CAZA.L Regulatory News (CAZA)

13 Dec 2007 07:30

Caza Oil & Gas, Inc.13 December 2007 13 December 2007 NOT FOR DISTRIBUTION IN THE UNITED STATES OF AMERICA Caza Oil & Gas, Inc. ("Caza" or the "Company") Admission to AIM and the Toronto Stock Exchange Caza, an oil and gas exploration and production company with on-shore assetsacross three US States (Louisiana, Texas and New Mexico), announces the placingof 18,821,000 common shares (the "Placing") and the admission of the Company'sissued and to be issued common shares with no par value ("Common Shares") totrading on AIM, a market operated by the London Stock Exchange plc ("AIM"), andto a listing on the Toronto Stock Exchange (the "TSX") (together "Admission"). The Common Shares were admitted to trading on AIM under the symbol "CAZA" at2.30pm (UK time) on 12 December 2007 and on the TSX under the symbol "CAZ" at5.15pm (UK time) on 12 December 2007. A temporary suspension of trading inCaza's Common Shares on AIM was put in place at 3.15pm (UK Time) on 12 December2007. This temporary suspension has now been lifted. Noble & Company Limited is the Company's nominated adviser and Noble & CompanyLimited and Haywood Securities (UK) Limited are the Company's joint brokers. Regarding the issuance of the Common Shares and the Admission, John McGoldrick,Executive Chairman of the Company, commented: "We are delighted to have received support for our plans from investors. Thefunds raised will accelerate our drilling programme and provide investors withexposure to a balance of exploration, appraisal and development drilling." Caza has 69,319,000 Common Shares in issue which trade under the following ISINnumbers: ISIN no. No. of Common Shares Type of shares CA 1498011024 58,989,200 UnrestrictedUS 1498012012 10,329,800 "Reg D" "Reg D" Certificates evidencing Common Shares issued to purchasers in the United Statespursuant to Regulation D of the US Securities Act 1933 ("Reg D") have beenissued in legended, certificated form. If such Common Shares are subsequentlytraded in compliance with Regulation S under the US Securities Act of 1933 withnon-US investors then such Common Shares will become identical to the other CazaCommon Shares held by non-US investors and will no longer be subject to Reg Drestrictions. Admission details: Placing price per Common Share Cdn$0.80 (39 pence)Number of Common Shares in the Placing to be issued by 18,821,000the Company Percentage of enlarged issued share capital 27.2%represented by the Common Shares being placed Common Shares in issue on Admission 69,319,000Market capitalisation on Admission at the Placing price Cdn$55.5 million (£27.0 million)Estimated net proceeds of the Placing receivable by Cdn$11.8 million the Company * (£5.7 million) * Net proceeds receivable by the Company are stated after deduction of thePlacing expenses of approximately Cdn$3.3 million (£1.6 million). For further information contact: John McGoldrick, Executive Chairman, +1(0) 281 363 4442Caza Oil & Gas, Inc. Nick Naylor, Noble & Company Limited +44 (0) 20 7763 2200(Nominated Adviser and Joint Broker) Daniel Brooks, Haywood Securities +44 (0) 20 7031 8000(UK) Limited (Joint Broker) Peter Reilly, Aquila Financial Ltd +44 (0) 20 7202 2601(Financial Public Relations Advisers) www.cazapetro.com This press release is not an offer to sell Common Shares of the Company in theUnited States. Common Shares may not be offered or sold in the United Statesabsent registration under the U.S. Securities Act of 1933 or an exemption fromregistration. Any public offering of Common Shares to be made in the UnitedStates will be made by means of a prospectus that may be obtained from theCompany and will contain detailed information about the Company and managementas well as financial statements. Further information about Caza Caza is engaged in the acquisition, exploration, development and production ofhydrocarbons in the Texas Gulf Coast (on-shore), south Louisiana, southeast NewMexico and the Permian Basin of west Texas regions of the United States ofAmerica through its subsidiary, Caza Petroleum, Inc. ("Caza Petroleum"). CazaPetroleum and its predecessors have been managed by the current members of itsmanagement team (John R. McGoldrick, W. Michael Ford, James M. Markgraf, AnthonyB. Sam and Richard R. Albro, together the "Management Team") and have beenengaged in the acquisition, exploration, development and production ofhydrocarbons in Caza Petroleum's core operating areas since 2000. Caza Petroleum has drilled two successful exploration wells in its southLouisiana focus area. These are the Thunder Stud discovery, located in CalcasieuParish, Louisiana, which is awaiting completion, and another which resulted inthe extension of the Dulac Field, located in Terrebonne Parish, Louisiana. Thewell located in the Dulac Field was brought on stream in December 2006. Four ofseven wells drilled by Caza Petroleum in Wharton County, Texas, were successfuland have been completed as producing wells. Caza Petroleum has interests in approximately 34,000 gross (11,400 net) acres ofland and operates the majority of its acreage. Caza Petroleum also enjoysnon-exclusive data licenses in respect of 8,000 square miles of 3-D Seismicdata. The Company's strategy is to utilize its 3-D Seismic data base to identifyundeveloped targets within proven hydrocarbon arenas. Caza Petroleum's current asset portfolio includes producing assets, newdevelopment projects, appraisal and exploration targets, prospects and leads. A Competent Persons Report, prepared by Netherland Sewell Associates Inc.("NSAI") (the "NSAI Report") estimates that, as at 30 June 2007, CazaPetroleum's total net proved, probable and possible oil and natural gas reserveswere approximately 166.9 Mbbl of light and medium crude oil, 74.7 Bcf of naturalgas and 656.8 Mbbl of natural gas liquids. The NSAI Report also attributes a netpresent value of US$187.9 million to Caza Petroleum's proved, probable andpossible reserves, before taxes, based on a discount rate of 10% and forecastprices effective as at June 30, 2007. Biographies of the directors of Caza John Russell McGoldrick, Executive Chairman and Director John Russell McGoldrick is a director and Executive Chairman of Caza and adirector and Executive Chairman of Caza Petroleum. From February 2004 to August2006, Mr. McGoldrick served as President of Falcon Bay. Prior thereto, Mr.McGoldrick was employed by Enterprise Oil plc from June 1984 to October 2002,serving in a number of positions, including President of Enterprise Oil Gulf ofMexico Inc. from August 2000 to October 2002 and Managing Director of EnterpriseEnergy Ireland Ltd. from December 1997 to August 2000. William Michael Ford, President, Chief Executive Officer and Director William Michael Ford is Chief Executive Officer of Caza and President of CazaPetroleum. From November 2000 to July 2006, Mr. Ford served as a Vice Presidentof Falcon Bay. Mr. Ford was also a founder and has served as President ofPenwell Energy, Inc. from 1988 to present. Penwell Energy, Inc. is depleting itsexisting assets and has no plans for future business. J. Russell Porter, Non-Executive Director J. Russell Porter is a director of Caza and has served as an officer of GastarExploration Ltd. since September 2000 and as President and Chief ExecutiveOfficer of such company since February 2004. Prior thereto, Mr. Porter served asExecutive Vice President of Forcenergy Inc. from April 1994 to September 2000,as Vice President of the Natural Resources Group of International Nederlanden(U.S.) Capital Corporation from January 1992 to April 1994, as an Associate ofthe energy merchant banking division of Manufacturers Hanover Trust Company fromJuly 1990 to January 1992, as assistant to the president of Gamxx Energy/Reliable Production Service from 1987 to 1988, and as Gulf Coast ProjectDirector of Ramco Energy Corporation from 1986 to 1987. John Ross Rooney, Non-Executive Director John Ross Rooney has served as Chief Executive Officer and a director of TUSKEnergy Corporation. since December 2006. Mr. Rooney has also previously servedas President, Chief Executive Officer and a director of Zenas Energy Corp. fromAugust 2005 to January 2007, as President and Chief Executive Officer ofBlizzard Energy Inc. from December 2002 to July 2005, as Vice President andChief Financial Officer and then President and Chief Executive Officer ofEquatorial Energy Inc. from May 1999 to June 2002, as Vice President and ChiefFinancial Officer of Calgary Louisiana Energy LLC from July 1997 to May 1999, asan originator and organizer of a private drilling fund from May 1997 to March1999, as Vice President and Chief Financial Officer of Tidal Resources Inc. fromJune 1993 to January 1997, and as an accountant and other positions for Ernst &Young and Clarkson Gordon from January 1980 to December 1992. Mr. Rooney is alsoa director of Saxon Energy Services Inc. James De Vaux Brillantes Guiang, Non-Executive Director James De Vaux Brillantes Guiang is a director of Caza. Mr. Guiang has more than25 years' experience in the international oil and gas exploration and productionindustry and has served as a Portfolio Manager with Millennium GlobalInvestments since May 2006. Prior thereto, Mr. Guiang was an independentconsultant. Mr. Guiang also served as a non-executive director of PetrolatinaEnergy PLC (an AIM listed company) until November 2007. Biographies of the Management Team Caza and Caza Petroleum are managed on a day to day basis by the Management Teamwhich consists of John McGoldrick, Michael Ford and the following threeexecutives: James Michael Markgraf, Vice President Finance and Chief Financial Officer James Michael Markgraf is Vice President, Finance and Chief Financial Officer ofCaza and Caza Petroleum. From October 2000 to July 2006, Mr. Markgraf served asChief Financial Officer and Treasurer of Falcon Bay. Prior thereto, Mr. Markgrafserved as Chief Financial Officer and Treasurer of Penwell Energy, Inc. fromOctober 1991 to October 2001, and as an accounting manager and accountant ofseveral different firms from 1984 to October 1991. Mr. Markgraf is a CertifiedPublic Accountant. Anthony Bryan Sam, Vice President Operations Anthony Bryan Sam is Vice President, Operations of Caza and has been VicePresident, Operations of Caza Petroleum and its predecessors since October 2000.Mr. Sam also served as President of Chahta Petroleum, Inc. since January 1992.Prior thereto, Mr. Sam served as President of Sendero Petroleum, Inc. fromJanuary 1989 to June 1992, as Operations Manager of Mussleman, Owen & KingOperating, Inc. from August 1987 to January 1989, and as a Petroleum Engineer ofChevron U.S.A. from May 1982 to August 1987. Richard Ronald Albro, Vice President Land and Secretary Richard Ronald Albro is Vice President, Land and Secretary of Caza and has beenVice President, Land of Caza Petroleum and its predecessors since October 2000.Mr. Albro also previously served in various land positions for Penwell Energy,Inc. from September 1993, after serving two years as Penwell Energy's in-houselandman. Quarter 3 results Set out below is the text of an announcement made by the Company through theCanadian System for Electronic Document Analysis and Retrieval ("SEDAR") on 7December 2007. Consolidated Financial Statements of CAZA OIL & GAS, INC. For the three and nine months ended 30 September 2007 (Unaudited) Caza Oil & Gas, Inc. Consolidated Statements of Net Loss and Comprehensive Income (Loss), and Retained Earnings (Deficit) (unaudited) For the Periods Ended (In Thousands of United States dollars, except per share amounts) Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 Revenue Petroleum and natural gas 273 110 780 269Other income - 135 - 239Interest income 113 10 393 10 386 255 1,173 518 Expenses Severance tax 21 13 64 36Production 135 11 206 70General and administrative 1,073 3,018 2,287 3,256Depletion, depreciation, 104 24 215 52amortization and accretion Interest 33 10 33 28 1,366 3,076 2,805 3,442 Loss Before Income Taxes (980) (2,821) (1,632) (2,924) Taxes Current income tax expense (4) 4 - 4(recovery) Future income tax expense (303) (216) (408) (216) (307) (212) (408) (212) Net loss and comprehensive loss (673) (2,609) (1,224) (2,712) Retained Earnings (Deficit), (1,954) 2,671 (1,403) 2,794Beginning of Period Amount ascribed to exchangeable - (970) - (970)share rights on acquisition of Caza Petroleum Future income taxes recognized - (308) - (308)on acquisition of Caza Petroleum Distributions - (331) - (351) Deficit, End of Period (2,627) (1,547) (2,627) (1,547) Loss per share basic and diluted $ (0.01) $ (0.04) $ (0.02) $ (0.04) Weighted average shares outstanding (Note 7(a)) basic and diluted 73,336,717 67,420,000 73,056,623 67,420,000 See accompanying notes to the consolidated financial statements Caza Oil & Gas, Inc. Consolidated Balance Sheets (unaudited) (In Thousands of United States dollars) September 30, December 31, 2007 2006 Assets Current Cash and cash equivalents 9,250 13,697Accounts receivable 4,186 2,155Prepaid and other 93 123 13,529 15,975 Future income tax asset 187 -Deferred financing costs (Note 9(c)) 1,400 -Petroleum and natural gas properties and 17,291 8,243equipment (Note 3) 32,407 24,218 Liabilities Current Accounts payable and accrued liabilities 12,963 4,171 Asset retirement obligation (Note 4) 62 56Future income taxes - 221 13,025 4,448 Shareholders' Equity Share capital (Note 5(b)) 19,378 18,923Contributed surplus (Note 5(f)) 2,631 2,250Deficit (2,627) (1,403) 19,382 19,770 32,407 24,218 Subsequent events (Note 9) See accompanying notes to the consolidated financial statements Caza Oil & Gas, Inc. Consolidated Statements of Cash Flows (unaudited) For the Periods Ended (In Thousands of United States dollars) Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net loss (673) (2,609) (1,224) (2,712) Adjustments for items not affecting cash: Depletion, depreciation, 104 24 215 52amortization and accretion Stock-based compensation 64 2,250 304 2,250Future income taxes recognized on - (308) - (308)acquisition of Caza Petroleum Future income tax expense (303) 92 (408) 92(recovery) Changes in non-cash working (435) 197 2,376 1,129capital (Note 7(b)) Cash flow from (used in) operating (1,243) (354) 1,263 503activities FINANCING Distributions - (331) - (351)Deferred financing costs (1,400) - (1,400) -Proceeds from issuance of shares, - 16,323 455 16,323net of issue costs Increase in notes payable - - - 280Repayment of notes payable - (397) - (397)Changes in non-cash working 1,280 - 1,310 -capital (Note 7(b)) Cash flow from (used in) financing (120) 15,595 365 15,855activities INVESTING Purchase of petroleum and gas (3,622) (1,348) (8,700) (1,937)properties Purchase of equipment (108) (3) (480) (4)Changes in non-cash working 2,224 (906) 3,105 257capital (Note 7(b)) Cash flow from (used in) investing (1,506) (2,257) (6,075) (1,684)activities INCREASE (DECREASE) IN CASH AND (2,869) 12,984 (4,447) 14,674CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, 12,119 1,892 13,697 202BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS, END OF 9,250 14,876 9,250 14,876PERIOD (Note 7(d)) Supplementary information (Note 7) See accompanying notes to the consolidated financial statements. Notes to the Consolidated Financial Statements (All Amounts In Thousands of United States dollars) For the Three and Nine Months Ended September 30, 2007 (Unaudited) 1. BASIS OF PRESENTATION Caza Oil & Gas, Inc. ("Caza" or the "Corporation") is a private Corporation,incorporated under the laws of British Columbia on June 9, 2006 for the purposesof acquiring shares of Caza Petroleum, Inc. ("Caza Petroleum"). The Corporationand its subsidiaries are engaged in the exploration for and the development,production and acquisition of, petroleum and natural gas reserves in the UnitedStates. Caza owns 63.7% of the outstanding common shares of Caza Petroleum. Theremaining interest in Caza Petroleum is held by senior management of Caza andmay be exchanged for Common Shares pursuant to a Share Exchange and ShareholdersAgreement (Note 5). The interim unaudited consolidated financial statements of Caza have beenprepared by management, in accordance with Canadian generally acceptedaccounting principles. The preparation of financial statements in conformitywith Canadian generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in the interimconsolidated financial statements and accompanying notes. Actual results coulddiffer from those estimates. The consolidated financial statements are expressedin United States of America ("US") dollars as this is the functional currency ofCaza and its subsidiaries. The interim consolidated financial statements have,in management's opinion, been properly prepared using careful judgment withreasonable limits of materiality. These interim consolidated financialstatements do not include all the note disclosures required for annualconsolidated financial statements and therefore they should be read inconjunction with the Company's audited financial statements for the year endedDecember 31, 2006. The interim consolidated financial statements have beenprepared following the same significant accounting policies as the most recentlyreported audited consolidated financial statements of Caza. 2. NEW ACCOUNTING POLICIES Effective January 1, 2007, the Corporation adopted the Canadian Institute ofChartered Accountants ("CICA") Section 1530, "Comprehensive Income", Section3855, "Financial Instruments - Recognition and Measurement", Section 3861,"Financial Instruments - Disclosure and Presentation" and Section 3865,"Hedges". The Corporation has adopted these standards prospectively and thecomparative interim consolidated financial statements have not been restated. Upon adoption of Section 3855, all financial instruments are classified into oneof the following five categories: held-for-trading, loans and receivables,held-to-maturity investments, available-for-sale financial assets or otherfinancial liabilities. Subsequent measurement of the financial instruments isbased on their initial classification. Held-for-trading financial assets aremeasured at fair value and changes in fair value are recognized in net income.Available-for-sale financial instruments are measured at fair value with changesin fair value recorded in other comprehensive income until the instrument isderecognized or impaired. All derivative instruments are recorded in the balancesheet at fair value unless they qualify for the normal sale and normal purchaseexemption. All changes in their fair value are recorded in net income unlesscash flow hedge accounting is used, in which case changes in fair value arerecorded in other comprehensive income until the underlying hedged transactionis recognized in net income. Any hedge ineffectiveness is immediately recognizedin net income. The other categories of financial instruments are recognized atamortized cost using the effective interest rate method. Upon adoption of these standards, the Corporation classified its cash and cashequivalents as held-for-trading, which are measured at fair value. Accountsreceivable are classified as loans and receivables, which are amortized at cost.Accounts payable and notes payable are classified as other financialliabilities, which are measured at amortized cost. For financial assets and financial liabilities that are not classified asheld-for-trading, the transaction costs that are directly attributable to theacquisition or issue of a financial asset or financial liability are adjusted tothe fair value initially recognized for that financial instrument. These costsare expensed using the effective interest rate method. The adoption of Section 1530 has no material impact on the consolidatedfinancial statements of the Corporation. The Corporation currently does not utilize hedges or other derivative financialinstruments in its operations, and as a result of the adoption of Section 3865had no material impact on the consolidated financial statements of theCorporation. The adoption of these new standards had no impact on the Corporation's openingretained earnings (deficit) as at January 1, 2007. The Corporation has also adopted Section 3251, "Equity" and Section 1506,"Accounting Changes". Section 3251 replaces Section 3250, "Surplus" anddescribes standards for the presentation of equity and changes in equity forreporting periods as a result of the application of Section 1530, "ComprehensiveIncome". The only impact of Section 1506, "Accounting Changes", is to providedisclosure of when an entity has not applied a new source of GAAP that has beenissued but is not yet effective. This is the case with Section 3862, FinancialInstruments Disclosures" and Section 3863, "Financial Instruments Presentations"which are required to be adopted for fiscal years beginning on or after October1, 2007. The Corporation will adopt these standards on January 1, 2008 and it isexpected the only effect on the Corporation will be additional disclosuresregarding the significance of financial instruments for the entity's financialposition and performance; and the nature, extent and management of risksarriving from financial instruments to which the entity is exposed. The Company has assessed new and revised accounting pronouncements that havebeen issued that are not yet effective and determined that the following mayhave a significant impact on the Company: • As of January 1, 2008, Caza will be required to adopt twonew CICA standards, Section 3862 "Financial Instruments - Disclosures" andSection 3863 "Financial Instruments - Presentation," which will replace Section3861 "Financial Instruments - Disclosure and Presentation." The new disclosurestandard increases the emphasis on the risks associated with both recognized andunrecognized financial instruments and how those risks are managed. The newpresentation standard carries forward the former presentation requirements. Thenew financial instruments presentation and disclosure requirements were issuedin December 2006 and the Company is assessing the impact on its consolidatedfinancial statements. • As of January 1, 2008, Caza will be required to adopt twonew CICA standards, Section 1535 "Capital Disclosures," which will requirecompanies to disclose their objectives, policies and processes for managingcapital. In addition, disclosures are to include whether companies have compliedwith externally imposed capital requirements. The new capital disclosurerequirements were issued in December 2006 and the Company is assessing theimpact on its consolidated financial statements. • The Corporation will be required to adopt CICA HandbookSection 3031, Inventories. This new accounting standard is effective for interimand annual financial statements for fiscal years beginning on or after January1, 2008. This new standard is not expected to have a material impact on theCorporation's consolidated financial statements. • In January 2006, the CICA Accounting Standards Board("AcSB") adopted a strategic plan for the direction of accounting standards inCanada. As part of that plan, accounting standards in Canada for publiccompanies are expected to converge with International Financial ReportingStandards ("IFRS") by the end of 2011. The Company continues to monitor andassess the impact of convergence of Canadian GAAP and IFRS. 3. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT September 30, 2007 Cost Accumulated Depletion Net Book and Depreciation Value ($'000's) Petroleum and natural gas 17,734 923 16,811assets Equipment 582 102 480 18,316 1,025 17,291 December 31, 2006 Cost Accumulated Depletion Net Book and Depreciation Value ($'000's) Petroleum and natural gas 8,954 766 8,188assets Equipment 102 47 55 9,056 813 8,243 At September 30, 2007 the cost of petroleum and natural gas properties includes$9,574 (December 31, 2006 - $6,674) relating to unproven properties which havebeen excluded from costs subject to depletion and depreciation. Caza capitalized general and administrative expenses of $1,004 in the nine monthperiod ended September 30, 2007 (first nine months of 2006 of $26) relating toexploration and development activities of which $77 related to stock basedcompensation. Capitalized general and administrative expense for the three monthperiods ending September 30, 2006 and 2007 were $17 and $389, respectively. 4. ASSET RETIREMENT OBLIGATIONS The following table presents the reconciliation of the beginning and endingaggregate carrying amount of the obligation associated with the retirement ofoil and gas properties.As at September 30, December 31, 2007 2006($'000's) Beginning balance 56 160Obligations incurred 4 10Accretion expense 2 2Obligations settled - (116)Ending balance 62 56 The Corporation's asset retirement obligations result from net ownershipinterests in petroleum and natural gas properties. The Corporation estimates thetotal undiscounted amount of cash flows required to settle its asset retirementobligation as at September 30, 2007 to be $68 (December 31, 2006 - $62) whichwill be incurred between 2008 and 2028. This amount has been discounted using acredit-adjusted risk free rate of 6.0 percent and an inflation rate of 3.0percent. 5. SHARE CAPITAL (a) Authorized: Unlimited number of voting Common Shares. (b) Issued: Common Shares Warrants Number of Amount Number of Amount Shares ($'000's) Warrants ($'000's)Incorporation on June 9, 2006 1 - - -Redemption of initial share (1) - - -Founders shares (Note (c)) 5,000,000 243 - -Initial offering shares (Note 34,420,000 11,659 17,210,000 3,700(d)) Initial offering broker - - 2,065,200 246warrants 1st Over-allotment closing 4,610,000 1,576 2,305,000 496(Note (d)) 1st Over-allotment broker - - 276,600 33warrants Balance at December 31, 2006 44,030,000 13,478 21,856,800 4,475 2nd Over-allotment closing 970,000 345 485,000 104(Note (d)) 2nd Over-allotment broker - - 58,200 7warrants Issued for exchange rights 1,498,000 52 - - Issued Entitlement shares 3,442,000 - - -(Note (d), (iv)) Balance September 30, 2007 49,940,000 13,875 22,400,000 4,585 Number of Common Amount Shares to be issued ($'000's) Exchangeable Share Rights (See Note 4 (e)) Issued on the acquisition of Caza 28,000,000 970 Petroleum Outstanding as of December 31, 2006 28,000,000 970 Rights exercised on March 8, 2007 (1,103,200) (38) Rights exercised on April 20, 2007 (394,800) (14) Outstanding as of September 30, 2007 26,502,000 918 (c) Founders Shares: On August 28, 2006, the Corporation completed a founders Common Share offeringof 5,000,000 shares at a purchase price of US$0.05 per share. A stock-basedcompensation expense of $2,250 was recognized on the issuance of the foundersshares. (d) Initial Placement: (i) On September 22, 2006, the Corporation completed theinitial closing of its private equity offering of 34,420,000 units at a purchaseprice of US$0.50 per unit. Each unit consisted of one Common Share, 1/2 of awarrant and one entitlement right (see Note 5(d)(iv)). Each full warrant givesthe holder the right to purchase one Common Share at an exercise price ofUS$1.00 per Common Share. Share issuance costs of $1,812 have been nettedagainst this offering. On November 20, 2006, the Corporation completed its firstover-allotment closing of 4,610,000 units. On January 17, 2007 the Corporationcompleted its second over-allotment closing of 970,000 units. The initialclosing of the private equity offering and subsequent over-allotment closingsare referred to as the "Initial Placement". The Corporation has allocatedUS$0.215 per warrant to the warrants issued in conjunction with the PrivateEquity Offering, with the remaining value allocated to the Common Shares. (ii) Each full warrant is exercisable until the earlier of (i)three years after the date the Common Shares are listed on the Toronto StockExchange or the TSX Venture Exchange, subject to reduction by the Corporation tosuch lesser time period as may be required by the exchange on which theCorporation's securities are listed and (ii) four years following the closingdate on which the warrants were acquired. Pursuant to the entitlement rightsdescribed below (see Note 5 (d)(iv)), if a liquidity event is not completedwithin one year of the closing date, the warrants will entitle the holder toacquire 1.1 Common Shares. (iii) In connection with the Initial Placement, the Corporationissued 2,400,000 warrants (the "Broker Warrants") to the agents as partialconsideration for their services rendered in connection with the InitialPlacement. Each Broker Warrant entitles the holder to purchase one Common Shareat a price of US$0.50 until March 22, 2008 in the case of 334,800 warrants andMarch 31, 2008 for the balance of the warrants. The Corporation ascribedUS$0.119 per warrant to each of the Broker Warrants. No Broker Warrants havebeen exercised at December 31, 2006 or June 30, 2007. The fair value of each warrant and Broker Warrant was determined using theassumptions set out below: Broker Warrants Warrants Exercise price US$1.00 US$0.50 Risk-free interest 4.75% 4.75% rate Expected maturity 3.0 1.5 (years) Expected volatility 88.16% 88.16% Dividend yield 0% 0% (iv) As part of the Initial Placement, the Corporation issued to the purchaser'sliquidity entitlements, which provided purchasers under the September 22, 2006closing, the right to receive for no additional consideration an aggregate of3,442,000 Common Shares if as the "liquidity event" did not occur by September22, 2007. Purchasers under the November 20, 2006 and January 17, 2007 closingshave the right to receive an aggregate of 558,000 Common Shares if a "liquidityevent" does not occur by November 20, 2007, see (Note 9(a)). The entitlement isbased on the receipt of 0.10 of a Common Share for each Common Share purchasedin the Initial Placement. Additionally, a comparable adjustment would be made tothe exercise of the warrants those purchasers received in the Initial Placement.A "liquidity event" is either (i) the completion of an initial public offeringand listing of the Common Shares on the TSX or the TSX Venture Exchange or (ii)a reverse take over transaction which involves the exchange of the Common Sharesfor common shares of a company that is listed on the TSX or TSX VentureExchange. (e) Acquisition of Caza Petroleum: Share Exchange and Shareholders Agreement Prior to the consummation of the Initial Placement the Corporation became aparty to a Share Exchange and Shareholders Agreement with Caza Petroleum and themanagement of Caza Petroleum and their respective spouses. Under the agreementmanagement are not permitted to transfer their shares of Caza Petroleum (otherthan among themselves and family members), except to the Corporation undercertain conditions. Management has the right at any time to exchange their CazaPetroleum shares for Common Shares of the Corporation on the basis of 2,800Common Shares for each Caza Petroleum share. In addition, the Corporation hasthe right to cause each manager to exchange his Caza Petroleum shares for commonshares in certain circumstances, including a change of control, liquidation,sale of substantially all of the assets, or bankruptcy of the Corporation, orthe divorce, death or incapacity of the manager or a breach of the agreement. (f) The following table presents the changes in contributed surplus. September 30, December 31, 2007 2006 Balance, beginning of 2,250 - period Stock-based 381 2,250 compensation Balance, end of period 2,631 2,250 6. STOCK-BASED COMPENSATION The Corporation granted stock options to its directors, officers and employeesunder the stock option plan dated January 31, 2007. The Corporation hasauthorized for issuance options in respect of 7,000,000 Common Shares. As atSeptember 30, 2007, the remaining options available for issuance are 3,035,000.The exercise price of each option is no less than the fair market value of theCorporation's Common Shares on the date of grant. Except as otherwise determinedby the Board and subject to the limitation that the stock options may not beexercised later than the expiry date provided in the relevant option agreementbut in no event later than 10 years (or such shorter period required by anexchange) from their date of grant. Subject to the Board's sole discretion inmodifying the vesting of stock options, stock options granted shall vest, andbecome exercisable, as to 33 1/3% on the first anniversary date and 33 1/3% oneach subsequent anniversary of that date. All options granted to a participantbut not yet vested shall vest immediately upon a change of control (as definedin the Stock Option Plan) or upon the Corporation's termination of aparticipant's employment without cause. A summary of the changes during the nine months ended September 30, 2007 ispresented below: Number Weighted Average Price (US$)Outstanding December 31, 2006 Granted 3,965,000 0.50Outstanding September 30, 2007 3,965,000 0.50 Date of Number Date of Weighted Weighted Number Grant outstanding Expiry Average Life Average Exercisable at Remaining Exercise at September September Contractual Price (US$) 30, 2007 30, 2007 Life January 3,325,000 January 31, 9.33 Years 0.50 1,108,333 31, 2007 2017 February 400,000 February 5, 9.34 Years 0.50 - 5, 2007 2017 May 10, 220,000 May 10, 2017 9.60 Years 0.50 - 2007 June 11, 20,000 June 11, 2017 9.69 Years 0.50 - 2007 3,965,000 9.35 Years 0.50 1,108,333 The weighted-average remaining contractual life of the options with an exerciseprice of US$0.50 per option granted during the first nine months of 2007, as atSeptember 30, 2007 was 9.3 years. The fair value of the stock options isestimated using the Black-Scholes option-pricing model that takes into account,the assumptions listed below. For the nine months ended September 30, 2007 theCorporation recorded stock-based compensation expense of $381 in connection withissuance of stock options to directors, officers and employees of which $304 isincluded in G&A and $77 was capitalized in PP&E. The fair value of the stockoptions granted is US$0.293 per option. Assumptions Exercise price US$0.50 Risk-free interest 4.75% rate Expected maturity 10 (years) Expected volatility 88.16% Dividend yield 0% 7. Supplementary Information (a) per share information The following table summarizes the Common Shares used in the per sharecalculations. Nine Months ended Three Months ended Sept. 30, Sept. 30 Sept 30 Sept 30 2007 2006 2007 2006Weighted average shares outstanding Basic 73,056,623 67,420,000 73,336,717 67,420,000Diluted 73,056,623 67,420,000 73,336,717 67,420,000 (b) net change in non-cash working capital Nine months ended Three Months ended Sept 30, Sept 30, Sept 30, Sept 30, 2007 2006 2007 2006($'000's) Provided by (used in) Accounts receivable (2,031) (222) 200 (1,015)Prepaids and other 30 (20) 127 Accounts payable and 8,792 1,628 2,742 306accrued liabilities 6,791 1,386 3,069 (709) Summary of changes Operating 2,376 1,129 (435) 197Financing 1,310 - 1,280 -Investing 3,105 257 2,224 (906) 6,791 1,386 3,069 (709) (c) supplementary cash flow information Nine Months ended Three Months ended ($'000's) Sept. 30, Sept. 30 Sept 30 Sept 30 2007 2006 2007 2006Interest paid 33 28 33 10Interest received 393 10 113 10Cash taxes paid - - - - (d) cash and cash equivalents Nine Months ended Sept. 30, Sept 30, 2006 year end December 2007 31,($'000's) 2006 Cash on deposit 1,755 106 195Money market instruments 7,495 14,770 13,502Cash and cash equivalents 9,250 14,876 13,697 The money market instruments bear interest at a rate of 5.29% as at September30, 2007 (December 31, 2006 - 5.19%) 8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT The nature of oil and gas operations exposes the Corporation to fluctuations incommodity prices and foreign currency exchange rates. The Corporation may usederivative instruments to manage these risks. Credit Risk A substantial portion of the Corporation's accounts receivable are withcustomers and joint-venture participants in the oil and natural gas industry andare subject to normal industry credit risks. The carrying amount of accountsreceivable reflects management's assessment of the credit risk associated withtheses customers and participants. The Corporations accounts receivable tradebalance is comprised primarily of joint interest receivables derived fromoutside joint venture partners participating in the Corporations drillingactivities. The Corporation's oil and natural gas production is sold to largemarketing companies. Typically, the Corporation's maximum credit exposure tocustomers is revenue from two months sales. During the three and nine monthperiod ended September 30, 2007, the Corporation sold a significant amount ofits crude oil and natural gas production to a single purchaser. This purchaseraccounted for 95% of the production for the three month and nine month periodsended September 30, 2007. For the three and nine month periods ended September30, 2006 this purchaser acquired 82% and 74% respectively of our production.These sales were conducted on transaction terms that are typical for the sale ofcrude oil and natural gas in the US. Foreign Currency Exchange Risk The Corporation is exposed to foreign currency exchange fluctuations, as certaingeneral and administrative expenses and financing costs are or will bedenominated in Canadian dollars and United Kingdom pounds sterling. TheCorporations' sales of oil and natural gas are all transacted in US dollars. Fair Value of Financial Instruments The Corporation has determined that the fair value of the financial instrumentsconsisting of cash and cash equivalents, accounts receivable and accountspayable is not materially different from the carrying value of such instrumentsreported on the balance sheet due to their short-term nature. 9. SUBSEQUENT EVENTS (a) On November 20, 2007, the liquidity entitlements issuedto purchasers in the November 20, 2006 closing of the Initial Placement and thepurchaser of the final closing of the Initial Placement on January 17 2007became effective. On November 20, 2007, the Corporation issued 558,000additional Common Shares to those purchasers and adjusted the warrants held bythose purchasers to have the right to receive 1.1 Common Shares in lieu of eachCommon Share that they were previously entitled to receive upon exercise of thewarrants. (b) On October 9 2007, the Corporation amended its stockoption plan to convert to a 10% rolling plan. (c) Under the terms of an agency agreement dated November28, 2007, the Corporation agreed to issue a minimum of 18,750,000 Common Sharesand a maximum of 25,000,000 Common Shares. Upon closing, the maximum netproceeds of this issue are estimated to be $16,613, net of the estimated issueexpenses and agents' fees in the aggregate of approximately $2,224 of which$1,400 was recorded at September 30, 2007. In connection with the terms of thisagency agreement and an admission agreement involving one of the agents, theCompany has agreed to grant compensation options entitling the agents to acquirefrom the Corporation at the offering price, a number of Common Shares equal toan aggregate of 5% of the number of Common Shares sold by the Corporation underthis offering for a period of 24 months after the Common Shares are listed onthe Toronto Stock Exchange or AIM, a market operated by the London StockExchange, plc. MANAGEMENT'S DISCUSSION AND ANALYSIS The following management's discussion and analysis ("MD&A") should be read inconjunction with the unaudited interim consolidated financial statements andaccompanying notes for the three and nine month periods ended September 30, 2007and the audited consolidated financial statements and the accompanying notes forthe year ended December 31, 2006. The financial statements and the financialdata included in the MD&A have been prepared in accordance with Canadiangenerally accepted accounting principles ("GAAP") and the amounts reported inthis MD&A are in thousands (US$000's) of US dollars, unless otherwise noted.This MD&A is dated December 7, 2007. Caza Oil & Gas, Inc. ("Caza") owns 63.7% of the outstanding common shares ofCaza Petroleum, Inc. ("Caza Petroleum"). The remaining interest in CazaPetroleum is held by the management team and may be exchanged for Common Sharespursuant to the share exchange agreement dated September 22, 2006 (the "ShareExchange Agreement") between the management of Caza Petroleum and Caza. CazaPetroleum amalgamated with Falcon Bay Energy ("Falcon Bay") on September 14,2006. As Caza, Caza Petroleum and Falcon Bay (collectively, the "Corporation")were under common control, the Corporation's consolidated financial statementsare presented on a continuity-of-interest basis of accounting and represent theactivities of Caza from September 14, 2006 to September 30, 2007 and Falcon Bayprior to that date. The information herein contains forward-looking information relating to theCorporation's plans and other aspects of the Corporation's anticipated futureoperations, strategies, financial and operating results and businessopportunities. Forward£looking information is typically contained in statementsusing words such as "anticipate", "believe", "project", "expect", "plan","intend" or similar words suggesting future outcomes, statements that actions,events or conditions "may", "would", "could" or "will" be taken or occur in thefuture, or statements regarding the outlook for petroleum prices, estimatedamounts and timing of capital expenditures, anticipated results of constructionprojects, estimates of future production, operating costs or other expectations,beliefs, plans, objectives, assumptions or statements about future events orperformance. Statements concerning reserves are also forward-lookingstatements, as they reflect estimates as to the expectation that the depositscan be economically exploited in the future. Forward-looking information is based on certain facts and assumptionsincluding, without limitation, with respect to expected growth, results ofoperations, business prospects and opportunities, oil and natural gas prices,reserves estimates, estimates of quantities of hydrocarbons recoverable from theCorporation's properties, the ability of the Corporation to replace and expandreserves, the cost and availability of drilling and other oilfield services andthe ability to access external sources of debt and equity capital in order tomake capital investments, fund acquisitions or further the Corporation'sexploration and development program. While the Board of Directors, having madedue and careful enquiry, believe such assumptions are accurate and theCorporation and the Board of Directors, consider the assumptions to bereasonable based on information currently available to them, these assumptionsmay prove to be incorrect. By its nature, forward-looking information involves numerous assumptions, risksand uncertainties and other factors that contribute to the possibility that thepredicted outcome will not occur. Among the factors that could cause actualevents or results to differ materially from those reflected in the forward-looking information in this MD&A include those identified under the heading"Risk Factors" in the final long prospectus of Caza dated November 28, 2007.Readers should be aware that the list of risks set forth hereunder and thereunder is not exhaustive. Except as required by applicable securities laws, Caza undertakes no obligationto update or revise any forward-looking information. Per barrel of oil equivalent ("boe") amounts have been calculated using aconversion rate of six thousand cubic feet of natural gas to one barrel of oil.BOE's may be misleading, particularly if used in isolation. The boe conversionratio used is based on an energy equivalency conversion method primarilyapplicable at the burner tip and does not represent a value equivalency at thewellhead. Non-GAAP Measures "Netbacks" and "Funds flow from operations" are used in the following MD&A, butdo not have any standardized meaning under GAAP and are unlikely to becomparable to similarly defined measures presented by other issuers. For thesepurposes, Caza defines netbacks as revenue less royalty and production costs.Funds flow from operations includes all cash from operating activities and iscalculated before changes in non-cash working capital. The most comparablemeasure calculated in accordance with GAAP would be cash flow from operatingactivities. Funds flow from operations is reconciled with cash flow fromoperating activities in this MD&A. Management uses these non-GAAP measurementsfor its own performance measures and to provide its shareholders and investorswith a measurement of the Corporation's efficiency and its ability to fund aportion of its future growth expenditures. The above terms should not, on their own, be construed as indicators of theCorporation's performance or as a measure of liquidity and should only be usedin conjunction with the financial statements to which they relate. The Corporation calculates funds flow from operations as follows: ($'000's) Nine months ended Three months ended Sept 30, Sept 30, Sept 30, Sept 30, 2007 2006 2007 2006Cash flow from (used in) operating 1,263 503 (1,243) (354)activities Adjustment for items not affecting 2,376 1,129 (435) 197cash Changes in non-cash working capital Funds flow from (used in) (1,113) (626) (808) (551)operations Comparison of Results of Operations for the three and nine month periods endedSeptember 30, 2007 and 2006. Petroleum and natural gas revenues increased to $780 and $273 for the nine andthree month periods ended September 30, 2007 from $269 and $110 for the nine andthree month periods ended September 30, 2006. The Corporation produced 109.6MMcf of gas and 725 bbls of condensate during the nine month period endedSeptember 30, 2007 and for the three month period ended September 30, 2007 theCorporation produced 43.3MMcf of gas and 286 bbls of condensate. This representsan average production rate for the nine month period ended September 30, 2007 of418 Mcfe/d compared to an average production rate during the nine month periodended September 30, 2006 of 171 Mcfe/d. The average natural gas price receivedby Caza increased to $6.68 per Mcf from $5.75 per Mcf during the first ninemonths of the prior year, an increase of 16.0%. The average price received forthe Corporation's condensate production during the period was $64.86 per barrel.The Corporation did not produce any condensates in the respective 2006 periods.Caza has not hedged any of its production and does not have any commodity pricemanagement programs in place. Other income, which is comprised primarily of consulting fees received fromthird party oil and gas companies decreased to $nil in the first nine months of2007 from $239 during the same period of 2006. Interest income increased to $393 from $10 during the same period last year,primarily as a result of interest earned on the proceeds from the Corporation'sInitial Private Placement ("Initial Placement") which was completed in the lasthalf of 2006 and in early 2007. The Corporation invested the proceeds from thesefinancings in short-term money market funds. Severance taxes were $64 during the nine month period ended September 30, 2007an increase from the $36 incurred during the nine month period ended September30, 2006. The increases in the Corporation's production during the nine monthsof 2007 and in the price of natural gas received by the Corporation were largelyresponsible for the increase. Production expenses for the nine month period ended September 30, 2007 were $206compared to $70 for the same period in 2006. The Corporation's average liftingcost for the three and nine month periods ended September 30, 2007 was $3.00 and$1.81 per Mcfe, respectively. The Corporation's average lifting costs for thethree and nine month periods ended September 30, 2006 was $0.54 and $1.49 perMcfe, respectively. The overall increase in lease operating expenses per Mcferesulted from four of the Corporation's wells decreasing in production while thelease operating expenses remain relatively fixed. On a per Mcfe basis, leaseoperating expenses increased by 17.7% as a result of this decrease inproduction. The Corporation's production expenses in 2006 and 2007 were alsoaffected by higher costs in the Aldwell Ranch area. General and administrative expenses for the three month period ended September30, 2007 were $1,073 and for the nine month period ended September 30, 2007 were$2,287. For the nine month period ended September 30, 2006 general andadministrative expenses were $3,256 of which $2,250 were stock basedcompensation expense incurred in 2006. General and administrative expenses forthe three months ended September 30, 2006 were $768 excluding stock basedcompensation expense of $2,250. Stock-based compensation expenses in the amountof $64 and $304 are included in general and administrative expenses for therespective three and nine month periods ended September 30, 2007. Increasedsalaries and wages, travel, administration, consulting and other expenses werelargely responsible for the increase in total general and administrativeexpenses as a result of company growth and the initial public offeringactivities. During the period ended September 30, 2007 the Corporationcapitalized general and administrative expenses relating to exploration anddevelopment activities of $1,004 (first nine months of 2006 of $26) of which $77related to capitalized stock-based compensation. The Corporation issued3,965,000 stock options to directors, officers and employees at an exerciseprice of $0.50 per share during the first nine months of 2007. These were thefirst grants of options made under the Corporation's option plan. The futurestock option expense will be dependent on the number of new options granted,volatility of the share price and the vesting provisions thereof. Depletion, depreciation, amortization and accretion expense for the first ninemonths of 2007 increased to $215 from $52 in the prior period. For the threemonth period ended September 30, 2007 the depletion, depreciation andamortization expense was $104 and $24 in the prior period. The drilling costsassociated with, and production from, three new wells in Texas were the reasonsfor the increase. During the nine month period ended September 30, 2007 the Corporation incurredinterest expense of $33, an increase of $5 from the $28 incurred during thefirst nine months of 2006. The Corporation eliminated the balance of the debtduring the last quarter of 2006. The Corporation incurred interest expenserelating to the payment of suspended royalty payments made to the state ofLouisiana during the third quarter of 2007. This interest expense was incurredbecause of the royalty in one of the Corporation's wells within the state ofLouisiana was suspended until the royalty owners, including the state ofLouisiana, could agree upon the allocation of their respective royaltypercentage. The Corporation accrued a future tax recovery of $(408) for the nine monthperiod ended September 30, 2007. The Corporation did not pay cash taxes duringthe nine months of 2007. The Corporation's net loss for the first nine months of 2007 was $1,224 ascompared to net loss of $2,712 during the first nine months of 2006 whichincludes the $2,250 stock based compensation expense in the third quarter of2006. For the three month period ended September 30, 2007 the Corporation's netloss was $673 as compared to $2,609 for the same period in 2006. Liquidity and Capital Resources At September 30, 2007, Caza had a working capital surplus of $566. This was adecline from the December 31, 2006 working capital of $11,804. The Corporationhad a cash balance of $9,250 and has no bank credit facilities in place. Themajor components of Caza's working capital are cash and cash equivalents,accounts receivable and accounts payable. As at September 30, 2007 theCorporation's accounts receivable and joint venture receivable were $308 and$3,878 and their accounts payable and joint venture payable were $5,299 and$7,664 respectively. As at December 31, 2006 the Corporation's accountsreceivable and joint venture receivable were $203 and $1,952 and their accountspayable and joint venture payable were $901 and $3,270 respectively. The decline in working capital is the result of the Corporation's capitalexpenditure program during the first nine months of 2007 and the correspondingdecline in cash and cash equivalents and the increase in accounts receivable andaccounts payable. Under the terms of an agency agreement dated November 28,2007, the Corporation agreed to issue a minimum of 18,750,000 Common Shares anda maximum of 25,000,000 Common Shares. Upon closing, the maximum net proceeds ofthis issue are estimated to be $16,613, net of the estimated issue expenses andagents' fees in the aggregate amounting to approximately $2,224 of which $1,400was incurred as at September 30, 2007. In connection with the terms of thisagency agreement and an admission agreement involving one of the agents, theCompany has agreed to grant broker warrants entitling the agents to acquire fromthe Corporation at the offering price an aggregate of 700,000 Common Shares fora period of 24 months after the Common Shares are listed on the Toronto StockExchange or AIM, a market operated by the London Stock Exchange, plc. The netproceeds from the Initial Public Offering ("Offering") will be used forexploration and development drilling, for general and administrative expensesand to provide working capital for the operations of the Corporation. Contractual Obligations Payments due by PeriodUS$000's Less 1 - 3 4 - 5 Thereafter Total than 1 Years Years year Operating leases 240 216 - - 456Asset retirement obligations 48 - 39 87 240 264 - 39 543 Note: The Corporation has commitments with respect to the lease on its offices locatedin Houston and Midland, Texas and a corporate apartment located in Houston. Contractual obligations can be financial or non-financial. Financial obligationsare known future cash payments that the Corporation must make under existingcontracts such as lease arrangements. Commercial commitments are contingentobligations that become payable if certain pre-defined events occur. TheCorporation has $87 of undiscounted asset retirement obligations afterinflation. As of September 30, 2007, the discounted value ($62) of theseestimated obligations have been provided for in our consolidated interimfinancial statements. The timing of any payments is difficult to determine withcertainty, and the table has been prepared using our best estimates. On August 31, 2004, the Corporation entered into a financing arrangement with athird party for the purposes of financing drilling on the Aldwell Ranch project.During 2004, 2005 and 2006 the Corporation received a total $2,565 under thisagreement. These funds are repayable out of the production from three wells onthe Aldwell Ranch project at a rate of 47.281% of 100% of the gross revenuesfrom the wells until repayment of the loan amount and 40.787% of 100% of thegross revenues thereafter. The repayment obligation ceases upon ninety percent(90%) of the then current estimated recoverable reserves being produced. Financial instruments held by Caza include cash and cash equivalents whichincluded an interest bearing money market account, accounts receivable andaccounts payable. The Corporation's prospects are dependent upon the investment of capital intoits development and exploration projects. Caza anticipates through a combinationof funds raised from the initial public offering, its existing cash balances andinternally generated cash flow, that it will have adequate liquidity to fundfuture capital expenditures during 2007 and 2008 and pursue new opportunitiesthat are consistent with its business plan. At September 30, 2007, Caza had 49,940,000 Common Shares outstanding. During thefirst half of 2007 the Corporation completed a financing, issuing 970,000 CommonShares, 485,000 warrants and liquidity entitlements (entitling the holdersthereof to acquire 97,000 Common Shares in certain situations) for net proceedsof $455. The shares were issued as a result of the exercise of theover-allotment option granted to the agents retained in connection with theInitial Placement completed during the second half of 2006. The Corporation alsoissued 1,498,000 Common Shares in exchange for common shares of Caza Petroleum.The remaining shares of Caza Petroleum held by the management team areexchangeable for 26,502,000 Common Shares pursuant to the Share ExchangeAgreement. On September 22, 2007, the Corporation issued 3,442,000 Common Shares tosubscribers of the Corporation's Initial Placement under their entitlementrights. These entitlement rights resulted in each subscriber receiving anadditional 0.1 Common Shares for each Common Share initially purchased. Thetotal number of shares outstanding after the issuance of these shares is49,940,000, as at September 30, 2007. On November 20, 2007, the Corporationissued 558,000 additional Common Shares to those purchasers and adjusted thewarrants held by those purchasers to have the right to receive 1.1 Common Sharesin lieu of each Common Share that they were previously entitled to receive uponexercise of the warrants. As of the date of this MD&A, the Corporation has 50,498,000 shares outstanding. Funds Flow from Operating Activities 9 months 9 months 3 months 3 months ended ended ended ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 (in $000's)Net income (loss) (1,224) (2,712) (673) (2,609)Funds flow used in (1,113) (626) (808) (551)operations (1) Notes: Funds flow from operating activities is before changes in non-cash workingcapital. See "Non-GAAP Measures" discussion above. The Corporation's net loss was $1,224 for the first nine months of 2007,compared to a net loss of $2,712 incurred in the first nine months of 2006.Caza's net loss is reflective of the Corporation's early stage of development.The Corporation has focused on increasing the number of employees over the last18 months and developing a large group of prospective drilling opportunities.The Corporation's current level of production from its existing wells is small.To the extent the Corporation's general and administrative and other expensesare in excess of cash flow from operations, Caza will finance these expenses andfuture capital expenditures from its existing cash balances and from futureequity offerings. The Corporation's cash flow from operations was reduced duringthe first nine months of the year primarily due to the increased general andadministrative expenses. Investing Activities 9 months 9 months 3 months 3 months ended ended ended ended September September September September 30, 2007 30, 2006 30, 2007 30, 2006 (in $000's)Purchase of petroleum 8,700 1,937 3,622 1,348and natural gas properties Purchase of equipment 480 4 108 3 The Corporation's expenditures for petroleum and natural gas propertiesincreased to $8,700 for the nine months ended September 30, 2007 ($1,937 for thefirst nine months of 2006). The Corporation participated in the drilling of fivegross (1.1 net) to date in 2007. Our drilling program was financed with theproceeds from the initial placements made in 2006 and first half of 2007.Relatively small expenditures were made to acquire other equipment, whichrepresents additional office equipment and leasehold improvements required inconnection with the Corporation's increased staffing levels. Financing Activities 9 months 9 months 3 months 3 months ended ended ended ended September September 30, September September 30, 2007 2006 30, 2007 30, 2006 (in $000's) Distributions - (351) - (331) Deferred finance costs 1,400 - 1,400 - Proceeds from share 455 - - - issuances, net Increase in notes - 280 - - payable Principal payments on - (397) - (397) notes payable The Corporation did not make any distributions in the first nine months of 2007.The distributions made in 2006 represent distributions made by Falcon Bay priorto its amalgamation with Caza Petroleum. During the first nine months of 2007 the Corporation completed a financing,issuing 970,000 Common Shares for net proceeds of $455. The shares were issuedas part of the over-allotment option granted to the agents of the privateplacement completed during the second half of 2006. The Corporation also issued1,103,200 Common Shares in March and 394,800 Common Shares in April pursuant tothe Share Exchange Agreement. New Accounting Standards Effective January 1, 2007, the Corporation adopted the Canadian Institute ofChartered Accountants ("CICA") Section 1530, "Comprehensive Income", Section3855, "Financial Instruments - Recognition and Measurement", Section 3861,"Financial Instruments - Disclosure and Presentation" and Section 3865,"Hedges". The Corporation has adopted these standards prospectively and thecomparative interim consolidated financial statements have not been restated. Upon adoption of Section 3855, all financial instruments are classified into oneof the following five categories: held-for-trading, loans and receivables,held-to-maturity investments, available-for-sale financial assets or otherfinancial liabilities. Subsequent measurement of the financial instruments isbased on their initial classification. Held-for-trading financial assets aremeasured at fair value and changes in fair value are recognized in net income.Available-for-sale financial instruments are measured at fair value with changesin fair value recorded in other comprehensive income until the instrument isderecognized or impaired. All derivative instruments are recorded in the balancesheet at fair value unless they qualify for the normal sale and normal purchaseexemption. All changes in their fair value are recorded in net income unlesscash flow hedge accounting is used, in which case changes in fair value arerecorded in other comprehensive income until the underlying hedged transactionis recognized in net income. Any hedge ineffectiveness is immediately recognizedin net income. The other categories of financial instruments are recognized atamortized cost using the effective interest rate method. Upon adoption of these standards, the Corporation classified its cash and cashequivalents as held-for-trading, which are measured at fair value. Accountsreceivable are classified as loans and receivables, which are amortized at cost.Accounts payable and notes payable are classified as other financialliabilities, which are measured at amortized cost. For financial assets and financial liabilities that are not classified asheld-for-trading, the transaction costs that are directly attributable to theacquisition or issue of a financial asset or financial liability are adjusted tothe fair value initially recognized for that financial instrument. These costsare expensed using the effective interest rate method. The adoption of Section 1530 has no material impact on the consolidatedfinancial statements of the Corporation. The Corporation currently does not utilize hedges or other derivative financialinstruments in its operations, and as a result of the adoption of Section 3865had no material impact on the consolidated financial statements of theCorporation. The adoption of these new standards had no impact on the Corporation's openingretained earnings (deficit) as at January 1, 2007. The Corporation has also adopted Section 3251, "Equity" and Section 1506,"Accounting Changes". Section 3251 replaces Section 3250, "Surplus" anddescribes standards for the presentation of equity and changes in equity forreporting periods as a result of the application of Section 1530, "ComprehensiveIncome". The only impact of Section 1506, "Accounting Changes", is to providedisclosure of when an entity has not applied a new source of GAAP that has beenissued but is not yet effective. This is the case with Section 3862, "FinancialInstruments Disclosures" and Section 3863, "Financial Instruments Presentations"which are required to be adopted for fiscal years beginning on or after October1, 2007. The Corporation will adopt these standards on January 1, 2008 and it isexpected the only effect on the Corporation will be additional disclosuresregarding the significance of financial instruments for the entity's financialposition and performance; and the nature, extent and management of risksarriving from financial instruments to which the entity is exposed. The Company has assessed new and revised accounting pronouncements that havebeen issued that are not yet effective and determined that the following mayhave a significant impact on the Company: * As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial Instruments - Presentation," which will replace Section 3861 "Financial Instruments - Disclosure and Presentation." The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standard carries forward the former presentation requirements. The new financial instruments presentation and disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements. * As of January 1, 2008, Caza will be required to adopt two new CICA standards, Section 1535 "Capital Disclosures," which will require companies to disclose their objectives, policies and processes for managing capital. In addition, disclosures are to include whether companies have complied with externally imposed capital requirements. The new capital disclosure requirements were issued in December 2006 and the Company is assessing the impact on its consolidated financial statements. * The Corporation will be required to adopt CICA Handbook Section 3031, Inventories. This new accounting standard is effective for interim and annual financial statements for fiscal years beginning on or after January 1, 2008. This new standard is not expected to have a material impact on the Corporation's consolidated financial statements * In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, accounting standards in Canada for public companies are expected to converge with International Financial Reporting Standards ("IFRS") by the end of 2011. The Company continues to monitor and assess the impact of convergence of Canadian GAAP and IFRS. Critical Accounting Policies and Estimates The Corporation's financial statements are prepared in accordance with GAAP,which require management to make judgments, estimates and assumptions which mayhave a significant impact on the financial statements. A summary of theCorporation's significant accounting policies found in Note 2 to theCorporation's financial statements. The following is a discussion of thoseaccounting policies and estimates that are considered critical in thedetermination of the Corporation's financial results. Capital Assets - Full Cost Accounting The Corporation follows the full cost method of accounting as described in Note2 to the financial statements. Alternatively, the Corporation could follow thesuccessful efforts method of accounting whereby all costs related tonon-productive wells are expensed in the period in which they are incurred. Under the full cost method of accounting, capitalized costs are subject to acountry-by-country cost center impairment test. Under successful efforts methodof accounting, the costs are aggregated on a property-by-property basis and thecarrying value of each property is subject to an impairment test. These policiesmay result in a different carrying value for capital assets and net income. TheCorporation has elected to follow the full cost method and it is the method mostcommonly followed. Under full cost accounting, a limit is placed on the carrying value of the netcapitalized costs in each cost center in order to test impairment. Impairmentexists when the carrying value of developed properties of a cost center exceedsthe estimated undiscounted future net cash flows associated with the costcenter's proved reserves. Costs relating to undeveloped properties are subjectto individual impairment assessments until it can be determined whether provedreserves exist. If impairment is determined to exist, the costs carried on thebalance sheet in excess of the discounted future net cash flows associated withthe cost center's proved plus probable reserves are charged to income. Reserve estimates Reserve estimates can have a significant impact on net income and the carryingvalue of capital assets. The process of estimating reserves requires significantjudgment based on available geological, geophysical, engineering, and economicdata, projected rates of production, estimated commodity price forecasts and thetiming of future expenditures, all of which are subject to interpretation anduncertainty. Reserve estimates impact net income through depletion expense andthe application of impairment tests. Revisions or changes in reserve estimatescan have either a positive or a negative impact on net income and can impact thecarrying amount of capital assets. Potential lenders may also use reserve estimates to assess the allowableborrowing base under a secured credit facility. Changes to the reserve estimatescan result in borrowing base increases or decrease, which could impact theCorporation's financial position. Asset Retirement Obligations The Corporation recognizes the estimated fair value of future retirementobligations associated with capital assets as a liability. The Corporationestimates the liability based on the estimated cost to abandon and reclaim itsnet ownership in tangible long-lived assets such as wells and the estimatedtiming of the costs to be incurred in future periods. Actual payments to settlethe obligations may differ from estimated amounts. Income taxes The amounts recorded as future income tax assets and liabilities and theutilization of future tax assets subject to an expiry date are based onestimates of future cash flows and profitability. By their nature, theseestimates are subject to measurement uncertainty and the effect on theconsolidated financial statements of changes of estimates in future periodscould be significant. Stock based Compensation The Black-Scholes option pricing model was developed for use in estimating thefair value of traded options which have no vesting restrictions and are fullytransferable. This model is used to value the stock options granted. Inaddition, option pricing models require the input of highly subjectiveassumptions including the expected stock price volatility. Because the Company'semployee's stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management's opinion, the existingmodels do not necessarily provide a reliable single measure of the fair value ofits employee stock options. Internal Controls over Financial Reporting Internal controls over financial reporting are designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof the financial statements for external purposes in accordance with GAAP. During the third quarter of 2007 there were no changes in the Corporation'sinternal controls over financial reporting that materially affected, or arereasonably likely to materially affect, the Corporation's internal controls overfinancial reporting. This information is provided by RNS The company news service from the London Stock Exchange