Energy SpA — Interim / Quarterly Report 2013

Feb 28, 2014

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS AND YEARS ENDED

DECEMBER 31, 2013 AND 2012

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 accompanying unaudited interim condensed consolidated financial statements of the Corporation have been prepared by and are the responsibility of the Corporation's management.

The Corporation'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 condensed consolidated financial statements by an entity's auditor.

Date: February 28, 2014

"Darren Moulds"

Chief Financial Officer

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(\$ Canadian)	December 31, 2013 (unaudited)	December 31, 2012 (unaudited)
ASSETS
Current
Cash	\$ 12,990	\$ 647,642
Restricted cash	-	1,284,192
Accounts receivable	322,349	487,164
Prepaid expenses and deposits	35,171	157,401
Assets held for sale (Note 3)	-	650,000
Inventory	61,827	74,272
Long-term	432,337	3,300,671
Reclamation deposits	574,900	574,900
Investment in associate (Note 4)	1,187,850	1,139,102
Exploration and evaluation assets (Note 6)	3,031,415	3,555,758
Property, plant and equipment (Note 5)	1,772,847	6,115,348
	6,567,012	11,385,108
	\$ 6,999,349	\$ 14,685,779
LIABILITIES
Current
Accounts payable and accrued liabilities	\$ 4,042,603	\$ 3,044,687
Loan payable (Note 7)	580,532	817,466
	4,623,135	3,862,153
Long-term
Asset retirement obligations	6,604,930	6,795,729
Long-term debt (Note 8)	6,913,683	8,172,567
Long-term derivative instrument (Note 8)	21,082	32,564
	13,539,695	15,000,860
	\$ 18,162,830	\$ 18,863,013
SHAREHOLDERS' EQUITY
Share capital (Note 9)	164,341,604	163,227,360
Contributed surplus (Note 9)	23,713,200	22,665,332
Warrants (Note 9)	-	941,900
Deficit	(191,288,401)	(183,480,549)
Accumulated other comprehensive income	(7,929,884)	(7,531,277)
	(11,163,481)	(4,177,234)
Basis of Presentation and Going Concern (Note 2)
	\$ 6,999,349	\$ 14,685,779

Approved on behalf of the board of directors

	"David Worrall"		"Pedro Paulo"
David Worrall	Director	Pedro Paulo	Director

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Three months ended December 31,			Twelve months ended December 31,
(\$ Canadian)	2013		2012	2013		2012
Revenue	(unaudited)		(unaudited)	(unaudited)		(unaudited)
Natural gas sales	\$ 78,747	\$	376,184	\$ 1,103,713	\$	1,571,197
Other income	-		-	94		177,000
Royalties	(3,234)		(5,960)	(48,203)		(37,378)
	75,513		370,224	1,055,604		1,710,819
Expenses
Transportation, gathering and processing	36,538		126,241	277,795		776,140
Operating expenses (Note 12)	247,485		626,327	1,589,108		2,077,170
Depreciation and depletion	45,906		205,095	804,682		1,109,598
Stock-based compensation (Note 9)	-		117,362	105,969		1,100,784
General and administrative (Note 13)	430,728		610,913	2,258,305		2,975,864
Finance costs (Note 11)	508,736		652,707	2,675,469		1,895,083
Gain on sale of investment	-		-	-		(802,167)
Gain on issuance of shares (Note 9)	-		-	(123,849)		-
Loss on sale of investment in subsidiary (Note 4)	-		-	-		477,312
Gain on derivative instruments (Note 8)	(2,131)		(539,692)	(4,008)		(2,529,823)
Impairment of asset held for sale (Note 3)	-		740,109	-		740,109
Gain on bond conversion (Note 8) Impairment of property, plant and equipment (Note 5)	- 2,839,406		- -	(1,646,476) 2,839,406		- -
	563,038		8,224,977	563,038		29,168,044
Impairment of exploration and evaluation assets (Note 6) Foreign exchange loss/(gain)	(125,569)		2,272,707	(475,983)		353,412
	4,544,137		13,036,746	8,863,456		37,341,526
Net loss	(4,468,624)		(12,666,522)	(7,807,852)		(35,630,707)
Other comprehensive loss
Foreign currency translation	141,097		2,898,062	(7,495)		(709,278)
Realized foreign exchange on impairment of assets (Note 5)	(391,112)		(372,033)	(391,112)		(372,033)
Comprehensive loss	\$ (4,718,639)	\$	(10,140,493)	\$ (8,206,459)	\$	(36,712,018)
Basic and diluted net loss per share	\$ (0.01)	\$	(0.04)	\$ (0.02)	\$	(0.11)
Weighted average number of common shares outstanding,
basic and diluted (Note 14)	345,228,857		316,702,258	328,821,696		316,702,258

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(\$ Canadian)	Twelve months ended December 31, 2013 (unaudited)			Twelve months ended December 31, 2012 (unaudited)
Common Shares Balance, beginning of period Common shares issued (Note 9)	\$	163,227,360 1,114,244	\$	163,227,360 -
Balance, end of period	\$	164,341,604	\$	163,227,360
Warrants Balance, beginning of period Exercised Granted	\$	941,900 (941,900) -	\$	890,204 - 51,696
Balance, end of period	\$	-	\$	941,900
Contributed Surplus Balance, beginning of period Share-based compensation (Note 9) Expiry of warrants	\$	22,665,332 105,968 941,900	\$	21,564,548 1,100,784 -
Balance, end of period	\$	23,713,200	\$	22,665,332
Accumulated other comprehensive loss Balance, beginning of period Realized foreign currency translation on impairment of exploration	\$	(7,531,277)	\$	(6,449,966)
and evaluation assets Foreign currency translation		(391,112) (7,495)		(372,033) (709,278)
Balance, end of period	\$	(7,929,884)	\$	(7,531,277)
Deficit
Balance, beginning of period Net loss	\$	(183,480,549) (7,807,852)	\$	(147,849,842) (35,630,707)
Balance, end of period	\$	(191,288,401)	\$	(183,480,549)

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

December 31, 2013 December 31, 2012 (\$ Canadian) (unaudited) (unaudited) Cash (used in) provided by: Operating activities: \$ (7,807,852) \$ (35,630,707) Net loss Non cash items: Depreciation and depletion 804,682 1,109,598 Stock-based compensation (Note 9) 105,969 1,100,784 Impairment of assets held for sale (Note 3) - 740,109 Impairment of exploration and evaluation assets (Note 6) 2,839,406 29,168,044 Impairment of property, plant and equipment (Note 5) 563,038 Unrealized foreign exchange loss/(gain) (1,345,168) 828,830 Finance costs (Note 11) 2,655,920 1,433,774 Loss on sale of investment in subsidiary - 477,312 Gain on bond conversion (Note 8) (1,646,476) - Gain on share issuance (Note 9) (123,849) - Gain on sale - (802,167) Gain on derivative instruments (Note 8) (4,008) (2,529,823) Income tax recovery - (3,958,338) (4,104,246) Cash from operations before changes in non-cash working capital Change in non-cash working capital (Note 15) 2,614,066 (1,654,281) (1,344,272) (5,758,527) Financing activities: - Loan proceeds excluding transaction costs (Note 7) 950,000 Convertible debenture excluding transaction costs (Note 8) - 8,368,736 - Finance costs (Note 11) (39,719) Net change in non-cash working capital (Note 15) (56,504) 766,613 (56,504) 10,045,630 Investing activities: Additions of exploration and evaluation assets (Note 6) (6,098,515) - Additions of property, plant and equipment (82,859) - Addition of assets held for sale (Note 3) (1,182,458) (34,389)
Proceeds on assets held for sale (Note 3) - 675,000
Additions of inventory (227,070) (212,204)
Proceeds from sale of assets (Note 6) 323,673 -
Proceeds from sale of subsidiary (Note 4) - 494,825
Proceeds from sale - 802,167
Net change in non-cash working capital (Note 15) 11,591 (1,249,290)
763,671 (7,543,200)
(637,105) (3,256,097) Decrease in cash
2,453 7,404 Net effect of foreign exchange on cash held in foreign currencies
647,642 3,896,335 Cash, beginning of period
Cash, end of period \$ 12,990 \$ 647,642
Supplemental cash flow information:
Interest paid 1,284,192 39,719
Income taxes paid - 70,714

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

1. REPORTING ENTITY

Transeuro Energy Corp. (the "Company" or "Transeuro") is a publicly traded company and is listed on the TSX Venture Exchange and Oslo Axess under the symbol "TSU". The Company was incorporated in British Colombia and is extra provincially registered in Alberta. Transeuro's head office is located at Suite 2800 – 350 7th Ave SW, Calgary, AB, Canada, T2P 3N9. Transeuro is involved in the acquisition of petroleum and natural gas rights, the exploration for, and development and production of crude oil, condensate and natural gas.

These interim condensed consolidated financial statements include Transeuro Energy Corp. and its wholly-owned subsidiaries Grey Creek Petroleum Limited Inc., Indusmin Energy Corporation, Mattson Holdings Ltd., Transeuro Beaver River Inc. (formerly Questerre Beaver River), Team Energy LLC, Scythian Energy B.V., Samartian Energy B.V., South Crimea Energy B.V., West Crimea Energy B.V., Ammonite B.V., Indusmin LLC, and Ammonite LLC.

2. BASIS OF PRESENTATION AND GOING CONCERN

These interim condensed consolidated financial statements for the period ended December 31, 2013 have been prepared using International Financial Reporting Standards ("IFRS") in accordance with IAS 34 – Interim Financial Reporting as issued by the International Accounting Standards Board ("IASB"). These interim condensed consolidated financial statements do not contain all disclosures required for full annual financial statements and should be read in conjunction with the audited consolidated financial statements as at and for the year ended December 31, 2012.

The accounting policies and fair value determination applied by the Company for these interim condensed consolidated financial statements are the same as those disclosed and applied by the Company as discussed in Note 3 of the audited consolidated financial statements as at and for the year ended December 31, 2012.

a. Basis of measurement

The interim condensed consolidated financial statements have been prepared on the historical cost basis except for investment in associate and derivative instruments which are measured at fair value with changes in fair value recorded in earnings.

b. Functional and presentation currency

These interim condensed consolidated financial statements are presented in Canadian dollars. The functional currency of the Canadian parent company is the Canadian dollar. The functional currency of foreign subsidiaries includes the Euro ("EUR"), Armenian Dram, U.S. dollar ("USD") and Ukraine Hryvna ("UAH"). Foreign currency gains and losses arise from the translation of intercompany loans denominated in a currency other than the presentation currency, transactions and period end balances in entities in a currency other than their functional currency and from recognition of exchange differences into net loss/income from foreign currency translation previously included in other comprehensive income.

c. Use of estimates and judgments

The preparation of the interim condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies regarding certain types of assets, liabilities, revenues and expenses in the preparation of the interim condensed consolidated financial statements. Actual results could differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the interim condensed consolidated financial statements is included the notes to the interim condensed consolidated financial statements.

d. Going concern

Management has made the necessary estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses in the preparation of the interim condensed consolidated financial statements. Actual results could differ from those estimates.

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

These interim condensed consolidated financial statements have been prepared in accordance with IFRS on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. Transeuro is a development stage enterprise that participates in oil and gas projects located in emerging markets, including the Ukraine. To date, Transeuro has not found proven reserves internationally. Oil and gas exploration, development and production activities in emerging markets, are subject to significant uncertainties which may adversely affect the Company's operations. Uncertainties include, but are not limited to, the risk of war, terrorism, expropriation, nationalization, renegotiation or nullification of existing or future concessions and contracts, the imposition of international sanctions, a change in crude oil or natural gas pricing policies, a change in taxation policies, and the imposition of currency controls. These uncertainties, all of which are beyond the Company's control, could have a material adverse effect on Transeuro's business, prospects and results of operations. In addition, if legal disputes arise related to oil and gas concessions acquired by the Company, Transeuro could be subject to the jurisdiction of courts other than those of Canada. The Company's recourse may be limited in the event of a breach by a government or government authority of an agreement governing a concession in which Transeuro acquires an interest. The Company may require licenses or permits from various governmental authorities to carry out future exploration, development and production activities. There can be no assurance that the Company will be able to obtain all necessary licenses and permits when required.

The Company has operating assets in Canada that in 2013 and 2012 generated negative operating cash flow. For the period ended December 31, 2013 the Company had net loss of \$7,807,852 and used cash of \$3,958,338 for operating activities. Consequently, the Company's ability to continue as a going concern is dependent on the Company's ability to obtain additional financing if, as and when required, and, ultimately, the attainment of profitable operations.

Management's assessment of the Company, based on its current cash flow forecast and financial model, is that there is significant uncertainty as to whether it is a going concern because of the following factors:

• a) The Company gas production operations in Canada continue to operating at a loss due to reducing gas production from natural decline and low gas prices. The Company had continued production while attempting to attract a farm in partner, but has now shut in production due to mechanical and equipment issues (Note 5).
• b) The Company has two remaining loan repayments due in December 2013 and April 2014 related to outstanding loan agreement (see Note 7).
• c) The Company is currently in non-compliance with certain covenants under its convertible bond and has requested a waiver from the bond trustee to allow the Company time to fulfill the requirements, see below for management plans to remedy.
• d) As at December 31, 2013, the Company has cash of \$12,990 which will cover some short-term expenditures, but are unlikely to cover the cash flow needs of the following twelve months.

Management's plans for addressing the above factors are as follows:

• a) To farm out an interest in the Beaver River field in Canada to fund a work programme that will increase production and revenue to cover fixed costs and deliver operating profits. To farm out an interest in the new Jordan Enhancement Program Agreement to cover the financial commitments and some corporate G&A.
• b) The Company is reviewing new production and exploration assets including through acquisitions and mergers that can provide immediate or short term revenue as well as good investment opportunities to increase production through development and exploration activities. Securing these additional assets will allow the Company to pursue additional financing at attractive prices.
• c) Make further use of the two financing facilities with Yorkville Advisors LLP ("Yorkville") subject to TSX regulations and the terms and conditions of the agreements (Note 10).
• d) Under the terms of the sale agreement of Povorotnoye, future staged payments for spudding of the first well (USD\$500,000) and on successful testing (USD\$500,000) will be received by Transeuro (Note 4). Drilling is anticipated in 2014.
• e) As a development stage exploration company, Transeuro will continue its efforts to seek appropriate financing initiatives to meet its obligations that benefit the Company and its shareholders. Among the alternatives, the Company will assess the relative cost/benefit of additional issuance of shares from treasury, financing alternatives or farm-out opportunities.

There can be no assurance that the above plan will be completed as described and these interim condensed consolidated financial statements do not give effect to adjustments that would be necessary and could be material to the carrying values and classifications of assets and liabilities should the Company be unable to continue as a going concern.

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

3. ASSETS HELD FOR SALE

During the second quarter, the Company signed an offer to purchase for the rig and has completed the sale of the related equipment. During 2013, \$675,000 was received as proceeds and \$9,389 was recorded as impairment to reflect the loss on sale. Any additional costs to be incurred in connection with the sale will be charged through profit and loss as incurred.

4. INVESTMENT IN ASSOCIATE

During the first quarter of 2012, the Company completed a transaction to sell 85% of its interest in East Crimea BV. East Crimea BV is the holding company that holds title to the Joint Activity Agreement to develop the Povorotnoye gas field in East Crimea.

Under the terms of the sale, the purchaser will drill well one to a depth of approximately 4,000 meters, and if a commercial discovery is declared, to put the well into production. The purchaser will then drill a second development well, commencing before May 15th 2016. The purchaser is solely responsible for the costs associated with the drilling of the two wells noted and the acquisition seismic on the licenses, subsequent to which the costs will revert to the ownership interest.

The Company received USD \$350,000 from the purchaser in 2011, representing the initial payment under the sale. The loss recorded by the Company of \$477,312 is based on proceeds received, the de-recognition of 85% of the net assets prior to sale, and the recognition of \$1,128,529 as the fair value of the investment.

The Company evaluated the fair value of this investment as at December 31, 2013 and determined that there was no adjustment in fair value. Any change in the value the investment is carried at is due to fluctuations in the foreign exchange rates.

During 2012 the purchaser made the first staged payment of USD \$500,000 on completion of the transaction. A second payment of USD \$500,000 is due on spudding of well one and a final payment of USD \$500,000 on the commencement of testing operations on well one.

5. PROPERTY, PLANT AND EQUIPMENT

In October, 2013 the Company announced the shut in of the natural gas field at Beaver River, due to equipment failure. The equipment required to bring production back on stream was not in the field and could not be mobilized due to weather conditions (ice roads and bridge repairs commissioned). As the Company was unable to establish production before year-end (and through February, 2014) no year-end independent reserve report was completed. Due to the future uncertainty of the Beaver River production and related economic reserves, the Company has recorded an impairment of \$2,839,406. Subsequent changes to the operations, reserves and production in the field will allow the Company to reverse all or a portion of the impairment recorded. The Company continues to carry the value of the Beaver River exploration and evaluation assets, as the carry value is supported by activity in the area, deal/transaction metrics in the region (land values) and other factors.

6. EXPLORATION AND EVALUATION ASSETS

	Ukraine	Canada	Total
Balance at January 1, 2012	\$ 27,326,574	\$ 2,934,000	\$ 30,260,574 -
Additions	6,032,469	66,046	6,098,515
Sale of investment in subsidiary (Note 4)	(3,123,525)	-	(3,123,525)
Change in estimate of asset retirement obligation	(11,331)	30,651	19,320
Foreign currency translation	(531,082)	-	(531,082)
Impairment	(29,168,044)	-	(29,168,044)
Balance at December 31, 2012	\$ 525,061	\$ 3,030,697	\$ 3,555,758
Change in estimate of asset retirement obligation	-	718	718
Disposal and impairment	(525,061)	-	(525,061)
Balance at December 31, 2013	\$ -	\$ 3,031,415	\$ 3,031,415

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

For the period ended December 31, 2013, the Company assessed the fair value of its assets and determined that due to the uncertainty of regaining valid Joint Activity Agreements in Ukraine, that an impairment of the remaining carry value be recorded (related to the net carrying value of exploration and evaluation assets and asset retirement obligations). For the year ended December 31, 2013, the Company recorded an impairment of \$563,038 and a related reclassification related to previously recorded foreign exchange gains from accumulated other comprehensive income to the statement of profit and loss. For the year ended December 31, 2012, as a result of the operational updates on Karl-101 released in November, 2012, the uncertainty of future operations and the ongoing negotiations for the various licenses and Joint Activity Agreements in Ukraine, the Company has recorded an impairment charge of \$29,168,044 through profit and loss.

As of January 1, 2013 all cost associated with Ukraine operations (general and administrative and office) are no longer capitalized with exploration and evaluation assets but are expensed as a part of general and administrative expenses (Note 13).

7. LOAN PAYABLE

During the second quarter of 2012 the Company finalized a financing facility with Yorkville (a third party) including a Loan Agreement for up to CAD \$5.0 million. Under the terms of the Loan Agreement, Transeuro can receive up to CAD \$5.0 million over a period of 24 months, which shall be advanced in tranches of CAD \$1.0 million with repayment over 12 months. The loan will be unsecured and pay annual interest at 12%. On May 16, 2012 The Company had drawn the first instalment of the Loan Agreement in the amount of CAD \$1.0 million and has issued 1 million, one year share purchase warrants (Note 9) with the exercise price of CAD \$0.168 to Yorkville. Monthly repayments of the first draw down installment commenced in August 2012 and were subsequently placed on hold under mutual agreement of the Company and Yorkville in November 2012 as a result of the ongoing regulatory and exchange discussions (refer to Note 10 for additional information on the Yorkville facility).

The Company and Yorkville have amended the Loan Agreement entered into in May 2013. Under the revised terms the Loan Agreement, the remaining principal and interest will be repaid in three installments in August 2013, December 2013 and April 2014.

During the three months ended September 30, 2013, the Company announced that further to its press release dated March 26, 2013, the Company has executed the first drawdown of the SPA with Yorkville. The Company issued 6,192,460 shares to Yorkville at a deemed price of CAD 0.05, valued at CAD 309,623.

The proceeds received from Yorkville were used for the first agreed loan repayment under the revised Loan Agreement with Yorkville dated May 2013. The Company has obligations to repay principal and interest in December 2013 and April 2014 and is in discussions to execute the SPA (Note 10) to issue additional shares to repay its obligations.

8. CONVERTIBLE BOND

On May 22, 2012 the Company closed a NOK 60 million (approximately CAD \$10.4 million) secured convertible bond. The final terms of the secured convertible bond are annual interest at 12% and a conversion price at NOK 0.85 (approximately CAD \$0.148). The bond is secured against the shares of Transeuro Beaver River Inc., the Company subsidiary holding title to 50% of the Beaver River field in British Columbia, Canada.

Long-term derivative instrument

As a result of the conversion option the debt is bifurcated into debt and the convertible option. The NOK denominated convertible bond is considered to contain an embedded derivative since the functional currency of the Company is the Canadian dollar. The fair value of the convertible component as at May 22, 2012 was \$2,563,975 determined using the Black-Scholes valuation method using a risk free rate interest rate of 1.02%, a dividend yield of 0%, a weighted average volatility factor 60%, market price per common share of NOK 0.65 and an expected life of 3 years. Transaction costs relating to the derivative portion of the instrument totalled \$167,794 and were charged to finance costs through profit and loss.

The fair value of the convertible component was revalued as at December 31, 2013 using the Black-Scholes valuation method using a risk free rate interest rate of 1.20%, a dividend yield of 0%, a weighted average volatility factor 60%, market price per common share of NOK 0.20 and an expected life of 1.39 years. As at December 31, 2013 fair value was determined to be \$21,082 resulting in a change of \$2,542,893 since inception, relating to the change in value due to the Black-Scholes inputs and relating to foreign exchange, both of these amounts are recorded through profit and loss.

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

If the volatility used to fair value the convertible component decreased by 10% the fair value would decrease by \$15,567. If the volatility increased by 10%, the fair value of the convertible option would increase by \$12,680.

If the share price used to fair value the convertible component decreased by NOK 0.10 the fair value would decrease by \$20,389. If the share price increased by NOK 0.10 the fair value of the convertible option would increase by \$84,312.

During the third quarter of 2013, NOK 13,000,000 (approximately \$2,164,826) were converted under the bond holders conversion rights. In conjunction with the conversions 15,294,116 of free trading shares were issued. As a result of the conversions, the Company recorded a gain to profit and loss for the period equal to \$1,646,476 related to the difference in the in stated conversion rate of NOK 0.85/share and the average market price of \$0.038/share (NOK 0.20/share).

Long-term liability

The liability component is determined by taking the face value of the bond less the fair value of the equity and finance costs. The debt will be accreted until bond maturity back to face value.

	Amount
Convertible debenture	\$ 8,215,600
Unamortized allocation to derivative instrument	(1,168,728)
Unamortized transaction costs	(233,621)
Unrealized foreign exchange	100,432
Balance December 31, 2013	\$ 6,913,683

The remaining unamortized component consists of \$1,168,728 of unamortized value relating to the derivative instrument, \$233,621 in transactions costs and \$100,443 of unrealized foreign exchange. During the three and twelve months ended December 31, 2013 transaction costs of \$37,015 and \$152,298, respectively (2012 – (\$58,761) and \$272,375), were recognized and charged to earning through finance costs. The Company recorded accretion on the long term derivative instrument for the three and twelve months ended December 31, 2013 of \$188,332 and \$893,550, respectively (2012 - \$237,251 and \$549,660), were recognized and charged to earning through finance costs.

9. SHARE CAPITAL

a) Authorized

Unlimited number of common shares, without par value

b) Common shares issued

	Number of shares	Amount
Balance December 31, 2012 and January 1, 2012	316,702,259	\$ 163,227,360
Common shares issued under the SPA (i)	13,232,482	537,774
Common shares issued with bond conversion (ii)	15,294,116	576,470
Balance at December 31, 2013	345,228,857	\$ 164,341,604

(i) In connection with the SPA (Note 10) on March 26, 2013 the Company issued 7,040,023 shares to Yorkville at a deemed price of \$0.05, valued at NOK 2,000,000.

On August 22, 2013, the Company executed the first drawdown of the SPA with Yorkville. The Company issued 6,192,460 shares to Yorkville at a deemed price of \$0.05/share, valued at \$309,623. The shares were be issued to Yorkville pursuant to Canadian prospectus exemptions and are subject to a four month hold period, which expires December 22, 2013, before the shares can be sold into the market. The market value of the shares on the date of issue was \$185,773 (\$0.035/share) resulting in a gain on the settlement of \$123,849.

(ii) During the third quarter of 2013, 15,294,115 shares were issued in connection with convertible bond conversions (see Note 7). The shares issued in connection with the bond conversions are free trading.

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

c) Warrants

A summary of activity and outstanding warrants as at December 31, 2013 is as follows:

	Number of warrants	Amount
Balance January 1, 2012	5,058,800	\$ 890,204
Granted	1,000,000	51,696
Balance at December 31, 2012	6,058,800	\$ 941,900
Expired	(6,058,800)	(941,900)
Balance at December 31, 2013	-	\$ -

In May 2012, 1,000,000 warrants, with an exercise price of \$0.17, were issued as a part of the loan received from Yorkville (Note 7). The fair value of these warrants were valued using the Black-Scholes option pricing model and the following weighted average assumptions: expected dividend yield of 0%, expected volatility of 155.2%, risk-free interest rate of 1.02%, forfeiture rate of 0%, and an expected life of 1 year. All outstanding warrants issued to Yorkville have expired during the nine months ended September 30, 2013.

d) Stock-based compensation

The Company has granted options for the purchase of common shares to its directors, officers, and employees. The aggregate number of shares that may be issuable pursuant to options granted under the Stock Option Plan will not exceed 10% of the issued common shares of the Company at the date of grant. No more than 5% of the issued shares of the Company may be granted to any one optionee. The options are non-transferable and non-assignable and may be granted for a term not exceeding ten years and will be determined by the Board on each grant date. The exercise price of the options may not be less than the greater of \$0.10 and the market price, subject to all applicable regulatory requirements.

The following table depicts the stock option transactions during the period:

		Weighted average
	Number of stock options	exercise price
Balance January 1, 2012	3,566,576	\$ 0.91
Granted	17,387,500	0.10
Expired/forfeited	(2,795,223)	(0.86)
Balance at December 31, 2013 and 2012	18,158,853	\$ 0.16

The fair value of the options granted in 2012 was determined using the Black-Scholes option pricing model and the following weighted average assumptions: expected dividend yield of 0%, expected volatility of 155.9%, risk-free interest rate of 1.36%, forfeiture rate of 5%, and an expected life of 5 years. Terms for vesting rules are approved by the Board of Directors on each grant and 2012 and 2011 options were granted with vesting terms of one quarter on grant and in three equal portions on the following 6, 12 and 18 months.

During the three and twelve months ended December 31, 2013, the Company recorded \$nil and 105,969, respectively, related to stock based compensation (December 31, 2012 - \$117,363 and 1,100,784).

As at December 31, 2013, the following stock options are outstanding:

Exercise Price	Options Outstanding	Remaining Life (Years)	Options Exercisable
\$1.25	373,109	0.72	373,109
\$1.25	750,000	1.98	750,000
\$0.50	248,244	0.72	248,244
\$0.50	750,000	1.98	750,000
\$0.10	16,037,500	3.04	16,037,500
\$0.16	18,158,853	2.87	18,158,853

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

e) Contributed surplus

	Amount
Balance Janaury 1, 2012	\$ 21,564,548
Stock-based compensation	1,100,784
Balance at December 31, 2012	\$ 22,665,332
Stock-based compensation	105,968
Expired warrants	941,900
Balance December 31, 2013	\$ 23,713,200

10. SHARE PURCHASE AGREEMENT

In May 2012 the Company signed final agreements with YA Global Master SPV Ltd ("YA Global"), which is advised by Yorkville, including a Loan Agreement for up to CAD \$5.0 million (Note 7), and a Share Purchase Agreement ("SPA") for up to NOK 100 million (approximately CAD \$17.2 million).

Pursuant to the proposed terms of the SPA, the Company has the discretion to withdraw funds in tranches up to a total of NOK 100 million over a period of 36 months. At the request of the Company YA Global will, subject to a number of conditions as set out in the SPA, be obligated to purchase ordinary shares at a discount of 5% to the average of the lowest volume weighted average share price of the Company during four consecutive 10 day forward pricing period. Alternatively the Company may elect a backward pricing period whereby YA Global will purchase shares at a 10% discount to the lowest volume weighted average share price of the Company during a 5 day backward pricing period. The Company had prepared and filed a Shelf Prospectus in Canada to facilitate the issuance of new shares under the SPA.

In October 2012 the Company revised the proposed SPA with YA Global that was previously announced in May 2012 to reflect changes requested by the Alberta Securities Commission ("ASC") following discussions of their review of the terms of the SPA and the preliminary Shelf Prospectus.

Pursuant to the terms of the revised SPA, the Company still has the discretion to withdraw funds in tranches up to a total of NOK 100 million over a period of 36 months. At the request of the Company YA Global will still, subject to a number of conditions as set out in the SPA, be obligated to purchase ordinary shares at a discount of 5% to the average of the lowest volume weighted average share price of the Company. However the revised agreement specifies a forward pricing period of 5 days compared to the previous period of 40 days. The facility for a backward pricing period has been removed.

In November 2012, the Company announced that it would no longer proceed with its shelf prospectus and exemptive relief application in connection with the SPA. The Company has received conditional approval from the TSX Venture Exchange to the SPA, but may require further amendments to the SPA before finalizing with Yorkville. As a result of not having a receipted prospectus, any shares issued pursuant to the SPA will be issued pursuant to prospectus exemptions and will be subject to a four month hold period. In March, 2013, the Company has issued 7,040,023 shares (the "Initial Implementation Shares") to Yorkville at a deemed price of CAD 0.05, valued at NOK 2,000,000 (with a four month hold). The Initial Implementation Fee Shares are calculated as 2% of the maximum aggregate funding from the SPA of NOK 100,000,000 that is available to the Company from the SPA over the 3 year term. Under the terms of the SPA, a further 1% (NOK 1,000,000) in shares will be issued as the balance of the implementation fee to Yorkville coincident with subsequent drawdowns from the SPA.

In connection with the execution of the SPA, the Company and Yorkville have amended the Loan Agreement entered into in May 2012. Under the revised terms the Loan Agreement, the remaining principal and interest will be repaid in three installments in August 2013, December 2013 and April 2014 (Note 6).

On August 22, 2013, the Company executed the first drawdown of the SPA with Yorkville. The Company issued 6,192,460 shares to Yorkville at a deemed price of \$0.05/share, valued at \$309,623. The shares were be issued to Yorkville pursuant to Canadian prospectus exemptions and are subject to a four month hold period, which expires December 22, 2013, before the shares can be sold into the market. The market value of the shares on the date of issue was \$185,773 (\$0.03/share) resulting in a gain on the settlement of \$123,849.

The proceeds received from Yorkville were used for the first agreed loan repayment under the revised Loan Agreement with Yorkville. The Company has obligations to repay principal and interest in December 2013 and April 2014 and is in discussions to execute the SPA to issue additional shares to repay its obligations.

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

11. FINANCE COSTS

A breakdown of finance costs is detailed below:

	Three months ended			Twelve months ended
		December 31,			December 31,
		2013		2012		2013		2012
Accretion on asset retirement obligation	\$	7,422 \$		33,537	\$	30,383	\$	99,985
Share purchase agreement (Note 10)		-		-		352,001		-
Interest on loan payable (Note 7)		21,393		17,466		68,701		57,235
Accretion of long term debt (Note 8)		188,332		237,251		893,550		549,660
Interest expense on convertible bond (Note 8)		248,494		323,686		1,158,987		766,613
Recognition of transaction costs relating to bond (Note 8)		37,015		(58,761)		152,298		272,375
Transaction costs relating to loan payable		-		101,696		-		101,696
Penalties and interest		-		-		-		35,477
Bank charges and other interest costs		6,080		(2,168) -		19,549		12,042
	\$	508,736	\$	652,707	\$	2,675,469	\$	1,895,083

12. OPERATING EXPENSES

Operating expenses relate entirely to the Beaver River operations in Canada.

	Three months ended				Twelve months ended
	December 31,				December 31,
	2013	2012		2013			2012
Salaries, consulting fees and employee expenses	\$ 146,766 \$		187,664	\$	770,236	\$	903,493
Equipment repairs, maintenance and rentals	7,319		57,130		215,354		270,422
Travel, camp groceries and supplies	19,744		61,486		124,809		190,747
Fluids, chemicals and fuel	22,393		173,961		224,649		393,316
Taxes, levies, licenses and permits	6,812		135,025		145,037		265,201
Insurance	29,746		8,484		66,200		35,256
Miscellaneous	14,705		2,577		42,823		18,735
	\$ 247,485	\$	626,327	\$	1,589,108	\$	2,077,170

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

13. GENERAL AND ADMINISTRATIVE EXPENSES

The breakdown of significant cost categories in general and administrative expense is as follows:

		Three months ended			Twelve months ended
	December 31,			December 31,
	2013			2012		2013		2012
Salaries, consulting fees and employee expenses	\$	80,116 \$		106,249	\$	418,843	\$	723,559
Officer and director fees		132,710		153,504		607,976		519,575
Ukraine office, general and administrative expenses		72,291		-		367,658		-
Travel, accommodation and conferences		22,432		93,104		104,636		229,654
Office, rent, computer and supplies		38,445		50,120		187,715		237,010
Audit, tax and legal		43,323		129,236		314,403		649,594
Insurance		28,400		41,700		114,964		134,540
Filing, transfer agent and stock exchange fees		7,980		24,777		103,175		327,320
Website, advertising and investor relations		3,255		12,223		16,932		65,434
Taxes		-		-		-		89,178
Other		1,776		- -		22,003		-
	\$	430,728	\$	610,913	\$	2,258,305	\$	2,975,864

14. NET INCOME/LOSS PER SHARE

The number of shares used to calculate the basic and diluted net income per share for the three and twelve months ended December 31, 2013 includes the weighted average number of Transeuro's common shares outstanding of 345,228,857 and 328,821,696, respectively (December 31, 2012 – 316,702,258). For the three and twelve months ended December 31, 2013, 18,158,853 options and 6,058,800 warrants were excluded from calculating dilutive loss per share as they were anti-dilutive (December 31, 2012 – 6,058,800 warrants and 17,858,853 options).

15. SUPPLEMENTAL CASH FLOW INFORMATION

The following table details the changes in non-cash working capital:

	December 31, 2013	December 31, 2012
Changes in non-cash working capital
Accounts receivable	\$ 164,815	\$ (51,835)
Prepaid expenses and deposits	122,230	80,299
Accounts payable and accrued liabilities (i)	997,916	(2,165,422)
Restricted cash	1,284,192	-
	\$ 2,569,153	\$ (2,136,958)
Operating activities	\$ 2,614,066	\$ (1,654,281)
Financing activities	(56,504)	766,613
Investing activities	11,591	(1,249,290)
	\$ 2,569,153	\$ (2,136,958)

(i) Effects for foreign exchange are included in accounts payable and accrued liabilities

As at and for the periods ended December 31, 2013 and 2012 (unaudited)

16. COMMITMENTS AND CONTINGENCIES

Ukraine - Povorotnoye

The Povorotnoye license expires, subject to any extensions, on May 14, 2016. Under the terms of the license extension, the license requires commencing in 2012 the drilling and testing of one well for minimum investment of \$12.5 million and commencing a seismic programme of \$5 million and other exploration and development procedures. The Company completed a sale of 85% of the holding Company related to this license (Note 4), and as such, the purchaser has assumed all funding and operating commitments subject to the terms of the sale agreement in 2012 and beyond. The drilling is expected to commence in 2014.

Office Rent

The Company has a lease in the Ukraine for a warehouse, which expires in July, 2014. The total minimum lease payments remaining for this facility is approximately \$13,000.

Corporate Information

Directors

David Worrall Aage Thoen Nils Trulsvik Pedro Paulo

Officers

David Worrall President and Chief Executive Officer

Darren Moulds Chief Financial Officer

Bankers

TD Canada Trust Vancouver, BC

CIBC Vancouver, BC

Legal Counsel

McCullogh O'Connor Irwin LLP 2600 Oceanic Plaza – 1066 West Hastings Street Vancouver, BC V6E 3X1

DLA Piper Olav Vs gate 4 P.O. Box 1364 Vika NO00114, Oslo Norway

Auditors

Deloitte & Touche LLP 700, 850 – 2 nd Street SW Calgary, AB T2P 0R8

Transfer Agent

Computershare Trust Company of Canada 510 Burrard Street, 3rd Floor Vancouver, BC V6C 3B9

DnB NOR Bank ASA Stranden 21 0021 Oslo, Norway

Head Office

Suite 2800 – 350 7th Ave SW Calgary, AB T2P 3N9 Telephone: (403) 705 -1919 Facsimile: (403) 705 – 1921 Web: www.transeuroenergy.com Email: info@transeuroenergy.com

Stock Information

TSX Venture Exchange Oslo Axess Symbol: TSU

Investor Relations

Darren Moulds, CFO Telephone: (403) 705 -1919 Facsimile: (403) 705 – 1921 Email: info@transeuroenergy.com