Nostra Terra Oil & Gas
Annual Report 2011

Plain-text annual report

ANNUAL REPORT Annual report 2011 2011 Highlights • Substantial interests acquired in Colorado and Oklahoma • Production in Kansas, Texas and Colorado • Own play launched in Oklahoma • Full ownership and operatorship assumed on Bloom property in Kansas; foreclosure proceedings subsequently initiated in relation to HPI settlement agreement • Operating loss for the year £996,000 (2010: £591,000) • £5 million financing agreement (expandable to £10 million) and US$1 million promissory note (expandable to US$3 million) with YA Global • First Verde well continues to perform above expectations. Contents Company information Chairman’s statement Chief Executive’s review Directors’ report Corporate governance report Board of directors Independent auditors’ report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Company statement of changes in equity Consolidated statement of financial position Company statement of financial position Consolidated statement of cash flows Note to the consolidated statement of cash flows Company statement of cash flows Note to the company statement of cash flows Notes to the financial statements Page 2 3 4 6 10 11 12 14 15 16 17 18 19 20 21 22 23 24 Annual report 2011 1 Company information Directors Sir Adrian Blennerhassett (Non-executive Chairman) Matt Lofgran (Chief Executive Officer) Alden McCall (Chief Operating Officer) Stephen Oakes (Non-executive Director) Secretary International Registrars Limited Registered office Finsgate 5-7 Cranwood Street London EC1V 9EE Registered number 05338258 (England and Wales) Auditor Jeffreys Henry LLP Finsgate 5-7 Cranwood Street London EC1V 9EE Nominated adviser Shore Capital and Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU Broker Alexander David Securities Limited Solicitors 10 Finsbury Square London EC2A 1AD Ronaldsons LLP 55 Gower Street London WC1E 6HQ Bankers National Westminster Bank plc Registrars PO Box 712 94 Moorgate London EC2M 6XT Share Registrars Ltd Suite E, First Floor 9 Lion & Lamb Yard Farnham Surrey GU9 7LL Website www.ntog.co.uk 2 Nostra Terra Oil and Gas Company plc Chairman’s statement Dear shareholder I am pleased to present the annual report and accounts of Nostra Terra Oil and Gas Company plc for the year ended 31 December 2011. 2011 was a busy and productive year for the company, in which we significantly increased our work programme and successfully expanded our asset base within the resurgent US onshore industry. This carefully targeted growth began in the first weeks of the year with two small acquisitions in Texas – a 1% interest in the Vintage Hills Prospect Unit and a 3% interest in the Nesbitt Prospect Unit. A horizontal well was drilled on each of these properties in the first half of the year, and both are now in production. We then set out to scale up our pipeline of development prospects. By mid-year we had acquired larger interests in two multi-well properties – the Verde Prospect Unit in Colorado (16.25% working interest) and the Bale Creek Prospect Unit in Oklahoma (30% working interest). The initial Verde well was drilled in the third quarter and is producing above our expectations. The first of several potential horizontal wells on the Bale Creek property was drilled after the year end, and is currently in the process of being completed. It will be tested as the second Bale Creek well is being drilled. Just a few days after the end of the reporting period, the company made a further substantial acquisition, of a 10% working interest in the Warrior Prospect Unit in Oklahoma. Six potential horizontal well locations have been identified on Warrior; the first of these has now been drilled, and the well will be completed and tested very shortly. In our interim report last September, we detailed the terms of the revised agreement reached between Nostra Terra and HPI (now Richfield Oil & Gas) to terminate the arrangements between them, which related mainly to properties in Kansas and Utah. Regrettably, the US$1.3 million secured loan note issued by Richfield under the terms of that agreement was not paid when due on 31 January 2012, and we are currently in the process of recovering against the collateral. Despite this distraction, we are encouraged by the progress made in building our asset base during 2011, and I believe the company is well positioned, financially and technically, to identify and secure many more value-adding growth opportunities in the future. As always, I wish to thank all Nostra Terra’s shareholders for their continuing loyalty, and we look forward to keeping you informed about our further progress in the months and years ahead. Sir Adrian Blennerhassett Chairman 29 May 2012 Annual report 2011 3 Chief Executive’s review Throughout 2011, Nostra Terra continued to expand its asset base within established hydrocarbon regions of the US. A dramatic renaissance is under way in these historic producing regions, with Goldman Sachs predicting recently that the US could once again become the world’s largest oil producer. The key to this transformation – and the cornerstone of our own growth strategy – is the use of precision drilling technology, including horizontal drilling, combined with 3D seismic mapping, sophisticated log suites and multi-stage well completions in order to target and exploit compartmentalised reservoirs that were underproduced or overlooked when the original vertical wells were drilled in these mature fields. The recent surge in technological innovation within the US was initially driven by shale gas, but these value-adding techniques are now being adapted successfully to oil plays, which are the focus of Nostra Terra’s growth strategy. Stepping up our growth Having acquired small working interests in three successful horizontal wells in Texas in 2010 and the beginning of 2011, Nostra Terra stepped up its efforts to identify, screen and acquire larger percentage interests and acreage holdings in order to increase the scale of its operations and revenues. The two small acquisitions made in January 2011 were a 1% interest in the Vintage Hills Prospect Unit and a 3% interest in the Nesbitt Prospect Unit. The first well on each of these prospects was drilled early in the year, and both wells are currently in production. By mid-year, we had signed two agreements to acquire larger interests in properties with multi-pay potential. The first of these was the Verde Prospect Unit covering 636 acres in south-eastern Colorado, in which we hold a 16.25% interest with Plainsmen Partners LLC as operator. The initial vertical well, targeting the Mississippian formation, was brought into production in September and at year end was producing approximately 50 barrels of oil per day (bopd). The well has served to derisk the prospect unit for any potential subsequent wells. The second agreement, with operator Pathfinder Development Capital LLC, was for a 30% interest in the Bale Creek Prospect in northern Oklahoma. This prospect lies within a highly productive and extensively mapped trend, with multi-pay potential from as many as eight reservoirs. It is planned to develop Bale Creek in two phases, with the first phase consisting of acquisition and interpretation of proprietary 2D and 3D seismic data, followed by drilling of a vertical pilot hole to determine the most promising of the several potentially productive zones within the prospect area, after which horizontal wells will be drilled and the required production and transmission facilities will be constructed. Following completion of the seismic programme before year end, and of the pilot borehole in March 2012, the first horizontal well has been drilled and is in the process of being completed prior to testing. The second Bale Creek horizontal well was spudded in mid-May. Also after the end of the financial year, Nostra Terra continued to build its portfolio by entering into an agreement with Crown Energy Company Inc. to acquire a 10% interest in the Warrior Prospect. Like Bale Creek, Warrior lies within a prolific oil system in Oklahoma, and contains multiple, stacked reservoirs. Several potential horizontal well locations have been identified within the prospect areas. The first Warrior well reached planned depth in May, and is also in the process of being completed prior to testing. Financial Nostra Terra incurred an operating loss for the year of £996,000 (2010: £591,000), while revenues rose to £244,000 from £137,000 in the prior year. In June 2011, we successfully raised £2 million before expenses by way of a placing of 333,333,335 new shares at 0.6 pence per share. We were pleased to secure the support of both retail and institutional investors in this fundraising, which is being used for working capital as we step up the pace of our growth. 4 Nostra Terra Oil and Gas Company plc In September, we further increased our financial flexibility by entering into a Standby Equity Distribution Agreement (SEDA) with YA Global. Under this agreement, YA Global has committed to subscribe, if requested by the company, for up to £5 million of ordinary shares over a period of three years. The shares will be priced at 96% of the lower of the daily volume weighted average price during the 10-day pricing period following a draw down request, or at a price agreed in writing between the two parties prior to the commencement of the pricing period. Nostra Terra also has the right to set a minimum acceptable price for each draw down, and to increase the commitment amount to £10 million at any time during the three-year term of the SEDA. We continue to identify opportunities to grow and upgrade our asset base. While most of these are within our existing financial resources, we want to ensure that we are able to enter negotiations on a wide range of potential acquisitions in the strongest possible position. The SEDA provides another strategic option in securing the most attractive deals that will add maximum value for our shareholders. At year end, the company held cash reserves of £1,457,133. Post year end, Nostra Terra entered into a loan facility of up to US$3 million with YA Global, which is supported by the SEDA detailed above. The initial advance will be US$1 million, subject to interest at a rate of 10% per annum for a term of 360 days, and will be repaid in 10 monthly instalments commencing in July 2012. The proceeds from the initial advance will be used to step up the company’s leasing programme and to provide additional working capital for its expanding activities. Also after the end of the financial year, Nostra Terra was obliged to initiate foreclosure proceedings against Richfield Oil & Gas Company, formerly Hewitt Petroleum, Inc (“Richfield”). Under the terms of the revised agreement announced by the parties on 14 April 2011, Richfield issued to Nostra Terra a US$1.3 million secured loan note which matured on 31 January 2012 and had been accruing interest at 10% per annum from the date of issue. The company granted Richfield a one-month extension to the repayment deadline. However, as no funds were received by that date, Nostra Terra has been obliged to begin the process of recovering against the collateral, which consists of producing leases in Kansas and non-producing leases in Utah. Controlling our own destiny During 2011, we expanded and upgraded our asset portfolio and prospect pipeline significantly. We are very encouraged by the results so far on Verde, Bale Creek and Warrior, and intend to continue building our portfolio in this way. As well as partnering with experienced regional operators, Nostra Terra is also looking to acquire and develop properties as operator and sole or majority interest holder. Towards the end of the financial year, we initiated the development of our own play in which we aim to establish a strong acreage position and generate multiple prospects. We will initially hold 100% ownership of leases within the play, giving us greater control over the pace and scale of our future growth. The project area extends over several counties in Oklahoma, and was identified following months of intensive geological investigation. It lies within a proven and well mapped hydrocarbon system containing shallow oil and liquids-rich gas in stacked, multi-pay formations. The company has engaged a team of experienced geologists and landmen to identify drilling targets and secure leases throughout the area. Our objective is to create value over a much larger area controlled by the company. During the last two years, Nostra Terra has demonstrated its ability to find new oil from old fields in the US Mid-Continent region using the most advanced exploration, drilling and production techniques. Our primary focus throughout 2012 and beyond is to increase the number and quality of our producing wells, and to progress our long-term strategic plan of generating and operating prospects internally as well as through partnerships in order to build our reserve base and deliver steady, material and growing cash flow. Matt Lofgran Chief Executive Officer 29 May 2012 Annual report 2011 5 Directors’ report The directors present their report with the financial statements of Nostra Terra Oil and Gas Company plc (“Company”) and its subsidiaries (collectively “Group”) for the year ended 31 December 2011. PRINCIPAL ACTIVITY The principal activity of the Group is the exploitation of hydrocarbon resources in the US Mid-Continent. REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS The results for the year and financial position of the Company and the Group are as shown in the annexed financial statements and noted in the Chairman’s statement and Chief Executive’s review. KEY PERFORMANCE INDICATORS At this stage in the company’s development, the key performance indicators that the directors monitor on a regular basis are management of liquid resources – that is, cash flows and bank balances, general administrative expenses, which are tightly controlled, and the level of production. KEY RISKS AND UNCERTAINTIES The key risk in the exploration and production business is the technical risk of no hydrocarbons being present when an exploration well is drilled. While the US Mid-Continent is a proven hydrocarbon region and is seeing a resurgence through the application of new drilling and well completion technologies, there are environmental and economic risks in the US Mid-Continent as there are in any hydrocarbon region. RESULTS AND DIVIDENDS The loss for the year was £995,685, which has been allocated against reserves. No dividends will be distributed for the period ended 31 December 2011. DIRECTORS The following directors have held office since 1 January 2011: A M Blennerhassett M B Lofgran S V Oakes A McCall M B Lofgran will retire at the Company’s forthcoming Annual General Meeting under the Articles of Association of the Company and, being eligible, offers himself for re-election. Remuneration of the directors for the year is summarised as follows: A M Blennerhassett M B Lofgran S V Oakes A B McCall Salaries £ – 97,050 – 87,345 Fees £ 18,000 – 18,000 – Total £ 18,000 97,050 18,000 87,345 184,395 36,000 220,395 There were no benefit-in-kind or share-based payments during the year. 6 Nostra Terra Oil and Gas Company plc The beneficial interests of the directors holding office on 31 December 2011 in the issued share capital of the Company were as follows: 31.12.11 01.01.11 No of ordinary shares of 0.1p each Percentage of issued share capital No of ordinary shares of 0.1p each Percentage of issued share capital A M Blennerhassett M B Lofgran S V Oakes 6,580,000 79,000,000 14,166,666 0.34% 4.05% 0.73% 5,500,000 15,000,000 14,166,666 0.43% 0.96% 0.91% The numbers of options outstanding to the directors at 31 December 2011 are as follows: M B Lofgran A B McCall SUBSTANTIAL SHAREHOLDERS 31.12.11 No of warrants exercisable at 0.1p each 01.01.11 No of warrants exercisable at 0.1p each 217,842,506 280,342,506 40,000,000 40,000,000 As at 22 May 2012, the Company was aware of the following interests in the issued share capital of the Company: TD Waterhouse Nominees (Europe) Limited Barclayshare Nominees Limited HSDL Nominees Limited JIM Nominees Limited HSBC Client Holdings Nominee (UK) Limited Hargreaves Lansdown (Nominees) Limited L R Nominees Limited Investor Nominees Limited M B Lofgran Share Nominees Ltd No of ordinary Percentage of shares of 0.1p each 288,101,358 287,182,793 257,596,266 202,035,852 122,724,550 115,607,917 106,909,118 104,372,701 79,000,000 70,871,109 issued share capital 14.77% 14.73% 13.21% 10.36% 6.29% 5.93% 5.48% 5.35% 4.05% 3.63% Annual report 2011 7 POLITICAL AND CHARITABLE CONTRIBUTION The Group made no political or charitable contributions during the year. COMPANY’S POLICY ON PAYMENT OF PAYABLES It is the Group’s normal practice to make payments to suppliers in accordance with agreed terms provided that the supplier has performed in accordance with the relevant terms and conditions. The Group does not follow any code or statement policy. Creditor days at the end of the year were 30 (2010: 88) days. EVENTS AFTER THE REPORTING PERIOD Refer to note 25 for details. PUBLICATION OF ACCOUNTS ON COMPANY WEBSITE Financial statements are published on the Company’s website. The maintenance and integrity of the website is the responsibility of the directors. The directors’ responsibility also extends to the financial statements contained therein. INDEMNITY OF OFFICERS The Group may purchase and maintain, for any director or officer, insurance against any liability and the Group does maintain appropriate insurance cover against legal action bought against its directors and officers. FINANCIAL INSTRUMENTS The Group does not have formal policies on interest rate risk or foreign currency risk. The Group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than pounds sterling (£). The Group maintains a natural hedge that minimises the foreign exchange exposure by matching foreign currency income with foreign currency costs. The Group does not consider it necessary to enter into foreign exchange contracts in managing its foreign exchange risk resulting from cash flows from transactions denominated in foreign currency, given the nature of the business, for the time being. GOING CONCERN After making appropriate enquiries, the directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements. REMUNERATION COMMITTEE The Remuneration Committee takes into account both Group and individual performance, market value and sector conditions in determining directors’ remunerations. The Group has maintained a policy of paying only minimum salaries compared with peer companies in the oil and gas sector until the Company has established a good position with acreage, assets, income and cash at hand. All current salaries are without pension benefits. LISTING The Company’s ordinary shares have been trading on London’s Alternative Investment Market (“AIM”) since 20 July 2007. Shore Capital and Corporate Limited is the Company’s Nominated Advisor and Alexander David Securities Limited is the Company’s Broker. The closing mid-market price at 31 December 2011 was 0.39p (2010: 0.37p). 8 Nostra Terra Oil and Gas Company plc STATEMENT OF DIRECTORS’ RESPONSIBILITIES The directors are responsible for preparing the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that year. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and follow IFRS as adopted by the European Union. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. STATEMENT AS TO DISCLOSURE OF INFORMATION TO AUDITORS So far as the directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group’s auditors are unaware, and each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. AUDITORS In accordance with Section 485 of the Companies Act 2006, a resolution that Jeffreys Henry LLP be reappointed as auditors of the Company will be put to the Annual General Meeting. On behalf of the Board: M B Lofgran Director 29 May 2012 Annual report 2011 9 Corporate governance report The directors recognise the importance of sound corporate governance commensurate with the Group’s size and the interests of shareholders. As the Group grows, policies and procedures that reflect the FRC’s UK Corporate Governance Code will be developed. So far as is practicable and appropriate, taking into account the size and nature of the Company, the directors will take steps to comply with the UK Corporate Governance Code. The Board of Directors The Board is comprised of two executive directors and two non-executive directors. The Board meets at least four times a year as issues arise which require Board attention. The Board has a formal schedule of matters specially referred to it for decision. The directors are responsible for the management structure and appointments, consideration of strategy and policy, approval of major capital investments and transactions, and significant financing matters. The Board has established an Audit Committee, a Remuneration Committee and a Nomination Committee, the respective roles and responsibilities of which are discussed below. Audit Committee An Audit Committee has been established and currently comprises A M Blennerhassett as Chairman and S V Oakes. Both have considerable and relevant financial experience. The Audit Committee, which has terms of reference agreed by the Board, meets at least twice a year and is responsible for ensuring the integrity of the financial information reported to the shareholders and the systems of internal controls. This committee provides an opportunity for reporting by the Company’s auditors. The Audit Committee is responsible for monitoring, in discussion with the auditors, the integrity of the financial statements and announcements of the Company; reviewing the Company’s internal financial controls and risk management systems; reviewing and monitoring the external auditor’s independence, objectivity and effectiveness of the audit process, taking into consideration relevant UK and other professional and regulatory requirements. The Audit Committee is also responsible for making recommendations to the Board to be put to shareholders for their approval in general meeting in relation to the appointment, reappointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor. Other responsibilities include considering annually whether there is a need for an internal audit function and making a recommendation to the Board, and reviewing arrangements by which the staff of the Group will be able to raise concerns about possible improprieties in matters of financial reporting or other matters related to the Group. Remuneration and Nomination Committees The Remuneration and Nomination Committees, which meet at least twice a year, consist of A M Blennerhassett as Chairman and S V Oakes. Based on the terms of reference approved by the Board, the Remuneration Committee is responsible for determining and agreeing with the Board the framework or broad policy for the remuneration of the Chief Executive Officer, the Chairman and other members as it is designated to consider. It is also responsible for setting the remuneration for all executive directors, the Chairman and the Company Secretary; recommending and monitoring the level and structure of remuneration for senior management; and determining targets for any performance-related pay schemes operated by the Group. The Remuneration Committee is also responsible for determining the policy and scope of pension arrangements for each executive director and for ensuring that contractual terms on termination and any payments made are fair to the individual and the Company. The Remuneration Committee will determine the terms and conditions of service of executive directors. This includes agreeing the policy for authorising claims for expenses from the Chief Executive Officer and the Chairman and, within the terms of the agreed policy, recommending the total individual remuneration package of each executive director including, where appropriate, bonuses, incentive payments and share options. The Nomination Committee is responsible for ensuring all director appointments are considered by the Committee before their formal recommendation to the Board for approval. 10 Nostra Terra Oil and Gas Company plc Relations with shareholders Communications with shareholders are very important and therefore are given a priority. The Company maintains a website, www.ntog.co.uk, for the purpose of improving information flow to shareholders as well as potential investors. It contains information about the Company’s activities, and annual and interim reports. Shareholders are welcome to make enquiries on any matters relating to the business and to their shareholdings. The Company encourages shareholders to attend the Annual Meeting, at which they will be given the opportunity to put questions to the Chairman and other members of the Board. Internal financial control The Board is responsible for establishing and maintaining the Company’s system of internal controls and for reviewing their effectiveness. They are designed to safeguard the assets of the Company and to ensure the reliability of the financial information for both internal use and external publication. The controls that include inter alia financial, operational and compliance matters and management are reviewed on an ongoing basis. A system of internal control can provide only reasonable, and not absolute, assurance that material financial irregularities will be detected or that risk of failure to achieve business objectives is eliminated. The Board has considered the need for an internal audit function but because of the size and nature of its operations does not consider it necessary at the current time. Board of directors Sir Adrian Blennerhassett, Non-Executive Chairman Previous positions held by Sir Adrian (72) include General Manager for Claremount Oil & Gas Limited and Technical Director at Peninsula Petroleum Limited. More recently, he had 11 years’ experience in corporate finance with Anglo European Amalgamations Limited and Chesham Amalgamations and Investments Limited. He studied geology at McGill University in Montreal, has an MSc in Geology from Imperial College, London, and an MBA from Cranfield School of Business Management. Matt Lofgran, Chief Executive Officer Matt Lofgran (37) has wide experience of business development in the energy, real estate and communications sectors. Prior to becoming CEO of Nostra Terra in July 2009, he was with Robson Energy, LLC, latterly as Vice President of International Business Development. In this capacity, he launched the oil and gas, field services and coal divisions, and was responsible for extending Robson Energy’s activities into Mexico. Mr Lofgran holds a Bachelor of Business Management degree from the University of Phoenix and a Global MBA from Thunderbird School of Global Management. Alden McCall, Chief Operating Officer Alden Branine McCall (61) has over 26 years’ experience of project management, business development, capital acquisition and consulting in oil and gas exploration and new production technologies. Prior to joining Nostra Terra, he was Principal and General Manager of Dallas-based AMX Consulting Services, LLC, delivering technical and commercial expertise to both public and private companies engaged in conventional and unconventional petroleum exploration and production. Mr McCall is a Certified Petroleum Geologist and is a member of the American Association of Petroleum Geologists, the Society of Petroleum Engineers, the Oklahoma Geological Society, the Fort Worth Geological Society and the Houston Geological Society. Stephen Vaughan Oakes, Non-Executive Director Stephen Oakes (56) has over 35 years’ experience in financial markets and is a Fellow of the Securities Institute. He is a former Chief Executive Officer, HSBC Investment Management. Since 2003, he has worked with a number of smaller AIM and Plus Markets-quoted companies. Annual report 2011 11 Independent auditors’ report to the shareholders of Nostra Terra Oil and Gas Company plc We have audited the group and parent company financial statements of Nostra Terra Oil and Gas Company plc for the year ended 31 December 2011, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and parent company statements of financial position, the consolidated and parent company statements of cash flow, consolidated and company statements of changes in equity and related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of directors' responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition we read all financial and non-financial information in the Chairman’s Statement, Chief Executive’s Review, Directors’ Report and Corporate Governance Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: • • • • the financial statements give a true and fair view of the state of the Group’s and Parent Company's affairs as at 31 December 2011 and of the Group’s loss for the year then ended; the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been properly prepared in accordance with the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 12 Nostra Terra Oil and Gas Company plc Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the Parent Company, or returns adequate for audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors' remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Sanjay Parmar SENIOR STATUTORY AUDITOR For and on behalf of Jeffreys Henry LLP, Statutory Auditor Finsgate 5-7 Cranwood Street London EC1V 9EE United Kingdom 29 May 2012 Annual report 2011 13 Consolidated income statement for the year ended 31 December 2011 Revenue Notes Cost of sales 5 4 6 GROSS LOSS Administrative expenses OPERATING LOSS Finance income LOSS BEFORE TAX Tax (expense) recovery LOSS FOR THE YEAR Attributable to: Owners of the Company Earnings per share expressed in pence per share: Continued operations 2011 £000 244 (370) (126) (933) (1,059) 63 (996) – 2010 £000 137 (256) (119) (472) (591) – (591) – (996) (591) (996) (591) Basic and diluted (pence) 8 (0.056) (0.038) 14 Nostra Terra Oil and Gas Company plc Consolidated statement of comprehensive income for the year ended 31 December 2011 Loss for the year Other comprehensive income: Currency translation differences 2011 £000 (996) 2010 £000 (591) – – Total comprehensive income for the year (996) (591) Total comprehensive income attributable to: Owners of the Company (996) (591) Annual report 2011 15 Consolidated statement of changes in equity for the year ended 31 December 2011 Share capital £000 Share premium £000 Translation reserves £000 Retained losses £000 Total £000 As at 1 January 2010 1,550 6,842 Loss after tax for the year – – As at 31 December 2010 1,550 6,842 Shares issued Share issue costs Loss after tax for the year 400 – – As at 31 December 2011 1,950 1,669 (110) – 8,401 12 – 12 – – – 12 (5,318) 3,086 (591) (5,909) – – (996) (6,905) (591) 2,495 2,069 (110) (996) 3,458 Share capital is the amount subscribed for shares at nominal value. Retained loss represents the cumulative losses of the Group attributable to owners of the Company. Share premium represents the excess of the amount subscribed for share capital over the nominal value of those shares net of share issue expenses. Share issue expenses in the year comprise costs incurred in respect of the issue of new shares on the London Stock Exchange’s AIM market. Translation reserves occurs on consolidation of the translation of the subsidiary’s balance sheet at the closing rate of exchange and its income statement at the average rate. 16 Nostra Terra Oil and Gas Company plc Company statement of changes in equity for the year ended 31 December 2011 Share capital £000 Share premium £000 Retained losses £000 Total £000 As at 1 January 2010 1,550 6,842 (4,999) 3,393 Loss after tax for the year – – (898) As at 31 December 2010 1,550 6,842 (5,897) Shares issued Share issue costs Loss after tax for the year As at 31 December 2011 400 – – 1,950 1,669 (110) – 8,401 – – (285) (6,182) (898) 2,495 2,069 (110) (285) 4,169 Share capital is the amount subscribed for shares at nominal value. Retained loss represents the cumulative losses of the Company attributable to owners of the Company. Share premium represents the excess of the amount subscribed for share capital over the nominal value of those shares net of share issue expenses. Share issue expenses in the year comprise costs incurred in respect of the issue of new shares. Annual report 2011 17 Consolidated statement of financial position 31 December 2011 ASSETS NON-CURRENT ASSETS Goodwill Other Intangibles Property, plant and equipment – oil and gas assets – others CURRENT ASSETS Trade and other receivables Deposits and prepayments Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables Financial liabilities – borrowings Notes 9 10 11 11 13 14 15 16 2011 £000 – 1,211 220 – 2010 £000 – 1,211 261 – 1,441 1,472 974 11 1,457 2,442 57 – 57 794 – 720 1,514 176 – 176 NET CURRENT ASSETS 2,385 1,338 NON-CURRENT LIABILITIES Financial liabilities – borrowings 16 NET ASSETS EQUITY AND RESERVES Called up share capital Share premium Translation reserves Retained losses 17 18 18 18 368 3,458 1,950 8,401 12 (6,905) 3,458 315 2,495 1,550 6,842 12 (5,909) 2,495 The financial statements were approved and authorised for issue by the Board of Directors on 29 May 2012 and were signed on its behalf by: M B Lofgran Director Company registered number: 05338258 18 Nostra Terra Oil and Gas Company plc Company statement of financial position 31 December 2011 Notes ASSETS NON-CURRENT ASSETS Fixed asset investments 12 CURRENT ASSETS Trade and other receivables Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables Financial liabilities – borrowings NET CURRENT ASSETS NET ASSETS EQUITY AND RESERVES Called up share capital Share premium Retained losses 13 14 15 16 17 18 18 2011 £000 3,951 3,951 49 193 242 24 – 24 2010 £000 2,035 2,035 64 541 605 146 – 146 218 459 4,169 2,494 1,950 8,401 (6,182) 4,169 1,550 6,842 (5,898) 2,494 The financial statements were approved and authorised for issue by the Board of Directors on 29 May 2012 and were signed on its behalf by: M B Lofgran Director Company registered number: 05338258 Annual report 2011 19 Consolidated statement of cash flows for the year ended 31 December 2011 Notes 1 Cash flows from operating activities Cash (consumed) by operations Net cash (consumed) by operating activities Cash flows from investing activities Purchase of intangibles – new oil and gas properties Purchase of plant and equipment Net cash from investing activities Cash flows from financing activities Issue of new shares Net cash from financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 14 Cash and cash equivalents at end of year 2011 £000 (1,223) (1,223) (8) 9 1 1,959 1,959 737 720 1,457 2010 £000 (446) (446) (460) (269) (729) – – (1,175) 1,895 720 Represented by: Cash at bank 14 1,457 720 20 Nostra Terra Oil and Gas Company plc Note to the consolidated statement of cash flows for the year ended 31 December 2011 1. RECONCILIATION OF LOSS BEFORE TAX TO CASH GENERATED FROM OPERATIONS Loss before tax for the year Depreciation of property, plant and equipment Amortisation of intangibles Foreign exchange loss/(gains) non-cash items Operating cash flows before movements in working capital Decrease in receivables (Decrease) in payables (Increase) in deposits and prepayments Cash (consumed) by continuing operations 2011 £000 (996) 34 2 47 (913) (180) (119) (11) (1,223) 2010 £000 (591) 12 – (42) (621) 291 (116) – (446) Annual report 2011 21 Company statement of cash flows for the year ended 31 December 2011 Notes 1 Cash (consumed) by operations Net cash from operating activities Cash flows from investing activities Interest received Net cash from investing activities Cash flows from financing activities Inter group loan (advances) Issue of new shares 2011 £000 (391) (391) – – 2010 £000 (306) (306) – – (1,916) 1,959 (1,044) – Net cash from financing activities 43 (1,044) Increase/(decrease) in cash and cash equivalents (348) (1,350) Cash and cash equivalents at beginning of year 14 Cash and cash equivalents at end of year 541 193 1,891 541 Represented by: Cash at bank 14 193 541 22 Nostra Terra Oil and Gas Company plc Note to the company statement of cash flow for the year ended 31 December 2011 1. RECONCILATION OF LOSS BEFORE TAX TO CASH GENERATED FROM OPERATIONS Loss before tax for the year Impairment of cost of investments Operating cash flows before movements in working capital (Increase)/decrease in receivables Increase/(decrease) in payables Cash (consumed) by continuing operations 2011 £000 (284) – (284) 15 (122) (391) 2010 £000 (899) 560 (339) (55) 88 (306) Annual report 2011 23 Notes to the financial statements for the year ended 31 December 2011 GENERAL INFORMATION Nostra Terra Oil and Gas Company plc is a company incorporated in England and Wales and quoted on the AIM market of the London Stock Exchange. The address of the registered office is disclosed on the company information page of this annual report. The principal activity of the Group is described in the directors’ report. 1. ACCOUNTING POLICIES Going concern The financial statements have been prepared on the assumption that the Group is a going concern. When assessing the foreseeable future, the directors have looked at a period of 12 months from the date of approval of this report. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer’s Report and Directors’ Report. In addition, note 19 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; and its exposures to credit risk and liquidity risk. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current cash resources. In addition, the Group has entered into a £5 million financing agreement (expandable to £10 million) and US$1 million promissory note (expandable to US$3 million) with Yorkville Advisors. After making enquiries, the directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. New and amended standards adopted by the Company The company has adopted the following new and amended IFRSs as of 1 January 2011: • • • 24 IAS 32 (amendment), ‘Financial instruments: presentation – classification of rights issue’, is effective from annual periods beginning on or after 1 February 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro-rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the company after initial application. IAS 24 (amendment), ‘Related party transactions’. The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities. The company does not expect any impact on its financial position or performance. IFRIC 14 (amendment), ‘Prepayments of a minimum funding requirement’. The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the financial statements of the company. Nostra Terra Oil and Gas Company plc • IFRIC 19, ‘Extinguishing financial liabilities with equity instruments’, is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. Where this cannot be reliably measured, the instrument is measured at the fair value of the liability extinguished. Any gain or loss is recognised in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the company. Standards, interpretations and amendments to published standards that are not yet effective The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2011 and have not been early adopted: • • • • • • • IFRS 9, ‘Financial instruments: classification and measurement’, as issued reflects the first phase of the IASB work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2015. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and derecognition. The adoption of the first phase of IFRS 9 might have an effect on the classification and measurement of the company’s assets. At this juncture it is difficult for the company to comprehend the impact on its financial position and performance. IFRS 7, ‘Financial instruments: disclosures (amendment)’, is effective for annual periods beginning on or after 1 July 2011. The amendment requires additional quantitative and qualitative disclosures relating to transfers of financial assets, where financial assets are derecognised in their entirety, but where the entity has a continuing involvement in them and where financial assets are not derecognised in their entirety. In addition to the above there has been a subsequent amendment effective for annual periods beginning on or after 1 January 2013 related to the offsetting of financial assets and financial liabilities. The adoption of these will have no effect on the financial statements of the company. IAS 12, ‘Income taxes (amendment) – deferred taxes: recovery of underlying assets’, is effective for annual periods beginning on or after 1 January 2012. It introduces a rebuttable presumption that deferred tax on investment properties measured at fair value will derecognised on a sale basis, unless an entity has a business model that would indicate the investment property will be consumed in the business. If consumed a use basis would need to be adopted. The amendments also introduce the requirement that deferred tax on non-depreciable assets measured using the revaluation model in IAS 16 should always be measured on a sale basis. The adoption of this interpretation will have no effect on the financial statements of the company. IFRS 11 ‘Joint arrangements’ is effective from 1 January 2013. The core principle of the standard is that a party to a joint arrangement determines the type of joint arrangements in which it is involved by assessing the rights and obligations, and accounts for those rights and obligations in accordance with the type of joint arrangement. Joint ventures now must be accounted for using the equity method. Joint operator which is a newly defined term recognises its assets, liabilities, revenues and expenses and relative shares thereof. The adoption of this will have no effect on the financial statements of the company. IFRS 12 ‘Disclosures of interests with other entities’ is effective from 1 January 2013. It requires increased disclosure about the nature, risks and financial effects of an entity’s relationship with other entities along with its involvement with other entities. The adoption of this will have no effect on the financial statements of the company. IFRS 13 ‘Fair value measurement’ is effective from 1 January 2013. It defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. It includes a three-level fair value hierarchy which prioritises the inputs in a fair value measurement. The adoption of this will have no effect on the financial statements of the company. IFRS 10 ‘Consolidated financial statements’, IFRS 11 ‘Joint arrangements’, IFRS 12 ‘Disclosures of interests with other entities’ along with related amendments to IAS 27 ‘Separate financial statements’ and IAS 28 ‘Investments in associates and joint ventures’ will have an effective date of 1 January 2013. Early adoption of these standards is permitted, but only if all five are early adopted together. IFRS 10 does not change consolidation procedures but changes whether an entity is consolidated by revising the definition of control and provides a number of clarifications on applying the new definition of control. The adoption of this will have no effect on the financial statements of the company. Annual report 2011 25 Notes to the financial statements for the year ended 31 December 2011 1. ACCOUNTING POLICIES continued • • • • IFRS 1, ‘First-time adoption of International Financial Reporting Standards (amendment) – severe hyperinflation and removal of fixed dates for first-time adopters’, has an effective date for annual periods beginning on or after 1 July 2011. This provides further guidance on how an entity should resume presenting IFRS financial statements when its functional currency ceases to be subject to severe hyperinflation. Early adoption of these standards is permitted. The adoption of this will have no effect on the financial statements of the company. IAS 1, ‘Presentation of items of other comprehensive income – amendments to IAS 1’, is effective for annual periods beginning on or after 1 July 2012. Items that would be reclassified to the profit and loss at a future point would be presented separately from items that will never be capitalised. The adoption of this will have no effect on the financial statements of the company. IAS 19, ‘Employee benefits (revised)’, is effective for annual periods beginning on or after 1 January 2013. For defined benefit plans the ability to defer recognition of actuarial gains and losses has been removed. There are new objectives for disclosure stated in the revised standard along with new or revised disclosure requirements. Plus the recognition of termination benefits and the distinction of short-term and other long-term employee benefits have changed. The adoption of this will have no effect on the financial statements of the company. IFRIC 20, ‘Stripping costs in the production phase of a surface mine’, is effective for annual periods beginning on or after 1 January 2013. The interpretation only applies to stripping costs incurred during the production phase of a surface mine (production stripping costs). These costs are to be capitalised as part of an asset, if an entity can demonstrate that it is probable future economic benefits will be realised, the costs can be reliably measured and the entity can identify the component of an ore body for which access has been improved. This asset is to be called the “stripping activity asset”. Where costs cannot be specifically allocated between the inventory produced during the period and the stripping activity asset, the Interpretation requires an entity to use an allocation basis that is based on a relevant production measure. The adoption of this will have no effect on the financial statements of the company. Subsidiaries The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Associates An associate undertaking (“associate”) is an enterprise over whose financial and operating policies the Group has the power to exercise significant influence and which is neither a subsidiary nor a joint venture of the Group. The equity method of accounting for associates is adopted in the Group financial statements, such that they include the Group’s share of operating profit or loss, exceptional items, interest, taxation and net assets of associates (“the equity method”). 26 Nostra Terra Oil and Gas Company plc In applying the equity method, account is taken of the Group’s share of accumulated retained earnings and movements in reserves from the effective date on which an enterprise becomes an associate and up to the effective date of disposal. The share of associated retained earnings and reserves is generally determined from the associate’s latest interim or final financial statements. Where the Group’s share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at nil. Additional losses are only recognised to the extent that the Group has incurred obligations or made payments outside the course of ordinary business on behalf of the associate. Joint Activity Agreement The Group’s interest in the Joint Activity Agreement (“JAA”) (see note 10) is accounted for by proportionate consolidation. The Group combines its share of the JAA’s individual income and expenses, assets and liabilities and cash flows on a line by line basis with similar items in the Group’s financial statements. The Group recognises the portion of gains and losses on the sale of assets by the Group to JAA that is attributable to the other ventures. The Group does not recognise its share of profits or losses from JAA that result from the Group’s purchase of assets from JAA until it resells the assets to an independent party. However, a loss on the transaction is recognised immediately if the loss provides evidence of a reduction in the net realisable value of current assets, or an impairment loss. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in “intangible assets”. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The Group allocates goodwill to each business segment in each country in which it operates. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Property, plant and equipment Tangible non-current assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life: Plant and machinery – 20% on cost The assets’ residual values and useful economic lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable value. Annual report 2011 27 Notes to the financial statements for the year ended 31 December 2011 1. ACCOUNTING POLICIES continued Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other (losses) or gains in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of hydrocarbons and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue is recognised when the oil and gas produced is despatched and received by the customers. Functional currency translation (i) Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which is mainly United States Dollars (US$). The financial statements are presented in Pounds Sterling (£), which is the Group’s presentation currency. ii) Transactions and balances Foreign currency transactions are translated into the presentational currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. iii) Group companies The results and financial position of all Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (a) (b) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (c) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differed from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The entity’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. 28 Nostra Terra Oil and Gas Company plc Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Operating leases Rental leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the year of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Financial Instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transactions costs, except as described below. Subsequent to initial recognition, non-derivative financial instruments are measured as described below. A financial instrument is recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial assets to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e. the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire or are discharged or cancelled. Annual report 2011 29 Notes to the financial statements for the year ended 31 December 2011 1. ACCOUNTING POLICIES continued Fair values The carrying amounts of the financial assets and liabilities such as cash and cash equivalents, receivables and payables of the Group at the balance sheet date approximated their fair values, due to the relatively short-term nature of these financial instruments. The Company provides financial guarantees to licensed banks for credit facilities extended to a subsidiary company. The fair value of such financial guarantees is not expected to be significantly different as the probability of the subsidiary company defaulting on the credit lines is remote. Share-based compensation The fair value of the employee and suppliers services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting year is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Oil and gas assets The Group applies the successful efforts method of accounting for oil and gas assets and has adopted IFRS 6 Exploration for and evaluation of mineral resources. Exploration and evaluation (“E&E”) assets Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or specific exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed. Pre-licence costs Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred. Exploration and evaluation (“E&E”) costs Costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, together with the directly related costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets. 30 Nostra Terra Oil and Gas Company plc Tangible assets used in E&E activities (such as the Group’s drilling rigs, seismic equipment and other property, plant and equipment used by the Company’s exploration function) are classified as property, plant and equipment. However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset. Such intangible costs include directly attributable overheads, including the depreciation of property, plant and equipment utilised in E&E activities, together with the cost of other materials consumed during the exploration and evaluation phases. E&E costs are not amortised prior to the conclusion of appraisal activities. Treatment of E&E assets at conclusion of appraisal activities Intangible E&E assets relating to each exploration licence/prospect are carried forward until the existence (or otherwise) of commercial reserves has been determined, subject to certain limitations including review for indications of impairment. If commercial reserves are discovered the carrying value, after any impairment loss of the relevant E&E assets, is then reclassified as development and production assets. If, however, commercial reserves are not found, the capitalised costs are charged to expense after conclusion of appraisal activities. Development and production assets Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads and the cost of recognising provisions for future restoration and decommissioning. Depletion, amortisation and impairment of oil and gas assets All expenditure carried within each field is amortised from the commencement of production on a unit of production basis, which is the ratio of oil and gas production in the period to the estimated quantities of commercial reserves at the end of the period plus the production in the period, on a field-by-field basis. Costs used in the unit of production calculation comprise the net book value of capitalised costs plus the estimated future field development costs to access the related commercial reserves. Changes in the estimates of commercial reserves or future field development costs are dealt with prospectively. Where there has been a change in economic conditions that indicates a possible impairment in an oil and gas asset, the recoverability of the net book value relating to that field is assessed by comparison with the estimated discounted future cash flows based on management’s expectations of future oil and gas prices and future costs. Any impairment identified is charged to the income statement as additional depletion and amortisation. Where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income statement, net of any depreciation that would have been charged since the impairment. Commercial reserves Commercial reserves are proven and probable oil and gas reserves, which are defined as the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. Annual report 2011 31 Notes to the financial statements for the year ended 31 December 2011 1. ACCOUNTING POLICIES continued Critical accounting estimates and judgments The preparation of consolidated financial statements requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: a) Impairment of investments Costs of investments are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates for each cash generating unit. b) Impairment of property, plant and equipment Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates. c) Recoverability of exploration and evaluation costs E&E assets are assessed for impairment when circumstances suggest that the carrying amount may exceed its recoverable value. This assessment involves judgment as to (i) the likely future commerciality of the asset and when such commerciality should be determined, and (ii) future revenues and costs pertaining to the asset in question, and the discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. d) Share-based payments Note 1 sets out the Group’s accounting policy on share-based payments, specifically in relation to the share options and warrants that the Company has granted. The key assumptions underlying the fair value of such share-based payments are discussed in note 22. The fair value amounts used by the Group have been derived by external consultants using standard recognised valuation techniques. 32 Nostra Terra Oil and Gas Company plc 2. SEGMENTAL ANALYSIS In the opinion of the directors, the Group has one class of business, being the exploitation of hydrocarbon resources. The Group’s primary reporting format is determined by geographical segment according to the location of the hydrocarbon assets. The Group’s reportable segments under IFRS 8 in the year are as follows: United Kingdom being the head office. Ukraine: a 25 per cent profit share in the onshore Oktyabrskoe oil field. US Mid-Continent properties at year end included the following: (i) Kansas: 100% working interest in the Bloom property located within the Chase-Silica Field; (ii) Texas: 1% working interest in the Vintage Hills Prospect Unit located within the Giddings Field; 3% working interest in the Nesbitt Prospect Unit located within the Woodlawn Field; (iii) Colorado: 16.25% working interest in the Verde Prospect Unit; (iv) Oklahoma: 30% working interest in the Bale Creek Prospect Unit. The chief operating decision maker’s internal report is based on the location of the oil properties as disclosed below. Segment results – 2011 Revenue Total Inter company Revenue Operating loss before depreciation, amortisation share-based payment charges and restructuring costs: Depreciation of tangibles Amortisation of intangibles Operating loss Realised exchange loss Finance income Loss before taxation Segment assets Property, plant and equipment Intangible assets Cash and cash equivalents Other assets US mid- continent 2011 £000 Ukraine 2011 £000 Head office 2011 £000 244 – 244 (1,012) (34) (2) (1,048) – 63 (985) 220 1,221 1,457 985 3,883 – – – – – – – – – – – – – – – – – – – – – – (11) – (11) – – – – – Total 2011 £000 244 – 244 (1,012) (34) (2) (1,048) (11) – (996) 220 1,221 1,457 985 3,883 Annual report 2011 33 Notes to the financial statements for the year ended 31 December 2011 2. SEGMENTAL ANALYSIS continued Segment results – 2010 Revenue Total Inter company Revenue Operating loss before depreciation, amortisation share-based payment charges and restructuring costs: Depreciation of tangibles Amortisation of intangibles Operating loss Realised exchange loss Finance income Loss before taxation Segment assets Property, plant and equipment Intangible assets Cash and cash equivalents Other assets US mid- continent 2010 £000 Ukraine 2010 £000 Head office 2010 £000 133 – 133 (712) (8) – (587) – – (587) 261 1,211 720 61 2,253 – – – – – – – – – – – – – – – 4 – 4 (8) – – – (4) – (4) – – – 7 7 Total 2010 £000 137 – 137 (720) (8) – (591) (4) – (591) 261 1,211 720 68 2,260 34 Nostra Terra Oil and Gas Company plc 3. EMPLOYEES AND DIRECTORS Directors’ fees Social security costs 2011 £000 220 11 231 2010 £000 219 9 228 The average monthly number of employees (including directors) during the year was as follows: Directors Directors’ remuneration 2011 Number 2010 Number 4 4 4 4 Other than the directors, the Group had no other employees. Total remuneration paid to directors during the year was as follows: Directors’ fees 2011 £000 220 2010 £000 219 The highest paid director’s emoluments and other benefits for the year ended 31 December 2011 are as listed below: M B Lofgran 4. FINANCE INCOME On bank balance On other receivables Salary £000 97 2010 £000 – – – 2011 £000 2 61 63 Annual report 2011 35 Notes to the financial statements for the year ended 31 December 2011 5. OPERATING LOSS FOR THE YEAR The operating loss for the year is stated after charging/(crediting): Auditors’ remuneration (Company £18,300 – 2010: £18,545) Depreciation of property, plant and equipment Amortisation of intangibles Loss on disposal of fixed assets Foreign exchange differences 2011 £000 18 34 2 (1) 11 The analysis of administrative expenses in the consolidated income statement by nature of expense: Employment costs Directors’ fees Consultancy fees Travelling and entertaining Legal and professional fees Establishment costs Foreign exchange differences Amount due from participating interest written off Other expenses 2011 £000 11 220 14 47 301 – 11 – 330 934 2010 £000 19 8 – 4 (3) 2010 £000 9 219 43 53 87 – (3) (37) 101 472 36 Nostra Terra Oil and Gas Company plc 6. INCOME TAX EXPENSE The tax charge on the loss for the year was as follows: Current tax: Corporation tax Overseas corporation tax/(recovery) Total Loss before tax 2011 £000 2010 £000 – – – 2011 £000 (996) – – – 2010 £000 (591) Loss on ordinary activities before taxation multiplied by standard rate of UK corporation tax of 26% (2010: 28%) (259) (166) Effects of: Non-deductible expenses Other tax adjustments Foreign tax Current tax charge 9 250 – 259 – 3 163 – 166 – At 31 December 2011 the Group had excess management expenses to carry forward of £849,069 (2010: £565,333) and trading losses of £917,630 (2010: £242,409). The deferred tax asset at 26% (2010: 28%) on these tax losses of £459,342 (2010: £226,167) has not been recognised due to the uncertainty of recovery. 7. LOSS OF PARENT COMPANY As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of these financial statements. The parent company’s loss for the financial year was £284,475 (2010: £898,477). Annual report 2011 37 Notes to the financial statements for the year ended 31 December 2011 8. EARNINGS PER SHARE The calculation of earnings per ordinary share is based on earnings after tax and the weighted average number of ordinary shares in issue during the year. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group had two classes of dilutive potential ordinary shares, being those share options granted to employees and suppliers where the exercise price is less than the average market price of the Group’s ordinary shares during the year, and in 2009 Convertible Loans. Details of the adjusted earnings per share are set out below: EPS – loss Loss attributable to ordinary shareholders (£000) Weighted average number of shares Weighted average number of shares on diluted basis Continued operations: Basic and diluted EPS – loss (pence) 2011 2010 (996) (591) 1,777,379,579 1,549,600,913 2,045,555,418 1,829,943,089 (0.056) (0.038) The diluted loss per share is the same as the basic loss per share as the loss for the year has an antidilutive effect. 9. GOODWILL Group COST At 1 January 2010 Additions At 31 December 2010 Additions At 31 December 2011 PROVISION At 1 January 2010 Charge for the year At 31 December 2010 Charge for the year At 31 December 2011 CARRYING VALUE At 31 December 2011 At 31 December 2010 £000 4,211 – 4,211 – 4,211 943 3,268 4,211 – 4,211 – – Goodwill arose on the acquisition of Nostra Terra (Overseas) Limited in 2007 and was fully impaired in 2009. 38 Nostra Terra Oil and Gas Company plc 10. OTHER INTANGIBLES Group COST At 1 January 2010 Transfer to other receivables Additions Disposals At 31 December 2010 Additions Expensed in the year Disposals Currency gain At 31 December 2011 PROVISION At 1 January 2010 Disposals At 31 December 2010 Charge for the year At 31 December 2011 CARRYING VALUE At 31 December 2011 At 31 December 2010 Licence £000 621 – 5 – 626 – – (409) 6 223 – – – – – 223 626 Exploration and evaluation assets £000 1,695 (1,055) 455 (510) 585 796 (140) (246) 6 Total £000 2,316 (1,055) 460 (510) 1,211 796 (140) (655) 12 1,001 1,224 (510) 510 – (3) (3) 998 585 (510) 510 – (3) (3) 1,221 1,211 The assets expensed in the year relate to the plugging and abandonment of 2 wells in the Bloom Field. Annual report 2011 39 Notes to the financial statements for the year ended 31 December 2011 10. OTHER INTANGIBLES continued The Group assesses at each reporting date whether there is an indication that the intangible assets may be impaired, by considering the net present value of discounted cash flows forecasts. If an indication exists an impairment review is carried out. At the year end, the directors are of the opinion that there has been no impairment in value. On 13 April 2011, the company entered into an agreement with Hewitt Petroleum, Inc. (now Richfield Oil & Gas Company) and Hewitt Energy Group, Inc. (together the “HPI Entities”). The principal terms of the agreement, which on closing led to termination of the operational relationship between the Company and the HPI Entities, were as follows: Nostra Terra acquired 100% working interest (WI) in, and assumed operatorship of, the producing Bloom property; Nostra Terra’s existing 75% WI before payout (50% WI after payout) in the Boxberger property, where operations remain suspended pending the resolution of title issues, was assigned to the HPI Entities; Nostra Terra assigned to the HPI Entities its interests in all other HPI-operated assets (including Hoffman, the undeveloped adjoining acreage within the Trapp field and the Koelsch property) and the Liberty #1 exploration well; Nostra Terra received a US$1.3 million note to be secured by other assets of the HPI Entities (the “HPI Note”). The HPI Note was extended by a month, matured on 31 January 2012 and accrues interest at 10% per annum. An early settlement discount of 3% per 30 day period prior to the maturity date is available to the HPI Entities; In the expectation that HPI’s successor, Richfield Oil & Gas Company (“Richfield”) will become publicly traded prior to the expiration of the HPI Note, Nostra Terra has the right, but not the obligation, to convert the principal amount outstanding under the HPI Note into shares of Richfield at US$0.25 per share; and Richfield has issued Nostra Terra a Warrant, exercisable in whole or in part, to subscribe for up to 6 million shares of Richfield common stock with an aggregate exercise price of US$1.5 million, at a strike price of US$0.25 per share, expiring one year after admission to trading on the Toronto Stock Exchange or the TSX Venture Exchange. The warrant will be transferable, subject to the provisions of the US Securities Act 1933 (as amended). However, as no funds were received by the maturity date, the Company began the process of recovering against the collateral which consists of producing leases in Kansas and non-producing leases in Utah. On 18 February 2010, the Group via its wholly-owned subsidiary, Nostra Terra Overseas Ltd (“NTOL”), entered into a contract with Crimea Nadra Invest (CNI) relating to its assets in Ukraine. Under the terms of the contract, CNI acquired all the rights and obligations associated with the Joint Activity Agreement of 27 January 2001 (the “JAA”) covering NTOL’s operations in Ukraine and in particular the Oktyabrskoe field licence, while NTOL retains a right to payment of 25 per cent of any net profits generated by CNI from the JAA, which runs for a period of 25 years from 27 January 2001. The consideration for the transaction is to be settled by the deferred payment from future oil sale proceeds of 360,000 Ukraine hryvnia (approximately £29,000), which will be applied towards general working capital. 40 Nostra Terra Oil and Gas Company plc 11. PROPERTY, PLANT AND EQUIPMENT Group COST At 1 January 2010 Disposals Additions At 31 December 2010 Dispositions Additions At 31 December 2011 PROVISION At 1 January 2010 Dispositions Charge for the year At 31 December 2010 Dispositions Charge for the year At 31 December 2011 CARRYING VALUE At 31 December 2011 At 31 December 2010 Plant & equipment – oil and gas assets £000 Plant & equipment – other assets £000 271 (271) 269 269 (40) 36 265 271 (271) 11 11 – 34 45 220 261 5 (5) – – – – – 1 (1) – – – – – – – Total £000 276 (276) 269 269 (40) 36 265 272 (272) 11 11 – 34 45 220 261 Annual report 2011 41 Notes to the financial statements for the year ended 31 December 2011 12. FIXED ASSET INVESTMENTS Company COST At 1 January 2010 Additions At 31 December 2010 Additions At 31 December 2011 PROVISION At 1 January 2010 Charge for the year At 31 December 2010 Charge for the year At 31 December 2011 CARRYING VALUE At 31 December 2011 At 31 December 2010 Investment in subsidiary £000 Loan to subsidiaries £000 4,409 – 4,409 – 4,409 4,409 – 4,409 – 4,409 – – 1,984 1,044 3,028 1,916 4,944 433 560 993 – 993 3,951 2,035 Total £000 6,393 1,044 7,437 1,916 9,353 4,842 560 5,402 – 5,402 3,951 2,035 In the opinion of the directors, the aggregate value of the Company’s investment in subsidiary undertakings is not less than the amount included in the balance sheet. See note 9 for details on impairment. The details of the subsidiaries are as set out below: Shareholding Country of incorporation Nature of business Nostra Terra (Overseas) Limited (“NTOL”) 100% Cyprus Oil and gas exploration in Ukraine (Dormant) New Horizon Energy 1 LLC (“NHE”) Goldhawk Oil & Gas, LLC (“Goldhawk”) Churchill Operating, LLC (“Churchill”) 100% USA Oil and gas exploration in USA 100% USA Oil and gas exploration in USA 100% USA Oil and gas exploration in USA 42 Nostra Terra Oil and Gas Company plc 13. TRADE AND OTHER RECEIVABLES Current: Other receivables Other taxes receivables Group Company 2011 £000 943 31 974 2010 £000 785 9 794 2011 £000 21 28 49 Other receivables include £902,000 due from Richfield. See note 10. The directors consider that the carrying amount of other receivables approximates their fair value. 14. CASH AND CASH EQUIVALENTS Bank current accounts 15. TRADE AND OTHER PAYABLES Current: Trade payables Accruals and deferred income Other payables Group Company 2011 £000 1,457 2010 £000 720 2011 £000 193 Group Company 2011 £000 20 37 – 57 2010 £000 29 147 – 176 2011 £000 – 24 – 24 2010 £000 58 6 64 2010 £000 541 2010 £000 – 146 – 146 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing expenses. The directors consider that the carrying amount of trade and other payables approximates their fair value. Annual report 2011 43 Notes to the financial statements for the year ended 31 December 2011 16. FINANCIAL LIABILITIES – BORROWINGS Maturity of the borrowings is as follows: Repayable between one and five years: Loan notes Group Company 2011 £000 368 368 2010 £000 315 315 2011 £000 – – 2010 £000 – – On 25 May 2007, the Company issued pursuant to the Share Purchase Agreement a promissory note in the sum of US$1,838,928 to be issued to the Vendors of Nostra Terra (Overseas) Limited. The Company will be obliged to repay the sums due under the terms of the promissory note relating to the Ukraine properties quarterly in arrears, based on the Group’s cash flow from all of its wells which have been producing for at least 30 days for the most recently completed quarter. No repayments shall be made until the net income from such wells exceeds US$225,000 for the relevant quarter. However, on 24 December 2009, the Company agreed with its wholly owned subsidiary, Nostra Terra (Overseas) Limited (“NTOL“), and Nikea Nominees Limited and Nikea Trustees Limited (together “Nikea“) to an assignment and variation of the promissory note dated 25 May 2007 in the sum of US$1,838,928, whereby the amount due from the Company to Nikea is reduced by 75% to US$459,732 (the “Nikea Sum“) and the obligation to repay the Nikea Sum is assigned to NTOL. In addition, interest will no longer be payable on the Nikea Sum, and the Nikea Sum will be due for repayment on or before 30 November 2012 with no contingency based on the cash flow from the Company's wells. A provision allowing the parties to assign the promissory note has also been inserted. On 25 June 2007, the Company issued £327,679.38 of zero coupon Creditors Convertible Loan Stock 2009 to the Nostra Terra (Overseas) Limited Vendors. The principal amount of the Creditors Convertible Loan Stock is convertible at the rate of one ordinary share for each 2p of the principal amount of the stock in the period to 25 June 2009. The stock was to be repaid on or before 31 December 2009. The Company would have been able to give notice at any time to convert any stock at 120% of its nominal value. On 25 June 2007, the Company issued £88,483 of zero coupon Creditors Non-convertible Loan Stock 2009, to be issued to the Vendor under the Acquisition Agreement. The Redeemable Loan Stock may be redeemed at any time by the Company and was repayable on or before 31 December 2009. On 30 June 2009, the Company reached agreement with all holders of outstanding loan notes issued in 2007 whereby the outstanding £252,951 (together with an additional £4,000 owing to one of the loan note holders) is settled by the payment of £35,131 in cash and the issue of 110,910,200 new ordinary shares at an effective issue price of 0.2 pence per ordinary share. 44 Nostra Terra Oil and Gas Company plc Loan notes issued by Nostra Terra (Overseas) Limited On 25 May 2007, a promissory note was issued to Nikea and Masterworks (Overseas) Limited (“Masterworks”) in the sum of US$436,460, which bears interest at 4.9% per annum. Repayment of the sums due under the terms of this promissory note is to be quarterly in arrears based on cash flow from the group’s wells which have been producing for at least 30 days for the most recently completed quarter. No repayments shall be made until the net income from such wells exceeds US$225,000 for the relevant quarter. On 24 December 2009, NTOL agreed with Nikea and Masterworks to a variation of the promissory note dated 25 May 2007 as partially assigned by deed of assignment dated 14 November 2007 in the total sum of US$436,460, whereby the amount due from NTOL to Nikea is reduced from US$194,161 by 75% to US$48,540 and the amount due from NTOL to Masterworks is reduced from US$242,299 by 75% to US$60,575 (together the “Nikea/Masterworks Sum”). In addition, interest will no longer be payable on the Nikea/Masterworks Sum and the Nikea/Masterworks Sum will be due for repayment on or before 30 November 2012 with no contingency based on the cash flow from the Company's wells. On 10 May 2006, a promissory note in the sum of US$159,744.50 was issued to Ucoco Energy, Inc (“Ucoco”). On 24 December 2009, NTOL agreed with Ucoco to a variation of the promissory note dated 10 May 2006 as amended by deed of variation dated 25 May 2007 in the sum of US$159,745, whereby the amount due from NTOL to Ucoco is reduced by 75% to US$39,936 (the “Ucoco Sum”). In addition, interest will no longer be payable on the Ucoco Sum and the Ucoco Sum will be due for repayment on or before 30 November 2012 with no contingency based on the cash flow from the Group’s wells. On 8 October 2010, pursuant to a deed of cancellation executed between Ucoco and the Company's wholly-owned subsidiary Nostra Terra (Overseas) Limited (“NTOL”), a promissory note under which NTOL had agreed to pay the sum of US$39,936 to Ucoco has lapsed and been terminated in its entirety. 17. CALLED UP SHARE CAPITAL Authorised: Number: Class: 2,500 million (2010 – 2,500 million) Ordinary Allotted, called up and fully paid: Number: Class: 1,950,100,585/1,950,100,585 Ordinary Nominal value: 0.1p Nominal value: 0.1p 2011 £000 2,500 2011 £000 1,950 2010 £000 2,500 20109 £000 1,550 Annual report 2011 45 Notes to the financial statements for the year ended 31 December 2011 18. RESERVES Group At 1 January 2010 Loss for the year At 31 December 2010 Shares issued in the year Share issue cost Loss for the year At 31 December 2011 Company At 1 January 2010 Loss for the year At 31 December 2010 Shares issued in the year Share issue cost Loss for the year At 31 December 2011 Translation reserve £000 12 – 12 – – – 12 Retained losses £000 Share premium £000 (5,318) 6,842 (591) (5,909) – – (996) (6,905) – 6,842 1,669 (110) – 8,401 Retained losses £000 Share premium £000 Total £000 1,536 (591) 945 1,669 (110) (996) 1,508 Total £000 (4,999) 6,842 1,843 (899) (5,898) – – (284) (6,182) – 6,842 1,669 (110) – 8,401 (899) 944 1,669 (110) (284) 2,219 46 Nostra Terra Oil and Gas Company plc 19. RISK AND SENSITIVITY ANALYSIS The Group’s activities expose it to a variety of financial risks: interest rate risk, liquidity risk, foreign currency risk, capital risk and credit risk. The Group’s activities also expose it to non-financial risks: market, legal and environment risk. The Group’s overall risk management programme focuses on unpredictability and seeks to minimise the potential adverse effects on the Group’s financial performance. The Board, on a regular basis, reviews key risks and, where appropriate, actions are taken to mitigate the key risks identified. Capital risk The Group’s objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Market risk The Group also faces risks in conducting operations in the US Mid-Continent, which include but are not limited to: • Fluctuations in the global economy could disrupt the Group’s ability to operate its business in the US Mid-Continent and could discourage foreign and local investment and spending, which could adversely affect its production. Environmental risks The Group faces environmental risks in conducting operations in the US Mid-Continent which include but are not limited to: • If the Group is found not to be in compliance with applicable laws or regulations, it could be exposed to additional costs, which might hinder the Group’s ability to operate its business. Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Foreign currency risk The Group does not have formal policies on interest rate risk or foreign currency risk. The Group reports its results in Pounds Sterling. A significant share of the exploration and development costs and the local operating costs are in United States Dollars. Any change in the relative exchange rates between Pounds Sterling, and United States Dollars could positively or negatively affect the Group’s results. The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Pounds Sterling. The Group maintains a natural hedge that minimises the foreign exchange exposure by matching foreign currency income with foreign currency costs. The Group does not consider it necessary to enter into foreign exchange contracts in managing its foreign exchange risk resulting from cash flows from transactions denominated in foreign currency, given the nature of the business, for the time being. The foreign exchange rate affecting the Group is as follows: Group Income statement Balance sheet Ukraine Hryvnia (UAH) United States Dollars (US$) 2011 £ 0.0820 0.6470 2010 £ 0.0815 0.6413 2011 £ 0.0820 0.6470 2010 £ 0.0815 0.6413 Annual report 2011 47 Notes to the financial statements for the year ended 31 December 2011 19. RISK AND SENSITIVITY ANALYSIS continued Volatility of crude oil prices A material part of the Group’s revenue will be derived from the sale of oil that it expects to produce. A substantial or extended decline in prices for crude oil and refined products could adversely affect the Group’s revenues, cash flows, profitability and ability to finance its planned capital expenditure. The movement of crude oil prices is shown below: Per barrel – US$ Per barrel – £ Liquidity risk 2011 101.76 63.54 2010 77.68 49.82 The Group expects to fund its exploration and development programme, as well as its administrative and operating expenses throughout 2011, principally using existing working capital and expected proceeds from the sale of future crude oil production. The Group had a bank balance of approximately £1,457,000 at 31 December 2011. 20. FINANCIAL COMMITMENTS Operating lease commitments There are no significant operating lease obligations at the year end. Capital commitments The Group had no material capital commitments at the year end. 21. RELATED PARTY TRANSACTIONS Group During the year, the Group advanced loans of £nil (2010: £6,875) and charged management fees of £nil (2010: £29,300) to JAA in Ukraine (see note 10). As at 31 December 2011, the outstanding loan balance due from JAA was £nil (2010: £nil). Company During the year, the Company advanced a loan of £nil (2010: £20,000) to NTOL. At the year end, the Company made a provision of £nil (2010: £433,000) against the outstanding loan balance due from NTOL. The net amount due to the Company from NTOL after provision at the year end was £6,825 (2010: £6,825). During the year, the Company advanced a loan of £1,210,100 (2010: £1,044,000) and charged management fees of £13,734 (2010: £50,520) to NHE. At the year end, the Company made a provision of £nil (2010: £560,000) against the outstanding loan balance due from NHE. The net amount due to the Company from NHE after provision at the year end was £3,090,798 (2010: £2,440,698). During the year, the Company advanced a loan of £705,912 (2010: £154,671) to Goldhawk. At the year end, the net amount due to the Company from Goldhawk was £860,584 (2010: £154,671). The intercompany loans are unsecured and interest-free. 48 Nostra Terra Oil and Gas Company plc 22. SHARE-BASED PAYMENTS There is no charge for share-based payments as the amount is not material. The details of options and warrants are as follows: 2011 2010 Number of options and warrants Weighted average exercise price Number of options and warrants Weighted average exercise price Outstanding at the beginning of the year 329,009,173 0.17 329,009,173 Pence Granted – 18 January 2011 Granted – 1 July 2011 Exercised – 30 June 2009 3,000,000 3,333,333 (67,166,667) 0.37 0.60 0.10 – – – Balance carried forward 268,175,839 329,009,173 Pence 0.17 – – – The options and warrants outstanding at 31 December 2011 are as follows: ‘C’ Warrants Religare Capital Markets 25/06/2007 30/04/2012 2p 4,000,000 Issue date End date Exercise price No of warrants 4,000,000 Warrants M B Lofgran A B McCall A B McCall A B McCall S V Oakes Alexander David Securities Ltd 01/07/2011 01/07/2014 30/06/2009 30/06/2012 0.1p 217,842,506 22/06/2010 21/06/2015 22/06/2010 21/06/2015 22/06/2010 31/12/2015 17/01/2011 14/01/2014 0.52p 0.75p 0.75p 0.37p 0.60p 10,000,000 10,000,000 20,000,000 3,000,000 6,000,000 264,175,839 268,175,839 The fair values of the options granted have been calculated using the Black-Scholes model assuming the inputs shown below: Share price at grant date Exercise price Option life in years Risk free rate Expected volatility Expected dividend yield Fair value of option Annual report 2011 1 July 2011 0.68p 0.6p 3 years 4.3% 30% 0% 0.12p 17 January 2011 0.5p 0.37p 3 years 4.3% 30% 0% 0.23p 22 June 2010 0.47p 0.52p 5 years 3.5% 10% 0% 0p 30 June 2009 0.2p 0.1p 3 years 3.5% 10% 0% 0.09p 49 Notes to the financial statements for the year ended 31 December 2011 23. CONTINGENT LIABILITIES AND GUARANTEES The Group has no contingent liabilities in respect of legal claims arising from the ordinary course of business and it is not anticipated that any material liabilities will arise from contingent liabilities other than those provided for. 24. ULTIMATE CONTROLLING PARTY The Company is quoted on the AIM market of the London Stock Exchange. At the date of the annual report there was no one controlling party. 25. EVENTS AFTER THE REPORTING PERIOD On 3 January 2012, the Company entered into an agreement with Crown Energy Company Inc (“Crown”) to acquire a 10% working interest in the Warrior Prospect, located in Oklahoma. The Warrior Prospect lies within a prolific oil system, proven to produce from multiple, stacked-pay reservoirs. Leasing, pooling and permitting of the initial well are already complete. Drilling of the initial horizontal well is anticipated to begin during the first half of 2012, along with construction of all production and transmission facilities. Up to five additional horizontal wells may be drilled on the prospect in the future and tie into the infrastructure that is being installed for the initial well. The development budget for the prospect, including current acreage (800 acres), cost to drill and complete the initial test well, and cost to drill and complete a salt water disposal well if required, is US$1,926,800, of which Nostra Terra's estimated portion is US$192,680. On 6 January 2012, the Company announced that further to the revised agreement with Richfield which was announced on 14 April 2011, a 30-day extension to the repayment period of the US$1.3 million loan note had been granted to Richfield by the Company. As the loan had defaulted, the Company began the process of recovering against the collateral, which consists of producing leases in Kansas and non-producing leases in Utah. On 25 January 2012, the Company granted 14,000,000 warrants to M B Lofgran, 14,000,000 warrants to A B McCall, 4,000,000 warrants to A M Blennerhassett and 6,000,000 warrants to S V Oakes exercisable on or before 25 January 2017 at a price of 0.41p. On 11 May 2012, the Company entered into a loan facility of up to US$3 million (the “Loan Facility”), with YA Global Master SPV Ltd (“YA Global”), an investment fund managed by Yorkville Advisors LLC. The initial advance on the loan facility will be US$1 million (“Initial Advance”) and the Company may request further advances of up to US$2 million, such advances to be at the discretion of YA Global. The Loan Facility is subject to interest at a rate of 10% per annum and is for a term of 360 days. The Loan Facility is supported by the Standby Equity Distribution Agreement (“SEDA”) between Nostra Terra and YA Global announced on 7 September 2011. The Initial Advance together with the interest thereon will be repaid in 10 monthly instalments commencing in July 2012, with the repayment schedule to be adjusted in the event further advances are drawn down. The proceeds from the Initial Advance will be used to augment the Company's existing leasing programme, as well as providing additional capital for Nostra Terra's expanding portfolio. 50 Nostra Terra Oil and Gas Company plc Notes Annual report 2011 51 Notes 52 Nostra Terra Oil and Gas Company plc 

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