NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2014
NOTE 1
–
ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2013 audited financial statements and the accompanying notes thereto. Operating results for the interim periods are not necessarily indicative of financial results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.
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 (See Note 12).
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 $337,500 for the balance of the option exercise price. The note bears no interest and has a maturity date of December 31, 2013, which was extended to June 30, 2014. The obligations of GEEI under the note are secured by 1,000 shares of SSL purchased by GEEI under the Option Agreement in accordance with the Pledge and Security Agreement dated November 25, 2013 made by GEEI in favor of the collateral agent acting on behalf of BHL. As a result, SSL, Limited Liability Company NPK-KONTAKT and Limited Liability Company LISPROMGAZ became indirect wholly-owned subsidiaries of the Company.
NOTE 2 – BASIS OF CONSOLIDATION
The Group’s entities maintain accounting books and records in local currencies of their domicile in accordance with the requirements of respective accounting and tax legislations. The accompanying condensed consolidated financial statements have been prepared in order to present the Company’s financial position and its results of operations and cash flows in accordance with US GAAP and are expressed in terms of US Dollars ($), unless otherwise stated.
The condensed 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 condensed consolidated interim 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 reporting currency is the US dollar ("USD").
The national currency of Ukraine, Ukrainian Hryvnia (“UAH”) is the functional currency for the Company’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 operations and comprehensive loss.
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 operations and comprehensive loss.
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 (first in first out) method and includes expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location. Inventories are comprised 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 Company 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 Company 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 Company 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 Company utilizes a recognition threshold and measurement attribute for the financial statement recognition and measurement. The recognition threshold requires the Company 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 Company 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 Company 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 three months ended
March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Net loss
|
|
$
|
(228,617
|
)
|
|
$
|
(31,081
|
)
|
|
Weighted average common
|
|
|
51,206,785
|
|
|
|
188,160,000
|
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
|
Warrants
|
|
|
149,000
|
|
|
|
-
|
|
|
Weighted average common shares outstanding (Diluted)
|
|
|
51,206,785
|
|
|
|
188,160,000
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
(Basic and diluted)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
As of March 31, 2014 and December 31, 2013, the Company had 51,227,896 and 51,177,896 shares issued and outstanding, respectively. The Company had 149,000 potentially dilutive securities, related to warrants in 2014, currently issued and outstanding.
Significant Concentrations
There is currently one customer that makes up 100% of total gas revenue as of March 31, 2014, and March 31, 2013, respectively. The loss of this customer would have a material adverse effect on the Company’s financial condition and results of operations.
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 – PROPERTY, PLANT, AND EQUIPMENT
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
Wells and related equipment and facilities
|
|
$
|
875,481
|
|
|
$
|
1,199,912
|
|
|
Buildings, equipment, vehicles, and other PPE
|
|
|
479,412
|
|
|
|
657,960
|
|
|
|
|
|
1,354,894
|
|
|
|
1,857,872
|
|
|
Less: Accumulated depreciation
|
|
|
(572,444
|
)
|
|
|
(767,335
|
)
|
|
|
|
$
|
782,450
|
|
|
$
|
1,090,537
|
|
The Company’s property, plant and equipment listed above include asset retirement costs associated with its asset retirement obligations (Note 6).
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:
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
Beginning balance
|
|
$
|
412,028
|
|
|
$
|
412,028
|
|
|
Effect of translation to financial reporting currency
|
|
|
(111,404
|
)
|
|
|
-
|
|
|
Ending balance
|
|
$
|
300,624
|
|
|
$
|
412,028
|
|
Aging of capitalized suspended exploratory well costs:
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
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
|
|
|
Effect of translation to financial reporting currency
|
|
|
(111,404
|
)
|
|
|
-
|
|
|
Effect of translation to financial reporting currency
|
|
$
|
300,624
|
|
|
$
|
412,028
|
|
Capitalized exploratory well costs are related to one project, represented by two wells drilled in 2003: $131,220 and $169,404 as of March 31, 2014. The wells were suspended pending final assessment of the operational and economic viability of the project. A decision is expected at the end of 2014.
NOTE 5
–
NOTES PAYABLE TO RELATED PARTIES
Loans received are non-interest unsecured loans, received from related parties. Loans received are short-term loans (less than year), which were prolonged more than once. The final maturity date is June 30, 2014.
NOTE 6 – ASSET RETIREMENT OBLIGATIONS
Change in asset retirement obligations:
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
Beginning balance
|
|
|
56,917
|
|
|
|
53,591
|
|
|
Accretion expense
|
|
|
2,119
|
|
|
|
3,326
|
|
|
Effect of translation to financial reporting currency
|
|
|
(15,808
|
)
|
|
|
-
|
|
|
Ending balance
|
|
|
43,228
|
|
|
|
56,917
|
|
Asset retirement obligations are Level 3 (unobservable inputs) fair value measurements.
NOTE 7 – 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 March 31, 2014 and December 31, 2013, the Company has issued 51,227,896 and 51,177,896 of the authorized shares of common stock respectively; 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. 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.
On January 16, 2014, the Company issued 50,000 shares of Common Stock to an investor.
On February 24, 2014 Mr. Herve Collet was appointed Chief Operating Office. Mr. Collet was granted 300,000 shares of stock of which 150,000 shares vest as of the date of the agreement and 150,000 shares vesting and issued 181 days after the date of the agreement. As of March 31, 2014 the first 150,000 shares had not been issued. On February 24, 2014 the stock was trading at $0.64 whereby the shares were valued at $96,000 and was recorded as a payable to related parties.
NOTE 8 – STOCK PURCHASE WARRANTS
During the year period ended March 31, 2014, the Company issued warrants to purchase a total of 5,000 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 $2,449 booked to additional paid in capital and offset as stock issuance fees. Volatility was calculated by using the average volatility of three benchmark companies 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.
The following table presents the assumptions used to estimate the fair values of the stock warrants and options granted:
|
|
|
2014
|
|
|
2013
|
|
|
Expected volatility
|
|
|
287- 337
|
%
|
|
|
287-294
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected term
|
|
5 Years
|
|
|
5 Years
|
|
|
Risk-free interest rate
|
|
|
1.36-1.65
|
%
|
|
|
1.36-1.43
|
%
|
The following table summarizes the changes in warrants outstanding issued to employees and non-employees of the Company during the period ended March 31, 2014.
|
Date Issued
|
|
Number of
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Expiration Date
(yrs)
|
|
|
Value if
Exercised
|
|
|
Balance December 31, 2013
|
|
|
144,000
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
5.00
|
|
|
$
|
144,000
|
|
|
Granted
|
|
|
5,000
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
5.00
|
|
|
|
5,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of March 31, 2014
|
|
|
149,000
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
5.00
|
|
|
$
|
149,000
|
|
NOTE 9 –
RELATED PARTY PAYABLES
The related party payable consists of reimbursement of expenses and compensation to the Company’s acting Chairman and acting CEO for their services. Each of them is to receive the Company’s common share in addition to a monthly cash payment for the period of April 15 through December 31, 2013. The compensation was calculated based on their average hours worked per week applied to an hourly rate that is compatible to the market rate of similar positions.
On July 25, 2013, GEEI entered into the Option Agreement with BHL, whereby BHL granted to GEEI an option to purchase 1,000 shares of equity capital of SSL, representing all issued and outstanding shares of SSL, for $1,250,000.
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 June 30, 2014. 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 of March 31, 2014, the Company had reduced the cost of the option by $165,000 and paid $750,000 in cash, $337,500 remaining as a non interest loan to BHL, and $2,597 was paid by common shares valued at par. The note is due on June 30, 2014.
The total of these related party payables as of March 31, 2014 and December 31, 2013 were $478,087 and $344,978, respectively.
NOTE 10 – TAXES PAYABLE
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
VAT payable
|
|
$
|
1,238
|
|
|
$
|
4,432
|
|
|
Other taxes payable
|
|
|
6,319
|
|
|
|
5,135
|
|
|
|
|
$
|
7,558
|
|
|
$
|
9,567
|
|
NOTE 11 – FOREIGN CURRENCY TRANSLATION
Transactions involving the Company's two natural gas companies in Ukraine, are denominated in Ukrainian Hryvnia. Assets and liabilities denominated in Ukrainian Hryvnia will be revalued to the United States dollar equivalent in the future. The effect of change in exchange rates from the transaction dates to the reporting date, for assets and liabilities, is reported as a Cumulative Currency Translation Adjustment and included in Other Comprehensive Gains or (Losses). As of March 31, 2014, the Company had $(297,398) in foreign currency translation, respectively.
NOTE 12 – CONTINGENCIES AND COMMITMENTS
Operating environment
The principal business activities of the Company are within Ukraine. Emerging markets such as Ukraine are subject to different risks than more developed markets, including economic, political and social, legal and legislative risks. As has happened in the past, actual or perceived financial problems or an increase in the perceived risks associated with investing in emerging economies could adversely affect the investment climate in Ukraine and the Ukraine’s economy in general. Laws and regulations affecting businesses operating in Ukraine are subject to rapid changes and the Company’s assets and operations could be at risk if there are any adverse changes in the political and business environment. See “Political Risks” in this footnote.
Taxation
The tax environment in Ukraine is constantly changing and characterized by numerous taxes and frequently changing legislation, which may be applied retroactively and are often unclear, contradictory, and subject to interpretation. Taxes are subject to review and investigation by a number of authorities, which are enabled by law to impose severe fines, penalties and interest charges and these amounts could be material. Future tax examinations could raise issues or assessments which are contrary to the Company’s tax filings.
Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable tax legislation and official pronouncements.
Environmental liabilities
The Company routinely evaluates its obligations relating to new and changing environmental legislation.
As liabilities in respect of the Company’s environmental obligations are able to be determined, they are recognized immediately. The likelihood and amount of liabilities relating to environmental obligations under proposed or any future legislation cannot be reasonably estimated at present and could become material. Under existing legislation, however, management believes that there are no significant unrecorded liabilities or contingencies, which could have a materially adverse effect on the operating results or financial position of the Company.
Political Risks
After continuous political and social turbulence that resulted in dismissal of the acting President of Ukraine, on February 27, 2014, the Ukrainian parliament appointed an interim government with a mandate to execute the Ukraine-EU Association and Free trade agreements, negotiated USD 16 billion IMF program in order to support implementation of liberal economic, judicial and social reforms. The Parliament also scheduled presidential elections on May 25, 2014. The US and European Union also agreed to provide additional USD 20 billion financial and technical support for Ukraine in light of its recent economic and military tensions with Russian Federation.
Political unrest in Ukraine of the past months and recent increase in political, economic and military pressures from Russian Federation, had fueled activity of various secessionist groups in the eastern part of the country. This may have an adverse effect on the national security and economy, and increase risks of doing business in Ukraine or investing in the companies doing business in Ukraine. The situation is exacerbated by the tensions with the Russian Federation which annexed the Crimean peninsula in March 2014 and built up a significant military presence at its border with Ukraine. Such events and circumstances have an adverse effect on investment climate in Ukraine and in case of further escalation might have further negative impact on the business environment.
NOTE 13 – GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has incurred $3,032,903 in accumulated deficit since its inception and has generated $67,028 in operating revenue during the three months ended March 31, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
In view of these matters, realization of the assets of the Company is dependent upon the Company’s ability to meet its financial requirements through equity financing and the success of future operations. These condensed consolidated financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE DISCUSSION IN THIS SECTION CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR OUR FUTURE PERFORMANCE. WORDS SUCH AS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "MAY" AND SIMILAR EXPRESSIONS OR VARIATIONS OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, WE URGE YOU TO CAREFULLY CONSIDER VARIOUS FACTORS IDENTIFIED IN THIS REPORT, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
The Company is focused on growing gas production volumes in Ukraine through expanding its assets base by exploring and developing its existing license field, as well as through evaluating and pursuing new investment opportunities. The Company’s management anticipates that in addition to the existing assets which will continue to provide ongoing revenues from our productive gas wells, the Company's surface and sub-surface facility optimization, expected new drilling activities and discovery of new resources will contribute to increased production volumes.
Plan of Operations
Since 2004, the Company explored and developed the shallow gas-bearing horizons only at two of seven domes within the license area; we currently operate only two productive wells. Thus, we believe that the Company has unrealized opportunity and can create the base for further expansion. We have developed a production increase plan for years 2014-2018, key elements of this plan include:
Increase production within overthrust/belowthrust domes.
We plan to enhance our gas production volumes on Northern Tomashevskoye and Southern Tomashevskoye domes through fracking and stimulation on our existing two exploratory, but currently suspended wells. Our 2014-2018 drilling program also includes drilling three new “shallow” and four new “deep” operated wells on Northern Tomashevskoye and Southern Tomashevskoye domes with implementation of fracking and stimulation technology to enhance initial production. In addition we plan to drill nine new “deep” exploratory wells on Zolotarivska, Toshkievskaya and Petrograd-Donetsk domes with fracking and stimulation.
Monetize CBM production.
We intend to monetize our Coal-bed Methane (CBM) production by modernizing degasification equipment and connecting our current two degassing wells with existing delivery infrastructure. In addition, we intend to significantly enhance our CBM production by drilling numerous new shallow vent-wells up to 500m each.
Conduct further geological research within our Lisichansk-Toskovskay area.
We intend to obtain new geological information for potential additional under-fault gas resources by reworking and deepening the 7K well up to 1,500m (under the fault) or drilling a new well up to 1,500m. We will also focus our efforts to carry out modern geological studies on the entire license area through 2D and 3D seismic as well as modern helium survey. As a result, we expect to compile a geophysical database and obtain geological proofs to update our reserves valuation.
Our 2014-2018 strategic and operational plan is subject to various factors, including market conditions, gas field services and equipment availability, commodity prices, drilling results and political instability. While we continue to explore opportunities to enhance our gas production volumes, our main efforts will be focused on drilling and completing wells. If we choose to pursue the rapid expansion strategy, we will contemplate obtaining greenfield licenses directly from government authorities and acquire underperforming existing operators that have room to grow.
Results of Operations for the Three Months ended March 31, 2014 and 2013
The following table discloses our gas sales volumes for the periods indicated:
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Sales Volume:
|
|
|
|
|
|
|
|
Gas production (MMcf)
|
|
|
6.21
|
|
|
|
7.56
|
|
|
Gas sales price ($/Mcf) (excluding VAT)
|
|
|
9.63
|
|
|
|
9.52
|
|
|
Gas sales ($)
|
|
|
53,650
|
|
|
|
71,964
|
|
Natural gas sales revenues
. Natural gas sales volumes decreased by 1.35 MMcf to 6.21 MMcf for the period ended March 31, 2014. Natural gas revenues decreased by $18,314 to $53,650 for the period ended March 31, 2014 as compared to natural gas revenues of $71,964 for the period ended March 31, 2013. The decrease in natural gas revenues was due to the devaluation of the hryvnia currency and also to the decrease of gas methane production compared to the same period in 2012.
The following table sets forth selected consolidated financial data as of and for the period ended March 31, 2014 and December 31, 2013.
|
|
|
For the three months ended
March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Gas sales
|
|
$
|
53,650
|
|
|
$
|
71,964
|
|
|
Other sales
|
|
|
12,164
|
|
|
|
1,401
|
|
|
Other income
|
|
|
1,214
|
|
|
|
8,232
|
|
|
Total Revenues and Other Income
|
|
|
67,028
|
|
|
|
81,597
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
|
|
50,454
|
|
|
|
58,970
|
|
|
General and administrative expenses
|
|
|
44,373
|
|
|
|
31,326
|
|
|
Depreciation, depletion and amortization
|
|
|
17,669
|
|
|
|
27,706
|
|
|
Professional fees
|
|
|
183,149
|
|
|
|
2,404
|
|
|
Total Operating Expenses
|
|
|
295,645
|
|
|
|
120,406
|
|
|
Loss from operations
|
|
|
(228,617
|
)
|
|
|
(38,809
|
)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
|
-
|
|
|
|
(1,804
|
)
|
|
Total other income (expense)
|
|
|
-
|
|
|
|
(1,804
|
)
|
|
Loss before income taxes
|
|
|
(228,617
|
)
|
|
|
(40,613
|
)
|
|
Income tax benefit/(provision)
|
|
|
-
|
|
|
|
9,532
|
|
|
Net loss applicable to common shares
|
|
$
|
(228,617
|
)
|
|
$
|
(31,081
|
)
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(297,398
|
)
|
|
|
-
|
|
|
Total other comprehensive loss
|
|
|
(297,398
|
)
|
|
|
-
|
|
|
Comprehensive Loss
|
|
$
|
(526,015
|
)
|
|
$
|
(31,081
|
)
|
Other
income
and other sales
. Our other sales and income mainly included revenues using the Company-owned transportable machinery and equipment, such as a cementing unit, compressor unit and pump set to render services to third parties. Other income and other sales increased by $3,745 to $13,378 for the period ended March 31, 2014.
Operating and maintenance expenses.
Our operating and maintenance expenses of $50,454 mainly included wages and salaries of the gas production personnel, cost of materials, taxes and duties. Operating and maintenance expenses decreased by $8,516 thousand in 2014 compared to 2013 mainly due to decreases in material expenses.
General and administrative (“G&A”) expenses
. G&A expenses increased by $13,047 to $44,373 for the period ended March 31, 2014, from $31,326 for the Period ended March 31, 2013.
Depreciation, depletion and amortization (“DD&A”) expenses
. Our DD&A expense decreased $10,037 to $17,699 for the period ended March 31, 2014, from $27,706 for the period ended March 31, 2013.
Professional fees
. Professional fee expenses of $183,149 in the first quarter of 2014 included accounting, legal fees and consulting expenses.
Loss from operations
. Our operating loss was $228,617 for the period ended March 31, 2014, as compared to the operating loss of approximately $38,809 for the period ended March 31, 2013. This increase in operating loss is primarily attributed to professional fees expenses, and to a lesser extent, to increase in other operating expenses
Net loss
. Our net loss was $228,617 for the period ended March 31, 2014, as compared to a net loss of $31,081 for the period ended March 31, 2013.
Liquidity and Capital Resources
The following is a summary of our change in cash and cash equivalents for the three months ended March 31, 2014 and 2013:
|
|
|
For the three months ended
March 31,
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
Net cash used in operating activities
|
|
$
|
(66,503
|
)
|
|
$
|
(60,787
|
)
|
|
$
|
(5,716
|
)
|
|
Net cash (used in) provided by investing activities
|
|
|
(948
|
)
|
|
|
342,532
|
|
|
|
(343,480
|
)
|
|
Net cash provided by / (used in) financing activities
|
|
|
50,695
|
|
|
|
(344,594
|
)
|
|
|
395,289
|
|
|
(Decrease) in cash
|
|
$
|
(16,756
|
)
|
|
$
|
(62,849
|
)
|
|
$
|
46,093
|
|
Operating activities.
During the period ended March 31, 2014 cash used in operating activities was $66,503 as compared to cash used in operating activities during the same period ended March 31, 2013 in the amount of $60,787.
Investing activities.
During the period ended March 31, 2014 and 2013, net cash used in investing activities was $948 and net cash provided by investing activities of $342,532, respectively. The decrease was primarily attributed to repayments of notes receivable in 2013.
Financing activities.
During the three months ended March 31, 2014, cash provided by financing activities was $50,695 compared to cash used in financing activities during the period ended March 31, 2013 in the amount of $344,594. The increase was primarily due to the increase in proceeds received from repayments of loans.
Our 2014 drilling program is designed to provide flexibility in identifying suitable well locations and in the timing and size of capital investment. Our 2014 capital expenditure budget contemplates drilling of two shallow productive wells on Northern Tomashevskoye and Southern Tomashevskoye domes, modernizing degasification equipment and connecting our current two degassing wells with existing delivery infrastructure. Additionally in 2014, we intend to enhance our gas production through fracking and stimulation on our existing two exploratory, but currently suspended wells. Our capital expenditure budget is estimated approximately $5.00 million in 2014 and is dependent on various factors, including market conditions, services and equipment availability, gas price and drilling results. Other factors that could cause us to further adjust our capital expenditure budget include, among other things, increases or decreases in service and material costs, changes in commodity prices or well performance that differ from our forecasts, any of which could affect our operating cash flow.
We plan to finance our 2014 capital expenditure budget primarily through the issuance of equity and, to a lesser extent, cash flows from operations, as discussed in more detail below:
Sources of Capital
Issuance of equity.
As of the date of this filing, in order to support our capital and exploration expenditures we plan to raise equity capital from investors of approximately $4.0 million in 2014. We will continue to assess our liquidity position and conditions on the capital markets and may increase or decrease our financing activities in 2014 accordingly.
Cash flow from operations
. We expect our cash flow from operations will increase commensurate with our anticipated increase in sales volumes resulting from our ongoing drilling and completion activities. We anticipate that our estimated 2014 revenues from operations of approximately $1.8 million will exceed our current cost estimates of approximately $0.8 million and resulting operating cash flows will support our capital program. As our production rates and operating cash flows increase, we will be more dependent on our anticipated cash flows from operations then on expected proceeds from investors.
Critical Accounting Policies
Going concern
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has incurred $3,032,903 in accumulated deficit since its inception, is in the development stage and has generated $67,028 of operating revenue during the period ended March 31, 2014. These items raise substantial doubt about the Company’s ability to continue as a going concern.
In view of these matters, realization of the assets of the Company is dependent upon the Company’s ability to meet its financial requirements through equity financing and the success of future operations. These financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Management believes they can raise the appropriate funds needed to support their business plan and acquire an operating company with positive cash flow. Management intends to seek new capital from owners and related parties to provide needed funds.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).