NOTES TO FINANCIAL STATEMENTS
December 31, 2013
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Great East Energy, Inc. (the “Company”) was incorporated under the name Epsilon Corp. in Delaware on October 17, 2011. The Company's current business plan is acquisition and development of natural gas properties located in Ukraine.
On July 25, 2013, the Company consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement”) dated July 25, 2013 by and among the Company and the stockholders of Great East Energy, Inc., a Nevada corporation (“GEEI”), (the “GEEI Stockholders”) whereby GEEI Stockholders transferred 100% of the outstanding shares of common stock of GEEI held by them, in exchange for an aggregate of 330,008 newly issued shares of the Company’s common stock, par value $.001 per share (“Common Stock”). As a result, GEEI became a wholly-owned subsidiary of the Company.
On July 25, 2013, GEEI entered into a Stock Purchase Option Agreement (the “Option Agreement”) with Bezerius Holdings Limited, a corporation organized under the laws of the Republic of Cyprus (“BHL”), whereby BHL granted to GEEI an option to purchase 1,000 shares of equity capital of Synderal Services LTD, a corporation organized under the laws of the Republic of Cyprus ("SSL"), representing all issued and outstanding shares of SSL, for $1,250,000. SSL is engaged in the gas exploration and production business in Ukraine through its two wholly-owned subsidiaries, Limited Liability Company NPK-KONTAKT and Limited Liability Company LISPROMGAZ, each a legal entity formed under the laws of Ukraine.
Under the Option Agreement, GEEI was required to pay to BHL $412,500 as an advance payment to be credited towards the purchase price of the SSL shares. The Company made the advance payment on July 25, 2013. The balance of the purchase price in the amount of $837,500 was paid by GEEI upon exercise of the option that was completed on November 25, 2013 by paying to BHL $500,000 in cash and issuing a promissory note in the principal amount of $337,500 for the balance of the option exercise price. The note bears no interest and has a maturity date of December 31, 2013, which was extended to March 31, 2013. The obligations of GEEI under the note are secured by 1,000 shares of SSL purchased by GEEI under the Option Agreement in accordance with the Pledge and Security Agreement dated November 25, 2013 made by GEEI in favor of the collateral agent acting on behalf of BHL. As a result, SSL, Limited Liability Company NPK-KONTAKT and Limited Liability Company LISPROMGAZ became indirect wholly-owned subsidiaries of the Company.
NOTE 2 – BASIS OF CONSOLIDATION AND COMBINATION
The Group’s entities maintain accounting books and records in local currencies of their domicile in accordance with the requirements of respective accounting and tax legislations. The accompanying consolidated financial statements have been prepared in order to present the Group's financial position and its results of operations and cash flows in accordance with US GAAP and are expressed in terms of US Dollars ($), unless otherwise stated.
The consolidated financial statements are based upon the historical financial statements of the Company, Synderal Services LTD, NPK-Kontakt LLC and Lispromgas LLC and certain adjustments that rely on preliminary estimates and certain assumptions which the Company believes are reasonable under the circumstances.
The adjustments made in preparing the interim consolidated financial statements are as follows:
- elimination of intra-entity transactions between Great East Energy, Inc. and Synderal Services LTD;
- elimination of intra-entity transactions between NPK-Kontakt LLC and Lispromgaz LLC;
- elimination of intra-entity balances between NPK-Kontakt LLC and Lispromgaz LLC;
- elimination of share capital of NPK-Kontakt LLC and Lispromgaz LLC and representation of payables for acquisition of subsidiaries incurred in connection with acquisition of NPK-Kontakt LLC and Lispromgaz LLC in March 2013.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of financial statements in conformity with US GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Although the Company uses its best estimates and judgments, actual results could differ from these estimates as future confirming events occur.
Reporting and functional currency
The Company’s functional and Group’s reporting currency is the US dollar ("USD").
The national currency of Ukraine, Ukrainian Hryvnia (“UAH”) is the functional currency for the Group’s entities that operate in Ukraine. Monetary assets and liabilities denominated in currencies other than the US dollar have been translated into the US dollar at the rate prevailing at each balance sheet date. Non-monetary assets and liabilities in currencies other than the US dollar have been translated into US dollars at historical rates. Non US dollar revenues, expenses and cash flows have been translated into US dollars at rates which approximate actual rates at the date of the transaction. Translation differences resulting from the use of these rates are included in the statement of income.
The cumulative translation effects for those entities using functional currencies other than the US dollar are included in “Foreign currency translation adjustment” on the statement of equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue recognition
Revenues from the sale of natural gas are recognized when title passes to customers, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixed or determinable.
Cash
Cash consists principally of currency on hand, demand deposits at commercial banks, and liquid investment funds having an original maturity of three months or less at the time of purchase.
Inventories
Inventories are stated at the lower of current market value or cost. The cost of inventories is based on the FIFO method and includes expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location. Inventories are made up of pipe and other material used to extract gas.
Accounts receivable
Accounts receivable are recorded at their transaction amounts less allowance for doubtful accounts. Allowance for doubtful accounts is recorded to the extent that there is a likelihood that any of the amounts due will not be obtained. The allowance is based on historical experience, current and expected economic trends and specific information about customer accounts. Accordingly, actual results may differ from these estimates under different assumptions or conditions at the date of the financial statements and the reported amount of revenues and expenses during those reporting periods.
Property, plant and equipment
Depreciation, depletion and amortization, based on cost less estimated salvage value of the asset, are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration. Maintenance and repairs, including planned major maintenance, are expensed as incurred. Major renewals and improvements are capitalized and the assets replaced are retired.
Production costs are expensed as incurred. Production involves lifting the gas to the surface and gathering, treating, field processing and field storage of the gas. Production costs are those incurred to operate and maintain wells and related equipment and facilities. These costs become part of the cost of gas produced.
Interest costs incurred to finance expenditures during the construction phase of multiyear projects are capitalized as part of the historical cost of acquiring the constructed assets. The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use.
Gas properties (wells) are accounted for using the successful efforts method of accounting whereby property acquisitions, successful exploratory wells, development costs, and support equipment and facilities are capitalized and depleted using the unit-of-production method. Unsuccessful exploratory wells are expensed when a well is determined to be non-productive. Other exploratory expenditures, including geological and geophysical cost are expensed as incurred.
The Group capitalizes costs related to exploratory wells and exploratory-type stratigraphic wells for more than one year if the well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project. If these conditions are not met or if information that raises substantial doubt about the economic or operational viability of the project is obtained, the well would be assumed impaired, and its cost, net of any salvage value, would be charged to operating expenses.
The capitalized costs of all other plant and equipment are depreciated or amortized over their estimated useful lives on a straight-line basis.
Long-lived assets, including gas properties, are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such events include write-downs of proved reserves based on field performance, significant decreases in the market value of an asset, significant change in the extent or manner of use of or a physical change in an asset, and a more-likely-than-not expectation that a long-lived asset or asset group will be sold or otherwise disposed of significantly sooner than the end of its previously estimated useful life. Recoverability of assets to be held and used is measured by a comparison of their carrying amount with their estimated undiscounted future cash flows expected to be generated by such assets. Impaired assets are written down to their estimated fair values, generally their discounted, future net before-tax cash flows.
Asset retirement obligation and environmental liabilities
The Group incurs asset retirement obligations for certain assets. These obligations may include the costs of asset disposal and additional soil remediation. The fair value of a liability for an asset retirement obligation is recorded as a liability when there is a legal obligation associated with the retirement of a long-lived asset and the amount can be reasonably estimated. In the estimation of fair value, the Group uses assumptions and judgments regarding such factors as the existence of a legal obligation for an asset retirement obligation; technical assessments of the assets; estimated amounts and timing of settlements; discount rates; and inflation rates. The costs associated with these liabilities are capitalized as part of the related assets and depreciated. Over time, the liabilities are accreted for the change in their present value.
Liabilities for environmental costs are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Environmental expenditures that relate to ongoing operations or to conditions caused by past operations are expensed. Expenditures that create future benefits or contribute to future revenue generation are capitalized.
The gross amount of environmental liabilities is based on the company’s best estimate of future costs using currently available technology. Future amounts are not discounted.
Start-up Costs
In accordance with ASC 720,
“Start-up Activities,
” the Company expenses all costs incurred in connection with the start-up and organization of the Company.
Common Stock Issued For Other Than Cash Proceeds
Services purchased and other transactions settled in the Company's common stock are recorded at the estimated fair value of the common stock issued if that value is more readily determinable than the fair value of the consideration received.
Income taxes
Income taxes represent amounts paid or estimated to be payable, net of amounts refunded or estimated to be refunded, for the current year and the change in deferred taxes, exclusive of amounts recorded in other comprehensive income.
Deferred income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are recognized using enacted tax rates for the effect of such temporary differences. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
In accounting for uncertainty in income taxes of a tax position taken or expected to be taken in a tax return, the Group utilizes a recognition threshold and measurement attribute for the financial statement recognition and measurement. The recognition threshold requires the Group to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position in order to record any financial statement benefit. If it is more likely than not that a tax position will be sustained, then the Group must measure the tax position to determine the amount of benefit to recognize in financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Group recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.
Net Income or (Loss) Per Share of Common Stock
The following table sets forth the computation of basic and diluted earnings per share:
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2013
|
|
|
FOR THE YEAR ENDED
DECEMBER 31, 2012
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(
3,964,595
|
)
|
|
$
|
26,663
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
|
|
|
|
|
|
|
|
|
shares outstanding (Basic)
|
|
|
127,884,636
|
|
|
|
178,245,256
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
144,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
|
|
|
|
|
|
|
|
|
shares outstanding (Diluted)
|
|
|
|
|
|
|
178,245,256
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
(Basic and diluted)
|
|
$
|
(
0.04
|
)
|
|
$
|
0.00
|
|
As of December 31, 2013 and 2012, the Company had 51,177,896 and 188,160,000 shares issued and outstanding, respectively. The Company had 144,000 potentially dilutive securities, related to warrants in 2013, currently issued and outstanding.
Significant Concentrations
There is currently one customer that makes up 100% of total gas revenue as of December 31, 2013 and 2012, respectively. The loss of this customer would have a material adverse effect on the Company’s financial condition and results of operation
Recently Enacted Accounting Standards
Based on our review of recently enacted accounting standards, the Company believes that none of them are expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 4 – INCOME FROM SALE OF EMISSION REDUCTION UNITS
Due to coal mine methane exploration, the Group generates greenhouse gas Emission Reduction Units (ERUs), which could be sold according to the procedure established by Kyoto Protocol.
In 2012 the Group verified 215 thousand tons of ERUs CO2 equivalent and sold it in July to Carbon Resource Management S.A. for €175,688, (U.S. $215,884); which have been recorded as other income in the year ended December 31, 2012.
NOTE 5 – PROVISION FOR INCOME TAXES
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Current income tax expense
|
|
|
(4,065
|
)
|
|
|
(41,355
|
)
|
Deferred tax
|
|
|
8,931
|
|
|
|
9,534
|
|
|
|
|
4,867
|
|
|
|
(31,821
|
)
|
The reconciliation between income tax expense and a theoretical tax:
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Income (loss) before income tax
|
|
|
|
|
|
|
Cyprus
|
|
|
(14,267
|
)
|
|
|
(4,426
|
)
|
Ukraine
|
|
|
(177,476
|
)
|
|
|
131,438
|
|
|
|
|
(191,743
|
)
|
|
|
127,012
|
|
Income tax rate
|
|
|
|
|
|
|
|
|
Cyprus
|
|
|
12.5
|
%
|
|
|
10.0
|
%
|
Ukraine
|
|
|
19.0
|
%
|
|
|
21.0
|
%
|
Theoretical tax at statutory rate
|
|
|
|
|
|
|
|
|
Cyprus
|
|
|
1,783
|
|
|
|
443
|
|
Ukraine
|
|
|
33,720
|
|
|
|
(27,602
|
)
|
|
|
|
35,504
|
|
|
|
(27,159
|
)
|
Effect of change in tax rate
|
|
|
(6,678
|
)
|
|
|
(4,544
|
)
|
Tax effect of permanent differences
|
|
|
11,544
|
|
|
|
(684
|
)
|
Tax effect of income not subject to tax
|
|
|
(58
|
)
|
|
|
962
|
|
Operating loss carryforwards
|
|
|
(35,504
|
)
|
|
|
(396
|
)
|
|
|
|
4,866
|
|
|
|
(31,821
|
)
|
On December 3, 2010, the new Tax Code of Ukraine was adopted, which came into effect on January 1, 2011. In accordance with the provisions of the new Tax Code, rates of the company income tax will be reduced from 25% to 16% in several stages during the years 2011-2014 starting from April 1, 2011.
Deferred tax assets and liabilities are measured at the income tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized.
In accordance with Transitional provisions of the Tax Code of Ukraine, the tax exemption is provided to entities in regard to taxation of income from gas (methane) extraction. This exemption is temporary and expires on January 1, 2020.
Tax effects of temporary differences for:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Current deferred tax assets and liabilities
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
2,322
|
|
|
|
2,779
|
|
Accounts payable and accrued liabilities
|
|
|
623
|
|
|
|
740
|
|
Net current deferred tax assets
|
|
|
2,945
|
|
|
|
3,519
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets and liabilities
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
11,727
|
|
|
|
6,023
|
|
Asset retirement obligations
|
|
|
9,289
|
|
|
|
8,575
|
|
Operating loss carryforwards
|
|
|
36,333
|
|
|
|
703
|
|
Deferred tax assets valuation allowance
|
|
|
(36,333
|
)
|
|
|
(703
|
)
|
|
|
|
21,015
|
|
|
|
14,598
|
|
Less: Offset of deferred tax assets and liabilities
|
|
|
-
|
|
|
|
(3,087
|
)
|
Net noncurrent deferred tax assets
|
|
|
21,015
|
|
|
|
11,511
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
(1,769
|
)
|
Notes issued
|
|
|
-
|
|
|
|
(1,318
|
)
|
|
|
|
-
|
|
|
|
(3,087
|
)
|
Less: Offset of deferred tax assets and liabilities
|
|
|
-
|
|
|
|
3,087
|
|
Net noncurrent deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
As at December 31, 2013 the Company had tax loss carry-forwards of $9,725 for SSL only, and Kontakt and Lispromgaz generated losses during the fiscal years ended December 31, 2013 and of $3,965,096 and $4,054, respectively. Under current Cyprus legislation, tax losses may be carried forward and be offset against taxable income of the five succeeding years. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management does not expect that deferred assets for operating loss carry-forwards will be realised.
The valuation allowance relates to deferred tax assets for operating loss carry-forwards and reduces the deferred tax assets to amounts that are, in management’s assessment, more likely than not to be realized.
NOTE 6 – PROPERTY, PLANT, AND EQUIPMENT
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Wells and
related equipment and facilities
|
|
|
1,199,912
|
|
|
|
1,209,354
|
|
Buildings, equipment, vehicles, and other PPE
|
|
|
657,960
|
|
|
|
657,287
|
|
|
|
|
1,857,872
|
|
|
|
1,866,641
|
|
Less: Accumulated depreciation
|
|
|
(
767,335
|
)
|
|
|
(
665,010
|
)
|
|
|
|
1,090,537
|
|
|
|
1,201,631
|
|
The Company’s property, plant and equipment listed above include asset retirement costs associated with its asset retirement obligations (Note 8).
Exploratory wells
The following two tables provide details of the changes in the balance of suspended exploratory well costs as well as an aging summary of those costs.
Change in capitalized suspended exploratory well costs:
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
Beginning balance
|
|
|
412,028
|
|
|
|
412,193
|
|
Effect of translation to presentation financial statement currency
|
|
|
-
|
|
|
|
(165
|
)
|
Ending balance
|
|
|
412,028
|
|
|
|
412,028
|
|
Aging of capitalized suspended exploratory well costs:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Capitalized for a period of between one and five years
|
|
|
33,283
|
|
|
|
33,283
|
|
Capitalized for a period of between five and ten years
|
|
|
378,745
|
|
|
|
378,745
|
|
|
|
|
412,028
|
|
|
|
412,028
|
|
Capitalized exploratory well costs are related to one project, represented by two wells drilled in 2003: $179,847 and $232,181 as at December 31, 2012. The wells were suspended pending final assessment of the operational and economic viability of the project. A decision is expected at the end of 2013.
NOTE 7 – NOTES PAYABLE TO RELATED PARTIES
Loans received are non-interest unsecured loans, received from related parties. Loans received are shot-term loans (less than year), which were prolonged more than once. The final maturity date is June 30, 2014.
As of December 31, 2013 loans received were fully repaid. The Company has a bank overdraft in amount of $454.
NOTE 8 – ASSET RETIREMENT OBLIGATIONS
Change in asset retirement obligations:
|
|
Year ended
December 31, 2013
|
|
|
Year ended
December 31, 2012
|
|
Beginning balance
|
|
|
53,591
|
|
|
|
48,754
|
|
Accretion expense
|
|
|
3,326
|
|
|
|
4,857
|
|
Effect of translation to presentation currency
|
|
|
-
|
|
|
|
(20
|
)
|
Ending balance
|
|
|
56,917
|
|
|
|
53,591
|
|
Asset retirement obligations incurred in the current period were Level 3 (unobservable inputs) fair value measurements.
NOTE 9 –
STOCKHOLDERS’ EQUITY
As of December 31, 2013, the Company has authorized 110,000,000 shares consisting of 100,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. On September 16, 2013, the Company effected a 56-for-1 forward stock split of its issued and outstanding shares of common stock. All common share and per share amounts have been restated for all periods presented for this stock split. As of December 31, 2013, the Company has issued 51,177,896 of the authorized shares of common stock and no shares of preferred stock.
On April 15, 2013, the Company issued 330,008 shares of common stock to the President and director as part of their consulting agreements, further discussed in note 6. The shares were valued based on an hourly rate of $150 that is compatible with the market rate for the similar positions and applied to their average of a combined 30 hours per week. The Company valued their services excluding the cash payments at $39,915. The Company also recorded the closing of Great East Energy (NV)’s accumulated deficit to additional paid in capital as part of the share exchange agreement. The shares related to this issuance were cancelled as part of the recapitalization on July 15, 2013.
On July 25, 2013, the Company issued 25,964,960 shares of Common Stock to BHL in connection with the option grant closing under the Option Agreement. The stock compensation for the period was calculated at par of $0.0001 per common share or $2,597.
From July 25, 2013 to December 31, 2013, the Company entered into and consummated transactions pursuant to a series of the Subscription Agreements (the “Subscription Agreements”) with certain accredited investors whereby the Company issued and sold to the investors for $1.00 per share an aggregate of 1,439,928 shares of the Company’s Common Stock for an aggregate purchase price of $1,440,000 (the “Private Placement”). The Company paid $89,593 in offering cost related to the private placement.
On July 25, 2013, the Company cancelled 168,000,000 shares of common stock per the terms of the Share Exchange Agreement.
During the month of August 2013, the Company issued 3,777,984 shares of common stock to officers, directors, and consultants in exchange for services provided at a value of $1.00 per common share or $3,777,984.
NOTE 10 – STOCK PURCHASE WARRANTS
During the year ended December 31, 2013, the Company issued warrants to purchase a total of 144,000 shares of the Company’s Common Stock. The Company issued the warrants as stock offering costs of 10% of the total dollar value of subscriptions at $1.00 per share under the agreement with the placement agent. The warrants were valued using the Black-Scholes pricing model under the assumptions noted below totaling $37,595 booked to additional paid in capital and offset as additional paid in capital as offering costs. Volatility was calculated by using the average volatility of three benchmark company’s in the same line of business with similar revenues and assets. The Company apportioned value to the warrants based on the relative fair market value of the Common Stock and warrants.