Nostra Terra Oil and Gas Company plc
("Nostra Terra", "NTOG" or the "Company
Final results for the year ended 31 December 2008
30 June 2009
Chairman's Statement
It is my duty to present our Annual Report and accounts for 2008. It was a
challenging and disappointing year for the Company. Our activities over the past
year have been largely directed at developing a new strategy and direction for
the Company. We have examined several potential alliances and evaluated a number
of alternatives to revive the fortunes of the Company. All of our activities
have been severely impacted by the worldwide economic crisis.
Simply put, our mission is to attract investment and partners who can
reinvigorate the Company so that shareholders may benefit from an improving oil
market.
It has been approximately nine months since our announcement that we decided to
cease work on Oktyabrskoe well #24. Immediately following this decision on well
#24 the board eliminated all cash compensation to all directors and senior
management. Operational costs were reduced to the bare minimum. Spending was
restricted to only those amounts essential to maintain our operation in the
Ukraine and keep our contractual commitments.
Additionally, the Company was successful in restructuring our debt obligations
with Promissory Note holders. Debt was transferred to our subsidiary NTOL,
reduced by 75% and extended until December 2012.
We expect 2009 to be a year when the Company needs to find additional impetus
and investment for it to move forward.
Sir Adrian Blennerhassett
Chairman
Chief Executive Officer's Statement
During the fiscal year 2008 the Company successfully negotiated the return of
Oktyabroskoe #1 and produced 3,254 barrels of oil from Oktyabrskoe well #1 and
192 barrels of oil from Oktyabrskoe well #24.
The major operational event for the Company was the opening of well #24. Initial
results were very encouraging with well #24 producing 61 barrels of oil during
the month of May 2008. This initial level of production was free flowing and the
well was open for only a few days in May.
Unfortunately as reservoir pressure dropped we encountered water from both above
and below the target zone. We attempted to address the water problem by
installing packers above the target zone to address water inflows from above and
re casing the bottom portion of the well to address possible water inflows from
the bottom.
Unfortunately, the application of both potential solutions did not result in a
reduction of the water to oil ratio. We decided to abandon plans to install a
pump on well #24 and we also abandoned plans to complete well #10 since that
well has similar geology to #24 and was therefore considered to have little
chance of success following the results produced by #24.
The balance of the year was devoted to minimizing operational costs and
attempting to find additional capital and partners to shift development to the
West Oktyabrskoe field.
While the Company conducted a vigorous search it was unable to attract any
investment or potential partners. This was due in large measure to the drop in
oil prices and the worldwide economic crisis. We intend to continue our efforts
to attract additional investment and hope that we meet with success in 2009.
Brian Courtney
Chief Executive Officer
Copies of the Annual Report and Accounts for the year ending 31 December 2008
are today being posted to shareholders and will shortly be available, in
electronic form, from the Company's website (www.ntog.co.uk)
For further information contact:
Nostra Terra Oil and Gas Company plc
Stephen Oakes, Non-executive Director Tel: +44 (0)207 877 8788
Blomfield Corporate Finance Limited Tel: +44 (0)20 7489 4500
Alan MacKenzie/Peter Trevelyan-Clark/Ben Jeynes
Alexander David Securities Ltd Tel: +44 (0)20 7448 9820
David Scott/Bill Sharp
Consolidated Income Statement
for the year ended 31 December 2008
Year 11 Months
ended to
31 31
December December
2008 2007
Notes £000 £000
Revenue 88 30
Cost of sales (213) (16)
-------- --------
GROSS PROFIT/(LOSS) (115) 14
Administrative expenses 5 (1,228) (362)
-------- --------
OPERATING LOSS 5 (1,343) (348)
Impairment of goodwill 9 (943) -
Loan notes waived 1 1,262 -
6
Finance costs 4 31 (32)
Finance income 4 1 5
-------- --------
LOSS BEFORE TAX (992) (375)
Tax (expense) recovery 6 7 (7)
-------- --------
LOSS FOR THE YEAR (985) (382)
-------- --------
Attributable to:
Equity holders of the Company (985) (382)
-------- --------
Earnings per share expressed
in pence per share:
Basic and diluted (pence) 8 (0.24) (0.20)
------- -------
Statement of Changes in Equity
for the year ended 31 December 2008
Share Share Translation Retained Total
Capital Premium Reserves Losses
£000 £000 £000 £000 £000
As at 1 February 63 167 - (110) 120
2007
Shares issued 283 3,339 - - 3,622
Loss after tax for - - - (382) (382)
the period
------- ------- ------- ------ ------
As at 31 December 346 3,506 - (492) 3,360
2007
Shares issued 78 421 - - 499
Translation - - 12 - 12
reserves
Loss after tax for - - - (985) (985)
the year
------- ------- ------- ------ ------
As at 31 December 424 3,927 12 (1,477) 2,886
2008
------- ------ ------ ------ ------
Share capital is the amount subscribed for share at nominal value.
Retained loss represents the cumulative losses of the Company attributable to
equity shareholders.
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 reserve occurs on consolidation the translation of the subsidiary's
balance sheet at the closing rate of exchange and its income statement at the
average rate.
Consolidated Balance Sheet
31 December 2008
2008 2007
Notes £000 £000
ASSETS
NON-CURRENT ASSETS
Goodwill 9 3,268 4,211
Other Intangibles 10 153 510
Property, plant and equipment 11 47 76
-------- --------
3,468 4,797
CURRENT ASSETS
Trade and other receivables 13 255 193
Cash and cash equivalents 14 11 153
-------- --------
266 346
LIABILITIES
CURRENT LIABILITIES
Trade and other payables 15 170 296
Tax payable - 7
Financial liabilities - 16 257 -
borrowings
-------- --------
427 303
-------- --------
NET CURRENT ASSETS (161) 43
-------- --------
NON-CURRENT LIABILTIIES
Financial liabilities - 16 421 1,480
borrowings
-------- --------
NET ASSETS 2,886 3,360
------- -------
EQUITY AND RESERVES
Called up share capital 17 424 346
Share premium 18 3,927 3,506
Translation reserves 18 12 -
Retained loss 18 (1,477) (492)
-------- --------
2,886 3,360
------- -------
The financial statements were approved and authorised for issue by the Board
of Directors on 30 June 2009 and were signed on its behalf by:
B W Courtney
Director
Consolidated Cash Flow Statement
for the year ended 31 December 2008
Year 11 Months
ended to
31 31
December December
2008 2007
Notes £000 £000
Cash flows from operating 1
activities
Cash generated/(consumed) by (550) 123
operations
Finance (costs) recovery 31 (32)
-------- --------
Net cash (consumed) from (519) 91
operating activities
Cash flows from investing
activities
Purchase of intangibles - (510)
Purchase of plant and equipment (123) (76)
Acquisition of subsidiaries - (203)
Interest received 1 5
-------- --------
Net cash from investing (122) (784)
activities
-------- --------
Cash flows from financing
activities
Issue of new shares 499 695
-------- --------
Net cash from financing 499 695
activities
-------- --------
Increase/(Decrease) in cash and (142) 2
cash equivalents
Cash and cash equivalents at 1 153 151
beginning of year 4
-------- --------
Cash and cash equivalents at end 1 11 153
of year 4
Represented by: ------- -------
Cash at bank 11 153
------- -------
Notes to the Group Cash Flow Statement for the year ended 31 December 2008
RECONCILIATION OF OPERATING PROFIT TO CASH GENERATED FROM OPERATIONS
Year 11 Months
ended to
31 31
December December
2008 2007
Note £000 £000
s
Operating loss for the year (1,343) (348)
Depreciation of property, plant 152 -
and equipment
Amortisation of intangibles 357 -
Foreign exchange loss non-cash 472 -
items
-------- --------
Operating cash flows before (362) (348)
movements in working capital
-------- --------
(Increase) Decrease in (62) 246
receivables
Decrease) Increase in payables (126) 225
-------- --------
Cash generated (consumed) by (550) 123
operations
------- -------
Notes to the Financial Statements
for the year ended 31 December 2008
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 page 1 of the financial
statements. The principal activity of the Group is described on page 4. The
Company changed to its present name on 19 July 2007 upon the successful
acquisition of Nostra Terra (Overseas) Limited.
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 twelve 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 on pages
2 to 7. 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 directors are in the process of raising a minimum of £200,000 of equity
funding to assist the Group with its future working capital requirements. A
placing agreement has been signed with the Company's brokers and placing
letters are expected to be dispatched in July 2009.
The Group's forecasts and projections, taking account of reasonably possible
changes in activities, show that the Group should be able to operate within
this fund raising.
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.
Were the Group to be unable to continue as a going concern, adjustments
would have to be made to the balance sheet of the Group to reduce balance
sheet values of assets to their recoverable amounts, to provide for future
liabilities that might arise and to reclassify non-current assets and long-
term liabilities as current assets and liabilities which may cast
significant doubt about the Group's ability to continue as a going concern
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 1985 applicable to
companies reporting under IFRS. The financial statements have been prepared
under the historical cost convention. The principal accounting policies
adopted are set out below.
(a) Standards, amendment and interpretations effective in 2008
The following interpretation to published standards is mandatory for
accounting periods beginning on or after 1 January 2008 but is not
relevant to the Group's operations:
· IFRIC 12, `Service concession arrangements';
· IFRIC 13, `Customer loyalty programmes'; and
· IFRIC 14 IAS 19, `The limit on a defined asset, minimum funding
requirements and their interaction' (effective from 1 January 2008).
(b) Standards, amendments and interpretations to existing standards that are
not yet effective and have not been adopted early by the Group.
· IAS 1 Revised - Presentation of Financial Statements (effective from 1
January 2009). Key changes include, the requirement to aggregate information in
the financial statements on the basis of shared characteristics, the
introduction of a Statement of Comprehensive Income & changes in titles of some
of the financial statements.
Preparers of financial statements will have the option of presenting
income and expense and components of other comprehensive income either
in a single statement or in two separate statements (a separate income
statement followed by a statement of comprehensive income).
The new titles for the financial statements (for example 'statement of
financial position' instead of balance sheet) will be used in the
accounting standards but are not mandatory for use in financial
statements.
The expected impact is still being assessed in detail by management as
the IASB is involved in discussions to examine more fundamental
questions about the presentation of information in financial
statements.
· IFRS 8 - Operating Segments (effective from 1 January 2009). IFRS 8
replaces IAS 14 and aligns segment reporting with the requirements of the US
standard SFAS 131, "Disclosures about segments of an enterprise and related
information". The new standard requires a "management approach", under which
segment information is presented on the same basis as that used for internal
reporting purposes. The expected impact is still being assessed in detail by
management, but it appears likely that the number of reportable segments, as
well as the manner in which segments are reported, will change in a manner that
is consistent with the internal reporting provided to the chief operating
decision-maker.
· IAS 27(2008) - Consolidated and Separate Financial Statements (effective
from 1 July 2009).
· IFRS 1 (Amendment) `First time adoption of IFRS', and IAS 27 `Consolidated
and separate financial statements' (effective from 1 January 2009).
· IFRS 2 (Amendment), `Share-based payment' (effective from 1 January 2009).
The amended standard deals with vesting conditions and cancellations. It
clarifies that vesting conditions are service conditions and performance
conditions only. Other features of a share-based payment are not vesting
conditions. These features would need to be included in the grant date fair
value for transactions with employees and others providing similar services;
they would not impact the number of awards expected to vest or valuation thereof
subsequent to grant date. All cancellations, whether by the entity or by other
parties, should receive the same accounting treatment. The company will apply
IFRS 2 (Amendment) from 1 January 2009. It may have a material impact on the
Group's financial statements depending on the specific circumstances of any
share options granted in the future.
· IFRS 3 (Revised), `Business combinations' (effective from 1 July 2009). The
revised standard continues to apply the acquisition method to business
combinations, with some significant changes. For example, all payments to
purchase a business are to be recorded at fair value at the acquisition date,
with contingent payments classified as debt subsequently re-measured through the
income statement. There is a choice on an acquisition-by-acquisition basis to
measure the non-controlling interest in the acquiree either at fair value or at
the non-controlling interest's proportionate share of the acquiree's net assets.
All acquisition-related costs should be expensed. The Group will apply IFRS 3
(Revised) prospectively to all business combinations from 1 January 2010.
· IFRS 5 (Amendment), `Non-current assets held-for-sale and discontinued
operations' (and consequential amendment to IFRS 1, `First-time adoption')
(effective from 1 July 2009). The amendment is part of the IASB's annual
improvements project published in May 2008. The amendment clarifies that all of
a subsidiary's assets and liabilities are classified as held for sale if a
partial disposal sale plan results in loss of control. Relevant disclosure
should be made for this subsidiary if the definition of a discontinued operation
is met. A consequential amendment to IFRS 1 states that these amendments are
applied prospectively from the date of transition to IFRSs. The Group will apply
the IFRS 5 (Amendment) prospectively to all partial disposals of subsidiaries
from 1 January 2010.
· IAS 36 (Amendment), `Impairment of assets' (effective from 1 January 2009).
The amendment is part of the IASB's annual improvements project published in May
2008. Where fair value less costs to sell is calculated on the basis of
discounted cash flows, disclosures equivalent to those for value-in-use
calculation should be made. The Group will apply the IAS 36 (Amendment) and
provide the required disclosure where applicable for impairment tests from 1
January 2009.
· IAS 19 (Amendment), `Employee benefits' (effective from 1 January 2009).
The amendment is part of the IASB's annual improvements project published in May
2008. The amendment clarifies that a plan amendment that results in a change in
the extent to which benefit promises are affected by future salary increases is
a curtailment, while an amendment that changes benefits attributable to past
service gives rise to a negative past service cost if it results in a reduction
in the present value of the defined benefit obligation. The definition of return
on plan assets has been amended to state that plan administration costs are
deducted in the calculation of return on plan assets only to the extent that
such costs have been excluded from measurement of the defined benefit
obligation. The distinction between short term and long term employee benefits
will be based on whether benefits are due to be settled within or after 12
months of employee service being rendered. IAS 37, `Provisions, contingent
liabilities and contingent assets, requires contingent liabilities to be
disclosed, not recognised. IAS 19 has been amended to be consistent. The Group
will apply the IAS 19 (Amendment) from 1 January 2009.
· IAS 39 (Amendment), `Financial instruments: Recognition and measurement'
(effective from January 2009). The amendment is part of the IASB's annual
improvements project published in May 2008. This amendment clarifies that it is
possible for there to be movements into and out of the fair value through profit
or loss category where a derivative commences or ceases to qualify as a hedging
instrument in cash flow or net investment hedge. The definition of financial
asset or financial liability at fair value through profit or loss as it relates
to items that are held for trading is also amended. This clarifies that a
financial asset or liability that is part of a portfolio of financial
instruments managed together with evidence of an actual recent pattern of short-
term profit taking is included in such a portfolio on initial recognition. The
current guidance on designating and documenting hedges states that a hedging
instrument needs to involve a party external to the reporting entity and cites a
segment as an example of a reporting entity. This means that in order for hedge
accounting to be applied at segment level, the requirements for hedge accounting
are currently required to be met by the applicable segment. The amendment
removes the example of a segment so that the guidance is consistent with IFRS 8,
`Operating segments', which requires disclosure for segments to be based on
information reported to the chief operating decision-maker. Currently, for
segment reporting purposes, each subsidiary designates contracts with group
treasury as fair value or cash flow hedges so that the hedges are reported in
the segment to which the hedged items relate. This is consistent with the
information viewed by the chief operating decision-maker. After the amendment is
effective, the hedge will continue to be reflected in the segment to which the
hedged items relate (and information provided to the chief operating decision-
maker), but the company will not formally document and test this relationship.
When remeasuring the carrying amount of a debt instrument on cessation of fair
value hedge accounting, the amendment clarifies that a revised effective
interest rate (calculated at the date fair value hedge accounting ceases) are
used. The company will apply the IAS 39 (Amendment) from 1 January 2009. It is
not expected to have an impact on the company's income statement
· There are a number of minor amendments to IFRS 7, `Financial instruments:
Disclosures', IAS 8, `Accounting policies, changes in accounting estimates and
errors', IAS 10, `Events after the reporting period', IAS 18, `Revenue' and IAS
34, `Interim financial reporting', which are part of the IASB's annual
improvements project published in May 2008 (not addressed above). These
amendments are unlikely to have an impact on the company's accounts and have
therefore not been analysed in detail.
(c) Standards, amendments and interpretations to existing standards that are
not yet effective and not relevant to the Group's operations . The following
interpretations to existing standards have been published and are mandatory for
the company's accounting periods beginning on or after 1 January 2008 or later
periods but are not relevant to the Group's operations:
· IFRS 5 (Amendment), `Non-current assets held-for-sale and discontinued
operations' (and consequential amendments to IFRS 1, `First-time
adoption')(effective from 1 July 2009).
· IAS 1 (Amendment), `Presentation of financial statements' - `Puttable
financial instruments and obligations arising on liquidation' (effective from 1
January 2009).
· IAS 16 (Amendment), `Property, plant and equipment' (and consequential
amendment to IAS 7, `Statement of cash flows') (effective from 1 January 2009).
· IAS 19 (Amendment), `Employees benefits' (effective from 1 January
2009).IAS 20 (Amendment), `Accounting for government grants and disclosure of
government assistance' (effective from 1 January 2009).
· IAS 23 (Amendment), `Borrowing costs' (effective from 1 January 2009).
· IAS 28 (Amendment), `Investments in associates' (and consequential
amendments to IAS 32, `Financial Instruments: Presentation' and IFRS 7,
`Financial instruments: Disclosures') (effective from 1 January 2009).
· IAS 29 (Amendment), `Financial reporting in hyperinflationary economies'
(effective from 1 January 2009).
· IAS 31 (Amendment), `Interest in joint ventures' (and consequential
amendments to IAS 32 and IFRS 7) (effective from 1 January 2009).
· IAS 40 (Amendment), `Investment property' (and consequential amendments to
IAS 16) (effective from 1 January 2009).
· IAS 41 (Amendment), `Agriculture' (effective from 1 January 2009).
· IFRIC 15, `Agreements for construction of real estate' (effective from 1
January 2009).
· The minor amendments to IAS 20 `Accounting for government grants and
disclosure of government assistance', and IAS 20, `Financial reporting in
hyperinflationary economies', IAS40, `Investment property', and IAS 41,
`Agriculture'.
· IFRC 16, `Hedges of a net investment in a foreign operation'.
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 the Group.
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 assets 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 asset's 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.
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.
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 Ukraine
Hryvnia. 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) assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance sheet;
(b) 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.
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.
Segment reporting
A business segment is a Group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from those of other business segments. A geographical segment is engaged in
providing products or services within a particular economic environment that
are subject to risks and returns that are different from those of segments
operating in other economic environments.
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
is 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.
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 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.
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
have 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.
Critical accounting estimates and judgements
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 judgements 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:
Critical accounting estimates and judgements
(a) Impairment of goodwill
The Group is required to test, at least annually, whether goodwill has
suffered any impairment. The recoverable amount is determined based on
value in use calculations. The use of this method requires the estimation
of future cash flows and the choice of a suitable discount rate in order
to calculate the present value of these cash flows. Actual outcomes could
vary. At the year end, the directors are of the opinion that there was an
indication of impairment of the value of goodwill due to the unsuccessful
exploration of the wells in Ukraine. The impairment has been provided on
the basis of the value in use for the Ukraine operations.
(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.
2. SEGMENTAL ANALYSIS
In the opinion of the directors, the operations of the Group comprise one
class of business, being oil and gas exploration, development and production
and the sale of hydrocarbons and related activities; and in only one
geographical area, the Ukraine.
3. EMPLOYEES AND DIRECTORS
Year 11 Months
ended to
31 31
December December
2008 2007
£000 £000
Wages and salaries 93 117
Social security costs 13 20
-------- --------
106 137
-------- --------
The average monthly number of employees (including directors) during the year
was as follows:
Directors 5 5
Operations 4 4
-------- --------
9 9
-------- --------
£000 £000
Directors' fees 153 117
-------- --------
4. NET FINANCE COSTS (RECOVERY)
Year Ended 11 Months
31 to
December 31
December
2008 2007
£000 £000
Finance income:
Deposit account interest (1) (5)
Finance costs:
Loan interest - 32
Loan interest waived (31) -
------- ------
Net finance costs /(recovery) (32) 27
------ -----
5. OPERATING LOSS FOR THE YEAR
The operating loss for the year is stated after charging/(crediting):
Year Ended 11 Months
31 to
December 31
December
2008 2007
£000 £000
Auditors' remuneration (Company £15,000 24 15
- 2007: £12,500)
Non -audit fees - Corporate finance - 80
services
Depreciation of property, plant and 152 -
equipment
Amortisation of intangibles 357 -
Foreign exchange differences 472 10
------ -----
The analysis of administrative expenses in the consolidated income statement
by nature of expense:
Year Ended 11 Months
31 to
December 31
December
2008 2007
£000 £000
Employment costs 46 20
Directors fees 153 117
Consultancy fees 18 14
Travelling and entertaining 29 14
Legal and Professional Fees 55 81
Establishment costs 3 38
Foreign exchange differences 472 -
Other expenses 452 78
------- ------
1,228 362
------ -----
6. INCOME TAX EXPENSE
The tax charge on the profit for the year was as follows:
Year 11 Months
Ended to
31 31
December December
2008 2007
£000 £000
Current tax:
Corporation tax - -
Overseas Corporation tax/ (recovery) (7) 7
------- -------
Total (7) 7
------ ------
Loss before tax (992) (375)
------- -------
Loss on ordinary activities before (278) (112)
taxation multiplied by standard rate
of UK corporation tax of 28% (2007 -
30%)
Effects of:
Non deductible expenses - 30
Other tax adjustments 278 82
Foreign tax (7) 7
-------- --------
271 119
-------- --------
Current tax charge (7) 7
------- -------
At 31 December 2008 the Group had excess management expenses to carry forward
of £896,500 (2007 - £369,500) and trading losses of £666,000 (2007 -
£185,000). The deferred tax asset on these tax losses of £186,000 (2007 -
£150,000) has not been recognised due to the uncertainty of recovery.
7. LOSS OF PARENT COMPANY
As permitted by Section 230 of the Companies Act 1985, 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 £984,000 (2007 -
£260,000).
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 has 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 Convertible Loans.
Details of the adjusted earnings per share are set out below:
Year Ended 11 Months
31 December to
31 December
2008 2007
£000 £000
Basic EPS-Loss
Loss attributable to ordinary (985) (382)
shareholders (£000)
Weighted average number of shares 401,890, 191,848,
097 170
Weighted average number of shares on 433,204, 146,379,
diluted basis 314 299
------- ------
Basic and diluted EPS- Loss (pence) (0.24) (0.20)
------ -----
9. GOODWILL
£000
COST
At 1 February 2007 4,211
Additions -
------
At 31 December 2007 4,211
Additions -
------
At 31 December 2007 4,211
-----
PROVISION
At 1 February 2007 and 31 December 2007 -
Charge for the year 943
------
At 31 December 2008 943
------
CARRYING VALUE
At 31 December 2008 3,268
At 31 December 2007 4,211
-----
Goodwill additions in 2007 arose on the acquisition of Nostra Terra
(Overseas) Limited.
The Group assesses at each reporting date whether there is an indication that
the goodwill 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
was an indication of impairment of the value of goodwill due to the
unsuccessful exploration of the wells in Ukraine. The impairment has been
provided on the basis of the value in use for the Ukraine operations.
Below are the changes to the hydrocarbons reserve from Competent Person's
Report prepared by Trimble Engineering Associates Limited, dated 2 April 2007
compared to 31 December 2008:
Oktyabrskoe February December Difference
Field 2007 2008
Group's Group's Group's
interest interest interest
net AR net AR net AR
Oil Mbbl Mbbl Mbbl
Oktyabrskoe #24 42 - (42)
Oktyabrskoe #10 42 - (42)
Oktyabrskoe #1 34 34 -
Oktyabrskoe #50 42 - (42)
--------- --------- ---------
160 34 (126)
--------- --------- ---------
Based on the exploration performed by the Group as at 31 December 2008, only
Oktyabrskoe #1 field has produced oil. The other oil fields above have not or
are likely to be successful. Hence, the directors have provided for an
impairment of the goodwill. The directors are confident about the prospects
for the West Oktyabrskoe gas fields which has an estimation of 4,406 Mcf of
possible reserves with value of well in excess of the carrying value above.
10. OTHER INTANGIBLES
£000
COST
At 1February 2007 -
Additions 510
------
At 31 December 2007 and 31 December 2008 510
-----
AMORTISATION
At 1 February 2007 and 31 December 2007 -
Amortisation for the year (357)
------
At 31 December 2008 (357)
-----
CARRYING VALUE
At 31 December 2007 153
At 31 December 2008 510
-----
Exploration and evaluation assets are assessed for impairment when
circumstances suggest that the carrying value may exceed its recoverable
value. The intangible asset above represents the purchase of 25% interest in
the Oktyabrskoe field Licence for US$1,012,500 from Anglo Crimean Oil
Company, the vendor of Nostra Terra (Overseas) Limited. The impairment is the
result of the unsuccessful exploration on the Oktyabrskoe #10, Oktyabrskoe
#24 and Oktyabrskoe #50 oil fields.
Oktyabroske field Licence
An agreement between the State Geological Enterprise Krymgeologia and the
Nostra Terra (Overseas) Limited representation (the Ukranian permanent
representation office of the NTOL) dated 27 January 2001, as amended
pursuant to which the parties agreed jointly to explore and exploit the
hydrocarbon fields included in the Tatyanovskoe Licence, Oktyabrskoe Licence
and Kovylnenskaya Licence (together the "Licences") including drilling of
new wells as well as completion of wells, along with production,
transportation and sale by both parties. The Joint activity arrangement is
managed by a management committee, which approves the work programme and
budgets. Fulfilment of the programme is to be subcontracted to Krymgeologia
and the financing provided by the representation.
The parties have the right to obtain their share of the production either in
natural or in monetary form. Earnings derived from the hydrocarbons
extracted under the license(s), after payment of taxes and all other fees,
are to be used sixty per cent to recover the capital expenses of the
Representative and Krymgeologia in proportion to their investment; and the
remaining forty per cent to be distributed before recovery of capital
expenses as seventy per cent. to the Representative and thirty per cent to
Krymgeologia and after recovery sixty per cent to the Representative and
forty per cent to Krymgeologia.
The JAA is for the term of 25 years from the date of execution on 27 January
2001.
The Group has a 60% interest in a Joint Activity Agreement ("JAA")
dated 27 January 2001 to explore for and pilot production develop the
hydrocarbons of the Oktyabrskoe License, Kovylnenskaya License and
Tatyanovskoe License. The following amounts represent the Group's 60% share
of the assets and liabilities, and sales and results of JAA. They are
included in the balance sheet and income statement.
2008 2007
£000 £000
Assets
Non-current assets 47 76
Current assets 128 48
--------- --------
-
175 124
Liabilities
Current liabilities (1) (44)
--------- --------
-
Net assets 174 80
------- -------
Income 88 30
Expenses (260) (90)
--------- --------
-
Loss after tax (172) (60)
------- -------
There are no commitments, contingent liabilities relating to the Group's
interest in JAA.
11. PROPERTY, PLANT AND EQUIPMENT
£000
Plant
and
equipmen
t - Oil
and Gas
Assets
COST
At 1February 2007 -
Additions 76
Acquisition of subsidiary 72
--------
-
At 31 December 2007 148
Additions 123
--------
-
At 31 December 2008 271
--------
-
DEPRECIATION
At 1 February 2007 -
Charge for the period -
Acquisition of subsidiary 72
--------
-
At 31 December 2007 72
Charge for the period 152
--------
-
At 31 December 2008 224
--------
-
CARRYING VALUE
At 31 December 2008 47
At 31 December 2007 76
-------
12. FIXED ASSET INVESTMENTS
Company
COST Shares Loans Total
£000 £000 £000
At 1 February 2007 - - -
Additions 4,409 430 4,839
--------- ------- --------
--
At 31 December 2007 4,409 430 4,839
Repayment - (17) (17)
--------- ------- --------
--
At 31 December 2008
4,409 413 4,822
----------------
--------
PROVISION
At 1 February 2007 and 122 - 122
31 December 2007
Charge for the year 1,425 - 1,425
--------- ------- --------
--
At 31 December 2008 1,547 - 1,547
--------- ------- --------
--
CARRYING VALUE
At 31 December 2008 2,862 413 3,275
------- ------- -------
At 31 December 2007 4,287 430 4,717
------- ------- -------
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 subsidiary is as set out below:
Country Nature of business
of
incorpora
tion
Nosta Terra (Overseas) Cyprus Oil and Gas
Limited exploration
The Company acquired the whole issued share capital of Nostra Terra
(Overseas) Limited on 20 June 2007 for a total consideration of £4,409,000.
The consideration was satisfied by the issue of 149,126,472 ordinary shares
of 0.1p each at a fair value of 2p and the issue of promissory notes of
£1,278,714. The legal and professional fees on the acquisition totaled
£203,000.
The results of the subsidiary as at 31 December 2008 are as follows:
2008 2007
£000 £000
Aggregate capital and reserves (603) 94
Loss for the year (481) (122)
------- -------
13. TRADE AND OTHER RECEIVABLES
Group
2008 2007
£000 £000
Current:
Other receivables 207 106
Other taxes receivables 48 87
--------- --------
255 193
------- -------
The directors consider that the carrying amount of trade and other
receivables approximates their fair value.
14. CASH AND CASH EQUIVALENTS
Group
2008 2007
£000 £000
Bank current accounts 11 153
------- -------
15. TRADE AND OTHER PAYABLES
Group
2008 2007
£000 £000
Current:
Trade payables 95 175
Accruals and deferred income 75 115
Other payables - 6
-------- --------
170 296
------- -------
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.
16. FINANCIAL LIABILITIES - BORROWINGS
Maturity of the borrowings is as Group
follows:
2008 2007
£000 £000
Repayable within one year on
demand:
Convertible loan notes 257 -
Repayable between one and five
years:
Convertible loan notes - 257
Loan notes 421 1,223
-------- --------
421 1,480
------- -------
678 1,480
------- -------
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 quarterly in arrears based on the group's cashflow 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 2008, 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 2008 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 2008. The stock is to be repaid on or
before 31 December 2008. The Company may give notice at any time to convert
any stock at 120 per cent of its nominal value.
On 25 June 2007 the Company issued £88,483 of zero coupon Creditors Non-
convertible Loan Stock 2008, to be issued to the Vendor under the
Acquisition Agreement. The Redeemable Loan Stock may be redeemed at any
time by the Company and is repayable on or before 31 December 2008.
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 cashflow 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 2008, 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 2008, 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.
17. CALLED UP SHARE CAPITAL
Authorised:
Number: Class: Nominal 2008 2007
value: £000 £000
1,500 million Ordinary0.1p 1,500 1,500
Allotted, called up
and fully paid:
Number: Class: Nominal 2008 2007
value: £000 £000
424,016,380/346,424,5 Ordinary0.1p 424 346
22
On 19 July 2007, the Company increased its authorised share capital to
£1.5 million by the creation of 500 million ordinary shares of 0.1p each
The share issues in the period and after the period are noted below.
Date Number Issu Purpose
of e
ordinary pric
shares e
of 0.1p penc
e
29 January 2008 20,000,0 0.5 Placing
00
18 February 2008 2,000,00 0.1 Exercise of
0 warrants
13 May 2008 53,333,3 0.75 Placing
32
22 May 2008 1,389,13 0.115 Placing
0
29 May 2008 869,565 0.115 Placing
18. RESERVES
Group
TranslatioRetained Share
n
reserve losses premium Total
£000 £000 £000 £000
At 1 February 2007 - (110) 167 57
Shares issued in - - 3,339 3,339
the period
Loss for the period - (382) - (382)
-------- --------- --------- --------
-
At 31 December 2007 - (492) 3,506 3,014
Shares issued in - - 421 421
the year
Translation reserve 12 - - 12
Loss for the year - (985) - (985)
-------- --------- --------- --------
-
At 31 December 2008 12 (1,477) 3,927 2,462
------- ------- ------- -------
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 Ukraine, which
include but are not limited to:
· The political situation in Ukraine could adversely affect the Group
and its business could be harmed if governmental instability recurs.
· Economic instability in Ukraine could adversely affect the Group's
business.
· Fluctuations in the global or Ukraine economies could disrupt the
Group's ability to operate its business in Ukraine and could discourage
foreign and local investment and spending, which could adversely affect its
production.
· Ukraine's physical infrastructure is in poor condition, which could
disrupt normal business activity.
Legal and environmental risk in Ukraine
The Group faces legal and environmental risks in conducting operations in
Ukraine which include but are not limited to:
· The Ukraine government can mandate deliveries of oil and refined products
at less than market prices, adversely affecting the Group's revenue and
relationships with other customers.
· Unlawful, selective or arbitrary government action may have an adverse
effect on the Group's business .
· Ukraine's developing legal system creates a number of uncertainties
for the Group's business.
· 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.
· Ukraine's unpredictable federal and local tax system gives rise to
significant uncertainties and risks that complicate the Group's tax
planning and business decisions.
· Ukraine's legislation may not adequately protect against expropriation and
nationalisation.
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 are in
Ukraine Hryvnia. Any change in the relative exchange rates between Pounds
Sterling, and the Ukraine Hryvnia 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 pound 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 net unhedged financial assets and liabilities of the Group that are
denominated in its functional currency are as follows:
Group Financial Assets Financial
Liabilities
2008 2007 2008 2007
£'000 £'000 £'000 £'000
Ukraine Hryvnia 243 922 5 126
(UAH)
United States - - 422 1,227
Dollars (US$)
------- ------- ------- --------
- - -
243 922 427 1,353
------- ------- ------- -------
The foreign exchange rates affecting the Group is as follows:
Group Income Balance sheet
statement
2008 2007 2008 2007
£ £ £ £
Ukraine Hryvnia 9.82 10.36 11.48 10.27
(UAH)
United States 0.54 0.53 0.69 0.51
Dollars (US$)
------ ------- ------- -------
-
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. In addition, the Group intends to sell a portion of its crude
oil in the Ukraine market, and although these prices have improved recently,
prices for crude oil in the Ukraine market have historically been lower than
in the international market. The movement of the crude oil prices shown
below:
Average price
2008 2007 2006
Per barrel - USD 91.48 64.20 58.30
Per barrel - £ 49.40 34.03 29.73
------- ------- -------
Liquidity risk
The Group expects to fund its exploration and development program, as well as
its administrative and operating expenses throughout 2009 principally, using
a combination of the proceeds from the fundraising on AIM, existing working
capital, expected proceeds from the sale of future crude oil production, and
the anticipated exercise of outstanding share warrants. The Company is
currently in the process of raising further funds of approximately £200,000
from the issue of new shares.
20. FINANCIAL COMMITMENTS
Operating lease commitments
There are no significant operating lease obligations at the year end.
Capital commitments
There was no capital expenditure contracted for at the balance sheet
dates but not yet incurred.
21. RELATED PARTY TRANSACTIONS
Group
During the year, the Group advance loan of £101,000 (2007 - £106,000) and
charged management fee of £34,300 (2007 - £76,000) to JAA (see Note 10). A
at 31 December 2008 the outstanding loan balance due from JAA was £207,000
(2007 - £106,000)
S V Oakes had guaranteed a convertible loan facility of £300,000.
N D Smith, who is a director of the Company up to 10 January 2009, is a
shareholder and director of Masterworks and Ucoco. The transactions entered
with the companies are disclosed in Note 16.
B W Courtney, who is a directors of the Company has a controlling interest
in Ucoco. The transactions entered with Ucoco is disclosed in Note 16.
Company
During the year, NTOL repaid £17,000 (2007 - £nil) to the Company. At
the year end, the amount due to the Company from NTOL was £412,000
(2007 - £430,000).
22. SHARE-BASED PAYMENTS
There is no charge for share-based payments as the fair values at the date
of grant were below the exercise prices:
The details of the options and warrants are as follows:
2008 2007
Number Weighted Number Weighted
of average of average
options exercise options exercise
and price and price
warrants warrants
Pence Pence
Outstanding at the 14,060,0 1.7 4,500,00 1.2
beginning of the year 00 0
Granted - 25 June 2007 - - 560,000 1.5
Granted - 25 June 2007 - - 9,000,00 2.0
0
Granted - 1 February 33,600,0 2.0 - -
2008 00
Exercised - 18 (2,000,0 0.1 - -
February 2008 00)
Expired (560,000 1.5 - -
)
Expired (20,000, 2.0 - -
000)
-------- -------- -------- --------
Balance carried 25,100,0 2.0 14,060,0 1.7
forward 00 00
------- ------- ------- -------
The options and warrants outstanding at 31 December 2008 are as follows:
Issue End date Exerci No of
Date se warrants
price
'A' Warrants
Falcon Securities 02/02/200 23/02/2012 2p
5 2,500,000
'C' Warrants
Blomfield Corporate 25/06/200 30/04/2012 2p
Finance 7 4,000,000
Falcon Securities 25/06/200 30/04/2012 2p
Limited 7 5,000,000
-------
-
9,000,000
Options
A M Belnnerhassett 01/02/200 31/12/2015 2p
8 2,000,000
B W Courtney 01/02/200 31/12/2015 2p
8 2,000,000
G G MacNeil 01/02/200 31/12/2015 2p
8 2,000,000
N D Smith 01/02/200 31/12/2015 2p
8 2,000,000
S V Oakes 01/02/200 31/12/2015 2p
8 2,000,000
Y Zvenigordski 01/02/200 31/12/2015 2p
8 3,600,000
-------
-
13,600,00
0
-------
-
25,100,00
0
-------
The warrants outstanding at 31 December 2007 are as follows:
Issue End date Exerci No of
Date se warrants
price
'A' Warrants
Falcon Securities 02/02/200 23/02/2012 2p
5 2,500,000
Founders Warrants
Karin Haugen 02/02/200 01/02/2008 0.1p
5 500,000
GCIT Foundation 02/02/200 01/02/2008 0.1p
5 500,000
Leo Knifton 02/02/200 01/02/2008 0.1p
5 333,334
Stephen Oakes 02/02/200 01/02/2008 0.1p
5 333,333
Nigel Weller 02/02/200 01/02/2008 0.1p
5 333,333
-------
-
2,000,000
'B' Warrants
Cairns Investment 25/06/200 19/07/2008 1.5p
Holdings Ltd 7 400,000
Kerry Knoll 25/06/200 19/07/2008 1.5p
7 160,000
-------
-
560,000
'C' Warrants
Blomfield Corporate 25/06/200 30/04/2012 2p
Finance 7 4,000,000
Falcon Securities 25/06/200 30/04/2012 2p
Limited 7 5,000,000
-------
-
9,000,000
-------
-
14,060,00
0
-------
The fair values of the options granted have been calculated using Black-Scholes
model assuming the inputs shown below:
2008 2007
Share price at grant date 1.6p 1.5p
Exercise price 2.0p As above
Option life in years 7 years As above
Risk free rate 3.5% 4.4%
Expected volatility 10% 10%
Expected dividend yield 0% 0%
Fair value of option 0p 0p
------- -------
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 the 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.