EMPYREAN ENERGY PLC Registered Number 05387837 Annual Report and Accounts 2017 Contents Company Information Highlights Chairman’s Statement Strategic Report Operational Review Directors’ Report Corporate Governance Report Statement of Directors’ Responsibilities Report of the Independent Auditors Statement of Comprehensive Income Statement of Financial Position Statement of Cash Flows Statement of Changes in Equity Statement of Accounting Policies Notes to Financial Statements 1 2 3 5 9 14 18 20 21 22 23 24 25 26 30 Company Information Directors Secretary and Registered Office Principal Administrative Office Auditors Nominated Adviser and Broker Solicitors Registrars Patrick Cross (Non‐Executive Chairman) Thomas Kelly (Chief Executive Officer) Frank Brophy (Technical Director) John Laycock (Finance Director) Gajendra Bisht (Executive Director) Amanda Wilton‐Heald 200 Strand London WC2R 1DJ UNITED KINGDOM Level 11, London House, 216 St Georges Terrace Perth WA 6000 Australia GPO Box 2517 Perth WA 6831 AUSTRALIA Phone: +61 8 9481 0389 Fax: +61 8 9463 6103 Email: enquiries@empyreanenergy.com BDO LLP 55 Baker Street London W1U 7EU UNITED KINGDOM Cenkos Securities Plc 66 Hanover Street Edinburgh EH2 1EL UNITED KINGDOM Kerman & Co LLP 200 Strand London WC2R 1DJ UNITED KINGDOM Capita Registrars Bourne House 34 Beckenham Road Beckenham, Kent BR3 4TU UNITED KINGDOM 1 Highlights Reporting period Implemented return of capital to shareholders of 7.9p per share following the Company’s sale of its interest in Marathon Oil operated Sugarloaf AMI, Texas Set about re‐building the Company's exploration portfolio and strategy Negotiated and awarded Block 29/11, offshore China Post reporting period Negotiated a 10% interest in the Duyung PSC, offshore Indonesia Secured initial funding for exploration Drilled the Mako South‐1 well on the Mako prospect at Duyung Achieved better than expected reservoir quality, gas saturation, porosity, permeability and flow rates from the Mako South‐1 well Mako South‐1 well flowed at a stabilised rate of 10.9 million cubic feet of gas per day with multi Darcy permeability Negotiated a 25‐30% working interest in the Sacramento Basin package of projects Sacramento Basin package includes the 1Tcf+ potential Dempsey prospect and the 2.4Tcf+ Alvares prospect plus a Dempsey Trend AMI with multiple targets High impact Dempsey 1‐15 well spudded on 2 August 2017 Empyrean CEO Tom Kelly said, “Empyrean has been completely transformed following successful sale of its interest in the Sugarloaf AMI and the subsequent capital return into an active explorer targeting high impact projects in energy hungry regions close to existing infrastructure. The Board of Directors has placed a heavy emphasis on adding value for shareholders. As a result, our portfolio has been strengthened and we have achieved our first exploration success at Mako in Indonesia. With excellent high impact targets remaining in Indonesia, China and the USA, it is exciting times as we build on this first success with the priority to create value for our shareholders.” 2 Chairman’s Statement I am pleased to report that Empyrean, after a major restructuring of its activities in 2015/6, has successfully embarked on a new era of exploration in 2016/7. In particular it has identified and invested in two new and exciting projects in China and Indonesia along with a package of projects in the USA with significant successes achieved already to date. The first half of this financial year was dedicated to refinancing and restructuring the Company to return value to shareholders, as promised following the sale of our interest in the Sugarloaf asset in the Eagle Ford Shale, Texas. The complex process resulted in a return of capital payment to shareholders of 7.9p for each ordinary share held. The necessary shareholder and court approvals were given in October 2016 and the capital repayment was distributed in November 2016. While this work was proceeding the Board continued to evaluate new projects to position the Company for renewed growth and to increase shareholder value. The first tangible result of this effort was manifested by the Company acquiring a permit covering 100% of the exploration rights, under a Geophysical Survey Agreement (“GSA”) with the subsequent right to enter a Production Sharing Contract (“PSC”) on pre‐ negotiated terms, for Block 29/11, located in the Pearl River Mouth Basin, offshore China. Under the negotiated terms, the China National Offshore Oil Company (“CNOOC”) will have a back in right to 51% of the PSC if a commercial discovery is made following Empyrean entering a PSC. Securing this opportunity was a major achievement for Empyrean. The permit is for an area of 1800km2 approximately 200 km SE of Hong Kong, and it contains two key exploration prospects, Jade and Topaz, which have already been identified in 2D seismic surveys. There are a number of additional leads within the Permit area and a large existing producing field immediately to the North of the area and other discoveries to the South and West. The initial work programme, after purchasing the existing 2D seismic data from CNOOC for basin‐focussed geological studies is acquisition of a 500km2 3D seismic survey over the Jade and Topaz prospects. Whilst Empyrean has 24 months under the GSA to complete the acquisition, processing and interpretation of the 3D seismic data, the acquisition of the 3D seismic survey commenced in earnest in June 2017. These steps were taken to enable sufficient time for the planning and drilling of exploration wells. Gaz Bisht, who was instrumental in the sourcing of this new project, has extensive experience as a Petroleum Geophysicist and Geologist, as well as ten years’ experience of working closely with CNOOC, and has now been appointed to Empyrean’s Board of Directors and will continue to work with Empyrean to oversee the technical programme and the future operations. The Company, as announced 4 April 2017, agreed to acquire from Conrad Petroleum Pte a 10% interest in West Natuna Exploration Ltd, (“WNEL”) which holds a 100% Participating Interest in the Duyung Production Sharing Contract (“Duyung PSC”) offshore Indonesia. The Duyung PSC includes the Mako Shallow Gas discovery (“Mako”) to which a Competent Person’s Report attributed 2C resources of 430Bcf recoverable gas. In addition, there are several high impact exploration leads identified via existing 2D and 3D seismic data with exploration potential of 4Tcf of gas and 120mmbbls of oil. The prospects are located close to existing pipeline infrastructure and in shallow water. 3 Chairman’s Statement (Continued) The Company participated in the drilling of the Mako South‐1 well and announced on 5 July 2017 that the well had exceeded expectations with a stabilised flow rate of 10.9 million cubic feet of gas per day with no contaminants and excellent permeability in the multi Darcy range. A terrific result for the Company’s first foray back into exploration. Lastly, the Company announced the acquisition of a package of projects in the Sacramento Basin, onshore California USA on 15 May 2017 and then increased its interest in those projects on 21 June 2017. The package includes the exciting 1Tcf potential Dempsey Prospect (EME 30%) and the 2.4Tcf potential Alvares Prospect (EME 25%). In addition, Empyrean will have a 30% interest in an area of mutual interest that has a number of prospects already identified. These projects include some existing production, but more importantly the acquisitions include surface infrastructure that allows the Company to convert any early exploration success quickly and effectively into cash flow. At the time of this report the Dempsey 1‐15 well was in the process of being drilled. The Duyung PSC, with the Mako shallow gas discovery flowing pure methane with excellent reservoir characteristics kicking off Empyrean’s aggressive exploration campaign and now underpinning value, coupled with the high impact Sacramento Basin assets with near term cash flow potential provide an excellent complement to our investment in the China Block 29/11 in the Pearl River Mouth Basin. Together these projects in Empyrean’s newly strengthened portfolio have the potential to provide significant production opportunities in the future and provide great balance. They reflect the Company’s new focus on building a strong presence in energy hungry markets with high impact exploration close to existing infrastructure. The Company is excited about its new strategy and high impact exploration portfolios and hopes that shareholders share this excitement. ______________________________ Patrick Cross Non‐Executive Chairman 14 August 2017 4 Strategic Report Business Overview and Likely Future Developments Following the sale of the Sugarloaf Asset in 2016 and a return of capital of 7.9p per share (totalling approximately £17,500,000) to shareholders, the Company has re‐established itself as an exploration company with a focus on high impact projects in proven hydrocarbon basins near to energy hungry markets that are close to existing infrastructure. The strategy is to continue to add value for shareholders by participating in late stage, mature exploration projects with low assessed geological risks. The Board and management recognises that exploration for hydrocarbons is a risky venture and there will be failures and challenges, however the Company has a team with a proven track record of finding hydrocarbons and advancing projects through exploration, appraisal and into production. Management continues to evaluate several projects that meet strict investment guidelines with an aim of adding value for all shareholders. Operations and Outlook As at 31 March 2017 the Company had an interest in Block 29/11 offshore China (100% during exploration and 49% upon any commercial discovery), along with a 58.084% working interest in the Eagle Oil Pool Development Project asset in California and a 10% working interest in the Riverbend Project in Texas. The Company added the Duyung PSC (10%) offshore Indonesia in May 2017 where Empyrean participated in the successful drilling and testing of the Mako South‐1 well in July 2017. Additionally the Company added the Sacramento Basin Assets (25‐30%) offshore California in June 2017 where Empyrean is currently participating in the drilling of the potentially high impact Dempsey 1‐15 well with drilling and testing expected during August and September 2017. Seismic acquisition and interpretation has commenced on Block 29/11 and on the Mako shallow gas discovery it is expected to commence in Q4 2017. Further analysis is provided in the Operational Review on page 9. Strategy The Company’s goal is to maximise value for shareholders. Empyrean will allocate its resources appropriately given the risk versus reward profile of our projects in order to achieve its goal. Risk assessment and evaluation is an essential part of the Company’s planning and an important aspect of the Company’s internal control system. These risks are first rigorously assessed at a technical level before the Company takes on a project and then diligently managed by the Company throughout the project timeline. The principal risks and uncertainties are considered to be the following: 5 Strategic Report (Continued) Exploration, Development and Production Risks Exploration and development activities may be delayed or adversely affected by factors outside the Company’s control, in particular; climatic conditions; performance of joint venture partners or suppliers; availability, delays or failures in commissioning or installing plant and equipment; unknown geological conditions resulting in uneconomic or dry wells; remoteness of location; failure to achieve estimated capital costs, operating costs, reserves, recovery and production levels; actions of host governments or other regulatory authorities; and failure to find a hydrocarbon or finding uneconomic hydrocarbons. The Company employs geological experts and engages independent consultants to review exploration data as it is produced. Commodity Risk The demand for, and pricing of, oil and gas is dependent on global and local supply and demand, weather conditions, availability of alternative fuels, actions of governments or cartels and general economic and political developments. The Company monitors the current and forecast oil prices on a regular basis. General and Economic Risk As a consequence of activities in different parts of the world, the Company may be subject to political, economic and other uncertainties both locally and internationally, including but not limited to inflation, interest rates, market sentiments, equity and financing market conditions. In particular, the Company’s remaining exploration assets are located in China, Indonesia and the USA and currently require US$ denominated funding to take them forward. The Company monitors the ongoing economic situations in the countries in which it has activities. Financing Risk Future investment is dependent on having sufficient funds to enable the exploration or development of projects, whether through debt or equity funding. The Company has raised funds in GBP and has had surplus US$ available from the sale of Sugarloaf in 2016. There is the potential to be exposed to foreign exchange losses or profits on any funds that the Company converts into GBP or converts from GBP to US$ as the Company’s exploration assets require payments for services to be made in US$. The Company prepares cash flow forecasts and monitors it expenditure against budget, raising funds when necessary. Market Risk Securing sufficient and profitable sales contracts to support operations is a key business risk. Empyrean’s exploration projects in California, require the renewing of certain leases from time to time. There is some risk that some leases may not be able to be negotiated or that the terms may be different. The Company also operates in China and Indonesia and there is risks associated with the demand for hydrocarbons and the different pricing between markets for different commodities such as gas versus oil. 6 Strategic Report (Continued) Environmental Risk For some assets, the Company is dependent on other operators for the performance of exploration and production activities and will be largely unable to direct, control or influence the activities and costs of these operators. The Company carefully considers the technical, HSSE and financial capabilities of future potential operators during any farm‐out process. The Company currently operates Block 29/11 in offshore China. Financial Position and Performance of the Business Net loss after tax for the year was US$10.282m (2016: US$0.913m net profit) which arose largely due to foreign exchange differences and impairment of the Eagle Oil Pool Development and Riverbend projects. Total assets were US$7.409m (2016: US$41.897m), the decrease mainly a result of the reduction in cash due to the return of value to shareholders during the year. Total liabilities were US$2.662m (2016: US$5.192m), the decrease mainly a result of the remittance of the tax payable in the prior year. Key Performance Indicators Over the last few years the key financial performance indicators (“KPI’s”) for the Company have been revenue and net profit as detailed above. The key non‐financial KPI’s are the Company’s reserves and share price. Given the prior year’s sale of the Company’s primary producing asset in 2016, Sugarloaf AMI, revenue, net profit, reserves and share price were no longer a reliable indicator of performance during this transition period. Following the return of capital to shareholders, and the implementation of the Company’s re‐build and exploration strategy with a view to adding value for shareholders – the Company’s share price has again become a KPI. Since the return of value to shareholders, the Company’s share price has grown from 1p to over 10p at the time of writing this report. In addition, with the Company becoming an active explorer, exploration results will become a KPI and to this end, the Company’s first exploration well, the Mako South‐1 well in offshore Indonesia, has had better than expected results that have been detailed in the Operational Review. The share price performance over the 24 months to 1 August 2017 is represented graphically below. 7 Strategic Report (Continued) The strategic report and operational review was approved by the Board on 14 August 2017 and signed on the Board’s behalf. ____________________ Thomas Kelly Chief Executive Officer 14 August 2017 8 Operational Review Following the sale of the Company’s interest in the Sugarloaf AMI in 2016 and the subsequent return of capital to shareholders, Empyrean has set about adding high potential impact exploration projects in energy hungry regions close to existing markets and infrastructure. The first project added to Empyrean’s portfolio was Block 29/11 offshore China. Subsequently, a 10% interest in the Duyung PSC, offshore Indonesia was added via the acquisition of 10% in West Natuna Exploration Limited (that holds 100% of the Duyung PSC). Most recently, the Company acquired a 25‐30% working interest in a package of assets in the Sacramento Basin, onshore California. Empyrean retains an interest in the Riverbend Project (10 % WI) located in the Tyler and Jasper counties, onshore Texas and a 58.084% WI in the Eagle Oil Pool Development Project, located in the prolific San Joaquin Basin onshore, Southern California. China Block 29/11 Project (100% WI) Block 29/11 is located in the Pearl River Mouth Basin, offshore China. Empyrean is operator with 100% of the exploration right of the Permit during the exploration phase of the project. The initial contractual term is for two years with a work programme commitment of acquisition, processing and interpretation of 500km2 of 3D seismic data. In the event of a commercial discovery, and subject to Empyrean first entering a PSC, CNOOC Limited will have a back in right to 51% of the permit. During the first Quarter of 2017, the operational activities were squarely focused on the acquisition of a 3D seismic survey. The bidding process commenced in January and the survey optimisation process was completed by March 2017. The survey has been designed to provide full fold 3D seismic coverage over the key exploration prospects, Jade and Topaz. Block 29/11 (100% WI) ‐ 3D seismic Survey planning A formal bidding pro forma was created, and three international companies including the China Offshore Services Limited (“COSL”) were invited to submit a bid by 20 January 2017. COSL was chosen as the successful bidding party and Empyrean entered into contract negotiations for services in February. During negotiations, the main technical efforts were orientated towards optimising the technical specifications and outline of the survey, acquisition parameters and operational efficiency. The focus was to acquire optimum survey parameters to cover the main prospects, Jade and Topaz. 9 Operational Review (Continued) Figure 1: Block 29/11 showing the 3D survey outline and the location of Jade and Topaz Prospects During April, a Joint Technical Committee (“JTC”) and a Joint Management Committee (“JMC”) were formed with the Shenzhen branch of CNOOC Limited to manage the operations in Block 29/11. The first formal meeting was held in Shenzhen where the JMC provided formal approval to the technical and budgetary components of the 3D survey. The survey commenced on 6 June 2017, and at the time of writing the report, more than 90% of the survey has been completed. The onboard processing of the raw data indicates that the quality of the data is excellent. Detailed negotiations have been held with the processing department of the COSL for processing the data. The COSL team were successful in demonstrating the required comprehensive processing capabilities. As a result, the Empyrean Board has awarded the processing contract to COSL. All efforts are being aimed for delivering the final processed dataset to Empyrean in Q4 2017. Empyrean’s technical group is also planning to complete the geological work in Q4, 2017 with particular focus on the migration pathways of oil in the basin. This work will then be incorporated with the seismic mapping for finalising the prospective resources and geological risks of the Jade and Topaz prospects. Duyung PSC, Indonesia (10% WI) More recently on the 4 April 2017, Empyrean announced that it had entered into a sale and purchase agreement to conditionally acquire up to a 20% shareholding in West Natuna Exploration Ltd (“WNEL”) from Conrad Petroleum Pte Ltd (“Conrad Petroleum”). Conrad Petroleum held 100% of WNEL which holds a 100% Participating Interest in the Duyung Production Sharing Contract (“Duyung PSC”) in offshore Indonesia and is the operator of the Duyung PSC. On 12 May 2017 it was confirmed that the Shareholder Agreement had been finalised and Empyrean had paid the agreed sum of $US2,000,000 to acquire a 10% holding in WNEL. Empyrean subsequently decided not to increase its interest from 10% to 20% and currently holds a 10% interest in WNEL. 10 Operational Review (Continued) The Duyung PSC covers an offshore permit of approximately 1,100km2 in the prolific West Natuna Basin. Apart from the existence of numerous prospects and leads, the block contains the Mako shallow gas discovery. According to a recent Competent Person’s Report (LEAP Energy 2017), the field has the potential to contain 2C and 3C Resources of 433 Bcf and 646 Bcf of recoverable gas respectively over an area of at least 340 km2. The appraisal well Mako South‐1 was spudded on 16 June 2017 using a jackup rig located in water depths of 308 ft. The well reached a TD of 1,707 ft on 22 June 2017. On 5 July 2017, Empyrean was able to announce that the well had flowed methane gas at a stabilised rate of 10.9 million cubic feet per day through a 2 inch choke. The test results demonstrated that the sandstone reservoir is laterally contiguous, and has exceptional permeabilities in the multi Darcy range. Furthermore, there was no pressure depletion during the extended production period. The methane gas observed was close to pure with no contaminants. A sample of core was recovered successfully and is currently undergoing further analysis to assist with the overall assessment of results. The gas saturation, permeability, overall reservoir quality and flow rates were much better than the operator and Empyrean had expected. As a consequence, preparations are now (July 2017) being finalised to commence a 3D seismic survey in Q4 2017. Its twofold purpose will be to accurately delineate the extent of the gas‐filled sandstone reservoir (s) and to aid in locating the best appraisal and development drilling sites. Figure 2: Duyung PSC Location Map Multi Project Farm‐in in Sacramento Basin, California (25%‐30% WI) Empyrean has made several announcements over the period 15 May‐21 June 2017 concerning its recent agreement to farm‐in to a package of projects in the Sacramento Basin. The agreement is with the operator Sacgasco Limited, an Australian company focussd on natural gas development and production in the Sacramento Basin onshore California. 11 Operational Review (Continued) The farm‐in involves participation in two mature, multi Tcf prospects “Dempsey” and “Alvares”, and an Area of Mutual Interest named the “Dempsey Trend AMI”. Empyrean will earn a 30% interest in the Dempsey Prospect targeting 1 Tcf of gas by paying US$2,100,000 towards the cost of drilling the Dempsey 1‐15 exploration well. These drilling costs have a promoted cap of US$3,200,000 and Empyrean will pay its working interest of 30% towards any additional costs towards Dempsey 1‐15, including completion costs. The Dempsey 1‐15 well was spudded on 2 August 2017 and is currently drilling ahead at the time of writing this report. A 25% WI will be earned in the Alvares Appraisal Prospect, by Empyrean paying 33.33% of the costs of the next Alvares appraisal well. The Alvares structure is interpreted by Sacgasco to hold prospective resources of over 2 Tcf of recoverable gas. Finally, the Dempsey Trend AMI, in which Empyrean will earn a 30% interest, includes at least three large Dempsey style follow up prospects that have already been identified. Empyrean will provide technical assistance to Sacgasco to further mature prospects within the Dempsey Trend AMI and will also have an option to participate in the already identified prospects on the following basis: Prospect #1 : EME pays 60% of dry hole cost (i.e. to testing and setting production casing or abandonment) to earn 30% W Prospect #2 : EME pays 45% of dry hole cost (i.e. to testing and setting production casing or abandonment) to earn 30% WI Prospect #3 : EME pays 45% of dry hole cost (i.e. to testing and setting production casing or abandonment) to earn 30% WI Over 11 Tcf produced from the basin Figure 3: Dempsey Prospect Location Map 12 Operational Review (Continued) Riverbend Project (10%) The Cartwright No1 re‐entry well produces gas and condensate from the arenaceous Wilcox Formation. Production commenced on 13 May 2013, and well head rates rapidly decreased to a monthly production in June 2014 of 2,687 msc.ft of gas and 83 barrels of condensate. Thereafter Cartwright No1 re‐entry has been shut in intermittently. The well is now virtually suspended producing only nominal amounts of gas condensate. In the last 12 months only 1,827 msc.ft of gas has been produced with virtually 455 barrels of condensate. In light of current market conditions, little or no work has been completed on the project in the year and no budget has been prepared for 2017/18 whilst the Company focuses on other projects. As a prudent measure, the Company has decided to fully impair the carrying value of the asset at 31 March 2017. Eagle Oil Pool Development Project (58.084% WI) Located in the prolific San Joaquin Basin onshore, southern California. No appraisal operations were carried out during this period. It is anticipated that, should there be a sustained improvement in the oil price, a vertical well test of the primary objective, the Eocene Gatchell Sand, followed by a horizontal appraisal well, would be the most likely scenario. In light of current market conditions, little or no work has been completed on the project in the year and no budget has been prepared for 2017/18 whilst the Company focuses on other projects. As a prudent measure, the Company has decided to fully impair the carrying value of the asset at 31 March 2017. Definitions 2C Contingent resources are quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable. The range of uncertainty is expressed as 1C (low), 2C (best) and 3C (high) ____________________ Frank Brophy BSc (Hons) Technical Director 14 August 2017 ____________________ Gajendra Executive 14 August 2017 Bisht M.Sc. (Tech) in Applied Geology Director (China) 13 Directors’ Report The Directors are pleased to present their report on the affairs of the Company, together with the audited financial statements for the period 1 April 2016 to 31 March 2017. Dividends The Directors do not propose the payment of a dividend. Directors and Directors’ Interests Directors of the Company who served throughout the entire year Patrick Cross – Non‐Executive Chairman Patrick Cross has international experience in corporate finance, organisation structures, marketing and joint venture operations. His previous positions include 25 years with BP specialising in marketing, strategic planning and business development across different cultures. He also worked for two years as President of Cable and Wireless Japan, and six years as Managing Director of BBC World Ltd. Patrick Cross has operated in South America, Asia, Europe and the United Kingdom establishing relationships at senior levels with major companies, Governments and the European Commission. He was non‐executive chairman of Mercom Capital Plc, was a non‐executive director of Orca Interactive Limited and is a Trustee of the Royal Society of Tropical Medicine and Hygiene. Thomas Kelly – Chief Executive Officer Thomas Kelly has had more than 25 years corporate, finance and investment banking experience. During this period, Thomas Kelly has had involvement in and been responsible for the financing of numerous listed companies on the Australian Securities Exchange (ASX) and several mergers and acquisitions within the Australian corporate sector. Thomas Kelly is a founding Director of Empyrean Energy Plc. Frank Brophy – Technical Director Frank Brophy has over 50 years’ experience as a petroleum geologist in the exploration, development and production of many world class projects. Frank Brophy’s roles have seen him involved with operations in many locations around the world including Australia, Asia, Europe, USA, Africa and the Middle East. Recent experience includes four years as General Manager of the Hanoi operation in North Vietnam, for France based company Maurel et Prom, and almost two years in Sicily representing the same company in gas appraisal and development. Frank Brophy’s previous positions also include his former role as International Business Development Manager for Ampolex Limited, Chief Geologist of Elf Aquitaine Australia and Exploration Manager for five years with Peko Oil Limited. John Laycock – Finance Director John Laycock has over 30 years’ experience in accounting, finance and risk management. His previous positions include 22 years with BP both in UK and international experience in France and Japan. John Laycock has a degree in Mechanical Engineering from Bristol University and is a Fellow of the Chartered Institute of Management Accountants, who is based in the UK. 14 Directors’ Report (Continued) Directors of the Company who were appointed subsequent to year end Gajendra Bisht – Executive Director (China) [Appointed 14 June 2017] Mr Bisht is an oil and gas professional with over 28 years’ of proven skills in all aspects of Exploration and Production. In past 5 years, he has developed strong business acumen in strategy framing and execution and have built deep and effective relationships with international companies as well regulators in South East and North Asia, particularly in Indonesia, China and Malaysia. Insurance The Company maintains liability insurance for the Directors and officers of the Company. Going Concern The Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future, which is supported by the cashflow forecasts prepared to 30 September 2018 and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements. Financial, Liquidity and Cashflow Risk Management Refer to Note 20 to the financial statements for further details. Post Reporting Date Events Significant events post reporting date were as follows: On 4 April 2017 the Company held a Shareholder General Meeting whereby shareholders approved the allotment of 70,000,000 shares at 0.2p each to Topaz Energy Pty Ltd in relation with services provided by Topaz Energy Pty Ltd (a company wholly owned by and of which Gajendra Bisht is a director) in relation to the introduction of the opportunity and successful award of the permit for 100% of the exploration rights for Block 29/11, offshore China to the Company. These shares were subsequently issued on 21 April 2017. Shareholders also approved the Directors to allot relevant securities up to a nominal amount of £250,000 (equating to 125,000,000 shares at a nominal value of 0.2p each). Shareholders also approved the dis‐ application of pre‐emption rights associated with both of these allotments. On 4 April 2017 the Company announced the acquisition of up to 20% interest in Duyung Production Sharing Contract in Indonesia from Conrad Petroleum Pte Ltd with the initial 10% interest conditionally acquired for US$2,000,000 utilising the Company’s existing cash resources with further payment of US$2,000,000 to be paid for additional 10% interest prior to 12 May 2017. On 11 May 2017 the Company announced that it was seeking to agree an extension to the period of payment for the further US$2,000,000 to be paid for additional 10% interest. On 12 May 2017 the Company announced confirmation of the initial 10% interest via payment of the initial US$2,000,000 to Conrad Petroleum Pte Ltd as well as the agreement to extend the period of payment for the further US$2,000,000 to be paid for additional 10% interest to 26 May 2017. On 30 May 2017 the Company announced that it had chosen not to increase its interest to 20%, thus the interest remained at 10%. On 19 June the Company announced a well drilling update. 15 Directors’ Report (Continued) On 24 April 2017 the Company announced the open offer pursuant to which qualifying shareholders may subscribe for 1 new ordinary share in the Company at a price of 3.5 pence each for every 4 ordinary shares held at the record date. On 11 May 2017 the Company announced the closure of the open offer resulting in the issue and allotment of 34,316,551 new ordinary share in the Company at a price of 3.5 pence each, raising a total of £1,200,000 before costs. On 15 May 2017 the Company announced that it had entered into an agreement with Sacgasco Limited to farm‐in to a package of gas projects in the Sacramento Basin. The Company agreed to pay an initial amount of US$10,000 with a further US$90,000 upon signing a definitive farm‐out agreement and joint operating agreement with Sacgasco Limited in order to secure the Company’s right to participate in the Dempsey Prospect. The Company is then required to pay US$1,500,000 by 17 June 2017 towards the dry hole cost (i.e. up to the point of testing and running production casing or abandonment) of the Dempsey‐1 Well to earn its 25% working interest in the Dempsey Prospect. If the Dempsey‐1 well costs exceed US$3,200,000 then the Company will pay 25% of any further costs under standard joint operating agreement terms. On 15 May 2017 the Company announced that it had agreed to pay 13.33% of the dry hole well costs (i.e. to testing and setting of production casing or abandonment) in the next Alvares appraisal well to earn a 10% working interest in the Alvares Appraisal Prospect. The Company’s 13.33% earn‐in is capped at a total well cost for Alvares of US$10,000,000, after which the Company will pay 10% of the costs moving forward. The Company has also agreed to pay US$20,000 upon signing the farmout agreement and joint operating agreement to reimburse Sacgasco for back costs associated with leasing and permitting the Alvares Appraisal Prospect. The joint venture partners have decided that drilling a well at the Dempsey Prospect is a first ranking priority before any proposal or decision to drill a well at Alvares will be made. The possibility of using the existing well bore to sidetrack and get a valid flow test, thus reducing costs will be examined. On 21 June 2017 the Company announced an increase in its working interest in the Dempsey Prospect to 30%, an increase in its working interest in the Alvares Appraisal Prospect to 25% and an increase to its working interest in the Dempsey Trend AMI to 30%. Part of the funds raised in the placement on 20 June 2017 will be used to fund this. On 13 June 2017 the Company announced an amendment to the exercise price of the existing options on issue, adjusted by 0.1p each in accordance with the terms and conditions of the option agreement which provided for adjustments to the option price in the event of a pro rata issue of shares (the open offer). On 13 June 2017 the Company announced that it had placed 16,080,000 new ordinary shares at a price of 3.5 pence each as well as converting the 15,000,000 options exercisable at 2p each expiring 19 July 2017, raising a total of £863,000 before costs. On 20 June 2017 the Company announced that it had placed 12,000,000 new ordinary shares at a price of 5.5p each, raising a total of £660,000 before costs. On 14 June 2017 the Company announced the appointment of Gaz Bisht as Executive Director (China) of the Company. On 2 August 2017 the Company announced that it had placed 11,764,706 new ordinary shares at a price of 8.5p each, raising a total of £1,000,000 before costs. Strategic Report The Company has chosen, in accordance with Section 414C of the Companies Act 2006, to set out the Likely future developments in the business of the Company which would otherwise be required to be contained in the report of the Directors within the Strategic Report on pages 5 to 8. Auditors The Auditors, BDO LLP, have indicated their willingness to continue in office and a resolution that they be reappointed will be proposed at the Annual General Meeting. 16 Directors’ Report (Continued) Statement of Disclosure to Auditors Each person who is a Director at the date of approval of this Annual Report confirms that: so far as the Director is aware, there is no relevant audit information of which the Company’s Auditors are not informed; and the Director has taken all steps required to make himself aware of any relevant audit information and to establish that the Company’s Auditors are informed of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. By order of the Board ____________________ Thomas Kelly Chief Executive Officer 14 August 2017 17 Corporate Governance Report The Directors are committed to maintaining high standards of corporate governance. Under the AIM rules, compliance with the UK Corporate Governance Code (“UK Code”) as published in September 2014 is voluntary. The Directors have established procedures, so far as is practicable, given the Company’s size, to comply with the UK Code and the recommendations of the Quoted Companies Alliance (“QCA Code”) published by Corporate Governance Guidelines. The Company has adopted and operates a share dealing code for Directors and senior employees on substantially the same terms as the Model Code appended to the Listing Rules of the UK Listing Authority. The Board The Board met 12 times throughout the year and each member was in attendance at each meeting. To enable the Board to perform its duties, each of the Directors has full access to all relevant information and to the services of the Company Secretary. If necessary the Non‐Executive Directors may take independent professional advice at the Company’s expense. The Board currently includes one Executive Director and three Non‐Executive Directors. The Board has delegated specific responsibilities to the committees described below. Patrick Cross is a Non‐Executive Director and Chairman of the Company and meets the Company’s criteria for independence. His experience and knowledge of the Company makes his contribution to the Board such that it is appropriate for him to remain on the Board and in his position as Chairman. John Laycock is a Non‐ Executive Director of the Company and meets the Company’s criteria for independence. Performance Evaluation The Chairman is responsible for the performance evaluation of the Executive and Non‐Executive Directors. The Non‐Executive Finance Director is responsible for the performance evaluation of the Chairman. The Board as a whole is responsible for the performance evaluation of the Committees and its own performance. These assessments occurred throughout the year. The Audit Committee The Audit Committee comprises Patrick Cross and John Laycock, and is chaired by John Laycock. During the year the Audit Committee met three times and each member was in attendance at each meeting. The Audit Committee reviews the Company’s annual and interim financial statements before submission to the Board for approval. The Audit Committee also reviews regular reports from management and the external auditors on accounting and internal control matters. When appropriate, the Audit Committee monitors the progress of action taken in relation to such matters. The Audit Committee also assesses the independence of, recommends the appointment of, and reviews the fees of, the external auditors. The Audit Committee has considered the need for an internal audit function and has deemed the need unnecessary as the Company is not of a size to warrant such a function. The Audit Committee Charter can be found on the Company’s website (www.empyreanenergy.com/corporate/governance). The Remuneration Committee The Remuneration Committee is made up of Patrick Cross and John Laycock, and is chaired by John Laycock. The Remuneration Committee met twice during the year ended 31 March 2017 and each member was in attendance at each meeting. It is responsible for reviewing the performance of the Executive Director and for setting the scale and structure of their remuneration, paying due regard to the interests of shareholders as a whole and the performance of the Company. The Remuneration Committee Charter can be found on the Company’s website (www.empyreanenergy.com/corporate/governance). 18 Corporate Governance Report (Continued) Internal Control The Board is responsible for the Company’s system of internal control and for reviewing its effectiveness annually. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board has established a continuous process for identifying, evaluating and managing the Company’s significant risks. This process involves the monitoring of all controls including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from senior management and professional advisors to ensure any significant weaknesses are promptly remedied and to indicate a need for more extensive monitoring. Relationship with Shareholders The Board attaches a high importance to maintaining good relationships with shareholders and seeks to keep them fully updated on the Company’s performance, strategy and management. In addition the Board welcomes as many shareholders as possible to attend its general meeting and encourages open discussion after formal proceedings. Corporate Social Responsibility Whilst the Company is cognisant of its corporate social responsibilities, the Company considers that it is not of the size to warrant a formal policy as the issues that are relevant to this policy are mostly the responsibility of the operators of the wells with which the Company has agreements. Bribery Act The Company is cognisant of its responsibilities under the Bribery Act and has implemented an Anti‐Bribery policy. UK City Code on Takeovers and Mergers The Company is subject to the UK City Code on Takeovers and Mergers. Market Abuse Regime The Company has adopted and operates a share dealing code for Directors and senior employees on substantially the same terms as the Model Code and MAR appended to the Listing Rules of the UKLA. 19 Statement of Directors’ Responsibilities The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on AIM. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website publication The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein. Company Number: 05387837 ____________________ Thomas Kelly Chief Executive Officer 14 August 2017 20 Independent Auditor’s Report to the Members of Empyrean Energy Plc We have audited the financial statements of Empyrean Energy Plc for the year ended 31 March 2017 which comprise the statement of comprehensive income, the statement of financial position, the statement of cash flows, the statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s (FRC’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements www.frc.org.uk/auditscopeukprivate. is provided on the FRC’s website at Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Company’s affairs as at 31 March 2017 and of the Company’s loss for the year then ended; the financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the strategic report and directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Matt Crane (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London, United Kingdom Date 14 August 2017 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 21 Statement of Comprehensive Income For the Year Ended 31 March 2017 Revenue Cost of sales Operating costs Impairment of oil and gas properties Amortisation Total cost of sales Gross loss Administrative expenditure Administrative expenses Compliance fees Directors’ remuneration Foreign exchange differences Total administrative expenditure Operating loss Finance income and expense Loss from continuing operations before taxation Tax benefit / (expense) in current year Loss from continuing operations after taxation Profit on discontinued operations net of tax (Loss) / profit after taxation Total comprehensive (loss) / profit for the year Notes 2017 US$’000 2016 US$’000 2, 10, 11 2, 11 2 5 3 6 7 1 (23) (6,960) (11) (6,994) (6,993) (2,202) (284) (637) ‐ (3,121) 10 (28) (6) (12) (46) (36) (290) (518) (577) 244 (1,141) (10,116) (1,177) (3,005) (3,836) (13,121) 2,839 (5,013) (709) (10,282) (5,722) ‐ 6,635 (10,282) (10,282) 913 913 Earnings per share from continuing operations (expressed in cents) ‐ Basic ‐ Diluted Earnings per share from discontinued operations (expressed in cents) ‐ Basic ‐ Diluted 8 8 (4.62)c (4.62)c (2.58)c (2.58)c ‐ ‐ 2.99c 2.99c The accompanying accounting policies and notes form an integral part of these financial statements. 22 Statement of Financial Position As at 31 March 2017 Company Number: 05387837 Assets Non‐current assets Contingent consideration receivable Oil and gas properties: exploration and evaluation Oil and gas properties: development and production Total non‐current assets Current assets Trade and other receivables Corporation tax receivable Contingent consideration receivable Cash and cash equivalents Total current assets Liabilities Current liabilities Trade and other payables Provisions Provision for corporation tax Derivative financial liabilities Total current liabilities Net current assets / (liabilities) Non‐current liabilities Provision for corporation tax Deferred tax liability Total non‐current liabilities Net assets Shareholders’ equity Share capital Share premium Share based payment reserve Retained losses Total equity Notes 2017 US$’000 2016 US$’000 9 10 11 12 6 9 13 14 6 15 6 16 18 19 ‐ 87 57 144 65 540 554 6,106 7,265 2,178 25 ‐ 459 2,662 371 6,842 156 7,369 17,055 ‐ ‐ 17,473 34,528 648 42 2,848 195 3,733 4,603 30,795 ‐ ‐ ‐ 750 709 1,459 4,747 36,705 754 18,466 2,421 (16,894) 710 40,250 2,946 (7,201) 4,747 36,705 The Financial Statements were approved by the Board of Directors on 14 August 2017 and were signed on its behalf by: ______________________________ Patrick Cross Chairman The accompanying accounting policies and notes form an integral part of these financial statements. ____________________ Executive Officer Thomas Kelly Chief 23 Statement of Cash Flows For the Year Ended 31 March 2017 Notes 2017 US$’000 2016 US$’000 Cash generated from operating activities – continuing operations Cash generated from operating activities – discontinued operations Payment of corporation tax Net cash (outflow) / inflow from operating activities Net proceeds from disposal of discontinued operations Amounts held in escrow Purchase of oil and gas properties : exploration and evaluation – continuing operations Purchase of oil and gas properties: development and production – continuing operations 17 7 (1,309) (116) (2,007) (3,432) ‐ 16,875 (17) (80) (1,253) 6,804 ‐ 5,551 60,474 (16,875) (3,212) (8,909) Net cash inflow for investing activities 16,778 31,478 Issue of ordinary share capital Return of value Payment of equity issue costs Proceeds from borrowings Proceeds from hedging Repayment of borrowings Finance expenses received/(paid) 44 (21,785) (63) ‐ ‐ ‐ 22 ‐ ‐ ‐ 3,038 1,582 (25,435) (2,944) Net cash (outflow) from financing activities (21,782) (23,759) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the start of the year Forex on cash held Cash and cash equivalents at the end of the year (8,436) 17,473 (2,931) 13,270 3,955 248 6,106 17,473 24 Statement of Changes in Equity For the Year Ended 31 March 2017 Share capital Share premium reserve US$’000 US$’000 Share based payment reserve US$’000 Retained loss Total equity US$’000 US$’000 Balance at 31 March 2015 710 40,250 2,946 (8,114) 35,792 Profit after tax for the year Total comprehensive income for the year ‐ ‐ ‐ ‐ ‐ ‐ 913 913 913 913 Balance at 31 March 2016 710 40,250 2,946 (7,201) 36,705 (Loss) after tax for the year Total comprehensive loss for the year Shares issued following exercise of options Creation of B shares Return of value (cancellation of B shares) Transfer of expired options Share based payment expense ‐ ‐ 44 ‐ ‐ ‐ 21,784 (21,784) ‐ ‐ ‐ ‐ (21,784) ‐ ‐ ‐ ‐ ‐ ‐ (589) 64 (10,282) (10,282) (10,282) (10,282) ‐ ‐ 44 ‐ ‐ 589 ‐ (21,784) ‐ 64 Balance at 31 March 2017 754 18,466 2,421 (16,894) 4,747 The accompanying accounting policies and notes form an integral part of these financial statements. 25 Statement of Accounting Policies For the Year Ended 31 March 2017 Basis of preparation The Company’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and Companies Act 2006. The principal accounting policies are summarised below. The financial report is presented in the functional currency, US dollars and all values are shown in thousands of US dollars (US$’000). The financial statements have been prepared on a historical cost basis and fair value for certain assets and liabilities. Nature of business The Company is a public limited company incorporated and domiciled in England and Wales. The address of the registered office is 200 Strand, London, WC2R 1DJ. The Company is in the business of financing the exploration, development and production of energy resource projects in regions with energy hungry markets close to existing infrastructure. The Company has typically focused on non‐operating working interest positions in projects that have drill ready targets that substantially short cut the life‐cycle of hydrocarbon projects by entering the project after exploration concept, initial exploration and drill target identification work has largely been completed. Going concern The Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future, which is supported by the cashflow forecasts prepared to 30 September 2018 and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements. Basis of accounting and adoption of new and revised standards a) New and amended standards adopted by the Company: There were no new standards effective for the first time for periods beginning on or after 1 April 2016. b) Standards, amendments and interpretations that are not yet effective and have not been early adopted: Any standards and interpretations that have been issued but are not yet effective, and that are available for early application, have not been applied by the Company in these financial statements. International Financial Reporting Standards that have recently been issued or amended but are not yet effective have not been adopted for the annual reporting period ended 31 March 2017: IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in May 2014. It is effective for accounting periods beginning on or after 1 January 2018. The new standard will replace existing accounting standards, and provides enhanced detail on the principle of recognising revenue to reflect the transfer of goods and services to customers at a value which the company expects to be entitled to receive. The standard also updates revenue disclosure requirements. At the year end the Company currently has no sales contracts. At the point in time when the Company enters into a sales contract it will assess the impact on the Company. IFRS 9 was published in July 2014 and will be effective from 1 April 2018. It is applicable to financial assets and financial liabilities, and covers the classification, measurement, impairment and de‐recognition of financial assets and financial liabilities together with a new hedge accounting model. The Company is still assessing the impact of IFRS 9. IFRS 16 ‘Leases’ – IFRS 16 ‘Leases’ was issued by the IASB in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. The new standard will replace IAS 17 ‘Leases’ and will eliminate the classification of leases as either operating leases or finance leases and, instead, introduce a single lessee accounting model. The standard has yet to be endorsed by the EU. The Standard Provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed. The Directors are currently evaluating the financial and operational impact of this standard, however do not consider that it will have a material impact as the Company does not currently have any significant lease arrangements. 26 Statement of Accounting Policies (Continued) For the Year Ended 31 March 2017 Revenue recognition Revenue is derived from sales of oil and gas to third party customers. Sales of oil and gas production are recognised at the time of delivery of the product to the purchaser which is when the risks and rewards of ownership pass and are included in the statement of comprehensive income as Revenue. Revenue is recognised net of local ad valorem taxes. Cash and cash equivalents Cash and short‐term deposits in the Statement of Financial Position comprise cash at bank and in hand and short‐ term deposits with an original maturity of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Tax The major components of tax on profit or loss include current and deferred tax. Current tax is based on the profit or loss adjusted for items that are non‐assessable or disallowed and is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Tax is charged to the income statement, except when the tax relates to items credited or charged directly to equity, in which case the tax is also dealt with in equity. Deferred tax Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the statement of financial position differs to its tax base. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available, against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). The Company has considered whether to recognise a deferred tax asset and has determined that this is not appropriate in line with IAS 12 as the conditions for recognition are not satisfied. Foreign currencies Transactions denominated in foreign currencies are translated into US dollars at contracted rates or, where no contract exists, at average monthly rates. Monetary assets and liabilities denominated in foreign currencies which are held at the year‐end are translated into US dollars at year‐end exchange rates. Exchange differences on monetary items are taken to the Statement of Comprehensive Income. Items included in the financial statements are measured using the currency of the primary economic environment in which the Company operates (the functional currency). Provisions Provisions are recognised when the Company has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated. Oil and gas assets: exploration and evaluation The Company applies the full cost method of accounting for Exploration and Evaluation (‘E&E’) costs, having regard to the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’. Under the full cost method of accounting, costs of exploring for and evaluating oil and gas properties are accumulated and capitalised by reference to appropriate cash generating units (‘CGUs’). Such CGUs are based on geographic areas such as a concession and are not larger than a segment. E&E costs are initially capitalised within oil and gas properties: exploration and evaluation. Such E&E costs may include costs of license acquisition, third party technical services and studies, seismic acquisition, exploration drilling and testing, but do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed directly to the income statement as they are incurred. Plant, Property and Equipment (‘PPE’) acquired for use in E&E activities are classified as property, plant and equipment. However, to the extent that such PPE is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible E&E asset. Intangible E&E assets related to exploration licenses are not depreciated and are carried forward until the existence (or otherwise) of commercial reserves has been determined. The Company’s definition of commercial reserves for such purpose is proven and probable reserves on an entitlement basis. 27 Statement of Accounting Policies (Continued) For the Year Ended 31 March 2017 If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a CGU basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within property, plant and equipment and are amortised on a unit of production basis over the life of the commercial reserves of the pool to which they relate. Intangible E&E assets that relate to E&E activities that are not yet determined to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets at cost, subject to meeting impairment tests as set out below. E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E assets concerned fall within the scope of an established CGU, the E&E assets are tested for impairment together with all development and production assets associated with that CGU, as a single cash generating unit. The aggregate carrying value is compared against the expected recoverable amount of the pool. The recoverable amount is the higher of value in use and the fair value less costs to sell. Value in use is assessed generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any established CGU, there will generally be no commercial reserves and the E&E assets concerned will generally be written off in full. Any impairment loss is recognised in the income statement. Oil and gas assets: development and production Development and production assets are accumulated on a field‐by‐field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the decommissioning asset (see below) and the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. They are presented as oil and gas properties in Note 11. The net book values of producing assets are depreciated on units of production basis. An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the carrying value of a development or production asset may exceed its recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit. The recoverable amount is the higher of value in use and the fair value less costs to sell. Value in use is assessed generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single cash generating unit where the cash flows of each field are interdependent. Assets held for sale and discontinued operations Assets are classified as held for sale if their carrying value will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met if the sale is highly probable, the asset is available for sale in its present condition, being actively marketed and management is committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and represents a separate major line of business or geographical area of operations; and is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale. Non‐current assets held for sale and discontinued operations are carried at the lower of carrying value or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the financial statements and related notes for the current and comparative period and disclosed as results from discontinued operations. Financial assets Financial assets are recognised at initial recognition at fair value plus, in the case of financial assets not recorded at fair value through profit and loss, transaction costs that are attributable to the acquisition of the financial asset. The Company’s financial assets consist of loans and receivables (trade and other receivables, excluding prepayments, and cash and cash equivalents) and financial assets classified as fair value through profit or loss (contingent consideration receivable). Loans and receivables are initially measured at fair value and subsequently at amortised cost. Financial assets designated as fair value through the profit or loss are measured at fair value through the profit or loss at the point of initial recognition and subsequent revalued at each reporting date. Movements in the fair value of derivative financial assets are recognised in the profit or loss in the period in which they occur. 28 Statement of Accounting Policies (Continued) For the Year Ended 31 March 2017 Financial liabilities All financial liabilities are classified as fair value through the statement of comprehensive income and financial liabilities at amortised cost. The Company’s financial liabilities at amortised cost include trade and other payables and its financial liabilities at fair value through the profit or loss include the derivative financial liabilities. Financial liabilities at amortised cost, are initially stated at their fair value and subsequently at amortised cost. Interest and other borrowing costs are recognised on a time‐proportion basis using the effective interest method and expensed as part of financing costs in the statement of comprehensive income. Derivative financial liabilities are initially recognised at fair value of the date a derivative contract is entered into and subsequently re‐measured at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company has not designated any derivatives as hedges as at 31 March 2016 or 31 March 2017. Share based payments The Company issues equity‐settled share‐based payments to certain employees. Equity ‐settled share‐based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity‐ settled share‐based payments is expensed over the vesting period, based on the Company’s estimate of shares that will eventually vest. Where equity instruments are granted to persons other than employees, the income statement is charged with the fair value of goods and services received. Significant accounting judgements estimates and assumptions The Company makes judgements and assumptions concerning the future that impact the application of policies and reported amounts. The resulting accounting estimates calculated using these judgements and assumptions will, by definition, seldom equal the related actual results but are based on historical experience and expectations of future events. The judgements and key sources of estimation uncertainty that have a significant effect on the amounts recognised in the financial statements are discussed below. Impairment of assets Financial and non‐financial assets are subject to impairment reviews based on whether current or future events and circumstances suggest that their recoverable amount may be less than their carrying value. Recoverable amount is based on a calculation of expected future cash flows which includes management assumptions around future production, costs, capital expenditure, inflation and discount rates. (Refer to Note 10 and 11) Exploration and evaluation expenditure The Company’s policy for E&E expenditure requires an assessment of both the future likely economic benefits from future exploitation or sale and whether the activities are at a stage that permit a reasonable assessment of the existence of reserves. Any such assessment may change as new information becomes available. If after capitalisation, information becomes available suggesting that the recovery of the carrying amount is unlikely, the relevant capitalised amount is written off in the statement of comprehensive income in the period when the new information becomes available. (Refer to Note 10) Valuation of potential contingent consideration amounts receivable In order to calculate the fair value of the contingent consideration receivable, the Company makes estimates principally relating to the assumptions used in its option‐pricing model as set out in Note 9. 29 Notes to the Financial Statements For the Year Ended 31 March 2017 1. Segmental analysis The primary segmental reporting format is determined to be the geographical segment according to the location of the asset. The Directors consider the Company to have two businesses being the exploration for, development and production of oil and gas properties. There is one geographical trading segment being North America which is involved in the exploration for, development and production of oil and gas properties. The Company’s registered office is located in the United Kingdom. Details Oil and Gas Properties: Exploration and Evaluation Oil and Gas Properties: Development and Production Total 31 Mar 17 US$’000 31 Mar 16 US$’000 31 Mar 17 US$’000 31 Mar 16 US$’000 31 Mar 17 US$’000 31 Mar 16 US$’000 Revenue from continued operations Revenue from discontinued operations Profit/(loss) on sale of discontinued operations Cost of sales of continued operations Cost of sales of discontinued operations Tax expense on discontinued operations Segment result Unallocated corporate expenses Operating profit Finance income and expense Profit/(loss) before taxation Tax benefit/(expense) in current year Profit after taxation Total comprehensive profit for the financial year Segment assets Unallocated corporate assets Total assets ‐ ‐ ‐ (6,871) ‐ ‐ 246 (6) 1 ‐ ‐ 10 6,205 1,329 1 ‐ ‐ (123) (40) (6,994) ‐ (141) ‐ (6,871) (18) 81 ‐ ‐ (122) (780) (205) 6,519 87 7,003 611 17,407 ‐ ‐ (6,993) (3,121) (10,116) (3,005) (13,121) 2,839 (10,282) (10,282) 698 6,711 7,409 10 6,205 1,575 (46) (921) (223) 6,600 (1,142) 5,458 (3,836) 1,622 (709) 913 913 24,410 17,487 41,897 30 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 1. Segmental analysis (Continued) Details Segment liabilities Unallocated corporate liabilities Total liabilities Oil and Gas Properties: Exploration and Evaluation Oil and Gas Properties: Development and Production Total 31 Mar 17 US$’000 31 Mar 16 US$’000 31 Mar 17 US$’000 31 Mar 16 US$’000 31 Mar 17 US$’000 31 Mar 16 US$’000 148 130 189 303 337 2,325 2,662 433 4,759 5,192 2017 US$’000 2016 US$’000 2. Operating (loss)/profit The operating (loss)/profit is stated after charging: Audit and tax fees (UK advisors) Consideration shares for Block 29/11 offshore China Impairment of oil and gas properties Amortisation Auditor’s Remuneration (99) (1,740) (6,960) (11) (8,810) Amounts paid to BDO LLP and their associates in respect of both audit and non‐audit services: Fees payable to the Company’s auditor for the audit of the Company annual accounts Fees payable to the Company’s auditor and its associates in respect of: ‐ Other services relating to taxation 65 34 99 (64) ‐ (6) (12) (82) 59 5 64 31 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 3. Finance income and expense Revaluation gain on contingent consideration receivable Interest received / receivable Net effective of de‐recognition and re‐recognition of derivative financial liability Finance income Fair value movement on derivative liability Share based payment Acceleration of costs due to repayment of Macquarie Bank loan facility Foreign exchange differences Interest paid/payable Fees associated with finance facility Finance expense Total finance income and expense 4. Share based payments 2017 US$’000 2016 US$’000 183 25 289 497 (552) (64) ‐ (2,883) (3) ‐ (3,502) (3,005) 232 ‐ ‐ 232 ‐ ‐ (606) ‐ (2,112) (1,350) (4,068) (3,836) During the year ended 31 March 2017, there were no options were granted to Directors or the Company Secretary. These are disclosed in detail under Note 18. 5. Directors’ emoluments Fees and salary Bonus payment Social security contributions 2017 2017 US$’000 US$’000 US$’000 2016 2016 2016 US$’000 US$’000 US$’000 2017 Short‐term employment benefits (Total) 2017 2016 US$’000 US$’000 Non‐Executive Directors: Patrick Cross John Laycock Frank Brophy(2) Executive Director: Thomas Kelly(1) 24 14 43 290 371 41 25 154 337 557 ‐ ‐ ‐ 282 282 ‐ ‐ ‐ ‐ ‐ 2 1 ‐ ‐ 3 4 3 ‐ ‐ 7 26 15 43 572 656 45 28 154 337 564 (1) Services provided by Apnea Holdings Pty Ltd. (2) Services provided by F J Brophy Pty Ltd for technical services. The average number of Directors was 4 during 2017 and 2016. The highest paid director received US$572,000 (2016: US$337,000). 32 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 2017 US$’000 2016 US$’000 6. Taxation UK corporation tax charge at 20% US corporation tax (benefit)/charge at 35% ‐ current US corporation tax charge at 35% ‐ non‐current Total corporation tax (receivable)/payable Factors affecting the tax charge for the year Loss from continuing operations Profit on discontinued operations Add back: contingent consideration receivable revaluation (Loss)/profit on ordinary activities before tax (Loss)/profit on ordinary activities at US rate of 35% (2016: 35%) Expenses not deductible for tax purposes Income not taxable Deferred tax previously unrecognised on capital allowances Deferred tax previously recognised on losses Tax profit on sale of assets Excess of capital allowances Over provision in prior year Release of tax liability on first contingent consideration payment (Note 7) Current year losses offset against prior year project disposal Deferred tax asset not recognised Utilisation of tax losses brought forward Analysed as: Tax (benefit)/charge on continuing operations Tax (benefit)/charge on discontinued operations Tax (benefit)/charge in current year ‐ (288) ‐ (288) (13,121) ‐ 183 (12,938) (4,528) 326 ‐ ‐ ‐ ‐ ‐ (1,382) (750) 441 3,054 ‐ (2,839) (2,839) ‐ (2,839) ‐ 2,848 750 3,598 (5,013) 6,858 1,845 646 80 (551) (18,555) 15,180 16,496 709 ‐ ‐ ‐ (13,073) 932 709 223 932 33 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 7. Discontinued operations In February 2016, the Company disposed of its working interest the Sugarloaf AMI project, for a cash consideration of US$61,500,000. In March 2016, the Company disposed of its working interest the Sugarloaf Block A project, for a consideration of US$538,000. The consideration shown below is stated after immaterial purchase price adjustments. The post‐tax gain on disposal of discontinued operations was determined as follows: Consideration received Costs of disposal Net consideration Net assets disposed: Oil and gas properties: exploration and evaluation Oil and gas properties: development and production Gain on disposal of discontinued operations Results of discontinued operations Revenue Cost of sales Tax expense Gain on disposal of discontinued operations Profit on discontinued operations after taxation Proceeds from disposal of discontinued operations Gain on disposal of discontinued operations Oil and gas properties: exploration and evaluation Oil and gas properties: development and production Amounts held in escrow (Note 11) Contingent consideration receivable before revaluation Proceeds from disposal of discontinued operations 2017 US$’000 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2016 US$’000 61,464 (851) 60,613 (4,784) (54,254) (59,038) 1,575 6,205 (922) (223) 1,575 6,635 1,575 4,784 54,254 (16,875) (139) 43,599 Contingent consideration Under the terms and conditions of the PSA for Sugarloaf AMI, the Company is entitled to certain additional amounts if the conditions are met. The conditions for receipt are described below: If the average New York Mercantile Exchange strip price of light sweet crude oil (WTI) for the calendar period of 1 January 2016 until 30 June 2016 or 1 July 2016 until 31 December 2016 exceeds US$55.00 per barrel (the “First Contingency”), then CEP II shall pay to the Company an additional US$1,000,000 for every whole dollar in excess of US$55.00 per barrel (collectively, the “First Contingent Payment”); provided, however, the First Contingent Payment shall not exceed US$5,000,000; 34 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 7. Discontinued operations (continued) If the average New York Mercantile Exchange strip price of light sweet crude oil (WTI) for the calendar period of 1 January 2017 until 30 June 2017 or 1 July 2017 until 31 December 2017 exceeds US$60.00 per barrel (the “Second Contingency”), then CEP II shall pay to the Company an additional US$1,000,000 for every whole dollar in excess of US$60.00 per barrel (collectively, the “Second Contingent Payment”) provided the Second Contingent Payment shall not exceed US$5,000,000. If there is no First Contingency Payment, this shall not preclude a Second Contingent Payment if the Second Contingency is met. The contingent consideration amounts that are potentially receivable are linked to the underlying oil price which is outside of the Company’s control, are settled at a date in the future. As such, the right to receive these amounts therefore represents a financial asset and has been treated as fair value through the profit or loss. As such the Company has estimated the fair value of the contingent consideration at the date that the sale completed using a Black Average (Asian) Model. The fair value of the contingent consideration at the date that the sale completed which has been included within the overall calculation of the gain arising on disposal of Sugarloaf AMI. Details of the inputs and assumptions used are disclosed in Note 9. The first contingency payment was not received and hence expired. 8. Earnings per share 2017 2016 The basic earnings per share is derived by dividing the profit/(loss) after taxation for the year attributable to ordinary shareholders by the weighted average number of shares in issue being 222,770,839 (2016: 221,833,853). Earnings per share from continuing operations Loss after taxation from continuing operations Earnings per share – basic (US$10,282,000) (4.62)c (US$5,722,000) (2.58)c Loss after taxation from continuing operations adjusted for dilutive effects Earnings per share – diluted (US$10,282,000) (4.62)c (US$5,722,000) (2.58)c Earnings per share from discontinued operations Profit after taxation from discontinued operations Earnings per share – basic Profit after taxation from discontinued operations adjusted for dilutive effects Earnings per share – diluted ‐ ‐ ‐ ‐ US$6,635,000 2.99c US$6,635,000 2.99c For the current financial year the exercise of the options would be anti‐dilutive. As such the diluted earnings per share is the same as the basic loss per share. In the prior year, these options and warrants were dilutive and the weighted average number of dilutive shares were 252,770,839. Details of the potentially issuable shares that could dilute earnings per share in future periods is set out in Notes 15 and 18. 35 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 9. Contingent consideration receivable Financial asset recorded at fair value through profit or loss: Opening balance Additions Revaluation of contingent consideration receivable (Note 3) 2017 US$’000 2016 US$’000 371 ‐ 183 554 ‐ 139 232 371 The balance represents the fair value of contingent consideration amounts attached to the sale of Sugarloaf AMI during the year. The first contingency payment was not received and hence expired. Further details on contingent consideration are given in Note 7. The fair value of the contingent consideration receivable was initially measured at the effective date of the sale, being 19 February 2016 and were subsequently remeasured at 31 March 2016 and 31 March 2017. The fair value is measured using a Black Average (Asian) Model with the following inputs: Fair value assumptions At 31 March 2017 At 31 March 2016 At 19 February 2016 Spot price Expected volatility Risk‐free interest rate US$50.60 US$38.34 50 –day historical 720 –day historical 0.901% to 1.056% 0.385% to 0.538% US$29.64 720 –day historical 0.385% to 0.538% The expected volatility is based on the 50‐day historical standard deviation of the log daily returns from WTI oil. The valuation is sensitive to changes in the volatility applied. Sensitivity analysis is provided below: Volatility applied Total (US$’000) 50 day historical (as used) 15% 25% 50% 10. Oil and gas properties: exploration and evaluation Balance brought forward Additions Reclassified to oil and gas properties: development and production (Note 11) Impairment1 Discontinued operations Net book value 371 84 583 1,673 2017 US$’000 6,842 116 ‐ (6,871) ‐ 87 Impact on Income statement (US$’000) ‐ 59 273 407 2016 US$’000 11,132 3,067 (2,526) (47) (4,784) 6,842 36 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 10. Oil and gas properties: exploration and evaluation (continued) 1 In light of current market conditions, little or no work has been completed on the Riverbend or Eagle Oil projects in the year and no substantial project is forecast for either project in 2017/18 whilst the Company focusses on other projects. Whilst the Company maintains legal title, as a prudent measure, the Company has decided to fully impair the carrying value of the asset at 31 March 2017. 11. Oil and gas properties: development and production Balance brought forward Additions Reclassified from oil and gas properties: exploration and evaluation (Note 10) Movement in Oil and gas decommissioning asset Amortisation Impairment Discontinued operations Net book value 2017 US$’000 2016 US$’000 156 1 ‐ ‐ (11) (89) ‐ 57 47,788 6,263 2,526 (469) (1,698) ‐ (54,254) 156 Project Operator Working Interest 2017 Carrying Value US$’000 2016 Carrying Value US$’000 Exploration and evaluation Riverbend Eagle Oil Pool Development China Block 29/11 Development production Falks Gas and Huff Energy Strata‐X Empyrean Energy 10% 58.084% 100%* Talisman Energy / Statoil 0.418% ‐ ‐ 87 87 57 57 1,918 4,924 ‐ 6,842 156 156 In the event of a commercial discovery, and subject to the Company entering PSC, CNNOC Limited will have a back in right to 51% of the permit. 12. Trade and other receivables Trade and other receivables Amounts held in escrow (Note 7) Accrued revenue Prepayments VAT receivable Total trade and other receivables 2017 US$’000 2016 US$’000 ‐ ‐ ‐ 51 14 65 161 16,875 5 ‐ 14 17,055 37 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 12. Trade and other receivables (continued) At 31 March 2017, the Company had US$Nil (2016: US$16.875m) restricted cash held in escrow as the amounts had been received during the year ended 31 March 2017. 13. Current trade and other payables Trade payables Other payables Accrued expenses Total trade and other payables 2017 US$’000 2016 US$’000 396 1,738 44 2,178 495 ‐ 153 648 Other payables relates to an amount agreed to be paid to Topaz Energy Pty Ltd in relation to the introduction of the opportunity and successful award of the Permit to Empyrean. Under the terms of the agreement, the Company agreed that Topaz Energy Pty Ltd would receive consideration of either 70,000,000 ordinary shares of 0.2p each in Empyrean or £1,391,390 in cash, which was equivalent to the value of the consideration shares at the volume weighted average price in the 5 days leading up to the date of award of the permit (1.9877p). 2017 US$’000 2016 US$’000 14. Provisions Current provisions Provision for annual leave Total current provisions Non‐current provisions Opening balance Reversal of decommissioning provision following sale of assets Total non‐current provisions 15. Derivative financial liabilities Opening balance Revaluation (Note 3) Extinguishment following substantial modification Recognition of modified derivative financial liability Revaluation gain (Note 3) Closing balance 25 25 ‐ ‐ ‐ 195 205 (400) 111 348 459 42 42 477 (477) ‐ 428 ‐ ‐ ‐ (233) 195 38 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 15. Derivative financial liabilities (continued) Derivative financial liabilities represent the fair value of 15,000,000 options granted to Macquarie Bank and linked to the extension of a now repaid loan facility held with Macquarie Bank. The options were granted on 27 July 2015 and are referred to as the Tranche 4 options. At the date of grant these were considered to fall outside of the scope of IFRS 2 and unlike Tranches 1‐3 (refer to Note 18) were not accounted for as a share based payment. The Macquarie Bank loan facility was repaid in 2016 but the options did not expire at that point. During the year, the Company modified the exercise price of the options. This was deemed to be a substantial modification under IAS 32 and IAS 39. The value of the derivative financial liability was extinguished at that point and the fair value of the modified options recognised at the date that they were granted. As a financial liability at fair value through the profit or loss these were revalued at the year end. The fair value is measured using a Black‐Scholes Model with the following inputs: Fair value of share options and assumptions Grant date Expiry date Share price Exercise price Volatility Option life Expected dividends Risk‐free interest rate (based on national government bonds) 31 March 2017 15 December 2016 (date of modification) 31 March 2016 27 July 2015 26 July 2019 £0.039 £0.021 83% 2.33 ‐ 0.12% 27 July 2015 27 July 2015 26 July 2019 26 July 2019 £0.053 £0.100 50% 3.32 ‐ 0.61% £0.020 £0.100 50% 2.61 ‐ 0.12% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the expected remaining life of the options. 16. Deferred tax Balance at beginning of year Income statement (credit)/charge Balance at end of year Comprising: Deferred tax liability 2017 US$’000 2016 US$’000 709 (709) 3,375 (2,666) ‐ ‐ ‐ 709 709 709 The deferred tax assets and liabilities are offset to determine the amounts stated in the Consolidated Statement of Financial Position when the taxes can legally be offset and will be settled net. Deferred taxation comprises: 39 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 16. Deferred tax (continued) Deferred tax liability: Oil and gas properties Deferred tax asset: Tax losses Net deferred taxation liability/(asset) Deferred tax liability: Oil and gas properties Deferred tax asset: Tax losses Net deferred taxation liability/(asset) 2017 Recognised 2017 Unrecognised ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2016 Recognised 2016 Unrecognised 709 709 ‐ ‐ 709 ‐ ‐ (270) (270) (270) Deferred tax assets of US$Nil (31 March 2016: US$Nil) have been recognised in respect of tax losses and to be utilised by future taxable profits generated by operations in the US. The unrecognised deferred tax asset represents losses at a UK company level (2017: US$1,851,000; 2016: US$1,500,000). The Company does not expect to pay tax in the UK as all profits are generated in the US branch and subject to tax in that jurisdiction. The Company claims double tax treaty relief for those taxable profits in the UK. 40 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 17. Reconciliation of net profit/(loss) before taxation to operating cash flows Net (loss)/profit before taxation Gain on sale of assets Amortisation – oil and gas properties (Profit)/loss on hedging liability Revaluation gain on contingent consideration receivable Finance costs Forex gain Impairment – oil and gas properties Share based payments Decrease in trade receivables (Increase)/decrease in trade payable (Decrease)/increase in provisions Net cash inflow from operating activities 18. Called up share capital Issued and fully paid Ordinary shares of 0.2p each Opening balance (number: 221,833,853) Exercise of options (number: 18,000,000) Closing balance (number: 239,833,853) Ordinary B shares of 7.9p each Opening balance (number: nil) New shares issued (number: 221,833,853) Cancellation/return of value Closing balance (number: nil) 2017 US$’000 2016 US$’000 (13,121) ‐ 11 ‐ (183) 531 2,883 6,960 (225) 115 (386) (17) (3,432) 710 44 754 ‐ 21,784 (21,784) ‐ 1,845 (1,575) 1,698 (1,676) (232) 4,068 (244) 47 ‐ 1,516 124 (20) 5,551 710 ‐ 710 ‐ ‐ ‐ ‐ The Companies Act 2006 (as amended) abolishes the requirement for a company to have an authorised share capital. Therefore the Company has taken advantage of these provisions and has an unlimited authorised share capital. At the General Meeting Empyrean Energy Plc held on 19 October 2016, shareholders of the Company approved a resolution, subject to the confirmation of the High Court of Justice in England and Wales (the "Court"), that the issued share capital of the Company be reduced by way of a return of value to shareholders. Each ordinary shareholder received one B share with a nominal value of 7.9p per share. Following Court approval, all B shares were cancelled and amounts returned to shareholders through cash payment. 41 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 18. Called up share capital (continued) Share options The number and weighted average exercise prices of share options are as follows: Outstanding at the beginning of the year Adjustment during the year(1) Exercised during the year Expired during the year Weighted average exercise price 2017 Weighted average exercise price 2016 Number of options 2017 Number of options 2016 59,400,000 £0.040 £0.002 3,000,000 £0.002 (18,000,000) £0.080 (14,400,000) £0.040 59,400,000 ‐ ‐ ‐ ‐ ‐ ‐ Outstanding at the end of the year £0.030 30,000,000 £0.040 59,400,000 The options outstanding at 31 March 2017 have an exercise price in the range of £0.021 to £0.041 (2016: £0.08 to £0.12) and a weighted average remaining contractual life of 0.64 years (2016: 0.83 years). (1) During the year the Company sought to reprice the 15,000,000 Tranche 1 Financier options. The exercise price was set at a price lower than the par value of the shares. As a consequence the Company was required to gain shareholder approval for the necessary capitalisation from reserves. Under the arrangement, if the holder of options wished to exercise these options prior to shareholder approval been granted then the options could be exercised at an exercise price of £0.002 and would convert into a greater number of 18,000,000 shares. Details of share options outstanding at 31 March 2017 are as follows: Option Class Grant Date Options awarded Exercise price (£) Expiry date Financier options (Tranche 2) 19 July 2012 15,000,000 £0.021 19 July 2017 Financier options (Tranche 3) 25 March 2013 15,000,000 £0.041 25 March 2018 Details of share options outstanding at 31 March 2016 are as follows: Option Class Grant Date Options awarded Exercise price (£) Expiry date Director and Company Secretary options 2 March 2012 14,400,000 £0.08 19 July 2016 Financier options (Tranche 1) Financier options (Tranche 2) Financier options (Tranche 3) 19 July 2012 15,000,000 £0.08 19 July 2017 19 July 2012 15,000,000 £0.10 19 July 2017 25 March 2013 15,000,000 £0.12 25 March 2018 42 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 18. Called up share capital (continued) On 15 December 2016 the Company modified a number of the outstanding share options by changing the exercise price of the options. The incremental fair value of the share options immediately prior to and after the modification were measured by reference to the fair value of share options and a charge of US$64,000 taken directly to the income statement as all options were already fully vested at the time of the modification. The estimate of the fair value of the options was measured based on the Black‐Scholes model. The inputs to those calculations were: Fair value of share options and assumptions At modification After modification Grant date Expiry date Share price Exercise price Volatility Option life Expected dividends Risk‐free interest rate (based on national government bonds) Tranche 2 Tranche 3 19 July 2012 25 March 2013 19 July 2016 25 March 2018 £0.020 £0.120 50% 1.27 ‐ £0.020 £0.100 50% 0.60 ‐ Tranche 2 19 July 2012 19 July 2016 £0.020 £0.021 50% 0.60 ‐ Tranche 3 25 March 2013 25 March 2018 £0.020 £0.041 50% 1.27 ‐ 0.12% 0.12% 0.12% 0.12% The expected volatility is based on the historic volatility of the share price (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. There are no market conditions associated with the share options. 19. Related party transactions There were no related party transactions during the year ended 31 March 2017 other than those payments made in regards to Director remuneration disclosed in Note 5 and the following: On 13 March 2017 the Company announced that Apnea Holdings Pty Ltd (“Apnea”), a company which is wholly‐owned by Tom Kelly, CEO of Empyrean, on that date purchased options (the “Options”) in respect of 63,000,000 ordinary shares of 0.2p each in in the Company (“Ordinary Shares”) from a third party not connected with the Company (the “Seller”). The Company announced that, on 10 March 2017, it received notice from Apnea that it intended to exercise its option in relation to 18,000,000 Ordinary Shares at an exercise price of 0.2 pence each. Accordingly, the Company issued and allotted 18,000,000 Ordinary Shares (refer to Note 18). 20. Financial instruments The Company’s operations expose it to a number of financial risks. The Board of Directors determine, as required, the degree to which it is appropriate to use financial instruments to mitigate risk. The Company’s financial assets comprise derivative financial assets and trade and other receivables. The Company’s financial liabilities comprise of derivative financial liabilities, trade and other payables. It is the Directors’ opinion that the carrying value of all of the Company’s financial assets and financial liabilities approximates to their fair value. The principal financial risks relate to: 43 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 20. Financial instruments (continued) Liquidity risk The Company’s policy throughout the year has been to ensure that it has adequate liquidity by careful management of its working capital. The following table details the remaining contractual maturity for the non‐derivative liabilities of the Company. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The table includes both interest and principal cash flows including rates for loan liabilities and cash deposits on actual contractual arrangements. The Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future, which is supported by the cashflow forecasts prepared to 30 September 2018 and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements. Trade and other payables (2017) Trade and other payables (2016) Less than 6 months US$’000 6 months to 1 year US$’000 1 to 6 years US$’000 Total US$’000 2,178 648 ‐ ‐ ‐ ‐ 2,178 648 Capital In managing its capital, the Company’s primary objective is to maintain a sufficient funding base to enable the Company to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, through new share issues, the Company considers not only its short‐ term position but also its long‐term operational and strategic objectives. Determination of fair values A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non‐financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Cash & cash equivalents, accounts receivable, accounts payable and accrued expenses The fair value of cash & cash equivalents, accounts receivable, accounts payable and accrued expenses is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. As at 31 March 2017 and 31 March 2016, the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated their carrying value due to their short term to maturity. Sugarloaf AMI contingent consideration (financial asset carried at fair value through profit or loss) The fair value of the contingent consideration is calculated using a Black Average (Asian) Model. Measurement inputs include price of WTI oil on measurement date, threshold price required under the terms of the sale agreement, expected volatility (based on the historical 720‐day standard deviation of the log daily returns from WTI oil), expected period, and the risk‐free interest rate (based on government bonds). Details of the inputs and assumptions are provided in Note 9. 44 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 20. Financial instruments (continued) (ii) Derivatives Options (derivative financial liability) The fair value of the options is calculated using a Black‐Scholes Model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk‐free interest rate (based on government bonds). A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of incentive stock options that vest. Refer to Note 15. 31 March 2017 Carrying Value US$’000 31 March 2017 Fair Value US$’000 31 March 2016 Carrying Value US$’000 31 March 2016 Fair Value US$’000 Financial assets: Contingent consideration receivable Cash and cash equivalents Trade and other receivables Amounts held in escrow Financial liabilities: Borrowings Trade and other payables Accrued expenses Derivative financial liability 554 6,106 ‐ ‐ ‐ 2,134 44 459 554 6,106 ‐ ‐ ‐ 2,134 44 459 371 17,473 161 16,875 ‐ 495 153 195 371 17,473 161 16,875 ‐ 495 153 195 The share options, derivative financial liability and the contingent consideration receivable represent level 3 fair measurements. The inputs and assumptions at grant and the reporting date and reconciliation of the movements have been provided in Notes 9, 15 and 18. 21. Events after the reporting date Significant events post reporting date were as follows: On 4 April 2017 the Company held a Shareholder General Meeting whereby shareholders approved the allotment of 70,000,000 shares at 0.2p each to Topaz Energy Pty Ltd in relation with services provided by Topaz Energy Pty Ltd (a company wholly owned by and of which Gajendra Bisht is a director) in relation to the introduction of the opportunity and successful award of the permit for 100% of the exploration rights for Block 29/11, offshore China to the Company. These shares were subsequently issued on 21 April 2017. Shareholders also approved the Directors to allot relevant securities up to a nominal amount of £250,000 (equating to 125,000,000 shares at a nominal value of 0.2p each). Shareholders also approved the dis‐ application of pre‐emption rights associated with both of these allotments. 45 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 21. Events after the reporting date (continued) On 4 April 2017 the Company announced the acquisition of up to 20% interest in Duyung Production Sharing Contract in Indonesia from Conrad Petroleum Pte Ltd with the initial 10% interest conditionally acquired for US$2,000,000 utilising the Company’s existing cash resources with further payment of US$2,000,000 to be paid for additional 10% interest prior to 12 May 2017. On 11 May 2017 the Company announced that it was seeking to agree an extension to the period of payment for the further US$2,000,000 to be paid for additional 10% interest. On 12 May 2017 the Company announced confirmation of the initial 10% interest via payment of the initial US$2,000,000 to Conrad Petroleum Pte Ltd as well as the agreement to extend the period of payment for the further US$2,000,000 to be paid for additional 10% interest to 26 May 2017. On 30 May 2017 the Company announced that it had chosen not to increase its interest to 20%, thus the interest remained at 10%. On 19 June the Company announced a well drilling update. On 24 April 2017 the Company announced the open offer pursuant to which qualifying shareholders may subscribe for 1 new ordinary share in the Company at a price of 3.5 pence each for every 4 ordinary shares held at the record date. On 11 May 2017 the Company announced the closure of the open offer resulting in the issue and allotment of 34,316,551 new ordinary share in the Company at a price of 3.5 pence each, raising a total of £1,200,000 before costs. On 15 May 2017 the Company announced that it had entered into an agreement with Sacgasco Limited to farm‐in to a package of gas projects in the Sacramento Basin. The Company agreed to pay an initial amount of US$10,000 with a further US$90,000 upon signing a definitive farm‐out agreement and joint operating agreement with Sacgasco Limited in order to secure the Company’s right to participate in the Dempsey Prospect. The Company is then required to pay US$1,500,000 by 17 June 2017 towards the dry hole cost (i.e. up to the point of testing and running production casing or abandonment) of the Dempsey‐1 Well to earn its 25% working interest in the Dempsey Prospect. If the Dempsey‐1 well costs exceed US$3,200,000 then the Company will pay 25% of any further costs under standard joint operating agreement terms. On 15 May 2017 the Company announced that it had agreed to pay 13.33% of the dry hole well costs (i.e. to testing and setting of production casing or abandonment) in the next Alvares appraisal well to earn a 10% working interest in the Alvares Appraisal Prospect. The Company’s 13.33% earn‐in is capped at a total well cost for Alvares of US$10,000,000, after which the Company will pay 10% of the costs moving forward. The Company has also agreed to pay US$20,000 upon signing the farmout agreement and joint operating agreement to reimburse Sacgasco for back costs associated with leasing and permitting the Alvares Appraisal Prospect. The joint venture partners have decided that drilling a well at the Dempsey Prospect is a first ranking priority before any proposal or decision to drill a well at Alvares will be made. The possibility of using the existing well bore to sidetrack and get a valid flow test, thus reducing costs will be examined. On 21 June 2017 the Company announced an increase in its working interest in the Dempsey Prospect to 30%, an increase in its working interest in the Alvares Appraisal Prospect to 25% and an increase to its working interest in the Dempsey Trend AMI to 30%. Part of the funds raised in the placement on 20 June 2017 will be used to fund this. On 13 June 2017 the Company announced an amendment to the exercise price of the existing options on issue, adjusted by 0.1p each in accordance with the terms and conditions of the option agreement which provided for adjustments to the option price in the event of a pro rata issue of shares (the open offer). On 13 June 2017 the Company announced that it had placed 16,080,000 new ordinary shares at a price of 3.5 pence each as well as converting the 15,000,000 options exercisable at 2p each expiring 19 July 2017, raising a total of £863,000 before costs. On 20 June 2017 the Company announced that it had placed 12,000,000 new ordinary shares at a price of 5.5p each, raising a total of £660,000 before costs. On 14 June 2017 the Company announced the appointment of Gaz Bisht as Executive Director (China) of the 46 Notes to the Financial Statements (Continued) For the Year Ended 31 March 2017 Company. 21. Events after the reporting date (continued) On 2 August 2017 the Company announced that it had placed 11,764,706 new ordinary shares at a price of 8.5p each, raising a total of £1,000,000 before costs. 22. Committed expenditure Block 29/11 offshore China The Company has committed an amount approximating US$3,000,000 to carry out its exploration obligations with CNOOC specifically for the acquisition of 500km2 of 3D seismic which is currently underway. Mako South‐1 well offshore Indonesia As announced on 12 May 2017, the Company made a payment of US$2,000,000 to secure its 10% interest in the project. Subsequent cash calls of approximately US$670,000 were also made. Sacramento Basin assets onshore California As announced on 15 May 2017, the Company was required to make a payment of US$10,000 upon signing its definitive farm‐our agreement and join operation agreement with Sacgasco. Subsequent amounts of approximately US$2,110,000, as announced on 15 May 2017 have also been made. 47
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