Nostra Terra Oil & Gas

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