By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 18 May 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
AIM-listed Frontera (FRR) has rather slipped since I last wrote about it last month HERE and HERE, concluding that it had a gaping black hole in its balance sheet. The shares were then trading at around 0.4p. This afternoon the shares are 0.31p in the middle (last seen) and it has announced its AGM. Just one thing: where are the full year results? The company is trying to raise c. £40 million in cash and loan settlements, and won’t show us the balance sheet? How big a RED FLAG do you want?
At the half-way stage last year the company reported net current assets of MINUS $57 million. Since then various confetti issues and a morphed loan have seen a net current assets improvement of perhaps around $36 million – but we don’t know how much spending has been racked up by the company. We do know that at the last count accumulated losses were an eye-watering $467 million. Very roughly, that is about the current market capitalisation sent to the great central bank in the sky every year since it joined the Casino!
So we have not yet had FY16 results (due by 30 June), yet the company has called its AGM for 5 June – and we are told that the results are expected to be released on/around 30 June. Given that AGMs normally have things like receiving the report and accounts for the year this is something of a Red Flag.
So why call the AGM ahead of the results? What is in the AGM business which might answer that question?
Waseem Shakoor has posted seven damning points which can be read HERE. Without wishing to repeat the great man, I have a few comments of my own.
Let’s look at the AGM resolutions – in particular, at the Special Business which, to paraphrase, boils down to authorities to allot, issue and redeem Series A convertible, preferred, redeemable shares of the company, and the near doubling of the authorised share capital.
Note: no adoption of FY16 report and accounts, nor the reappointment of auditors. I guess that can wait for a promised EGM which the company is threatening in order to consolidate the shares.
Now let’s look at what those newly minted golden tickets are being lined up to settle:
1) The company seems to have raised $700,000 from “a consortium of financial institutions” and issued a convertible loan note which can be repaid in cash on 31 May or by conversion into 323,529,412 shares “when available.” The “when available” is of interest because we are told this morning that the company’s authorised share capital sits at 8.85 billion shares, and 8.842 billion golden tickets are already out there, leaving headroom for just another 8 million shares to be rolled off the presses – nowhere near enough.
That conversion works out at 0.216 cents per share – about 0.168p per share. Against this morning’s opening price that’s about a 50% discount. As it happens the AGM date of 5 June is 12 trading days away, but since this is the world’s most successful growth market there is no possibility that those shares have already been forward-sold on a T+20, so that’s just fine.
There are also 25 million warrants to be issued (exercisable at 1p, so that won’t happen!).
When did the company announce this financing package? We are told that the deal was done on 15 May – Monday. Why has it taken until Thursday for the company to get around to announcing it?
2) The company ‘fesses up to having racked up indebtedness for “various oil field and supporting services” in the sum of “approximately” $8 million. For a company with a market capitalisation of £26 million (source: ADVFN) that is a significant sum of money – call that £6.2 million – about 24% of the market capitalisation. When was this announced? Answers of a postcard….
This $8 million is proposed to be converted at “a” prevailing market price. Well that’s clear….oh, er…..why “a” prevailing market price and not “the” prevailing market price, I wonder?
We are told that the company estimates that this conversion will require 1.9 billion shares, suggesting an issue price of 0.421 US cents per share – about where the shares are now.
That may seem OK, but one is reminded of the old saying that if you owe the bank a million quid it is the bank (ie not you) which has the problem. One can’t help thinking that with $8 million outstanding it is the contractors who have the problem and faced with the alternative of pursuing a company with (right now) negative assets or taking shares which might get somewhere near repaying them, they’ve settled for what they can get. Again, naturally, there is no chance of this previously undisclosed $8 million of debt having been forward sold at prices of up to 0.4p as recently as last Wednesday so that’s all fine too, especially since “it is not intended that this conversion will take place immediately following the AGM”. With all the other rounds of confetti headed this way, this is just as well – we wouldn’t want Mr Market to suffer from indigestion.
Just one question here: what happens if the shares fall dramatically before conversion: will a new price be set?
3) There is outstanding debt of $6.2 million to YA II PN (that’ll be Yorkville to us plebs) which is to be settled by the issue of 7,200 convertible, preferred, redeemable shares (with a “liquidation Amount” of $1,000 each) which themselves are convertible at (ignoring the red herring of the 1p per share fixed price option) 90% of the lowest daily VWAP (volume weighted average price) of the five trading days preceding notice of conversion. A maximum of 1.3 billion shares is being made available for that over the coming 12 months, with Yorkville allowed to convert up to $400,000 worth (by value of the issued conversion shares) of these preference shares per month.
Hmm - $6.2 million of debt becomes $7.2 million of debt, of which only (roughly) $0.4 million per month can be converted? So the maximum conversion in the 12 months following issue of these convertible, redeemable prefs is $4.8 million worth? That leaves $2.6 million worth of prefs left over for the following year. What is the maximum number of ordinary shares being made available for that?
So when we are told that there is a maximum of 1.3 billion shares available for the Yorkville conversion package over the 12 months following issuance of these “redconprefs” we could actually see 1.3 billion shares issued to settle just $4.8 million of debt. And that $4.8 million of debt is $4.8 million of £7.2 million issued to settle $6.2 million of debts.
Confused? I make that up to 1.3 billion shares to settle currently outstanding debt of $4.13 million – 0.318 US cents per share, or about 0.246p per share. That’s a discount of 20% to the current share price.
And if Yorkville elects to convert a little more slowly, does the full 1.3 billion share cap still apply, resulting in an even lower potential conversion prices?
As for the management loans being converted at 1p, Waseem Shakoor suggests that these have ballooned in recent years as the result of 15% compound interest rolling up to achieve a whopping and unpayable $26 million bill. Conversion at 1p (is that affected by a share consolidation – one assumes so but….) may seem like management skin in the game but since that amount of cash wasn’t put in to the company to start with, it isn’t really all that relevant. I’d be more inclined to focus on what Yorkville is paying and what that $700,000 loan is being converted at.
So let’s see: at last year’s half way stage the company had negative net assets of MINUS $65 million and raised a few buttons since then. Now we learn of heading for $9 million of debts racked up that we might not have known about before. Wiping those, and $26 million of management loans off the books, as well as Yorkville cash (when was that all drawn?) still, as far as I can see, leaves negative net assets.
The company says it continues with efforts to raise new working capital via a placing, expecting to raise around $12 million and estimating the need to issue around 2.85 billion shares. So that’s 0.42 US cents per share – about 0.326p. With a boat-load of equity being splurged out at around half of that figure…….good luck with that one, fellas!
And so having identified the need for an additional (ball-park, including warrants) 350 million shares to settle the $700,000 loan, 1.3 billion shares to issue to Yorkville (to settle just over $4 million of existing debt), 2 billion shares to settle $26 million of management loans and 1.9 billion to settle the $8 million of debts and 2.85 billion shares for a $12 million placing that comes to around 8.4 billion new shares.
In other words Frontera, on a market capitalisation of £26 million, is looking to raise around $51 million (call that £40 million) before we even get to see the balance sheet as at five months ago!
Does anyone really wonder why this is all coming 25 days before the company has to get its numbers out (and thus avoid AIM suspension)?
Does anyone really wonder what happened to that drilling programme which was delayed because the kit didn’t arrive (why was that, then?) and then postponed, apparently because of some kind of JV or farm-out discussions?
This is a complete dog. It has been on AIM for years and has simply racked up massive losses year after year after year – a whopping $467 million after 11 years on the world’s most successful growth market.
The shares are, quite simply, a total and utter bargepole of the lowest order. Sell.
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