October 4, 2014
Notice of Default - Maranta Block
The company recently received a notice of default from the operator of the Maranta
block in which La Cortez holds an interest. As previously discussed, the company
has had outstanding obligations due in respect of its share of operating and capital
costs since June 2013, and such obligations have been accruing interest in
accordance with the provisions of the joint operating agreement at a rate of LIBOR
plus 10 basis points. Prior to receipt of the notice of default it was the company’s
expectation that such obligations could be satisfied through cash flow generated
from operating activities.
Upon receipt of such notice, the company met with the operator to discuss certain
field operating problems and to propose various alternatives for dealing with the
outstanding amounts due. In response to such meeting, the company has been
informed that beginning with the September cash call, the operator expects to
receive payment for all outstanding amounts, and prompt payment from then on for
monthly cash calls in conformance with the joint operating agreement signed
between the parties. A cash call for September in the amount of $588k was received
by the company on October 1, 2014, and such amount is due for payment October
10th, 2014. In addition to amounts included in the September cash call the company
is aware of additional obligations for prior period operating and capital costs of
approximately $220k that are expected to be included in future cash calls by the
operator. Pursuant to the joint operating agreement, non-defaulting partners have
the right to cause withdrawal of the defaulting party if outstanding obligations are
not paid within thirty days of a notice of default.
In addition to the obligations owed Emerald, the company has approximately
$1,094k in other obligations outstanding relating to sums owed for various
Colombian taxes, third party vendors and others, for total corporate obligations
outstanding of approximately $1,902k as of September 30, 2014. These amounts
are before any reduction in amounts for unsold crude for the account of the
company. At September 30, 2014 unsold crude totaled 4,667 bbls with a value of
approximately $328k based on recent product sale prices.
The company has for some time been attempting to find sources of funding to
address its outstanding obligations. To fund commitments over the past year, the
company was able to secure $250,000 in equity from one of its shareholders who is
{00157854.2 / 0903-001}
an affiliate of one of the directors of the company. We were recently informed by
such shareholder it is no longer willing to fund the company on the same terms as it
has been doing to date in light of these recent developments. We continue our
efforts to secure financing to satisfy the Maranta obligations; however, given the
time frame for addressing its outstanding work commitments, the company believes
it has few alternatives for financing the Maranta obligations. No assurance can be
given that the company will be able to secure financing to satisfy the Maranta
obligations, and if successful, the terms of such financing are likely to be highly
dilutive and contain terms that are unattractive to the shareholders of the company.
Other Matters
As previously disclosed, the operator resumed operations at Maranta in late
January. Work over activity was performed at all four of the wells in which the
company holds an interest, and an artificial lift system was installed in three of the
four wells. The operator has been unable to consistently establish production at one
of the wells, and this well has been closed since August 21, 2014, pending further
evaluation by the operator. It is not anticipated that production from such shut-in
well will resume for some time, if at all. As a result, over the past thirty days,
production net to the interest of La Cortez has declined to approximately 140
barrels average per day after royalty.
During September the company’s President, Nadine Smith, resigned as president
and a director. Ms. Smith continues to assist the company and the Board of
Directors with transition and corporate matters as requested.
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