Cub Energy Inc. (Formerly 3P International Energy Corp.) Condensed Consolidated Interim Financial Statements (Expressed in US Dollars, unless otherwise noted) (unaudited)
Notice of No Auditor Review of Interim Financial Statements Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The management of Cub Energy Inc. is responsible for the preparation of the accompanying unaudited condensed consolidated interim financial statements. The unaudited condensed consolidated interim financial statement have been prepared in accordance with International Financial Reporting Standards and are considered by management to present fairly the consolidated financial position, operating results and cash flows of the Company. The Company s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor. These unaudited condensed consolidated interim financial statements include all adjustments, consisting of normal and recurring items, that management considers necessary for a fair presentation of the consolidated financial position, results of operations and cash flows. Mikhail Afendikov Mikhail Afendikov, Chief Executive Officer Wally Rudensky Wally Rudensky, Chief Financial Officer May 29, 2013
Condensed Consolidated Interim Statements of Financial Position Note March 31, December 31, Assets Current assets Cash 6 $ 11,740 $ 10,116 Investment 7-302 Trade and other receivables 11 127 160 Inventory 11 11 Other assets 166 - Prepaid expenses 185 71 12,229 10,660 Non-current assets Exploration and evaluation assets 10 16,622 16,616 Property, plant and equipment 9 22,154 22,212 Equity investment in KGHL 8 28,893 29,740 Loan to KGHL 38 38 67,707 68,606 Total assets $ 79,936 $ 79,266 Liabilities Current liabilities Trade and other payables 12 $ 1,618 $ 1,083 Non-current liabilities Deferred income tax liability 5,738 5,738 Provisions 19 399 376 6,137 6,114 Total liabilities 7,755 7,197 Shareholders' equity Share capital 14 45,714 45,714 Contributed surplus 16 2,204 2,126 Accumulated other comprehensive income (99) 630 Retained earnings 24,362 23,599 Total shareholders' equity 72,181 72,069 Total shareholders' equity and liabilities $ 79,936 $ 79,266 Nature of operations (Note 1) Subsequent events and proposed transactions (Note 24) Approved by the Board Mikhail Afendikov Robert Hodgins Director (Signed) Director (Signed) See accompanying notes, which are an integral part of these condensed consolidated interim financial statements. 3
Condensed Consolidated Interim Statements of Operations and Comprehensive Income Note Three months ended March 31, Revenue $ 1,055 $ - Cost of sales 561 - Gross profit 494 - Operating expenses Selling and general administrative expenses 18 1,951 119 Share-based payments 16 78 - Depletion and depreciation 9 375 - Accretion of decommissioning obligation 19 7-2,411 119 Other income Income from equity investment 8 2,153 1,909 Foreign exchange gain 589 - Transaction expense recovery 5-401 2,742 2,310 Profit (loss) before tax 825 2,191 Income tax expense 62 - Net profit (loss) 763 2,191 Currency translation adjustment (729) 237 Comprehensive income (loss) $ 34 $ 2,428 Earnings (loss) per share Basic 17 $ 0.00 $ 0.02 Diluted 17 $ 0.00 $ 0.02 See accompanying notes, which are an integral part of these condensed consolidated interim financial statements. 4
Condensed Consolidated Interim Statements of Changes in Equity for the three month periods ended March 31, 2013 and 2012 Note Number of shares Share capital Warrants Contributed surplus Accumulated other comprehensive income Retained earnings Total Balances as at January 1, 2012 123,278,089 $ - $ - $ - $ 341 $ 21,309 $ 21,650 Reverse takeover transaction 5 85,772,344 33,562 717 791 - - 35,070 Currency translation adjustment - - - - 237-237 Net profit for the period - - - - - 2,191 2,191 Balances as at March 31, 2012 209,050,433 33,562 717 791 578 23,500 59,148 Balances as at January 1, 2013 242,298,551 45,714-2,126 630 23,599 72,069 Share-based payments - - - 78 - - 78 Currency translation adjustment - - - - (729) - (729) Net profit for the period - - - - - 763 763 Balances as at March 31, 2013 242,298,551 $ 45,714 $ - $ 2,204 $ (99) $ 24,362 $ 72,181 See accompanying notes, which are an integral part of these condensed consolidated interim financial statements. 5
Condensed Consolidated Interim Statements of Cash Flows Note Three months ended March 31, Operating activities Profit $ 763 $ 2,191 Adjustments for: Income from equity investment 8 (2,153) (1,909) Share-based payments 78 - Depletion and depreciation 375 - Changes in working capital 13 590 (410) Changes in provisions 23 - Cash flows provided by (used in) operating activities (324) (128) Investing activities Cash received through acquisition 5-4,716 Dividends received from equity investment 8 3,000 - Purchase of property, plant and equipment 9 (317) - Purchase of exploration and evaluation assets 10 (6) - Cash provided by (used in) investing activities 2,677 4,716 Net increase (decrease) in cash 2,353 4,588 Effects of exchange rate changes on cash (729) - Cash at beginning of period 10,116 5 Cash at end of period $ 11,740 $ 4,593 See accompanying notes, which are an integral part of these condensed consolidated interim financial statements. 6
1 Nature of operations The financial statements of the consolidated entity (the Company ), as a result of a reverse takeover transaction are a continuation of Gastek LLC ( Gastek ), but are presented under the name of Cub Energy Inc. (formerly 3P International Energy Corp.) ( Cub Canada ) the legal parent. The Company is engaged in the exploration, development and production of petroleum and natural gas properties in the Black Sea Region, with a current focus on Ukraine. The Company is incorporated by Certificate of Incorporation issued pursuant to the provisions of the Business Corporations Act (Ontario) on April 3, 2008. In February 2012, the Company filed for continuance to become a Canadian corporation. The address of the Company s registered office is 36 Toronto Street, Suite 1000, Toronto Ontario, M5C 2C5, Canada. The Company is listed on the TSX Venture Exchange ( TSXV ) under the trading symbol KUB. On March 29, 2012, Cub Canada completed a reverse takeover transaction ( RTO ) (Note 5), under which the Company issued 123,278,089 common shares to the former shareholder of Gastek in exchange for all of the outstanding units of Gastek. Gastek owns a 30% equity interest in KUBGAS Holdings Limited ( KGHL ), which in turn owns a 100% equity interest in Kub-Gas LLC ( Kub-Gas ), which owns 5 licensed gas and gas condensate fields in the Dnieper-Donetsk Basin of Ukraine (3 operating under production licenses and 2 under exploration licenses). The Company through its subsidiary Private Joint Stock Company Tysagaz owns a 100% working interest in four licenses in Ukraine covering a total of 80,927 acres. The Rusko-Komarivske field is currently in production while the other three licenses are currently under exploration. The continued operations of the Company and the recoverability of amounts shown for its petroleum and natural gas properties is dependent upon the ability of the Company to obtain financing to continue the exploration and development of its petroleum and natural gas properties, the existence of economically recoverable reserves and future profitable production, or alternatively, upon the Company s ability to recover its costs through a disposition of its properties. The amount shown for petroleum and natural gas properties does not necessarily represent present or future value of those properties. Changes in future conditions could require a material change in the amount recorded for the petroleum and natural gas properties. The Company is exposed to commodity price risk with respect to natural gas and oil commodity prices. A significant decline in any one of these commodity prices may affect the Company s ability to obtain capital for the exploration and development of its petroleum and natural gas properties. 7
2 Basis of preparation (a) Statement of compliance The consolidated interim financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) and their interpretations as issued by the International Accounting Standards Board ( IASB ). The condensed consolidated interim financial statements have been prepared in conformity with IAS 34, Interim Financial Reporting, and do not include all the information required for full annual consolidated financial statements in accordance with IFRS. The consolidated financial statements for the period ended March 31, 2013, were approved by the board of directors of the Company on May 29, 2013. (b) Basis of consolidation (i) Subsidiaries Subsidiaries are entities legally controlled by Cub Canada. The Company owns 100% of Tysagaz (Ukraine) ( Tysagaz ), 3P International Energy Limited (Cyprus) ( Cub Cyprus ), Galizien Energy Corp. (Ontario) ( Galizien ) and Gastek, which are consolidated from the date control commences to the date control ceases. The Company accounts for its 30% indirect ownership in KGHL as an investment in associate subject to significant influence under the equity method. As Gastek is the parent for accounting purposes, the financial statements presented are based on Gastek s financial statements including the 30% indirect ownership in KGHL prior to the RTO, and include all other entities post the RTO. (ii) Transactions eliminated on consolidation Intercompany balances and transactions, and any unrealized gains arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising on transactions with equity accounted investees are eliminated against the investment to the extent of the Company s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (c) Basis of measurement The consolidated financial statements are prepared on the historical cost basis. Where there are assets and liabilities calculated on a different basis, this fact is disclosed in the relevant accounting policy. (d) Functional and presentation currency Gastek, KGHL and Cub Cyprus functional currencies are the US Dollar ( USD ). Cub Canada and Galizien have a functional currency of Canadian dollars. The national currency of Ukraine is the Ukrainian Hryvnia ( UAH ), which is the functional currency of Tysagaz. The presentation currency of the consolidated financial statements is the USD. All financial information herein is presented in USD and is rounded to the nearest thousand, except as noted. 8
2 Basis of preparation (continued) (e) Use of estimates and judgments Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRS. Actual results could differ from those estimates. Significant estimates include: To value the equity investment in KGHL, management obtains financial information from the majority owner and adjusts the carrying value of the investment. The equity investment in KGHL is subject to all estimates included in the financial information from the majority owner as well as estimates of impairment losses. Amounts recognized for depletion and depreciation and amounts used for impairment calculations are based on estimates of petroleum and natural gas reserves. By their nature, the estimates of reserves, including the estimates of future prices, costs, discount rates and the related future cash flows, are subject to measurement uncertainty. These estimates are also used in assessing impairment for exploration and evaluation assets. Amounts recognized for decommissioning obligations, if any, and the related accretion expense requires the use of estimates with respect to the amount and timing of decommissioning expenditures. Other provisions are recognized in the period when it becomes probable that there will be a future cash outflow. Charges for share-based payment and the value of warrants are based on the fair value at the date of issuance. These instruments are subject to the estimation of what the ultimate payout will be using pricing models such as the Black-Scholes option pricing model, which is based on assumptions such as volatility, dividend yield, risk free rate of return and expected term. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. Allocation of the purchase price of acquisitions requires estimates as to the fair market value of the assets acquired. Tax interpretations, regulations and legislations in the jurisdictions in which the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings. Judgement is required to determine the functional currency of the parent and its subsidiaries. These judgements are continuously evaluated and are based on management s experience and knowledge of the relevant facts and circumstances. 9
3 Significant accounting policies These unaudited interim financial statements are prepared in accordance with IFRS and follow the same accounting policies and methods of their application as the most recent audited financial statements for the year ended December 31, 2012. These financial statements should be read in conjunction with those financial statements. 4 New standards and interpretations not yet adopted Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee ( IFRIC ) that are mandatory for accounting periods beginning after January 1, 2013, or later periods. The standards impacted that are applicable to the Company are as follows: IFRS 9 Financial Instruments was issued by the IASB in October 2010 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. 5 Reverse takeover transaction On January 26, 2012, Cub Canada entered into a securities exchange agreement with Gastek and Gastek s sole unitholder Pelicourt Limited, and Pelicourt s beneficial shareholders. Pursuant to the Securities Exchange Agreement, Cub Canada acquired all of the outstanding units of Gastek from Pelicourt in exchange for 123,278,089 common shares of the Company. On March 29, 2012, all required approval had been received and the reverse takeover transaction was completed. As the former shareholders of Gastek controlled more than 50% of Cub Canada, the acquisition constituted a reverse takeover transaction. The transaction has been accounted for under IFRS 3, Business Combinations, as a reverse acquisition where Cub Canada is the legal acquirer and the accounting acquiree. As a result of the reverse acquisition, the consolidated financial statements represent the continuation of the financial statements of Gastek, the legal subsidiary, except for its capital structure. As part of the transaction with Gastek, the former shareholders of Gastek were required to fund certain transaction costs. As a result, there was approximately $401 payable to the former shareholder of Gastek, which the Company subsequently wrote off and recorded as transaction expense recovery. The identified assets and liabilities below are a result of management s best estimates and assumptions after taking into account all relevant information available. All financial assets acquired and financial liabilities assumed were recorded at fair value in the table below. The purchase price allocation is summarized as follows: 10
5 Reverse takeover transaction (continued) Number of shares issued and outstanding prior to Gastek Acquisition: 41% 85,772,344 Shares issued to former Gastek Shareholders: 59% 123,278,089 Total shares issued and outstanding post transaction: 100% 209,050,433 Number of shares to be issued, had Gastek been reporting issuer: 85,772,344 Value per share in USD at close of markets on March 29, 2012 $ 0.3913 Share consideration $ 33,562 Warrants consideration (Note 15) 717 Stock option consideration (Note 16) 791 Total consideration $ 35,070 Fair value of net assets acquired: Cash $ 4,716 Investment 301 Trade and other receivables 602 Inventory 11 Prepaid expenses 91 Property, plant and equipment 21,907 Exploration and evaluation assets 15,789 Trade and other payables (2,228) Provisions (381) Deferred income tax liability $ (5,738) 35,070 11
6 Cash Cash comprise cash on hand and balances with banks with an investment grade minimum rating. Cash is as follows: March 31, December 31, Current accounts $ 11,740 $ 10,116 7 Investment Investment as of December 31, 2012, consisted of a one year non-cashable, non-redeemable guaranteed investment certificate for $302 ($300 CAD), which bears interest at a rate of prime minus 1.3% per annum and matured on January 4, 2013. 8 Equity investment in KGHL The Company s share of the income (loss) from its 30% ownership interest in KGHL for the period ended March 31, 2013, totalled $2,153 (2012 - $1,909). As of March 31, 2013, and December 31, 2012, the Company s 30% ownership investment was $28,893 and $29,740, respectively. Investment in KGHL as at January 1, 2012 $ 21,997 Income from Equity investment 1,909 Currency translation adjustment 237 Investment in KGHL as at March 31, 2012 $ 24,143 Investment in KGHL as at January 1, 2013 $ 29,740 Income from Equity investment 2,153 Dividends received (3,000) Investment in KGHL as at March 31, 2013 $ 28,893 As at March 31, 2013, and December 31, 2012, the financial metrics of KGHL on a gross basis include the following: As at March 31, December 31, Total assets $ 126,357 $ 139,904 Total liabilities $ (31,928) $ (40,771) 12
8 Equity investment in KGHL (continued) 9 Property, plant and equipment For the three months ended March 31, March 31, Capital expenditures $ 5,161 $ 10,074 Revenues 28,709 21,801 Royalty expense 7,547 4,281 Net income $ 7,175 $ 6,363 Movements in property, plant and equipment for the three month period ended March 31, 2013, and for the year ended December 31, 2012, are as follows: Cost Petroleum and Natural Gas Properties Equipment, Furniture and Fixtures Balance as at December 31, 2011 $ - $ - $ - Acquisition (note 5) 21,396 511 21,907 Balance as at March 31, 2012 $ 21,396 $ 511 $ 21,907 Total Additions 693 323 1,016 Disposals (2) (3) (5) Balance as at December 31, 2012 $ 22,087 $ 831 $ 22,918 Additions 80 236 317 Balance at March 31, 2013 $ 22,167 $ 1,067 $ 23,235 Accumulated depletion, depreciation and impairment losses Balance as at December 31, 2011 and March 31, 2012 $ - $ - $ - Depletion and depreciation for the period 529 180 709 Disposals - (3) (3) Balance as at December 31, 2012 $ 529 $ 177 $ 706 Depletion and depreciation for the period 318 56 375 Balance at March 31, 2013 $ 847 $ 234 $ 1,081 Carrying amounts Balance as at December 31, 2012 $ 21,558 $ 654 $ 22,212 Balance as at March 31, 2013 $ 21,320 $ 834 $ 22,154 13
10 Exploration and evaluation assets Movements in exploration and evaluation assets for the three month period ended March 31, 2013, and for the year ended December 31, 2012, are as follows: Exploration and evaluation assets consist of the Company s intangible exploration projects which are pending the determination of proved or probable reserves. 11 Trade and other receivables March 31, 2013 December 31, 2012 Net carrying amount, beginning of period $ 16,616 $ - Acquisition (note 5) - 15,789 Additions 6 827 Net carrying amount, end of period $ 16,622 $ 16,616 March 31, December 31, Trade receivables $ 70 $ 116 HST receivables 57 39 Other tax receivables - 5 $ 127 $ 160 12 Trade and other payables March 31, December 31, Trade payables $ 1,549 $ 1,083 Accrued liabilities 69 - $ 1,618 $ 1,083 14
13 Changes in working capital Three months ended March 31 Cash flows relating to: Decrease (increase) in investments $ 302 $ - Decrease (increase) in trade and other receivables 33 - Decrease (increase) in prepaid expenses (114) - Decrease (increase) in other assets (166) - Increase (decrease) in trade and other payables 535 (410) $ 590 $ (410) The working capital cash flows shown above differ from the statement of financial position due to the current assets and liabilities acquired in the reverse takeover transaction as outlined in Note 5. 14 Share capital As at March 31, 2013 and December 31, 2012, the Company was authorized to issue an unlimited number of common shares with no par value. a) On March 29, 2012, Cub Canada completed a reverse takeover transaction where the former shareholders of Gastek acquired 59% of the Company in exchange for a 100% interest in Gastek (Note 5). A total of 123,278,089 common shares were issued to the former shareholders of Gastek. b) During the year ended December 31, 2012, the Company issued 1,998,118 common shares upon the exercise of warrants. c) On December 17, 2012, the Company completed a private placement for gross proceeds totalling $12,500,000 CAD which was comprised of the issuance of 31,250,000 common shares of the Company at $0.40 CAD per common share. The agents received a cash fee on the sale of the common shares equal to $625,000 CAD, representing 5% of the gross proceeds. Total transaction costs of approximately $947,000 were incurred. 15
15 Warrants On March 29, 2012, as part of the reverse takeover transaction (Note 5), all warrants previously issued remained issued and outstanding and a current value was calculated using the Black-Scholes option pricing model and included as part of the purchase price. Warrants Amount Balance as at December 31, 2011 - $ - Warrants valuation as part of reverse acquisition 11,820,016 717 Balance as at March 31, 2012 11,820,016 $ 717 Exercise of warrants (1,998,118) (219) Expiry of warrants (9,821,898) (498) Balance as at December 31, 2012 and March 31, 2013 - $ - The fair value of the Company's warrants issued was estimated using the Black-Scholes option pricing model for the three month period ended March 31, 2013, and the year ended December 31, 2012, using the following assumptions: Volatility N/A (2012 100%) Risk-free interest rate N/A (2012 0.59%) Expected life (years) N/A (2012 0.10 to 0.58) Dividend yield N/A (2012 Nil) Stock price N/A (2012 0.39 CAD) Strike price N/A (2012 $0.15 to $0.70) Volatility is determined based on a review of comparable companies volatilities given the Company has limited trading history. 16 Share-based payments The Company has a stock option plan under which it is authorized to grant options to its directors, officers, employees and consultants for the purchase of up to 10% of the issued and outstanding common shares. The term of options under the plan shall not exceed 10 years, have an exercise price not less than the current market price and may be subject to vesting terms as determined by the board of directors. On March 29, 2012, as part of the reverse takeover transaction (Note 5), all options previously issued remained issued and outstanding and the options were revalued using the Black-Scholes option pricing model and included as part of the purchase price based on the vested portion of the options. 16
16 Share-based payments (continued) Number of Options Weighted Avg Exercise Price Balance as at December 31, 2011 - $ - Options valuation as part of reverse acquisition 7,149,451 0.52 Balance as at March 31, 2012 and December 31, 2012 7,149,451 0.52 Options cancelled or expired (1,025,000) 0.60 Balance as at March 31, 2013 6,124,451 $ 0.50 Expiry date Exercise price (CAD) Outstanding Exercisable Weighted Avg Remaining Life (years) September 22, 2015 $ 0.31 440,000 440,000 2.48 October 6, 2015 $ 0.40 809,451 809,451 2.52 October 28, 2015 $ 0.67 225,000 225,000 2.58 December 21, 2015 $ 0.87 450,000 450,000 2.73 February 14, 2016 $ 0.85 100,000 100,000 2.88 April 18, 2016 $ 0.64 50,000 43,750 3.05 April 18, 2016 $ 0.75 300,000 300,000 3.05 May 16, 2016 $ 0.65 250,000-3.13 July 12, 2016 $ 0.40 600,000 450,000 3.28 September 8, 2016 $ 0.50 650,000 487,500 3.44 December 2, 2016 $ 0.45 2,250,000 1,406,250 3.68 Total $ 0.50 6,124,451 4,711,951 3.19 Options generally vest over two years with one eighth vesting at the end of each quarter. The Company uses a graded vesting methodology to expense the options over the vesting period. 17
16 Share-based payments (continued) The fair value of the Company's options issued was estimated using the Black-Scholes option pricing model for the three month period ended March 31, 2013, and the year ended December 31, 2012, using the following assumptions: Volatility N/A (2012 100%) Risk-free interest rate N/A (2012 1.37 to 1.49%) Expected life (years) N/A (2012 1.00 to 4.68) Dividend yield N/A (2012 Nil) Stock price N/A (2012 $0.39 CAD) Forfeiture rate N/A (2012 0%) Average fair value per option N/A (2012 $0.25 CAD) Volatility is determined based on a review of comparable companies volatilities given the Company has limited trading history. 17 Earnings (loss) per share Three months ended March 31, Numerator Profit for the year - basic and diluted $ 763 $ 2,191 Denominator (in 000's) Weighted average shares - basic 242,299 125,164 Stock options 14 10 Warrants - 46 Denominator for diluted profit per share 242,313 125,219 Basic (loss) per share $ 0.00 $ 0.02 Diluted profit (loss) per share $ 0.00 $ 0.02 18 Selling and general administrative expenses Three months ended March 31, Professional fees $ 618 $ 119 Salaries 509 - Travel 408 - Office and administration 416 - $ 1,951 $ 119 18
19 Provisions March 31, December 31, Decommissioning liability, beginning of period $ 376 $ - Acquisitions - 333 Accretion 7 20 Decommissioning liability, end of period 383 353 Other provisions, including acquisitions 16 23 Balance, end of period $ 399 $ 376 The Company s decommissioning obligation results from its ownership in petroleum and natural gas assets. The total decommissioning obligation is estimated based on the Company s net ownership in all wells and facilities, estimated costs to reclaim and abandon these wells and facilities and the estimated timing of the costs to be incurred in future years. In Ukraine, the Company estimated the total undiscounted amount required to settle the obligation is $690 (December 31, 2012 - $690). The costs are expected to be settled between 2020 and 2028. The liability has been discounted using a risk-free interest rate of 8% (December 31, 2012 8%) and an inflation rate of 2% (December 31, 2012 2%) as at March 31, 2013. 20 Operating segments The Company defines its reportable segments based on geographical locations as follows: Three months ended March 31, 2013 Ukraine Canada USA Total Revenue $ 1,050 $ 5 $ - $ 1,055 Cost of sales (561) - - (561) Income from equity investment 2,153 - - 2,153 Finance expenses 486 109 (6) 589 Income tax expense (62) - - (62) Selling and general administrative expenses (316) (486) (1,150) (1,951) Share-based payments - (78) - (78) Depletion, depreciation and accretion (329) (4) (49) (382) Net profit $ 2,420 $ (454) $ (1,204) $ 763 As at March 31, 2013 Total current assets $ 957 $ 10,638 $ 634 $ 12,229 Total non-current assets $ 66,727 $ 51 $ 928 $ 67,707 Total liabilities $ 6,513 $ 655 $ 587 $ 7,755 Two customers represent approximately 85% of revenue for the period ended March 31, 2013. The accounts receivable from these two customers represents approximately 94% of trade receivables as of March 31, 2013. 19
20 Operating segments (continued) Three months ended March 31, 2012 Ukraine Canada USA Total Income from equity investment $ 1,909 $ - $ - $ 1,909 Transaction expense recovery - - 401 401 Selling and general administrative expenses - - (119) (119) Net income $ 1,909 $ - $ 282 $ 2,191 As at December 31, 2012 Total current assets $ 255 $ 9,718 $ 687 $ 10,660 Total non-current assets $ 68,079 $ 56 $ 471 $ 68,606 Total liabilities $ 6,317 $ 394 $ 486 $ 28,788 21 Related party transactions Transactions with related parties are incurred in the normal course of business and are measured at the fair value, which is the amount of consideration established and approved by the related parties. As of March 31, 2013, $123,333 salaries related to the CEO of the Company remain in payables (December 31, 2012 77,083). 22 Financial risk management (a) Overview The Company has exposure to the following risks from its use of financial instruments: credit risk liquidity risk foreign exchange risk interest risk This note presents information about the Company s exposure to each of these risks, the Company s objectives, policies and processes for managing and measuring risk, and the management of capital. Management has overall responsibility for the establishment and oversight of the risk management framework. The risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company s activities. 20
22 Financial risk management (continued) (b) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation, and arises principally from cash and cash equivalents. The Company s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Company s customer base, including the default risk of the industry and country in which customers operate, as these factors may have an influence on credit risk. The Company manages its credit risk by holding its cash and its investment in deposits with high credit quality Canadian financial institutions. The following table identifies the Company s maximum exposure to credit risk: March 31, December 31, Cash $ 11,740 $ 10,116 Trade and other receivables 127 160 Loan to KGHL 38 38 $ 11,905 $ 10,314 The Company, through Gastek (a wholly owned subsidiary and owner of the 30% interest in KGHL), has provided a cross-indemnity of up to 30% to KGHL s majority shareholder with respect to a guarantee provided by KGHL s majority shareholder to the European Bank for Reconstruction and Development ( EBRD ) for a loan facility advanced to Kub-Gas. As at March 31, 2013, Kub-Gas had approximately $9,400 of loan proceeds outstanding with EBRD. The Company s maximum guarantee exposure as at March 31, 2013, amounts to $2,820. 21
22 Financial risk management (continued) (c) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows and anticipated investing and financing activities. Officers of the Company are actively involved in the review and approval of planned expenditures. The Company ensures that it has sufficient cash on demand to meet expected operational expenses, including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. As at March, 31, 2013, the Company had current assets of $12,229 and had the following financial liabilities: Carrying Amount As at March 31, 2013 Contractual Cash Flows < 1 year Trade and other payables $ 1,618 $ 1,618 $ 1,618 Provisions 399-399 $ 2,017 $ 1,618 $ 2,017 (d) Foreign exchange risk The Company is exposed to foreign exchange risk primarily related to operating and capital expenditures, denominated in currencies other than the US Dollar, which is primarily Canadian dollars and Ukrainian Hryvnia. The following financial instruments are shown in US Dollars: As at March 31, 2013 UAH CAD Total Cash $ 692 $ 2,553 $ 3,245 Trade and other receivables 66 57 123 Trade and other payables (301) (655) (956) Provisions (39) - (39) $ 418 $ 1,956 $ 2,374 Effect of +/- 10% change in exchange rate $ 42 $ 195 $ 237 22
22 Financial risk management (continued) (e) Capital management The Company s objectives when managing capital are to safeguard the Company s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Company includes equity, comprised of issued share capital, contributed surplus, warrants, accumulated other comprehensive income and retained earnings (deficit) in the definition of capital. As at March 31, 2013, the Company has total shareholders equity of $72,181 (December 31, 2012 - $72,069). The Company s primary objective with respect to its capital management is to ensure that it has sufficient cash resources to fund the identification and evaluation of potential acquisitions. To secure the additional capital necessary to pursue these plans, the Company may attempt to raise additional funds through the issuance of equity or by securing strategic partners. The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the period ended March 31, 2013. 23 Financial instruments The Company s financial instruments consist of cash, investments, trade and other receivables, loan to KGHL and trade and other payables. The fair values of financial instruments other than cash approximate their carrying values because of their current nature. The following table summarizes the carrying values of the Company s financial instruments: March 31, December 31, Fair value through profit or loss (i) $ 11,740 $ 10,418 Loans and receivables (ii) 165 198 Other financial liabilities (iii) $ 1,618 $ 1,083 (i) Cash and investment (ii) Trade and other receivables and Loan to KGHL (iii) Trade and other payables The Company classifies its fair value measurements in accordance with the three levels fair value hierarchy as follows: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, and Level 3 Inputs that are not based on observable market data. The Company s financial instruments measured at fair value on a recurring basis at March 31, 2013, are as follows: Level 1 Level 2 Level 3 Total Cash $ 11,740 $ - $ - $ 11,740 23
24 Subsequent events and proposed transactions On March 8, 2013, the Company announced that it has entered into an agreement to acquire a private Ukrainian oil and gas exploration company ( TGI ). TGI assets consist of approximately 70,000 gross acres of undeveloped land. As consideration for TGI, Cub will issue 55,555,555 common shares at a deemed price of $0.45 per share, representing aggregate consideration to TGI two shareholders of $25 million. The number of shares to issue to TGI will remain fixed. The transaction is expected to occur on or around June 30, 2013, and is subject to the satisfaction of standard conditions, including the receipt of applicable stock exchange and Ukraine regulatory approvals. On May 2, 2013, the Company received a $2.4 million dividend from KGHL. On April 26, 2013, the Company signed an arrangement agreement providing for the acquisition of all of the issued and outstanding shares of Anatolia Energy Corp. ( Anatolia ), a Company listed on the TSX Venture Exchange trading under the symbol AEE (the Transaction ). Pursuant to the Transaction, the shareholders of Anatolia will receive 0.106 of a share in the Company for each Anatolia share held. Anatolia shareholders will receive approximately 13.9 million shares of the Company. Anatolia owns an interest in 11 licenses in four primary project areas in Turkey consisting of 1,162,856 gross acres (581,429 net) which are highly prospective for both conventional and unconventional resources. 24