GRAN TIERRA ENERGY INC.

(Exact name of registrant as specified in its charter)

Nevada		98-0479924
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)
300, 625 11 th Avenue S.W. Calgary, Alberta, Canada		T2R 0E1
(Address of principal executive offices)		(Zip code)

Large Accelerated Filer   x	Accelerated Filer   ¨
Non-Accelerated Filer   ¨	(do not check if a smaller reporting company) Smaller Reporting Company   ¨

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

Gran Tierra Energy Inc.

Condensed Consolidated Statements of Operations and Retained Earnings (Unaudited)

(Thousands of U.S. Dollars, Except Share and Per Share Amounts)

		Three Months Ended March 31,
		2011				2010
REVENUE AND OTHER INCOME
Oil and natural gas sales		$	122,296			$	92,932
Interest			223				178
			122,519				93,110
EXPENSES
Operating			16,396				10,185
Depletion, depreciation, accretion, and impairment (Note 5)			63,357				40,343
General and administrative			13,638				7,190
Equity tax (Note 8)			8,050				-
Financial instruments gain (Note 11)			(230	)			(44	)
Gain on acquisition (Note 3)			(24,300	)			-
Foreign exchange loss			5,199				14,294
			82,110				71,968
INCOME BEFORE INCOME TAXES			40,409				21,142
Income tax expense (Note 8)			(26,696	)			(11,182	)
NET INCOME AND COMPREHENSIVE INCOME			13,713				9,960
RETAINED EARNINGS, BEGINNING OF PERIOD			58,097				20,925
RETAINED EARNINGS, END OF PERIOD		$	71,810			$	30,885
NET INCOME PER SHARE — BASIC		$	0.05			$	0.04
NET INCOME PER SHARE — DILUTED		$	0.05			$	0.04
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 6)			260,930,753				248,818,662
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 6)			267,819,800				256,863,106

(See notes to the condensed consolidated financial statements)

 

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Gran Tierra Energy Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(Thousands of U.S. Dollars, Except Share and Per Share Amounts)

		March 31,				December 31,
		2011				2010
ASSETS
Current Assets
Cash and cash equivalents		$	253,901			$	355,428
Restricted cash (Note 12)			7,950				250
Accounts receivable			137,059				43,035
Inventory (Note 2)			6,448				5,669
Taxes receivable			16,660				6,974
Prepaids			3,107				1,940
Deferred tax assets (Note 8)			2,112				4,852
Total Current Assets			427,237				418,148
Oil and Gas Properties (using the full cost method of accounting)
Proved			544,828				442,404
Unproved			402,070				278,753
Total Oil and Gas Properties			946,898				721,157
Other capital assets			6,352				5,867
Total Property, Plant and Equipment (Note 5)			953,250				727,024
Other Long Term Assets
Restricted cash (Note 12)			2,335				1,190
Deferred tax assets (Note 8)			2,497				-
Other long term assets			308				311
Goodwill			102,581				102,581
Total Other Long Term Assets			107,721				104,082
Total Assets		$	1,488,208			$	1,249,254
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable (Note 9)		$	42,689			$	76,023
Accrued liabilities (Note 9)			60,808				32,120
Bank debt (Note 12)			31,250				-
Taxes payable			66,300				43,832
Replacement warrants (Notes 3 and 6)			1,292				-
Asset retirement obligations (Note 7)			334				338
Total Current Liabilities			202,673				152,313
Long Term Liabilities
Deferred tax liabilities (Note 8)			216,697				204,570
Deferred remittance tax and other			1,064				1,036
Equity tax payable (Note 8)			10,174				-
Asset retirement obligations (Note 7)			9,767				4,469
Total Long Term Liabilities			237,702				210,075
Commitments and Contingencies (Note 10)
Shareholders’ Equity
Common shares (Note 6)			5,848				4,797
(260,053,351 and 240,440,830 common shares and 16,959,181 and 17,681,123 exchangeable shares, par value $0.001 per share, issued and outstanding as at March 31, 2011 and December 31, 2010 respectively)
Additional paid in capital			968,101				821,781
Warrants (Note 6)			2,074				2,191
Retained earnings			71,810				58,097
Total Shareholders’ Equity			1,047,833				886,866
Total Liabilities and Shareholders’ Equity		$	1,488,208			$	1,249,254

(See notes to the condensed consolidated financial statements)

 

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Gran Tierra Energy Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Thousands of U.S. Dollars)

		Three Months Ended March 31,
		2011				2010
Operating Activities
Net income		$	13,713			$	9,960
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depletion, depreciation, accretion, and impairment			63,357				40,343
Deferred taxes			(187	)			(10,054	)
Stock based compensation (Note 6)			3,453				1,362
Unrealized gain on financial instruments (Note 11)			(62	)			(44	)
Unrealized foreign exchange loss			4,458				12,707
Settlement of asset retirement obligations (Note 7)			(4	)			-
Equity taxes payable long term			6,132				-
Gain on acquisition (Note 3)			(24,300	)			-
Net changes in non-cash working capital
Accounts receivable			(83,036	)			(46,208	)
Inventory			736				97
Prepaids			(831	)			(669	)
Accounts payable and accrued liabilities			(22,756	)			(17,796	)
Taxes receivable and payable			8,101				12,747
Net cash provided by (used in) operating activities			(31,226	)			2,445
Investing Activities
Restricted cash			(5,600	)			712
Additions to property, plant and equipment			(74,266	)			(27,072	)
Proceeds from disposition of oil and gas property			-				600
Cash acquired on acquisition (Note 3)			7,747				-
Proceeds on sale of asset backed commercial paper (Note 3)			22,679				-
Long term assets and liabilities			3				32
Net cash used in investing activities			(49,437	)			(25,728	)
Financing Activities
Settlement of bank debt (Notes 3 and 12)			(22,853	)			-
Proceeds from issuance of common shares			1,989				18,173
Net cash (used in) provided by financing activities			(20,864	)			18,173
Net decrease in cash and cash equivalents			(101,527	)			(5,110	)
Cash and cash equivalents, beginning of period			355,428				270,786
Cash and cash equivalents, end of period		$	253,901			$	265,676
Cash		$	243,399			$	101,580
Term deposits			10,502				164,096
Cash and cash equivalents, end of period		$	253,901			$	265,676
Supplemental cash flow disclosures:
Cash paid for interest		$	668			$	-
Cash paid for income taxes		$	9,693			$	10,147
Non-cash investing activities:
Non-cash working capital related to property, plant and equipment		$	42,698			$	10,328

 (See notes to the condensed consolidated financial statements)

 

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Gran Tierra Energy Inc.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(Thousands of U.S. Dollars)

		Three Months Ended				Year Ended
		March 31, 2011				December 31, 2010
Share Capital
Balance, beginning of period		$	4,797			$	1,431
Issue of common shares			1,051				3,366
Balance, end of period			5,848				4,797
Additional Paid in Capital
Balance, beginning of period			821,781				766,963
Issue of common shares			141,910				19,119
Exercise of warrants (Note 6)			117				24,916
Exercise of stock options (Note 6)			717				2,300
Stock based compensation expense (Note 6)			3,576				8,483
Balance, end of period			968,101				821,781
Warrants
Balance, beginning of period			2,191				27,107
Exercise of warrants (Note 6)			(117	)			(24,916	)
Balance, end of period			2,074				2,191
Retained Earnings
Balance, beginning of period			58,097				20,925
Net income			13,713				37,172
Balance, end of period			71,810				58,097
Total Shareholders’ Equity		$	1,047,833			$	886,866

(See notes to the condensed consolidated financial statements)

 

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Gran Tierra Energy Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business

 

Gran Tierra Energy Inc., a Nevada corporation (the “Company” or “Gran Tierra”), is a publicly traded oil and gas company engaged in acquisition, exploration, development and production of oil and natural gas properties. The Company’s principal business activities are in Colombia, Argentina, Peru and Brazil.

2. Significant Accounting Policies 

These interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the interim consolidated financial statements, and revenues and expenses during the reporting period. In the opinion of the Company’s management, all adjustments (all of which are normal and recurring) that have been made are necessary to fairly state the consolidated financial position of the Company as at March 31, 2011, the results of its operations and its cash flows for the three month periods ended March 31, 2011 and 2010.

The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2010 included in the Company’s 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2011. The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements which are included in the Company’s 2010 Annual Report on Form 10-K and are the same policies followed in these unaudited interim consolidated financial statements, except as disclosed below. The Company has evaluated all subsequent events through to the date these unaudited interim consolidated financial statements were issued.

Fair value of financial instruments

The Company’s financial instruments are cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, bank debt, asset backed commercial paper (“ABCP”) and derivatives. The fair values of these financial instruments, excluding ABCP, derivatives and bank debt, approximate their carrying values due to their immediate or short-term nature.  Bank debt is recorded at amortized cost, except as noted in Note 12 and the fair value of the ABCP and derivatives are valued as disclosed in Notes 11 and 12.

Restricted cash

Restricted cash relates to cash resources pledged to secure letters of credit or to meet the requirement to place in to trust amounts for future debt repayments associated with a credit facility assumed upon the acquisition of Petrolifera Petroleum Limited (“Petrolifera”) (Notes 3 and 12). Letters of credit currently secured by cash relate to requirements for work commitment guarantees contained in exploration contracts and are currently classified as current or long term assets.

Inventory

Crude oil inventories at March 31, 2011 and December 31, 2010 are $5.1 million and $3.6 million, respectively. Supplies at March 31, 2011 and December 31, 2010 are $1.3 million and $2.1 million, respectively.

 

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Warrants

Upon issuance, the Company records warrants issued to purchase its common stock at fair value; subsequently, the warrants are carried at amortized cost or fair value, depending on the terms of the warrants. The Company determines the fair value of warrants issued by using the Black-Scholes option pricing model. Additional warrants (“Replacement Warrants”) were issued on the acquisition of Petrolifera and their fair value of $1.4 million was recorded as a current liability and as part of the consideration paid for the acquisition (Note 3). Changes in the fair value of this derivative are recorded in the statement of operations until the warrants are exercised or expire.

New Accounting Pronouncements

Stock Compensation

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), "Compensation–Stock Compensation (Topic 718)." The update clarifies that an employee share based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The implementation of this update did not materially impact the Company’s consolidated financial position, operating results or cash flows.

Business Combinations

In December 2010, the FASB issued ASU, "Business Combinations (Topic 850), Disclosures of Supplementary Pro Forma Information for Business Combinations." The update is intended to conform reporting of pro forma revenue and earnings for material business combinations included in the notes to the financial statements and expand disclosure of non-recurring adjustments that are directly attributable to the business combination. The pro forma revenue and earnings of the combined entity are presented as if the acquisition date had occurred as of the beginning of the annual reporting period. If comparatives are presented, the pro forma disclosures for both periods presented should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The implementation of this update did not materially impact the Company’s disclosures.

3. Business Combination

On March 18, 2011 (the “Acquisition Date”), Gran Tierra completed its acquisition of all the issued and outstanding common shares and warrants of Petrolifera, a Canadian corporation, pursuant to the terms and conditions of the Arrangement Agreement dated January 17, 2011 (the “Arrangement”). Petrolifera is a Calgary-based crude oil, natural gas and natural gas liquids exploration, development and production company active in Argentina, Colombia and Peru. The transaction contemplated by the Arrangement was effected through a court-approved plan of arrangement in Canada. The Court of Queen’s Bench of Alberta issued its Final Order approving the plan of arrangement on the Acquisition Date. The Arrangement was approved at a special meeting of Petrolifera shareholders on March 17, 2011 and by the Court of Queen's Bench of Alberta on March 18, 2011.

Under the Arrangement, Petrolifera shareholders received, for each Petrolifera share held, 0.1241 of a share of Gran Tierra common stock, and Petrolifera warrant holders received, for each Petrolifera warrant held, 0.1241 of a Replacement Warrant to purchase a share of Gran Tierra common stock at an exercise price of $9.67 Canadian  (“CDN”) dollars per share. Gran Tierra Replacement Warrants are only net exercisable, and expire on August 28, 2011.

 

Gran Tierra has acquired all the issued and outstanding Petrolifera shares and warrants through the issuance of 18,075,247 Gran Tierra common shares, par value $0.001, and 4,125,036 Replacement Warrants. Upon completion of the transaction on the Acquisition Date, Petrolifera became an indirect wholly owned subsidiary of Gran Tierra. On a diluted basis, upon the closing of the Arrangement, Petrolifera security holders owned approximately 6.6% and the Gran Tierra security holders immediately prior to the transaction owned approximately 93.4% of the Company immediately following the transaction. The total consideration for the transaction was approximately $143.0 million.

 

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The fair value of Gran Tierra’s common shares was determined as the closing price of the common shares of Gran Tierra as at the Acquisition Date. The fair value of the Replacement Warrants was estimated on the Acquisition Date using the Black-Scholes option pricing model with the following assumptions:

Exercise price (CDN dollars per warrant)		$	9.67
Risk-free interest rate			1.3	%
Expected life		0.45 Years
Volatility			44	%
Expected annual dividend per share		Nil
Estimated fair value per warrant (CDN dollars)		$	0.32

Gran Tierra’s Replacement Warrants issued as a result of the acquisition meet the definition of a derivative. Because the exercise price of the Replacement Warrants is denominated in Canadian dollars, which is different from Gran Tierra’s functional currency, the Replacement Warrants are not considered indexed to Gran Tierra’s common shares and the Replacement Warrants cannot be classified within equity. Therefore the Replacement Warrants, which expire in August 2011, are classified as a current liability on the Gran Tierra’s condensed consolidated balance sheet.

The acquisition is accounted for using the acquisition method, with Gran Tierra being the acquirer, whereby Petrolifera’s assets acquired and liabilities assumed are recorded at their fair values as at the Acquisition Date and the results of Petrolifera have been consolidated with those of Gran Tierra from that date.

The following table shows the allocation of the consideration transferred based on the fair values of the assets and liabilities acquired:

(Thousands of U.S. Dollars)
Consideration Transferred:
Common shares issued net of share issue costs		$	141,690
Replacement Warrants			1,354
		$	143,044
Allocation of Consideration Transferred (1):
Oil and gas properties
Proved		$	58,457
Unproved			161,278
Other long term assets			4,417
Net working capital (including cash acquired of $7.7 million and accounts receivable of $6.4 million)			(14,622	)
Asset retirement obligations			(4,901	)
Bank debt			(22,853	)
Other long term liabilities			(14,432	)
Gain on acquisition			(24,300	)
		$	143,044

(1) The allocation of the consideration transferred is not final and is subject to change.

As shown above in the allocation of the consideration transferred, the fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred. Consequently, Gran Tierra reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. As a result, Gran Tierra recognized a gain of $24.3 million, which is reported as “Gain on acquisition”, in the consolidated statement of operations. The gain reflects the impact on Petrolifera’s pre-acquisition market value resulting from their lack of liquidity and capital resources required to maintain current production and reserves and further develop and explore their inventory of prospects.

 

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As part of the assets acquired and included in the net working capital in the allocation of the consideration transferred, the Company assigned $22.5 million in fair value to investments in notes that Petrolifera received in exchange for ABCP with a face value of $31.3 million. On March 28, 2011, these notes were sold to an unrelated party for proceeds of $22.7 million after the associated line of credit was settled (Note 12).

The pro forma results for the three months ended March 31, 2011 and 2010 are shown below, as if the acquisition had occurred on January 1, 2010. Pro forma results are not indicative of actual results or future performance.

		Three Months Ended March 31,
(Thousands of U.S. Dollars except per share amounts)		2011				2010
Oil and natural gas sales and interest		$	131,714			$	107,882
Net (loss) income		$	(21,711	)		$	11,821
Net (loss) income per share -basic		$	(0.08	)		$	0.04
Net (loss) income per share - diluted		$	(0.08	)		$	0.04

The supplemental pro forma earnings of Gran Tierra for the three months ended March 31, 2011 were adjusted to exclude $4.4 million of acquisition costs recorded in general and administrative expense and the $24.3 million gain on acquisition recognized in the first quarter of  2011 results of Gran Tierra because they are not expected to have a continuing impact on Gran Tierra’s results of operations. The actual results of operations for Petrolifera, since the Acquisition Date were insignificant and have not been separately disclosed.

4. Segment and Geographic Reporting 

The Company’s reportable operating segments are Colombia, Argentina, Peru and Corporate, based on a geographic organization. The Company is primarily engaged in the exploration and production of oil and natural gas. In the three months ended March 31, 2011, Peru became a reportable geographic segment due to the significance of its loss before income taxes as compared to the consolidated loss before income taxes.  Prior year comparative geographic segment presentation has been conformed to this presentation with the Peru related results and asset information disaggregated from the Corporate segment.  Brazil is included as part of the Corporate segment and is not a reportable segment because the level of activity is not significant at this time. The accounting policies of the reportable geographic segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on income or loss from oil and natural gas operations before income taxes.

The following tables present information on the Company’s reportable geographic segments:

		Three Months Ended March 31, 2011
(Thousands of U.S. Dollars except per unit of production amounts)		Colombia				Argentina				Peru				Corporate				Total
Revenues		$	117,304			$	4,992			$	-			$	-			$	122,296
Interest income			87				-				-				136				223
Depreciation, depletion, accretion and impairment			30,036				1,147				31,933				241				63,357
Depreciation, depletion, accretion and impairment - per unit of production			24.77				11.90				-				-				48.39
Segment income (loss) before income taxes			57,886				(430	)			(32,625	)			15,578				40,409
Segment capital expenditures		$	42,264			$	11,622			$	14,287			$	930			$	69,103

 

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		Three Months Ended March 31, 2010
(Thousands of U.S. Dollars except per unit of production amounts)		Colombia				Argentina				Peru				Corporate				Total
Revenues		$	89,433			$	3,499			$	-			$	-			$	92,932
Interest income			77				16				-				85				178
Depreciation, depletion, accretion, and impairment			35,006				5,267				8				62				40,343
Depreciation, depletion, accretion and impairment - per unit of production			27.58				69.20				-				-				29.99
Segment income (loss) before income taxes			28,760				(4,644	)			(248	)			(2,726	)			21,142
Segment capital expenditures		$	17,553			$	660			$	527			$	764			$	19,504
		As at March 31, 2011
(Thousands of U.S. Dollars)		Colombia				Argentina				Peru				Corporate				Total
Property, plant and equipment		$	766,838			$	148,140			$	22,471			$	15,801			$	953,250
Goodwill			102,581				-				-				-				102,581
Other assets			198,756				41,807				7,164				184,650				432,377
Total Assets		$	1,068,175			$	189,947			$	29,635			$	200,451			$	1,488,208
		As at December 31, 2010
(Thousands of U.S. Dollars)		Colombia				Argentina				Peru				Corporate				Total
Property, plant and equipment		$	654,416			$	29,031			$	28,578			$	14,999			$	727,024
Goodwill			102,581				-				-				-				102,581
Other assets			155,798				15,220				18,575				230,056				419,649
Total Assets		$	912,795			$	44,251			$	47,153			$	245,055			$	1,249,254

The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. In 2011, the Company has one significant customer for its Colombian crude oil, Ecopetrol S.A. (“Ecopetrol”), a Colombian government agency. Sales to Ecopetrol accounted for 96% of the Company’s revenues in the first quarter of 2011 and 96% in the first quarter of 2010. In Argentina, the Company has one significant customer, Refineria del Norte S.A (“Refiner”).

 

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5. Property, Plant and Equipment 

		As at March 31, 2011
(Thousands of U.S. Dollars)		Cost				Accumulated DD&A				Net book value
Oil and natural gas properties
Proved		$	943,475			$	(398,647	)		$	544,828
Unproved			402,070				-				402,070
			1,345,545				(398,647	)			946,898
Furniture and fixtures and leasehold improvements			5,253				(2,940	)			2,313
Computer equipment			6,082				(2,467	)			3,615
Automobiles			933				(509	)			424
Total Property, Plant and Equipment		$	1,357,813			$	(404,563	)		$	953,250

		As at December 31, 2010
(Thousands of U.S. Dollars)		Cost				Accumulated DD&A				Net book value
Oil and natural gas properties
Proved		$	777,262			$	(334,858	)		$	442,404
Unproved			278,753				-				278,753
			1,056,015				(334,858	)			721,157
Furniture and fixtures and leasehold improvements			5,233				(2,831	)			2,402
Computer equipment			5,521				(2,358	)			3,163
Automobiles			779				(477	)			302
Total Property, Plant and Equipment		$	1,067,548			$	(340,524	)		$	727,024

Depreciation, depletion, accretion and impairment (“DD&A”) for the three months ended March 31, 2011 includes a ceiling test impairment loss of $31.9 million in Gran Tierra’s Peru cost center. This impairment loss was a result of the inclusion of dry well costs and seismic costs associated with the asset base of the Peru cost center for ceiling test determination purposes. For the three months ended March 31, 2010, a $3.7 million ceiling test impairment loss was included in the Company’s Argentina cost center. This impairment loss was a result of a redetermination of the income tax effect on the present value of future cash inflows used to determine the Argentina ceiling for that country’s ceiling test.

During the three months ended March 31, 2011, the Company capitalized $1.8 million (year ended December 31, 2010 - $4.1 million) of general and administrative expenses related to the Colombian full cost center, including $0.1 million (year ended December 31, 2010 - $0.3 million) of stock based compensation expense, and $0.4 million (year ended December 31, 2010 - $1.2 million) of general and administrative expenses in the Argentina full cost center, including $47,000 (year ended December 31, 2010 - $0.2 million) of stock based compensation.

The unproved oil and natural gas properties at March 31, 2011 consist of exploration lands held in Colombia, Argentina, Peru, and Brazil, including additions related to the newly acquired Petrolifera assets. As at March 31, 2011, the Company had $308.7 million (December 31, 2010 - $228.8 million) of unproved assets in Colombia, $59.0 million (December 31, 2010 - $9.4 million) of unproved assets in Argentina, $21.8 million (December 31, 2010 - $28.2 million) of unproved assets in Peru, and $12.6 million (December 31, 2010 - $12.4 million) of unproved assets in Brazil for a total of $402.1 million (December 31, 2010 - $278.8 million). These properties are being held for their exploration value and are not being depleted pending determination of the existence of proved reserves. Gran Tierra will continue to assess the unproved properties over the next several years as proved reserves are established and as exploration dictates whether or not future areas will be developed.

 

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6. Share Capital 

The Company’s authorized share capital consists of 595,000,002 shares of capital stock, of which 570 million are designated as common stock, par value $0.001 per share, 25 million are designated as preferred stock, par value $0.001 per share and two shares are designated as special voting stock, par value $0.001 per share.  As at March 31, 2011, outstanding share capital consists of 260,053,351 common voting shares of the Company, 9,148,069 exchangeable shares of Gran Tierra Exchange Co., automatically exchangeable on November 14, 2013, and 7,811,112 exchangeable shares of Goldstrike Exchange Co., automatically exchangeable on November 10, 2012. The exchangeable shares of Gran Tierra Exchange Co, were issued upon acquisition of Solana Resources Limited (“Solana”). The exchangeable shares of Gran Tierra Goldstrike Inc. were issued upon the business combination between Gran Tierra Energy Inc., an Alberta corporation, and Goldstrike, Inc., which is now the Company. Each exchangeable share is exchangeable into one common voting share of the Company. The holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote and are entitled to share in all dividends that the Company’s board of directors, in its discretion, declares from legally available funds. The holders of common stock have no pre-emptive rights, no conversion rights, and there are no redemption provisions applicable to the common stock. Holders of exchangeable shares have substantially the same rights as holders of common voting shares.

Warrants

At March 31, 2011, the Company had 3,674,932 warrants outstanding to purchase 1,837,466 common shares for $1.05 per share, expiring between June 20, 2012 and June 30, 2012 and 4,125,036 Replacement Warrants outstanding, issued upon the acquisition of Petrolifera (Note 3), to purchase 4,125,036 common shares for CDN$9.67, expiring August 28, 2011. For the three months ended March 31, 2011, 210,000 common shares were issued upon the exercise of 420,000 warrants (three months ended March 31, 2010, 8,118,018 common shares were issued upon the exercise of 9,090,098 warrants). Included in warrants exercised in the three months ended March 31, 2010 were 7,145,938 warrants to purchase 7,145,938 common shares for $14.4 million, assumed on the acquisition of Solana in November 2008.

The fair value of the Replacement Warrants as of March 31, 2011 was determined using the Black-Scholes option pricing model with the following assumptions:

Exercise price (CDN dollars per warrant)		$	9.67
Risk-free interest rate			1.3	%
Expected life		0.45 Years
Volatility			44	%
Expected annual dividend per share		Nil
Estimated fair value per warrant (CDN dollars)		$	0.32

Stock Options

As at March 31, 2011, the Company has a 2007 Equity Incentive Plan, formed through the approval by shareholders of the amendment and restatement of the 2005 Equity Incentive Plan, under which the Company’s board of directors is authorized to issue options or other rights to acquire shares of the Company’s common stock. On November 14, 2008, the shareholders of Gran Tierra approved an amendment to the Company’s 2007 Equity Incentive Plan, which increased the number of shares of common stock available for issuance thereunder from 9,000,000 shares to 18,000,000 shares.   On June 16, 2010, another amendment to the Company’s 2007 Equity Incentive plan was approved by shareholders, which increased the number of shares of common stock available for issuance thereunder from 18,000,000 shares to 23,306,100 shares.

The Company grants options to purchase common shares to certain directors, officers, employees and consultants. Each option permits the holder to purchase one common share at the stated exercise price. The options vest over three years and have a term of ten years, or three months after the grantee’s end of service to the Company, whichever occurs first. At the time of grant, the exercise price equals the market price. For the three months ended March 31, 2011, 605,332 common shares were issued upon the exercise of 605,332 stock options (three months ended March 31, 2010 – 1,208,994). The following options were outstanding as of March 31, 2011:

 

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		Number of				Weighted Average
		Outstanding				Exercise Price
		Options				$/Option
Balance, December 31, 2010			10,943,058			$	3.49
Granted in 2011			3,219,996				8.39
Exercised in 2011			(605,332	)			(2.92	)
Forfeited in 2011			(29,167	)			(3.96	)
Balance, March 31, 2011			13,528,555			$	4.68

The weighted average grant date fair value for options granted in the three months ended March 31, 2011 was $5.20 (three months ended March 31, 2010 - $3.33). The intrinsic value of options exercised for the three months ended March 31, 2011 was $3.2 million (three months ended March 31, 2010 - $4.5 million).

The table below summarizes stock options outstanding at March 31, 2011:

		Number of				Weighted Average				Weighted
		Outstanding				Exercise Price				Average
Range of Exercise Prices ($/option)		Options				$/Option				Expiry Years
0.50 to 2.00			1,369,171			$	1.14				5.4
2.01 to 3.50			5,144,552				2.46				7.5
3.51 to 5.50			466,666				4.43				8.5
5.51 to 7.00			3,123,170				5.92				8.9
7.01 to 8.40			3,424,996				8.35				9.9
Total			13,528,555			$	4.68				8.3

The aggregate intrinsic value of options outstanding at March 31, 2011 is $46.9 million (December 31, 2010 - $49.9 million) based on the Company’s closing stock price of $8.07 (December 31, 2010 - $8.05) for that date. At March 31, 2011, there was $18.8 million (December 31, 2010 - $6.1 million) of unrecognized compensation cost related to unvested stock options which is expected to be recognized over the next three years. As at March 31, 2011, 5,910,173 (December 31, 2010 – 5,426,367) options were exercisable.

For the three months ended March 31, 2011, the stock based compensation expense was $3.6 million (three months ended March 31, 2010 - $1.4 million) of which $3.2 million (three months ended March 31, 2010 - $1.1 million) was recorded in general and administrative expense and $0.2 million was recorded in operating expense in the consolidated statement of operations (three months ended March 31, 2010 – $0.2 million). For the three months ended March 31, 2011, $0.2 million of stock based compensation was capitalized as part of exploration and development costs (three months ended March 31, 2010 – $0.1 million).

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model based on assumptions noted in the following table. The Company uses historical data to estimate option exercises, expected term and employee departure behavior used in the Black-Scholes option pricing model. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.

 

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		Three Months Ended March 31,
		2011				2010
Dividend yield (per share)		$	nil			$	nil
Volatility			81	%			90	%
Risk-free interest rate			1.4	%			0.4	%
Expected term		4 - 6 years				3 years
Estimated forfeiture percentage (per year)			4	%			10	%

Weighted average shares outstanding

		Three Months Ended March 31,
		2011				2010
Weighted average number of common and exchangeable shares outstanding			260,930,753				248,818,662
Shares issuable pursuant to warrants			3,203,257				5,518,333
Shares issuable pursuant to stock options			5,894,518				5,013,174
Shares to be purchased from proceeds of stock options			(2,208,728	)			(2,487,063	)
Weighted average number of diluted common and exchangeable shares outstanding			267,819,800				256,863,106

Net Income per share

For the three month period ended March 31, 2011, 4,125,036 Replacement Warrants were excluded from the diluted income per share calculation as the instruments were anti-dilutive. For the three months ended March 31, 2010, options to purchase 3,195,000 common shares were excluded from the diluted income per share calculation as the instruments were anti-dilutive.

7. Asset Retirement Obligations

As at March 31, 2011 the Company’s asset retirement obligations were comprised of Colombian obligations in the amount of $4.4 million (December 31, 2010 - $3.7 million) and Argentine obligations in the amount of $5.7 million (December 31, 2010 - $1.1 million). As at March 31, 2011, the undiscounted asset retirement obligations were $26.6 million (December 31, 2010 - $8.7 million). Changes in the carrying amounts of the asset retirement obligations associated with the Company’s oil and natural gas properties were as follows:

		Three Months Ended				Year Ended
(Thousands of U.S. Dollars)		March 31, 2011				December 31, 2010
Balance, beginning of period		$	4,807			$	4,708
Settlements			(4	)			(286	)
Disposal			-				(720	)
Liability incurred			270				719
Liability assumed in a business combination (Note 3)			4,901				-
Foreign exchange			5				58
Accretion			122				328
Balance, end of period		$	10,101			$	4,807
Asset retirement obligations - current		$	334			$	338
Asset retirement obligations - long term			9,767				4,469
Balance, end of period		$	10,101			$	4,807

 

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8. Income Taxes

 

The income tax expense reported differs from the amount computed by applying the U.S. statutory rate to income before income taxes for the following reasons:

		Three Months Ended March 31,
(Thousands of U.S. Dollars)		2011				2010
Income before income taxes		$	40,409			$	21,142
			35	%			35	%
Income tax expense expected			14,143				7,400
Other permanent differences			4,065				(612	)
Foreign currency translation adjustments			1,981				4,166
Impact of foreign taxes			(1,598	)			(840	)
Enhanced tax depreciation incentive			-				(1,292	)
Stock based compensation			1,143				449
Increase in valuation allowance			15,288				1,721
Branch and other foreign income pick-up in the United States and Canada			(1,619	)			(1,248	)
Non-deductible third party royalty in Colombia			1,820				1,438
Non-taxable gain on bargain purchase			(8,527	)			-
Total income tax expense		$	26,696			$	11,182
Current income tax			26,677				21,236
Deferred tax (recovery)			19				(10,054	)
Total income tax expense		$	26,696			$	11,182

 

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		As at
(Thousands of U.S. Dollars)		March 31, 2011				December 31, 2010
Deferred Tax Assets
Tax benefit of loss carryforwards		$	45,317			$	27,527
Tax basis in excess of book basis			21,459				7,975
Foreign tax credits and other accruals			23,520				16,895
Capital losses			1,453				1,413
Deferred tax assets before valuation allowance			91,749				53,810
Valuation allowance			(87,140	)			(48,958	)
		$	4,609			$	4,852
Deferred tax assets - current		$	2,112			$	4,852
Deferred tax assets - long term			2,497				-
			4,609				4,852
Deferred Tax Liabilities
Long-term - book value in excess of tax basis			(216,697	)			(204,570	)
Net Deferred Tax Liabilities		$	(212,088	)		$	(199,718	)

Equity tax for the current quarter of $8.1 million represents a Colombian tax of 6.2% on the balance sheet equity recorded in our Colombia branches at January 1, 2011. The equity tax is assessed every four years. The tax for the four-year period from 2011 to 2014 is payable in eight semi-annual installments over the four-year period but is expensed in the first quarter of 2011 at the commencement of the four-year period. Accordingly, the equity tax expense for the previous four-year period was recorded prior to 2010 and no expense is recorded in the first quarter of 2010.

The Company was required to calculate a deferred remittance tax in Colombia based on 7% of profits not reinvested in the business on the presumption that such profits would be transferred to the foreign owners up to December 31, 2006.   As of January 1, 2007, the Colombian government rescinded this law; therefore, no further remittance tax liabilities will be accrued. The historical balance which was included in the Company’s financial statements as of March 31, 2011 was $0.5 million (December 31, 2010 - $0.5 million).

As at March 31, 2011, the total amount of Gran Tierra ’ s unrecognized tax benefits was approximately $16.6 million, a portion of which, if recognized, would affect the Company ’ s effective tax rate. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component of income taxes in the consolidated statement of operations. As at March 31, 2011, the total amount of interest and penalties included in unrecognized tax benefits in deferred and current income tax liabilities in the condensed consolidated balance sheet was approximately $1.9 million. The Company had no interest or penalties included in the consolidated statement of operations for the three months ended March 31, 2011.

Changes in the Company's Unrecognized Tax Benefit are as Follows:
(Thousands of U.S. Dollars)
Unrecognized tax benefit at January 1, 2011		$	4,175
Additions to tax position related to prior years			70
Additions to tax position related to the current year			12,364
Balance at March 31, 2011		$	16,609

 

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The Company and its subsidiaries file income tax returns in the U.S. federal and state jurisdictions and certain other foreign jurisdictions. The Company is subject to income tax examinations for the calendar tax years ended 2005 through 2010 in most jurisdictions. It does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months.

As at March 31, 2011, the Company has deferred tax assets relating to net operating loss carryforwards of $45.3 million (December 31, 2010 - $27.5 million) and capital losses of $1.5 million (December 31, 2010 - $1.4 million) before valuation allowances. Of these losses, $36.6 million (December 31, 2010 - $20.5 million) are losses generated by the foreign subsidiaries of the Company. Of the total losses, $0.1 million (December 31, 2010 - $nil) will expire at the end of 2011, $1.5 million will begin to expire in 2012 (December 31, 2010 - $nil) and $45.2 million (December 31, 2010 - $28.9 million) will begin to expire thereafter.

9. Accounts Payable and Accrued Liabilities

The balances in accounts payable and accrued liabilities and are comprised of the following:

		As at March 31, 2011
(Thousands of U.S. Dollars)		Colombia				Argentina				Peru				Corporate				Total
Property, plant and equipment		$	31,971			$	10,670			$	8,274			$	1,379			$	52,294
Payroll			2,567				322				76				1,525				4,490
Audit, legal, and consultants			5				219				-				2,060				2,284
General and administrative			2,503				102				145				446				3,196
Operating			35,254				5,606				373				-				41,233
Total		$	72,300			$	16,919			$	8,868			$	5,410			$	103,497

		As at December 31, 2010
(Thousands of U.S. Dollars)		Colombia				Argentina				Peru				Corporate				Total
Property, plant and equipment		$	32,854			$	10,452			$	8,377			$	1,438			$	53,121
Payroll			3,256				186				-				2,300				5,742
Audit, legal, and consultants			-				140				16				1,676				1,832
General and administrative			1,039				590				70				363				2,062
Operating			43,037				2,141				173				35				45,386
Total		$	80,186			$	13,509			$	8,636			$	5,812			$	108,143

10. Commitments and Contingencies

Leases

Gran Tierra holds four categories of operating leases: compressor, office, vehicle and equipment and housing. The Company pays monthly amounts of $0.1 million for a compressor, $0.2 million for office leases, $12,000 for vehicle and equipment leases and $8,000 for certain employee accommodation leases in Canada, Colombia, Argentina, Peru, and Brazil. Future lease payments at March 31, 2011 are as follows:

 

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		As at March 31, 2011
		Payments Due in Period
Contractual Obligations		Total				Less  than 1 Year				1 to 3 years				3 to 5 years				More than  5 years
(Thousands of U.S. Dollars)
Operating leases		$	7,835			$	3,151			$	3,044			$	1,640			$	-
Bank debt			31,250				31,250				-				-				-
Software and Telecommunication			1,228				1,033				195				-				-
Drilling, Completion, Facility Construction and Oil Transportation Services			64,571				48,301				16,270				-				-
Consulting			317				317				-				-				-
Total		$	105,201			$	84,052			$	19,509			$	1,640			$	-

Guarantees

Corporate indemnities have been provided by the Company to directors and officers for various items including, but not limited to, all costs to settle suits or actions due to their association with the Company and its subsidiaries and/or affiliates, subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance to mitigate the cost of any potential future suits or actions. The maximum amount of any potential future payment cannot be reasonably estimated.

The Company may provide indemnifications in the normal course of business that are often standard contractual terms to counterparties in certain transactions such as purchase and sale agreements. The terms of these indemnifications will vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amounts that may be required to be paid. Management believes the resolution of these matters would not have a material adverse impact on the Company’s liquidity, consolidated financial position or results of operations.

Contingencies

 

Ecopetrol and Gran Tierra Energy Colombia Ltd. “Gran Tierra Colombia”, the contracting parties of the Guayuyaco Association Contract, are engaged in a dispute regarding the interpretation of the procedure for allocation of oil produced and sold during the long term test of the Guayuyaco-1 and Guayuyaco-2 wells. There is a material difference in the interpretation of the procedure established in Clause 3.5 of Attachment-B of the Guayuyaco Association Contract. Ecopetrol interprets the contract to provide that the extended test production up to a value equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s account only and serves as reimbursement of its 30% back-in to the Guayuyaco discovery. Gran Tierra Colombia’s contention is that this amount is merely the recovery of 30% of the direct exploration costs of the wells and not exclusively for benefit of Ecopetrol. There has been no agreement between the parties, and Ecopetrol has filed a lawsuit in the Contravention Administrative Court in the District of Cauca regarding this matter. Gran Tierra Colombia filed a response on April 29, 2008 in which it refuted all of Ecopetrol’s claims and requested a change of venue to the courts in Bogotá.  At this time no amount has been accrued in the financial statements as the Company does not consider it probable that a loss will be incurred. Ecopetrol is claiming damages of approximately $5.5 million.

Gran Tierra is subject to a third party 10% net profits interest on 50% of the Company’s production from the Costayaco field that arises from the original acquisition in 2006 of 50% of Gran Tierra’s interest in the Chaza Block Contract. There is currently a disagreement between Gran Tierra and the third party as to the calculation of the net profits interest. Gran Tierra and the third party have agreed to resolve this issue through an arbitration which is anticipated to be heard in Texas, in accordance with the rules of the American Arbitration Association, in the fourth quarter of 2011. At this time no amount has been accrued in the financial statements as the Company does not consider it probable that a loss will be incurred. The disputed amount at March 31, 2011 is $5.4 million.

 

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Gran Tierra has several lawsuits and claims pending for which the Company currently cannot determine the ultimate result. Gran Tierra records costs as they are incurred or become determinable. Gran Tierra believes the resolution of these matters would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

11. Financial Instruments, Fair Value Measurements and Credit Risk 

The Company’s financial instruments recognized in the balance sheet consist of cash and cash equivalents, restricted cash, accounts receivable, ABCP, accounts payable, accrued liabilities, bank debt and derivative financial instruments. The estimated fair values of the financial instruments have been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. Certain of Gran Tierra’s assets and liabilities are reported at fair value in the accompanying consolidated balance sheets. As at March 31, 2011, the fair values of financial instruments approximate their book amounts due to the short term maturity of these instruments except as discussed below.

None of the Company's derivative instruments currently qualify as fair value hedges or cash flow hedges, and accordingly, changes in fair value of the derivative instruments are recognized  as income or expense in the consolidated statement of operations and retained earnings with a corresponding adjustment to the fair value of derivative instruments recorded on the balance sheet. The derivative instruments include the Replacement Warrants (Notes 3 and 6) and a crude oil collar which expired in February 2010.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities. The Company uses appropriate valuation techniques based on the available inputs to measure the fair values of assets and liabilities. When available, Gran Tierra measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

As at the Acquisition Date and as at March 31, 2011, the Company held investments with a face value of $6.6 million and a carrying value of $nil comprised of ineligible master asset vehicles Classes 1 & 2 (“MAV IA 1 & 2”) notes. These notes, which were received by Petrolifera in 2009 in exchange for ABCP, were provided as a security for a related ABCP backed line of credit (Note 12) which was drawn at $5.0 million as at the Acquisition Date and as at March 31, 2011. The fair value of these notes receivable at the Acquisition Date and March 31, 2011 is $nil as there is no active market for these notes. The Company classified these notes received in exchange for ABCP, and ABCP secured line of credit as Level 2.

The Company does not have any assets or liabilities whose fair value is measured using the Level 1method. The Company classifies the Replacement Warrants (Notes 3 and 6) as Level 3 and measured their fair values as discussed in Note 6.

Most of the Company’s accounts receivable relate to oil and natural gas sales and are exposed to typical industry credit risks. The Company manages this credit risk by entering into sales contracts with only credit worthy entities and reviewing its exposure to individual entities on a regular basis. The book value of the accounts receivable reflects management’s assessment of the associated credit risks.

The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. For the three months ended March 31, 2011, the Company had one significant customer for its Colombian crude oil, Ecopetrol. In Argentina, the Company had one significant customer, Refiner.

Additionally, foreign exchange gains/losses result from the fluctuation of the U.S. dollar to the Colombian peso due to Gran Tierra’s deferred tax liability, a monetary liability, which is denominated in the local currency of the Colombian foreign operations. As a result, a foreign exchange gain/loss must be calculated on conversion to the U.S. dollar functional currency. A strengthening in the Colombian peso against the U.S. dollar results in foreign exchange losses, estimated at $110,000 for each one peso decrease in the exchange rate of the Colombian peso to one U.S. dollar.

 

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12. Bank Debt and Credit Facilities

The balances of bank debt are comprised of the following:

		Three Months Ended				Year Ended
(Thousands of U.S. Dollars)		March 31, 2011				December 31, 2010
Current bank debt
Reserve-backed credit facility		$	31,250			$	-
Balance, end of period		$	31,250			$	-

Effective July 30, 2010, a subsidiary of Gran Tierra, Solana, established a credit facility with BNP Paribas for a three-year term which may be extended or amended by agreement between the parties. This reserve based facility has a maximum borrowing base up to $100.0 million and is supported by the present value of the petroleum reserves of the Company’s two subsidiaries with operating branches in Colombia – Gran Tierra Energy Colombia Ltd. and Solana Petroleum Exploration (Colombia) Ltd. The initial committed borrowing base is $20 million. Amounts drawn down under the facility bear interest at the U.S. dollar LIBOR rate plus 3.5%. In addition, a stand-by fee of 1.50% per annum is charged on the unutilized balance of the committed borrowing base and is included in general and administrative expense. Under the terms of the facility, the Company is required to maintain and was in compliance with certain financial and operating covenants. As at March 31, 2011, the Company had not drawn down any amounts under this facility.

As part of the acquisition of Petrolifera on March 18, 2011, Gran Tierra assumed a $100.0 million reserve-backed credit facility with available and outstanding balance as at the Acquisition Date and March 31, 2011 of $31.3 million. This credit facility agreement with a syndicate of banks expires on June 30, 2012. Gran Tierra is required to make three scheduled reserve deposits of $3.8 million per quarter through September 30, 2011 at which time those deposits are applied to repay part of the principal.  Two additional principal repayments of $3.8 million are to be made at the end of each of the following quarters with the final settlement of $12 million to be made June 30, 2012 when this agreement expires. As of March 31, 2011, $4.3 million, which includes $0.5 million reserved prior to the acquisition, has been placed in reserve and is recorded as restricted cash in current assets in the Company’s condensed consolidated balance sheet. Under the terms of this credit facility agreement, one-half of any potential farmout proceeds received by Gran Tierra related to Petrolifera's Argentine assets, up to a maximum of $5.0 million, are to be first allocated to reduce the final $12.0 million permanent debt repayment due and payable upon expiry of the agreement in June 2012.  Any excess farmout proceeds are then to be evenly allocated to reduce Gran Tierra’s quarterly reserve payments or debt repayments. The credit facility bears interest at LIBOR plus 8.25%, is partially secured by the pledge of the shares of Petrolifera’s subsidiaries and has a provision for a borrowing base adjustment every six months.  This facility is currently under review, with any adjustment to the borrowing base calculated based on information as at December 31, 2010. Gran Tierra accounts for this credit facility at amortized cost.

Under the terms of the facility, the Company is required to maintain and was in compliance with certain financial and operating covenants. Gran Tierra has classified this credit facility as current as the Company intends to repay the credit facility at the first opportunity in August of 2011. A regulation of the Argentine Central Bank establishes that "new indebtedness and renewals of debts with foreign creditors engaged by local residents shall be kept for a minimum 365 days".  Petrolifera entered into an amendment of this credit facility on August 4, 2010, which then renewed and restructured the existing debt.   As a result, the principal debt that was loaned into Argentina cannot be repaid and retired until August 2011.

 

Upon the acquisition of Petrolifera, Gran Tierra assumed an ABCP line of credit with a Canadian Chartered Bank, to a maximum of CDN$23.2 million, which is included as part of net working capital in the allocation of consideration transferred, with an initial expiry in April 2012. Gran Tierra settled this line of credit immediately after the completion of the acquisition of Petrolifera for the face value of CDN$22.5 million in borrowings plus accrued interest (Note 3).

 

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Also upon the acquisition of Petrolifera, Gran Tierra assumed a second line of credit agreement (“Second ABCP line of credit”) with the same Canadian chartered bank to a maximum of CDN$5.0 million, which was fully drawn as at the Acquisition Date and March 31, 2011. This Second ABCP line of credit, which expired on April 8, 2011, was secured by the MAV IA 1 & 2 notes. Gran Tierra retained the option to settle the Second ABCP line of credit of CDN$5.0 million in borrowings, as drawn on this facility, through delivery to the lender of the MAV IA 1 & 2 notes. Subsequent to the acquisition, Gran Tierra elected to record this second line of credit at fair value and planned at that time to settle the debt through delivery of the MAV IA 1 & 2 notes upon expiry. Accordingly, a value of $nil was recorded for the debt upon its acquisition and at March 31, 2011 (Note 11). Gran Tierra settled such borrowings by delivery of the MAV IA 1 & 2 notes on April 8, 2011.

Interest expense on the facilities for the 13 day period from the Acquisition Date to March 31, 2011 was $0.1 million.  This amount is recorded on the Consolidated Statements of Operations and Retained Earnings as part of general and administrative expense.

13. Related Party Transaction

On February 1, 2009, the Company entered into a sublease for office space with a company, of which one of Gran Tierra’s directors is a shareholder and director. The term of the sublease runs from February 1, 2009 to August 31, 2011 and the sublease payment is $9,000 per month plus approximately $5,000 for operating and other expenses. The terms of the sublease were consistent with market conditions in the Calgary, Alberta, Canada real estate market.

On August 3, 2010, Gran Tierra entered into a contract related to the Peru drilling program with a company of which one of Gran Tierra’s directors is a shareholder and director. For the three months ended March 31, 2011, $2.0 million was capitalized and at March 31, 2011, $1.4 million was included in accounts payable related to this contract, the terms of which are consistent with market conditions.

On January 12, 2011, the Company entered into an agreement to sublease office space to a company of which Gran Tierra’s President and Chief Executive Officer serves as an independent Director.  The term of the sublease runs from February 1, 2011 to January 30, 2013 and, at $5,000 per month plus approximately $6,000 of operating and other expense, the terms are consistent with market conditions in the Calgary, Alberta, Canada real estate market.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward-Looking Information

This report contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our projected financial position and results, estimated quantities values of reserves, business strategy, plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set out in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion of our financial condition and results of operations should be read in conjunction with the Financial Statements as set out in Part I – Item 1 of this Quarterly Report on Form 10-Q, as well as the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 25, 2011.

Overview

We are an independent international energy company incorporated in the United States and engaged in oil and natural gas acquisition, exploration, development and production. We are headquartered in Calgary, Alberta, Canada and operate in South America in Colombia, Argentina, Peru, and Brazil.

In September 2005, we acquired our initial oil and gas interests and properties, which were in Argentina. During 2006, we increased our oil and gas interests and property base through further acquisitions in Colombia, Argentina and Peru. We funded acquisitions of our properties in Colombia and Argentina through a series of private placements of our securities that occurred between September 2005 and June 2006.

In 2007, we made a new field discovery, Costayaco, in the Chaza Block of the Putumayo Basin in Colombia.

Effective November 14, 2008, we completed the acquisition of Solana Resources Limited (“Solana”), an international resource company engaged in the acquisition, exploration, development and production of oil and natural gas in Colombia and incorporated in Alberta, Canada. At the date of acquisition, Solana held various working interests in nine blocks in Colombia including a 50% working interest in the Chaza Block, which includes the Costayaco field, and a 35% working interest in the Guayuyaco Block, which includes the Juanambu field.

During the third quarter of 2009, we opened a business development office in Rio de Janeiro, Brazil.

In June 2010, we expanded our land position in the Putumayo Basin and added new frontier exploration acreage in Colombia through successful bids on three blocks in Colombia. In August and October 2010, respectively, we made new Colombian field discoveries in Moqueta in the Chaza Block (Putumayo Basin) and Jilguero in the Garibay Block. Also in August 2010, we finalized a farm-in agreement with Alvorada Petroleo S.A. relating to the on-shore Reconcavo Basin in Brazil, pending regulatory approval from Brazil’s Agencia nacional de Petroleo Gas natural e Bioncombustiveis (“ANP”). In Peru, in September 2010, we acquired a 20% working interest in three blocks and, in December 2010, we acquired a 60% interest in one block. Both transactions in Peru are subject to government approval and final assignment of interests.

 

 

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