Nature of operations and basis of preparation (Note 1) Commitments and contingencies (Note 15)

Transcription

1 Consolidated Balance Sheets December 31, (US $000 s) (Restated, Note 3) ASSETS Current Cash and term deposits (Note 4) $ 144,531 $ 22,407 Accounts receivable 9,358 1,804 Accounts receivable non-controlling interest (Note 5) - 9,582 Prepaid expenses and refundable deposits (Note 7) 3,803 4,409 Inventory 1,051 - Due from directors/employees (Note 8) ,802 38,646 Due from directors/employees (Note 8) Deferred financing costs (Note 9) 2,801 4,103 Property and equipment (Note 10) 173, ,157 $ 335,480 $ 164,906 LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities $ 19,443 $ 18,852 19,443 18,852 Asset retirement obligation (Note 11) 73 - Convertible bonds (Note 12) 109,686 59,663 Non-controlling interest 25,284 24, , ,632 Shareholders' equity Share capital (Note 13(b)) 192,204 64,341 Share purchase warrants (Note 13(c)) - 22 Contributed surplus (Note 13(e)) 2,116 1,265 Convertible bonds equity portion (Note 12) 23,491 5,964 Accumulated deficit (36,817) (9,318) 180,994 62,274 Nature of operations and basis of preparation (Note 1) Commitments and contingencies (Note 15) Approved on behalf of the Board $ 335,480 $ 164,906 Stephen W. Mason, Director Brandon Swim, Director The accompanying notes are an integral part of these consolidated financial statements 1

2 Consolidated Statement of Operations and Comprehensive Loss and Accumulated Deficit (USD 000 s) Year ended December 31, Three months ended December 31, (Restated, Note 3) (Restated, Note 3) Revenues Operating revenue, net of royalties $ 1,935 $ - $ 730 $ - Expenses Operating expenses 9,154-4,539 General and administrative (Note 8) 20,088 4,207 8,328 1,298 Net financing expense (Note 6) 2, Depletion, depreciation, amortization and accretion (Note 10 and 11) 1, Stock based compensation (Note 13(d)) 1, Exchange (gains) losses (136) 161 (136) (39) Total expenses 33,985 5,856 14,772 2,164 Net loss for the period before noncontrolling interest (32,050) (5,856) (14,042) (2,164) Non-controlling interest 4,551-2,165 - Net loss and comprehensive loss for the period (27,499) (5,856) (11,877) (2,164) Accumulated deficit and accumulated comprehensive loss, beginning of period (Note 3) (9,318) (3,462) (24,940) (7,154) Accumulated deficit and accumulated comprehensive loss, end of period $ (36,817) $ (9,318) $ (36,817) $ (9,318) Loss per share basic and diluted $ (1.09) $ (0.32) $ (0.39) $ (0.11) Weighted average number of shares 25,194,792 18,535,006 30,758,071 20,022,766 2 The accompanying notes are an integral part of these consolidated financial statements

3 Consolidated Statements of Cash Flows (USD 000 s) Year ended December 31, Three months ended December 31, Operating Activities: Net loss for the period $ (27,499) $ (5,856) $ (11,877) $ (2,164) Operating items not requiring cash: Non-controlling interest (4,551) - (2,165) Accretion of convertible bonds (Note 6) 2, Depletion, depreciation, amortization and accretion 1, Stock based compensation 1, Financing costs on convertible bonds (Note 6) 1, Unrealized exchange (gains) losses 44 - (144) - Other (26,185) (3,958) (11,714) (1,179) Net change in non-cash working capital (Note 18) (8,681) 3,109 (3,529) 684 (34,866) (849) (15,243) (495) Financing Activities: Other (226) (91) (157) - Net proceeds from convertible bond 67,629 65,000 67,694 35,000 Deferred financing costs on debt facility (Note 9) (1,923) (4,114) (962) (1,953) Net proceeds from issuance of common shares 127,478 15,574 93,054 15, ,958 76, ,629 48,621 Investment Activities: Capital expenditures (52,496) (82,931) (6,190) (27,668) Proceeds from sale of shares in Subsidiary 15,300 12,835 9,582 - Purchases of term deposits (Note 4) (140,091) - (140,091) (177,287) (70,096) (136,699) (27,668) Net change in non-cash working capital (Note 18) 1,228 3,935 (6,208) (1,315) (176,059) (66,161) (142,907) (28,983) Increase/(decrease) in cash (17,967) 9,359 1,479 19,143 Cash, beginning of period 22,407 13,048 2,961 3,264 Cash, end of period (Note 4) $ 4,440 $ 22,407 $ 4,440 $ 22,407 3 The accompanying notes are an integral part of these consolidated financial statements

4 1. Nature of Operations and Basis of Preparation Artumas Group Inc. ( AGI or Artumas or the Company ) was incorporated under the laws of Alberta, Canada on August 8, Artumas is an independent energy company engaged in exploration, development and production activities in the Rovuma Delta Basin in East Africa. Artumas is also actively involved in developing commercial opportunities for the identified hydrocarbon resource, including small- and large-scale electricity generation, compressed natural gas ( CNG ) export, and other gas transportation alternatives utilizing strategic partnerships. The electricity generation and transmission and distribution activities are governed by the Electricity Act of the United Republic of Tanzania. The Energy and Water Utilities Regulatory Authority ( EWURA ) has the authority to regulate the setting of tariffs for the sale and/or transportation for sale of electricity. Tariffs approved by EWURA will reflect all prudently incurred costs and a reasonable return on investment. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) on the going concern basis, which presumes that AGI will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As a start-up company with a limited source of operating revenues, AGI is relying upon its ability to successfully deliver on business plans to explore for new petroleum reserves, commercialize existing gas resource and to produce and sell electricity in a developing region. Given the lead time associated with these activities, the Company s ability to continue as a going concern is dependent on its ability to establish profitable operations, secure additional sources of financing and on the continued support of its lenders, creditors and shareholders. The outcome of these matters cannot be predicted at this time. The consolidated financial statements do not reflect adjustments to the carrying values and classification of assets and liabilities that might be necessary should the Company be unable to continue its operations. 2. Significant Accounting Policies The consolidated financial statements have been prepared by management in accordance with Canadian GAAP. The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the amounts recorded in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements have, in management s opinion, been properly prepared using careful judgement with reasonable limits of materiality and within the framework of the significant accounting policies summarized below. (a) Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. (b) Property and equipment The Company accounts for crude oil and natural gas properties in accordance with the Canadian Institute of Chartered Accountants guideline on full cost accounting in the oil and gas industry. Under this method, all costs associated with the acquisition of, exploration for and the development of, natural gas and crude oil reserves, including asset retirement costs, are capitalized within a separate cost centre for each country in which the Company has oil and gas activities. Such costs include lease acquisition, lease rentals on undeveloped properties, geological and geophysical, drilling both productive and non-productive wells, 4

5 production equipment and overhead charges directly related to acquisition, exploration and development activities. Costs capitalized in this manner are assessed at the end of each reporting period to determine if the total of such costs may be recovered in the future. Any costs considered unlikely to be recovered are written off and a corresponding loss is recognized in net earnings. Costs accumulated within each cost centre are depreciated, depleted and amortized using the unit-of-production method based on estimated gross proved reserves as determined by independent engineers. Capitalized costs subject to depletion are net of equipment salvage values and include estimated future costs to be incurred in developing proved reserves. Proceeds from the disposal of properties are normally deducted from the full cost pool without recognition of gain or loss unless that deduction would result in a change to the rate of depreciation, depletion and amortization of 20% or greater in which case a gain or loss is recorded. Costs of major development projects and costs of acquiring and evaluating significant unproved properties are excluded, on a cost centre basis, from costs subject to depletion until it is determined whether or not proved reserves are attributable to the properties, or impairment has occurred. An impairment loss is recognized in net earnings when the carrying amount of a cost centre is not recoverable and the carrying amount of the cost centre exceeds its fair value. The carrying amount of the cost centre is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows from proved reserves. If the sum of the cash flows is less than the carrying amount, the impairment loss is limited to the amount by which the carrying amount exceeds the sum of: (a) the fair value of proved and probable reserves; and (b) the costs of unproved properties that have been subject to a separate impairment test. Costs related to power generation, transmission and distribution facilities are recorded at cost and amortized on a straight-line basis over their estimated useful life in accordance with rates approved by local regulatory authorities. Office and other equipment is recorded at cost and amortized on a straight-line basis over its estimated useful life at rates of 20-30% per annum. (c) Asset Retirement Obligations The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred and records a corresponding increase in the carrying value of the related long-lived asset. The liability is subsequently adjusted for the passage of time and is recognized as an accretion expense in the consolidated statement of operations and comprehensive loss and accumulated deficit. The fair value of the obligation is periodically adjusted for revisions in either the timing or the amount of the original estimated cash flows associated with the liability. The fair value is determined through a review of engineering studies, industry guidelines, and management s estimates on a site by site basis. The asset is amortized using the same method of depreciation as the underlying asset with which the retirement obligation is associated. (d) Revenue Recognition Revenue from the sale of commodities is recognized when the risks and rewards of ownership pass to the purchaser and collectibility is reasonably assured. (e) Stock-based Compensation The Company records compensation expense for stock options granted to employees and directors using the fair value method. Fair values are determined using the Black-Scholes option pricing model. Compensation costs are expensed over the vesting period with a 5

6 corresponding increase to contributed surplus. Upon exercise of the options, consideration paid by the option holder together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. A Zero Strike Price stock option plan was introduced in 2007, in which options are exercised immediately upon vesting. Compensation costs are expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of the options, the amount previously recognized in contributed surplus is recorded as an increase to share capital. (f) Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the carrying value and the tax basis of assets and liabilities, and measured using the substantively enacted tax rates and laws expected to be in effect when the differences are expected to reverse. Future income tax assets are recorded in the consolidated financial statements if realization is considered more likely than not. (g) Foreign Currency Translation Transactions originating in foreign currencies are translated into US dollars at the exchange rate on the date of the transaction. Monetary items are translated at the rates in effect at the balance sheet date and non-monetary items are translated at the rates prevailing at the respective transaction dates. Exchange gains and losses arising on translation are included in the determination of losses for the year. Monetary assets and liabilities of integrated operations that are not denominated in US dollars are translated at the exchange rates in effect at the balance sheet date. Non-monetary items are translated at historical rates and revenues and expenses are translated at average rates of exchange during the year. Exchange gains and losses arising on translation of the accounts of integrated operations are included in the consolidated statements of operations and deficit. (h) Financing Costs Financing costs related to debt facilities are deferred, netted against the fair value of the debt on initial recognition and amortized over the term of the related debt based on the effective interest method. The Company capitalizes interest expense during the development and construction phase of the projects which were funded by the financing (see Note 3). (i) Convertible Bonds Upon issuance, convertible bonds are classified into financial liability and equity components at their fair value. The financial liability is accreted by way of a charge to earnings over the maturity of the debt. Related bond issue costs are amortized over the life of the related bond based on the effective interest method. (j) Joint ventures The Company s exploration and development activities may be conducted jointly with others. These consolidated financial statements reflect only the Company s proportionate interest in such activities. (k) Cash and cash equivalents Cash and cash equivalents comprise cash in banks, less outstanding cheques and includes short-term and highly liquid short-term investments and are recorded at cost. 6

7 (l) Inventory Inventories of consumable materials are valued at the lower of cost and net realizable value. Cost is determined using the first in, first out (FIFO) method. (m) Basic and Diluted Loss per Share Basic loss per share figures is calculated using the weighted average number of shares outstanding during the period. The dilutive effect of options is computed using the treasury stock method and the effect of convertible bonds by the if converted method. Fully dilutive amounts are not presented when the effect of the computations are anti-dilutive due to the losses incurred. Accordingly, there is no difference in the amounts presented for basic and diluted loss per share for 2006 and (n) Measurement Uncertainty The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in the preparation of these financial statements include the estimate of proved and probable reserves, asset retirement obligations and impairment of assets. The valuation of stock options is based on a number of assumptions. The valuation is significantly affected by the assumptions made with respect to the expected volatility over the expected life of the option at the time of the grant. As the assumption is based on management s best estimate at the time of the option grant, it is subject to measurement uncertainty. The Company does not plan to amend the assumptions once they have been determined at the grant date. 3. Changes in Accounting Policies Capitalization of interest On January 1, 2007 the Company adopted a policy of capitalizing debt related interest expense, for debt acquired to fund the construction of capital projects. The 2006 results have been restated to reflect this change in policy, as summarized below: 7

8 For the year ended December 31, 2006 As published Change in Policy Restated Consolidated Balance Sheet Property and Equipment $ 119,521 $ 2,636 $ 122,157 Accumulated deficit (11,954) 2,636 (9,318) Consolidated Statements of Operations and Comprehensive Loss and Accumulated Deficit Financing expense 3,353 (2,636) 717 Net loss and comprehensive loss (8,492) 2,636 (5,856) Accumulated deficit and accumulated comprehensive loss, end of period (11,954) 2,636 (9,318) Basic and diluted loss per share (0.46) 0.14 (0.32) For the three months ended December 31, 2006 As published Change in Policy Restated Consolidated Statements of Operations and Comprehensive Loss and Accumulated Deficit Financing expense $ 1,195 $ (903) $ 292 Net loss and comprehensive loss (3,067) 903 (2,164) Accumulated deficit and accumulated comprehensive loss, end of period (11,954) 2,636 (9,318) Basic and diluted loss per share (0.15) 0.04 (0.11) Other changes in accounting policies The Company adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 1506, Accounting Changes; Section 1530, Comprehensive Income; Section 3251, Equity; Section 3855, Financial Instruments Recognition and Measurement; Section 3861, Financial Instruments - Presentation and Disclosure; and Section 3865, Hedges on January 1, These changes have been introduced to conform more closely to International Financial Reporting Standards ( IFRS ). The Company has evaluated the impact of these new standards and determined that the adoption of these standards has had no material impact on the Company s net earnings or cash flows. The other effects of the implementation of the new standards are discussed below. Comprehensive Income (IFRS equivalent: Other Recognized Income ) The new standards introduce comprehensive income, which consists of net earnings and other comprehensive income. Because the Company does not have any other comprehensive income, the Company s consolidated financial statements do not include a Statement of Comprehensive Income. Nor does the Company have any accumulated other comprehensive income, and therefore the interim consolidated balance sheet does not include this new category within shareholders equity and has not included a Statement of Accumulated Other Comprehensive Income. 8

9 Financial Instruments The financial instruments standards require that entities categorize financial instruments and measure certain financial instruments at fair value. The Company has categorized its financial instruments as follows: Financial Instrument Classification Cash and cash equivalents Held for trading Accounts receivable Loans and receivables Due from employees/directors Loans and receivables Refundable deposits Loans and receivables Accounts payable Other financial liabilities Convertible bonds Other financial liabilities Debt issue costs As a result of adopting CICA Section 3855, Financial Instruments Recognition and Measurement, transaction costs directly attributable to the issuance of the convertible bonds are now netted against the fair value on initial recognition and amortized using the effective interest method. Previously these amounts were deferred and amortized using the straight line method over the term of the debt. Unamortized amounts were separately presented in assets on the Consolidated Balance Sheet. Prior periods have not been restated as a result of adopting this new accounting standard as the transitional provisions have prohibited restatement. The adoption of this Handbook Section had no impact on opening deficit. Recent accounting pronouncements The CICA has issued section 1535, Capital Disclosures, which establishes disclosure standards about an entity s capital structure and how it is managed. Section 3862, Financial Instruments Disclosures, and Section 3863, Financial Instruments Presentation, have also been issued and establish standards for the presentation of financial instruments and non-financial derivatives and require additional disclosure to enable users to evaluate the significance and risks related to financial instruments on an entity s financial position. The CICA has also issued section 3031, Inventories, which will require companies to value inventory either using the first-in, first-out method, or on a weighted average basis. All of these sections will be adopted by the Company effective January 1, The Company does not anticipate that the adoption of these standards will have a significant impact on its results of operations or financial position. The CICA has also issued section 3064, Goodwill and Intangible Assets, which establishes standards for the measurement and disclosure of goodwill and intangible assets. This section will be adopted by the Company effective January 1, The Company does not anticipate that the adoption of this standard will have a significant impact on its results of operations or financial position The CICA Accounting Standards Board ( AcSB ) has announced a proposal that all Canadian public companies will be required to adopt International Financial Reporting Standards ( IFRSs ) as of January 1, The AcSB is expected to confirm this date by March 31, The Company continues to monitor developments in this regard, and will assess the impact of convergence of Canadian GAAP and IFRS once it has been finalized. 9

10 4. Cash and term deposits Cash and term deposits Cash $ 4,440 $ 22,407 Term deposit 140,091 - Total cash and term deposits $ 144,531 $ 22,407 Cash and term deposits consist of cash on deposit and investment in short-term guaranteed investment certificates. The investments have effective interest rates between 4.05% and 4.58% and maturity dates between January 15, 2008 and March 20, 2008, of which $77 million is invested for more than 90 days but less than 123 days. 5. Accounts receivable non-controlling interest The Company recorded a receivable of $9,582 from the Netherlands Development Financial Institution ( FMO ) who holds a non-controlling interest in a subsidiary at December 31, 2006 representing the additional amount to be collected from FMO for its proportionate share of costs incurred to date. The payment of this amount plus an additional amount of $5,718 was made in No receivable was accrued at December 31, Net financing expense Net financing expense includes the following amounts: For the three months For the year ended, ended, Financing income $ (1,347) $ (473) $ (784) $ (115) Financing costs Amortization of deferred financing costs 1, Accretion of convertible bonds 2, $ 2,249 $ 717 $ 728 $

11 7. Prepaid Expenses and Refundable Deposits The Company has made security deposits of $3,260 ( $3,860) under contracts for oilfield services to be provided by third party contractors. These deposits are held in escrow accounts with a law firm and are refundable at the end of the contracts when the Company has fulfilled its payment commitments for services provided under the contracts. Other prepaid expenses include prepaid travel, office rentals, legal retainer and other of $543 ( $549). 8. Due from Directors/Employees In 2006, the Company loaned $48 to a director. The loan is non-interest bearing, unsecured and due on demand. The loan was provided to facilitate the purchase, by the director, of AGI shares from a third party. A $270 share purchase loan, previously secured by shares of the Company and due on June 23, 2007, has been re-established without security, is non-interest bearing and repayable on demand. In addition, $331 has been loaned to employees, in accordance with commitments related to their employment arrangements, on similar terms. In 2007, $152 of amounts due from employees/directors has been repaid. Balance, December 31, 2005 $ 396 Loan 48 Balance, December 31, Loans 331 Repayment (152) Balance, December 31, 2007 $ 623 Due from directors/employees, in next 12 months $ 59 Due from directors/employees, on demand 564 Balance, December 31, 2007 $ Deferred Financing Costs Financing costs of $2,801 relating to the arrangement of a long-term debt facility currently being negotiated to support the Company s Mtwara Gas to Power Project, are deferred and will be netted against the debt and amortized over the term of the debt using the effective interest method. 11

12 10. Property and Equipment Tanzania (Energy Program) Mnazi Bay Gas Development o Cost December 31, 2007 Accumulated Amortization Net Book Value December 31, 2006 Net Book Value (Restated, Note 3) Petroleum drilling, exploration, development $ 111, ,706 $ 77,998 Mtwara Region Gas to Power o Gathering, Processing and Pipeline 37,781-37,781 30,239 o Power generation 11, ,723 7,911 o VLPP study o Transmission/ distribution 2,114-2,114 1,048 Capital Inventory 4,120-4,120 4,083 Office and field equipment , , ,346 Mozambique Program Rovuma Basin o Petroleum drilling, exploration, development 2,858-2, Canadian office equipment 3, , Balance $ 174,801 1, ,313 $ 122,157 During the year and three months ended December 31, 2007, $298 and $(20) respectively ( $2,994 and $1,255) of general and administrative expenses were capitalized to the Tanzania Energy Program. In addition, for the year and three months ended December 31, 2007, $6,722 and $1,991 respectively ( $2,636 and $903) of interest expense related to borrowings to fund the capital program were capitalized to both the Tanzania Energy Program and Mozambique Program. While the gas component of the Tanzania Energy Program is in the pre-production phase, minimal depletion ($118) has been recorded relating to the incidental production required for power generation. No depreciation or depletion has been recognized on the gas component of the Mozambique Program as these assets have not begun commercial production. The amounts included under property and equipment represent costs incurred to date and are not intended to reflect present or future values. The recoverability of these capitalized costs is dependant on the confirmation of economically recoverable reserves, and the ability of the Company to obtain the necessary approvals and financing to successfully complete their development, including finalization of all agreements with the Government of Tanzania. 12

13 As the activities of the Company had not yet reached the stage of commercial production at December 31, 2006, and there had been no impairment, net book value and cost are identical in all cases except for Canadian office equipment. Accumulated depreciation of office equipment was $82 at December 31, The Company has recorded an amount of $4,703 (December 31, $4,041) in capitalized project costs (with an offsetting liability of $4,703 included in accounts payable and accrued liabilities) with respect to withholding tax. This accrual is the estimated amount of Tanzanian withholding tax not deducted by the Company from payments made to its foreign contractors who provided services in Tanzania but were not registered for Tanzanian tax purposes. Should the Company receive an exemption from withholding taxes, it will be able to reduce its capitalized costs and accounts payable by the amount of the provision. 11. Asset retirement obligation The Company has recognized an asset retirement obligation in relation to the Power Generation facilities. The change in the asset retirement obligations liability is as follows: For the three months For the year ended, ended, Asset retirement obligation at January 1 $ - $ - $ - $ - Additions Accretion Asset retirement obligation at December 31 $ 73 $ - $ 73 $ - The total undiscounted amount of the estimated cash flows required to settle the obligations is $750 (2006 nil), which has been discounted using a credit-adjusted risk-free rate of 13 per cent. The settlement of the obligations is expected to occur in 20 years. No asset retirement obligations have been recorded in relation to the Gas Facility, as it is not yet in commercial production. 12. Convertible Bonds Effective November 20, 2007, the Company issued a convertible bond in the amount of $70 million. The bond is denominated in notes of $100,000 each, carries a coupon of 6.0% per annum, and will mature on November 21, The conversion price is NOK 60.5 per common share, subject to adjustment. The Company may convert the bonds to common shares after November 20, 2010, if the closing price of the Company s shares has exceeded 150 percent of the conversion price for at least 20 trading days within a period of 30 consecutive trading days. 13

14 The exchange rate for conversion will be at the official reference rate provided by the European Central Bank on the date triggering such adjustments. Effective December 20, 2006, the Company issued a convertible bond in the amount of $35 million. The bond is denominated in notes of $100 each, carries a coupon of 10.0% per annum, and will mature on December 20, The conversion price is NOK 55 per common share, subject to adjustment. The Company may convert the bonds to common shares of Artumas on or after December 20, 2007, if the closing price of the common shares has exceeded NOK 90 for at least 20 trading days within a period of 30 consecutive trading days. The exchange rate for conversion is fixed in US dollars at the exchange rate of NOK to 1 US dollar, based on the official European Bank reference rate on December 20, Effective June 30, 2006, the Company issued a convertible bond in the amount of $10 million. The bond is denominated in notes of $100 each, carries a coupon of 10.5% per annum, and will mature on June 30, The conversion price is NOK 40 per common share, subject to adjustment. The Company may convert the bonds to common shares of Artumas on or after June 30, 2007, if the closing price of the common shares has exceeded NOK 80 for at least 20 trading days within a period of 30 consecutive trading days. The exchange rate for conversion is fixed in US dollars at the exchange rate of NOK to 1 US dollar, based on the official European Bank reference rate on June 30, The net proceeds of $9,556, after commission and costs, from issue of the bond were held in trust at June 30, 2006 and were received by the Company on July 6, Effective January 16, 2006, the Company issued a convertible bond in the amount of $20 million. The bond is denominated in notes of $100 each, carries a coupon of 10.5% per annum, and will mature on January 16, The conversion price is Norwegian Kroners ( NOK ) 40 per common share, subject to adjustment. The Company may convert the bonds to common shares of Artumas on or after January 16, 2007, if the closing price of the common shares has exceeded NOK 80 for at least 20 trading days within a period of 30 consecutive trading days. The exchange rate for conversion is fixed in US dollars at the exchange rate of NOK to 1 US dollar, based on the official European Bank reference rate on January 17, The offering was fully underwritten by Perseverance Ltd. ( Perseverance ). Perseverance and related parties purchased $7 million of the bond notes pursuant to the offering. Perseverance is a major shareholder of the Company and is represented on the Board of Directors of the Company. Bond issuance costs were approximately $1.3 million comprising sales commissions and underwriting fees of $1.2 million and legal and other costs of approximately $100. Sales commissions and underwriting fees of $675 were paid to Perseverance and parties related to Perseverance. The fair value attributed to the debt component of these four bonds amounted to $111,509 and was recorded as a long-term liability. The total fair value of the conversion option features was determined to be $23,491 and is recorded as part of Shareholders Equity. The fair values were based on the present value of future cash flows resulting from principal and interest payments for the bonds, discounted at the market rate of interest in effect at the time the bonds were issued for similar financial instruments with no conversion feature. The difference between these fair values and the proceeds is considered the value attributed to the conversion option feature. Accretion of the fair value of the conversion option is recorded as a charge to earnings over the term to maturity of the bonds. The bonds are subject to standard covenants including certain financial ratios that are reported to the lenders quarterly. At December 31, 2007, the Company was not in breach of any of its covenants. If any one of these covenants is contravened, the holders have the right to call the loan immediately. The bond s liability, equity component and accretion were recorded as follows: 14

15 December 31, 2007 December 31, 2006 Total proceeds of convertible bonds $ 135,000 $ 65,000 Fair value of equity component 23,491 5,964 Value attributed to debt component 111,509 59,036 Financing transaction costs (6,095) - Cumulative transaction costs expensed 1,565 - Cumulative accretion on the bond 2, Balance $ 109,686 $ 59, Share Capital (a) Authorized Unlimited number of voting common shares without nominal or par value. Unlimited number of non-voting preferred shares to be issued in series, without nominal or par value. (b) Common shares issued Number of shares Amount Balance, December 31, ,033,636 $ 48,767 Issued for cash pursuant to private placement (i) 3,000,000 16,436 Share issue costs (i) - (862) Balance, December 31, ,033,636 $ 64,341 Issued on exercise of options 286, Transfer from contributed surplus for exercised options Private placement (ii) 3,308,000 35,191 Share issue costs (ii) - (1,661) Private placement (iii) 12,000,000 97,905 Share issue costs (iii) - (4,852) Balance, December 31, ,627,636 $ 192,204 (i) (ii) Effective October 11, 2006, the Company completed a private placement issuance for three million common shares for cash consideration of NOK 37 (approximately $5.48) per share for total gross proceeds of $16.4 million. The Company incurred share issue costs of $862 in connection with the private placement. Effective April 2, 2007, the Company completed a private placement issuance for 3,308,000 new common shares, for cash consideration of Norwegian Kroners ( NOK ) 65 (approximately $10.69) per share for total gross proceeds of $35 million. Included in this placement was 1,200,000 shares borrowed from members of Artumas management 15

16 without any compensation. The Company has incurred share issue costs of $1,661 in connection with the private placement. (iii) Effective November 14, 2007, the Company completed a private placement issuance for 12,000,000 new common shares, for cash consideration of Norwegian Kroners ( NOK ) 44 (approximately $8.16) per share for total gross proceeds of $98 million. The Company has incurred share issue costs of $4,852 in connection with the private placement. (c) Issued and outstanding warrants On June 20, 2007, 32,000 warrants expired without being exercised. The value of the unexercised warrants was $22. (d) Stock options The Company has a stock option plan under which up to 10% of the number of the Company s issued and outstanding common shares (including warrants to purchase common shares) may be reserved for issuance to directors, officers, employees and consultants. Under the plan, the options are typically granted and vest over a four year period and expire 10 years from the date of grant. The Company introduced a new stock option plan, retroactive to March 31, Under this plan, up to 10% of the number of the Company s issued and outstanding common shares may be reserved for issuance to directors, officers, employees and consultants. Employees in Tanzania will receive a Zero Strike Price Option plan under which options will vest over a three year period and will be exercised immediately upon vesting. Employees in Calgary will have the option of selecting the Zero Strike Price Option plan or a traditional option plan which will vest over a three year period and expire 10 years from the date of grant. At December 31, 2007 the Company has granted stock options to various directors, consultants, and employees of the Company as follows: Weighted Average Remaining Life (Years) Exercise Price (USD) Number of options Balance, December 31, ,000 $ 2.08 Granted 75, Granted 700, Balance, December 31, ,520,000 $ 3.47 Exercised (286,000) 3.13 Forfeited (70,500) 3.04 Granted 249, Balance, December 31, ,413,486 $ 4.78 The number of shares exercisable at December 31, 2007 is 760,000 at exercise prices ranging from $1.75 to $10.69 per share ( ,000 at exercise prices ranging from $1.75 to $5.00 per share). The fair value of stock options granted during the year ended December 31, 2007 for which the exercise price was equal to the share s market price was estimated at $720 ( $1,528). The fair value of stock options granted during the year ended December 31, 2007 for which the 16

17 exercise price was less than the share s market price was estimated at $781 ( $nil). These amounts will be recognized as stock compensation expense over the vesting period of the options. The fair value of stock options granted was determined at the dates of granting the options using the Black-Scholes option pricing model based on the following assumptions: risk-free interest rate of 4% (2006 4%); expected term of 6 years ( years); volatility of 40% ( %); and expected future dividend yield of nil. (e) Contributed surplus Balance, December 31, Stock compensation expense 724 Balance, December 31, 2006 $ 1,265 Stock compensation expense 1,215 Less: Stock compensation expense of options exercised (386) Warrants (note 13 (c)) 22 Balance, December 31, 2007 $ 2, Segmented Information The Company conducts its business through three major operating business segments. Gas operations include the exploration, development, production and transportation of natural gas, and these activities are carried out in Tanzania and Mozambique. The Power segment includes the production and distribution of electricity in Tanzania. Inter-segment transfers of products, which are accounted for at market value, are eliminated on consolidation. Shared Services includes investment income, interest expense, and general corporate expenditures. In 2006, all projects were managed by a central construction manager and therefore no segmented information is provided for

18 For the year ended December 31, 2007 Tanzania Gas Tanzania Power Mozambique Gas Shared Services Inter- Segment Eliminations Consolidated Revenue Sales to customers 2,189 2,189 Royalties (254) (254) Inter-segment sales 1,165 (1,165) - Segmented revenue 911 2,189 - (1,165) 1,935 Expenses Expenses 21,064 3,442 2,304 7,175 33,985 Inter-segment expenses 1,165 (1,165) - Segmented expenses 21,064 4,607 2,304 7,175 (1,165) 33,985 Net loss before noncontrolling interest (20,153) (2,418) (2,304) (7,175) - (32,050) Non-controlling interest 4,551 Net loss (20,153) (2,418) (2,304) (7,175) (27,499) Property and equipment additions 41,941 4,312 2,255 4,052 52,560 Property and equipment (NBV) 153,606 13,337 2,858 3, ,313 For the three months ended December 31, 2007 Tanzania Gas Tanzania Power Mozambique Gas Shared Services Inter- Segment Eliminations Consolidated Revenue Sales to customers Royalties (73) (73) Inter-segment sales 410 (410) - Segmented revenue (410) 730 Expenses Expenses 10,711 1,516 1, ,772 Inter-segment expenses 410 (410) - Segmented expenses 10,711 1,926 1, (410) 14,772 Net loss from operations before non-controlling interest (10,374) (1,123) (1,567) (978) (14,042) Non-controlling interest 2,165 Net loss from operations (10,374) (1,123) (1,567) (978) (11,877) Property and equipment additions 3, ,517 6,608 Property and equipment (NBV) 153,606 13,337 2,858 3, ,313 18

19 15. Commitments and Contingencies (a) Lease payments The future minimum lease payments as at December 31, 2007 are as follows: , , , , ,014 Total future minimum lease payments $ 9,260 (b) Capital expenditure commitments As of December 31, 2007, the Company has committed to a minimum expenditure of $41million in Mozambique during the three year exploration period (2006 nil). The Company has no commitments in Tanzania at December 31, (2006 approximately $4 million in Tanzania, Phase 2). (c) Commission Payable A third party has filed a statement of claim in the amount of $1,753 in connection with commission payable on previous share private placement issuances. Artumas believes it has no liability in this matter and is defending against the claim. (d) Interest in Mnazi Bay petroleum reserves On February 20, 2006, the Company received notice from Tanzania Petroleum Development Corporation ( TPDC ) that, in accordance with the Production Sharing Agreement, it intends to elect to exercise its option to participate in a 20% share in the Mnazi Bay Development Area production. As a result TPDC is obliged to pay 20% of all Development expenses. The Company has not finalized an agreement with TPDC on the terms of the election therefore no receivable has been recognized. (e) Consulting income A third party has filed a statement of claim in the amount of $250 in connection with alleged unpaid placement services of a former consultant. The Company has determined that it has no liability in this matter and is defending against the claim. (f) Purchase Power Agreement Under the Interim Power Purchase Agreement ( IPPA ) dated August 10, 2006 between AG&P Power Limited ("AGP"), a subsidiary of the Company, and Tanzanian Electric Supply Company Limited ("TANESCO"), AGP is obligated to deliver and TANESCO obligated to purchase electricity for the defined area up to a maximum capacity of eight MW from the Mtwara Power Generation Facility ( Facility ). The IPPA expires in August This Facility currently has 12 MW of installed capacity. There are liquidated damages for non-delivery in an amount equal to 16 cents times the number of kilowatt hours failed to be delivered over the period. As at December 31, 2007, no liquidated damages have been assessed. 19

20 (g) Mozambique On April 18, 2007, Artumas Group Inc. s wholly owned subsidiary Artumas Moçambique Petróleo Limitada, signed an Exploration and Production Concession Contract (EPCC) for the Rovuma Onshore Block in the Rovuma Basin in northern Mozambique. The EPCC contract received approval from the Administrative Tribunal dated August 10, 2007 making the contract effective as of September 1, Under the terms of the contract, Artumas has secured an initial three-year exploration term with two extension terms of three and two years. The initial exploration period work commitment calls for acquisition of a minimum of 250 kilometres of new 2D seismic and drilling of a deep Cretaceous prospect, representing a minimum projected capital expenditure of $20 million. On May 3, 2007 Artumas Group Inc. and its wholly owned subsidiary, Artumas Moçambique Petróleo Limitada, signed a Trade Agreement with Anadarko Petroleum Corporation`s subsidiary Anadarko Moçambique Area 1, Limitada, covering a mutual exchange of interests in their respective Exploration and Production Concessions (EPCs) in Mozambique. The transaction was accounted for at historical cost with no gain or loss being recognized on the transaction. In accordance with the requirements of the EPC, the Company placed a $20 million performance bond for a term of three years, guaranteeing the Company s minimum expenditure during the exploration period. This bond was underwritten by the Economic Development Corporation of Canada. (h) Sunorca Development Corporation During March 2006, the Company executed a settlement agreement with Sunorca Development Corporation ( Sunorca ) regarding outstanding issues related to Sunorca s participating interest in the Tanzania Energy Program on the terms as described in Note 10 (b) to the Consolidated Financial Statements for the years ended December 31, Under the terms of the settlement, Sunorca sold all its rights and interest in the Tanzania Energy Program for cash consideration of $326 (Canadian $400) and a gross overriding royalty ("GORR") on the Company s interest in the mineral rights for the Tanzania Energy Program of 2.75% (net 2.2%) for the Development Block and 2.75% to 1.85% (net 2.2% to 1.5%) for the Exploration Block. The unsecured demand promissory note in the amount of $43 (Canadian $50) payable to Sunorca and outstanding at December 31, 2005, was deemed to be satisfied and paid in full as part of the settlement. Under the terms of this agreement Sunorca has no rights or interest in the power or transmission and distribution components of the Tanzania Energy Program. The payment, in 2006, of $326 to Sunorca was recorded as an addition of $214 to project costs. The remaining balance of $112 was recorded in the consolidated statement of operations and deficit to reverse the amount previously contributed by Sunorca prior to 2005 and recorded as Settlement Costs. 16. Income taxes Future income taxes arise from temporary differences in the recognition of income and expenses for financial reporting and tax purposes. The significant components of the Company s future tax assets are as follows: 20

21 December 31, 2007 Canada Tanzania Mozambique Non-capital losses carried forward $ 16,981 $ 33,713 $ 2,320 Share and debt issue costs 12, Undepreciated capital costs in excess of book value 3, ,565 2,777 32, ,278 5,097 Valuation allowance (32,498) (187,278) (5,097) Future income tax assets $ - $ - $ - December 31, 2006 Canada Tanzania Mozambique Non-capital losses carried forward $ 11,098 $ 5,120 $ 5 Share and debt issue costs 5, Undepreciated capital costs in excess of book value , , , Valuation allowance (17,334) (121,090) (587) Future income tax assets $ - $ - $ - The Company has recorded a valuation allowance of $224,873 as at December 31, 2007 because management believes that the future income tax assets are not more likely than not to be realized in the carry forward period. The non-capital losses in Canada begin to expire in 2008 and in Mozambique in Noncapital losses in Tanzania never expire. 17. Financial Instruments The fair value of the Company s cash, accounts receivable, deposits and accounts payable approximate their carrying values due to the short-term nature of these instruments. The fair value of the amounts Due from directors/employees is not significantly different than the carrying value as these amounts are non-interest bearing and due on demand. The Company holds monetary assets and liabilities that are denominated in foreign currencies and is therefore exposed to foreign currency exchange risk. The Company incurs operating and administrative expenses in Tanzania and accordingly they are subject to fluctuations in exchange rates. Substantially all of the Company s cash was held at one recognized Canadian financial institution and, as a result, the Company was exposed to all of the risks associated with that institution. Substantially all of the Company s receivables are due from the Government of Canada for GST or from the Government of Tanzania for VAT or electricity sales. The convertible bonds are designated as other financial liabilities and changes in fair value are not included in regular earnings or other comprehensive income. They are accounted for at amortized cost. The fair value of the convertible bonds based on the present value of future cash 21

22 flows, discounted at the current market rate of interest for similar financial instruments is $1,276 higher than the current amount on the balance sheet. 18. Supplementary Cash Flow Information Net change in working capital: For the three months For the year ended, ended, Accounts receivable $ (7,554) $ (11,027) $ (3,888) $ (778) Accounts receivable non-controlling interest - 9,582 (9,582) - Inventory (1,051) - (82) - Prepaid expenses and refundable deposits 606 (3,966) Accounts payable and accrued liabilities ,455 2, (7,453) 7,044 (9,737) (631) Less: Amounts related to investing activities (1,228) (3,935) 6,208 1,315 $ (8,681) $ 3,109 $ (3,529) $ 684 Interest received and paid Interest received $ 481 $ 473 $ 127 $ - Interest paid 6,650 2,531 3,835 2, Related Party Transactions In addition to those disclosed elsewhere in these consolidated financial statements, the Company had the following related party transactions: (a) In the normal course of business, legal services were provided by a law firm in which one of the directors of the Company is a partner. The transactions have been recorded at the exchange amount, which approximates fair value. The following table describes the transactions: 22