Final Results

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.

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