UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 10, 2005
GRAN TIERRA ENERGY, INC.
(f/k/a GOLDSTRIKE INC.)
(Exact name of registrant as specified in its charter)
Nevada 333-111656 Applied For
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(State or other (Commission File Number) (I.R.S. Employer
jurisdiction Identification Number)
of incorporation)
10th Floor, 610-8th Avenue S.W.
Calgary, Alberta, Canada T2P 1G5
(Address of principal executive offices) (Zip Code)
(403) 537-3218
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
FORWARD LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. This Quarterly Report includes
statements regarding our plans, goals, strategies, intent, beliefs or current
expectations. These statements are expressed in good faith and based upon a
reasonable basis when made, but there can be no assurance that these
expectations will be achieved or accomplished. These forward looking statements
can be identified by the use of terms and phrases such as "believe," "plan,"
"intend," "anticipate," "target," "estimate," "expect," and the like, and/or
future-tense or conditional constructions ("will," "may," "could," "should,"
etc.). Items contemplating or making assumptions about, actual or potential
future sales, market size, collaborations, and trends or operating results also
constitute such forward-looking statements.
Although forward-looking statements in this report reflect the good faith
judgment of management, forward-looking statements are inherently subject to
known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed in
these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. We assume no obligation to update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
report, other than as may be required by applicable law or regulation. Readers
are urged to carefully review and consider the various disclosures made by us in
the our reports filed with the Securities and Exchange Commission which attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operation and cash flows. If one or
more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, our actual results may vary materially from those
expected or projected.
Item 2.01. Completion of Acquisition or Disposition of Assets
On November 10, 2005, pursuant to a share purchase agreement, which has been
attached hereto and is incorporated herein by reference, (the "Share Purchase
Agreement") among Goldstrike Inc., a Nevada corporation ("Goldstrike"), Gran
Tierra Energy Inc., an Alberta corporation ("Gran Tierra Energy") and holders of
shares of capital stock in Gran Tierra Energy (individually a "Gran Tierra
Stockholder" and collectively the "Gran Tierra Stockholders") and an assignment
agreement, which has been attached hereto and is incorporated herein by
reference, (the "Assignment Agreement") between Goldstrike and Goldstrike
Exchange Co, a Canadian corporation indirectly-owned by Goldstrike
("Exchangeco"), Exchangeco acquired 96.03% of the outstanding shares of capital
stock in Gran Tierra Energy ("Gran Tierra Shares") in exchange for which each
Gran Tierra Stockholder, at their election, received either 1.5873016 shares of
common stock of Goldstrike ("Common Stock") and/or 1.5873016 shares of
exchangeable stock of Exchangeco ("Exchangeable Shares"); and Goldstrike changed
its name to Gran Tierra Energy Inc. (referred to hereinafter as the "Company" or
"Gran Tierra") (the "Share Purchase"). Exchangeco intends to carry out a
compulsory acquisition transaction in accordance with the Business Corporations
Act (Alberta) to acquire the Gran Tierra Shares not already acquired as the
result of the Share Purchase. After completion of such transaction, Gran Tierra
Energy will become a indirectly-owned subsidiary of Goldstrike.
In connection with the Share Exchange, certain Canadian resident Gran Tierra
Stockholders may receive, at their election, Exchangeable Shares on the
surrender of their Gran Tierra Shares. Exchangeable Shares will be exchangeable,
at the option of the holder, at any time for shares of Common Stock.
Exchangeable Shares will be economically equivalent to shares of Common Stock by
entitling holders to dividends and other economic rights provided to holders of
shares of Common Stock and will be equivalent on a non-financial basis by
providing holders with the same voting rights and liquidation rights as those
provided to shares of Common Stock.
Simultaneously with the consummation of the Share Exchange, Goldstrike, Gran
Tierra Energy, Goldstrike Callco, a corporation incorporated under the laws of
Alberta Canada ("Callco") and Olympia Trust Company, a Canadian corporation (the
"Trustee") executed a voting exchange and support agreement, which has been
attached hereto and is incorporated herein by reference, (the "Voting Exchange
and Support Agreement") to make provision for and establish a procedure whereby
voting rights in the Company will be exercisable by the Trustee for the benefit
of the holders of Exchangeable Shares (the "Beneficiaries"); Goldstrike issued
to the Trustee, for the benefit of the Beneficiaries, one share of special
voting stock, $.001 par value (the "Goldstrike Special Voting Share") and Callco
granted to the Trustee the right, under certain circumstances, to require Callco
to purchase the Exchangeable Shares.
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Immediately prior to the Share Purchase, Goldstrike transferred to Goldstrike
Leasco Inc., a newly-formed Nevada corporation wholly owned by Goldstrike
("Leasco") all of Goldstrike's rights and interests in that certain Mineral
Property Sale Agreement previously entered into by Goldstrike. The Mineral
Property Sale Agreement was filed by Goldstrike with the Securities and Exchange
Commission as Exhibit 10.1 to Goldstrike's Annual Report on Form 10-KSB filed on
March 24, 2005.
Simultaneously with the closing of the Share Purchase, upon the terms and
conditions of a split-off agreement, which has been attached hereto and is
incorporated herein by reference (the "Split-off Agreement"), among Goldstrike,
Leasco, Dr. Yenyou Zheng (the "Split-off Purchaser") and Gran Tierra Energy,
Goldstrike sold all the issued and outstanding shares of capital stock of Leasco
(the "Leasco Shares") to the Split-off Purchaser in exchange for all of the
shares of Common Stock owned by the Split-off Purchaser and the assumption by
the Split-off Purchaser of all responsibilities for any debts, obligations and
liabilities of Leasco.
In connection with the consummation of the Share Purchase, the address of our
principal executive offices was changed to 10th Floor, 610-8th Avenue S.W.,
Calgary, Alberta, Canada T2P 1G5 and the telephone number of our executive
offices was changed to (403) 537-3218.
BUSINESS
Goldstrike
Goldstrike was incorporated in the State of Nevada on June 9, 2003 to pursue
opportunities in the field of mineral exploration. On June 30, 2003, pursuant to
the Mineral Property Sale Agreement, Goldstrike acquired a 100% undivided
mineral interest in properties located in the Kamloops Mining Division, in the
Province of British Columbia, Canada (the "Goldstrike Property").
In July 2005, Goldstrike retained P & L Geological Services ("P&L") to conduct
the first phase of exploration on the Goldstrike Property. On its review and
sampling, P&L indicated that the Goldstrike Property did not host readily
available areas of significant mineralization for follow-up exploration. Based
on P&L's report, Goldstrike decided not to conduct any further exploration on
these mineral claims and began to review other potential resource and
non-resource assets for acquisition.
Gran Tierra Energy
Gran Tierra Energy is a private international oil and gas exploration and
production company, incorporated in Canada in January 2005. The Company
commenced business activity in May 2005 with capital obtained through its
initial financing of approximately $1.8 million. Its vision and mandate is to
move aggressively and purposefully to build a substantial international presence
and record of success, initially focusing on business opportunities in South
America with the intent to expand its activities in the future into North
Africa, the Middle East and Southeast Asia.
Gran Tierra Energy was founded to capitalize on the depth and breadth of
experience of the management team, to access exploration and development
opportunities and leverage strategic relationships to build a diverse
international oil and gas company.
The Gran Tierra Energy management team consists of four senior international
energy professionals representing over one hundred years of hands-on
international exploration and production operations experience in most of the
world's principal petroleum producing regions. Three of the members of the
management team were most recently employed by EnCana Corporation, Canada's
largest oil and gas company by market capitalization. Two of the founders of
Gran Tierra Energy are also founders of Saxon Energy Services Inc., an expanding
Canadian public company involved in oil and gas drilling and related services in
South America.
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Since its inception in May, Gran Tierra Energy has acquired interests in
producing and non-producing properties in Argentina (the "Argentine
Acquisition") and has developed an inventory of future exploration and
production opportunities that is expected to consolidate the Company's presence
in Argentina, provide entry into other countries in South America and provide a
base for future growth.
Gran Tierra Energy made a formal offer to purchase the Argentina assets of Dong
Won Corporation S.A on May 30, 2005, that was accepted on June 22, 2005. The
Argentine Acquisition closed on September 1, 2005, and consists of a 14%
participation in several producing oil fields governed by a single joint
venture, and a 50% interest in two additional properties. The major property,
Palmar Largo, produces approximately 350 barrels per day to Gran Tierra and
generates operating cash flow of approximately $200,000 per month to the
Company. The total acquisition cost was approximately $7 million.
The Palmar Largo joint venture is operated by Pluspetrol S.A. The area has been
producing since 1984 and is in the later stages of its production life. A
planned two-well drilling program is now nearing completion. The initial
exploration well was not commercially successful; a second development well is
currently drilling.
The Palmar Largo acquisition was not made for its exploration upside but rather
to establish cash flow in a region of interest to Gran Tierra Energy and to
establish a presence and base for expansion. It is a strategic first step for
the Company. Still, 3-D seismic has identified several leads and prospects that
are potential drilling candidates.
Concurrent with the Argentine Acquisition, Gran Tierra Energy commenced
negotiation of a business combination with Goldstrike. To facilitate these
negotiations, Goldstrike provided a bridge loan to Gran Tierra Energy to finance
the Argentine Acquisition. Upon the effectiveness of the consolidation of the
companies, this loan was to be forgiven. The consolidation of the two companies,
affected by the Share Purchase, has been consummated and the loan has been
forgiven.
The Company
On November 10, 2005, the two companies consummated the Share Purchase and the
Split-off and adopted the business plan of Gran Tierra Energy. The combination
of Goldstrike, Gran Tierra Energy and the Argentina properties acquired in the
Argentine Acquisition brings to the Company business components essential to the
success and growth of the Company: the vision and senior management experience
of Gran Tierra Energy, an appropriate first property acquisition through the
Argentine Acquisition and access to the U.S. capital markets as a public
company.
Our plan is to create value in the international oil & gas exploration and
development industry, initially in South America. Our business strategy is
founded on several principles:
o Engage qualified, experienced, intelligent and motivated
professionals
o Position the Company in countries that welcome foreign investment,
provide attractive fiscal terms and offer previously ignored or
undervalued opportunities;
o Establish an effective local presence and leverage management
experience and synergies with strategic partners to access
proprietary deal flow;
o Create alliances with companies that are active in areas of interest
to the Company, and consolidate initial land/property positions;
o Build a balanced portfolio of production, development, step-out and
more speculative exploration opportunities;
o Mix technical excellence with common sense;
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o Take a pragmatic approach to business; and
o Transact business in familiar countries with familiar people and
familiar assets.
Industry Overview
Although prices for oil and natural gas fluctuate on the commodities market,
prices have been at or near record highs over the past year. Oil and natural gas
exploration and development activity in many countries is or has been dominated
by larger companies, that have overlooked or undervalued smaller-sized oil and
gas opportunities, some of which have not been considered economically viable in
a lower price environment. This creates opportunities for more nimble, smaller
companies like Gran Tierra.
High energy prices make smaller fields more economic; small fields are less
attractive for large companies who need larger projects to maintain their
growth. In many instances, larger companies are disposing of their smaller,
non-core assets. However, many small companies have limited international
management depth, limited access to capital, and limited operating capability,
including access to drilling rigs. In some countries, smaller fields have been
overlooked or undervalued. More progressive governments have recognized this
unrealized potential, and are moving to attract smaller companies.
The international oil and gas industry is extremely diverse and offers very
different opportunities for different companies in different countries. There
are several realities, however, that are pervasive:
o Oil and gas reserves tend to be distributed in a pyramid pattern.
The distribution of oil and gas reserves is generally depicted as a
"pyramid" with the greatest number of fields being smaller fields
and with very few large fields. Because of their size, the very
large fields are more easily located - most have already been
discovered and tend be the most economical to produce (though not
always).
o Oil and gas companies tend to be distributed in a pyramid pattern.
Oil and gas companies tend to be distributed in a pattern that is
similar to that of oil and gas reserves. There are many small
companies and few very large companies (the super majors).
Furthermore, large companies tend to shed smaller non-core assets
that then become available for acquisition by smaller companies and
as a result small companies tend to proliferate.
o In a mature producing area with a mature industry, the entirety of
the resource pyramid is being explored and developed by both small
and large oil and gas companies. In less mature areas where small
companies have been discouraged, the potential of the resource base
and resource industry has not been fully realized.
o New opportunities for smaller companies. High energy prices, more
open energy policies and continuing divestitures are creating a
significant opportunity for smaller companies today, in certain
countries in particular.
o The general consensus within the energy industry indicates that the
higher oil prices we currently are experiencing are not a short-term
phenomenon. According to the NYMEX futures exchange, which
represents the market's view on future prices, prices near $60 per
barrel can be expected for the next three years and remain in the
mid-$50s range for several more years.
o By its nature, finding and producing oil and gas is a risky
business. Oil and gas deposits may be located miles below the
earth's surface. There is no guarantee, despite the sophistication
of modern exploration techniques, that oil or gas will be present in
a particular location without drilling. Additionally, there is no
guarantee that a discovery will be commercially viable without
follow up drilling, nor can there be any guarantee that such follow
up drilling will be successful. There is furthermore no guarantee
that reserves once established will produce at expected rates. Added
to this are the vagaries of politics and fiscal systems that can
render a project economic one day and uneconomic the next, and
societies that can threaten the safety and security of workers or
the reputation of the company.
o The oil and gas industry is capital intensive - particularly for
startups that cannot depend on cashflow to fund their ambitions.
Investment decisions are based on long time horizons - the typical
oil and gas project has a life of 20+ years. Economics and value are
based on a long-term perspective. This can be extremely problematic
for investors looking for quarterly results, especially for smaller
companies that do not have a large portfolio and an assembly-line
approach to their work. These companies will progress in fits and
starts, especially relative to their size. They will have
disappointments and they will have successes, some large and some
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small.
o The production profile for a substantial majority of oil and gas
reservoirs is a declining trend - Production from an oil or gas
field with a fixed number of wells declines over time. That decline
rate varies depending on the reservoir and well/development
characteristics but in general, steepest declines are earlier in the
production life of the field. Typically, production falls to a point
where revenues are insufficient to cover operating costs (the
project reaches its economic limit) and the field is abandoned.
o Production levels in a field can be maintained by more intensive
drilling and/or enhancement of existing wells and such efforts are
usually made to offset the natural decline in production. A low
price environment, budgetary constraints or lack of imagination can
prevent companies from taking appropriate action, however. This can
present a significant opportunity for new operators in a high price
environment.
o Chance of exploration success in areas where there is no oil and gas
activity is low. The average chance of success for `wildcat'
exploration wells, globally, is less than 10%. In other words, 9 of
10 wells are unsuccessful. An exploration success of 30% (one of
three wells successful) is a significant accomplishment.
Growth Opportunities
In general, growth for an oil and gas company is measured in terms of production
and reserves, and corresponding cash flow. A significant determinant of cash
flow is prices, over which a single oil company has no control. Price movements
provide significant cash windfalls or depressions that likewise tend to impact
market valuation, but the ultimate viability of an oil and gas company depends
on underlying reserve and production fundamentals.
In many ways, growth is easier to achieve for a smaller company than a large
company, as a small company begins from a small base and small steps can
represent large percentages. Large companies, however, are able to absorb
failures without jeopardizing the viability of their company. Their stronger
balance sheets and financial positions provide a competitive advantage, allow
them to take more risk and often attract the most qualified people.
There are essentially two ways to grow an oil and gas company - by acquiring
production/reserves or by acquiring land and drilling. Acquisitions provide the
greatest impact over the shortest period of time but they may or may not be
self-sustaining. Acquisition of land and subsequent drilling is a long process
with a limited chance of success. Land is often competitively tendered.
Appraisal usually requires geological and geophysical work, assessment and time,
that may or may not support the drilling of an exploration well.
The Company's growth strategy focuses on building a portfolio of production,
exploration prospects and land by selective acquisitions, where future drilling
will add value.
RISK FACTORS
Our future revenues will be derived from international oil and natural gas
exploration and development. There are numerous and varied risks, known and
unknown, that may prevent us from achieving our goals, including those described
below. The risks described below are not the only ones Gran Tierra will face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our financial performance and business operations. Our business,
financial condition or results of operation may be materially adversely affected
by the nature and impact of these risks. In such case, the market value of our
securities could decline, and investors may lose all or part of their
investment. Please refer to the other information contained in this Current
Report for further details pertaining to the Company's business and financial
condition.
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RISKS RELATED TO OUR BUSINESS
We are a new enterprise engaged in the business of oil and natural gas
exploration and development. The business of exploring for, developing and
producing oil and natural gas reserves is inherently risky. We will face
numerous and varied risks, both known and unknown, which may prevent us from
achieving our goals. Some of these risks are described below. Even a combination
of experience, knowledge and careful evaluation may be unable to overcome these
risks.
We Are A Development Stage Company. We Have Limited Operating History For You To
Evaluate Our Business. We May Never Attain Profitability.
We are a development stage company and have limited current oil or natural gas
operations. As an oil and gas exploration and development company with limited
operating history, it is difficult for potential investors to evaluate our
business. Our proposed operations are therefore subject to all of the risks
inherent in light of the expenses, difficulties, complications and delays
frequently encountered in connection with the formation of any new business, as
well as those risks that are specific to the oil and gas industry. Investors
should evaluate us in light of the delays, expenses, problems and uncertainties
frequently encountered by companies developing markets for new products,
services and technologies. We may never overcome these obstacles.
Our business is speculative and dependent upon the implementation of our
business plan and our ability to enter into agreements with third parties for
the rights to exploit potential oil and gas reserves on terms that will be
commercially viable for us. There can be no assurance that our efforts will be
successful or result in revenue or profit. There is no assurance that we will
earn significant revenues or that investors will not lose their entire
investment.
Unanticipated Problems in Our Argentina Operations May Harm Our Business and
Our Viability.
If our Argentina operations, in particular the Palmar Largo property, which is
the principal asset in this location at this time, are disrupted and/or the
economic integrity of these projects is threatened for unexpected reasons (which
may be due to technical difficulties, geographic and weather conditions,
business reasons or otherwise), our business may experience a setback. Because
we are at the beginning stages of our development, we are particularly
vulnerable to these events. Prolonged problems may threaten the commercial
viability of our Argentina operations. Moreover, the occurrence of significant
unforeseen conditions or events in connection with the Argentine Acquisition may
cause us to question the thoroughness of our due diligence and planning process
which occurred prior to the acquisition, which may cause us to reevaluate our
business model and the viability of our contemplated business. Such actions and
analysis may adversely affect our business.
We May Be Unable to Obtain Development Rights We Need to Build Our Business.
Our business plan focuses on international exploration and production
opportunities, initially in South America and later in North Africa and the
Middle East and Southeast Asia. We have thus far acquired three properties for
exploration and development in Argentina. In the event that we do not succeed in
negotiating additional property acquisitions, our future prospects will likely
be substantially limited, and our financial condition and results of operation
may be materially adversely affected.
Our Lack of Diversification Will Increase the Risk of an Investment in Gran
Tierra.
Our business will focus on the oil and gas industry in a limited number of
properties, initially in Argentina, with the intention of expanding elsewhere in
South America and later into North Africa and the Middle East and Southeast
Asia. 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, we will likely be impacted more
acutely by factors affecting our industry or the regions in which we operate
than we would if our business were more diversified.
Strategic Relationships upon Which We May Rely are Subject to Change.
Gran Tierra's ability to successfully bid on and acquire additional properties,
to discover reserves, to participate in drilling opportunities and to identify
and enter into commercial arrangements with customers will depend on developing
and maintaining close working relationships with industry participants and on
our ability to select and evaluate suitable properties and to consummate
transactions in a highly competitive environment. These realities are subject to
change and may impair Gran Tierra's ability to grow.
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To develop our business, we will endeavor to use the business relationships of
our management to enter into strategic relationships, which may take the form of
joint ventures with other private parties or with local government bodies,
contractual arrangements with other oil and gas companies, including those that
supply equipment and other resources that we will use in our business. There can
be no assurances that we will be able to establish these strategic
relationships, or if established that the relationships will continue to be
maintained. 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 may suffer.
Competition in Obtaining Rights to Explore and Develop Oil and Gas Reserves and
to Market Our Production May Impair Our Business.
The oil and gas industry is highly competitive. Other oil and gas companies will
bid 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, thereby providing competition to us for these rights. This competition
is increasingly intense as prices of oil and natural gas on the commodities
markets has risen in recent years. Additionally, other companies engaged in our
line of business may compete with us from time to time in obtaining capital from
investors. Competitors include larger, foreign owned companies, which, in
particular, may have access to greater resources than us, may be more successful
in the recruitment and retention of qualified employees and may conduct their
own refining and petroleum marketing operations, which may give them a
competitive advantage. In addition, actual or potential competitors may be
strengthened through the acquisition of additional assets and interests. If we
are unable to compete effectively or adequately respond to competitive
pressures, this inability may materially adversely affect our results of
operation and financial condition.
We May Be Unable to Obtain Additional Capital That We Will Require to
Implement Our Business Plan.
We expect that current capital and our other existing resources, will be
sufficient only to provide a limited amount of working capital, and the revenues
generated from the Argentina properties will not alone be sufficient to fund our
operations or planned growth. We will require additional capital to continue to
operate our business beyond the initial phase of these three Argentina
properties, and to expand our exploration and development programs to additional
properties. There are no assurance that we will be able to obtain the capital
required in such a short period of time or at all.
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.
Shortly after the closing of the Share Exchange, we will require such additional
capital and we therefore 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. There is no assurance that we
will be successful in locating a suitable financing transaction in the time
period required or at all, or that we will be successful in obtaining the
capital we require by other means. Moreover, there is no assurance that, if we
do succeed in raising additional capital shortly after the Share Exchange, the
capital received will be sufficient to fund our operations going forward without
obtaining additional capital financing. Furthermore, future financings are
likely to be dilutive to the stockholders, as we will most likely issue
additional shares of Common Stock or other equity to the investors in future
financing transactions.
Our ability to obtain needed financing may be impaired by such factors as the
capital markets (both generally and in the oil and gas industry in particular),
our status as a new enterprise without a demonstrated operating history, the
location of our oil and natural gas properties in developing countries and
prices of oil and natural gas on the commodities market (which will impact the
amount of asset-based financing available to us). Further, if oil and/or natural
gas prices on the commodities markets decrease, then our revenues will likely
decrease, and decreased revenues may increase our requirements for capital. Some
of the contractual arrangements governing our operations may require us to
maintain minimum capital, and we may lose our contract rights (including
exploration, development and production rights) if we do not have the required
minimum capital. If the amount of capital we are able to raise from financing
activities, together with our revenues from operations, is not sufficient to
satisfy our capital needs (even to the extent that we reduce our operations) we
may be required to cease our operations.
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We May Be Unable To Meet Our Capital Requirements In The Future.
We may need additional capital in the future, which may not be available to us
on reasonable terms or at all. The raising of additional capital may dilute your
ownership in the Company. 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:
o pursuing growth opportunities, including more rapid expansion;
o acquiring complementary businesses;
o making capital improvements to improve our infrastructure;
o hiring qualified management and key employees;
o responding to competitive pressures;
o complying with licensing, registration and other requirements; and
o maintaining compliance with applicable laws.
Any additional capital raised through the sale of equity may dilute your
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 and 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.
Our strategy envisions expanding our business. If we fail to effectively manage
our growth, our financial results could be adversely affected. Growth may place
a strain on our management systems and resources. We must continue to refine and
expand our business development capabilities, our systems and processes and our
access to financing sources. As we grow, we must continue to hire, train,
supervise and manage new employees. We cannot assure you that we will be able
to:
o meet our capital needs;
o expand our systems effectively or efficiently or in a timely manner;
o allocate our human resources optimally;
o identify and hire qualified employees or retain valued employees; or
o incorporate effectively the components of any business that we may
acquire in our effort to achieve growth.
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If we are unable to manage our growth and our operations our financial results
could be adversely affected.
Our Business May Suffer If We Do Not Attract and Retain Talented Personnel.
Our success will depend in large measure on the abilities, expertise, judgment,
discretion integrity and good faith of our management and other personnel in
conducting the business of Gran Tierra. We have a small management team, and the
loss of a key individual or inability to attract suitably qualified staff could
materially adversely impact our business. We may also experience difficulties in
certain jurisdictions in our efforts to obtain suitably qualified staff and
retaining staff who are willing to work in that jurisdiction. 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, no assurance can be given that our key
personnel will continue their association or employment with Gran Tierra or that
replacement personnel with comparable skills can be found. 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.
Our Management Team Does Not Have Extensive Experience in Public Company
Matters.
Our management team has had limited U.S. public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable
federal securities laws including filing required reports and other information
required on a timely basis. There can be no assurance that our management will
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.
Risks Related to our Prior Business May Adversely Affect our Business.
Prior to the Share Exchange, the business of the Company involved mineral
exploration, with a view towards development and production of mineral assets,
conducted by Goldstrike, including ownership of 32 mineral claim units in a
property in British Columbia, Canada and the exploration of this property. We
have determined not to pursue this line of business following the Share
Exchange. However, claims arising from the former business of Goldstrike may be
made against us. These claims may arise from Goldstrike's activities (including
employee and labor matters), financing and credit arrangements or other
commercial transactions. While no claims are pending and we have no actual
knowledge of any threatened claims, it is possible that third parties may seek
to make claims against us. Even if asserted claims are without merit and we have
no liability, defense costs and the distraction of management attention may
adversely affect our business. If any potential claims are made against us, our
business could suffer, in particular if any such claims are material in terms of
their magnitude or complexity. Therefore, claims arising from the business of
Goldstrike prior to the Share Exchange may have a material adverse affect on the
Company's business in the future. While the relevant definitive agreements
executed in connection with the Split-o provide indemnities to us for
liabilities arising from the prior business activities of Goldstrike, these
indemnities may not be sufficient to fully protect us from all costs and
expenses.
RISKS RELATED TO OUR INDUSTRY
Our Exploration for Oil and Natural Gas Is Risky and May Not Be Commercially
Successful.
Oil and natural gas exploration involves a high degree of risk. These risks are
more acute in the earlier stages of exploration. There is no assurance that Gran
Tierra's expenditures on exploration will 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 have a material adverse affect on our
results of operation and financial condition.
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We May Not Be Able to Develop Oil and Gas Reserves on an Economically Viable
Basis.
To the extent that we succeed in discovering oil and/or natural gas reserves, we
cannot assure that these reserves will be capable of production levels we
project or in sufficient quantities to be commercially viable. On a long-term
basis, Gran Tierra's viability depends on our ability to find or acquire,
develop and commercially produce additional oil and gas reserves. Without the
addition of reserves through exploration, acquisition or development activities,
our reserves and production will decline over time as reserves are produced. Our
future reserves will depend not only on our ability to develop then-existing
properties, but also on our ability to identify and acquire additional suitable
producing properties or prospects, to find markets for the oil and natural gas
we develop and to effectively distribute our production into our markets.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-downs of connected wells resulting from extreme weather
conditions, problems in storage and distribution and adverse geological and
mechanical conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be able
to eliminate them completely in any case. Therefore, these conditions will have
some adverse effect on our revenue and cash flow levels to varying degrees and
result in the impairment of our oil and natural gas interests, which may be
material.
Estimates of Oil and Natural Gas Reserves that We Make May Be Inaccurate.
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 have a materially adverse affect on our operating results and financial
condition and result in the impairment of our oil and natural gas interests.
Drilling New Wells Could Result in New Liabilities.
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. Reduced
revenues or losses resulting from the occurrence of any of these risks could
have a materially adverse effect on us and our future results of operations.
Gran Tierra may become subject to liability for pollution, blow-outs or other
hazards. We will obtain insurance with respect to these hazards, however, 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 Gran Tierra or could in an extreme case, result in a
total loss of its properties and assets. Moreover, there can be no assurance
that Gran Tierra will 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.
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Decommissioning Costs Are Unknown and May be Substantial.
Gran Tierra may become responsible for costs associated with abandoning and
reclaiming wells, facilities and pipelines which we use for production of oil
and gas reserves. Abandonment and reclamation of these facilities and the costs
associated therewith is often referred to as "decommissioning." We have not yet
determined whether we will establish a reserve account for these potential costs
in respect of any of our current properties or facilities, or if we will satisfy
such costs of decommissioning from the proceeds of production in accordance with
the practice generally employed in onshore and offshore oilfield operations. If
decommissioning is required prior to economic depletion of our properties or if
our estimates of the costs of decommissioning exceed the value of the reserves
remaining at any particular time to cover such decommissioning costs, we may
have to draw on funds from other sources to satisfy such costs. The use of other
funds to satisfy such decommissioning costs could have a materially adverse
effect on our financial position and future results of operations.
If We Are Unable to Obtain Necessary Facilities, Our Operations Will Be
Hampered.
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.
In order to sell the oil and natural gas that we are able to produce, we will
have to make arrangements for storage and distribution to the market. We will
rely on local infrastructure and the availability of transportation for storage
and shipment of our products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at commercially
acceptable terms in the localities in which we operate. This will 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.
Furthermore, there can be no assurance that future instability in one or more of
the countries in which we will operate, weather conditions or natural disasters,
actions by companies doing business there, labor disputes or actions taken by
the international community will not have a material adverse effect on the
distribution of oil and/or natural gas and in turn on our financial conditions
or operations.
Prices and Markets for Oil and Natural Gas Are Unpredictable and Tend to
Fluctuate Significantly.
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. We expect
that prices will fluctuate in the future. Price fluctuations will have a
significant impact upon our revenue, the return from our reserves and on our
financial condition generally. Price fluctuations for oil and natural gas
commodities may also impact the investment market for companies engaged in the
oil and gas industry. Although during 2005 market prices for oil and natural gas
have risen to near-record levels, there is no assurance that these prices will
remain at current levels. Future decreases in the prices of oil and natural gas
may have a material adverse effect on our financial condition and future results
of operations.
12
Increases in Our Operating Expenses will Impact Our Operating Results and
Financial Condition.
Exploration, development, production, marketing (including distribution costs)
and regulatory compliance costs (including taxes) will substantially impact the
net revenues we derive from the oil and gas that we produce. These costs are
subject to fluctuations and variation in different locales in which we will
operate, and we may not be able to predict or control these costs. If these
costs exceed our expectations, this may adversely affect our results from
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 or may otherwise
adversely affect our financial condition.
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 increasing 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, there could be a material adverse effect on
our prospects, business, financial condition and our results of operation.
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. We can give no assurance that the
application of environmental laws to our business will not cause us to curtail
our production or a materially increase the costs of our production, development
or exploration activities or otherwise adversely affect our financial condition,
results of operations or prospects.
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 deal with 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 against, or if the insurer of such
event is not solvent, this could have a material adverse effect on Gran Tierra's
results of operations or financial condition.
Our Business is Subject to Local Legal, Political and Economic Factors which are
Beyond Our Control.
We initially expect to operate our business in Argentina and other South
American countries, and to expand into North Africa and the Middle East and
Southeast Asia. We believe that Argentina'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.
13
However, there are risks that conditions will change in an adverse manner. 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 regulations and policies or a
shift in political attitudes in Argentina or other countries in which we intend
to operate are beyond our control and may adversely affect our business and
future financial results.
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. These factors, individually or in the aggregate, may
materially adversely affect our operations and financial condition.
Local Legal and Regulatory Systems in Which We Operate May Create Uncertainty
Regarding Our Rights and Operating Activities.
As a result of the Share Exchange, we are a US company that is subject to US
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 US, which may result in risks such as:
o 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;
o a higher degree of discretion on the part of governmental
authorities;
o the lack of judicial or administrative guidance on interpreting
applicable rules and regulations;
o inconsistencies or conflicts between and within various laws,
regulations, decrees, orders and resolutions; and
o 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. We can make no assurance that property right transfers,
joint ventures, licenses, license applications or other legal arrangements
pursuant to which we operate will not be adversely affected by the actions of
government authorities and the effectiveness of and enforcement of our rights
under such arrangements in these jurisdictions cannot be assured.
Our Business Will Suffer if We 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. We believe that we
will be able to obtain all necessary licenses and permits to carry on the
activities which we contemplate under the three Argentina properties and that we
will be able to obtain licenses and permits necessary for our future properties
and operations. However, 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 may have a materially adverse impact on our operations and
financial condition.
Challenges to Our Properties May Impact Our Financial Condition.
Title to oil and natural gas interests is often not capable of conclusive
determination without incurring substantial expense. While Gran Tierra intends
to make appropriate inquiries into the title of properties and other development
rights we acquire, no absolute assurances can be given that title defects will
not exist. In addition, we may be unable to obtain adequate insurance for title
defects, on a commercially reasonable basis or at all. If title defects do
exist, it is possible that we may lose all or a portion of our right, title and
interest in and to the properties to which the title defects relate.
14
Furthermore, no assurance can be given that applicable governments will not
revoke or unfavorably alter the conditions of exploration and development
authorizations that we procure, or that third parties will not challenge any
exploration and development authorizations we procure. There is no certainty
that such rights or additional rights we apply for will be granted or renewed on
terms satisfactory to us.
If our property rights are reduced, whether by governmental action or third
party challenges, our ability to conduct our exploration, development and
production may be impaired, which could have a material adverse affect on our
financial condition.
Foreign Currency Exchange Rate Fluctuations May Affect Our Financial Results.
We expect to sell our oil and natural gas production under agreements that will
be denominated in US 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 US dollar against
the local currencies in jurisdictions where we operate could result in
unanticipated and material fluctuations in our financial results.
We Will Rely on Technology to Conduct Our Business and Our Technology Could
Become Ineffective Or Obsolete.
We rely on technology, including geographic and seismic analysis techniques and
economic models, to develop our reserve estimates and to guide our exploration
and development and production activities. We will be required to continually
enhance and update our technology to maintain its efficacy and to avoid
obsolescence. The costs of doing so may be substantial, and may be higher than
the costs that we anticipate for technology maintenance and development. If we
are unable to maintain the efficacy of our technology, our ability to manage our
business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient
means of reaching our objectives, in which case we may incur higher operating
costs than we would were our technology more efficient. The impact of technical
shortcomings could have a material adverse effect on our prospects, business,
financial condition and results of operations.
RISKS RELATED TO OUR COMMON STOCK
There Has Been No Established Trading Market for the Common Stock.
There has been no established trading market for the Common Stock. The lack of
an active market may impair your ability to sell your shares at the time you
wish to sell them or at a price that you consider reasonable. The lack of an
active market may also reduce the fair market value of your shares. An inactive
market may also impair the Company's ability to raise capital by selling shares
of capital stock and may impair the Company's ability to acquire other companies
or technologies by using Common Stock as consideration.
You May Have Difficulty Trading and Obtaining Quotations for Our Common
Stock.
The Common Stock is currently quoted on NASD's Over-the-Counter Bulletin Board
under the symbol "GDSK.OB." The Common Stock is not actively traded, and the bid
and asked prices for our Common Stock have fluctuated widely. As a result, an
investor may find it difficult to dispose of, or to obtain accurate quotations
of the price of, our securities. This severely limits the liquidity of the
Common Stock, and would likely have a material adverse effect on the market
price of the Common Stock and on our ability to raise additional capital.
The Market Price of Our Common Stock Is, and Is Likely to Continue to Be, Highly
Volatile and Subject to Wide Fluctuations.
The market price of the Common Stock is likely to be highly volatile and could
be subject to wide fluctuations in response to a number of factors that are
beyond our control, including:
15
o dilution caused by our issuance of additional shares of Common Stock
and other forms of equity securities, which we expect to make in
connection with future capital financings to fund our operations and
growth, to attract and retain valuable personnel and in connection
with future strategic partnerships with other companies;
o announcements of new acquisitions, reserve discoveries or other
business initiatives by our competitors;
o fluctuations in revenue from our oil and natural gas business as new
reserves come to market;
o changes in the market for oil and natural gas commodities and/or in
the capital markets generally;
o changes in the demand for oil and natural gas, including changes
resulting from the introduction or expansion of alternative fuels;
and
o changes in the social, political and/or legal climate in the regions
in which we will operate.
In addition, the market price of our Common Stock could be subject to wide
fluctuations in response to:
o quarterly variations in our revenues and operating expenses;
o changes in the valuation of similarly situated companies, both in
our industry and in other industries;
o changes in analysts' estimates affecting our company, our
competitors and/or our industry;
o changes in the accounting methods used in or otherwise affecting our
industry;
o additions and departures of key personnel;
o announcements of technological innovations or new products available
to the oil and natural gas industry;
o announcements by relevant governments pertaining to incentives for
alternative energy development programs;
o fluctuations in interest rates, exchange rates and the availability
of capital in the capital markets; and
o significant sales of our Common Stock, including sales by the
investors following registration of the shares of Common Stock
issued in this Offering and/or future investors in future offerings
we expect to make to raise additional capital.
These and other factors are largely beyond our control, and the impact of these
risks, singly or in the aggregate, may result in material adverse changes to the
market price of our Common Stock and/or our results of operation and financial
condition.
Our Operating Results May Fluctuate Significantly, and These Fluctuations May
Cause Our Stock Price to Decline.
Our operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses, including the coming to
market of oil and natural gas reserves that we are able to develop, expenses
that we incur, the prices of oil and natural gas in the commodities markets and
other factors. If our results of operations do not meet the expectations of
current or potential investors, the price of our Common Stock may decline.
16
We Do Not Expect to Pay Dividends In the Foreseeable Future.
We do not intend to declare dividends for the foreseeable future, as we
anticipate that we will reinvest any future earnings in the development and
growth of our business. Therefore, investors will not receive any funds unless
they sell their Common Stock, and stockholders may be unable to sell their
shares on favorable terms or at all. Investors cannot be assured of a positive
return on investment or that they will not lose the entire amount of their
investment in the Common Stock.
Applicable SEC Rules Governing the Trading of "Penny Stocks" Limit the Trading
and Liquidity of the Common Stock, Which May Affect the Trading Price of the
Common Stock.
Shares of Common Stock may be considered a "penny stock" and be subject to SEC
rules and regulations which impose limitations upon the manner in which such
shares may be publicly traded and regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock, the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules which may increase the
difficulty investors may experience in attempting to liquidate such securities.
Employees
As of November 10, 2005 we have 7 full-time employees. None of our employees is
represented by a labor union, and we consider our employee relations to be good.
PLAN OF OPERATIONS
As the result of the change in the business and operations of the Company from
mineral exploration and development prior to the Share Purchase and Split-off
(referred to collectively as the "Transactions") to oil and natural gas
exploration following the Transactions, a discussion of our past financial
results is not pertinent to the business plan of the Company on a going forward
basis.
The following describes our current business plan, including our ability to
satisfy our cash requirements and needs/plans to raise additional funds over the
next year; a summary of planned acquisition, exploration and development
initiatives and expected expenditures.
After giving effect to the Transactions, Gran Tierra's cash balance is expected
to be approximately $1.4 million, representing net proceeds received from
Goldstrike as the result of its completion of a private placement of its
securities. This balance is net of monies advanced to Gran Tierra Energy to
finance the Argentine Acquisition and to provide additional working capital to
Gran Tierra Energy, and net of costs associated with the Transactions.
Capital expenditures for the Palmar Largo joint venture have been unusually high
in 2005 due principally to the drilling of two wells, contributing to a capital
budget of approximately $20.8 million for the year ($2.9 million for a 14%
share). Over the year, these expenditures are covered by cash flow from the
property. However, as both wells are being drilled later in the year, much of
the expenditure is being borne by Gran Tierra, which has had access to cash flow
only since September 1, 2005. Gran Tierra's share of capital expenditures to
December 31, 2005 is expected to be approximately $2.2 million and is being
funded partly from cash flow and partly from available cash. Following the
completion of the second well expected in December 2005, cash flow surpluses are
expected to return. Plans for the Palmar Largo joint venture for 2006 include a
modest expenditure budget, with no additional drilling. The preliminary capital
budget for 2006 is $1.2 million to Gran Tierra.
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Gran Tierra's plan for growth is linked to its financial capabilities. Our
integrated strategy can be described as follows:
o Gran Tierra Energy completed an initial equity financing to acquire funds
for general and administrative expenses incurred as it assessed
opportunities and identified an appropriate first acquisition. Goldstrike
completed a private placement offering, the proceeds of which were used to
fund the Argentine Acquisition and provide additional working capital.
Operating cash flow generated by the Argentina properties will allow Gran
Tierra to expand its activities and capabilities, by hiring additional
staff.
o We plan on continuing to assess opportunities and identify appropriate
acquisitions. Current acquisition targets include "tuck-in" opportunities
in Argentina as well as acquisitions which will provide the Company with
new country entries.
o Identification and successful completion of such acquisitions will provide
additional cash flow which will allow Gran Tierra to expand its activities
and capabilities, assume a role as an operator, and advance exploration
and development opportunities.
We expect an increase in general and administrative expenditures to
approximately $200,000 per month, equivalent to our current operating cash flow.
We have expanded our staff in Calgary from three to six employees with additions
in the areas of geoscience, accounting and administration, and are targeting one
or two additional hires. We are establishing an office in Buenos Aires,
Argentina and our Vice President of Latin America is re-locating from Quito,
Ecuador. Our staff complement in Buenos Aires is expected to increase to three
before year-end, with an operational focus. We are targeting two additional
hires in Buenos Aires early in 2006.
We expect our net cash position to stabilize in January 2006 (following the
drilling of the Palmar Largo well). A portion of Gran Tierra's current cash
balance will cover the projected cash deficit to that time.
Following is a summary of the short and longer term components of our business
plan:
Short-Term Plan
o Acquire additional opportunities to increase production and cash
flow, provide exploration and development upside and create a
regional presence with an initial focus on opportunities in
Argentina and Colombia.
o Establish production bases, tuck-in exploration and/or development
opportunities and add more speculative exploration targets.
o Target acquisitions that provide growth, production and exploration
opportunities and qualified local personnel.
Long-Term Plan
o Expand acquisitions of additional opportunities to other areas of
South American and, eventually, other regions including Northeast
Africa, the Middle East and Southeast Asia.
o Create independent business units for each country implementing a
business model similar to that implemented for Gran Tierra.
o Evolve from creating value by acquisition to creating value by
exploration and drilling.
Business Principles
o Engage qualified, experienced, intelligent and motivated
professionals
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The management team of Gran Tierra has over 100 years of hands-on
international experience and has developed extensive contacts and
relationships that it can bring together to build the company.
Qualified geophysicists, geologists and engineers are in short supply. We
believe that Gran Tierra offers an enticing opportunity for such
professionals by providing them with the opportunity to work with other
professionals that they know and with whom they have worked effectively in
the past to build a successful international exploration and production
company.
o Position in countries that are welcoming to foreign investment, that
provide attractive fiscal terms and offer opportunities that have been
previously ignored or undervalued
The pace of oil and gas exploration and development in countries around
the world is generally dictated by geology, government policy and
regulation, as well as oil and gas prices. The presence or absence of such
factors can limit or prevent a country from realizing its oil and gas
resource potential. Governments of certain countries facing declining
production have taken steps to improve the economics of oil and gas
exploration and development and attract foreign investment. In addition,
the recent increases in oil and gas prices have positively impacted the
pace of oil and gas exploration and development in many countries.
Gran Tierra plans to target smaller, overlooked and/or undervalued
exploration, development and production opportunities via joint venture
arrangements. The oil industry is about finding and producing oil and gas.
It is inherently a risky business as there is no certainty of oil or gas
until a well is drilled and there is no certainty of reserves until the
last barrel is produced. For this reason, oil companies usually work
together, in a joint venture arrangement, to spread risk and manage their
portfolios.
We plan to initially target South America, initially in Argentina where
activity has historically been dominated by the national oil company and
Colombia which has revamped its energy policies to appeal to smaller
foreign companies.
o Establish an effective local presence
We believe that establishing an effective local presence is essential for
an international oil and gas company - that is familiar with the local
operating environment, with the local oil and gas industry, with local
companies and governments - in order to facilitate business. We plan to
achieve a local presence by staffing with qualified and respected local
management and professionals. Additionally, our ability to run our
international operations as a "local" company is expected to produce
general business advantages.
o Assess and close opportunities expeditiously
A local company structure is also expected to provide the Company with the
ability to quickly and efficiently assess and close oil and gas
opportunities.
o Create alliances with companies that are active in areas of interest, and
consolidate initial land/property positions
19
This is a two-pronged approach to growth. Gran Tierra's initial offer to
purchase interests in connection with the Argentine Acquisition provided
us with introductions to four local company partners who have been
negotiating with the Company for other opportunities both inside the
country and elsewhere in South America. At the same time, we have been
pursuing opportunities with other companies that our management team has
affiliations with and/or where a strategic fit has been sought. The oil
industry, worldwide, is characterized by cooperation between companies;
Gran Tierra is finding an early niche in Argentina.
o Build a balanced portfolio of production, development, step-out and more
speculative exploration opportunities
Gran Tierra's growth strategy is initially focused on acquisition of
property - establishing a base of production in a region or country to
provide immediate cash flow then moving quickly to add tuck-in exploration
opportunities. These will include both low and higher risk projects, with
appropriate working interests. The most effective risk mitigation in
international oil and gas is diversification, and the highest chance of
exploration success results from the largest number of exploration
projects. For Gran Tierra, this will translate to smaller working interest
in many exploration prospects rather than a large interest in a single
prospect.
As Gran Tierra continues to build its portfolio and personnel, it will
assume a role as operator for selected joint ventures.
o Take a pragmatic approach to business
This is about focusing on fundamentals - geological risk, operational
realties and business practicalities. As a smaller company, Gran Tierra
must be focused and must use its experience and expertise to move the
Company forward, practically.
o Mix technical excellence with common sense
Technical excellence in the oil and gas business is not typically about
inventing a new technology. Rather, it is about applying an existing
technology in a new way or new location. It encompasses knowing what
technology is out there and opening to new possibilities. Some of this is
aptitude, some of this is learning. As all of the members of the current
management team have had significant experience in large international
companies who tend to be on the vanguard of technology, they can bring the
knowledge-base of the multi-national into the small company environment.
o Do business in familiar countries with familiar people and familiar assets
This is the practical benefit of experience. Our business model is a
bringing together of peoples' knowledge and relationships into a single
entity with a single purpose.
Gran Tierra cannot compete with the international oil and gas industry on
an open tender basis. Assets and opportunities that are offered globally
will receive a premium price and chance of success for any one bidder is
low. This is not Gran Tierra's territory. Our approach is based on niche
opportunities for buyer and seller.
PROPERTIES
The Company leases office space in Calgary, Alberta and has temporary office
space in Quito, Ecuador and in Buenos Aires, Argentina, on month to month terms.
The following table describes the properties acquired by Gran Tierra Energy
effective September 1, 2005. Metrics and values represent a June 1, 2005
evaluation date.
Property Working Reserves/
Interest Operator Production/Cashflow Purchase Price
--------------------------------------------------------------------------------
Palmar Largo 14% Pluspetrol 705,000 bbl, 386 b/d,
$217,000/mo $6,969,659, $9.79/bbl
Nacatimbay 50% CGC minor gas/condensate $50,467
production
Ipaguazu 50% CGC non-producing $12,588
--------------------------------------------------------------------------------
Reserves
Gran Tierra's offer for Palmar Largo was based on projected value for proved
producing reserves, equivalent to 705 thousand barrels for Gran Tierra's 14%
working interest at June 1, 2005. These estimates are net before royalties. They
are supported by an independent reserve assessment for the property.
20
Gran Tierra did not assign value to non-producing or undeveloped producing
reserves or to probable or possible reserves, including reserves that may be
attributable to two wells planned for the year.
Production
Production for Palmar Largo averaged 485 barrels per day in 2003, 434 barrels
per day in 2004 and 388 barrels per day for the first half of 2005,
corresponding to a 14% share (net before royalties). Average sales prices were
$24.98 per barrel in 2003, $29.67 per barrel in 2004 and $29.44 per barrel for
the first six months of 2005. Oil prices in Argentina are regulated according to
a tax on exports of oil, which effectively establishes a ceiling for domestic
prices. The export tax escalates to 45% of value over $45 per barrel for West
Texas Intermediate (WTI) oil; the tax is currently scheduled to expire in
February 2007. Production from Palmar Largo is transported by pipeline and truck
to a nearby refinery. Oil is sold under contract and at a discount to WTI that
ranges between 22% and 41% for WTI between $32 and $65 per barrel.
Operating costs for Palmar Largo averaged $7.33 per barrel in 2003, $8.98 per
barrel in 2004 and $11.94 per barrel over the first half of 2005 (due to
workover activity).
Wells, Acreage, Present Activity
There are currently 35 (gross) wells producing at Palmar Largo. One well is
inactive and 9 wells are abandoned. Total area covered by the joint venture is
approximately 1,380 square kilometers - Gran Tierra's interest is 14%. The
Company also holds a 50% interest in two minor properties. The Nacatimbay
property encompasses 148 square kilometers. One (gross) well is currently
producing. The Ipaguazu concession covers 175 square kilometers, and is
currently non-producing. All lands are considered developed acreage.
Two (gross) wells have been drilled in 2005 at Palmar Largo. One exploration
well was abandoned. A second twin of an existing well is currently drilling. One
(gross) development well was drilled at Palmar Largo in 2004; no other wells
were drilled in the 2003 to 2005 period.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 10, 2005 by (i) each person who, to
our knowledge, beneficially owns more than 5% of the shares of Common Stock;
(ii) each of the directors and executive officers of the Company; and (iii) all
of our executive officers and directors as a group.
Number of Percentage
Shares of Common
Name and Address of Beneficial Owner Beneficially Stock
Owned (1) Outstanding
Dana Coffield (2) 1,734,661 4.11%
James Hart 1,689,683 4.00
Max Wei 1,689,683 4.00
Rafael Orunesu 1,689,683 4.00
Jeffrey Scott (3) 2,213,857 5.25
Walter Dawson (4) 1,847,619 4.38
Verne Johnson (5) 1,479,542 3.51
Directors and executive officers as a
group (total of 7 persons) 12,344,720 27.46%
* Less than 1% of the outstanding Common Stock
21
(1) Beneficial ownership is calculated based on 42,191,873 shares of Common
Stock issued and outstanding as of November 10, 2005. Beneficial ownership
is determined in accordance with Rule 13d-3 of the SEC. The number of
shares beneficially owned by a person includes shares of Common Stock
underlying options or warrants held by that person that are currently
exercisable or exercisable within 60 days of November 10, 2005. The shares
issuable pursuant to the exercise of those options or warrants are deemed
outstanding for computing the percentage ownership of the person holding
those options and warrants but are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. The persons and
entities named in the table have sole voting and sole investment power
with respect to the shares set forth opposite that person's name, subject
to community property laws, where applicable.
(2) The number of shares beneficially owned includes 14,993 shares issuable on
exercise of warrants exercisable within 60 days of November 10, 2005.
(3) The number of shares beneficially owned includes 174,981 shares issuable
on exercise of warrants exercisable within 60 days of November 10, 2005.
(4) The number of beneficially owned includes 158,730 shares of Common Stock
held by Mr. Dawson's spouse.
(5) The number of shares beneficially owned includes 62,492 shares issuable on
exercise of warrants exercisable within 60 days of November 10, 2005.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Concurrently with the consummation of the Share Purchase, the officers and
directors of Goldstrike resigned and simultaneously therewith new officers and
new directors of the Board of Directors were designated. The Board consists of 5
members.
Executive Officers
The following provides general information for the persons who hold executive
officer positions with the Company:
Name Age Executive Officer Position Held With Company
---------------------- ----- -----------------------------------------------
Dana Coffield 47 President and Chief Executive Officer
James Hart 51 Vice President Finance and Chief Financial
Officer
Max Wei 56 Vice President of Operations
Rafael Orunesu 50 Vice President - Latin America
Dana Coffield, President & CEO. Prior to joining Gran Tierra Energy, Inc. in May
2005, Mr. Coffield was Vice President of the Middle East Business Unit for
EnCana Corporation, North America's largest independent oil and gas company,
from April 2002 through April 2004. His responsibilities included business
development, exploration operations, commercial evaluations, government and
partner relations, planning and budgeting, environment/health/safety, security
and management of several overseas operating offices. From July 1998 through
April 2002, he held various senior management positions for EnCana's
predecessor, Alberta Energy Company, where he managed petroleum exploration and
production operations in five countries. Previous to that time, he was with ARCO
International for ten years, where he participated in exploration and production
operations in North Africa, SE Asia and Alaska. He began his career as a
mud-logger in the Texas Gulf Coast and later as a Research Assistant with the
Earth Sciences and Resources Institute where he conducted geoscience research in
North Africa, the Middle East and Latin America. Dana has participated in the
discovery of over 130,000,000 barrels of oil equivalent reserves. Mr. Coffield
graduated from the University of South Carolina with an MSc and PhD in Geology,
based on research conducted in the Oman Mountains in Arabia and Gulf of Suez in
Egypt respectively. In addition, Mr. Coffield holds a BSc in Geological
Engineering from the Colorado School of Mines, is a member of the AAPG, the GSA
and the CSPG, and is a Fellow of the Explorers Club.
James Hart, VP Finance & CFO. Prior to joining Gran Tierra Energy, Inc. in May
2005, Mr. Hart was an internal consultant with EnCana Corporation, from November
2001 through April 2005, providing specialized business analyses, ideas and
advice for international and corporate clients. Previously, from December 1994
to October 2001, he was Treasurer of Gulfstream Resources, an international oil
and gas company active in Qatar, Oman and Madagascar (eventually acquired by
Anadarko). Mr. Hart was responsible for financing initiatives and commercial
assessments and served as a spokesperson for the company. Mr. Hart's prior
experience includes a varied tenure at Nexen (formerly Canadian Occidental
Petroleum) from 1984 to 1994, as Manager of the company's worldwide Treasury
activities and as Senior Advisor responsible for corporate acquisitions. He was
primarily responsible for completing several international acquisitions totaling
$220,000,000, and was actively involved in strategy initiatives of the company.
He began his career with the Alberta Petroleum Marketing Commission, providing
policy advice to the Provincial Government. Mr. Hart graduated from the
University of Manitoba with a Masters in Natural Resources Management (Economics
specialization) and a BSc in Geology. He is frequent instructor for the Canadian
Petroleum Institute and EuroMaTech Seminars.
22
Max Wei, VP Operations. Mr. Wei is a Petroleum Engineering graduate from
University of Alberta and has twenty-five years of experience as a reservoir
engineer and project manager for oil and gas exploration and production in
Canada, the US, Qatar, Bahrain, Oman, Kuwait, Egypt, Yemen, Pakistan,
Bangladesh, Russia, Netherlands, Philippines, Malaysia, Venezuela and Ecuador,
among other countries. Max began his career with Shell Canada in 1979 and later
with Imperial Oil, in Heavy Oil Operations. He moved to the US in 1986 to work
with Bechtel Petroleum Operations at Naval Petroleum Reserves in Elk Hills,
California and joined Occidental Petroleum in Bakersfield, California in March
of 1933 as its Senior Reservoir Engineer. Max returned to Canada in June 2000 as
Senior Reservoir Engineer with Marathon Canada and in January of 2001 joined AEC
International and its successor, EnCana Corporation as Team Leader for Qatar and
Bahrain operations where he worked until 2004. He completed a project management
position with Petronas in Malaysia in April, 2005, before joining Gran Tierra
Energy in May 2005.
Max is specialized in reservoir engineering, project management, production
operations, field acquisition and development, and mentoring. He is a registered
Professional Engineer in the State of California and a member of the Association
of Professional Engineers, Geologists and Geophysicists of Alberta. Max has a
BSc in Petroleum Engineering from the University of Alberta and Certification in
Petroleum Engineering from Southern Alberta Institute of Technology.
Rafael Orunesu, VP Latin America. Raphael Orunesu brings a mix of operations
management, project evaluation, production geology, reservoir and production
engineering as well as leadership skills to Gran Tierra, with a South American
focus. He was most recently Engineering Manager for Pluspetrol Norte SA, from
1997 through 2004, responsible for planning and development operations in the
Peruvian North jungle. He participated in numerous evaluation and asset purchase
and sale transactions covering Latin America and North Africa, incorporating
200,000,000 barrels of oil over a five-year period. Rafael was previously with
Pluspetrol Argentina from 1990 to 1996 where he managed the technical/economic
evaluation of several oil fields. He began his career with YPF, initially as a
geologist in the Austral Basin of Argentina and eventually as Chief of
Exploitation Geology and Engineering for the Catriel Field in the Nuequen Basin,
where he was responsible for drilling programs, workovers and secondary recovery
projects.
Rafael has a postgraduate degree in Reservoir Engineering and Exploitation
Geology from Universidad Nacional de Buenos Aires and a degree in Geology from
Universidad Nacional de la Plata, Argentina.
Board of Directors
The following provides certain information with respect to each of our
directors. Except as otherwise indicated, each person has been or was engaged in
his present or last principal occupation, in the same or a similar position, for
more than five years.
Positions Held & Principal Occupations During
Name Age the Past 5 Years
-------------------- ------ -------------------------------------------------
Jeffrey Scott 43 Chairman of the Board. Since 2001, Mr. Scott
has served as President of Postell Energy Co.
Ltd., a privately held junior oil and gas
producing company. Mr. Scott is a Director of
Saxon Energy Services, Inc. and High Plains
Energy.
Walter Dawson 65 Director. Mr. Dawson has been the Chairman, CEO
and Director of Saxon Energy Services, Inc.
since 2001. Prior to his time at Saxon he
founded Enserco Energy Services (formerly Bonus
Resource Services) and was President, CEO and
Director of Computalog Gearhart. Mr. Dawson is
the Chairman of the Board of Directors of High
Plains Energy.
23
Positions Held & Principal Occupations During
Name Age the Past 5 Years
-------------------- ------ -------------------------------------------------
Verne Johnson 61 Director. Mr. Johnson is a Director of Harvest
Energy Trust. He was formerly President &
Director of ELAN Energy, President of Paragon
Petroleum.
Dana Coffield 47 Director. President and Chief Executive Officer
of Gran Tierra.
James Hart 51 Director. Vice President of Finance and Chief
Financial Officer of Gran Tierra.
Board Committees
The Company intends that in the near future a majority of its directors will be
independent directors of which at least one director will qualify as an "audit
committee financial expert." Additionally, the Board of Directors is expected to
appoint an audit committee, nominating committee and compensation committee, to
adopt charters relative to each such committee and to formulate and adopt a code
of ethics.
EXECUTIVE COMPENSATION
Gran Tierra Energy was not formed until January 2005 and its business activities
did not begin until May 2005. Accordingly, no compensation was paid to its
executive officers during the fiscal year ended December 31, 2004. The executive
officers of Goldstrike served without compensation for the fiscal period from
Goldstrike's incorporation on June 9, 2003 through December 31, 2003 and for the
fiscal year ended December 31, 2004.
The Company will provide the executive officers with insurance benefits and
other employee benefits as determined by management from time to time. The
Company will also make advances and/or reimburse its executive officers and
other employees for travel, meal and other expenses incurred from time to time
on behalf of the Company, in accordance with the Company's expense policies. The
Company pays its Vice President of Latin America $6,250.00 per month to cover
living expenses incurred by such executive in Quito, Ecuador.
Employment Contracts and Termination of Employment and Change in Control
Gran Tierra has entered into executive employment agreements with all members of
its current management team. The employment agreements entered into between Gran
Tierra and Dana Coffield, James Hart and Max Wei have identical terms except for
the position held by each such person and terms related to participation on the
Board of Directors for Mr. Coffield and Mr. Hart. The respective employment
agreements provide for an initial annual base salary of $150,000 and provide for
unspecified annual bonuses and options as warranted. The executive employment
agreements became effective on May 1, 2005 and have initial terms of
three-years, subject to extension or earlier termination and provide for
severance payment to each employee, in the event they are terminated without
cause or the employee terminates the agreement for good reason, in the amount of
two times total compensation for the prior year. "Good reason" includes an
adverse change in the Executive's position, title, duties or responsibilities or
any failure to re-elect him to such positions, titles or duties (except
termination for Cause); a reduction of the Executive's Base Salary; a sale of
substantially all of the assets of the company; a change in control in any
manner whatsoever, and; any breach by the Company of the Employment Agreement.
All agreements include standard indemnity, insurance, non-competition and
confidentiality provisions. Initial contract terms for each of Dana Coffield,
James Hart and Max Wei included rights to purchase 200,000 shares of Gran Tierra
prior to an initial public offering. These rights have since been removed, with
mutual consent.
The Company has also entered into an employment agreement with Rafael Orunesu
which provides for an initial annual base salary of $150,000, unspecified annual
bonuses and options as warranted. The agreement became effective on March 1,
2005 and has an initial term of two-years which terminates on March 1 2007,
subject to extension or earlier termination. The agreement provides for
severance payments in the event of the employee's termination without cause or
for good reason, in an amount equal to the salary payable under the employment
agreement during any remaining time in the initial two year term. Initial rights
to purchase 200,000 shares of Gran Tierra prior to an initial public offering
have since been removed, with mutual consent.
24
2005 EQUITY INCENTIVE PLAN
Summary
The Board reserved a total of 2,000,000 shares of common stock for issuance
under the 2005 Equity Incentive Plan (the "Plan"). If an incentive award granted
under the Plan expires, terminates, is unexercised or is forfeited, or if any
shares are surrendered to us in connection with an incentive award, the shares
subject to such award and the surrendered shares will become available for
further awards under the Plan.
Shares issued under the Plan through the settlement, assumption or substitution
of outstanding awards or obligations to grant future awards as a condition of
acquiring another entity will not reduce the maximum number of shares available
under the Plan. In addition, the number of shares subject to the Plan, any
number of shares subject to any numerical limit in the Plan, and the number of
shares and terms of any incentive award may be adjusted in the event of any
change in the outstanding common stock of the Company by reason of any stock
dividend, spin-off, split-up, stock split, reverse stock split,
recapitalization, reclassification, merger, consolidation, liquidation, business
combination or exchange of shares or similar transaction.
No more than 750,000 shares of the authorized shares may be allocated to
incentive awards granted or awarded to any individual participant during any
36-month period. Any shares of restricted stock, restricted stock units,
performance grants or stock awards that are forfeited will not count against
this limit.
The maximum cash payment that can be made for all incentive awards granted to
any one individual under the 2005 Plan will be $500,000 times the number of
12-month periods in any performance cycle for any single or combined performance
goals. Any amount that is deferred by a participant is subject to this limit in
the year in which the deferral is made but not in any later year in which
payment is made.
Administration
The Compensation Committee of the Board, or a subcommittee of the Compensation
Committee, will administer the Plan. Subject to the terms of the Plan, the
Compensation Committee will have complete authority and discretion to determine
the terms of incentive awards.
Stock Options
The Plan authorizes the grant of nonqualified stock options. Nonqualified stock
options are stock options that do not satisfy the requirements of Section 422 of
the Internal Revenue Code (the "Code"). Options granted under the Plan entitle
the grantee, upon exercise, to purchase a specified number of shares from us at
a specified exercise price per share. The Compensation Committee determines the
period of time during which an option may be exercised, as well as any vesting
schedule, except that no option may be exercised more than 10 years after the
date of grant. The exercise price for shares of common stock covered by an
option cannot be less than the fair market value of the common stock on the date
of grant unless we agree otherwise at the time of the grant.
Under the Plan, a participant may not surrender an option for the grant of a new
option with a lower exercise price or another incentive award. In addition, if a
participant's option is cancelled before its termination date, the participant
may not receive another option within six months of the cancellation date unless
the exercise price of the new option equals or exceeds the exercise price of the
cancelled option.
Restricted Stock Awards
The Plan also authorizes the grant of restricted stock awards on terms and
conditions established by the Compensation Committee, which may include
performance conditions. The terms and conditions will include the designation of
a restriction period during which the shares are not transferable and are
subject to forfeiture. In general, the minimum restriction period applicable to
any award of restricted stock that is not subject to the achievement of one or
more performance standards is three years from the date of grant. The minimum
restriction period for any award of restricted stock that is subject to one or
more performance standards is one year from the date of grant, except that
restriction periods of shorter duration may be approved for awards of restricted
stock or restricted stock units combined with respect to up to 600,000 shares
reserved for issuance under the Plan.
25
Restricted Stock Units
Restricted stock units may be granted on the terms and conditions established by
the Compensation Committee, including conditioning the lapse of restrictions on
the achievement of one or more performance goals. In the case of restricted
stock units, no shares are issued at the time of grant. Rather, upon lapse of
restrictions, a restricted stock unit entitles a participant to receive shares
of common stock or a cash amount equal to the fair market value of a share of
common stock on the date the restrictions lapse. The requirements with respect
to restriction periods for restricted stock units are the same as those for
restricted stock awards.
Performance Grants
The Compensation Committee may make performance grants to any participant that
are intended to comply with Section 162(m) of the Code. Each performance grant
will contain performance goals for the award, including the performance
criteria, the target and maximum amounts payable, and other terms and
conditions. Performance criteria may include price per share of the Company's
common stock, return on assets, expense ratio, book value, investment return,
return on invested capital ("ROIC"), free cash flow, value added (ROIC less cost
of capital multiplied by capital), total stockholder return, economic value
added (net operating profit after tax less cost of capital), operating ratio,
cost reduction (or limits on cost increases), debt to capitalization, debt to
equity, earnings, earnings before interest and taxes, earnings before interest,
taxes, depreciation and amortization, earnings per share (including or excluding
nonrecurring items), earnings per share before extraordinary items, income from
operations (including or excluding nonrecurring items), income from operations
compared to capital spending, net income (including or excluding nonrecurring
items, extraordinary items and/or the accumulative effect of accounting
changes), net sales, return on capital employed, return on equity, return on
investment, return on sales, and sales volume.
The Compensation Committee will make all determinations regarding the
achievement of performance goals. Actual payments to a participant under a
performance grant will be calculated by applying the achievement of performance
criteria to the performance goal. Performance grants will be payable in cash,
shares of common stock or a combination of cash and shares of common stock. The
Compensation Committee may reduce or eliminate, but not increase the payments
except as provided in the performance grant.
Stock Awards
The Plan authorizes the granting of stock awards. The Compensation Committee
will establish the number of shares of common stock to be awarded and the terms
applicable to each award, including performance restrictions. No more than
600,000 shares of common stock, reduced by restricted stock and restricted stock
unit awards, may be granted under the Plan without performance restrictions.
Stock Appreciation Rights
The Compensation Committee may grant stock appreciation rights ("SARs") under
the Plan. Subject to the terms of the award, SARs entitle the participant to
receive a distribution in an amount not to exceed the number of shares of common
stock subject to the portion of the SAR exercised multiplied by the difference
between the market price of a share of common stock on the date of exercise of
the SAR and the market price of a share of common stock on the date of grant of
the SAR. Such distributions are payable in cash or shares of common stock, or a
combination thereof, as determined by the Compensation Committee.
Change in Control
The Compensation Committee may make provisions in incentive awards with respect
to a change in control, including acceleration of vesting or removal of
restrictions or performance conditions.
26
Duration, Amendment and Termination
The Board may suspend or terminate the Plan without stockholder approval or
ratification at any time or from time to time. Unless sooner terminated, the
Plan will terminate on [November 10, 2015]. The Board may also amend the 2005
Plan at any time. No change may be made that increases the total number of
shares of common stock reserved for issuance pursuant to incentive awards or
reduces the minimum exercise price for options or exchange of options for other
incentive awards, unless such change is authorized by our stockholders. A
termination or amendment of the Plan previously granted will not, without the
consent of the participant, adversely affect a participant's rights under a
previously granted incentive award.
Restrictions on Transfer - Deferral
Except as otherwise permitted by the Compensation Committee and provided in the
incentive award, incentive awards may not be transferred or exercised by another
person except by will or by the laws of descent and distribution. The
Compensation Committee may permit participants to elect to defer the issuance of
common stock or the settlement of awards in cash under the Plan.
Federal Income Tax Information
The following is a general summary of the current federal income tax treatment
of incentive awards, which would be authorized to be granted under the Plan,
based upon the current provisions of the Code and regulations promulgated
thereunder. The rules governing the tax treatment of such awards are quite
technical, so the following discussion of tax consequences is necessarily
general in nature and is not complete. In addition, statutory provisions are
subject to change, as are their interpretations, and their application may vary
in individual circumstances. Finally, this discussion does not address the tax
consequences under applicable state and local law.
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Units,
Performance Grants, and Stock Awards: A participant generally is not required to
recognize income on the grant of a nonqualified stock option, a stock
appreciation right, restricted stock units, a performance grant, or a stock
award. Instead, ordinary income generally is required to be recognized on the
date the nonqualified stock option or stock appreciation right is exercised, or
in the case of restricted stock units, performance grants, and stock awards,
upon the issuance of shares and/or the payment of cash pursuant to the terms of
the incentive award. In general, the amount of ordinary income required to be
recognized is, (a) in the case of a nonqualified stock option, an amount equal
to the excess, if any, of the fair market value of the shares on the exercise
date over the exercise price, (b) in the case of a stock appreciation right, the
amount of cash and/or the fair market value of any shares received upon exercise
plus the amount of taxes withheld from such amounts, and (c) in the case of
restricted stock units, performance grants, and stock awards, the amount of cash
and/or the fair market value of any shares received in respect thereof, plus the
amount of taxes withheld from such amounts.
Restricted Stock: Unless a participant who receives an award of restricted stock
makes an election under Section 83(b) of the Code as described below, the
participant generally is not required to recognize ordinary income on the award
of restricted stock. Instead, on the date the shares vest (i.e., become
transferable and no longer subject to forfeiture), the participant will be
required to recognize ordinary income in an amount equal to the excess, if any,
of the fair market value of the shares on such date over the amount, if any,
paid for such shares. If a participant makes a Section 83(b) election to
recognize ordinary income on the date the shares are awarded, the amount of
ordinary income required to be recognized is an amount equal to the excess, if
any, of the fair market value of the shares on the date of award over the
amount, if any, paid for such shares. In such case, the participant will not be
required to recognize additional ordinary income when the shares vest.
Gain or Loss on Sale or Exchange of Shares: In general, gain or loss from the
sale or exchange of shares granted or awarded under the 2005 Plan will be
treated as capital gain or loss, provided that the shares are held as capital
assets at the time of the sale or exchange.
Deductibility by Company: In general, in the case of a nonqualified stock
option, a stock appreciation right, restricted stock, restricted stock units,
performance grants, and stock awards, the Company will be allowed a deduction in
an amount equal to the amount of ordinary income recognized by a participant,
provided that certain income tax reporting requirements are satisfied.
27
Parachute Payments: Where payments to certain employees that are contingent on a
change in control exceed limits specified in the Code, the employee generally is
liable for a 20 percent excise tax on, and the corporation or other entity
making the payment generally is not entitled to any deduction for, a specified
portion of such payments. The Compensation Committee may make awards as to which
the vesting thereof is accelerated by a change in control of the Company. Such
accelerated vesting would be relevant in determining whether the excise tax and
deduction disallowance rules would be triggered with respect to certain Company
employees.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years, there have been no transactions, or proposed
transactions, to which the Company was or is a party, in which any of the
directors or executive officers of the Company, any nominee for election as a
director for the Company, any persons who beneficially owned, directly or
indirectly, shares with more than 5% of the Common Stock or any relatives of any
of the foregoing had or is to have a direct or indirect material interest.
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
As of November 10, 2005, the Company was authorized to issue 75,000,000 shares
of common stock, par value $0.001 per share (the "Common Stock"), 5 million
shares of preferred stock, par value $.001 per share (the "Preferred Stock") and
1 share of preferred stock designated as a special voting share, par value $.001
per share ("Special Voting Share").
Capital Stock Issued and Outstanding
As of November 10, 2005, assuming all Gran Tierra Stockholders elect to receive
shares of Common Stock, there were issued and outstanding 42,191,873 shares of
Common Stock, 0 shares of Preferred Stock and 0 Special Voting Share.
The following description of our capital stock is derived from various
provisions of Gran Tierra's Articles of Incorporation and By-laws as well as
provisions of applicable law. Such description is not intended to be complete
and is qualified in its entirely by reference to the relevant provisions of Gran
Tierra's Articles of Incorporation, as amended, and By-laws.
Description of Common Stock
Holders of the Common Stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of Common Stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
Common Stock voting for the election of directors can elect all of the
directors. Holders of the Common Stock representing a majority of the voting
power of the capital stock issued, outstanding and entitled to vote, represented
in person or by proxy, are necessary to constitute a quorum at any meeting of
stockholders. A vote by the holders of a majority of the outstanding shares of
Common Stock is required to effectuate certain fundamental corporate changes
such as liquidation, merger or an amendment to the articles of incorporation.
Holders of Common Stock are entitled to share in all dividends that the board of
directors, in its discretion, declares from legally available funds. In the
event of a liquidation, dissolution or winding up, each outstanding share
entitles its holder to participate pro rata in all assets that remain after
payment of liabilities and after providing for each class of stock, if any,
having preference over the Common Stock. Holders of the Common Stock have no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to the Common Stock.
28
Description of Preferred Stock
The Company is authorized to issue 5,000,000 shares of "blank check" preferred
stock, par value $.001 per share, none of which as of the date hereof designated
or outstanding. The Board of Directors will be 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 the Board of Directors, without the necessity of obtaining approval of the
stockholders.
Description of Special Voting Share
The Special Voting Share was designated to allow the holders of Exchangeable
Shares to vote at general meetings of the Company. The holder of the Special
Voting Share is not entitled to receive dividends or distributions but has the
right to vote on each matter on which holders of the Common Stock are entitled
to vote and to cast that number of votes equal to the number of Exchangeable
Shares outstanding that are not owned by the Company or its affiliates.
Description of Warrants
As of November 10, 2005, warrants representing the right to purchase 6,470,933
shares of Common Stock are issued and outstanding. The outstanding warrants are
excercisable for 5 years at an exercise price of $.625 per one-half of a share.
The shares of Common Stock underlying the outstanding warrants are subject to
registration under the Securities Act by the Company within 120 days of the
closing of the Share Exchange.
Description of Options
As of November 10, 2005, options representing the right to purchase 1,600,000
shares of Common Stock are issued and outstanding. The outstanding options were
granted pursuant to the Plan to certain employees, officers and directors of the
Company and are excercisable for 10 years at an exercise price of $0.80 per
share.
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
The Common Stock was first cleared for quotation on NASD's OTC Bulletin Board
under the symbol "GDSK.OB" on June 3, 2005 and has not been actively traded
since that time.
As of November 10, 2005, there were approximately 143 holders of record of
shares of the Common Stock.
Dividends
Our Articles of Incorporation provide for the payment of dividends out of any
funds available therefore, as often, in such amounts, and at such time as the
Board of Directors may determine and shares may be issued pro rata and without
consideration to the Company's stockholders. Shares of one class or series may
not be issued as a share dividend to stockholders of another class or series
unless such issuance is in accordance with our Articles of Incorporation and a
majority of the current stockholders of the class or series to be issued approve
the issuance or there are no outstanding shares of the class or series of shares
that are authorized to be issued as a dividend.
No cash dividends have been declared on the Common Stock.
LEGAL PROCEEDINGS
From time to time we may become a party to litigation or other legal proceedings
that, in the opinion of our management are part of the ordinary course of our
business. Currently, no legal proceedings or claims are pending against or
involve us that, in the opinion of our management, could reasonably be expected
to have a material adverse effect on our business, prospects, financial
condition or results of operation.
RECENT SALES OF UNREGISTERED SECURITIES
As reported in the Current Report on Form 8-K filed by Goldstrike on September
7, 2005 under the caption "Item 3.02. Unregistered Sales of Equity Securities"
which information is incorporated herein by reference, on September 1, 2005,
Goldstrike completed the initial closing of a private placement of units of its
securities offered at a price of $0.80 per unit and consisting of one share of
Common Stock and a warrant to purchase one-half share of Common Stock for five
years at the exercise price of $0.625 per one-half share.
29
As reported in the Current Report on Form 8-K filed by Goldstrike on November 2,
2005 under the caption "Item 3.02. Unregistered Sales of Equity Securities"
which information is incorporated herein by reference, on October 7, 2005,
Goldstrike conducted the second closing of the initial private placement and on
October 28, 2005 closed on a secondary offering of units of its securities
offered at a price of $.08 per unit and consisting of one share of Common Stock
and a warrant to purchase one-half share of Common Stock for five years at the
exercise price of $0.625 per one-half share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Nevada law, director immunity from liability to a company or its
shareholders for monetary liabilities applies automatically unless it is
specifically limited by a company's articles of incorporation (our articles do
not impose any special limitation in this regard). Excepted from that immunity
are:
o a willful failure to deal fairly with the company or its
shareholders in connection with a matter in which the director has a
material conflict of interest;
o a violation of criminal law (unless the director had reasonable
cause to believe that his or her conduct was lawful or no reasonable
cause to believe that his or her conduct was unlawful);
o a transaction from which the director derived an improper personal
profit; and
o willful misconduct.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent not prohibited by Nevada law; provided, however, that we may
modify the extent of such indemnification by individual contracts with our
directors and officers; and, provided, further, that we shall not be required to
indemnify any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless:
o such indemnification is expressly required to be made by law;
o the proceeding was authorized by our Board of Directors;
o such indemnification is provided by us, in our sole discretion,
pursuant to the powers vested us under Nevada law; or
o such indemnification is required to be made pursuant to the bylaws.
Our bylaws provide that we will advance all expenses incurred to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was our director or
officer, or is or was serving at our request as a director or executive officer
of another company, partnership, joint venture, trust or other enterprise, prior
to the final disposition of the proceeding, promptly following a request. This
advance of expenses is to be made upon receipt of an undertaking by or on behalf
of such person to repay said amounts should it be ultimately determined that the
person was not entitled to be indemnified under our bylaws or otherwise.
Our bylaws also provide that no advance shall be made by us to any officer in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made: (a) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to the proceeding; or (b) if such quorum is not obtainable, or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, that the facts known to the
decision-making party at the time such determination is made demonstrate clearly
and convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to our best interests.
30
Simultaneously with the closing of the Share Exchange, the Company has executed
indemnity agreements with each of its name executive officers and directors (the
"Indemnity Agreements") which have been attached hereto as exhibits and which
are incorporated herein by reference and pursuant to which the Company has
agreed to indemnify its named executive officers and directors to the fullest
extent permitted by applicable law and the Company's Articles of Incorporation
and Bylaws.
Item 3.02 Recent Sales of Unregistered Securities
Reference is made to the disclosure set forth under Item 2.01 of this Current
Report on form 8-K which disclosure is incorporated herein by reference.
Item 4.01 Changes in Registrant's Certifying Accountant
None.
Item 5.01. Changes in Control of Registrant
Reference is made to the disclosure set forth under Item 2.01 of this Current
Report on form 8-K which disclosure is incorporated herein by reference.
Item 5.02. Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers
Reference is made to the disclosure set forth under Item 2.01 of this Current
Report on form 8-K which disclosure is incorporated herein by reference.
Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in
Fiscal Year.
As described under Item 2.01, on November 8, 2005, the Company changed its name
from "Goldstrike Inc." to "Gran Tierra Energy, Inc.", authorized a class of
"blank check" preferred stock and authorized the Special Voting Share, all by
way of an amendment to the Registrant's Articles of incorporation, filed with
the Secretary of State of Nevada on that date. A copy of this amendment is
attached as Exhibit 3.1 to this Current Report and is hereby incorporated herein
by reference.
Item 5.06. Change in Shell Company Status
Reference is made to the disclosure set forth under Item 2.01 of this Current
Report on form 8-K which disclosure is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits
(a) Financial statements of business acquired.
31
Report of Independent Registered Chartered Accountants
To the Shareholders of
Gran Tierra Energy Inc.
(a development stage company):
We have audited the consolidated balance sheet of Gran Tierra Energy Inc. (a
development stage company) as at June 30, 2005 and the consolidated statements
of operations and deficit, and cash flows for the period from incorporation on
January 26, 2005 to June 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Gran Tierra Energy Inc. as at June
30, 2005 and the results of its operations and its cash flows for the period
from incorporation on January 26, 2005 to June 30, 2005 in accordance with
accounting principles generally accepted in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion.
Calgary, Alberta, Canada /s/ Deloitte & Touche LLP
November 7, 2005 Independent Registered Chartered Accountants
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES
OF AMERICA REPORTING DIFFERENCES
The standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when the financial statements are affected by conditions and events
that cast a substantial doubt on the Company's ability to continue as a going
concern, such as those described in note 1 to the financial statements. Our
report is expressed in accordance with Canadian reporting standards, which do
not require a reference to such conditions and events in the auditors' report
when these are adequately disclosed in the financial statements.
Calgary, Alberta, Canada /s/ Deloitte & Touche LLP
November 7, 2005 Independent Registered Chartered Accountants
F-1
GRAN TIERRA ENERGY INC.
(a development stage company)
Consolidated Statement of Operations and Deficit
Period from Incorporation on January 26, 2005 to June 30, 2005
(Stated in US dollars)
--------------------------------------------------------------------------------
$
----------
REVENUES --
----------
OPERATING EXPENSES
General and administration 259,337
Depreciation 2,209
----------
261,546
----------
LOSS BEFORE INCOME TAXES (261,546)
INCOME TAXES --
----------
LOSS AND DEFICIT, END OF PERIOD (261,546)
==========
BASIC AND DILUTED LOSS PER SHARE 0.10
==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,500,000
==========
(See notes to the consolidated financial statements)
F-2
GRAN TIERRA ENERGY INC.
(a development stage company)
Consolidated Balance Sheet
June 30, 2005
(Stated in US dollars)
--------------------------------------------------------------------------------
$
----------
ASSETS
CURRENT
Cash 1,318,822
Accounts receivable 1,414
----------
1,320,236
Capital assets (Note 3) 42,946
----------
1,363,182
==========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 126,778
----------
SHAREHOLDERS' EQUITY
Share capital (Note 4)
(11,250,000 common voting shares, without par value, issued
and outstanding at June 30, 2005) 1,497,950
Deficit accumulated during the development stage (261,546)
----------
1,236,404
----------
1,363,182
==========
(See notes to the consolidated financial statements)
F-3
GRAN TIERRA ENERGY INC.
(a development stage company)
Consolidated Statement of Cash Flows
Period from Incorporation on January 26, 2005 to June 30, 2005
(Stated in US dollars)
--------------------------------------------------------------------------------
$
----------
CASH FLOWS RELATED TO THE
FOLLOWING ACTIVITIES:
OPERATING
Net loss (261,546)
Adjustment for:
Depreciation 2,209
Changes in non-cash working capital (Note 6) 125,364
----------
(133,973)
----------
FINANCING
Proceeds from issuance of common shares 1,497,950
----------
INVESTING
Purchase of capital assets (45,155)
----------
NET INCREASE IN CASH 1,318,822
CASH, BEGINNING OF PERIOD --
----------
CASH, END OF PERIOD 1,318,822
==========
Supplemental cash flow disclosures:
Cash paid for interest --
Cash paid for taxes --
==========
(See notes to the consolidated financial statements)
F-4
GRAN TIERRA ENERGY INC. 1
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
1. DESCRIPTION OF BUSINESS AND GOING CONCERN
Gran Tierra Energy Inc. (the "Company") was incorporated under the
Business Corporations Act (Alberta) on January 26, 2005. The Company's
principal business is to pursue opportunities in oil and natural gas
exploration and development.
The Company's ability to continue as a going concern is dependent upon
obtaining the necessary financing to acquire oil and natural gas interests
and generate profitable operations from its oil and natural gas interests
in the future.
Management of the Company plans to address the above as follows:
o raise additional capital through the sale and issuance of common
shares (see note 4);
o borrow from Goldstrike, Inc., a Nevada company, under a bridge loan
facility to acquire oil and natural gas interests in Argentina (see
note 8);
o pursue a merger with Goldstrike, Inc, a Nevada company, which will
allow the Company to raise additional capital through the sale and
issuance of common shares in the United States of America (see note
8); and
o acquire producing and non-producing oil and natural gas interests in
Argentina for approximately $7,000,000 on September 1, 2005 (see
note 8). These properties produced profit after direct expenses and
royalties of approximately $2,800,000 for the year ended December
31, 2004.
Should the going concern assumption not be appropriate and the Company not
be able to realize its assets and settle its liabilities in the normal
course of operations, these consolidated financial statements would
require adjustments to the amounts and classifications of assets and
liabilities.
F-5
GRAN TIERRA ENERGY INC. 2
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. The significant accounting policies are:
Development stage company
The Company is a development stage company as it does not have established
operations.
Principles of consolidation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. The Company will proportionately
consolidate its undivided interest in oil and gas exploration and
development joint ventures.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
GRAN TIERRA ENERGY INC. 3
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency translation
The Company's functional currency is the United States Dollar. The balance
sheet accounts of the Company's foreign operations that use different
functional currencies are translated into US dollars at the period-end
exchange rates, while income, expenses and cash flows are translated at
the average exchange rates for the period. Translation gains or losses
related to net assets will be included as a component of accumulated other
comprehensive income in shareholders' equity. Gains and losses resulting
from foreign currency transactions, which are transactions denominated in
a currency other than the entity's functional currency, are included in
the consolidated statement of operations and deficit.
Fair value of financial instruments
The Company's financial instruments are cash, accounts receivable and
accounts payable and accrued liabilities. The fair values of these
financial instruments approximate their carrying values due to their
immediate or short-term nature.
Capital assets
Capital assets are recorded at cost upon acquisition. Depreciation is
provided using the declining balance-basis at the following annual rates:
Computer equipment 30%
Automobiles 30%
Income taxes
Income taxes are reported under Statement of Financial Accounting
Standards ("SFAS") No. 109 and, accordingly, deferred income taxes are
recognized using the asset and liability method, whereby deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases,
and operating loss and tax credit carryforwards. Valuation allowances are
provided if, after considering available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realised.
F-7
GRAN TIERRA ENERGY INC. 4
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss per share
Basic loss per share calculations are based on the net income (loss)
attributable to common shareholders for the period divided by the weighted
average number of common shares issued and outstanding during the period.
The diluted earnings (loss) per share calculations are based on the
weighed average number of common shares outstanding during the period,
plus the effects of dilutive common share equivalents. This method
requires that the dilutive effect of outstanding options and warrants
issued should be calculated using the treasury stock method. This method
assumes that all common share equivalents have been exercised at the
beginning of the period (or at the time of issuance, if later), and that
the funds obtained thereby were used to purchase common shares of the
Company at the average trading price of common shares during the period.
Oil and natural gas properties
The Company will use the full cost method of accounting for its investment
in oil and natural gas properties. Under this method, the Company
capitalizes all acquisition, exploration and development costs incurred
for the purpose of finding oil and natural gas reserves, including
salaries, benefits and other internal costs directly attributable to these
activities. Costs associated with production and general corporate
activities, however, are expensed in the period incurred. Interest costs
related to unproved properties and properties under development are also
capitalized to oil and natural gas properties. Unless a significant
portion of the Company's proved reserve quantities in a particular country
are sold (greater than 25 percent), proceeds from the sale of oil and
natural gas properties are accounted for as a reduction to capitalized
costs, and gains and losses are not recognized.
The Company will compute depreciation, depletion and amortization ("DD&A")
of oil and natural gas properties on a quarterly basis using the
unit-of-production method based upon production and estimates of proved
reserve quantities. Unproved properties are excluded from the amortizable
base until evaluated. The cost of exploratory dry wells is transferred to
proved properties and thus subject to amortization immediately upon
determination that a well is dry in those countries where proved reserves
exist. In countries where the Company has not booked proved reserves, all
costs associated with a prospect or play are considered quarterly for
impairment upon full evaluation of such prospect or play. This evaluation
considers among other factors, seismic data, requirements to relinquish
acreage, drilling results, remaining time in the commitment period,
remaining capital plans, and political, economic, and market conditions.
Geological and geophysical ("G&G") costs are recorded in proved property
and therefore subject to amortization as incurred in mature basins.
F-8
GRAN TIERRA ENERGY INC. 5
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In exploration areas, G&G costs are capitalized in unproved property and
evaluated as part of the total capitalized costs associated with a
prospect or play. Future development costs are added to the amortizable
base.
In performing its quarterly ceiling test, the Company will limit, on a
country-by-country basis, the capitalized costs of proved oil and natural
gas properties, net of accumulated DD&A and deferred income taxes, to the
estimated future net cash flows from proved oil and natural gas reserves
discounted at 10 percent, net of related tax effects, plus the lower of
cost or fair value of unproved properties included in the costs being
amortized. If capitalized costs exceed this limit, the excess is charged
as additional DD&A expense. The Company calculates future net cash flows
by applying end-of-the-period prices except in those instances where
future natural gas or oil sales are covered by physical contract terms
providing for higher or lower amounts.
Given the volatility of oil and natural gas prices, it is reasonably
possible that the Company's estimate of discounted future net cash flows
from proved oil and natural gas reserves could change in the near term. If
oil and natural gas prices decline significantly, even if only for a short
period of time, it is possible that write-downs of oil and natural gas
properties could occur.
Unproved properties will be assessed quarterly for possible impairments or
reductions in value. If a reduction in value has occurred, the impairment
is transferred to proved properties. For international operations where a
reserve base has not yet been established, the impairment is charged to
earnings.
Asset retirement obligations
The Company will use Statement of Financial Accounting Standard No. 143
Accounting for Asset Retirement Obligations to account for asset
retirement obligations which requires recognition of a liability for the
future retirement obligations associated with capital assets, which
includes oil and natural gas properties. The asset retirement obligation
is initially measured at fair value and capitalized to capital assets as
an asset retirement cost. The asset retirement obligation accretes until
the time the asset retirement obligation is expected to settle while the
asset retirement cost is amortized over the useful life of the underlying
capital assets.
The amortization of the asset retirement cost and the accretion of the
asset retirement obligation will be included in DD&A. Actual asset
retirement costs are recorded against the obligation when incurred. Any
difference between the recorded asset retirement obligation
F-9
GRAN TIERRA ENERGY INC. 6
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
and the actual retirement costs incurred is recorded as a gain or loss in
the period of settlement.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment", which is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123(R) supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95,
"Statement of Cash Flows". Generally, the approach in SFAS No. 123(R) is
similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative. SFAS
No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. To assist in
the implementation of the new standard, the SEC issued SAB No. 107,
"Share-Based Payment". While SAB No. 107 addresses a wide range of issues,
the largest area of focus is valuation methodologies and the selection of
assumptions. Notably, SAB No. 107 lays out simplified methods for
developing certain assumptions. In addition to providing the SEC staff's
interpretive guidance on SFAS No. 123(R), SAB No. 107 addresses the
interaction of SFAS No. 123(R) with existing SEC guidance (e.g., the
interaction with the SEC's guidance dealing with non-GAAP disclosures).
The compliance date for SFAS No. 123(R) has been amended such that the
standard will be effective for the first fiscal year beginning after June
15, 2005. As of the required effective date, all public entities will
apply this standard using a modified version of prospective application.
Under that transition method, compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123(R)
for all share-based payments granted after the effective date, and (b)
based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date. For periods before the required effective
date, entities may elect to apply a modified version of retrospective
application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for
those periods by SFAS No. 123. The Company plans to adopt SFAS No. 123(R)
on January 1, 2006 and is reviewing the standard to determine the
potential impact, if any, on its consolidated financial statements.
F-10
GRAN TIERRA ENERGY INC. 7
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In March 2005, the FASB issued FIN No. 47, "Accounting for Conditional
Asset Retirement Obligations". FIN No. 47 clarifies that the term
Conditional Asset Retirement Obligation as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations", refers to a legal
obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. Accordingly, an entity is
required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be
reasonably estimated. The interpretation is effective no later than the
end of fiscal years ending after December 15, 2005. The Company is
reviewing the interpretation to determine the potential impact, if any, on
its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154 ("SFAS 154") "Accounting Changes
and Error Corrections--a replacement of APB Opinion No. 20 and FASB
Statement No. 3". SFAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. APB Opinion No. 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the change. SFAS 154 applies to all voluntary changes in accounting
principle. SFAS 154 also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. SFAS
154 carries forward without change the guidance contained in APB Opinion
No. 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. SFAS 154 also
carries forward the guidance in APB Opinion No. 20 requiring justification
of a change in accounting principle on the basis of preferability. SFAS
154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.
F-11
GRAN TIERRA ENERGY INC. 8
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In June 2004, the Financial Accounting Standards Board ("FASB") issued an
exposure draft of a proposed statement, "Fair Value Measurements" to
provide guidance on how to measure the fair value of financial and
non-financial assets and liabilities when required by other authoritative
accounting pronouncements. The proposed statement attempts to address
concerns about the ability to develop reliable estimates of fair value and
inconsistencies in fair value guidance provided by current U.S. GAAP, by
creating a framework that clarifies the fair value objective and its
application in GAAP. In addition, the proposal expands disclosures
required about the use of fair value to re-measure assets and liabilities.
The standard would be effective for financial statements issued for fiscal
years ending after December 15, 2006.
In June 2005, the FASB published an Exposure Draft containing proposals to
change the accounting for business combinations. The proposed standards
would replace the existing requirements of the FASB's Statement No. 141,
"Business Combinations". The proposals would result in fewer exceptions to
the principle of measuring assets acquired and liabilities assumed in a
business combination at fair value. Additionally, the proposals would
result in payments to third parties for consulting, legal, audit, and
similar services associated with an acquisition being recognized generally
as expenses when incurred rather than capitalized as part of the business
combination. The FASB also published an Exposure Draft that proposes,
among other changes, that non-controlling interests be classified as
equity within the consolidated financial statements. The FASB's proposed
standard would replace Accounting Research Bulletin No. 51, "Consolidated
Financial Statements".
3. CAPITAL ASSETS
----------------------------------
Accumulated Net Book
Cost Depreciation Value
$ $ $
----------------------------------
Computer equipment 8,316 367 7,949
Automobiles 36,839 1,842 34,997
----------------------------------
45,155 2,209 42,946
==================================
F-12
GRAN TIERRA ENERGY INC. 9
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
4. SHARE CAPITAL
----------------------
Number of Amount
Shares $
----------------------
Balance, beginning of period - -
Common shares issued 11,250,000 1,497,950
----------------------
Balance, end of period 11,250,000 1,497,950
======================
Subsequent to June 30, 2005, 1,350,000 common shares were issued for proceeds of
approximately $280,000.
5. INCOME TAXES
There is a loss of approximately $260,000 carried forward that may be
applied against future taxable income. The Company does not have any
income tax liabilities during the current period and, accordingly, no
income taxes are recorded. A valuation allowance has been taken for the
potential income tax benefit associated with the loss incurred by the
Company in the period, due to uncertainty of utilisation of the tax loss.
The income tax expense (recovery) reported differs from the amount computed by
applying the statutory rate to loss before income taxes for the following
reasons:
$
---------
Loss before income taxes (261,546)
Statutory income tax rate 35%
Income tax benefit 91,541
Valuation allowance (91,541)
---------
--
=========
F-13
GRAN TIERRA ENERGY INC. 10
(a development stage company)
Notes to the Consolidated Financial Statements
Period from Incorporation on January 26, 2005 to June 30, 2005
(Tabular amounts stated in US dollars)
--------------------------------------------------------------------------------
6. CHANGES IN NON-CASH WORKING CAPITAL
The changes in non-cash working capital are comprised of the following:
---------
$
---------
Increase in accounts receivable (1,414)
Increase in accounts payable and accrued liabilities 126,778
---------
125,364
=========
7. COMMITMENTS
The Company leases an automobile under a capital lease that expires on
April 30, 2006.
The future minimum lease payments under the capital lease are as follows:
$
---------
2005 13,262
2006 7,578
---------
Total minimum lease payments 20,840
=========
8. SUBSEQUENT EVENTS
The Company entered into an agreement with Goldstrike, Inc., a Nevada
company, to consummate a share exchange effective as of November 10, 2005.
The Company acquired producing and non-producing oil and natural gas
interests in Argentina for approximately $7 million on September 1, 2005.
The acquisition was financed by a bridge loan from Goldstrike, Inc.
F-14
Report of Independent Registered
Public Accounting Firm
To the Board of Directors of
Dong Won Corporation and Gran Tierra Energy Inc.
We have audited the accompanying schedule of revenues, royalties and operating
cost (the "financial statements") corresponding to the 14% interest in the
Palmar Largo joint venture (representing the 14% working interest acquired by
Gran Tierra Energy Inc. through its wholly owned subsidiary Gran Tierra Energy
Argentina S.A. in the "YPF S.A. - Pluspetrol S.A. - Compania General de
Combustibles S.A. - Dong Won Corporation - Palmar Largo Union Transitoria de
Empresas" (the "Palmar Largo joint venture")) for the years ended December 31,
2004 and 2003 (the "Schedule of Revenues, Royalties and Operating Cost"). The
Schedule of Revenues, Royalties and Operating Cost is the responsibility of Dong
Won Corporation's management. Our responsibility is to express an opinion on
this Schedule of Revenues, Royalties and Operating Cost based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. Dong Won Corporation is not required
to have, nor were we engaged to perform, an audit of their internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of Dong Won Corporation's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statement presents fairly, in all material
respects, the revenues, royalties and operating cost corresponding to the 14%
interest in the Palmar Largo joint venture on the basis of accounting described
in Notes 1 and 2 for the years ended December 31, 2004 and 2003, in conformity
with accounting principles generally accepted in the United States of America.
Buenos Aires, Argentina
November 7, 2005
Deloitte & Co. S.R.L.
/s/Ricardo C. Ruiz
Ricardo C. Ruiz
Partner
F-15
Schedule of Revenues, Royalties and Operating Cost corresponding to the 14%
interest in the Palmar Largo joint venture for the years ended December 31, 2004
and 2003 and for the six months ended June 30, 2005 and 2004 (unaudited) (Note
1)
(Amounts expressed in U.S. Dollars - Note 2)
Six-month period ended Year ended
------------------------ ------------------------
June 30, June 30,
2005 2004 2004 2003
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Revenues 2,065,587 2,036,454 4,703,136 4,422,688
Royalties (258,716) (239,111) (492,535) (457,293)
Operating costs (837,524) (635,088) (1,424,152) (1,297,260)
---------- ---------- ---------- ----------
969,347 1,162,255 2,786,449 2,668,135
========== ========== ========== ==========
F-16
Schedule of Revenues, Royalties and Operating Cost corresponding to the 14%
interest in the Palmar Largo joint venture for the years ended December 31, 2004
and 2003 and for the six months ended June 30, 2005 and 2004 (unaudited)
1. Basis of Presentation
The accompanying Schedule of Revenues, Royalties and Operating Cost
includes the revenues, royalties and operating costs for the years ended
December 31, 2004 and 2003 and for the six months ended June 30, 2005 and
2004 (unaudited), corresponding to the 14% working interest in the "YPF
S.A. - Pluspetrol S.A. - Compania General de Combustibles S.A. - Dong Won
Corporation - Palmar Largo Union Transitoria de Empresas" (the "Palmar
Largo joint venture") acquired on September 1, 2005 by Gran Tierra Energy
Inc. through its wholly owned subsidiary Gran Tierra Energy Argentina S.A.
from Dong Won Corporation. The Schedule of Revenues, Royalties and
Operating Cost does not include any cost related to indirect general and
administrative costs, income and capital taxes or any provisions related
to depletion, depreciation or asset retirement obligation.
The interim financial information for the six months ended June 30, 2005
and 2004 is unaudited and has been prepared on the same basis as the
audited financial statement. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
The results for the six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2005.
The Palmar Largo joint venture was formed on November 24, 1992 under the
method foreseen in Chapter III, Section II of Argentine Law No. 19.550
(volume 1984 and their modifications). The Palmar Largo joint venture aims
at exploring, exploiting and developing the hydrocarbons of the "Palmar
Largo" Area.
On December 18, 1992, by Decree 2.444/92 of the Argentine Federal
Executive, the production and exploration concession corresponding to
"Palmar Largo" Area - Northwest Basin- Provinces of Salta and Formosa
offered by the International Public Bidding No 14-280/92 was awarded to
Y.P.F S.A., Pluspetrol Exploracion y Produccion S.A, Norcen Argentina S.A,
Compania General de Combustibles S.A and Dong Won Co. Ltd. According to
Argentine laws, production concessions have a term of 25 years, which may
be extended for an additional ten-year term, in accordance with the
corresponding applicable legislation.
The concession is managed through the joint venture's partners through a
formal joint venture operating agreement. After given effect to the
acquisition of the 14% interest in the Palmar Largo joint venture by Gran
Tierra Energy Argentina S.A. as mentioned in the first paragraph, the
interest of each of the companies making up the joint venture are as
follows: YPF S.A.: 30%, Pluspetrol S.A. (joint venture's Operator):
38.15%, Compania General de Combustibles S.A: 17.85% and Gran Tierra
Energy Argentina S.A.: 14%.
Since the Palmar Largo joint venture's partners are the holders of the
hydrocarbons produced in the Palmar Largo area, each of them withdraws the
production that the Operator assigns in the measurement and delivery
point.
The accompanying schedule of revenues, royalties and operating cost only
represents the revenues, royalties and operating cost corresponding to the
Palmar Largo joint venture's production assigned to and commercialized by
Dong Won Corporation for the years ended December 31, 2004 and 2003 and
for the six months ended June 30, 2005 and 2004 (unaudited), representing
its 14% interest in the Palmar Largo joint venture's assigned production
for such years.
F-17
2. Significant Accounting Policies
The schedule of revenues, royalties and operating cost has been prepared
in accordance with generally accepted accounting principles in the United
States of America ("U.S. GAAP") as follows:
Revenues
Revenues from the sale of product are recognized upon delivery to
purchasers.
Royalties
A 12% royalty is payable on the estimated value at the wellhead of crude
oil production and the natural gas volumes commercialized. The estimated
value is calculated based upon the actual sale price of the crude oil and
gas produced, less the costs of transportation and storage.
Operating cost
Operating cost include amounts incurred on extraction of product to the
surface, gathering, field processing, treating, field storage and
transportation.
Translation to U.S. dollars
In preparing the Schedule of Revenues, Royalties and Operating Cost, the
results have been translated from Argentine pesos to U.S. dollars using
the average exchange rate for each year. The average exchange rates from
Argentine pesos to U.S. dollars were Argentine peso 2.9416 and 2.9492 to
U.S. dollar for the years ended December 31, 2004 and 2003, respectively
and Argentine peso 2.9108 and 2.9069 to U.S. dollar for the six months
ended June 30, 2005 and 2004, respectively.
F-18
(b) Pro Forma financial information.
GRAN TIERRA ENERGY, INC.
PROFORMA FINANCIAL STATEMENTS
AS AT JUNE 30, 2005 AND FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005
AND THE YEAR ENDED DECEMBER 31, 2004
On November 10, 2005, pursuant to a share purchase agreement among
Goldstrike Inc. ("Goldstrike"), Gran Tierra Energy Inc. ("Gran Tierra
Energy") and the holders of common shares of Gran Tierra Energy and an
assignment agreement between Goldstrike and Goldstrike Exchange Co, a
Canadian corporation indirectly-owned by Goldstrike ("Exchangeco"),
Exchangeco acquired all of the outstanding common shares in Gran Tierra
Energy in exchange for which each Gran Tierra common shareholder, at their
election, received either 1.5873016 shares of common stock of Goldstrike
("Common Stock") and/or 1.5873016 shares of exchangeable stock of
Exchangeco ("Exchangeable Shares"). As a result of the foregoing
transactions, Gran Tierra Energy became an indirectly-owned subsidiary of
Goldstrike and Goldstrike changed its name to Gran Tierra Energy, Inc.
(the "Company").
Subsequent to June 30, 2005, in order to facilitate merger discussions,
Goldstrike advanced funds through a bridge-financing facility to Gran
Tierra Energy to acquire producing and non-producing oil and natural gas
properties in Argentina and for working capital purposes. The principal
acquisition was a 14% interest in the Palmar Largo joint venture (the
"Palmar Largo Property"), for approximately $7,000,000. The
bridge-financing facility advanced to Gran Tierra Energy by Goldstrike has
not been included in these pro forma financial statements as the amount
due to Goldstrike by Gran Tierra Energy and the amount due by Gran Tierra
Energy to Goldstrike are eliminated on consolidation.
The accompanying unaudited pro forma consolidated financial statements
("pro forma statements") reflect the acquisition of Gran Tierra Energy by
Goldstrike using the purchase method of accounting and takes into account
the acquisition of the Palmar Largo Property. The acquisition is accounted
for as a reverse takeover of Goldstrike by Gran Tierra Energy, as the
shareholders of Gran Tierra Energy will control the consolidated entity
after the acquisition.
The pro forma statements have been prepared for inclusion in the Current
Report on Form 8-K of the Company dated November 10, 2005 and have been
prepared from, and should be read in conjunction with, the following:
o Gran Tierra Energy's audited consolidated financial statements for
the period from incorporation on January 26, 2005 to June 30, 2005;
o Goldstrike's unaudited financial statements for the six months ended
June 30, 2005 and 2004;
o Goldstrike's audited financial statements for the year ended
December 31, 2004;
o unaudited schedules of revenues, royalties and operating costs of
the Palmar Largo Property for the six months ended June 30, 2005 and
2004; and
o audited schedules of revenues, royalties and operating costs of the
Palmar Largo Property for the year ended December 31, 2004.
32
GRAN TIERRA ENERGY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
As at June 30, 2005
(Unaudited)
(thousands of US dollars)
-------------------------------------------------------------------------------------1
Gran Palmar
Tierra Largo Pro forma Note Pro forma
Energy Goldstrike Property Adjustments Ref Consolidated
------------------------------------------------------------
ASSETS
Current assets
Cash and cash
equivalents 1,319 1 - 3,291 4,611
Accounts receivable 1 - - - 1
------------------------------------- --------
1,320 1 - 3,291 4,612
Capital assets 43 - - 7,110 2b,4 7,153
------------------------------------- --------
1,363 1 - 10,401 11,765
===================================== ========
LIABILITIES
Current liabilities
Accounts payable and
accrued liabilities 127 6 - - 133
Related party note - 10 - (10) 2d -
------------------------------------- --------
127 16 - (10) 133
------------------------------------- --------
Asset retirement
obligations - - - 110 2b,4 110
------------------------------------- --------
SHAREHOLDERS' EQUITY
- 2a,
Share capital 1,498 32 10,254 2c 11,784
Deficit (262) (47) - 47 2c (262)
------------------------------------- --------
1,236 (15) - 10,301 11,522
------------------------------------- --------
1,363 1 - 10,401 11,765
===================================== ========
33
GRAN TIERRA ENERGY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Six-Month Period Ended June 30, 2005
(Unaudited)
(thousands of US dollars, except for per share amounts)
-------------------------------------------------------------------------------------
Gran Palmar
Tierra Largo Pro forma Note Pro forma
Energy Goldstrike Property Adjustments Ref Consolidated
------------------------------------------------------------
REVENUE
Oil and natural gas
revenue - - 2,066 - 2,066
Royalties - - (259) - (259)
------------------------------------- --------
- - 1,807 - 1,807
------------------------------------- --------
EXPENSES
Operating - - 838 - 838
General and
administrative 260 22 - - 282
Depletion,
depreciation and
accretion 2 - - 457 3a 459
------------------------------------- --------
262 22 838 457 1,579
------------------------------------- --------
Earnings (loss) before
income taxes (262) (22) 969 (457) 228
Provision for income
taxes - - - 179 3b 179
------------------------------------- --------
NET EARNINGS (LOSS)
FOR THE PERIOD (262) (22) 969 (636) 49
===================================== ========
Basic and Diluted
Earnings (Loss) Per
Share (0.10) (0.01) - - 5 0.00
===================================== ========
34
GRAN TIERRA ENERGY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2004
(Unaudited)
(thousands of US dollars, except for per share amounts)
-------------------------------------------------------------------------------------
Gran Palmar
Tierra Largo Pro forma Note Pro forma
Energy Goldstrike Property Adjustments Ref Consolidated
------------------------------------------------------------
REVENUE
Oil and natural gas
revenue - - 4,703 - 4,703
Royalties - - (493) - (493)
------------------------------------- --------
- - 4,210 - 4,210
------------------------------------- --------
EXPENSES
Operating expenses - - 1,424 - 1,424
General and
administrative - 5 - - 5
Depletion, depreciation
and accretion - - - 1,011 3a 1,011
------------------------------------- --------
- 5 1,424 1,011 2,440
------------------------------------- --------
Earnings (loss) before
income taxes - (5) 2,786 (1,011) 1,770
Provision for income
taxes - - - 620 3b 620
------------------------------------- --------
NET EARNINGS (LOSS)
FOR THE PERIOD - (5) 2,786 (1,631) 1,150
===================================== ========
Basic and Diluted
Earnings (Loss) Per
Share - (0.00) - - 5 0.03
===================================== ========
35
GRAN TIERRA ENERGY, INC. 1
--------------------------------------------------------------------------------
Notes to the Pro forma Consolidated Financial Statements
--------------------------------------------------------------------------------
As at June 30, 2005 and for Six-Month Period Ended June 30, 2005 and the Year
Ended December 31, 2004
(Unaudited)
(Tabular amounts expressed in thousands of US dollars)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These pro forma consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America ("GAAP") and Gran Tierra Energy's accounting policies,
as disclosed in Note 2 of the audited financial statements of Gran Tierra
Energy for the period ended June 30, 2005.
The pro forma consolidated financial statements are based on the estimates
and assumptions included in these notes and include all adjustments
necessary for the fair presentation of the transactions in accordance with
GAAP. The purchase price allocation is preliminary and is based on
management's best estimate of the fair values of the assets acquired and
liabilities assumed. The purchase price allocation will be completed once
all final adjustments have been identified and the asset and liability
valuations have been finalized.
These pro forma consolidated financial statements are not intended to
reflect results from operations or the financial position which would have
actually resulted had the acquisition been effected on the dates
indicated. These pro forma statements do not include any cost savings or
other synergies that may result from the transaction. Moreover, these pro
forma statements are not intended to be indicative of the results of
operations or financial position which may be obtained in the future.
2. PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED BALANCE SHEET
The following adjustments have been made as at June 30, 2005 to reflect
the transactions described above, as if these transactions occurred on
June 30, 2005 for purposes of the pro forma consolidated balance sheet.
a. Sale of common stock and warrants of Goldstrike for net proceeds of
$10,301,000 after issue costs of $52,000.
b. Acquisition of the Palmar Largo Property by Gran Tierra Energy for
approximately $7,000,000 (see note 4).
c. Exchange of common shares of Gran Tierra Energy for Common Stock or
Exchangeable Shares resulting in the acquisition of Goldstrike by
Gran Tierra Energy, accounted for as a reverse takeover, and
consummation of the merger. As all of the assets and liabilities are
being carved out of Goldstrike prior to the merger, there are no pro
forma adjustments required for the reverse takeover of Goldstrike by
Gran Tierra Energy.
d. Repayment of the related party loan to Goldstrike in the amount of
$10,000.
36
GRAN TIERRA ENERGY, INC. 2
--------------------------------------------------------------------------------
Notes to the Pro forma Consolidated Financial Statements
--------------------------------------------------------------------------------
As at June 30, 2005 and for Six-Month Period Ended June 30, 2005 and the Year
Ended December 31, 2004
(Unaudited)
(Tabular amounts expressed in thousands of US dollars)
--------------------------------------------------------------------------------
3. PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED STATEMENTS OF OPERATIONS
The following adjustments have been made to reflect the transactions
described above, as if the transactions occurred on January 1, 2004 for
purposes of the pro forma consolidated statements of operations for the
six-month period ended June 30, 2005 and the year ended December 31, 2004.
a. Depreciation, depletion and accretion ("DD&A") expense has been
adjusted to reflect the additional depletion on the Palmar Largo
Property and the accretion of asset retirement obligations acquired.
b. The provision for income taxes has been adjusted to account for the
tax effects of operating income from the Palmar Largo Property and
DD&A.
4. PURCHASE PRICE ALLOCATION
The total purchase price has been allocated on a preliminary basis to the
Palmar Largo Property based on their estimated fair values.
These fair values are based on management's estimates and are subject to
change once the final valuations have been completed. The following is the
preliminary allocation of the purchase price:
-----------
$
-----------
Cash paid 7,000
===========
Purchase price allocated
Oil and natural gas properties 7,110
Asset retirement obligations (110)
-----------
7,000
===========
5. BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using 42,191,873
shares of common stock.
37
(c) Exhibits.
--------------------------------------------------------------------------------
Incorporated by Reference to
Exhibit No. Description Filings Indicated
----------- ----------- -----------------
--------------------------------------------------------------------------------
3.1 Articles of Incorporation Exhibit 3.1 to Company's Annual
Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.2 Certificate Amending Articles of Exhibit 3.2 to Company's Annual
Incorporation Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.3 Bylaws Exhibit 3.3 to Company's Annual
Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.4 Certificate Amending Articles of
Incorporation*
--------------------------------------------------------------------------------
10.1 Share Purchase Agreement*
--------------------------------------------------------------------------------
10.2 Assignment Agreement*
--------------------------------------------------------------------------------
10.3 Voting Exchange and Support
Agreement*
--------------------------------------------------------------------------------
10.4 Split Off Agreement*
--------------------------------------------------------------------------------
10.5 Employment Agreement between the
Company and Dana Coffield*
--------------------------------------------------------------------------------
10.6 Employment Agreement between the
Company and James Hart*
--------------------------------------------------------------------------------
10.7 Employment Agreement between the
Company and Max Wei*
--------------------------------------------------------------------------------
10.8 Employment Agreement between the
Company and Rafael Orunesu*
--------------------------------------------------------------------------------
10.9 Form of Indemnity Agreement*
--------------------------------------------------------------------------------
10.10 Mineral Property Sale Agreement Exhibit 10.1 to Company's
dated June 30, 2003 Annual Report on Form 10-KSB
filed on March 24, 2005
--------------------------------------------------------------------------------
10.11 2005 Equity Incentive Plan*
--------------------------------------------------------------------------------
----------------
* filed herewith
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Gran Tierra Energy, Inc.
By: /s/ James Hart
------------------------------
Name: James Hart
Title: Chief Financial Officer
Date: November 10, 2005
39
EXHIBIT INDEX
--------------------------------------------------------------------------------
Incorporated by Reference to
Exhibit No. Description Filings Indicated
----------- ----------- -----------------
--------------------------------------------------------------------------------
3.1 Articles of Incorporation Exhibit 3.1 to Company's Annual
Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.2 Certificate Amending Articles of Exhibit 3.2 to Company's Annual
Incorporation Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.3 Bylaws Exhibit 3.3 to Company's Annual
Report on Form 10-KSB filed on
March 24, 2005
--------------------------------------------------------------------------------
3.4 Certificate Amending Articles of
Incorporation*
--------------------------------------------------------------------------------
10.1 Share Purchase Agreement*
--------------------------------------------------------------------------------
10.2 Assignment Agreement*
--------------------------------------------------------------------------------
10.3 Voting Exchange and Support
Agreement*
--------------------------------------------------------------------------------
10.4 Split Off Agreement*
--------------------------------------------------------------------------------
10.5 Employment Agreement between the
Company and Dana Coffield*
--------------------------------------------------------------------------------
10.6 Employment Agreement between the
Company and James Hart*
--------------------------------------------------------------------------------
10.7 Employment Agreement between the
Company and Max Wei*
--------------------------------------------------------------------------------
10.8 Employment Agreement between the
Company and Rafael Orunesu*
--------------------------------------------------------------------------------
10.9 Form of Indemnity Agreement*
--------------------------------------------------------------------------------
10.10 Mineral Property Sale Agreement Exhibit 10.1 to Company's
dated June 30, 2003 Annual Report on Form 10-KSB
filed on March 24, 2005
--------------------------------------------------------------------------------
10.11 2005 Equity Incentive Plan*
--------------------------------------------------------------------------------
----------------
* filed herewith
40