Frontera Resources Regulatory News (FRR)

14 Sep 2006 07:02

Frontera Resources Corporation14 September 2006 Frontera Resources Corporation Reports 2006 Interim Results and Provides Operations Update HOUSTON, TEXAS, USA, September 14, 2006 - Frontera Resources Corporation (LondonStock Exchange, AIM Market - Symbol: FRR), an international oil and gas companypursuing exploration, development and production opportunities in the GreaterBlack Sea Region, today announced its results for the six-month period endedJune 30, 2006 and provided an update on its operations. Highlights include: OPERATIONS Taribani Field Unit • Began a planned three-well drilling program to re-enter existing wellsin the Taribani Field where recoverable reserves are believed to beapproximately 140 million barrels. • Horizontal drilling and testing completed at the first well, the Dino#2, validated several important elements of Frontera's field model regardingcommercial viability. • Objective reservoirs were found to be highly pressured and fractured,as well as thicker, higher in porosity and more numerous than originallyestimated. • Extended production testing yielded good quality 38 degree API oil,while challenged with sediment obstruction. • Completion program for wells to be redesigned to overcome sedimentchallenge. • Further drilling postponed pending successful completion programredesign. • Company remains confident that challenges can be overcome with areturn to operations later this year or early next year. • Processed, interpreted and integrated new seismic data acquired in2005 into our existing mapping of the field. This data revealed a largerstructure than previously thought and identified a new prospect lead to thesouthwest of the Taribani Field. Basin Edge Play Unit • Advanced key studies related to the 350 kilometers of new 2D seismicdata over the Basin Edge Play Unit's "B" and "C" prospects where unriskedrecoverable reserves are estimated to be in excess of 1 billion barrels. • Successfully completed acquisition of a new 80-square kilometer, 3-Dseismic survey over the Basin Edge Play Unit's "C" prospect to further define alarge, independent four-way structural closure of approximately 55 squarekilometers. • Completed acquisition and began interpretation of approximately 170kilometers of 2-D seismic data over the Basin Edge Play Unit's "B" prospect. • Advanced an environmentally important multi-year hydro-geologic studydesigned to assess ground water quality in the vicinity of Basin Edge Play Unitprior to commencement of drilling operations in 2007. Mizraani Field Area Exploration Unit • Completed interpretation of 105 kilometers of 2-D seismic dataacquired in 2005 to further delineate mapped prospects beneath the MirzaaniField. • Interpretation revealed a larger than originally mapped structure withpotential reserves believed to be in excess of 50 million barrels. • Confirmed and further delineated a second prospect called the MirzaaniSouth Prospect. • Selected a drilling location for the Mirzaani Deep Prospect in 2007. Mirzaani Field Area Production Unit • Profitable production continued. • Options to increase productivity of the field are being evaluated. Ifsuccessful, could lead to development of large undeveloped portions of the fieldand two other undeveloped nearby fields. Block 12 Area-Wide Field/Prospect Inventory Development • Continued development and prioritization of extensive inventory ofprospects within Block 12, consisting of 19 identified prospects and leads andfive undeveloped fields. CORPORATE • Balance sheet remains strong to carry out planned drilling programs atTaribani Field Unit and Basin Edge Play Unit. • Reported a net loss of $5.0 million, or $0.09 per share on a fullydiluted basis, for the period ending June 30, 2006. • Net loss includes $1.6 million non-cash charge related to expensing ofstock options. • Commenced initiative to seek and evaluate new venture growthopportunities throughout the Greater Black Sea Region. • Announced and pursuing enforcement of an award of $1.2 million plusinterest against the State Oil Company of the Azerbaijan Republic (SOCAR). Steve C. Nicandros, Chairman and Chief Executive Officer, commented: "The results achieved from operations within each of our business units thisyear have continued to encourage us and confirm our assumptions regarding theseindividual areas of prospectivity within Block 12. The information we haveobtained has brought Frontera closer to its goal of establishing commercialproduction from the four business units that represent only a portion of thecompany's very large portfolio of opportunities in Block 12. We remain confidentthat our technically prudent and steady approach will place Frontera Resourcesin an ever-stronger position to tap the significant value that we haveidentified in Block 12 and the Greater Black Sea Region." About Frontera Frontera Resources Corporation is an independent Houston, Texas, U.S.A.- basedinternational oil and gas exploration and production company whose strategy isto identify opportunities and operate in emerging markets around the world. Frontera has operated in Georgia since 1997 where it holds a 100 per centworking interest in a production sharing agreement with the government ofGeorgia. This gives Frontera the exclusive right to explore for, develop andproduce oil and gas from a 5,060 square kilometer area in eastern Georgia knownas Block 12. For more information, please see www.fronteraresources.com . This release contains certain forward-looking statements, including, withoutlimitation, expectations, beliefs, plans and objectives regarding the potentialtransactions, potential drilling schedule and ventures discussed in thisrelease, as well as reserves and future production. Among the important factorsthat could cause actual results to differ materially from those indicated bysuch forward-looking statements are future exploration and development results,availability and performance of needed equipment and personnel, the finalresults of the processing of seismic data, fluctuations in oil and gas prices,weather conditions, general economic conditions and the political situation inGeorgia and neighboring countries. There is no assurance that Frontera'sexpectations will be realized, and actual results may differ materially fromthose expressed in the forward-looking statements. The common shares of Frontera have not been registered under the U.S. SecuritiesAct of 1933. Transfer of these securities is prohibited, except in accordancewith the provisions of Regulation S, pursuant to registration under the U.S.Securities Act, or pursuant to an available exemption from registration.Hedging transactions involving these securities may not be conducted unless incompliance with the U.S. Securities Act. Neither this document nor any attachment hereto shall constitute an offer tosell or the solicitation of an offer to buy the Company's securities in anyjurisdiction in which such offer is unlawful, including the United States. The reserve information herein was determined by the independent consulting firmof Netherland, Sewell & Associates in accordance with the petroleum resourcedefinitions adopted by the Society of Petroleum Engineers (SPE), World PetroleumCouncil (WPC) and the American Association of Petroleum Geologists (AAPG) in2000. Enquiries Frontera Resources Corporation Liz WilliamsonVice President Investor Relations and Corporate Communications(+1713) 585-3216lwilliamson@fronteraresources.com Citigate Dewe Rogerson (+44 207 638 9571) Analyst enquiries: Nina SoonMedia enquiries: Martin Jackson/George Cazenove Chairman and Chief Executive Officer's Statement The following statement was made to Frontera's shareholders in a letter datedSeptember 14, 2006 from Steve C. Nicandros, Chairman and Chief ExecutiveOfficer. A full copy of this letter can be downloaded from Frontera's websiteat www.fronteraresources.com: Dear Fellow Shareholder: As we approach the end of the third quarter of 2006, I am writing to update youon our company's progress, as well as to provide you with our mid-year financialresults for the period ending June 30, 2006. For your convenience, you can alsoaccess a copy of this letter together with our interim financial report on ourwebsite at: www.fronteraresources.com. During the first half of 2006 and since my last letter to you of June 26th, I amhappy to report that Frontera continued to make progress on its variousexploration and development initiatives. The results achieved from operationswithin each of our business units this year have continued to encourage us andconfirm our assumptions regarding these individual areas of prospectivity withinBlock 12. At the Taribani Field Unit drilling operations achieved a measure ofsuccess, while also revealing new production engineering challenges. Eventhough we continue to be confident that these challenges can be successfullyaddressed, they have caused us to temporarily slow down the pace of our drillingwhile we develop solutions for implementation in future drilling at this largeundeveloped oil field. At the Basin Edge Play Unit, a new 80 square kilometer3D seismic survey successfully revealed more confirming detail of a verysubstantial oil prospect for which drilling preparations are currently underway.These results, together with progress from our investments at the MirzaaniField Area Exploration and Production Units, have brought us closer to our goalof establishing commercial production from the four business units thatrepresent only a portion of our very large portfolio of opportunities in Block12. You will note from the attached interim financial results for this year that wecontinue to pursue our work in four business units within Block 12 with a strongbalance sheet. In addition, we continue to work on the balance of this5,060-square kilometer license area in eastern Georgia in order to advanceprospecting on our extensive remaining inventory of five undeveloped fields andnineteen prospects and leads. From this inventory, future business units willemerge to capture the additional reserve potential that we have identifiedthroughout our massive license area, an area that is equal in size to some 250blocks in the U.S. Gulf of Mexico or approximately 25 standard blocks in theU.K. North Sea. Finally, amidst a strong oil price environment, we have commenced a new venturesinitiative to broaden and grow our company's exposure to opportunities in anarea that we refer to as the Greater Black Sea Region. This area, anchored byour current position in Georgia, has been strategically highlighted as an areaof focus to pursue opportunities in oil and gas basins that build on Frontera'sextensive technical experience in the Kura Basin where our current work inGeorgia has been focused and where we had a significant effort in the country ofAzerbaijan in past years. We believe this historical work in the Kura Basin provides us with a uniqueadvantage in identifying and understanding technically similar and meaningfulopportunities that will build on our success in Georgia and allow us to grow ourcompany throughout this area in the years ahead. Hand in hand with thisinitiative, we are investigating ways to further strengthen our balance sheet ina manner that is intended to be accretive in value to our shareholders in orderto accelerate our work throughout Block 12 as well as to pursue new ventures. A detailed update of our progress in each of our business units within Block 12in Georgia follows below, together with a summary of our interim financialresults for 2006. OPERATIONS UPDATE TARIBANI FIELD UNIT Drilling Operations: In February 2006, Frontera began a three-well drillingprogram to reenter existing wells in the Taribani Field to determine whethersustainable commercial production could be established from undeveloped oilbearing horizons. Frontera believes targeted horizons can be effectivelydeveloped and produced with the use of conventional horizontal drilling,completion and associated production engineering techniques the company hastailored specifically for the Taribani Field. Our plan was to collect extensivedata and production testing results from the three-well program that wouldcollectively provide Frontera with the necessary technical data to determinewhether the Taribani Field can be commercially developed. In April 2006, horizontal drilling operations were completed at the first well,the Dino #2. This well was designed to evaluate multiple horizons within thefield, with a primary objective of a final horizontal completion into Zone 15 ata total vertical depth of approximately 2,700 meters. Once the horizontalportion of the well was completed, an extended testing program commenced on theDino #2, which continued through the end of August. To date, information obtained from the Dino #2 well has validated severalimportant elements of Frontera's field model regarding commercial viability ofthe Taribani Field. Specifically, data has confirmed: (1) Frontera's abilityto drill a horizontal well successfully into the over-pressured reservoirs thatexist within the field; (2) the presence of fractures in Zones 9, 14 and 15; (3)that the orientation of reservoir fracture systems can be successfullyencountered via horizontal drilling methods; (4) matrix porosities in Zones 9,14 and 15 are higher than originally projected in the company's third partyreservoir engineering assessments, thereby verifying a larger hydrocarbonstorage capability for the target reservoirs; and, (5) objective reservoirs werethicker and more numerous than originally estimated. Because of a better than expected reservoir section that was encountered at Zone14, we completed and tested both Zones 14 and 15 together. During the testingprogram, bottom-hole pressure was observed to be approximately 6,800 psi,thereby confirming excellent reservoir energy. Conservative drawdown parameterswere employed in order to avoid artificial stimulation of sediment influx fromreservoir formations into the well bore. When testing with drawdowns from 300psi to 800 psi, the well initially flowed approximately 80 bbls per day oflight, 38 degree API oil with minor amounts of associated gas on a 4/64th inchchoke. We were encouraged by these results because our reservoir models indicated thatthe well was capable of higher flow rates as we increased drawdown rates. This,coupled with the frequent oil and gas flows that we experienced duringhorizontal drilling operations while utilizing heavy 17+ pound per gallon mudweights, provided important confirmation of certain assumptions in our reservoirengineering models. However, despite this encouragement, the extendedproduction testing program proved to be challenged with sediment obstruction inthe well bore that interrupted sustainable production from the well and,therefore, required frequent cleaning. Over the course of the extended testing program, sediment obstruction wasobserved to be a new challenge that we currently attribute to ourwell-completion procedures and design that we believe can be solved. Pendingcompletion of ongoing engineering analysis, we believe that we have experienceda situation whereby we have not been able to successfully clean the well priorto commencing testing operations. Heavy drilling mud, residual cuttings fromthe drilling process and formation sediment has remained in the horizontalportion of the well, thereby impeding flow rates and acting as an obstacle toproduction. To this end, we are now designing a solution for the Dino #2 welland a new well-completion design for our future wells to overcome theseoccurrences as we evolve our understanding of how to successfully complete andsustain production from Zone 14/15 reservoirs. Upon finishing drilling operations at the Dino #2 well, drilling commenced atWell #23 on May 30th with an objective of a Zone 9 horizontal completion. Priorto drilling, core samples and logs were taken from Zone 9 at the nearby Dino #2location for the sole purpose of confirming properties for this targetreservoir. These cores and logs revealed fractured, oil saturated sandstones inexcess of 20 meters in thickness. Two attempts were made to sidetrack from theexisting well. However, due to the poor integrity of the thirty nine year oldwell bore, the casing collapsed during sidetrack operations. As a result, wetemporarily suspended operations at the Well #23 location due to the risk offurther failure associated with continued attempts to utilize the old well.Instead, we will drill a new well from this location to reach the same Zone 9objectives. Drilling will recommence once long lead time materials that werenot on hand for a new well can be procured and delivered. In light of the challenges observed during the extended testing program at theDino #2 well, we postponed the third well, the Niko #1 reentry/sidetrack, inorder to allow adequate time to fully incorporate the evolving new completiondesign changes in this well, as well as at Well #23. Seismic Operations: During 2005, the company successfully acquired 60 kilometersof 2D seismic over the south-western portion of the Taribani Field. Thesouthwest area of the field is situated approximately 900 feet updip from thearea of the field where our current drilling operations are currently underway.During the first half of 2006, this new seismic data was processed, interpretedand integrated into our existing mapping of the field. This data revealed alarger structure than previously thought and identified a new prospect lead tothe southwest of the Taribani Field. Overall, we remain encouraged by the data gathered from our operations to dateand we are committed to integrating our learning in a smart manner. We areattempting to solve the engineering challenges as quickly as possible so that wemight return to down-hole operations as early as the fourth quarter of this yearor, depending on the redesign solution we choose, early next year. Despite the delay we are experiencing in our work program, it is important tokeep in perspective the size of the value objective that we are moving closer toachieving in this large oil field. To this end, since our inception of work atthe Taribani Field, we have expended approximately $0.50 per barrel in "findingcost" in order to prove commerciality of the approximately 140 million barrelsof oil that we believe to be recoverable. Considering that the industry spendsan average of approximately $9.00 per barrel to find a commercial field of thissize, our historical spending to address the challenges in the Taribani Fieldhas been comparatively low. As a result, we remain confident that the issuesrelated to developing this field can be resolved and further investment iswarranted to achieve commerciality. BASIN EDGE PLAY UNIT In June, Frontera successfully completed acquisition of a new 80 squarekilometer 3-D seismic survey over the Basin Edge Play Unit's "C" prospect.Processing and interpretation of this new seismic survey has revealed a largeindependent four-way structural closure of approximately 55 square kilometers insize and is currently being integrated with our existing database for thissizeable prospect in order to select drilling locations this fall. Drilling ofthe first well at the "C" prospect is expected to commence during the first halfof 2007. During the first half of 2006, Frontera also completed acquisition ofapproximately 170 kilometers of 2D seismic data over a second large prospectwithin the Basin Edge Play Unit, known as the "B" prospect. Interpretation ofthis data is currently underway. Finally, as we prepare to commence drilling operations, we continued to advancean environmentally important multi-year hydro-geologic study that is designed toassess ground water quality in the vicinity of the Basin Edge Play Unit, as wellas the region in general. The goals of the study are to: (1) Conduct a baselineground water quality environmental assessment of 130 water wells and naturalsprings in the eastern portion of Block 12 ahead of commencing planned drillingoperations next year (we will continue to monitor these wells in the future);(2) Determine direction of ground water flow in the region; (3) Determine groundwater chemistry and map the location of any pre-existing pollution in the groundwater system; (4) Provide water for local use and for the planned drillingoperations; and, (5) Determine the reservoir drive mechanism for prospectsassociated with the Basin Edge Play Unit. The project began in 2005 and is beingconducted with the support of project team members from Penn State University inthe U.S. and the Georgian Geologic Institute of Tbilisi. Frontera's objectives within the Basin Edge Play Unit remain focused oncommercially accessing the unrisked resource potential that is estimated to bein excess of one billion barrels of oil for the "B" and "C" prospects by theindependent consulting firm of Netherland, Sewell and Associates. These holdJurassic, Cretaceous and Tertiary age reservoir objectives. MIRZAANI FIELD AREA EXPLORATION UNIT In 2005, approximately 105 kilometers of 2D seismic were acquired overidentified prospects that are situated below discovered fields within theMirzaani Field Area Exploration Unit. Processing and interpretation of this newdata was completed earlier this year and further evolved our mapping of one ofthese prospects in greater detail, the Mirzaani Deep Prospect. This evolutionrevealed a larger prospect than previously mapped such that Frontera nowbelieves unrisked recoverable reserves may be in excess of 50 million barrels ofoil. The Mirzaani Deep Prospect sits below the existing Mirzaani Field that iscurrently on production from shallower reservoirs. Frontera's newinterpretation indicates that the same "hanging wall" fault that sets up theshallow field also creates the deep prospect and is a part of the same petroleumsystem. New mapping has revealed a better defined prospect with moreindependent closure than originally hypothesized. The primary objectives forthis prospect lie within the marine section of the Upper Miocene age interval ata depth of approximately 2,500 meters. Well planning and design is targetingnot only these primary deep objectives, but will also evaluate the shallowPliocene age interval. Our interpretation of the new seismic data acquired to the south of the MirzaaniField also confirmed a previously identified feature called the Mirzaani SouthProspect. This structure is in the "foot wall" of the same fault that sets upthe Mirzaani Deep Prospect and the shallower Mirzaani Field. The mainobjectives for this prospect are fluvial sandstones associated with the Plioceneinterval, a potential look-alike to the currently producing Mirzaani Field. TheMirzaani South Prospect will remain in our inventory for future drilling. A drilling location has been selected to test the Mirzaani Deep Prospect in2007. Other similar prospects are believed to be on trend with the MirzaaniDeep Prospect and remain the focus of ongoing geological and geophysical workwithin this business unit. MIRZAANI FIELD AREA PRODUCTION UNIT During the first half of 2006, operations within the Mirzaani Field AreaProduction Unit continued to yield an average daily production rate ofapproximately 90 barrels per day of oil from wells that range from 800 to 1,500meters in depth. This production comes from one of three fields within thisbusiness unit. While this volume is not significant in terms of our long-termstrategy, Frontera operates this field at a profit and expertise gained from theoperations will be valuable when we develop and produce future fields in Block12. As a result of studying the shallow Pliocene age reservoirs that transcend theMirzaani Field Area Production Unit, the Mirzaani Field is currently underconsideration for pressure maintenance and enhanced oil recovery to see if it ispossible to increase production from this low-reservoir-energy field. Withsuccess in implementing such a program, Frontera has identified largeundeveloped portions of this field and the two other undeveloped fields withinthis unit that will be candidates for future development drilling. BLOCK 12 AREA-WIDE FIELD/PROSPECT INVENTORY DEVELOPMENT UNIT In addition to our work at the four business units already described, wecontinued to develop and prioritize our extensive inventory of prospects andleads throughout Block 12. Today, in addition to our primary areas of focus,our block inventory consists of 19 identified prospects and leads and fiveundeveloped fields. From this area outside of our existing business units newopportunities will emerge from our inventory and future business units will beformed with the potential to capture additional reserves from within Block 12.We hope that our ongoing technical studies and data gathering throughout thisarea will allow us to create a "conveyor belt" of highly prospective drillingopportunities for many years to come. CORPORATE UPDATE Financial Review. For the six months ending June 30, 2006, we incurred a netloss of $5.0 million, or $.09 per share on a fully-diluted basis. This losscompares to a net loss of $2.8 million, or $0.08 per share for the first sixmonths of 2005. The increase in the net loss reported is due primarily tohigher operating expenses and lower other income in the first half of 2006.Below is a comparison of the six month periods ending June 30 for 2005 and 2006. Revenues from crude oil sales during the first six months of 2006 were $0.8million, an increase of $0.4 million from $0.4 million during the same periodlast year. The increase in revenues was primarily attributable to higher oilprices realized this year. Operating expenses were $6.6 million during the first six months of 2006, anincrease of $1.4 million from $5.2 million in 2005. Both periods includeone-time charges that caused general and administrative expenses to be higherthan normal. In 2006, we incurred a $1.6 million non-cash charge related to theexpensing of stock options in accordance with provisions of SFAS 123R. Lastyear, expenses included non-recurring costs related to Frontera's IPO andarbitration proceedings with SOCAR. Excluding these charges in both periods,general and administrative expenses increased by $0.7 million this year owing toadditional costs associated with being a public company and the ramp-up of ourdrilling and seismic operations work programs in Georgia. Other income of $0.8 million during the first six months of 2006 decreased $1.3million from $2.1 million in 2005. The decrease was largely attributable to a$2.9 million gain in 2005 from retiring a portion of the long-term debt at adiscount. Partially offsetting this gain was an increase of $0.5 million ininterest income in 2006 from investing cash balances and the reduction ininterest expense of $1.1 million as a result of a significant portion of thelong-term debt being repaid in 2005. Looking forward, we have a strong balance sheet with $38 million in cash andmarketable securities with only $3.5 million in long-term debt. In addition, wehad 13,500 barrels of oil in storage, worth approximately $0.75 million, at June30. While the cash balances should be sufficient to carry out our drillingprograms for the Taribani Field and Basin Edge Play Units in 2007, we areinvestigating ways to raise additional funds to accelerate work in our otheroperating units and pursue new ventures outside of Block 12. We will keep youinformed on any developments in the coming months. SOCAR Arbitration. In January 2006, we announced that our wholly ownedsubsidiary, Frontera Resources Azerbaijan Corporation, was awarded $1.2 millionplus interest from 2000 until payment is made in connection with its bindingarbitration case with SOCAR, the State Oil Company of the Azerbaijan Republic.The arbitration was held in Sweden and is binding on the parties under the rulesof UNCITRAL, the United Nations Commission on International Trade Law. As you will recall, Frontera initiated the arbitration against SOCAR in October2003 related to claims resulting from SOCAR's halting of exports from theonshore Kursangi & Karabagli oilfields in the Azerbaijan Republic during thefourth quarter of 2000. The arbitral panel found that the halting of exports of crude oil from theKursangi & Karabagli oil fields in the Azerbaijan Republic was in violation ofthe Agreement on Rehabilitation, Exploration, Development and Production Sharingbetween SOCAR, Frontera, Delta/Hess and SOCAR Oil Affiliate (the "PSA"). Thearbitration panel rejected all other claims and counterclaims between theparties and the arbitration therefore resolves all claims between Frontera andSOCAR with respect to the PSA. In February 2006, Frontera Azerbaijan filed an action in the United StatesDistrict Court, Southern District of New York seeking to enforce the tribunal'saward in the United States. Contemporaneously, SOCAR filed a challenge to theaward with the Swedish Court of Appeals. Frontera Azerbaijan does not believethere is any basis for a challenge by SOCAR and will continue to pursueenforcement of the Swedish tribunal's award. Shareholder Meetings. On January 16, 2006, the company held an annual meetingof shareholders in Houston, Texas. At that meeting, the company re-electedSteve C. Nicandros, Andrew J. Szescila and Luis E. Giusti as Class II directorsto hold office until the 2008 annual meeting. In recognition of itsshareholders outside the United States who were unable to travel to Houston inJanuary, the company held a second meeting of shareholders in London, England onJune 8, 2006. At this meeting, the company provided shareholders an overview ofits results for the 12-months ending December 31, 2005 and an update of thecompany's operations. No new material price-sensitive information was presentedat this meeting. Beginning in 2007, the company intends to hold its annualmeeting of shareholders in May. ***** Please do not hesitate to contact us should you have any questions about ourinterim financial report or the details of our progress to date. In themeantime, please know that all of us at Frontera remain confident in the beliefthat our technically prudent and steady approach to our work programs will placeFrontera Resources in an ever-stronger position to tap the significant valuecreation that we have identified in Block 12 and the Greater Black Sea Region.Thank you for your continued confidence and support. Sincerely, Steve C. NicandrosChairman and Chief Executive OfficerFrontera Resources Corporation FRONTERA RESOURCES CORPORATIONCONSOLIDATED BALANCE SHEETS Unaudited Audited June 30, June 30, December 31, 2006 2005 2005ASSETS CURRENT ASSETS Cash and cash equivalents $ 25,938,108 $ 60,063,457 $19,586,747 Restricted cash equivalent 4,425,000 - 250,000 Restricted short-term investments - - 2,950,000 Marketable securities 8,436,000 - 30,600,000 Accounts receivable - other 194,660 866,075 146,300 Inventory 2,163,740 2,084,346 1,970,128 Prepaid expenses and other 467,310 109,243 568,804 TOTAL CURRENT ASSETS 41,624,818 63,123,121 56,071,979 FIXED ASSETS, net 429,083 319,710 580,419 OIL AND GAS PROPERTIES, full cost method Properties being depleted 24,665,368 24,503,780 24,652,783 Properties not subject to depletion 23,898,570 144,376 5,929,994 48,563,938 24,648,156 30,582,777 Less: accumulated depletion (20,876,838) (20,405,102) (20,685,118) NET OIL AND GAS PROPERTIES 27,687,100 4,243,054 9,897,659 TOTAL ASSETS $ 69,741,001 $ 67,685,885 $66,550,057 Unaudited Audited June 30, June 30, December 31, 2006 2005 2005LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 333,731 $ 176,334 $ 601,227 Accrued liabilities 5,245,491 1,863,147 1,758,043 Accrued interest 73,429 91,619 114,266 Current portion of notes payable, related party 191,471 - 403,604 TOTAL CURRENT LIABILITIES 5,844,122 2,131,100 2,877,140 NOTES PAYABLE Related party, less current portion - 403,604 - Vendor 3,450,941 3,450,941 3,450,941 TOTAL NOTES PAYABLE 3,450,941 3,854,545 3,450,941 OTHER LONG-TERM LIABILITIES 2,327,367 2,327,367 2,327,366 TOTAL LIABILITIES 11,622,430 8,313,012 8,655,447 STOCKHOLDERS' EQUITY (DEFICIT) Common stock 2,674 2,164 2,178 Additional paid-in capital 147,888,786 142,595,235 142,480,721 Common stock warrants 9,908 31,974 31,151 Treasury stock, at cost (567,832) (567,832) (567,832) Accumulated deficit (89,351,835) (82,688,668) (84,315,968) Accumulated other comprehensive income 136,870 - 264,360 TOTAL STOCKHOLDERS' EQUITY 58,118,571 59,372,873 57,894,610 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $69,741,001 $67,685,885 $66,550,057 FRONTERA RESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Audited Six Months Ended Year Ended June 30, June 30, December 31, 2006 2005 2005REVENUE Crude oil sales $ 758,630 $ 351,302 $ 1,809,427 TOTAL REVENUE 758,630 351,302 1,809,427 OPERATING EXPENSES Field operating and project costs 646,918 154,919 1,466,364 General and administrative 5,486,744 4,746,921 8,354,984 Depreciation, depletion and amortization 464,693 298,272 610,320 TOTAL OPERATING EXPENSES 6,598,355 5,200,112 10,431,668 LOSS FROM OPERATIONS (5,839,725) (4,848,810) (8,622,241) OTHER INCOME (EXPENSE) Forgiveness of debt income 11,732 2,863,109 4,158,861 Interest income 926,381 430,819 1,445,624 Interest expense (144,779) (1,232,485) (1,384,583) Other, net 10,524 (266) (12,594) TOTAL OTHER INCOME (EXPENSE) 803,858 2,061,177 4,207,308 NET LOSS $ (5,035,867) $ (2,787,633) $(4,414,933) Net Loss Per Common Share: Basic and diluted (0.09) (0.08) (0.10) Weighted Average Common Shares Outstanding: Basic and diluted 58,856,834 35,993,168 45,206,970 FRONTERA RESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)PERIODS ENDED JUNE 30, 2006 AND DECEMBER 31, 2005 Convertible Convertible Accumulated Preferred Preferred Additional Common Other Total Stock Stock Common Paid-in Stock Treasury Accumulated Comprehensive Stockholders' Series D Series E Stock Capital Warrants Stock Deficit Income (Deficit) EquityBalance, January 1, 2005 $ - $ 29 $ 242 $ 48,382,082 $ 36,927 $ (567,832)$(79,901,035) $ - (32,049,587) Exercise of common stockwarrants - - 94 81,588 (5,776) - - - 75,906 Issuance of common stock,net of offering costs - - 1,229 80,168,951 - - - - 80,170,180 Compensation expense fromrepricing of stock options - - - 12,632 - - - - 12,632 Conversion of bridge loan to common stock,includingbeneficial conversion - - 43 3,124,957 - - - - 3,125,000 Conversion of Series A1, A2& B redeemable preferredstock to common stock - - 172 10,710,880 - - - - 10,711,052 Conversion of Series D & Epreferred stock tocommon stock - (29) 398 (369) - - - - - Unrealized gain onmarketable securities - - - - - - - 264,360 264,360 Net loss - - - - - - (4,414,933) - (4,414,933) Total comprehensive loss (4,150,573) Balance, December 31, 2005 - - 2,178 142,480,721 31,151 (567,832) (84,315,968) 264,360 57,894,610 Exercise of common stockwarrants - - 475 3,304,394 (21,243) - - - 3,283,626 Exercise of common stockoptions - - 21 524,979 - - - - 525,000Compensation expense fromissuance of stock options - - - 1,578,692 - - - - 1,578,692 Unrealized gain on -marketable securities - - - - - - - (127,490) (127,490) Net loss - - - - - - (5,035,867) - (5,035,867) Total comprehensive loss (5,163,357) Balance, June 30, 2006 $ - $ - $ 2,674 $147,888,786 $9,908 $(567,832)$(89,351,835) $136,870 $ 58,118,571 - - FRONTERA RESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Audited Six Months Ended Year Ended June 30, June 30, December 31, 2006 2005 2005CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (5,035,867) $ (2,787,633) $ (4,414,933)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion and amortization 464,693 298,272 610,320 Interest income from unrealized gain (264,360) - - Interest on redeemable preferred shares - 88,470 88,470 Beneficial conversion of bridge loan - 625,000 625,000 Common stock options issued for compensation 1,578,692 138,948 12,632 Forgiveness of debt income (11,732) (2,863,109) (4,158,861)Changes in operating assets and liabilities: Receivables (48,360) 279,609 999,384 Inventory (193,612) (383,987) (269,769) Prepaid expenses and other 101,495 28,815 (430,746) Accounts payable (580,400) (400,004) 1,320,640 Accrued liabilities (1,173,674) (223,122) (328,226) Accrued interest (40,837) (1,157,401) (1,134,754) NET CASH USED IN OPERATING ACTIVITIES (5,203,962) (6,356,142) (7,080,843) CASH FLOWS FROM INVESTING ACTIVITIES Investment in oil and gas properties (13,006,611) (618,356) (6,224,410) Investment in fixed assets (110,388) - (621,307) Investment in cash collateral account (4,425,000) - - Redemption of (investment in) certificates of deposit 3,200,000 - (3,200,000) Redemption of (investment in) marketable securities 22,300,870 - (30,335,640) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,958,871 (618,356) (40,381,357) CASH FLOWS FROM FINANCING ACTIVITIES Repayment on line of credit - (850,670) (850,670) Repayment on related party notes - (13,693,498) (13,758,412) Payment on long-term liabilities - (91,678) (91,678) Exercise of common stock options 525,000 - - Exercise of common stock warrants 3,071,452 - 75,906 Proceeds from issuance of common stock - 80,170,180 80,170,180 NET CASH PROVIDED BY FINANCING ACTIVITIES 3,596,452 65,534,334 65,545,326 NET INCREASE IN CASH AND CASH EQUIVALENTS 6,351,361 58,559,836 18,083,126 CASH AND CASH EQUIVALENTS, beginning of period 19,586,747 1,503,621 1,503,621 CASH AND CASH EQUIVALENTS, end of period $ 25,938,108 $ 60,063,457 $ 19,586,747 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 185,616 $ 1,805,867 $ 1,805,867 FRONTERA RESOURCES CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2006 NOTE A - NATURE OF OPERATIONS Frontera Resources Corporation, a Delaware corporation, and its subsidiaries(collectively "Frontera" or the "Company") are engaged in the development of oiland gas projects in emerging marketplaces. Frontera was founded in 1996 and isheadquartered in Houston, Texas. The Company emphasizes development of reservesin known hydrocarbon-bearing basins, and is attracted to exploitation projectsthat have significant exploration upside. Beginning in 2002, the Company hasfocused substantially all of its efforts on the exploration and development ofoilfields within the Republic of Georgia ("Georgia"), a member of the FormerSoviet Union. In June 1997, the Company entered into a 25 year production sharing agreementwith the Ministry of Fuel and Energy of Georgia and State Company Georgian Oil("Georgian Oil"), which gives the Company the exclusive right to explore,develop and produce crude oil in a 5500 square kilometer area in eastern Georgiaknown as Block 12, hereafter referred to as the "Block 12 PSA". The Block 12 PSAcan be extended if commercial production remains viable upon its expiration inJune 2022. Under the terms of the Block 12 PSA, the Company is entitled to conductexploration and production activities and is entitled to recover its cumulativecosts and expenses from the crude oil produced from Block 12. Following recoveryof cumulative costs and expenses from Block 12 production, the remaining crudeoil sales, referred to as Profit Oil, are allocated between Georgian Oil andFrontera in the proportion of 51% and 49%, respectively. Under the terms of the Block 12 PSA, Frontera is exempt from all taxes imposedby the government of Georgia, and any taxes imposed on the Company shall be paidby Georgian Oil on behalf of the Company from Georgian Oil's 51% share of ProfitOil. Taxes are defined by the Block 12 PSA to mean all levies, duties, payments,fees, taxes or contributions payable to or imposed by any government agency,subdivision, municipal or local authorities within the Government of Georgia. NOTE B - BASIS OF PRESENTATION The Frontera Resources Corporation unaudited consolidated financial statementsas of, and for the period ended June 30, 2006 should be read in conjunction withthe Company's audited financial statements for the year ended December 31, 2005,which was previously filed with the London AIM exchange. The unauditedconsolidated financial statements reflect all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation of the interim periods.The results of operations for the interim periods are not necessarily indicativeof the results of operations to be expected for the full year. NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include theaccounts of Frontera Resources Corporation ("FRC") and it's wholly and majorityowned subsidiaries. The wholly owned subsidiaries are Frontera InternationalCorporation ("FIC"); Frontera Resources Caucasus Corporation ("FRCC"); FronteraResources Georgia Corporation ("FRGC"); Frontera Resources AzerbaijanCorporation ("FRAC"); Frontera Resources Overseas Corporation ("FROC"); FronteraAzerbaijan Ventures Corporation ("FAVC") and Frontera Resources Georgia, Limited("FRGL"). Also included are the accounts of Frontera Eastern Georgia, Limited ("FEGL"), a 50%-owned subsidiary, as control is deemed to reside with the Company.All significant inter-company transactions and accounts have been eliminated inconsolidation. Use of Estimates: The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the period. Actual results could differ from thoseestimates. Cash and cash equivalents: The Company considers all highly liquid investmentswith an original maturity of three months or less at the time of purchase to becash equivalents. Foreign Operations: Frontera's future revenues depend on operating results fromits operations in the Republic of Georgia. The success of Frontera's operationsis subject to various contingencies beyond management control. Thesecontingencies include general and regional economic conditions, prices for crudeoil, competition and changes in regulation. Frontera is subject to variousadditional political and economic uncertainties in the Republic of Georgia whichcould include restrictions on transfer of funds, import and export duties,quotas and embargoes, domestic and international customs and tariffs, andchanging taxation policies, foreign exchange restrictions, political conditionsand regulations. Oil and Gas Properties: The Company follows the full cost method of accountingfor oil and gas properties. Accordingly, all costs associated with acquisition,exploration, and development of oil and gas reserves, including directly relatedoverhead costs, are capitalized. Tarabani and Basin Edge costs are shown asproperties not subject to depletion as evaluation of commerciality is ongoing. Stock-Based Compensation: The Company adopted SFAS No. 123R, Share-BasedPayment, effective January 1, 2006. This statement requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their grant-date fair values.Compensation costs for awards granted prior to, but not vested, as of January 1,2006 would be based on the grant date attributes originally used to value thoseawards for pro forma purposes under SFAS No. 123. The Company adopted SFAS No.123R using the modified prospective transition method, utilizing the Black-Scholes option pricing model for the calculation of the fair value of ouremployee stock options. Under the modified prospective method, we recordcompensation cost related to unvested stock awards as of December 31, 2005 byrecognizing the unamortized grant date fair value of these awards over theremaining vesting periods of those awards with no change in historical reportedearnings. The Company estimated forfeiture rates for the first six months of2006 based on our historical experience of approximately 2 percent. The Companyrecorded $1,578,692 of stock option expense to general and administrativeexpense in the first six months of 2006. The Black-Scholes model incorporates assumptions to value stock-based awards.The risk-free rate of interest is the related U.S. Treasury yield curve forperiods within the expected term of the option at the time of grant. Thedividend yield on our common stock is assumed to be zero as we have historicallynot paid dividends and have no current plans to do so in the future. Theexpected volatility is based on historical volatility of our common stock sinceit began trading of approximately 40 percent. Prior to January 1, 2006, we accounted for our stock-based compensation usingAccounting Principles Board Opinion No. 25 ("APB No. 25"). Under APB No. 25,compensation expense is recognized for stock options with an exercise price thatis less than the market price on the grant date of the option. For stock optionswith exercise prices at or above the market value of the stock on the grantdate, we adopted the disclosure-only provisions of SFAS No. 123, Accounting ForStock-Based Compensation. We also adopted the disclosure-only provisions of SFASNo. 123 for the stock options granted to our employees and directors.Accordingly, no compensation cost was recognized under APB No. 25. A summary of our stock option activity and related information as of June 30,2006 is as follows: Shares Weighted- Under Average Options Exercise Price Balance at January 1, 2006 9,063,013 $ 1.74 Granted 487,500 2.50 Surrendered (216,666) 2.87 Exercised (525,000) 1.00 Outstanding at June 30, 2006 8,808,847 1.81 Exercisable at June 30, 2006 6,505,519 If the Company applied the fair value provisions of SFAS No. 123, net loss wouldhave been as follows: Six Months Year Ended Ended June 30, December 31, 2005 2005 Net loss attributable to common stockholders, as reported $(2,787,633) $(4,414,933) Deduct: total stock-based compensation expense determined under fair value based method for all amounts, net of related income tax (989,653) (3,133,879) Net loss attributable to common stockholders, pro forma $(3,777,286) $(7,548,812) Basic and diluted loss per share: As reported $ (0.08) $ (0.10) Pro forma (0.10) (0.17) The fair value for these options was estimated at the date of grant using aBlack Scholes pricing model with the following weighted-average assumptions: Six Months Year Ended Ended June 30, December 31, 2005 2005 Risk-free interest rate 4.22% 4.28% Dividend yield - - Weighted-average expected life of options (years) 10 10 Volatility 100% 100% Earnings Per Share: Basic earnings per share amounts are calculated based onthe weighted average number of shares of Common Stock outstanding during eachperiod. Diluted earnings per share is based on the weighted average number ofshares of Common Stock outstanding for the periods, including the dilutiveeffect of stock options, warrants granted, convertible notes, and convertiblePreferred Stock. Dilutive options and warrants that are issued during a periodor that expire or are canceled during a period are reflected in the computationsfor the time they were outstanding during the periods being reported. Optionsand warrants where the exercise price exceeds the average stock price for theperiod are considered anti-dilutive, and therefore are not included in thecalculation of dilutive shares. As the Company was in a net loss position forall periods presented, no convertible instruments have been considered in thediluted earnings per share calculation as the effect would be anti-dilutive. Recently Issued Accounting Pronouncements: In June 2006, the FinancialAccounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48),"Accounting for Uncertainty in Income Taxes". FIN 48 is an interpretation ofFASB Statement No. 109 "Accounting for Income Taxes" and must be adopted by theCompany no later than January 1, 2007. FIN 48 prescribes a comprehensive modelfor recognizing, measuring, presenting, and disclosing in the financialstatements uncertain tax positions that the company has taken or expects to takein its tax returns. The Company is evaluating the impact of adopting FIN 48. NOTE D - INITIAL PUBLIC OFFERING In March 2005 the Company successfully completed its initial public offering(IPO) of common stock. The Company raised approximately $80,000,000 through thesale of 30,685,215 shares at a U.S. dollar equivalent price of $2.89 per share.In conjunction with the IPO the Company was admitted for trading on the AIMmarket of the London Stock Exchange. A portion of the proceeds of the offeringwere used to retire $17,135,000 of long and short term debt. Also, immediatelyprior to the IPO all of the Company's Series A1, A2, B, D and E preferred shareswere converted to common stock as follows: Number of Number Preferred of Common Shares Shares Upon Prior to IPO Conversion Series A1 Redeemable Preferred Stock 322,400 1,935,913Series A2 Redeemable Preferred Stock 135,000 810,633Series B Redeemable Preferred Stock 254,000 1,533,313Series D Redeemable Preferred Stock 23,600 2,240,000Series E Redeemable Preferred Stock 2,889,333 13,406,505 3,624,333 19,926,364 Also in March 2005, the Company converted $2,500,000 of related party debt intocommon stock at a pre-agreed discount to the IPO price. The Company issued1,081,858 shares of common stock and recorded a beneficial conversion feature tointerest expense and additional paid in capital in the amount of $625,000 inconnection with the conversion. NOTE E - STOCKHOLDERS' EQUITY The Company has the authority to issue up to 10,000,000 shares, par value$.00001, of serial preferred stock. The Board of Directors may designate andauthorize the issuance of such shares with such voting power and in such classesand series, and with such designation, preferences and relative participation,optional, or other special rights, qualifications, limitations, or restrictionsas deemed appropriate by the Company's Board of Directors. All previously issued and outstanding preferred shares were converted intocommon shares in conjunction with the Company's March 2005 IPO on the LondonAIM. See note D for conversion details. In conjunction with the IPO the Companyauthorized 10,000,000 preferred shares with a par value of $.00001 each, ofwhich zero were outstanding at June 30, 2006, December 31, 2005, and June 30,2005. Common Stock: As of June 30, 2006, the Company is authorized to issue200,000,000 shares of common stock, par value $.00004 per share. As of June 30,2006, December 31, 2005, and June 30, 2005, the Company had 66,778,066,54,389,787 and 54,046,299 common shares outstanding, respectively. Treasury Stock: The Company has repurchased both common stock and preferredSeries E stock as treasury stock. As of June 30, 2006, December 31, 2005, andJune 30, 2005, the Company had 5,739,855 shares of treasury stock. Of theseamounts, all 5,739,855 shares of treasury stock are comprised of common stock asall series E preferred stock, including series E held in treasury, was convertedto common stock during the Company's IPO. Stock Options: During 2003, the Company re-priced certain outstanding optionsdownward to be more in line with the value of the Company. According to FIN 44,Accounting for Certain Transactions Involving Stock Compensation - AnInterpretation of APB Opinion No. 25, if a fixed stock option or award iscanceled or modified such that a new measurement of compensation cost orvariable accounting is required, compensation cost shall be adjusted forincreases or decreases in the intrinsic value of the modified award insubsequent periods until that award is exercised, is forfeited, or expiresunexercised. However, compensation cost shall not be adjusted below theintrinsic value (if any) of the modified stock option or award at the originalmeasurement date unless the award is forfeited because the employee fails tofulfill an obligation. As of June 30, 2005, there were 631,584 remaining optionssubject to variable accounting. During the six months ended June 30, 2005, theCompany recorded compensation expense of $138,948 related to the re-pricedoptions. Effective January 1, 2006, the Company adopted SFAS 123(R), which doesnot allow this treatment for re-priced stock options. Accordingly, the Companyceased expensing these options beginning as of January 1, 2006. NOTE F - COMMITMENTS AND CONTINGENCIES BJ Services Company Middle East Limited Litigation: In September 2004, BJServices Company Middle East Limited ("BJ Services") filed a claim in TbilisiDistrict Court in Tbilisi, Georgia against FEGL due to non-payment for servicesrendered. BJ Services performed certain oil field services for FEGL between Mayand June 2003; however, the Company has argued that the services were defectiveand that certain other charges were not properly levied. The BJ Services claimwith interest and penalties is $299,375, net of a $160,000 prepayment made bythe Company in advance of the services being undertaken. This matter was settledin May 2005 by payment of $61,146 plus court fees of approximately $1,400. SOCAR Arbitration: In June 1998 Frontera Resources Azerbaijan Corporation ("FRAC"), an indirect wholly owned subsidiary of the Company, entered into aproduction sharing agreement with SOCAR, the State Oil Company of AzerbaijanRepublic, hereafter referred to as the "Azerbaijan PSA". In October 2003, FRAC initiated arbitration proceedings against SOCAR to recoupfunds resulting from SOCAR's halting of exports from the onshore Kursangi &Karabagli oilfields in the Azerbaijan Republic during the fourth quarter of2000. In January 2006, the arbitral panel found that the halting of exports of crudeoil from the Kursangi & Karabagli oil fields was in violation of the AzerbaijanPSA, and FRAC was awarded approximately $1,250,000 plus interest at a rate equalto LIBOR plus 4% from January 1, 2001 until full payment is made. The award alsoincluded a requirement for the Company to pay for certain costs of arbitrationof approximately $254,000 and to pay SOCAR approximately $290,000 for part ofSOCAR's costs of arbitration. The arbitration panel rejected all other claimsand counterclaims between the parties and the arbitration therefore resolves allclaims between Frontera and SOCAR with respect to the Azerbaijan PSA. In February 2006, FRAC filed an action in the United States District Court,Southern District of New York, seeking to enforce the tribunal's award in theUnited States of America. Contemporaneously, SOCAR filed a challenge to theaward with the Swedish Court of Appeals. FRAC intends to vigorously defend thechallenge by SOCAR. No gain or loss from the arbitration ruling has beenrecorded in the Company's consolidated financial statements pending ultimateresolution of the appeal. NOTE F - COMMITMENTS AND CONTINGENCIES Vendor Invoices: In August 2003 and July 2004, the Company settled vendorinvoices of $79,036 and $1,607,214, respectively. The terms of both settlementagreements provided that Frontera would not be responsible to repay theliability unless the Company generated Profit Oil revenues, as defined in theBlock 12 PSA by August 2007 and July 2008, respectively. Because Profit Oil isdetermined based on the recovery of cumulative costs incurred for thedevelopment of Block 12, the Company does not expect to pay these vendors anyadditional amounts under the settlements; however, the costs will continue to beaccrued until the Profit Oil contingency expires. NOTE G - NON-CASH INVESTING AND FINANCING ACTIVITIES The following non-cash transactions took place during the six months ended June30, 2006: • The Company adopted the provisions of SFAS 123R and recorded compensation expense related to the issuance of common stock options in the amount of $1,578,692. • The Company recorded interest income of $264,360 related to an amount previously treated as an unrealized gain. • Related Party Notes Payable of $212,174 were utilized by note holders to fund the exercise of common stock warrants. • The Company recorded forgiveness of debt income of $11,732 related to an old payable deemed to be forgiven. • The Company had accounts payable and accrued liabilities of $4,985,761 which related to investments in oil and gas properties. The following non-cash transactions took place during the year ended December31, 2005: • A 12% Convertible $2,500,000 Note Payable to a related party was converted to common stock at a 20% discount. In conjunction with this transaction the Company recorded a beneficial conversion feature to interest expense and additional paid in capital of $625,000 and the related note payable was retired. This transaction is discussed in further detail in Note C. • A Note Payable to a related party for $3,825,000 and related accrued interest of $370,164 was settled for $1,332,055 resulting in forgiveness of debt income of $2,863,109. • Related Party Notes Payable of $75,906 were utilized by note holders to fund the exercise of common stock warrants. • An entity of the Georgian government acknowledged responsibility of previously accrued social taxes, resulting in forgiveness of debt income of $1,131,134. • A number of old payables were deemed to be forgiven, resulting in forgiveness of debt income of $164,606. The following non-cash transactions took place during the period ended June 30,2005: • A 12% Convertible $2,500,000 Note Payable to a related party was converted to common stock at a 20% discount. In conjunction with this transaction the Company recorded a beneficial conversion feature to interest expense and additional paid in capital of $625,000 and the related note payable was retired. This transaction is discussed in further detail in Note D. • A Note Payable to a related party for $3,825,000 and related accrued interest of $370,164 was settled for $1,332,055 resulting in forgiveness of debt income of $2,863,109. • Related Party Notes Payable of $64,915 were utilized by note holders to fund the exercise of common stock warrants. NOTE H - LINE OF CREDIT During 2006 the Company established a $10,000,000 line of credit with acommercial bank by agreeing to collateralize $15,000,000 of cash and marketablesecurities. The cash and marketable securities can be accessed at any time tothe extent that the line of credit has not been drawn upon. As of June 30, 2006$2,950,000 of the line of credit is not available as it was used to support twoletters of credit for vendors utilized in the Company's drilling program inGeorgia. Accordingly, approximately $4,425,000 of the Company's cash is beingused as collateral and is shown as restricted cash equivalents in the Company'sconsolidated balance sheet. This information is provided by RNS The company news service from the London Stock Exchange