Gutierrez.
Contributed
services
During
the year ended December 31, 2008, our Chairman of the Board and interim CFO
contributed services for which the Company determined the fair value to be
$23,333, and, accordingly, we recognized such amount as
compensation. There were no such services contributed during the year
ended December 31, 2007.
Note
5 – Income taxes
La Cortez
Energy, Inc. files a U.S. Federal income tax return. The Company’s
foreign subsidiaries file income tax returns in their respective jurisdictions.
The components of the consolidated net loss before income tax benefit are as
follows:
2008
|
2007
|
|||||||
U.S.
|
$ | 1,909,043 | $ | 28,836 | ||||
Non-U.S.
|
671,486 | - | ||||||
Net
Loss
|
$ | 2,580,529 | $ | 28,836 |
The
components of the Company’s deferred tax assets at December 31, 2008 and 2007
are as follows:
2008
|
2007
|
|||||||
Deferred
tax assets and liabilities:
|
||||||||
Loss
carryforwards
|
$
|
426,000
|
$
|
9,818
|
||||
Property
and equipment
|
(5,000
|
)
|
-
|
|||||
Stock-based
compensation
|
83,000
|
-
|
||||||
Net
deferred tax asset
|
504,000
|
9,818
|
||||||
Valuation
allowance
|
(504,000
|
)
|
(9,818
|
)
|
||||
$
|
-
|
$
|
-
|
F-34
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Income
tax benefit differs from the amount computed at the federal statutory rates
(approximately 34%) as follows:
Income
tax benefit at statutory rate
|
(877,000
|
)
|
||
Stock
issued to consultant
|
337,000
|
|||
Other
Permanent differences
|
31,000
|
|||
Increase
in valuation allowance
|
494,000
|
|||
Other
|
15,000
|
|||
As of
December 31, 2008, the Company had generated U.S. net operating loss
carryforwards of approximately $555,000, which expire from 2027 to 2028 and net
loss carryforwards in certain non-U.S. jurisdictions of approximately $671,486,
which do not expire. These net operating loss carryforwards are available
to reduce future taxable income. However, a, change in ownership, as defined by
federal income tax regulations, could significantly limit the Company’s
ability to utilize its U.S. net operating loss carryforwards. Additionally,
because federal tax laws limit the time during which the net operating loss
carryforwards may be applied against future taxes, if the Company fails to
generate taxable income prior to the expiration dates it may not be able to
fully utilize the net operating loss carryforwards to reduce future income
taxes. As the Company has had cumulative losses and there is no assurance of
future taxable income, valuation allowances have been recorded to fully
offset the deferred tax asset at December 31, 2008 and 2007. The valuation
allowance increased $494,000 and $9,813 due primarily to the Company’s 2008
and 2007 net losses, respectively.
Note
6 – Shareholders’ Equity
As of
December 31, 2008, there were 18,935,244 shares of common stock and no shares of
preferred stock issued and outstanding.
Common
Stock split
On
February 8, 2008, the articles of incorporation of LCE were amended to increase
the authorized capital stock of LCE to 310,000,000 shares, of which 300,000,000
are common stock with a par value of $0.001 per share and 10,000,000 shares are
preferred stock with a par value $0.001 per share. The Board of
Directors is authorized to fix or alter the designation, powers, preferences and
rights of the preferred stock. The Board of Directors has made no
such designation as of December 31, 2008.
On
February 7, 2008, the Company’s Board of Directors approved a 5-for-1 forward
stock split on each share of its common stock issued and outstanding at the
close of business on February 21, 2008. Shares issued prior to February 21, 2008
have been retroactively restated to reflect the impact of the stock
split.
Common
Stock issued for services
On
February 7, 2008, the Company issued 1,000,000 (post-split) shares of its common
stock in exchange for consulting services, which included assisting the Chairman
in building the Board of Directors and senior management team for the Company.
The transaction was valued in accordance with EITF 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.” Management determined
the fair value of the stock issued to the consultant at $1.00 (post-split) per
share based on the stock price received in the Offering (defined below) on March
14, 2008. Accordingly, stock-based compensation expense of $1,000,000 was
recognized in the accompanying consolidated financial statements for the year
ended December 31, 2008.
F-35
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Common
Stock sales
On July
28, 2006, the Company sold 11,250,000 (post-split) shares of Common Stock to its
previous sole officer and director for $9,000, or $.0008 (post split) per
share.
On
December 12, 2006, the Company sold 9,500,000 (post split) shares of Common
Stock at a price of $.002 (post split) per share for total proceeds of $19,000.
The offering was made pursuant to the Company’s SB-2 registration statement that
became effective on December 4, 2006. All sales were made by the Company’s
previous sole officer and director.
On
February 7, 2008, the Company sold 1,150,000 (post split) shares of Common Stock
to Nadine Smith, its then newly appointed sole officer and director, for
$11,500, or $.01 (post-split) per share.
On
February 19, 2008 the Board of Directors authorized the Company to offer up to
2,000,000 shares of Common Stock to a limited number of accredited investors
and/or non-U.S persons at a price of $1.00 per share, in a private placement
offering (the “Offering”) pursuant to the exemption from registration provided
by Rule 506 of Regulation D under the Securities Act, Regulation S under the
Securities Act and/or Section 4(2) of the Securities Act. Because the offering
was oversubscribed, the Company’s Board of Directors further authorized to
increase the size of the Offering to up to 3,000,000 shares of Common Stock. On
March 14, 2008, the Company issued a total of 2,400,000 shares of Common Stock
for total proceeds to the Company of $2,400,000 ($2,314,895 net after offering
expenses).
On July
23, 2008 the Board of Directors authorized the Company to offer up to a maximum
of 10,000,000 units (the “Units”) 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. The Units were offered to a
limited number of accredited investors and non-U.S persons, in a private
placement offering pursuant to the exemption from registration provided by Rule
506 of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”), Regulation S under the Securities Act and/or Section 4(2) of
the Securities Act. 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, for total proceeds
to the Company of $5,981,000 ($5,762,126 net after offering expenses), and
warrants to purchase 2,392,400 shares of Common stock.
Investors
in the 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 the 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 Unit
Offering. That is, at any time on or after the date that is six
months after the Closing, and only if the Company has not filed a registration
statement enabling the investors to exercise their “piggyback” registration
rights, 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 expects 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 Unit Offering
included in the Units of those investors who choose to participate in such
Demand Registration. The Company shall pay monetary penalties to
these investors equal to one and one-quarter percent (1.25%) of the gross
proceeds of the 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 the date of this report.
F-36
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Common
Stock issued to extinguish debt
On
February 8, 2008, the Corporation issued a $50,000 promissory note to Milestone
Enhanced Fund Ltd. (“Milestone”) in exchange for Milestone’s $50,000 working
capital loan to the Company. The note was due within one year of its date of
issuance and carried a 9% annual interest rate. On February 25, 2008, the
Company issued 100,444 shares of Common Stock in exchange for full payment of
the note and accrued interest. This transaction was valued by the Company’s
Board of Directors at the fair value of the Common Stock issued, or 100,000
shares at $.50/share for the principal and 444 shares at $.50/share for the
accrued interest which amounted to $222.
Common
Stock cancelled
On
February 26, 2008, 9,000,000 shares of LCE Common Stock owned by the founding
stockholder were surrendered to LCE and cancelled.
On August
21, 2008, 2,250,000 shares of LCE common stock owned by the founding director,
were surrendered in exchange for her interest in a split-off subsidiary of LCE,
as more fully described in a Form 8-K of the same date filed by the Company with
the SEC. The net assets of the Split-Off Subsidiary were
$Nil as of August 21, 2008. Therefore, this transaction was valued at
$Nil.
2008
Equity Incentive Plan
The
Company’s 2008 Equity Incentive Plan (the “2008 Plan”) provides for the grant of
incentive stock options to employees of the Company and non-statutory stock
options, restricted stock and stock appreciation rights to employees, directors
and consultants of the Company and of an affiliate or subsidiary of the Company.
A maximum of 4,000,000 shares of common stock are available for issuance under
the 2008 Plan. The 2008 Plan, originally adopted and approved by our Board of
Directors and majority stockholders on February 7, 2008 to enable grants to
issue up to 2,000,000 shares of our Common Stock, was amended and restated by
approval of our Board of Directors on November 7, 2008 to, among other things,
increase the number of shares that may be issued under the 2008 Plan to
4,000,000. Our stockholders have not yet approved this
increase. As of December 31, 2008, options had been granted under the
2008 Plan exercisable for an aggregate of 2,025,000 shares of common
stock.
The
Company determines the fair value of stock option awards on the date of grant in
accordance with Statement of Financial Accounting Standard (SFAS) No. 123(R),
Share-Based Payment.
Stock
Option Awards
On July
1, 2008, the Company granted options to purchase (i) 1,000,000 shares of its
Common Stock to Andres Gutierrez, the Company’s President and Chief Executive
Officer, (ii) 175,000 shares of its Common Stock to Nadine C. Smith, the
Company’s Chairman and Vice President, (iii) 100,000 shares of its Common Stock
to Jaime Ruiz, a newly appointed director, and (iv) an additional 175,000 shares
of its Common Stock to three employees of its Colombian subsidiary. The 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 $2.20.
F-37
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
On July
23, 2008, the Company granted options to purchase (i) 100,000 shares of its
Common Stock to each of Jaime Navas Gaona and Richard G. Stevens, newly
appointed directors, (ii) 150,000 shares, to Highlands Capital, Inc., a
consultant to the Company, and (iii) an additional 75,000 shares of its Common
Stock to one employee of its Colombian subsidiary. The 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
$2.47.
On
November 7, 2008, the Company granted options to purchase (i) 100,000 shares of
its common stock to Jose Montoya, a newly appointed director, and (ii) 50,000
shares to one employee. The 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
$1.71.
Stock
option activity summary 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, 2007
|
—
|
—
|
|||||||||
Granted
|
2,025,000
|
$
|
2.22
|
||||||||
Exercised
|
—
|
—
|
|||||||||
Forfeited
|
—
|
—
|
|||||||||
Expired
|
—
|
—
|
|||||||||
Outstanding
at December 31, 2008
|
2,025,000
|
$
|
2.22
|
9.54
|
$
|
—
|
None of
the options outstanding at December 31, 2008 are vested or
exercisable. During the year ended December 31, 2008, 2,025,000
options were granted with a weighted average grant date fair value of
$0.89. During the year ended December 31, 2008, the Company
recognized stock-based compensation expense of $246,153 related to stock
options. As of December 31, 2008, there was approximately $1,356,000
of total unrecognized compensation cost related to non-vested stock options
which is expected to be recognized over a weighted-average period of
approximately 2.5 years.
Subsequent
to year end, the Company granted options to purchase 200,000 shares to one
employee of its Colombian subsidiary. The 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
$1.50.
Options
to purchase 50,000 shares of common stock were forfeited subsequent to year
end.
The fair
value of the options granted during 2008 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)
|
$1.27 - $1.37 | |||
Risk-free
interest rate (2)
|
3.11 – 3.77 | % | ||
Dividend
yield (3)
|
0.00 | % | ||
Volatility
factor (4)
|
83.63 | % | ||
Expected
life (5)
|
6.5
years
|
|||
Expected
forfeiture rate (6)
|
10 | % |
(1)
|
The estimated market value of the
stock on the date of grant was based on a calculation by management after
consideration of price per share received in the private offerings and
reported public market
prices.
|
(2)
|
The risk-free interest rate was
estimated by management using the U.S. Treasury zero-coupon yield over the
contractual term of the option on date of
grant.
|
F-38
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
(3)
|
Management estimated the dividend
yield at 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.
|
(5)
|
The expected life was estimated
by management as the midpoint between the vesting date and the expiration
date of the options.
|
(6)
|
Management estimated the
forfeiture rate at 10% based on its experience with companies in similar
industries and
regions.
|
Note
7 – General and administrative expenses
General
and administrative expenses are made up of the following for the years ended
December 31, 2008 and 2007 and for the period from June 9, 2006 (inception)
through December 31, 2008:
|
Year ended December 31,
|
Inception
through
December 31,
|
||||||||||
2008
|
2007
|
2008
|
||||||||||
General
and administrative expense:
|
||||||||||||
Payroll
|
$
|
505,783
|
$
|
-
|
$
|
515,771
|
||||||
Stock
–based compensation
|
1,246,153
|
-
|
1,246,153
|
|||||||||
Professional
fees
|
441,683
|
19,695
|
461,378
|
|||||||||
Travel
|
168,812
|
-
|
168,812
|
|||||||||
Rent
|
56,012
|
2,400
|
59,612
|
|||||||||
Other
|
230,869
|
6,741
|
239,661
|
|||||||||
Total
general and administrative expense
|
$
|
2,649,312
|
$
|
28,836
|
$
|
2,691,387
|
Note
8 - Commitments
Leases
The
Company has signed a three year lease for approximately 3,000 square feet of
office space in Bogotá, Colombia. The rent for this office space is
approximately $8,100 per month during the first year. The rental contract
provides for a 2% increase per year in the base rent and an additional
adjustment for inflation in Colombia as reflected in the Colombian consumer
price index, or the “Indice de Precios al Consumidor” (the “IPC”). This lease
will expire on July 2, 2011.
From
August to December 2008, the first five months of this lease, the Company paid
rent of approximately U.S. $42,714.
F-39
LA CORTEZ
ENERGY, INC.
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
Based on
an estimated exchange rate of COP 2.250 per US dollar for each year (2009, 2010
and 2011), annual lease payment commitments for the remainder of the lease have
been calculated as follows:
Year
|
Total Lease Payment
Amount
|
|||
2009
|
$
|
99,000
|
||
2010
|
$
|
107,000
|
||
2011
|
$
|
65,000
|
These US
dollar amounts for the remainder of the office lease could increase if the US
dollar to COP exchange rate deteriorates in favor of the COP.
Employment
Agreement
The
Company has entered into an employment agreement effective as of June 1, 2008
(the “Employment Agreement”) with Andres Gutierrez pursuant to which Mr.
Gutierrez was appointed as its President and Chief Executive Officer, Pursuant
to the Employment Agreement, Mr. Gutierrez’s base annual compensation has
been set at U.S. $250,000, which amount may be increased annually at the
discretion of the Board of Directors. This annual compensation shall be paid in
equal monthly installments in Colombian Pesos (“COP”). The exchange rate used to
calculate Mr. Gutierrez’s monthly salary payment will be calculated each month
and shall neither exceed a maximum of COP 2,400 nor be less than a minimum of
COP 1,600. This minimum/maximum range will be adjusted at the end of each
calendar year based upon changes in the IPC.
In
addition, Mr. Gutierrez is eligible to receive an annual cash bonus of up to
fifty percent (50%) of his applicable base salary. Mr. Gutierrez’s annual bonus
(if any) shall be in such amount (up to the limit stated above) as the Board of
Directors may determine in its sole discretion, based upon Mr. Gutierrez’s
achievement of certain performance milestones to be established annually by the
Board of Directors in discussion with Mr. Gutierrez (the
“Milestones”).
Under the
Employment Agreement, we agreed to grant Mr. Gutierrez an option to purchase an
aggregate of 1,000,000 shares of our common stock under our 2008 Equity
Incentive Plan (the “2008 Plan”) as of June 1, 2008. We granted this option on
July 1, 2008. This option vests in three equal annual installments beginning on
July 1, 2009 and is exercisable at $2.20 per share.
The
initial term of the Employment Agreement expires on June 1, 2009. In the event
of a termination of employment “without cause” by the Company during the first
12 months following June 1, 2008, Mr. Gutierrez shall receive: (i) twelve
(12) months of his base salary; plus (ii) to the extent the Milestones
are achieved or, in the absence of Milestones, the Board of Directors has, in
its sole discretion, otherwise determined an amount for Mr. Gutierrez’s bonus
for the initial 12 months of his employment, a pro rata portion of his annual
bonus for the initial 12 months of his employment, to be paid to him on the date
such annual bonus would have been payable to him had he remained employed by the
Company; plus (iii) any other accrued compensation and Benefits, as defined
in the Employment Agreement. In the event of a termination of employment by Mr.
Gutierrez for “good reason”, as defined in the Employment Agreement, Mr.
Gutierrez shall receive: (i) twelve (12) months of his then in effect
base salary, subject to his compliance with the non-competition,
non-solicitation and confidentiality provisions of the Employment
Agreement. As of December 31, 2008, the Company has accrued a bonus
payable to Mr. Gutierrez in the amount of $72,915.
F-40
11,107,200 Shares of Common
Stock
La
Cortez Energy, Inc.
PROSPECTUS
__________,
2009
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
Set forth
below is an estimate (except for registration fees, which are actual) of the
approximate amount of the fees and expenses payable by us in connection with the
issuance and distribution of the shares of our common stock. The
selling stockholders will not responsible for any of the expenses of this
offering.
EXPENSE
|
AMOUNT
|
|||
Registration
fee
|
$
|
1,457.00
|
||
Legal
fees and expenses
|
10,000
|
|||
Accounting
fees and expenses
|
||||
Transfer
agents’ fees
|
||||
Printing
and engraving
|
||||
Total
|
$
|
Item
14. Indemnification of Directors and Officers.
Nevada
Revised Statutes (NRS) Sections 78.7502 and 78.751 provide us with the power to
indemnify any of our directors, officers, employees and agents. The
person entitled to indemnification must have conducted himself in good faith,
and must reasonably believe that his conduct was in, or not opposed to, our best
interests. In a criminal action, the director, officer, employee or
agent must not have had reasonable cause to believe that his conduct was
unlawful.
Under NRS
Section 78.751, advances for expenses may be made by agreement if the director
or officer affirms in writing that he has met the standards for indemnification
and will personally repay the expenses if it is determined that such officer or
director did not meet those standards.
Our
bylaws include an indemnification provision under which we have the power to
indemnify our current and former directors, trustees, officers, employees and
other agents against expenses (including attorneys’ fees), judgment, fines and
amounts paid in settlement actually and reasonably incurred by any such person,
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person’s conduct was unlawful. Our bylaws further provide for
the advancement of all expenses incurred in connection with a proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amounts
if it is determined that the party is not entitled to be indemnified under our
bylaws. These indemnification rights are contractual, and as such
will continue as to a person who has ceased to be a director, trustee, officer,
employee or other agent, and will inure to the benefit of the heirs, executors
and administrators of such a person.
Item
15. Recent Sales of Unregistered Securities.
On March
14, 2008, we closed a private placement of our common stock, $0.001 par value
per share. In this private placement, we offered our shares of common
stock at a price of $1.00 per share and we derived total proceeds of $2,314,895,
net after expenses, from the sale of 2,400,000 shares of our common
stock.
On
September 10, 2008, we closed a private placement of units. Each unit
consisted of (i) one share of our common stock and (ii) 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. We offered these units at a
price of $1.25 per unit and we derived total proceeds of $5,981,000 ($5,762,126
net after expenses) from the sale of 4,784,800 units.
II-1
On June
19, 2009, we conducted an initial closing of a private placement of
units. Each unit consisted of (i) one share of our common stock and
(ii) 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.
We offered these units at a price of $1.25 per unit and we derived total
proceeds at the initial closing of $6,074,914 ($5,244,279 net after expenses)
from the sale of 4,860,000 units. On July 31, 2009, we completed the
final closing of our 2009 unit offering. At the final closing, we
received gross proceeds of $256,250 from the sale of 205,000
units. In the aggregate, we received gross proceeds of
$6,331,164 in the 2009 unit offering on the sale of a total of 5,065,000
units. The 2009 unit offering terminated on July 31,
2009.
Item
16. Exhibits.
Exhibit
No.
|
Description
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Registrant as filed with the
Nevada Secretary of State on February 8, 2008 (1)
|
|
3.2
|
By-Laws
of the Registrant (2)
|
|
5.1
|
Opinion
of Gottbetter & Partners, LLP
|
|
10.1
|
Employment
Agreement dated May 13, 2008 by and between the Registrant and Andres
Gutierrez Rivera (3)
|
|
10.2
|
Form
of Stock Option Agreement to Directors under the Registrant’s 2008 Equity
Incentive Plan, as amended (4)
|
|
10.3
|
Form
of Stock Option Agreement to Executive Officers under the Registrant’s
2008 Equity Incentive Plan, as amended (4)
|
|
10.4
|
Split-Off
Agreement dated August 15, 2008 by and among the Registrant, de la Luz
Chocolates, Inc., and Maria de la Luz (5)
|
|
10.5
|
General
Release Agreement dated August 15, 2008, by and among the Registrant, de
la Luz Chocolates, Inc., and Maria de la Luz (5)
|
|
10.6
|
Form
of Subscription Agreement (6)
|
|
10.7
|
Form
of Warrant (6)
|
|
10.8
|
Form
of Registration Rights Agreement (6)
|
|
10.9
|
The
Registrant’s Amended and Restated 2008 Equity Incentive Plan
(7)
|
|
10.10
|
Memorandum
of Understanding between the Registrant and Petroleos del Norte S. A.
dated as of December 22, 2008 (8)
|
|
10.11
|
Farm-Out
Agreement (Maranta E&P Block) by and between Emerald Energy Plc
Sucursal Colombia and La Cortez Energy Colombia, Inc. dated as of February
6, 2008
|
|
10.12
|
Joint
Operating Agreement By and Between Petroleos Del Norte S.A. and La Cortez
Energy Colombia, Inc. dated as of February 23, 2009 (9)
|
|
14.1
|
Code
of Ethics (10)
|
II-2
Exhibit
No.
|
Description
|
|
21.1
|
List
of Subsidiaries
|
|
23.1
|
Consent
of Gottbetter & Partners, LLP (included in its opinion filed as
Exhibit 5.1)
|
|
23.2
|
Consent
of BDO Seidman, LLP
|
|
23.3
|
Consent
of Cordovano and Honeck LLP
|
|
24.1
|
Power
of Attorney (included on signature
page)
|
(1)
|
Filed
with the SEC on February 13, 2008 as an exhibit, numbered as indicated
above, to the Registrant’s current report (SEC File No. 333-138465) on
Form 8-K, which exhibit is incorporated herein by
reference.
|
(2)
|
Filed
with the Securities and Exchange Commission on November 7, 2006 as an
exhibit, numbered as indicated above, to the Registrant’s registration
statement (SEC File No. 333-138465) on Form SB-2, which exhibit is
incorporated herein by reference.
|
(3)
|
Filed
with the SEC on May 20, 2008 as an exhibit, numbered as indicated above,
to the Registrant’s current report (SEC File No. 333-138465) on Form 8-K,
which exhibit is incorporated herein by
reference.
|
(4)
|
Filed
with the SEC on July 28, 2008 as an exhibit, numbered as indicated above,
to the Registrant’s current report (SEC File No. 333-138465) on Form 8-K,
which exhibit is incorporated herein by
reference.
|
(5)
|
Filed
with the SEC on August 21, 2008 as an exhibit, numbered as indicated
above, to the Registrant’s current report (SEC File No. 333-138465) on
Form 8-K, which exhibit is incorporated herein by
reference.
|
(6)
|
Filed
with the SEC on September 16, 2008 as an exhibit, numbered as indicated
above, to the Registrant’s current report (SEC File No. 333-138465) on
Form 8-K, which exhibit is incorporated herein by
reference.
|
(7)
|
Filed
with the SEC on November 14, 2008 as an exhibit, numbered as indicated
above, to the Registrant’s quarterly report (SEC File No. 333-138465) on
Form 10-Q, which exhibit is incorporated herein by
reference.
|
(8)
|
Filed
with the SEC on January 9, 2009 as an exhibit, numbered as indicated
above, to the Registrant’s current report (SEC File No. 333-138465) on
Form 8-K, which exhibit is incorporated herein by
reference.
|
(9)
|
To
be filed with the SEC on or about November 16, 2009 as an exhibit,
numbered as indicated above, to the Registrant’s quarterly report (SEC
File No. 333-138465) on Form 10-Q, which exhibit is incorporated herein by
reference.
|
(10)
|
Filed
with the SEC on March 31, 2008 as an exhibit, numbered as indicated above,
to the Registrant’s annual report (SEC File No. 333-138465) on Form
10-KSB, which exhibit is incorporated herein by
reference.
|
II-3
Item
17. Undertakings.
The
undersigned registrant hereby undertakes:
1.
|
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
i.
|
To include any prospectus
required by Section 10(a)(3) of the Securities Act of
1933;
|
ii.
|
To reflect in the prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement;
|
iii.
|
To include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration
statement.
|
2.
|
That, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
3.
|
To remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the
offering.
|
4.
|
That, for the purpose of
determining liability under the Securities Act of 1933 to any purchaser,
each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule
430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first
use.
|
5.
|
That, for the purpose of
determining liability of the registrant under the Securities Act of 1933
to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by
means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell
such securities to such
purchaser:
|
i.
|
Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required
to be filed pursuant to Rule
424;
|
ii.
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned
registrant;
|
II-4
iii.
|
The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by
or on behalf of the undersigned registrant;
and
|
iv.
|
Any other communication that is
an offer in the offering made by the undersigned registrant to the
purchaser.
|
6.
|
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the
undersigned Registrant pursuant to the provisions described in Item 15 or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such
issue.
|
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Bogotá, Colombia, on November 6,
2009.
La
Cortez Energy, Inc.
|
||
By:
|
/s/ Andres Gutierrez Rivera
|
|
Name:
|
Andres
Gutierrez Rivera
|
|
Title:
|
Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each individual whose signature appears below
constitutes and appoints Andres Gutierrez Rivera and Nadine C. Smith, and each
of them, his/her true and lawful attorneys-in-fact and agents with full power of
substitution, for him/her and in his/her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective on
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he/she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his/her or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In
accordance with the requirements of the Securities Act of 1933, as amended, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Signature
|
Title
|
Date
|
||
/s/
Nadine C. Smith
|
||||
Nadine
C. Smith
(Interim
Principal Financial and Accounting Officer)
|
Chairman and Interim Chief Financial
Officer
|
November
6, 2009
|
||
/s/
Andres Gutierrez Rivera
|
Director,
President and Chief Executive Officer
|
November
6, 2009
|
||
Andres
Gutierrez Rivera
|
||||
//s/s/ Jose
Fernando Montoya Carrillo
|
Director
|
November
6, 2009
|
||
Jose
Fernando Montoya Carrillo
|
||||
/s/ Jaime Navas
Gaona
|
Director
|
November
6, 2009
|
||
Jaime
Navas Gaona
|
||||
/s/ Jaime Ruiz
Llano
|
Director
|
November
6, 2009
|
||
Jaime
Ruiz Llano
|
||||
/s/ Richard G.
Stevens
|
Director
|
November
6, 2009
|
||
Richard
G. Stevens
|
||||
II-6
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Registrant as filed with the
Nevada Secretary of State on February 8, 2008 (1)
|
|
3.2
|
By-Laws
of the Registrant (2)
|
|
5.1
|
Opinion
of Gottbetter & Partners, LLP
|
|
10.1
|
Employment
Agreement dated May 13, 2008 by and between the Registrant and Andres
Gutierrez Rivera (3)
|
|
10.2
|
Form
of Stock Option Agreement to Directors under the Registrant’s 2008 Equity
Incentive Plan, as amended (4)
|
|
10.3
|
Form
of Stock Option Agreement to Executive Officers under the Registrant’s
2008 Equity Incentive Plan, as amended (4)
|
|
10.4
|
Split-Off
Agreement dated August 15, 2008 by and among the Registrant, de la Luz
Chocolates, Inc., and Maria de la Luz (5)
|
|
10.5
|
General
Release Agreement dated August 15, 2008, by and among the Registrant, de
la Luz Chocolates, Inc., and Maria de la Luz (5)
|
|
10.6
|
Form
of Subscription Agreement (6)
|
|
10.7
|
Form
of Warrant (6)
|
|
10.8
|
Form
of Registration Rights Agreement (6)
|
|
10.9
|
The
Registrant’s Amended and Restated 2008 Equity Incentive Plan
(7)
|
|
10.10
|
Memorandum
of Understanding between the Registrant and Petroleos del Norte S. A.
dated as of December 22, 2008 (8)
|
|
10.11
|
Farm-Out
Agreement (Maranta E&P Block) by and between Emerald Energy Plc
Sucursal Colombia and La Cortez Energy Colombia, Inc. dated as of February
6, 2008
|
|
10.12
|
Joint
Operating Agreement By and Between Petroleos Del Norte S.A. and La Cortez
Energy Colombia, Inc. dated as of February 23, 2009
|
|
14.1
|
Code
of Ethics (9)
|
|
21.1
|
List
of Subsidiaries
|
|
23.1
|
Consent
of Gottbetter & Partners, LLP (included in its opinion filed as
Exhibit 5.1)
|
|
23.2
|
Consent
of BDO Seidman, LLP
|
|
23.3
|
Consent
of Cordovano and Honeck LLP
|
|
24.1
|
Power
of Attorney (included on signature
page)
|