Frontera Resources Regulatory News (FRR)

31 May 2007 07:03

Frontera Resources Corporation31 May 2007 FRONTERA RESOURCES CORPORATION Houston, Texas U.S.A., May 31, 2007 PRIVATE PLACEMENT OF ADDITIONAL CONVERTIBLE NOTES AND ANNOUNCEMENT OF 2006 FINAL RESULTS Frontera Resources Corporation (London Stock Exchange, AIM Market - Symbol:FRR), an independent oil and gas exploration and production company, todayannounces the private placement of a second tranche of Convertible Notes (Notes)and final results for the year ended 31 December 2006. This announcement follows the Private Placement of Convertible Notes andOperational Update announced on 9 May 2007. SUMMARY $20.5 Million Raised In Additional Private Placement • $20.5 million raised through a private placement of convertible unsecured notes due May 2012. This placement is in addition to $46.5 million raised through an initial private placement described in the announcement of 9 May 2007 which said that the company might issue additional notes within 30 days of the initial issue. The additional Notes have been issued on the same terms and in accordance with the provisions of the initial placement. • Net proceeds to support Frontera's exploration and development projects in Block 12, Georgia. 2006 Results • Results for the year ended 31 December 2006 reflect a net loss of $9.7 million reflecting the early stage nature of the portfolio and expenditures to evaluate the company's primary business units of undeveloped fields and exploration opportunities. • Strong year end 2006 cash position, enhanced by recent $67 million placement to aggressively pursue planned exploration and development work programs. Operations Update • Taribani Field Unit - Planned 20-well development program for Zone 9 remains on schedule to begin with re-entry and re-completion of Dino #2 well in June, followed by two new development wells this year. Eight additional Zone 9 wells planned in 2008. • Basin Edge Play Unit - Drilling at Basin Edge 'C' Prospect, Lloyd #1 well, on schedule to commence in July to evaluate multiple objectives, with a primary Cretaceous target. • Mirzaani Field Area Production Unit - Q1 2007 oil sales totalled U.S. $1.1 million, with two new wells and up to five new re-entries in undeveloped portions of the field scheduled during second half of 2007. Steve C. Nicandros, President and Chief Executive Officer, commented: "We are very pleased to have completed the placement of an additional $20.5million of convertible notes in order to provide us with the ability toaggressively pursue our planned exploration and development programs in a mannerthat is commensurate with the significant potential that our historicalinvestments have identified. Results from 2006 reflect investments related toextensive geophysical and drilling appraisal programs ahead of commencing newexploration and development drilling this year. As a result, the remainder of2007 finds our company technically well positioned and strategically well fundedin order to undertake its largest drilling campaign ever to realize value fromour outstanding portfolio. " Enquiries: Frontera Resources CorporationLiz WilliamsonVice President, Investor Relations and Corporate CommunicationsHouston Office: (713) 585-3216 Brunswick Group LLPPatrick Handley / Mark AntelmeLondon: +44 207 4045959 Notes to Editors: 1. Frontera Resources Corporation is an independent Houston, Texas, U.S.A.-based international oil and gas exploration and production company whosestrategy is to identify opportunities and operate in emerging markets around theworld. 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. 2. The reserve information herein was determined by the independent consultingfirm of Netherland, Sewell & Associates in accordance with the petroleumresource definitions adopted by the Society of Petroleum Engineers (SPE), WorldPetroleum Council (WPC) and the American Association of Petroleum Geologists(AAPG) in 2000. 3. 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, future drilling, development and production. Amongthe important factors that could cause actual results to differ materially fromthose indicated by such forwardlooking statements are future exploration anddevelopment results, availability and performance of needed equipment andpersonnel, seismic data, fluctuations in oil and gas prices, weather conditions,general economic conditions and the political situation in Georgia andneighboring countries. There is no assurance that Frontera's expectations willbe realized, and actual results may differ materially from those expressed inthe forward-looking statements. For more information, please see www.fronteraresources.com PRESIDENT AND CHIEF EXECUTIVE OFFICER'S STATEMENT I am pleased to report that Frontera Resources continues to make good progresstoward realizing the significant value that our historical investments haveidentified in the country of Georgia. As a result of encouraging results fromour extensive geologic, geophysical and operational work programs in 2006, weare set to commence new drilling campaigns during the second half of 2007 acrossthree of our four primary business units within Block 12. Accordingly, 2007 willfind our company undertaking its largest drilling campaign ever with elevenwells planned. Throughout 2006 and during the first quarter of 2007, Frontera made importantstrides toward realizing value from its assets through a continued dedication tothe utilization of advanced technical and analytical applications to our ongoingprojects. We have successfully complemented this with strategic efforts toensure that we have the financial strength to undertake the work programs thatwe believe are necessary to achieve our overall business objectives. In 2006, we made concerted efforts to process, interpret and map recentlyacquired 2D geophysical programs, and we acquired an important new 3Dgeophysical survey over one of our largest prospects. The results of this workhave encouraged us to undertake new drilling in the Basin Edge Play Unit and theTaribani Field Unit in 2007, while also providing the basis for new drillingthrough a farmout at the Mirzaani Field Area Exploration Unit. Moreover, theprogress of our drilling campaign at the Taribani Field Unit makes us optimisticthat we are closer to our objective of achieving sustained commerciality fromthis large undeveloped field. Although we did not achieve this objective in 2006due to certain technical challenges that were encountered, the results weobtained have nonetheless permitted us to identify specific solutions and nowembark with confidence on the commencement of an extensive development planassociated with one of the twelve known reservoirs within the field. Inaddition, new field study work at the Mirzaani Field Area Production Unit showedus that we have the potential to increase our existing production and cash flowfrom this underdeveloped asset and this is the basis for a new drilling campaignin 2007. Finally, continued evolution of our large inventory of remainingundeveloped fields, prospects and leads continued such that we see extensiveprospectivity for many years to come from Block 12 as a major core area for ourcompany. 2006 Financial Highlights Our 2006 financial results reflected the ongoing investment profile necessary toevaluate and evolve our portfolio of undeveloped fields and explorationopportunities with the goal of generating significant production and revenue inthe near future. For the year ending December 31, 2006, we incurred a net lossof $9.7 million, or $0.15 per share on a fully diluted basis. This loss comparedto a net loss of $4.4 million, or $0.10 per share for fiscal year 2005. Theincrease in the net loss was due primarily to lower revenues at our MirzaaniField Area Production Unit related to timing of crude oil sales, as crude oilproduced in the second half of 2006 was not sold until early 2007 and highergeneral and administrative costs related to preparation for the extensive 2007drilling campaign. Operating expenses were $14.3 million in 2006, an increase of $3.9 million from$10.4 million in 2005. Both years included charges that caused general andadministrative expenses to be higher than normal. In 2006, we incurred a $3.1million non-cash charge related to the expensing of stock options in accordancewith provisions of SFAS 123R. In 2005, expenses included non-recurring costsrelated to Frontera's IPO and arbitration proceedings with SOCAR. Excludingthese charges in both years, general and administrative expenses in 2006increased by $3.6 million compared to 2005 owing to additional costs associatedwith being a public company and the ramp-up of our drilling and seismicoperations work programs in Georgia. We realized other income of $3.8 million in 2006, which was a decrease of $0.4million from $4.2 million in 2005. Both years included income from forgivenessof debt. In 2005, we realized forgiveness of debt income of $4.2 million fromretiring a portion of the long-term debt at a discount. In 2006, forgiveness ofdebt income was realized by writing-off $2.3 million of long-term liabilities.In addition, interest expense in 2006 was $1.1 million lower than in 2005 as aresult of a significant portion of the long-term debt being repaid in 2005. Due to the exploration and undeveloped nature of our portfolio of assets, it iscrucial to have sufficient capital to pursue necessary work programs designed tobring these holdings into production. In 2006, we continued our commitment tomaintaining a strong balance sheet and to having sufficient cash to fundadvanced technical work programs. At year end 2006, we had a strong balancesheet with almost $25 million in cash and marketable securities and only $3.5million in debt. Combined with the net proceeds from the recent $67 millionprivate placement, Frontera has sufficient funds to advance current work plansfor each of its existing Business Units. 2006 Operational Highlights • Taribani Field Unit - Drilling results, reservoir analysis and new mapping from recently acquired 2D seismic data provided the basis for focusing on the development of Zone 9 in 2007. Results revealed a better understanding of target reservoirs and permitted the design of specific technical solutions for completing new wells in order to manage sediment production as we produce oil. Based on this, a 36-month, 20-well development program for Zone 9 has been designed to commence with three wells in 2007, followed by eight wells in 2008. Zone 9 contains approximately 17% of the 118 million barrels of P3 reserves that have been identified within the field. • Basin Edge Play Unit - Building on our philosophy of utilizing advanced geologic and geophysical data to guide drilling programs, we conducted extensive processing, interpretation and mapping of recently acquired 2D seismic data related to the large "B" and "C" prospects. Encouraged by this work, we acquired a new 80-square kilometer 3D seismic survey over the "C" prospect. Further processing, interpretation and mapping of this survey revealed a prospect of about 55 square kilometers in size, approximately 20% larger than originally contemplated. This work provided the basis to commence new drilling at this prospect in 2007. Total resources within our two prospects are estimated to be in excess of one billion barrels of recoverable oil. • Mirzaani Field Area Production Unit - For 2006, oil sales revenue from this business unit totaled $0.5m and provided the basis for continued profitable operations, with an additional $1.1 million realized early in the first quarter of 2007 from a planned oil sale that slipped just beyond the end of the 2006 calendar year. A 2006 study of the Mirzaani Field revealed an opportunity to enhance existing production and book additional reserves through re-entries of existing wells and new drilling within the field from undeveloped locations. As a result, two new wells and up to five re-entries are scheduled for 2007. • Mirzaani Field Area Exploration Unit - Processing, interpretation and mapping was completed on recently acquired geophysical data focused on the Mirzaani Deep Prospect situated directly below the currently producing Mirzaani Field. Our work revealed a larger than originally mapped structure. In order to accelerate testing of this important prospect in parallel with ongoing operations in our other business units, an effort is currently underway to seek a farm-out partner with which to undertake new drilling operations as soon as possible. In 2006, Frontera delivered another year of strong performance in the areas ofhealth, safety, and environmental stewardship. I am happy to report that acrossall areas of our business, we conducted our operations with respect and care forour employees, contractors, communities, and the environments in which weoperate. We continually strive for zero harm to people and the environment. Outlook In 2007, we are fortunate to find ourselves undertaking an aggressive newdrilling campaign in the midst of a strong oil price environment. Marketconditions strongly support our business plan. However, this favorableenvironment also challenges us with long lead times for sourcing equipment andmaterials. These lead times caused our plans to commence drilling operations atthe Basin Edge Play Unit in the second quarter of 2007 to be slightly delayeduntil July. Maintaining our financial strength is proving essential to ensurethat our operational plans can continue to be thorough and remain on schedule. The year 2007 should prove to be a year of revealing important results for ourcompany. While our recipe for conducting the exploration and production businessis a methodical one, my colleagues and I believe that it is one that will mostappropriately mitigate the risk of our investments and ensure the best possiblechance to achieve the results we are seeking. To this end, we are operating witha strong sense of urgency to deliver profitable results from our measured workprograms. This is our foremost objective. On behalf of Frontera's Board of Directors and employees, I am very grateful tothe government and people of Georgia for working in partnership with ourCompany. Our relationship will undoubtedly yield important benefits foreveryone, including all of Frontera's shareholders around the world. Georgia'scontinued commitment to creating a democratically stable political system and astrong economic climate continues to provide attractive encouragement for directforeign investment. This is significant in that the overall environment forinvestment in Georgia has never been as strong as it is today. Thank you for your continued interest and investment in Frontera Resources.Please know that the dedicated men and women of our company are all working veryhard each and every day to reward this confidence by realizing value as soon aspossible from the significant potential that our historical investments haveidentified. Steve C. NicandrosPresident and Chief Executive Officer Report of Independent Auditors To the Board of Directors of Frontera Resources Corporation: In our opinion, the accompanying consolidated balance sheet and the relatedconsolidated statements of operations, stockholders' equity and cash flowspresent fairly, in all material respects, the financial position of FronteraResources Corporation and its subsidiaries (the "Company") at December 31, 2006,and the results of their operations and their cash flows for the year then endedin conformity with accounting principles generally accepted in the United Statesof America. These consolidated financial statements are the responsibility ofthe Company's management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit. We conducted our audit ofthese statements in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion. Thefinancial statements of the Company as of December 31, 2005 and for the yearthen ended were audited by other auditors whose report dated January 28, 2006expressed an unqualified opinion on those statements. As discussed in Note 2 to the consolidated financial statements, the Companychanged the manner in which it accounts for share-based compensation in 2006. PricewaterhouseCoopers LLP May 7, 2007 Frontera Resources Corporation and SubsidiariesConsolidated Balance SheetsDecember 31, 2006 and 2005 2006 2005AssetsCurrent assets Cash and cash equivalents $ 9,927,181 $ 19,586,747 Restricted cash equivalents - 250,000 Restricted short-term investments - 2,950,000 Marketable securities 14,823,000 30,600,000 Accounts receivable 139,107 146,300 Inventory 3,124,858 1,970,128 Prepaid expenses and other current assets 267,720 568,804 ------------ ----------- Total current assets 28,281,866 56,071,979 ------------ -----------Property andequipment, net 1,081,213 1,482,221Oil and gas properties, full cost method Properties being depleted 23,750,981 23,750,981 Properties not subject to depletion 27,631,505 5,929,994 ------------ ----------- 51,382,486 29,680,975Less:Accumulateddepletion (21,107,707) (20,685,118) ------------ ------------ Net oil and gas properties 30,274,779 8,995,857 ------------ ------------ Total assets $ 59,637,858 $ 66,550,057 ------------ ------------Liabilities and Stockholders' EquityCurrent liabilities Accounts payable $ 566,396 $ 601,227 Accrued liabilities 502,454 1,758,043 Accrued interest 15,550 114,266 Current maturities of notes payable-vendor 3,450,941 - Current maturities of notes payable-related party 51,097 403,604 ------------ ------------ Total current liabilities 4,586,438 2,877,140Notespayable-vendor - 3,450,941Otherlong-termliabilities 41,669 2,327,366 ------------ ------------ Total liabilities 4,628,107 8,655,447 ------------ ------------Commitments and contingenciesStockholders' equity Common stock 2,818 2,178 Additional paid-in capital 149,499,177 142,480,721 Common stock warrants 1,266 31,151 Treasury stock, at cost (567,832) (567,832) Accumulated deficit (94,050,228) (84,315,968) Accumulated other comprehensive income 124,550 264,360 ------------ ------------ Total stockholders' equity 55,009,751 57,894,610 ------------ ------------ Total liabilities and stockholders' equity $ 59,637,858 $ 66,550,057 ------------ ------------ The accompanying notes are an integral part of these consolidated financial statements. Frontera Resources Corporation and SubsidiariesConsolidated Statements of OperationsYears Ended December 31, 2006 and 2005 2006 2005 Revenue - crude oil sales $ 758,630 $ 1,809,427Operating expensesField operating and project costs 1,407,321 1,466,364General and administrative 11,920,999 8,354,984Depreciation, depletion and amortization 963,678 610,320 ------------ ------------- Total operating expenses 14,291,998 10,431,668 ------------ ------------- Loss from operations (13,533,368) (8,622,241) ------------ -------------Other income (expense)Forgiveness of debt 2,339,098 4,158,861Interest income 1,698,352 1,445,624Interest expense (267,958) (1,384,583)Other, net 29,616 (12,594) ------------ ------------- Total other income (expense) 3,799,108 4,207,308 ------------ ------------- Net loss $ (9,734,260) $ (4,414,933) ------------ -------------Loss per shareBasic and diluted $ (0.15) $ (0.10)Number of shares used in calculating loss per shareBasic and diluted 63,113,205 45,206,970 The accompanying notes are an integral part of these consolidated financial statements. Frontera Resources Corporation and SubsidiariesNotes to Consolidated Financial StatementsDecember 31, 2006 and 2005 Convertible Accumulated Preferred Additional Common Other Total Stock Common Paid-in Stock Treasury Accumulated Comprehensive Stockholders' Series E Stock Capital Warrants Stock Deficit Income Equity Balances atDecember 31,2004 $ 29 $ 242 $ 48,382,082 $ 36,927 $ (567,832) $ (79,901,035) $ - $ (32,049,587) Exercise ofcommon stockwarrants - 94 81,588 (5,776) - - - 75,906Issuance ofcommon stock,net ofoffering costs - 1,229 80,168,951 - - - - 80,170,180Compensationexpense fromrepricing ofstock options - - 12,632 - - - - 12,632Conversion ofbridge loan tocommon stock,includingbeneficialconversion - 43 3,124,957 - - - - 3,125,000Conversion of Series A1, A2 and Bredeemablepreferredstock tocommon stock - 172 10,710,880 - - - - 10,711,052Conversion of Series D and E preferredstock tocommon stock (29) 398 (369) - - - - -Unrealizedgain onmarketablesecurities - - - - - - 264,360 264,360Net loss - - - - - (4,414,933) - (4,414,933) ___________________________________________________________________________________________________________Totalcomprehensiveloss for theyear - - - - - - - (4,150,573) ___________________________________________________________________________________________________________Balances atDecember 31,2005 - 2,178 142,480,721 31,151 (567,832) (84,315,968) 264,360 57,894,610Exercise ofcommon stockwarrants - 619 3,428,262 (29,885) - - - 3,398,996Exercise ofcommon stockoptions - 21 524,979 - - - - 525,000Compensationexpense-commonstock options - - 3,065,215 - - - - 3,065,215Unrealizedgain onmarketablesecurities - - - - - - 397,993 397,993Reclassification adjustment for gains onmarketablesecuritiesincluded innet income - - - - - - (537,803) (537,803)Net loss - - - - - (9,734,260) - (9,734,260) ___________________________________________________________________________________________________________Totalcomprehensiveloss for theyear - - - - - - - (9,874,070) ___________________________________________________________________________________________________________Balances atDecember 31,2006 $ - $ 2,818 $ 149,499,177 $ 1,266 $ (567,832) $ (94,050,228) $ 124,550 $ 55,009,751 ___________________________________________________________________________________________________________ The accompanying notes are an integral part of these consolidated financial statements. Frontera Resources Corporation and SubsidiariesConsolidated Statements of Cash FlowsYears Ended December 31, 2006 and 2005 2006 2005 Cash flows from operating activitiesNet loss $ (9,734,260) $ (4,414,933)Adjustments to reconcile net loss to net cash used inoperating activities Depreciation, depletion and amortization 963,678 610,320 Gain on sale of asset (85,000) - Interest on redeemable preferred shares - 88,470 Beneficial conversion of bridge loan - 625,000 Amortization of warrants 72,504 - Stock based compensation 3,065,215 12,632 Forgiveness of debt (2,339,098) (4,158,861)Changes in operating assets and liabilities: Accounts receivable 7,193 999,384 Inventory (1,154,730) (269,769) Prepaid expenses and other current assets 301,084 (430,746) Accounts payable (34,831) 1,320,640 Accrued liabilities (1,243,857) (328,226) Accrued interest (98,716) (1,134,754) Other long-term liabilities 41,669 (91,678) ------------- ------------ Net cash used in operating activities (10,239,149) (7,172,521) ------------- ------------Cash flows from investing activitiesInvestment in oil and gas properties (21,701,511) (6,224,410)Investment in property and equipment (140,081) (621,307)Restricted cash equivalents 250,000 (250,000)Restricted short-term investments 2,950,000 (2,950,000)(Investment in) redemption of marketable securities 15,637,190 (30,335,640)Proceeds from disposal of property, plant and equipment 85,000 - ------------- ------------ Net cash used in investing activities (2,919,402) (40,381,357) ------------- ------------Cash flows from financing activitiesRepayments of borrowings (212,878) (14,533,176)Exercise of common stock warrants 3,186,863 -Proceeds from issuance of common stock - 80,170,180Exercise of common stock options 525,000 - ------------- ------------ Net cash provided by financing activities 3,498,985 65,637,004 ------------- ------------ Net increase (decrease) in cash and cash equivalents (9,659,566) 18,083,126Cash and cash equivalentsBeginning of year 19,586,747 1,503,621 ------------- ------------End of year $ 9,927,181 $ 19,586,747 ------------- ------------Supplemental cash flow informationCash paid for interest $ 121,619 $ 1,805,867Notes payable used to exercise common stock warrants 212,133 75,906 The accompanying notes are an integral part of these consolidated financial statements. Frontera Resources Corporation and SubsidiariesNotes to Consolidated Financial StatementsDecember 31, 2006 and 2005 1. 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. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Frontera ResourcesCorporation and it's wholly and majority owned subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation. Reclassifications Certain reclassifications have been made in prior period financials statementsto conform with current period presentation. Reclassifications have no impact onthe Company's financial position, results of operations, or cash flows. Use of Estimates The preparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management 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 reporting period. Actual results could differfrom those estimates. Estimates of oil and natural gas reserves and their values, future productionrates and future costs and expenses are inherently uncertain for numerousreasons, including many factors beyond the Company's control. Reservoirengineering is a subjective process of estimating underground accumulations ofoil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of dataavailable and of engineering and geological interpretation and judgment. Inaddition, estimates of reserves may be revised based on actual production,results of subsequent exploitation and development activities, prevailingcommodity prices, operating cost and other factors. These revisions may be material and could materially affect the Company's futuredepletion, depreciation and amortization expenses. The Company's revenue, profitability, and future growth are substantiallydependent upon the prevailing and future prices for oil and natural gas, whichare dependent upon numerous factors beyond its control such as economic,regulatory developments and competition from other energy sources. The energymarkets have historically been volatile and there can be no assurance that oiland natural gas prices will not be subject to wide fluctuations in the future. Asubstantial or extended decline in oil and natural gas prices could have amaterial adverse effect on the Company's financial position, results ofoperations, cash flows and quantities of oil and natural gas reserves that maybe economically produced. Cash and Cash Equivalents Cash and cash equivalents include all cash balances, money market accounts andcertificates of deposit, all of which have original maturities of three monthsor less. Restricted Cash Equivalent and Restricted Short-Term Investments At December 31, 2005 the Company had $250,000 and $2,950,000 of restricted cashequivalents and restricted short term investments, respectively, serving ascollateral for an irrevocable stand-by letters of credit that provided financialassurance that the Company would fulfill its obligations with respect to servicecontracts with certain vendors. At December 31, 2006, the stand-by letters ofcredit had expired and accordingly the Company has no cash or short terminvestments restricted as to use or availability. Marketable Securities The Company determines the appropriate classification of its investments in debtand equity securities at the time of purchase and re-evaluates suchdeterminations at each balance sheet date. Debt securities are classified asheld-to-maturity when the Company has the positive intent and ability to holdthe securities to maturity. Debt securities for which the Company does not havethe intent or ability to hold to maturity are classified as available-for-sale.Held-to-maturity securities are recorded as either short-term or long-term onthe balance sheet based on contractual maturity date and are stated at amortizedcost. Marketable securities that are bought and held principally for the purposeof selling them in the near term are classified as trading securities and arereported at fair value, with unrealized gains and losses recognized in earnings.Debt and marketable equity securities not classified as held-to-maturity or astrading, are classified as available-for-sale, and are carried at fair marketvalue, with the unrealized gains and losses, net of tax, included in thedetermination of comprehensive income and reported in stockholders' equity. The fair value of substantially all securities is determined by quoted marketprices. The estimated fair value of securities for which there are no quotedmarket prices is based on similar types of securities that are traded in themarket. At December 31, 2006, available-for-sale securities consist of investments incorporate bonds with an estimated fair value of $14,823,000 and net unrealizedholding gains in the amount of $124,550, which have been included in accumulatedother comprehensive income. Inventory Inventory consists primarily of materials to be used in the Company's foreignoilfield operations and crude oil held in stock tanks. Inventory is valued usingthe first-in, first-out method and is stated at the lower of cost or market.Inventory consists of the following: December 31, December 31, 2006 2005 Materials and supplies $ 1,405,610 $ 1,679,538Crude oil 1,719,248 290,590 --------- --------- $ 3,124,858 $ 1,970,128 --------- --------- Property and Equipment Property and equipment are stated at cost. Expenditures for major renewals andbetterments, which extend the original estimated economic useful lives ofapplicable assets, are capitalized. Expenditures for normal repairs andmaintenance are charged to expense as incurred. The costs and relatedaccumulated depreciation of assets sold or retired are removed from theaccounts, and any gain or loss thereon is reflected in operations. Depreciationof property and equipment is computed using the straight-line method over theestimated useful lives of the assets, ranging from three to seven years. Oil and Gas Properties The Company follows the full cost method of accounting for oil and gasproperties. Accordingly, all costs associated with acquisition, exploration, anddevelopment of oil and gas reserves, including directly related overhead costs,are capitalized. All capitalized costs of oil and gas properties, including the estimated futurecosts to develop proved reserves, are depleted on the unit-of-production methodusing estimates of proved reserves. Investments in unproved properties and majordevelopment projects are not depleted until proved reserves associated with theprojects can be determined or until impairment occurs. In addition, thecapitalized costs are subject to a "ceiling test," which limits such costs tothe aggregate of the future net revenues from proved reserves, based on currenteconomic and operating conditions, discounted at a 10% interest rate, plus thelower of cost or fair market value of unproved properties. A ceiling testcalculation is performed at each year-end. No impairment write down wasnecessary for the years ended December 31, 2006 and 2005. Sales or other dispositions of oil and gas properties are accounted for asadjustments of capitalized costs with no gain or loss recognized, unless suchadjustments would significantly alter the relationship between capitalized costsand proved reserves of oil and gas, in which case the gain or loss is recognizedin earnings. Costs Excluded Costs associated with unproved properties related to continuing operations of$27.6 million as of December 31, 2006 are excluded from amounts subject toamortization. The majority of the evaluation activities are expected to becompleted within a three-year period. In addition, the Company's internalengineers evaluate all properties on an annual basis. Costs Excluded by Year Incurred ----------------------- Year Cost Incurred Excluded ----------------------- Costs at Prior December 31, Years 2005 2006 2006 Property acquisition $ - $ - $ - $ -Exploration 144,376 5,785,618 21,701,511 27,631,505Development - - - - --------- ----------- ----------- ------------ Total costs incurred $ 144,376 $ 5,785,618 $ 21,701,51 $ 27,631,505 -------- ----------- ----------- ------------ Income Taxes The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes,which requires the recognition of deferred tax liabilities and assets for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. Under this method, deferred tax liabilitiesand assets are determined based on the difference between the financialstatements and the tax basis of assets and liabilities using enacted rates ineffect for the years in which the differences are expected to reverse. Valuationallowances are established, when appropriate, to reduce deferred tax assets tothe amount expected to be realized. Revenue Recognition Oil and natural gas revenues are recorded when title passes to the customer, netof royalties, discounts and allowances, as applicable. Oil and natural gas soldis not significantly different from the Company's share of production. Foreign Currency Transactions The financial statements of the foreign subsidiaries are prepared in UnitedStates dollars, and the majority of transactions are denominated in UnitedStates dollars. Gains and losses on foreign currency transactions are the resultof changes in the exchange rate between the time a foreign currency-denominatedinvoice is recorded and when it is ultimately paid and are included inoperations. Foreign currency transaction gains and losses were not material forthe years ended December 31, 2006 and 2005. Foreign Operations Frontera's future revenues depend on operating results from its operations inthe Republic of Georgia. The success of Frontera's operations is subject tovarious contingencies beyond management control. These contingencies includegeneral and regional economic conditions, prices for crude oil, competition andchanges in regulation. Frontera is subject to various additional political andeconomic uncertainties in Georgia which could include restrictions on transferof funds, import and export duties, quotas and embargoes, domestic andinternational customs and tariffs, and changing taxation policies, foreignexchange restrictions, political conditions and regulations. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations ofcredit risk consist principally of cash and accounts receivable. The Companymaintains its cash in bank deposits with various major financial institutions.These accounts, at times, may exceed federally insured limits. Deposits in theUnited States are guaranteed by the Federal Deposit Insurance Corporation up to$100,000. The Company monitors the financial condition of the financial institutions anddoes not anticipate any losses on such accounts. For the years endedDecember 31, 2006 and 2005, 100% of the Company's crude oil sales were to oneunrelated customer. Fair Value of Financial Instruments Frontera's financial instruments consist of cash, accounts receivable, accountspayable, a line of credit and notes payables. The fair value of cash, accountsreceivable and accounts payable are estimated to approximate the carrying valuedue to the liquid nature of these instruments. The fair value of the line ofcredit and notes payable was determined based upon discount rates whichapproximate variable interest rates for borrowings of a similar nature. The fairvalues of the Debt Instruments at December 31, 2006 and 2005 were approximately$3,500,000 and $2,700,000, respectively. Earnings (Loss) Per Share Basic earnings (loss) per share amounts are calculated based on the weightedaverage number of common shares outstanding during the year. Diluted earningsper share are calculated using the weighted average number of common sharesoutstanding during the year, including the dilutive effect of stock options,warrants, convertible notes, and convertible Preferred Stock. Basic and dilutedloss per share for the years ended December 31, 2006 and 2005 are the same sincethe effect of all common stock equivalents is antidilutive to the Company's netloss per share under SFAS No. 128. Stock-Based Compensation The Company adopted SFAS No. 123R, Share-Based Payment, effective January 1,2006. This statement requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their grant-date fair values. Compensation costs for awards grantedprior to, but not vested, as of January 1, 2006 would be based on the grant dateattributes originally used to value those awards for pro forma purposes underSFAS No. 123. The Company adopted SFAS No. 123R using the modified prospectivetransition method, utilizing the Black-Scholes option pricing model for thecalculation of the fair value of employee stock options. Under the modifiedprospective method, the Company records compensation cost related to unvestedstock awards as of December 31, 2005 by recognizing the unamortized grant datefair value of these awards over the remaining vesting periods of those awardswith no change in historical reported earnings. The Company estimated forfeiturerates for the year based on our historical experience of approximately 3%. The effect of adoption of the new standard related to stock option plans was anadditional expense of $3,065,215 ($0.05 per share, basic and diluted) for theyear ended December 31, 2006. At December 31, 2006, there was $1,465,718 oftotal unrecognized compensation cost related to non-vested stock options. Thiscompensation cost is expected to be recognized over a weighted-average period ofapproximately 0.5 years. 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 the Company's commonstock. Due to the Company's net operating loss position; there are no anticipatedwindfall tax benefits upon exercise of options. Prior to January 1, 2006 the Company accounted for stock based compensation inaccordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"),"Accounting for Stock Issued to Employees," and related interpretations. UnderAPB No. 25, compensation expense is recognized for stock options with anexercise price that is less than the market price on the grant date of theoption. The Company also provided the disclosures required under SFAS No. 123,"Accounting for Stock Based Compensation," as amended by SFAS No. 148,"Accounting for Stock Based Compensation - Transition and Disclosures." As a result, no expense was reflected in the consolidated statement ofoperations in 2005 for stock options, except for repriced stock options, as alloptions granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustrates the pro forma effect on net loss and loss pershare as if the Company were applying the fair value recognition provisions ofSFAS No. 123R to its stock-based compensation plans for the year ended December 31, 2005: Net loss $(4,414,933)Add: Total stock-based employee compensation expense includedin report net loss, net of related tax effects 7,579Deduct: Total stock based compensation expense determinted under fairvalue method for all awards vested during the year, net ofany tax effects (3,133,879) -----------Pro forma net loss $(7,541,233) -----------Basic and diluted loss per shareAs reported $ (0.10) -----------Pro forma $ (0.17) ----------- The estimated fair values for options granted in 2005 was calculated using aBlack Scholes option pricing model, with the following weighted averageassumptions for 2005: risk free interest rate of 4.28%; no dividend yield;volatility factor of 100%; and an expected option life of ten years. 3. Initial Public Offering In March 2005, the Company successfully completed an initial public offering("IPO") of common stock. The Company raised approximately $80.2 million in netproceeds through the sale of 30,685,215 shares at a U.S. dollar equivalent priceof $2.89 after deducting offering expenses of $8.5 million. In conjunction withthe IPO the Company was admitted for trading on the AIM market of the LondonStock Exchange. A portion of the proceeds from the offering was used to retire$17,135,000 of long-term and short-term debt, of which approximately $2,500,000was forgiven. Also, immediately prior to the IPO all of the Company's Series A1,A2, B, D and E preferred shares were converted to common stock as follows: 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 ---------- ---------- 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. 4. Notes Payable 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 line was primarily set up to support letters of credit issued bythe Company from time to time in support of it's oil and gas operations. Thecash and marketable securities can be accessed at any time to the extent thatthe line of credit has not been drawn upon. As of December 31, 2006, the line ofcredit has not been drawn upon and subsequently, all of the Company's cash andmarketable securities were available for use at December 31, 2006. Notes Payable - Related Party Effective December 31, 2001, the Company raised $500,394 through the issuance ofa rights offering consisting of 6% notes payable plus warrants which entitledthe holders to purchase an aggregate of 15,637,329 shares of common stock of theCompany at an exercise price of $0.032 per share. During 2006 the notes becamedue and were retired in full with the exception of one note holder as theCompany was awaiting fund transfer instructions. This note holder was paid infull in early January 2007. Notes payable - related party outstanding as ofDecember 31, 2006 and 2005 was $51,907 and $403,604, respectively. During 2006 and 2005 warrant holders exercised warrants to purchase 12,468,741and 2,372,124 common shares, respectively, for approximately $399,000 and$76,000, respectively. Note Payable - Vendor Effective October 1, 2004, the Company converted a $3,450,941 account payable toSaipem S.p.A. ("Saipem") into a note payable for the same amount. Under theterms of the Saipem note payable agreement, the Company agreed to pay Saipemquarterly interest-only payments until September 30, 2007, the maturity date, atwhich date the note is due in full. The note bears interest at 5% per annum.Notes payable - vendor outstanding as of December 31, 2006 and 2005 was$3,450,941. During 2006, warrants were exercised to purchase 3,000,000 common shares for$3,000,000 related to a prior senior note. 5. Income Taxes The Company has incurred losses since inception and, therefore, has not beenrequired to pay federal income taxes. As of December 31, 2006, the Company hasgenerated net operating loss ("NOL") carryforwards of approximately $37.9million that may be available to reduce future income taxes. These carryforwardsbegin to expire in 2012 with a limited annual utilization. Several factors mayfurther limit the Company's ability to utilize these carryforwards, including alack of future taxable income, a change of Company ownership (as defined byfederal income tax regulations) or the expiration of the utilization periodallowed by federal income tax regulations. During 2006 and 2005, the valuation allowance increased $3,272,035 and$1,556,945, respectively, primarily due to the Company's losses. The effectivetax rate for 2006 and 2005 differs from the statutory tax rate due primarily tothe valuation allowance. The components of the Company's deferred tax liabilities and assets atDecember 31, 2006 and 2005, are as follows: 2006 2005 Deferred tax liabilitiesGeological & geophysical $ (938,023) $ -Other - - Deferred tax assetsNet operating losses - U.S. 12,890,000 9,280,174Net operating losses - Foreign 16,282,696 15,722,756Depreciation and amortization 328,891 328,891Accrued salaries 46,159 -Other 3,654 9,520 ------------ ------------ 28,613,377 25,341,341Valuation allowance (28,613,377) (25,341,341) ------------ ------------Net deferred tax assets $ - $ - ------------ ------------ The valuation allowance is primarily attributed to U.S. federal deferred taxassets. Management believes enough uncertainty exists regarding the realizationof these items and has recorded a full valuation allowance. Profits derived from oil and gas operating activities are subject to a profitstax on taxable income as defined by Georgian law. However, under the terms ofthe Block 12 PSA, Georgian Oil is responsible for paying the Company's profittax liabilities with respect to income derived from these activities. Althoughthe Company has incurred operating losses in Georgia, no adjustment with respectto deferred tax assets or a potentially related valuation allowance has beenmade, as any future benefit related to these operating losses would serve toreduce Georgian Oil's liability. 6. Commitments and Contingencies Operating Leases The Company has non-cancelable operating leases for office facilities andlodging. Approximate future minimum annual rental commitments under theseoperating leases are as follows: Years Ending December 31, 2007 $ 437,6272008 224,2642009 228,5502010 216,1102011 44,676 ----------- $ 1,151,227 ----------- Rental expense for the years ended December 31, 2006 and 2005 was approximately$429,000 and $234,000, respectively. SOCAR Arbitration In June 1998, Frontera Resources Azerbaijan Corporation, an indirect whollyowned subsidiary of the Company, entered into a production sharing agreementwith SOCAR, the State Oil Company of Azerbaijan Republic, hereafter referred toas the "Azerbaijan PSA". The Azerbaijan PSA covered onshore oilfields in an areaof Azerbaijan known as the K&K Block. The Company and an operating partnerundertook an exploration and development program on the K&K Block. The Company'srelationship with SOCAR deteriorated as a result of several disputes under theAzerbaijan PSA and the Company was unsuccessful at reaching a settlement withSOCAR. In January 2006, Frontera Resources Azerbaijan Corporation was awardedapproximately $1.2 million plus interest from 2000 until payment is made inconnection with its binding arbitration case with SOCAR. The arbitral panelfound that the halting of exports of crude oil from the Kursangi & Karabagli oilfields in the Azerbaijan Republic was in violation of the Agreement onRehabilitation, Exploration, Development and Production Sharing between SOCAR,Frontera, Delta/Hess and SOCAR Oil Affiliate. The arbitration panel rejected allother claims and counterclaims between the parties. Frontera initiatedarbitration against SOCAR in October 2003 related to claims resulting fromSOCAR's halting of exports from the onshore Kursangi & Karabagli oilfields inthe Azerbaijan Republic during the fourth quarter of 2000. The arbitration washeld in Sweden and is binding on the parties under the rules of UNCITRAL, theUnited Nations Commission on International Trade Law. SOCAR has refused to pay the award and instead filed litigation in Svea Court ofAppeals, in Stockholm, Sweden, seeking an order annulling the award. The Companyhas moved to dismiss SOCAR's Swedish lawsuit on procedural grounds, and theparties are awaiting the court's ruling. As a result of SOCAR's refusal to paythe award, the Company commenced an action in the United States District Courtfor the Southern District of New York in February 2006, seeking to confirm theaward and convert it to a judgment in accordance with applicable law. SOCAR hasopposed this proceeding. In March 2007, the New York Court granted SOCAR'sMotion to Dismiss, and the Company is considering whether to appeal thatdecision. Vendor Invoices In August 2003 and July 2004, the Company settled vendor invoices ofapproximately $2.3 million. The terms of these settlement agreements providedthat Frontera would not be responsible to repay the liability unless the Companygenerated Profit Oil revenues, as defined in the Block 12 PSA, by August 2007and July 2008, respectively. Because Profit Oil is determined based on therecovery of cumulative costs incurred for the development of Block 12, theCompany does not consider it probable that any additional amounts under thesettlement agreements will be paid. Accordingly, the remaining liabilities ofapproximately $2.3 million were written-off for the year ended December 31,2006. 7. Stockholders' Equity Preferred Stock The Company has the authority to issue up to 10,000,000 shares, par value$.00001, of serial preferred stock. No preferred stock is outstanding atDecember 31, 2006 and 2005. The Board of Directors may designate and authorizethe issuance of such shares with such voting power and in such classes andseries, 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. Common Stock As of December 31, 2006 the Company is authorized to issue 200,000,000 shares ofcommon stock, par value $.00004 per share. As of December 31, 2006 and 2005, theCompany had 70,383,528 and 54,389,787 of common shares issued and outstanding,respectively. At December 31, 2006 and 2005, there are an additional 11,310,000and 26,500,000 shares, respectively, of common stock reserved for the exerciseof existing options and warrants. Treasury Stock As of December 31, 2006 and 2005, the Company had 5,739,855 shares of treasurystock, all held as common shares. 1998 Employee Stock Incentive Plan In 1998, the Company's stockholders approved the 1998 Employee Stock IncentivePlan (the "Plan"), pursuant to which options may be granted to purchase up to15% of the Company's common shares authorized to be issued by the Company,reduced by the total number of shares of stock subject to stock options andstock awards that have been granted under the Plan and the Frontera ResourcesCorporation 2000 Nonqualified Stock Option and Stock Award Plan at any giventime. The Board of Directors has appointed Frontera's chief executive officer asadministrator (the "Administrator") of the Plan. In this capacity, theAdministrator determines which employees will receive options, the number ofshares covered by any option agreement, and the exercise price and other termsof each such option. The Board of Directors is responsible for administering thePlan as it relates to options granted to the chief executive officer. Under the terms of the Plan, any issued options expire ten years after the dateof grant, with the exception of options granted to 10% stockholders which expirefive years after the date of grant, or upon earlier termination of employment.Options granted vest over periods ranging from immediate vesting to vesting inequal increments over three years from the date of grant. 2000 Nonqualified Stock Option and Stock Award Plan In 2000, the Company's Board of Directors approved the 2000 Nonqualified StockOption and Stock Award Plan (the "Stock Award Plan"), pursuant to which optionsmay be granted to purchase up to 15% of the Company's common shares authorizedto be issued by the Company, reduced by the total number of shares of stocksubject to stock options and stock awards that have been granted under the StockAward Plan and the Frontera Resources Corporation 1998 Employee Stock IncentivePlan. The Board of Directors has appointed Frontera's chief executive officer asadministrator of the Stock Award Plan. In this capacity, the Administratordetermines which employees will receive options, the number of shares covered byany option agreement, and the exercise price and other terms of each suchoption. The Board of Directors is responsible for administering the Stock AwardPlan as it relates to options granted to the chief executive officer. Under the terms of the Stock Award Plan, any issued options expire ten yearsafter the date of grant or upon earlier of termination of employment oraffiliation relationship between the grantee and the Company. Options grantedvest over periods ranging from immediate vesting to vesting in equal incrementsover three years from the date of grant. A summary of the Company's stock option activity and related information is asfollows: Weighted- Average Options Exercise Price Options outstanding at December 31, 2005 9,063,013 $ 1.74Granted 1,117,500 2.67Exercised (525,000) 1.00Surrendered (295,500) 2.65 --------- ---------Options outstanding at December 31, 2006 9,360,013 1.87 --------- --------- Options exercisable at December 31, 2006 6,700,684 $ 1.53 --------- --------- At December 31, 2006, the total intrinsic value and weighted average life forstock options outstanding was $0 and 6.85 years, respectively. At December 31,2006, the total intrinsic value and weighted average life for stock optionsexercisable was $0 and 6.12 years, respectively. The following table summarizes information about stock options outstanding atDecember 31, 2006: Options Outstanding Options Exercisable ------------------------- ---------------- Weighted-Range of Number Average Weighted- Number Weighted-Exercise Outstanding at Remaining Average Exercisable at AveragePrices December 31, Contractual Exercise December 31, Exercise 2006 Life (Years) Price 2006 Price $0.92-1.00 4,443,000 6.20 $ 0.99 4,443,000 $ 1.002.00-2.87 4,812,013 7.56 2.58 2,152,684 2.395.28-8.85 105,000 1.36 6.30 105,000 6.30 ---------- --------- -------- ---------- ------- 9,360,013 6.85 $ 1.87 6,700,684 $ 1.53 ---------- --------- -------- ---------- ------- Stock option information related to the nonvested options for the year endedDecember 31, 2006, was as follows: Number Weighted- of Shares Average Grant Underlying Date Fair Options Value Nonvested options outstanding atDecember 31, 2005 2,988,500 $ 2.30 Granted 1,117,500 0.96 Vested (1,255,005) 2.08 Canceled (191,666) 2.05 --------- ---------Nonvested options outstanding atDecember 31, 2006 2,659,329 $ 1.86 --------- --------- During 2003, the Company repriced certain outstanding options downward to bemore in line with the value of the Company. 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. Effective January 1, 2006, the Company adopted SFAS 123(R), which does not allow this treatment for re-priced stock options.Accordingly, the Company ceased expensing the re-priced options as of January 1,2006. The Company granted 1,117,500 options to employees during 2006 with exerciseprices ranging between $2.08 and $2.87 which was at or above the market value ofthe Company's common stock at the time of grant. The weighted average fair valueof the options granted in 2006 was $0.96. The fair value of the option grantswere calculated using a Black-Scholes option pricing model, with the followingweighted average assumptions: risk free interest rate of 4.64%; no dividendyield; volatility factor of 66%; and an expected option life of 8.3 years. 8. Subsequent Event On May 8, 2007, Frontera raised $47.0 million through a private placement ofconvertible unsecured notes due May 2012. The notes were issued at par and willbear interest at 10%, payable quarterly in arrears in cash or in kind at thecompany's discretion. The notes are convertible into common shares at aconversion price of $1.67 per share. The conversion price will be reset to $1.30per share if the stock price is at or below $1.30 per share for 10 out of any 20consecutive trading days at any time in the 12 months following the closingdate. The notes will be automatically converted into common shares at theconversion price if the stock price exceeds two times the conversion price forat least 20 consecutive trading days. This information is provided by RNS The company news service from the London Stock Exchange