Frontera Resources Regulatory News (FRR)

31 Aug 2005 07:30

Frontera Resources Corporation31 August 2005 FRONTERA RESOURCES CORPORATION August 31, 2005 - Houston, Texas - USA Results for the Period Ended June 30, 2005 and Operational Update Frontera Resources Corporation, an independent oil and gas exploration,development and production company operating in Georgia, today announces itsresults for the period ended June 30, 2005 and provides an update on itsoperations. HIGHLIGHTS * Corporate: - Raised approximately $88.7 million through an initial placing and admission totrading on AIM * Georgia Operations: * Taribani Field Unit: - Selected and prioritized a final list of existing well candidates for newhorizontal drilling operations in fourth quarter - Major contract for fourth quarter 2005 drilling program awarded in August - Contract awarded for fourth quarter seismic acquisition program ahead of the2006 drilling program - Identification of up to 29.9 million barrels of additional resource potentialreserves by Netherland, Sewell and Associates * Basin Edge Play Unit: - Detailed scientific analysis and 'gravity survey' completed - Contract awarded for seismic acquisition program to be shot during fourthquarter ahead of the 2006 drilling program * Mirzaani Field Area Exploration Unit: - Seismic contract awarded for fourth quarter acquisition ahead of the 2006drilling program * Mirzaani Field Area Production Unit - Profitable production continued in the Mirzaani Field AreaProduction Unit * Block 12 Area-wide Field/Prospect Inventory Development Unit - Continued evaluation/prioritization of inventory of existing fields andprospects within Block 12 Steve C. Nicandros, Chairman and Chief Executive Officer, commented: "Since our last update to shareholders in June, I am happy to report that ourplans continue according to schedule as we move towards commencement ofsignificant drilling and geophysical operations in the fourth quarter of thisyear. I am also happy to report that as we continue to advance our work, thefinancial condition of our company is strong. As we enter the second half of2005, we at Frontera remain committed to continued hard work to realize thevalue we believe that our assets hold. I look forward to reporting to you on ourcontinued progress in the months ahead." ENQUIRIES Citigate Dewe Rogerson (+44 20 7638 9571) - Martin Jackson / Rachel Lankester For additional information, please visit Frontera's website at:www.fronteraresources.com CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S STATEMENT Since June, Frontera has advanced its specific work programs throughout our fiveprimary areas of focus in Block 12: The Taribani Field Unit; The Basin Edge PlayUnit; The Mirzaani Field Area Exploration Unit; The Mirzaani Field AreaProduction Unit, and; The Block-wide Field/Prospect Inventory Development Unit.Our work in these areas continues according to plan with a focus on scientificstudies and operational preparations. These efforts are aimed at accessingcommercial production from the 118 million barrels of P3 reserves and 1.4billion barrels of unrisked resource potential that has been identified. As weare only five months into an aggressive three year plan, we are confidentlyapproaching this task with a strong balance sheet. Our results for the first six months of 2005 reflect that we were able tosubstantially strengthen our balance sheet as a result of our public offeringand listing on the AIM market in March. This offering resulted in $88.7 millionof new capital for Frontera. As a result, we were able to significantly reduceour outstanding debt and position the company for undertaking our planned workprograms from a strong financial foundation. We believe that the deployment ofour planned capital programs in our areas of focus will provide the basis foraccessing the value creation potential that we see in our assets as we enter thesecond half of this year. Finally, Frontera's Board of Directors held it's regularly scheduled thirdquarter board meeting in August where it endorsed our company's continuedprogress, as well as the First-Half 2005 Results Report that you will findattached. An update of progress in each of our focus areas within Block 12 since Junefollows below, together with a more detailed overview of our first half results: Taribani Field Unit: Preparation for Q4-2005 Drilling Program: Since June, we continued our work toidentify locations with optimal reservoir conditions for our plannedmultiple-well horizontal drilling program in the Taribani Field. In addition,we produced 2,248 barrels of oil during the second quarter from four existingwells. Our team has completed detailed fracture-identification, hydrogeology andsedimentology studies in our targeted reservoirs at the Taribani Field. Thesestudies have been integrated with the results of new geologic field work andremote satellite imaging analysis that was also completed over the past coupleof months. The result is that we have prioritized a list of existing wells inthe field that are scheduled for re-entry horizontal drilling operations duringthe fourth quarter of this year. We continue to believe that we will need tosee the results of several wells to best assess the optimal developmentpotential of the field. With this advance technical work now complete, our focus has turned tocompleting final procurement and staffing arrangements in order to ensure thatwe are ready to commence drilling operations as planned. To this end, inAugust, Frontera awarded a major contract in support of our upcoming drillingprogram at the Taribani Field. The contract was awarded to an international service subsidiary of TPAO, thestate oil company of Turkey (www.tpao.gov.tr/en/index.html), who will provide adrilling rig and certain associated drilling services for our planned multi-wellhorizontal drilling program. The F-200 drilling rig is currently preparing tomobilize across the border into Georgia from neighboring Turkey. It should beon location and ready to commence drilling operations in November. With theaddition of TPAO to our team, we continue to build a solid foundation forexecution of our drilling program. Preparation for 2006 Drilling Program: Global Geophysical Services, Inc.(www.globalgeophysical.com) will undertake our planned 2D seismic acquisitionprogram over the southwestern portion of the Taribani Field. This program willbe shot during the fourth quarter of this year. To stay within our budget for2005, we plan to acquire 85kms of 2D seismic vs the 140kms that were originallyplanned due to higher than anticipated acquisition costs. We believe that thisrevised program will sufficiently meet our original objectives of enhancing ourunderstanding of the field and establishing the basis for next year's plannedwells in the portion of the field where the seismic will be acquired. Reserves Booking Update: Netherland, Sewell and Associates(www.netherlandsewell.com) have completed analysis on three additional horizonsin the field. They originally identified 118 million barrels of P3 reservesfrom horizons 9, 14, 15 and 19 earlier this year. Since March, their continuedanalysis has resulted in the identification of as much as 29.9 million barrelsof additional resource potential associated with horizons 23, 24 and 25. As thefield continues to grow in potential size, results from our planned seismicprogram over the southwest portion of the field will provide the basis forunderstanding how much additional potential exists in these horizons. Basin Edge Play Unit Since March, work has continued in support of shooting an extensive seismicsurvey over our Basin Edge 'B' and 'C' prospects that are located in thenortheastern portion of Block 12 during the fourth quarter of this year inanticipation of drilling operations on one of these prospects in 2006. Hydrogeology, fracture-identification and sedimentology studies similar to thosewe undertook at the Taribani Field Unit have been completed within the BasinEdge Play Unit. We also successfully finished the acquisition of a 'gravitysurvey' over the Basin Edge 'B' prospect to assist in our understanding of thislarge structure. Global Geophysical Services, Inc. will also undertake our planned 2D seismicacquisition program over the large 'B' and 'C' prospects. This program will beshot during the fourth quarter of this year using vibroseis equipment as well asdynamite. In August, Global's equipment was loaded on a ship at the port ofHouston, Texas U.S.A. where it began its mobilization journey to Georgia. We made the decision to acquire 335kms of 2D seismic instead of the 500kms thatwere originally planned over both prospects in order to stay within our budgetfor the year. This adjusted program will sufficiently establish the basis forselecting a drilling location in one of the prospects for next year. Frontera's objectives within the Basin Edge Play Unit remain focused oncommercially accessing the unrisked resource potential of 1.4 billion barrelsthat have been attributed to the 'B' and 'C' prospects by the independentconsulting firm of Netherland, Sewell and Associates. Mirzaani Field Area Exploration Unit Global Geophysical Services Inc. will also acquire 90 kilometers of new 2Dseismic over mapped prospects within the Mirzaani Field Area Exploration Unit.Due to higher than anticipated acquisition costs, this seismic program wasmodestly reduced from 100 planned kilometers in order to stay within our 2005budget. This program will also be shot during the fourth quarter of this year and willbetter define our existing mapping to select specific drilling locations fornext year's drilling program within this Unit. Hydrogeology, fracture-identification and sedimentology studies similar to thosewe undertook at the Taribani Field Unit and Basin Edge Play Unit have also nowbeen completed within the Mirzaani Field Area Exploration Unit. These studieswill also be integrated with the interpretation of our new seismic to give us abetter understanding of the reservoirs we will be drilling within the Mirzaaniarea. Mirzaani Field Area Production Unit Operations within the Mirzaani Field Area Production Unit yielded an averagedaily production rate of approximately 91 barrels per day of oil during thesecond quarter of 2005. This resulted in a total production for the quarter of8,318 barrels. While this volume is not significant in terms of our long termstrategy, the day to day operations also provide us a platform to develop theproduction expertise which will be required as we unlock the larger reserves inBlock 12. During the second quarter, our operations field staff undertook fieldmaintenance to ensure the continued profitable operations from this Unit. Block 12 Area-Wide Field/Prospect Inventory Development Unit During the second quarter of 2005, our team advanced work on our extensiveinventory of prospects and leads throughout Block 12 with regional geologic andgeophysical studies, including new extensive field work. New maps were completed that integrate surface geology, fractures, oil seeps,dip information, rivers and major streams together with our existing data base.This work will highlight future areas of focus within Block 12 for new drillingoperations outside of our four main areas of focus detailed above. Today, ourinventory consists of more than 20 identified prospects, including severalundeveloped fields. Corporate News Financial Highlights During the first six months of 2005, we significantly improved our balancesheet. In addition to raising $88.7 million as part of our IPO in March, $2.5million of short-term debt and $10.6 million of preferred stock were alsoconverted into common stock. After retiring $17.1 million of debt from a portionof the offering proceeds, we had $60 million in cash and cash equivalents with$3.8 million in long-term debt at June 30, 2005. We experienced a net loss of $2.8 million for the first six months of 2005. Thisloss was due to higher general and administrative costs related to the offeringand our arbitration against SOCAR, partially offset by a gain on income fromretiring a portion of the long-term debt at a discount. Although most of thesecosts are non-recurring, we will continue to spend in accordance with ourapproved programs this year until production increases as a result of ourplanned drilling programs later this year and into next year. Other Highlights SOCAR Arbitration: In July we submitted follow-up information related to thefinal post hearing briefs that were submitted to the arbitration tribunal inMay. As previously reported, we are now waiting for the tribunal to render itsfinal and binding decision related to our arbitration proceedings against SOCAR,the State Oil Company of Azerbaijan Republic. Frontera Resources AzerbaijanCorporation, our wholly owned subsidiary, initiated the arbitration proceedingsagainst SOCAR in October 2003 to recoup funds due to Frontera for oil deliveriesmade between 1999 and 2002. In late 2000, SOCAR halted exports of crude oil fromthe Kursangi & Karabagli oil fields in the Azerbaijan Republic, which we believewas in violation of the Rehabilitation, Exploration, Development and ProductionSharing Agreement between Frontera, SOCAR, Delta/Hess and SOCAR Oil Affiliate. Industry Recognition: The Society of Petroleum Engineers (www.spe.org) hasannounced that it has awarded one of its highest honors, the annual Health,Safety & Environment Award to Terry Thoem, Frontera's Vice President of Health,Safety and Environment. We are very proud of Terry's accomplishments over avery successful career and extend heartfelt congratulations for thisdistinguished honor. He will formally receive this award later this year atSPE's annual reception and banquet that will be held during the month of Octoberin Dallas, Texas. As we enter the second half of 2005, all of us at Frontera remain very committedto continue to work very hard on behalf of all of our shareholders to realizethe value we believe that our assets hold. I look forward to reporting ourcontinued progress in the months ahead. Steve C. Nicandros Chairman and Chief Executive Officer Frontera Resources Corporation This release contains certain forward-looking statements, including, withoutlimitation, expectations, beliefs, plans and objectives regarding transactionsand ventures discussed in this release, as well as reserves and futureproduction. Among the important factors that could cause actual results todiffer materially from those indicated by such forward-looking statements arefuture exploration and development results, availability and costs of neededequipment and personnel, fluctuations in oil and gas prices, general economicconditions and the political situation in Georgia and neighboring countries.There is no assurance that Frontera's expectations will be realized, and actualresults may differ materially from those expressed in the forward-lookingstatements. For additional information, please visit Frontera's website at:www.fronteraresources.com FRONTERA RESOURCES CORPORATION CONSOLIDATED FINANCIAL STATEMENTS Interim Results for the Six Months ended June 30, 2005 FRONTERA RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS Unaudited Audited June 30, June 30, December 31, 2005 2004 2004ASSETS CURRENT ASSETS Cash & cash equivalents $ 60,063,457 $ 563,881 $ 1,503,621 Trade receivables, net - - 507,868 Accounts receivable - other 866,075 3,471,241 637,816 Inventory 2,084,346 189,673 1,700,359 Prepaid expenses and other 109,243 40,467 138,057 TOTAL CURRENT ASSETS 63,123,121 4,265,262 4,487,721 PROPERTY AND EQUIPMENT, net 319,710 455,619 213,011 OIL AND GAS PROPERTIES, full cost method Properties being depleted 24,503,780 21,708,054 24,213,991 Properties not subject to depletion 144,376 144,376 144,376 24,648,156 21,852,430 24,358,367 Less: accumulated depletion (20,405,102) (20,292,161) (20,328,697) NET OIL AND GAS PROPERTIES 4,243,054 1,560,269 4,029,670 TOTAL ASSETS $ 67,685,885 $ 6,281,150 $ 8,730,402 Unaudited Audited June 30, June 30, December 31, 2005 2004 2004LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 176,334 $ 4,116,808 $ 576,338 Accrued liabilities 1,863,147 1,135,809 2,086,269 Accrued interest 91,619 611,277 1,586,530 Deferred gain - 1,458,168 - Line of credit - - 850,670 Current portion of notes payable, related - 9,259,544 12,784,011 party TOTAL CURRENT LIABILITIES OTHER THANSHARES 2,131,100 16,581,606 17,883,818 REDEEMABLE PREFERRED SHARES Series A1, stated at redemption value - 4,700,074 4,804,856 Series A2, stated at redemption value - 1,968,085 2,011,959 Series B, stated at redemption value - 3,723,216 3,805,767 TOTAL REDEEMABLE PREFERRED SHARES - 10,391,375 10,622,582 TOTAL CURRENT LIABILITIES 2,131,100 26,972,981 28,506,400 NOTES PAYABLE Related party, less current portion 403,604 5,103,049 6,403,604 Vendor 3,450,941 - 3,450,941 TOTAL NOTES PAYABLE 3,854,545 5,103,049 9,854,545 OTHER LONG-TERM LIABILITIES 2,327,367 2,419,044 2,419,044 TOTAL LIABILITIES 8,313,012 34,495,074 40,779,989 STOCKHOLDERS' EQUITY (DEFICIT) Convertible preferred stock - Series D - - - - Convertible preferred stock - Series E - - 29 29 Common stock 2,164 242 242 Additional paid-in capital 142,595,235 48,373,535 48,382,082 Common stock warrants 31,974 36,927 36,927 Treasury stock, at cost (567,832) (566,332) (567,832) Accumulated deficit (82,688,668) (76,058,325) (79,901,035) TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 59,372,873 (28,213,924) (32,049,587) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT) $ 67,685,885 $ 6,281,150 $ 8,730,402 FRONTERA RESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Audited Six Months Ended Year Ended June 30, June 30, December 31, 2005 2004 2004 REVENUE Crude oil sales $ 351,302 $ 301,925 $ 1,040,656 TOTAL REVENUE 351,302 301,925 1,040,656 EXPENSES Field operating and project costs 154,919 55,447 189,148 General and administrative 4,746,921 1,194,531 4,035,327 Depreciation, depletion and amortization 298,272 225,667 525,902 TOTAL EXPENSES 5,200,112 1,475,645 4,750,377 LOSS FROM OPERATIONS (4,848,810) (1,173,720) (3,709,721) OTHER INCOME (EXPENSE) Forgiveness of debt income 2,863,109 114,919 114,920 Interest income 430,819 - - Interest expense (1,232,485) (709,141) (2,019,378) Other, net (266) 5,738 9,265 TOTAL OTHER INCOME (EXPENSE) 2,061,177 (588,484) (1,895,193) NET LOSS $ (2,787,633) $ (1,762,204) $ (5,604,914) Net loss Per Common Share: Basic and diluted $ (.08) $ (.29) $ (0.94) Weighted Average Common Shares Outstanding: Basic and diluted 35,993,168 5,990,372 5,994,276 FRONTERA RESOURCES CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)PERIODS ENDED JUNE 30, 2005 AND DECEMBER 31, 2004 Convertible Convertible Common Additional Preferred Preferred Stock Paid-in Stock Stock Capital Series D Series EBalance, $ - $ 29 $ 240 $ 43,183,632December 31,2003 Exercise of - - 2 1,198common stockwarrants Repurchase - - - 5,189,902of preferredstock SeriesE warrants Issuance of - - - 7,350common stockoptions forservices Purchase of - - - -treasurystock Net loss - - - - Balance, - 29 242 48,382,082December 31,2004 Exercise of - - 81 69,787common stockwarrants Issuance of - - 1,228 80,168,950commonstock, netof offeringcosts Compensation - - - 138,948expense fromrepricing ofstockoptions Conversion - - 43 3,124,957of bridgeloan tocommonstock Conversion - - 172 10,710,880of SeriesA1, A2 & Bpreferredstock tocommonstock Convert - (29) 398 (369)Series D & Eto commonstock Net loss - - - - Balance, $ - $ - $ 2,164 $ 142,595,235June 30,2005(Unaudited) Preferred Common Treasury Accumulated Total Stock Stock Stock Deficit Stockholders' Warrant Warrants DeficitBalance, $ 5,268,936 $ 36,927 $ (495,366) $ (74,296,121) $ (26,301,723)December 31,2003 Exercise of - - - - 1,200common stockwarrants Repurchase (5,268,936) - - - (79,034)of preferredstock SeriesE warrants Issuance of - - - - 7,350common stockoptions forservices Purchase of - - (72,466) - (72,466)treasurystock Net loss - - - (5,604,914) (5,604,914) Balance, - 36,927 (567,832) (79,901,035) (32,049,587)December 31,2004 Exercise of - (4,953) - - 64,915common stockwarrants Issuance of - - - - 80,170,178commonstock, netof offeringcosts Compensation - - - - 138,948expense fromrepricing ofstockoptions Conversion - - - - 3,125,000of bridgeloan tocommonstock Conversion - - - - 10,711,052of SeriesA1, A2 & Bpreferredstock tocommonstock Convert - - - - -Series D & Eto commonstock Net loss - - - (2,787,633) (2,787,633) Balance, $ - $ 31,974 $ (567,832) $ (82,688,668) $ 59,372,873June 30,2005(Unaudited) FRONTERA RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Audited Six Months Ended Year Ended June 30, June 30, December 31, 2005 2004 2004 CASH FLOWS FROM OPERATING ACTIVITIESNet loss $ (2,787,633) $ (1,762,204) $ (5,604,914)Adjustments to reconcile net loss to net cashused in operating activities: Depreciation, depletion and amortization 298,272 225,667 525,902 Interest on redeemable preferred shares 88,470 231,204 462,410 Beneficial conversion of bridge loan 625,000 - - Net amortization of debt discounts - - (74,832) Common stock options issued forcompensation 138,948 - 7,350 Forgiveness of debt income (2,863,109) (114,920) (114,920)Changes in operating assets and liabilities: Receivables 279,609 (813,500) (450,211) Inventory (383,987) 873 43,774 Prepaid expenses and other 28,815 - 123,035 Accounts payable (400,004) 480,195 (1,014,335) Accrued liabilities (223,122) 461,650 (985,600) Accrued interest (1,157,401) 119,329 1,094,582 NET CASH USED IN OPERATING ACTIVITIES (6,356,142) (1,171,706) (5,987,759) CASH FLOWS FROM INVESTING ACTIVITIES Investment in oil and gas properties (618,356) - - NET CASH USED IN INVESTING ACTIVITIES (618,356) - - CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing/(repayment) from line ofcredit (850,670) - 850,670 Proceeds from related party notes - 1,725,288 6,630,711 Repayment of other long term liability (91,677) - - Exercise of common stock warrants - - 1,200 Payment on related party notes (13,693,497) - - Proceeds from issuance of common stock, net 80,170,178 - -of offering costs Purchase of treasury stock - (150,000) (151,500) NET CASH PROVIDED BY FINANCINGACTIVITIES 65,534,334 1,575,288 7,331,081 Unaudited Audited Six Months Ended Year Ended June 30, June 30, December 31, 2005 2004 2004 NET INCREASE IN CASH AND CASH EQUIVALENTS 58,559,836 403,582 1,343,322 CASH AND CASH EQUIVALENTS - BEGINNING OFPERIOD 1,503,621 160,299 160,299 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 60,063,457 $ 563,881 $ 1,503,621 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 1,856,505 $ 358,709 $ 555,374 FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 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. Prior to 2002, the Company's other significant operating focuswas on the exploration and development of an oilfield within the AzerbaijanRepublic ("Azerbaijan"), which was sold during 2002 and all operating activitiesin Azerbaijan ceased at that time. 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 12PSA can be extended if commercial production remains viable upon its expirationin June 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. Followingrecovery of cumulative costs and expenses from Block 12 production, theremaining crude oil sales, referred to as Profit Oil, are allocated betweenGeorgian Oil and Frontera 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 governmentagency, subdivision, municipal or local authorities within the Government ofGeorgia. NOTE B - BASIS OF PRESENTATION The Frontera Resources Corporation unaudited consolidated financial statementsas of, and for the period ended June 30,2005 should be read in conjunction withthe Company's audited financial statements for the years ended December 31,2004, 2003 and 2002, which were filed in the Company's offering memorandum inconjunction with the initial public offering in March of 2005. 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. FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include theaccounts of Frontera Resources Corporation ("FRC") and its 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 theCompany. All significant inter-company transactions and accounts have beeneliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity withaccounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the period. Actual results could differ from those estimates. 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. Stock-Based Compensation: In accordance with the provisions of Statement ofFinancial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-BasedCompensation", the Company has elected to follow the Accounting PrinciplesBoard's Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25")and related interpretations in accounting for its employee stock-basedcompensation plans. Under APB 25, if the exercise price of the Company'semployee stock options equals or exceeds the fair value of the underlying stockon the date of grant as determined by the Company's Board of Directors, nocompensation expense is recognized. FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) If the Company applied the fair value provisions of SFAS No. 123, net loss wouldhave been as follows: Six Months Ended Year Ended June 30, June 30, December 31, 2005 2004 2004 Net loss attributable to common stockholders,as reported $ (2,787,633) $ (1,762,204) $ (5,604,914) Deduct: total stock based compensation expensedetermined under fair value based method forall amounts, net of related income tax (989,653) (2,625) (5,250) Net loss attributable to common stockholders,pro forma $ (3,777,286) $ (1,764,829) $ (5,610,164) Basic loss per share: As reported $ (0.08) $ (0.29) $ (0.94) Pro forma (0.10) (0.29) (0.94) Diluted loss per share: As reported $ (0.08) $ (0.29) $ (0.94) Pro forma (0.10) (0.29) (0.94) 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 Ended Year Ended June 30, June 30, December 31, 2005 2004 2004 Risk-free interest rate 4.22% 2.64% 2.64% Dividend yield - - - Weighted-average expected life ofoptions (years) 10 10 10 FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 December 2004, the FASB issuedSFAS No. 123R, SHARE-BASED PAYMENT (SFAS 123R). SFAS 123R revises SFAS No. 123,ACCOUNTING FOR STOCK-BASED COMPENSATION, and focuses on accounting forshare-based payments for services by employer to employee. The statementrequires companies to expense the fair value of employee stock options and otherequity-based compensation at the grant date. The statement does not require acertain type of valuation model and either a binomial or Black-Scholes model maybe used. The provisions of SFAS 123R are effective for financial statements forannual periods beginning after December 15, 2005. The Company is currentlyevaluating the method of adoption and the impact on our operating results. TheCompany's future cash flows will not be impacted by the adoption of thisstandard. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and ErrorCorrections," which is effective for the Company beginning on January 1, 2006.SFAS No. 154 requires that all voluntary changes in accounting principles areretrospectively applied to prior financial statements as if that principle hadalways been used, unless it is impracticable to do so. When it is impracticableto calculate the effects on all prior periods, SFAS No. 154 requires that thenew principle be applied to the earliest period practicable. The adoption ofSFAS No. 154 is not anticipated to have a material effect on our financialposition or results of operations. 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. Inconjunction with the IPO the Company was admitted for trading on the AIM marketof the London Stock Exchange. A portion of the proceeds of the offering wereused 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: FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 NOTE D - INITIAL PUBLIC OFFERING (Continued) Number of Number of Preferred Shares Common shares prior to IPO Upon 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 Convertible Preferred Stock 23,600 2,240,000Series E Convertible 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. As of June 30, 2005, all previously issued and outstanding preferred shares wereconverted into common shares in conjunction with the Company's March 2005 IPO onthe London AIM. See note D for conversion details. In conjunction with thepublic offering the Company authorized 10,000,000 preferred shares with a parvalue of .00001 each, of which zero were outstanding at June 30, 2005. Common Stock: As of June 30, 2005, the Company is authorized to issue200,000,000 shares of common stock, par value $.00004 per share. As of June 30,2005 and December 31, 2004, the Company had 54,046,299 and 6,027,872, commonshares outstanding, respectively. Treasury Stock: The Company has repurchased both common stock and preferredSeries E stock as treasury stock. As of June 30, 2005 and December 31, 2004,the Company had 5,739,855 and 1,265,433, shares of treasury stock, respectively. Of these amounts, 5,739,855 and 36,209 shares of treasury stock are comprisedof common stock in 2005 and 2004, respectively. FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 NOTE E - STOCKHOLDERS EQUITY (Continued) 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 the intrinsic value (ifany) of the modified stock option or award at the original measurement dateunless the award is forfeited because the employee fails to fulfill anobligation. As of June 30, 2005, there are 631,584 remaining options subject tovariable accounting. During the six months ended June 30, 2005 the Companyrecorded compensation expense of $138,948 related to the re-priced options. NOTE F - COMMITMENTS AND CONTINGENCIES SOCAR Arbitration: In June 1998, the Company, through its wholly ownedsubsidiary FRAC, entered into a production sharing agreement with SOCAR,hereafter referred to as the "Azerbaijan PSA". The Azerbaijan PSA coveredonshore oilfields in an area of Azerbaijan known as the K&K Block. The Companyand an operating partner undertook an exploration and development program on theK&K Block. In October 2003, FRAC initiated arbitration proceedings against SOCAR to recoupfunds due to FRAC for oil deliveries made between 1999 and 2002. The AzerbaijanPSA provided that arbitration shall be governed by the United NationalCommission on International Trade Law rules on arbitration and a hearing washeld in March 2005 in Stockholm, Sweden. A ruling from the tribunal is expectedin the third quarter of 2005. FRAC is seeking damages from SOCAR for threeseparate breaches for non-payment totaling approximately $15.7 million, plusinterest and certain costs. At this point, the outcome of the claim againstSOCAR cannot be reasonably determined and no gain has been recognized by theCompany with respect to any potential outcome of the arbitration hearing orsubsequent rulings. SOCAR has alleged a counter-claim against FRAC for up to $11.2 million, arguingthat FRAC underpaid SOCAR the difference between local market obligation valueand the world market value of the oil which SOCAR alleges should have beendelivered in 1999 and 2000. Frontera management believes the counter-claim iswithout merit and no reserve has been made in the accounts of the Company. FRONTERA RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 2005 NOTE G - NON-CASH INVESTING AND FINANCING ACTIVITIES The following non-cash transactions took place during the period ended June 30,2004: During 2004, the Company transferred a vendor account payable of $1,607,214 tolong-term liabilities upon the negotiation of a settlement agreement which willnot be recognized as income from forgiveness of debt until 2008. The following non-cash transactions took place during the year ended December31, 2004: The Company converted a vendor account payable of $3,450,941 into a note payablewhich matures in 2007. During 2004, the Company transferred a vendor account payable of $1,607,214 tolong-term liabilities upon the negotiation of a settlement agreement which willnot be recognized as income from forgiveness of debt until 2008. During 2004, the Company reacquired oil & gas properties of $2,532,598 byagreeing to forgive a $1,962,268 payable with the operator and by assuming thepayables and accrued liabilities of the operator. Included in this transactionwas the assumption of $3,802,712 in current liabilities and the acquisition ofcurrent assets of $1,270,114. At the time this transaction closed, the Companyreversed the existing $1,458,168 deferred gain associated with the 2003 sale ofan interest in the property which was never recognized. The following non-cash transactions took place during the six months ended June30, 2005: During 2005, a 12% Convertible $ 2,500,000 Note Payable to a related party wasconverted to common stock at a 20% discount. In conjunction with thistransaction the Company recorded a beneficial conversion feature to interestexpense and additional paid in capital of $625,000 and the related note payablewas retired. This transaction is discussed in further detail in Note D. During 2005 a Note Payable to a related party for $3,825,000 and related accruedinterest of $370,164 was settled for $1,332,055 resulting in forgiveness of debtincome of $ 2,863,109. During 2005, Related Party Notes Payable of $64,915 were utilized by noteholders to fund the exercise of common stock warrants with a total exerciseprice of $64,915. This information is provided by RNS The company news service from the London Stock Exchange