By Tom Winnifrith, The Sheriff of AIM | Monday 3 July 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.
The City's No 1 oil analyst Zac "the Knife" Phillips of SP Angel is in full flow on the subject of Frontera Resources (FRR) where the management team has today, again, shown that they are greedy selfish pigs who do not give a flying wotsit about shareholder dilution. The Knife puts it a tad more diplomatically but he does not hide his undisguised - and 100% justified - contempt for Steve Nicandros and his co-directors. Over to the Knife...
Frontera Resources – $26mm Management Debt: Today’s news that $26mm of “management debt” has been accumulated comes at somewhat of a surprise for a company whose paper (in its current format), has been listed since 2011. Those with long memories will remember that at that time, the management converted the $9.2mm of outstanding management notes to shares. This is in addition to the $120mm of debt that was also converted in 2011 and the ~$30mm of convertibles it has sought to eliminate from the balance sheet using Chapter 7 regulations, which quite rightly has faced significant headwinds.
In the context of this, the latest move to convert an illiquid note to tradable paper, irrespective of the fact that it is being conducted at a premium, belies the fact that management appear to have little concern for respect for generating shareholder value. If they did, they would forgo that unpaid salary, especially as it is a reflection of the excess over and above what they could be paid in cash terms; Steve Nicandros paid himself $550,000 in 2011, which obviously hasn’t included any “performance” payments, and the $7mm per annum SG&A hasn’t varied significantly since then.
Irrespective of the fact that they have got these shares converted at a premium, that have now valorised their cash, which means that should they so desire, once the 12-month lock in expires, they can start to realise that cash.
This is all against the fact that they could have surrendered the salary in lieu of the disastrous performance over the life of the companies, (including the predecessor company Frontera Resources Delaware), and rather than wait for cash flow from operations, they have chosen this route. In order to fully understand this, the directors should make known the tax advice they have received in respect of this premium, as under certain circumstances, the US tax code allows the carry forward of losses to be offset against taxable ordinary income; see Section 165. If this is the case, I will let you draw your own conclusions, but management could allay these fears by signing a perpetual lockin, forbidding them for selling or otherwise valorising their ownership until certain criteria are met.
Of course, the number of shares also provides them with effective control, a happy by-product some may say. Management teams should always be rewarded for creating shareholder value, but where there has been wholesale destruction of value on the scale of Frontera Resources, and it is still not in production, we believe that the shareholders, bond holders and any other provider of credit to the Company should ask serious questions.
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