Melbana Energy Limited
Annual Report 2020

Plain-text annual report

Melbana Energy Limited L3, 350 Collins St, Melbourne Victoria 3000 Australia Telephone: +61 (3) 8625 6000 Email: admin@melbana.com ABN 43 066 447 952 melbana.com ANNUAL REPORT 2020 Melbana Energy Limited Contents 30 June 2020 Corporate directory Directors' report Auditor's independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members of Melbana Energy Limited Shareholder information 1 2 16 17 18 19 20 21 54 55 58 Melbana Energy Limited Corporate directory 30 June 2020 Directors Andrew Purcell (Executive Chairman) Michael Sandy (Non-Executive Director) Peter Stickland (Non-Executive Director) Company secretary Melanie Leydin Notice of annual general meeting The Company will hold its annual general meeting of shareholders on 19 November 2020 Registered office Principal place of business Share register Auditor Level 3, 350 Collins Street Melbourne, Victoria 3000 Australia Telephone +61 (3) 8625 6000 Level 3, 350 Collins Street Melbourne, Victoria 3000 Australia Telephone +61 (3) 8625 6000 Link Market Services Limited Level 1, 333 Collins Street Melbourne, Victoria 3000 Australia Telephone +61 (3) 9615 9800 Grant Thornton Audit Pty Ltd Collins Square, Tower 5 727 Collins Street Melbourne VIC 3008 Australia Stock exchange listing Melbana Energy Limited securities are listed on the Australian Securities Exchange (ASX code: MAY) Website www.melbana.com Corporate Governance Statement Corporate governance statements are available in Group's website. Please refer to http://www.melbana.com/site/About-Us/corporate-governance 1 Melbana Energy Limited Directors' report 30 June 2020 The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Consolidated Entity') consisting of Melbana Energy Limited (referred to hereafter as the 'Company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2020. Directors The following persons were Directors of Melbana Energy Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Andrew Purcell (Non-Executive Chairman until 20 February 2020 and appointed as Executive Chairman on 21 February 2020) Michael Sandy (Appointed Non-Executive Director since 30 July 2015 and served as Interim CEO from 22 July 2019 to 20 February 2020) Peter Stickland (Non-Executive Director) Principal activities The principal activities of the Consolidated Entity during the year were oil and gas exploration in Cuba and Australia together with development concepts for the Tassie Shoal Methanol and LNG Project. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations INTERNATIONAL OPERATIONS Cuba - Block 9 (Melbana 30%)1 In December 2019, Melbana executed a binding Heads of Agreement (HOA) with Sonangol E.P. (Sonangol), the National Oil Company of Angola. The terms of the HOA provided for Sonangol to receive a 70% interest in Block 9 PSC, subject to satisfaction of certain Conditions Precedent, in return for agreeing to fund 85% of a two well exploration drilling program in Block 9 (for which Melbana is to be the operator) and repaying Melbana’s Past Costs. In April 2020, the HOA was superseded by a more detailed Farm-in Agreement (FIA). In July 2020 Melbana received its first payment from Sonangol, which was counted towards the repayment of its Past Costs, and the Conditions Precedent in the FIA were satisfied in full on 14 August 2020. Planning for the two well exploration drilling program in Cuba are advancing. All material regulatory approvals and permits necessary to commence drilling of the first exploration well have been received and are expected to be finalized for the second exploration well this year. Preferred drilling and other service contractors have been shortlisted and contract negotiations are currently being finalized. An international tender for certain inventory items necessary to commence drilling operations is underway and construction of the first well pad and related civil works is expected to commence soon. Melbana has committed to drilling the first of these two exploration wells by November 2020. Application has been made to CUPET to extend the period available to meet this commitment, as per their recommendation. Project management of the two well drilling campaign has been affected by COVID-19 but is not expected to impact the commencement of drilling operations, unless restrictions for the management of the pandemic were to materially worsen and logistics and border controls be adversely affected as a result. During the reporting period, the United States of America (U.S.) expanded the scope of its sanctions against the Republic of Cuba. These included increased travel restrictions to Cuba for U.S. nationals and further restrictions on access to goods with U.S. content. The ending of the suspension of Title III of the Helms-Burton Act resulted in litigation being brought before U.S. Courts against parties reportedly trafficking in property confiscated from U.S. nationals by the Cuban Government on or after 1 January 1959. Your Board has planned the two well exploration program cognisant of these sanctions and believes it remains outside of their scope. 1 Sonangol received Cuban regulatory approval for their 70% interest in Block 9 on 14 August 2020. 2 Melbana Energy Limited Directors' report 30 June 2020 Melbana has identified Block 9 as one of the world's most exciting exploration plays with an independent assessment by McDaniel & Associates identifying exploration potential of approximately 14.8 billion barrels of Oil-in-Place with a Prospective Resource of 676 million barrels (Best Estimate, 100% basis)2. Cuba - Santa Cruz (Melbana 100%,subject to receiving final regulatory approvals) No material progress was made towards the receipt of final regulatory approval for the binding contract Melbana has entered into for the Santa Cruz oil field during the reporting period. The Santa Cruz oil field has produced at least 7.4 million barrels from 18 wells since its discovery in 2004. AUSTRALIAN OPERATIONS WA-488-P (Melbana 100%) Melbana was awarded 100% interest in WA-488-P, located in the Bonaparte Basin, in May 2013. The permit is located between the producing Blacktip gas field and the undeveloped Turtle and Barnett oil fields and contains the giant Beehive prospect. Beehive was identified as a follow-up to the 2011 Ungani-1 oil discovery in the adjacent Canning Basin and represents a new play type in the Bonaparte Basin. Beehive is considered prospective for oil at the upper Carboniferous aged carbonate target and is considered analogous to the giant Tengiz oil field in the Caspian Sea. An independent assessment by McDaniel & Associates in 2018 has assessed the Beehive prospect as having a Prospective Resource of 388 million barrels of oil equivalent (Best Estimate, 100% basis)2. During the reporting period, the options held by Total and Santos to acquire an 80% interest in WA-488-P expired unexercised. As a result, Melbana once again holds an unencumbered 100% interest in the permit. Total and Santos had previously funded the acquisition of a 3D seismic survey in WA-488-P, particularly over the Beehive prospect, in consideration for having been granted this option. Melbana is now in possession of these data from this survey and is actively seeking a partner to assist it to drill an exploration well into the Beehive prospect. Several parties are currently conducting due diligence on the opportunity. In May 2020, Melbana received a 12-month suspension and extension for WA-488-P from the National Offshore Petroleum Titles Administrator. Melbana therefore now has until December 2021 to meet its commitment to drill an exploration well in WA-488-P. Tassie Shoal (100%) Melbana has Australian Government environmental approvals to construct, install and operate two stand-alone world scale 1.75 Mtpa methanol plants - collectively referred to as the Tassie Shoal Methanol Project (TSMP) - and a single 3 Mtpa LNG plant - known as the Tassie Shoal LNG Project (TSLNG) - on Tassie Shoal, an area of shallow water in the Australian waters of the Timor Sea approximately 275 km north-west of Darwin, Northern Territory. These Environmental Approvals are valid until 2052. These projects uniquely provide a development option for discovered but undeveloped gas resources in the region. Progress for these projects is dependent on securing access to proximate gas supply on suitable commercially terms. No material progress was made in this regard during the reporting period but developments such as Santos’ progress towards FID of its Barossa project (a decision on which has been delayed until economic conditions improve) and ENI’s decision to sell its Australian assets both being of interest to your Board. Results for the year The net loss after tax of the Consolidated Entity for the financial year was $2,157,906 (2019: net loss after tax of $3,357,696). The loss for the year was mainly due to administration costs of $2,228,545 (2019: $2,484,647). Overall loss for the year decreased by $1,199,790 compared to the 2019 financial year. The loss for the 2019 financial year was higher largely due to a one off non-cash finance charge of $973,600 incurred, being the fair value of the 80,000,000 unquoted options issued in relation a personal guarantee provided by Executive Chairman of the Company, Mr Andrew Purcell, in connection with a loan made by a third party to the Company. There were no such transactions during the year, resulting in a lower finance costs and losses. These options were unexercised and expired on 4 August 2020. 2 This estimate should be read with reference to the footnote “Notes regarding Contingent and Prospective resource estimates” on page 15. 3 Melbana Energy Limited Directors' report 30 June 2020 During the year, the Consolidated Entity incurred net operating cash outflows of $2,133,832 (2019: outflows of $2,757,996), net investing cash inflows of $498,027 (2019: inflows of $2,827,996) and net financing cash outflows of $24,199 (2019: outflows of $123,356). The successful drilling and commercialisation of any commercial oil and gas discoveries in Cuban and Australian exploration permits and/or the development/sale of the Consolidated Entity's methanol and LNG Projects could ultimately lead to the establishment of a profitable business or result in a profit to the Company if an asset sale occurs. While the Consolidated Entity is in the exploration/appraisal stage of drilling for hydrocarbons in its offshore Australian exploration permit and overseas acreage and in the project development phase for its other offshore Australian interests, funding will be provided by equity capital raised from the issue of new shares and/or farm out or joint development arrangements with other companies. Review of financial position The net assets increased by $993,364 to $8,846,082 at 30 June 2020 (30 June 2019: $7,852,718). During the year, the Consolidated Entity incurred $410,169 (2019: $472,413) on exploration, mainly in relation to Block 9 in Cuba. The main determinants of the Consolidated Entity's financial condition were: ● ● loss after tax of $2,157,906 (2019: $3,357,696); Increase in share capital amounting to $3,972,110 (2019: $3,540,491). The Consolidated Entity issued ordinary shares amounting to $3,911,241 as non-cash consideration for the acquisition of equity shares in a public listed company. The working capital position as at 30 June 2020 of the Consolidated Entity results in an excess of current assets over current liabilities of $367,256 (30 June 2019: $2,969,529). The cash balances, including term deposits, as at 30 June 2020 were $1,752,263 (2019: $3,363,168). Corporate The Consolidated Entity’s future prospects are centred on its ability to secure quality exploration, development and producing opportunities and seeking to maximise the value to shareholders of its current portfolio, identifying and securing additional value-accretive projects, and/or undertaking a corporate transaction. Adequacy of funding will remain a key focus for the Consolidated Entity for the immediate future. The Consolidated Entity may look to raise additional funding either through farm-in/sale and/or capital injection to advance its projects. In the event that the Consolidated Entity cannot meet its share of work program commitments, permits may need to be surrendered. Significant changes in the state of affairs On 15 July 2019, the Company made an off market takeover bid to acquire ordinary shares in Metgasco Limited (ASX: MEL). The transaction was completed on 5 February 2020 and the Company acquired 27.81% of the issued shares in MEL. The takeover offer to MEL shareholders was a scrip for scrip offer under which the Company issued 434,582,340 ordinary shares as non-cash consideration for the acquisition, to all the shareholders of MEL who accepted the offer. On 25 July 2019, the Company issued 2,584,949 shares with a nil issue price following the exercise of performance rights. On 14 October 2019, the Company issued 4,178,209 shares with a nil issue price following the exercise of performance rights. On 22 October 2019, the Company announced it had received final formal approvals for amendments to its Block 9 PSC in Cuba, which extended the current exploration sub period by one year until 02 November 2020 by which time the Company must drill one exploration well. On 23 December 2019, the Company entered into a Heads of Agreement (HOA) with Sonangol E.P. (Sonangol), the National Oil Company of Angola, for it to acquire a 70% interest in the Block 9 PSC in Cuba. This includes a firm commitment from Sonangol to fund 85% of the costs of drilling two exploration wells in Block 9. The Company will remain as the operator, contribute 15% of the costs of the drilling program and maintain a 30% interest. Upon completion of confirmatory due diligence, the Company and Sonangol entered into a Farm-In Agreement (FIA) on 25 May 2020. The Company has received $688,959 from Sonangol as part of the approximately USD$3.8 million to cover its expenditure to date related to Block 9 PSC. 4 Melbana Energy Limited Directors' report 30 June 2020 On 4 March 2020, Santos Limited (Santos) advised the Company that it had not concluded a farm out of its contingent interest in WA-488-P. Santos therefore no longer has any right to acquire any interest in WA-488-P and the Company now has a 100% unencumbered interest. The Company currently is in discussions with potential partners to assist it to drill an exploration well in the permit area. In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread globally as well as in Australia. The spread of COVID-19 has caused significant volatility in Australian and international markets. There is a significant uncertainty around the breadth and duration of business disruptions related to COVID-19 and therefore the Company has taken precautionary measures by temporarily closing the Company’s office and having arranged for its employees to work remotely, as well as minimising non-critical activities and curtailing travel. At the date of this report, the impact of these measures is not expected to significantly impact the completion of the current work being undertaken. However, as the circumstances continue to evolve, there may be disruptions to the future work timelines if employees, consultants or their respective families are personally impacted by COVID-19 or if travel and other operational restrictions are not lifted. On 29 May 2020, the Company received approval for a 12-month suspension and extension of the work program conditions in respect of WA-488-P permit Year 3 from the National Offshore Petroleum Titles Administrator. The Company now has until 21 December 2021 to drill an exploration well in WA-488-P. There were no other significant changes in the state of affairs of the Consolidated Entity during the financial year. Matters subsequent to the end of the financial year Subsequent to the end of the financial year, on 17 August 2020, the last unsatisfied Condition Precedent to the Completion of the Farm-in Agreement was resolved when Cuban regulatory approval was received for Sonangol’s 70% Participating Interest in Block 9 PSC. Subsequent to the end of the financial year, on 24 August 2020 the Company announced it had completed updating the Prospective Resource assessment of the Beehive prospect in WA-488-P to incorporate the recently acquired 3D seismic data over the prospect. The presence of the Beehive prospect was validated by the new seismic data set and the best estimate prospective resource increased to 416MMboe, a 7% uplift to the previous independent resource assessment based on the pre-existing 2D seismic dataset. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Consolidated Entity's operations, the results of those operations, or the Consolidated Entity's state of affairs in future financial years. Likely developments and expected results of operations The Consolidated Entity will continue to pursue its exploration interests in: - Block 9 PSC in Cuba in partnership with Sonangol. Significant progress was made during the year on well planning, permitting, contractor engagement and sourcing of inventory in prosecution of the commencement of drilling operations. - WA-488-P in the Joseph Bonaparte Gulf in northern Australia (Melbana 100%) - Santa Cruz Incremental Oil Recovery Project in Cuba (Melbana 100%) 5 Melbana Energy Limited Directors' report 30 June 2020 Environmental regulation The Consolidated Entity holds participating interests in a number of oil and gas areas. The various authorities granting such tenements require the licence holder to comply with the terms of the grant of the licence and all directions given to it under those terms of the licence. Your Board of Directors believe that all workplace injuries are avoidable. Policies and procedures are in place to ensure employees and contractors conduct all activities in a safe manner. Melbana has adopted an environmental, health and safety policy and conducts its operations in accordance with the Australian Petroleum Production & Exploration Association (APPEA) Code of Practice. There have been no known breaches of the tenement conditions, and there have been zero incidents, zero lost time injuries and zero spills within the Company and farm-out operations during the year ended 30 June 2020. Information on Directors Name: Title: Qualifications: Experience and expertise: Interests in shares: Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): Metgasco Limited (ASX: MEL) Special responsibilities: Andrew Purcell Executive Chairman (Non-Executive Chairman until 20 February 2020 and appointed as Executive Chairman on 21 February 2020) B Eng; MBA Andrew Purcell founded the Lawndale Group (formerly Teknix Capital) in Hong Kong over 15 years ago, a company specialising in the development and management of projects in emerging markets across heavy engineering, petrochemical, resources and infrastructure sectors. Prior to this, Mr Purcell spent 12 years working in investment banking across the region for Macquarie Bank and then for Credit Suisse. Mr Purcell also has significant experience as a public company director, both in Australia and across Asia. AJ Lucas Group Limited (ASX: AJL) Member of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee 368,733,939 fully paid ordinary shares Peter Stickland Non-Executive Director BSc, Hons (Geology), GDipAppFin (Finsia), GAICD Peter Stickland has over 30 years' global experience in oil and gas exploration. Mr Stickland was CEO and subsequently Managing Director of the Company until January 2018 and then became a non-executive director. Previously, Mr Stickland was CEO and subsequently Managing Director of Tap Oil Limited (ASX: TAP) from 2008 until late 2010 during which time he oversaw the evolution of the company into a South East Asia/Australia focused E&P company. Prior to joining Tap Oil, Mr Stickland had a successful career with BHP Billiton including a range of technical and management roles. Mr Stickland is also a life member of the Australian Petroleum Production and Exploration Association Limited (APPEA). Talon Petroleum Limited (ASX: TPD) Chairman of Reserves Committee, member of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee 16,597,279 fully paid ordinary shares 3,000,000 unlisted options expiring 27 September 2020 Other current directorships: Former directorships (last 3 years): XCD Energy Limited (ASX: XCD) Special responsibilities: Interests in shares: Interests in options: 6 Melbana Energy Limited Directors' report 30 June 2020 Name: Title: Qualifications: Experience and expertise: Michael Sandy Non-Executive Director (served as Interim CEO from 22 July 2019 until 20 February 2020) BSC Hons (Geology), MAICD Michael Sandy is a geologist with over 40 years' experience in the resources industry – mostly focused on oil and gas. In the early 1990s he was Technical Manager of Oil Search Limited, based in Port Moresby, PNG. Mr. Sandy was involved in establishing Novus Petroleum Ltd and preparing that company for its $186m IPO in April 1995. Over 10 years, he held various senior management roles with Novus including manager of assets in Australia, Asia, the Middle East and the USA and was involved in numerous acquisitions and divestments. He co-managed the defence effort in 2004 when Novus was taken over by Medco Energi. For the last 15 years, Mr Sandy has been the principal of energy consultancy company Sandy Associates P/L. None Other current directorships: Former directorships (last 3 years): MEC Resources Limited (Chairman) (ASX: MMR) Special responsibilities: Interests in shares: Chairman of the Audit and Risk Committee, Chairman of the Remuneration and Nomination Committee and a member of Reserves Committee 5,400,000 fully paid ordinary shares Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Former directorships' (last 3 years) quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company Secretary Ms Melanie Leydin, BBus (Acc. Corp Law) CA FGIA Melanie Leydin holds a Bachelor of Business majoring in Accounting and Corporate Law. She is a member of the Institute of Chartered Accountants, Fellow of the Governance Institute of Australia and is a Registered Company Auditor. She graduated from Swinburne University in 1997, became a Chartered Accountant in 1999 and since February 2000 has been the principal of Leydin Freyer. The practice provides outsourced company secretarial and accounting services to public and private companies across a host of industries including but not limited to the Resources, technology, bioscience, biotechnology and health sectors. Melanie has over 25 years’ experience in the accounting profession and over 15 years as a Company Secretary. She has extensive experience in relation to public company responsibilities, including ASX and ASIC compliance, control and implementation of corporate governance, statutory financial reporting, reorganisation of Companies and shareholder relations. Meetings of Directors The number of meetings of the Company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2020, and the number of meetings attended by each Director were: Full Board Reserves committee Audit and Risk Committee Attended Held Attended Held Attended Held Andrew Purcell Michael Sandy Peter Stickland 10 10 10 10 10 10 - 2 2 - 2 2 2 2 2 2 2 2 Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. The Company did not hold any Remuneration and Nomination Committee meetings during 2020 financial year. Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the Consolidated Entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. 7 Melbana Energy Limited Directors' report 30 June 2020 Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: ● ● ● ● ● ● Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the Consolidated Entity's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practices for the delivery of reward. The Board of Directors ('the Board') ensures that executive reward satisfies the following key criteria for good reward governance practices: ● ● ● ● competitiveness and reasonableness acceptability to shareholders performance linkage / alignment of executive compensation transparency The Remuneration and Nomination Committee is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the Consolidated Entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The Remuneration and Nomination Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the Consolidated Entity. The reward framework is designed to align executive reward to shareholders' interests. The Board have considered that it should seek to enhance shareholders' interests by: ● ● having profit as a core component of plan design focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-financial drivers of value attracting and retaining high calibre executives ● The performance of the Consolidated Entity depends upon the quality of its directors and executives. To prosper, the Consolidated Entity must attract, motivate and retain highly skilled directors and executives. To this end, the Consolidated Entity embodies the following principles in its remuneration framework: ● ● ● Offer competitive remuneration benchmarked against the external market to attract high calibre executives; Where appropriate, provide executive rewards linked to shareholder value; and Encourage non-executive directors to hold shares in the Company. In accordance with best practice corporate governance, the structure of non-executive director and executive director remuneration is separate. 8 Melbana Energy Limited Directors' report 30 June 2020 Non-executive directors' remuneration Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors' fees and payments are reviewed annually by the Remuneration and Nomination Committee. The Remuneration and Nomination Committee receives independent market data when undertaking this annual review process. The Remuneration and Nomination Committee may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors' fees and payments are appropriate and in line with the market. The Remuneration and Nomination Committee did not use the services of a remuneration consultant during the year. The Chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his own remuneration. Generally non-executive directors do not receive share options or other incentives. However, from time to time, the Board may grant share options subject to specified criteria are met. The Board approved a fee increase to non-executive directors effective 1 July 2019 following the resignation of the CEO in recognition of additional responsibilities and workload placed on the non-executive directors. Due to the near-term market and operational uncertainty as a result of the outbreak of COVID-19 during the year, the Board agreed to reduce Director fee payments by 50% effective 1 April 2020 with the remainder of the entitlements to be accrued until further notice. Subsequent to the year-end, the board approved that effective from 1 September 2020, non-executive director fees will be reduced to $75,000 per annum. The non-executive directors will be entitled to charge the Consolidated Entity at a rate of $1,200 per day for any work performed in excess of 5 days per calendar month, subject to submitting a description of the works required and prior approval from the Executive Chairman. The Constitution and the ASX listing rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. The most recent determination was at the Annual General Meeting held on 18 November 2010, where the shareholders approved a maximum annual aggregate remuneration of $500,000. The combined payment to all non-executive directors does not exceed this aggregate amount. Executive remuneration The Consolidated Entity aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The executive remuneration and reward framework has the following components: ● ● Fixed remuneration Variable remuneration consisting of Short Term Incentive (‘STI’); and Long Term Incentive (‘LTI’). The combination of these comprises the executive's total remuneration. The mix between fixed and variable remuneration is established for the executive remuneration by the Remuneration and Nomination Committee. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the Nomination and Remuneration Committee based on individual and business unit performance, the overall performance of the Consolidated Entity and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the Consolidated Entity and provides additional value to the executive. Fixed remuneration is reviewed annually by the Remuneration and Nomination Committee and where appropriate, external advice on policies and practices are obtained. As noted above, the Remuneration and Nomination Committee has access to external advice independent of management. The STI program is designed to align the targets of the business units with the performance hurdles of executives. STI payments are granted to executives based on specific annual targets and key performance indicators ('KPI's') being achieved. KPI's include profit contribution, customer satisfaction, leadership contribution and product management. The LTI comprised of options and/or performance rights awarded to executives and conditional upon the recipient meeting service objectives. 9 Melbana Energy Limited Directors' report 30 June 2020 Consolidated Entity performance and link to remuneration Remuneration for certain executives granted options or performance rights is linked to the performance of the Consolidated Entity, as an improvement in the Company's share price will correspondingly increase the benefits to the executive. This will align the interests of the executive and the shareholders. Refer to the section ''Additional information" below for details of the earnings and share price movements for the last five years. Voting and comments made at the Company's 2019 Annual General Meeting ('AGM') At the 22 November 2019 AGM, 37.6% of the votes were cast against the adoption of the remuneration report for the year ended 30 June 2019 and the resulting spill resolution was not carried at the meeting. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the Consolidated Entity are set out in the following tables. Directors: ● Andrew Purcell - Executive Chairman (Non-Executive Chairman until 20 February 2020 and appointed as Executive Chairman on 21 February 2020) Michael Sandy - Non-Executive Director (served as Interim CEO from 22 July 2019 until 20 February 2020) Peter Stickland - Non-Executive Technical Director ● ● Executives: ● Robert Zammit - Chief Executive Officer (until 19 July 2019) Short-term benefits Post- employme nt benefits Long-term benefits Share- based payments Salary and fees $ Cash bonus $ Super- annuation $ Long service leave $ Equity- settled $ Terminatio n benefit $ 30 June 2020 Non-Executive Directors: Andrew Purcell* Michael Sandy Peter Stickland Executive Directors: Andrew Purcell* Michael Sandy** Other Key Management Personnel: Robert Zammit** Total $ 95,548 45,616 112,500 107,055 66,884 - - - - - 89,999 89,999 161,933 589,536 95,548 45,616 112,500 107,055 66,884 51,442 479,045 - - - - - - - - - - - - - - - - - 6,962 6,962 13,530 13,530 - - - - - - - 10 Melbana Energy Limited Directors' report 30 June 2020 30 June 2019 Non-Executive Directors: Andrew Purcell*** Michael Sandy Peter Stickland Other Key Management Personnel: Robert Zammit Short-term benefits Post- employme nt benefits Long-term benefits Share- based payments Salary and fees $ Cash bonus $ Super- annuation $ Long service leave $ Equity- settled $ Terminatio n benefit $ 100,000 75,000 75,000 - - - - - - - - - - - 6,874 265,873 515,873 30,000 30,000 20,129 20,129 11,681 11,681 6,279 13,153 - - - - - Total $ 100,000 75,000 81,874 333,962 590,836 * ** Mr Purcell was appointed as Executive Chairman on 21 February 2020 and prior to that held the role of Non-Executive Chairman. The disclosures above reflect his remuneration during his tenure as Non-Executive Director and Executive Director, respectively. Mr Zammit resigned from the Company on 19 July 2019. Mr Sandy was appointed as Interim CEO on 22 July 2019 and remained in that role until 20 February 2020. The disclosures above reflect his remuneration during his tenure as Non- Executive Director and Executive Director, respectively. *** On 1 April 2020, the board approved to reduce directors fee payments by 50% with the remainder of the entitlements accrued until further notice. The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: Andrew Purcell Michael Sandy Peter Stickland Other Key Management Personnel: Robert Zammit Fixed remuneration At risk - STI 30 June 2020 30 June 2019 30 June 2020 30 June 2019 30 June 2020 30 June 2019 At risk - LTI 100% 100% 100% 100% 100% 93% 100% 89% - - - - - - - 9% - - - - - - 7% 2% Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Andrew Purcell Executive Chair 21 February 2020 No fixed term Mr Purcell’s fixed remuneration is $300,000 per annum (inclusive of statutory superannuation). At the discretion of the board, Mr Purcell, entitled for a short-term cash incentive up to a maximum of 100% of fixed remuneration based on the achievement of key performance indicators over a 2 year period aligned with shareholder interests. The executive can terminate the agreement with 3 months' notice. The Company can terminate the agreement with 3 months' notice, or payment in lieu thereof. 11 Melbana Energy Limited Directors' report 30 June 2020 Key management personnel have no entitlement to termination payments in the event of removal for misconduct. Share-based compensation Issue of shares There were no shares issued to Directors and other key management personnel as part of compensation during the year ended 30 June 2020 (2019: Nil). Options There were no options over ordinary shares issued to Directors and other key management personnel as part of compensation that were outstanding as at 30 June 2020. Performance rights There were no performance rights over ordinary shares granted to or vested by Directors and other key management personnel as part of compensation during the year ended 30 June 2020. Additional information The earnings of the Consolidated Entity for the five years to 30 June 2020 are summarised below: 2020 $ 2019 $ 2018 $ 2017 $ 2016 $ Loss after income tax (2,157,906) (3,357,696) (6,100,290) (2,121,000) (10,406,000) The factors that are considered to affect total shareholders return ('TSR') are summarised below: Share price at financial year end ($) Basic earnings per share (cents per share) 0.01 (0.11) 0.01 (0.18) 0.01 (0.41) 0.02 (0.26) 0.02 (1.31) 2020 2019 2018 2017 2016 Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each Director and other members of key management personnel of the Consolidated Entity, including their personally related parties, is set out below: Ordinary shares Andrew Purcell Michael Sandy Peter Stickland Robert Zammit* Balance at the start of the year Exercise of performance rights / options Additions Disposals/Other Balance at the end of the year 62,666,307 5,400,000 16,597,279 4,539,612 89,203,198 - - - - - 306,067,632 - - - 306,067,632 - - - (4,539,612) (4,539,612) 368,733,939 5,400,000 16,597,279 - 390,731,218 * Mr Zammit resigned from the Company on 19 July 2019. 12 Melbana Energy Limited Directors' report 30 June 2020 Option holding The number of options over ordinary shares in the Company held during the financial year by each Director and other members of key management personnel of the Consolidated Entity, including their personally related parties, is set out below: Options over ordinary shares Andrew Purcell** Peter Stickland Robert Zammit* Balance at Balance at the start of the year Options granted pursuant to a placement Options granted for other services** Expired / Others the end of the year 81,875,621 3,000,000 2,000,000 86,875,621 - - - - - - - - (1,875,621) - (2,000,000) (3,875,621) 80,000,000 3,000,000 - 83,000,000 * ** Mr Zammit resigned from the Company on 19 July 2019. During 2018 financial year, Mr Purcell, provided a personal guarantee in connection with a loan made by a third party to the Company. As a consideration for this personal guarantee, the Company issued 80,000,000 options to Mr Purcell on 13 August 2018, following shareholders' approval at a General Meeting held on 9 August 2018. These options expired unexercised on 4 August 2020. Options over ordinary shares Peter Stickland Andrew Purcell Vested and exercisable Balance at the end of the year 3,000,000 80,000,000 83,000,000 3,000,000 80,000,000 83,000,000 Performance rights holding The number of performance rights over ordinary shares in the Company held during the financial year by each Director and other members of key management personnel of the Consolidated Entity, including their personally related parties, is set out below: Balance at the start of the year Received as part of remuneration Exercised Balance at the end of the year Others Performance rights over ordinary shares Robert Zammit* 2,584,949 2,584,949 - - - - (2,584,949) (2,584,949) - - * Mr Zammit resigned from the Company on 19 July 2019. This concludes the remuneration report, which has been audited. Shares under option Unissued ordinary shares of Melbana Energy Limited under option at the date of this report are as follows: Grant date 28 March 2017 23 November 2017 23 November 2017 Expiry date 27 September 2020 23 November 2020 27 September 2020 Exercise price $ Number under option $0.0320 $0.0180 $0.0320 5,500,000 20,000,000 3,000,000 28,500,000 13 Melbana Energy Limited Directors' report 30 June 2020 During 2018 financial year, Mr Purcell, provided a personal guarantee in connection with a loan made by a third party to the Company. As a consideration for this personal guarantee, the Company issued 80,000,000 options to Mr Purcell on 13 August 2018, following shareholders' approval at a General Meeting held on 9 August 2018. These options were unexercised and expired on 4 August 2020. No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the Company or of any other body corporate. Shares under performance rights There were no unissued ordinary shares of Melbana Energy Limited under performance rights outstanding at the date of this report. Shares issued on the exercise of options There were no ordinary shares of Melbana Energy Limited issued on the exercise of options during the year ended 30 June 2020 and up to the date of this report. Shares issued on the exercise of performance rights The following ordinary shares of Melbana Energy Limited were issued during the year ended 30 June 2020 and up to the date of this report on the exercise of performance rights granted: Date performance rights granted 10 May 2018 (issued on 25 July 2019) 10 May 2018 (issued on 14 October 2019) Exercise price Number of shares issued $0.0000 $0.0000 2,584,949 4,178,209 6,763,158 Indemnity and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor To the extent permitted by law, the Company has agreed to indemnify its auditors, Grant Thornton, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Grant Thornton during or since the end of the financial year. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 25 to the financial statements. 14 Melbana Energy Limited Directors' report 30 June 2020 The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in note 25 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. ● Officers of the Company who are former partners of Grant Thornton Audit Pty Ltd There are no officers of the Company who are former partners of Grant Thornton Audit Pty Ltd. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this Directors' report. Auditor Grant Thornton Audit Pty Ltd continues in office in accordance with section 327 of the Corporations Act 2001. Notes regarding Contingent and Prospective resource estimates 1. The estimated quantities of petroleum that may potentially be recovered by the application of a future development project(s) relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration appraisal and evaluation is required to determine the existence of a significant quantity of potentially moveable hydrocarbons. The information that relates to Prospective Resources for Melbana is based on, and fairly represents, information and supporting documentation compiled by Peter Stickland, a director of Melbana Energy. Mr Stickland B.Sc (Hons) has over 30 years of relevant experience, is a member of the European Association of Geoscientists & Engineers and the Petroleum and Exploration Society of Australia, and consents to the publication of the resource assessments contained herein. The Prospective Resource estimates are consistent with the definitions of hydrocarbon resources that appear in the Listing Rules. Total Liquids = oil + condensate 6 Bcf gas equals 1 MMboe; 1 MMbbl condensate equals 1 MMboe Melbana share can be derived by pro-rating the resource ranges described in the tables above by its percentage equity. 2. 3. 4. 5. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors ___________________________ Andrew Purcell Executive Chairman 26 August 2020 15 Collins Square, Tower 5 727 Collins Street Melbourne VIC 3008 Correspondence to: GPO Box 4736 Melbourne VIC 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of Melbana Energy Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Melbana Energy Limited for the year ended 30 June 2020, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. Grant Thornton Audit Pty Ltd Chartered Accountants T S Jackman Partner – Audit & Assurance Melbourne, 26 August 2020 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Th ornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Th ornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 16 Melbana Energy Limited Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2020 Other income Interest income Expenses Administration costs Finance costs Loss before income tax expense Income tax expense Loss after income tax expense for the year attributable to the owners of Melbana Energy Limited Other comprehensive income Items that will not be reclassified subsequently to profit or loss Loss on the revaluation of equity instruments at fair value through other comprehensive income, net of tax Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Melbana Energy Limited Basic earnings per share Diluted earnings per share Note 30 June 2020 30 June 2019 $ $ 5 6 7 8 70,655 10,349 324,667 48,604 (2,228,545) (10,365) (2,484,647) (1,246,320) (2,157,906) (3,357,696) - - (2,157,906) (3,357,696) 11 (759,971) - - (759,971) (674) (674) (2,917,877) (3,358,370) Cents Cents 33 33 (0.11) (0.11) (0.18) (0.18) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 17 Melbana Energy Limited Consolidated statement of financial position As at 30 June 2020 Assets Current assets Cash and cash equivalents Other receivables Other financial assets Total current assets Non-current assets Financial assets at fair value through other comprehensive income Plant and equipment Right-of-use assets Exploration and evaluation Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Lease liabilities Provisions Advances from farm-out arrangement Total current liabilities Non-current liabilities Lease liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Note 30 June 2020 30 June 2019 $ $ 9 10 13 11 14 12 15 16 17 18 19 17 1,752,263 87,487 28,385 1,868,135 3,363,168 107,014 72,018 3,542,200 3,149,272 28,482 100,996 5,252,593 8,531,343 - 40,765 - 4,842,424 4,883,189 10,399,478 8,425,389 623,727 63,846 124,347 688,959 1,500,879 387,582 - 185,089 - 572,671 52,517 52,517 - - 1,553,396 572,671 8,846,082 7,852,718 20 21 280,302,775 276,330,665 1,459,285 (272,077,015) (269,937,232) 620,322 8,846,082 7,852,718 The above consolidated statement of financial position should be read in conjunction with the accompanying notes 18 Melbana Energy Limited Consolidated statement of changes in equity For the year ended 30 June 2020 Issued capital $ Share based payment reserve $ Other reserves $ Accumulated losses $ Total equity $ Balance at 1 July 2018 272,790,174 476,027 18,797 (266,590,001) 6,694,997 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued (note 20) Share issue cost (note 20) Exercise of options (note 20) Exercise of performance rights (note 20) Share options lapsed (note 21) Share based payments (options and performance rights) (note 21) Share based payments on finance cost (note 21) - - - - - - - (3,357,696) (3,357,696) (674) - (674) (674) (3,357,696) (3,358,370) 3,500,000 (239,063) 199,554 80,000 - - - - - - (80,000) (10,465) 82,000 973,600 - - - - - - - - - - - 10,465 3,500,000 (239,063) 199,554 - - - - 82,000 973,600 Balance at 30 June 2019 276,330,665 1,441,162 18,123 (269,937,232) 7,852,718 Issued capital $ Share based payment reserve $ Other reserves $ Accumulated losses $ Total equity $ Balance at 1 July 2019 276,330,665 1,441,162 18,123 (269,937,232) 7,852,718 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued (note 20) Exercise of performance rights (note 20) Transfer of FCTR to accumulated losses - - - - - - - (2,157,906) (2,157,906) (759,971) - (759,971) (759,971) (2,157,906) (2,917,877) 3,911,241 60,869 - - (60,869) - - - (18,123) - - 18,123 3,911,241 - - Balance at 30 June 2020 280,302,775 1,380,293 (759,971) (272,077,015) 8,846,082 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 19 Melbana Energy Limited Consolidated statement of cash flows For the year ended 30 June 2020 Cash flows from operating activities Payments to suppliers and employees (inclusive of GST) Interest received Interest paid COVID-19-related government grants Note 30 June 2020 30 June 2019 $ $ (2,156,531) 10,349 (8,868) 21,218 (2,533,880) 48,604 (272,720) - Net cash used in operating activities 32 (2,133,832) (2,757,996) Cash flows from investing activities Payments for property, plant and equipment Payments for exploration and evaluation Payments for security deposits for bank guarantee Proceeds from sale of exploration interest Proceeds from farm-out arrangement Proceeds from disposal of property, plant and equipment Proceeds from security deposits for bank guarantee Net cash from investing activities Cash flows from financing activities Proceeds from issue of shares Repayment of borrowings Share issue transaction costs Payment of principal element of lease liabilities Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 15 - (234,565) - - 688,959 - 43,633 (1,954) (472,413) (72,018) 100,000 - 3,000 3,271,381 498,027 2,827,996 - - - (24,199) 3,699,554 (3,583,847) (239,063) - (24,199) (123,356) (1,660,004) 3,363,168 49,099 (53,356) 3,047,017 369,507 Cash and cash equivalents at the end of the financial year 9 1,752,263 3,363,168 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 20 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 1. General information The financial statements cover Melbana Energy Limited as a Consolidated Entity consisting of Melbana Energy Limited and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Melbana Energy Limited's functional and presentation currency. Melbana Energy Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are disclosed on the Corporate Summary accompanying these financial statements. A description of the nature of the Consolidated Entity's operations and its principal activities are included in the Directors' report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 26 August 2020. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Consolidated Entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The following Accounting Standards and Interpretations are most relevant to the Consolidated Entity: AASB 16 Leases The Consolidated Entity has adopted AASB 16 from 1 July 2019. The standard replaces AASB 117 'Leases' and for lessees eliminates the classifications of operating leases and finance leases. Except for short-term leases and leases of low-value assets, right-of-use assets and corresponding lease liabilities are recognised in the statement of financial position. Straight- line operating lease expense recognition is replaced with a depreciation charge for the right-of-use assets (included in operating costs) and an interest expense on the recognised lease liabilities (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results improve as the operating expense is now replaced by interest expense and depreciation in profit or loss. For classification within the statement of cash flows, the interest portion is disclosed in operating activities and the principal portion of the lease payments is separately disclosed in financing activities. Please refer to note 17 to the financial statements for further information regarding adoption of AASB 16. 21 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) Interpretation 23 Uncertainty over Income Tax Treatments Interpretation 23 requires the assessment of whether the effect of uncertainty over income tax treatments should be included in the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates. The Interpretation outlines the requirements to determine whether an entity considers uncertain tax treatments separately, the assumptions an entity makes about the examination of tax treatments by taxation authorities, how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and how an entity considers changes in facts and circumstances. The Consolidated Entity has adopted Interpretation 23 from 1 July 2019, based on an assessment of whether it is ‘probable’ that a taxation authority will accept an uncertain tax treatment. This assessment takes into account that for certain jurisdictions in which the Consolidated Entity operates, a local tax authority may seek to open a company’s books as far back as inception of the Consolidated Entity. Where it is probable, the Consolidated Entity has determined tax balances consistently with the tax treatment used or planned to be used in its income tax filings. Where the Consolidated Entity has determined that it is not probable that the taxation authority will accept an uncertain tax treatment, the most likely amount or the expected value has been used in determining taxable balances (depending on which method is expected to better predict the resolution of the uncertainty). There has been no impact from the adoption of Interpretation 23 in this reporting period. Other accounting pronouncements which have become effective from 1 July 2019 and have therefore been adopted have not had a significant impact on the Consolidated Entity’s financial results or position. Going concern The financial report has been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. At 30 June 2020, the Consolidated Entity: ● ● had, for the financial year ending on that date, incurred a net loss after tax of $2,157,906 (2019: $3,357,696); had, for the financial year ending on that date, net cash outflows from operating and investing activities of $1,635,805 (2019: net inflows of $70,000); had cash and cash equivalents of $1,752,263 (2019: $3,363,168); and had a net working capital position of $367,256 (2019: $2,969,529). ● ● The Consolidated Entity is involved in the exploration and evaluation of oil and gas tenements. Further expenditure will be required on these tenements to ascertain whether they contain economically recoverable reserves. The cash reserves as at 30 June 2020 may not be sufficient to meet the Consolidated Entity’s planned exploration commitments and activities for the 12 months from the date of this report. To meet its funding requirements the Consolidated Entity will rely on taking appropriate steps, including: ● ● ● ● Meeting its additional obligations by either farm-out or partial sale of the Consolidated Entity's exploration interests; Raising capital by one of a combination of the following: placement of shares, pro-rata issue to shareholders, the exercise of outstanding share options, and/or further issue of shares to the public; In some circumstances, subject to negotiation and approval, minimum work requirements may be varied or suspended, and/or permits may be surrendered or cancelled; or Other avenues that may be available to the Consolidated Entity. In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread globally as well as in Australia. The spread of COVID-19 has caused significant volatility in Australian and international markets. There is a significant uncertainty around the breadth and duration of business disruptions related to COVID-19 and therefore the Company has taken precautionary measures by temporarily closing the Company’s office and having arranged the employees to work remotely, as well as minimising non-critical activities and curtailing travel. At the date of this report, the impact of these measures is not expected to significantly impact the completion of the current work being undertaken. However, as the circumstances continue to evolve, there may be disruptions to the future work timelines if employees, consultants or their respective families are personally impacted by COVID-19 or if travel and other operational restrictions are not lifted. 22 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) This financial report has been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. In the event these steps do not provide sufficient funds to meet the Consolidated Entity's exploration commitments, the interest in some or all of the Consolidated Entity's tenements may be affected. No adjustments have been made relating to the recoverability and reclassification of recorded asset amounts and classification of liabilities that might be necessary should the Consolidated Entity not continue as a going concern, particularly the write-down of capitalised exploration expenditure should the exploration permits be ultimately surrendered or cancelled. Having assessed the potential uncertainties relating to the Consolidated Entity’s ability to effectively fund exploration activities and operating expenditures, the Directors believe that the Consolidated Entity will continue to operate as a going concern for the foreseeable future. Therefore, the Directors consider it appropriate to prepare the financial statements on a going concern basis. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the AASB and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Consolidated Entity's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Melbana Energy Limited ('Company' or 'parent entity') as at 30 June 2020 and the results of all subsidiaries for the year then ended. Melbana Energy Limited and its subsidiaries together are referred to in these financial statements as the 'consolidated entity'. Subsidiaries are all those entities over which the Consolidated Entity has control. The Consolidated Entity controls an entity when the Consolidated Entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Specifically, the Consolidated Entity controls an investee if and only if the Consolidated Entity has: ● ● ● Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect its returns. When the Consolidated Entity has less than a majority of the voting or similar rights of an investee, the Consolidated Entity considers all relevant facts and circumstances in assessing whether it has power over an investee, including: ● ● ● The contractual arrangement with the other vote holders of the investee; Rights arising from other contractual arrangements; The Consolidated Entity’s voting rights and potential voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Consolidated Entity. They are de- consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Consolidated Entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Consolidated Entity. 23 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the Consolidated Entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Consolidated Entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Foreign currency translation The Consolidated Entity's consolidated financial statements are presented in Australian dollars, which is also the parent company’s functional currency. Each entity in the Consolidated Entity determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance date. All exchange differences in the consolidated report are taken to profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition The Consolidated Entity recognises revenue as follows: Other income Other income is recognised when it is received or when the right to receive payment is established. Interest income Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Government Grants Government grants are recognised in the financial statements at expected values or actual cash received when there is a reasonable assurance that the Consolidated Entity will comply with the requirements and that the grant will be received. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. 24 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a ● transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance date. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Income taxes relating to items recognised directly in equity are recognised in equity and not in the consolidated statement of comprehensive income. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Consolidated Entity's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Consolidated Entity's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Financial Instruments (i) Trade Receivables Trade receivables are amounts due from customers for goods sold in the ordinary course of business. They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Consolidated Entity holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Details about the group’s impairment policies and the calculation of the loss allowance are provided in (ii) below. 25 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) (ii) Allowance for expected credit loss The Consolidated Entity applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. (iii) Trade and other payables Trade payables are unsecured and are usually paid within 30 days of recognition. The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature. (iv) Loans and borrowings Loans and borrowings are recognised initially at fair value, being the consideration received, less directly attributable transaction costs, with subsequent measurement at amortised cost using the effective interest rate method. Any gains or losses arising from non - substantial modifications are recognised immediately in the statement of profit and loss and the financial liability continues to amortise using the original effective interest rate. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash at bank and on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement, have rights to assets, and obligations for the liabilities of the joint arrangement. Joint control is the contractual agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Consolidated Entity accounts for its share of the joint operation assets, and liabilities it has incurred, its share of any liabilities jointly incurred with other ventures, income from the sale or use of its share of the joint operation’s output, together with its share of the expenses incurred by the joint operation, and any expenses it incurs in relation to its interest in the joint operation. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Consolidated Entity has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, its carrying value is written off. Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income include equity investments which the Consolidated Entity intends to hold for the foreseeable future and has irrevocably elected to classify them as such upon initial recognition. Subsequent measurement of financial assets at fair value through other comprehensive income Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Consolidated Entity benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. The Consolidated Entity elected to classify irrevocably its listed equity investment under this category. 26 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) Impairment of financial assets The Consolidated Entity recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income (only debt instruments, not equity instruments). The measurement of the loss allowance depends upon the Consolidated Entity's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. For financial assets mandatorily measured at fair value through other comprehensive income (only debt instruments, not equity instruments), the loss allowance is recognised in other comprehensive income with a corresponding expense through profit or loss. In all other cases, the loss allowance reduces the asset's carrying value with a corresponding expense through profit or loss. Plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over their expected useful lives which range from 3 to 15 years. The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the profit or loss in the consolidated statement of comprehensive income in the period the item is derecognised. Impairment The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash- generating unit to which the asset belongs. Impairment exists when the carrying value of an asset exceeds its estimated recoverable amount. The asset is written down to its recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Consolidated Entity expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. 27 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) The Consolidated Entity has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. Exploration and evaluation assets Exploration and evaluation expenditure is carried at cost. If indication of impairment arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. Exploration and evaluation costs are accumulated separately for each current area of interest and carried forward provided that one of the following conditions is met: ● ● such costs are expected to be recouped through successful development or sale; or exploration activities have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing. Impairment of exploration and evaluation costs To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable in the future, profits/(losses) and net assets will be varied in the period in which this determination is made. Farm-outs ● ● The Consolidated Entity will not record any expenditure made by the farm-in partner on its behalf; The Consolidated Entity will not recognise a gain or loss on the farm-out arrangement but rather will redesignate any costs previously capitalised in relation to the whole interest as relating to the partial interest retained; and Any cash consideration to be received will be credited against costs previously capitalised in relation to the whole interest with any excess to be accounted for by the Consolidated Entity as gain on disposal. ● Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Consolidated Entity's incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are recognised in provisions in respect of employees’ service up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Share-based payments Equity-settled share-based compensation benefits are provided to employees. 28 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Consolidated Entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Consolidated Entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Consolidated Entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Issued capital Ordinary shares are classified as equity and paid up capital is recognised at the fair value of the consideration received by the Consolidated Entity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Melbana Energy Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. 29 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 2. Significant accounting policies (continued) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Consolidated Entity for the annual reporting period ended 30 June 2020. The Consolidated Entity's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Consolidated Entity, are set out below. Conceptual Framework for Financial Reporting (Conceptual Framework) The revised Conceptual Framework is applicable to annual reporting periods beginning on or after 1 July 2020 and early adoption is permitted. The Conceptual Framework contains new definition and recognition criteria as well as new guidance on measurement that affects several Accounting Standards. Where the Consolidated Entity has relied on the existing framework in determining its accounting policies for transactions, events or conditions that are not otherwise dealt with under the Australian Accounting Standards, the Consolidated Entity may need to review such policies under the revised framework. At this time, the application of the Conceptual Framework is not expected to have a material impact on the Consolidated Entity's financial statements. Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Exploration and evaluation costs Exploration and evaluation costs are accumulated separately for each area of interest and carried forward provided that one of the following conditions is met: ● ● such costs are expected to be recouped through successful development or sale; or exploration activities have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing. 30 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 3. Critical accounting judgements, estimates and assumptions (continued) Significant judgement is required in determining whether it is likely that future economic benefits will be derived from the capitalised exploration and evaluation expenditure. In the judgement of the Directors, at 30 June 2020 exploration activities in Cuba Block 9 has not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves. Active and significant operations in relation to Cuba Block 9 is continuing and nothing has come to the attention of the Directors to indicate future economic benefits will not be achieved. The Directors are continually monitoring the areas of interest and are exploring alternatives for funding the development of areas of interest when economically recoverable reserves are confirmed. If new information becomes available that suggests the recovery of expenditure is unlikely, the amounts capitalised will need to be reassessed at that time. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the Coronavirus (COVID-19) pandemic has had, or may have, on the Consolidated Entity based on known information. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the Consolidated Entity operates. Other than as addressed in specific notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the Consolidated Entity unfavourably as at the reporting date or subsequently as a result of the Coronavirus (COVID-19) pandemic. Share-based payment transactions The Consolidated Entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black- Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Fair value measurement hierarchy The Consolidated Entity is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. Estimation of useful lives of assets The Consolidated Entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Consolidated Entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Lease term The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the Consolidated Entity's operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and disruption to replace the asset. The Consolidated Entity reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances. 31 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 3. Critical accounting judgements, estimates and assumptions (continued) Incremental borrowing rate Where the interest rate implicit in a lease cannot be readily determined, an incremental borrowing rate is estimated to discount future lease payments to measure the present value of the lease liability at the lease commencement date. Such a rate is based on what the Consolidated Entity estimates it would have to pay a third party to borrow the funds necessary to obtain an asset of a similar value to the right-of-use asset, with similar terms, security and economic environment. No significant influence over entities where more than 20% voting rights held Management have determined that the Consolidated Entity does not have significant influence over Metgasco Limited, even though it holds 27.81% of the issued capital of this entity. Currently the Company does not have a board representation in Metgasco Limited. The Company’s request for a board representation was not successful as confirmed by the Metgasco Limited shareholders' meeting on 23 June 2020. Other than publicly available information, the Company does not have access to other information on Metgasco Limited. In addition, there are no arrangements exist for transactions, resource, and knowledge transfers between the Company and Metgasco Limited. Note 4. Operating segments The Consolidated Entity operates in the petroleum exploration industry within Australia and Cuba. The Board of Directors currently receive regular consolidated cash flow information as well as Consolidated Statement of Financial Position and Statement of Comprehensive Income information that is prepared in accordance with Australian Accounting Standards. The Board does not currently receive segmented Statement of Financial Position and Statement of Comprehensive Income information. The Board manages exploration activities of each permit area through review and approval of budgets, joint venture cash calls and other operational information. Information regarding exploration expenditure capitalised for each area is contained in Note 15. Note 5. Other income Net foreign exchange gain COVID-19-related government grants Net refunds from project Other income 30 June 2020 30 June 2019 $ $ 49,099 21,556 - 83,466 - 241,201 70,655 324,667 Other income Other income is recognised when it is received or when the right to receive payment is established. COVID-19-related government grants COVID-19-related government grants represent the cash flow boost payments received from Federal Government in response to ongoing novel coronavirus (COVID-19) pandemic. Government grants are recognised in the financial statements at expected values or actual cash received when there is a reasonable assurance that the Consolidated Entity will comply with the requirements and that the grant will be received. 32 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 6. Administration costs Consultants fees and expenses Employee benefits expense excluding superannuation and share-based payments Defined contribution superannuation expense Share based payments Administration and other expenses Audit, tax and other compliance related costs Securities exchange, share registry and reporting costs Operating lease and outgoing expenses Investor relations and corporate promotion costs Travel costs Depreciation expense - plant & equipment Depreciation expense - right-of-use assets Tenement application and other related expenses Transaction costs paid for acquisition of an investment Less: Allocation to exploration activities Note 7. Finance costs Share-based payment on finance cost Interest expenses 30 June 2020 30 June 2019 $ $ 48,622 937,642 34,286 - 226,172 60,771 95,247 3,602 27,000 109,908 12,283 49,667 49,496 575,564 (1,715) 460,950 1,116,879 64,429 82,000 323,980 68,500 140,821 160,260 49,296 89,273 29,116 - - - (100,857) 2,228,545 2,484,647 30 June 2020 30 June 2019 $ $ - 10,365 973,600 272,720 10,365 1,246,320 Interest expenses for the year ended 30 June 2020 represent the interest expense in relation to office space lease accounted under AASB 16 Leases. Share-based payment on finance cost During the previous financial year, the Executive Chairman of the Company, Mr Andrew Purcell, provided a personal guarantee in connection with a loan made by a third party to the Company. As consideration for this personal guarantee, the Company issued 80,000,000 options to Mr Purcell on 13 August 2018, following shareholders' approval at a General Meeting held on 9 August 2018. These options were independently valued by an external expert and the full non-cash valuation of $973,600 was booked as a finance cost and measured in accordance with AASB 2 Share-based Payment. 33 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 8. Income tax expense Numerical reconciliation of income tax expense and tax at the statutory rate Loss before income tax expense Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Share-based payments Non-assessable non-exempt income Other non-deductible expenditure Current year tax losses not recognised Income tax expense Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 26% (2019: 27.5%) 30 June 2020 30 June 2019 $ $ (2,157,906) (3,357,696) (593,424) (923,366) - 5,928 284 290,290 - - (587,212) 587,212 (633,076) 633,076 - - 30 June 2020 30 June 2019 $ $ 191,152,997 189,594,318 49,699,779 52,138,437 The above potential tax benefit for tax losses has not been recognised in the statement of financial position. These tax losses can only be utilised in the future if the continuity of ownership test is passed, or failing that, the same business test is passed. Note 9. Cash and cash equivalents Current assets Cash at bank Note 10. Other receivables Current assets Other receivables Prepayments GST receivable 30 June 2020 30 June 2019 $ $ 1,752,263 3,363,168 30 June 2020 30 June 2019 $ $ 4,820 65,160 69,980 7,500 83,070 90,570 17,507 16,444 87,487 107,014 34 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 11. Financial assets at fair value through other comprehensive income Non-current assets Ordinary shares Reconciliation Reconciliation of the fair values at the beginning and end of the current and previous financial year are set out below: Opening fair value Additions Disposals Revaluation decrements Closing fair value 30 June 2020 30 June 2019 $ $ 3,149,272 - - 3,911,241 (1,998) (759,971) 3,149,272 - - - - - On 5 February 2020, the Company acquired 27.81% issued shares in Metgasco Limited (ASX: MEL). The takeover offer to MEL shareholders, was a scrip for scrip offer under which the Company issued 434,582,340 ordinary shares as non-cash consideration for the acquisition, to all the shareholders of MEL who accepted the offer. The implied value of the offer consideration was $0.009 cents per share. Shares were issued on 14 February 2020. On 4 April 2020, the Company sold 50,000 Metgasco Limited shares for a consideration of $1,998 in an off-market transaction. Refer note 27 for further information. The transaction was initially assessed under AASB 128 Investments in Associates and Joint Ventures as the Company holds more than 20 per cent of the voting rights. However, due to lack of significant influence, the Company irrevocably elected to recognise this investment at fair value through other comprehensive income under AASB 9 Financial Instruments. Under this, only dividend income (if any) is recognised in the profit or loss with all other gains and losses recognised in OCI and there is no reclassification on derecognition. Investments in MEL held by the Consolidated Entity at fair value are valued in accordance with AASB 13 Fair Value Measurement, using Level 1 of the fair value hierarchy - quoted prices (unadjusted) in active markets for identical assets or liabilities. The fair values of the financial assets held have been determined by reference to the quoted price on the ASX at 30 June 2020. Note 12. Right-of-use assets Non-current assets Office space - right-of-use Less: Accumulated depreciation Refer note 17 for further information on the Consolidated Entity's leasing arrangements. Note 13. Other financial assets Current assets Term deposits 30 June 2020 30 June 2019 $ $ 150,663 (49,667) 100,996 - - - 30 June 2020 30 June 2019 $ $ 28,385 72,018 Security deposits represent a term deposit of $28,385 (2019: $27,718) lodged as security for the short term lease. 35 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 14. Plant and equipment Non-current assets Office equipment - at cost Less: Accumulated depreciation 30 June 2020 30 June 2019 $ $ 251,007 (222,525) 251,007 (210,242) 28,482 40,765 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2018 Additions Disposals Depreciation expense Balance at 30 June 2019 Depreciation expense Balance at 30 June 2020 Note 15. Exploration and evaluation Non-current assets Exploration and evaluation Block 9 Cuba - at cost Office equipment $ 101,241 1,954 (33,314) (29,116) 40,765 (12,283) 28,482 Consolidated 30 June 2020 30 June 2019 $ $ 5,252,593 4,842,424 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2018 Expenditure during the year Disposals Balance at 30 June 2019 Additions Balance at 30 June 2020 Block 9 Cuba PEP 51153 $ $ Total $ 4,370,011 472,413 - 4,842,424 410,169 5,252,593 100,000 - (100,000) 4,470,011 472,413 (100,000) - - - 4,842,424 410,169 5,252,593 36 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 15. Exploration and evaluation (continued) Significant judgement is required in determining whether it is likely that future economic benefits will be derived from capitalised exploration and evaluation expenditure. In the judgement of the Directors, at 30 June 2020 exploration activities in each area of interest, where costs are carried forward, have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves. Active and significant operations in relation to each area of interest are continuing and nothing has come to the attention of the Directors to indicate future economic benefits will not be achieved. The Directors are continually monitoring the areas of interest and are exploring alternatives for funding the development of areas of interest when economically recoverable reserves are confirmed. A review of the consolidated entity's exploration licenses was undertaken during the financial year and based on the review management identified no impairment indicators on Block 9. Further information on operating activities and development are included in the Directors' report. Note 16. Trade and other payables Current liabilities Trade payable Other payable Refer to note 23 for further information. Note 17. Lease liabilities 30 June 2020 30 June 2019 $ $ 378,250 245,477 166,773 220,809 623,727 387,582 The Consolidated Entity has lease arrangement for office space. Rental contracts are typically made for fixed periods of 12 to 36 months, but may have an extension option. This note provides information for leases where the Consolidated Entity is a lessee. Lease terms are negotiated on an individual basis and may contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Right-of-use assets and lease liabilities The Consolidated Entity has adopted AASB 16 Leases (AASB 16) on 1 July 2019, but has not restated comparatives for the 2019 reporting period, as permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 July 2019. On adoption of AASB 16, the Consolidated Entity recognised lease assets (known as "right-of-use") and liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These assets and liabilities were measured at the present value of the remaining lease payments, discounted using the Consolidated Entity's incremental borrowing rate as of 1 July 2019. In applying AASB 16 for the first time, the Consolidated Entity has used the following practical expedients permitted by the standard: ● ● ● ● ● applying a single discount rate to a portfolio of leases with reasonably similar characteristics relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous contracts as at 1 July 2019 accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and using hindsight in determining the lease term where the contract contains options to extend or terminate the lease. 37 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 17. Lease liabilities (continued) The Consolidated Entity has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Consolidated Entity relied on its assessment made applying AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease. Please refer to note 12 to the financial statements for the details of right-of use asset balances at 30 June 2020. The balance sheet shows the following amounts relating to lease liabilities: Current liabilities Lease liability Non-current liabilities Lease liability Reconciliation of lease liability Adoption of AASB 16 at 1 July 2019 Payments during the period Interest expenses Balance at 30 June 2020 30 June 2020 30 June 2019 $ $ 63,846 52,517 116,363 - - - 30 June 2020 $ 150,663 (44,665) 10,365 116,363 Refer to note 23 for further information on financial instruments. The Consolidated Entity had no short-term lease arrangements during the year ended 30 June 2020. On adoption of AASB 16, the Consolidated Entity recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate as of 1 July 2019. The weighted average incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 7.5%. Right-of use assets were measured at an amount equal to the lease liability at 1 July 2019. The change in accounting policy affected the following items in the statement of financial position on 1 July 2019: Operating lease commitments disclosed as at 30 June 2019 (Note 26) Impact of discount (using the incremental borrowing rate) and lease incentives at the date of initial application Value of lease liabilities and right-of-use assets recognised at 1 July 2019 30 June 2020 $ 192,051 (41,388) 150,663 38 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 18. Provisions Current liabilities Annual leave Long service leave Note 19. Advances from farm-out arrangement Current liabilities Advances from farm-out arrangement 30 June 2020 30 June 2019 $ $ 74,163 50,184 89,255 95,834 124,347 185,089 30 June 2020 30 June 2019 $ $ 688,959 - Advances from farm-out arrangement represent amounts received from Sonangol as reimbursement for Block 9 as per the FIA which was executed on 25 May 2020. This amount will be offset against exploration and evaluation assets once conditions attached to the contract are fulfilled. Refer note 30 to the financial statements and Directors' report for further information on the arrangement. Note 20. Issued capital 30 June 2020 30 June 2019 30 June 2020 30 June 2019 Shares Shares $ $ Ordinary shares - fully paid 2,316,851,413 1,875,505,915 280,302,775 276,330,665 Movements in ordinary share capital Details Date Shares Issue price $ Balance Share issue upon exercise of performance rights Share issue upon exercise of options Share issue upon exercise of options Share issue upon exercise of options Share issue upon exercise of options Share placement Share placement Share issue costs (net of tax) 1 July 2018 6 July 2018 13 August 2018 21 August 2018 28 August 2018 5 September 2018 27 September 2018 21 November 2018 Balance Share issue upon exercise of performance rights Share issue upon exercise of performance rights Share issued for acquisition of investments 30 June 2019 25 July 2019 14 October 2019 14 February 2020 1,665,750,480 5,333,333 3,141,226 4,761,215 1,247,988 827,228 188,817,582 5,626,863 - 1,875,505,915 2,584,949 4,178,209 434,582,340 272,790,174 80,000 - 62,825 $0.0200 95,224 $0.0200 24,960 $0.0200 16,545 $0.0200 3,398,716 $0.0180 101,284 $0.0180 (239,063) - $0.0090 $0.0090 $0.0090 276,330,665 23,265 37,604 3,911,241 Balance 30 June 2020 2,316,851,413 280,302,775 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 39 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 20. Issued capital (continued) Share issue costs Incremental costs directly attributable to the issue of new shares or options, including transactional costs and fees payable to relevant service providers, are shown in equity as a deduction, net of tax, from the proceeds. Share buy-back There is no current on-market share buy-back. Shares under options Information relating to the Consolidated Entity's details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the reporting period, is set out in note 34 to the financial statements. Capital risk management The Consolidated Entity's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Consolidated Entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Consolidated Entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company's share price at the time of the investment. The Consolidated Entity is not actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies. The Consolidated Entity is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the 2019 Annual Report. Note 21. Reserves Foreign currency reserve Share-based payments reserve Financial assets at fair value through other comprehensive income reserve 30 June 2020 30 June 2019 $ $ - 1,380,293 (759,971) 18,123 1,441,162 - 620,322 1,459,285 Financial assets at fair value through other comprehensive income reserve The reserve is used to recognise increments and decrements in the fair value of financial assets at fair value through other comprehensive income. Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. The Consolidated Entity ceased its foreign operations during the year and the foreign currency translation reserve balance at 30 June 2020 was transferred to the accumulated losses. 40 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 21. Reserves (continued) Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services. Information relating to the Consolidated Entity's details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the reporting period, is set out in note 34 to the financial statements. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Balance at 1 July 2018 Foreign currency translation Share options lapsed Exercise of performance rights Share based payments (options and performance rights) Share based payments on finance cost Balance at 30 June 2019 Revaluation decrements Foreign currency translation transferred to accumulated losses Exercise of performance rights Financial assets at fair value through other comprehensive income reserve $ Share based payment reserve $ Foreign currency reserve $ - - - - - - 476,027 - (10,465) (80,000) 82,000 973,600 18,797 (674) - - - - Total $ 494,824 (674) (10,465) (80,000) 82,000 973,600 - (759,971) 1,441,162 - 18,123 - 1,459,285 (759,971) - - - (60,869) (18,123) - (18,123) (60,869) Balance at 30 June 2020 (759,971) 1,380,293 - 620,322 Note 22. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Note 23. Financial instruments Financial risk management objectives The Consolidated Entity's principal financial instruments comprise cash and short term deposits, the main purpose of which is to finance the Consolidated Entity’s operations. The Consolidated Entity has various other financial assets and liabilities such as trade receivables and trade payables which arise directly from its operations and, as at 30 June 2020. The main risks arising from the Consolidated Entity’s financial instruments are credit risk, interest rate risk, exchange rate risk and liquidity risk. The Board of Directors has reviewed each of those risks and has determined that, overall, they are not significant in terms of the Consolidated Entity’s current activities. The Consolidated Entity may also enter into derivative financial instruments, principally forward currency contracts. The purpose is to manage the currency risks arising from the Consolidated Entity’s operations. Speculative trading in derivatives is not permitted. There are no derivatives outstanding at 30 June 2020 (2019: $nil). Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the consolidated financial statements. 41 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 23. Financial instruments (continued) Market risk Foreign currency risk Generally, the Consolidated Entity's main exposure to exchange rate risk relates primarily to trade payables and cash denominated in US dollars, arising in relation to its activities in Cuba. Where a payable is significant, US dollars may be purchased on incurring the liability or commitment. The Consolidated Entity’s exposure to unhedged financial assets and liabilities at balance date is as follows: USD financial assets Cash on hand and at bank USD financial liabilities Trade creditors NZD financial assets Cash on hand and at bank EUR financial assets Cash on hand and at bank EUR financial liabilities Trade Creditors 30 June 2020 30 June 2019 $ $ 727,078 1,378,571 30 June 2020 30 June 2019 $ $ 8,762 217,287 30 June 2020 30 June 2019 $ $ - 63 30 June 2020 30 June 2019 $ $ 802 1,617 30 June 2020 30 June 2019 $ $ 182,881 - The Consolidated Entity had net assets denominated in foreign currencies of $536,237 as at 30 June 2020 (2019: of $1,162,964). Based on this exposure, had the Australian dollars strengthened by 10% / weakened by 10% (2019: strengthened by 5% and weakened by 5%) against these foreign currencies with all other variables held constant, the Consolidated Entity's loss before tax for the year would have been $48,748 higher / $59,582 lower (2019: $55,379 lower / $61,208 higher) and equity would have been $48,748 lower / $59,582 higher (2019: $55,379 lower / $61,208 higher). The percentage change is the expected overall volatility of the significant currencies, which is based on management's assessment of reasonable possible fluctuations taking into consideration movements over the last 12 months and the spot rate at each reporting date. An analysis of the exchange rate sensitivity by foreign currency is as follows: 42 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 23. Financial instruments (continued) 30 June 2020 US dollars net financial assets/liabilities Euros net financial assets/liabilities 30 June 2019 US dollars net financial assets/liabilities NZ dollars net financial assets/liabilities Euros net financial assets/liabilities AUD strengthened Effect on AUD weakened Effect on % change profit before tax Effect on equity % change profit before tax Effect on equity 10% (65,301) 65,301 10% 79,813 (79,813) 10% 16,553 (16,553) 10% (20,231) 20,231 (48,748) 48,748 59,582 (59,582) AUD strengthened Effect on AUD weakened Effect on % change profit before tax Effect on equity % change profit before tax Effect on equity 5% 5% 5% (55,299) (55,299) (3) (77) (3) (77) 5% 5% 5% 61,120 61,120 3 85 3 85 (55,379) (55,379) 61,208 61,208 Price risk The Consolidated Entity's exposure to equity investment price risk arises from investments held by the Consolidated Entity and classified in the statement of financial position as at fair value through other comprehensive income (FVOCI) (Note 11). This investment is publicly traded on the ASX. Had the equity share price improved by 50% / weakened by 50% with all other variables held constant, the Consolidated Entity's other comprehensive income for the year and equity balance at year-end would have been $1,574,636 higher / $1,574,636 lower. The percentage change is considered reasonable based on the overall movement of the equity share price of the investment over the last 12 months. Interest rate risk The Consolidated Entity's exposure to the risk of changes in market interest rates relates primarily to the Consolidated Entity’s cash and cash equivalents with a floating interest rate. Short term deposits are made for varying periods depending on the immediate cash requirements of the Consolidated Entity, and earn interest at the respective short term deposit rates. Taking into account the current cash balance and prevailing interest rates, a +/- 1.0% movement from the year-end Australian interest rates will not have a material impact on the profit or loss and cash balances of the Consolidated Entity. Credit risk The Consolidated Entity has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the Consolidated Entity based on recent sales experience, historical collection rates and forward-looking information that is available. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. 43 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 23. Financial instruments (continued) The Consolidated Entity trades only with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the results being that the Consolidated Entity's exposure to bad debts is not significant. Credit risk arises from the financial assets of the Consolidated Entity, which comprise cash and cash equivalents and trade and other receivables. The Consolidated Entity's exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. No collateral is held as security. Exposure at balance date is the carrying value as disclosed in each applicable note. Liquidity risk Vigilant liquidity risk management requires the Consolidated Entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Consolidated Entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Remaining contractual maturities The following tables detail the Consolidated Entity's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. 30 June 2020 Non-derivatives Non-interest bearing Trade and other payables Interest-bearing - variable Lease liability Total non-derivatives 30 June 2019 Non-derivatives Non-interest bearing Trade and other payables Total non-derivatives Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Remaining contractual maturities $ Over 5 years $ - 623,727 - 7.50% 70,202 693,929 54,021 54,021 - - - - - - 623,727 124,223 747,950 Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Remaining contractual maturities $ Over 5 years $ - 387,582 387,582 - - - - - - 387,582 387,582 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. The carrying amounts of trade receivables and trade payables are assumed to approximate their fair values due to their short-term nature. Where appropriate, the fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial instruments. 44 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 24. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the Consolidated Entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments Note 25. Remuneration of auditors 30 June 2020 30 June 2019 $ $ 479,045 6,962 13,530 89,999 - 545,873 20,129 11,681 - 13,153 589,536 590,836 During the financial year the following fees were paid or payable for services provided by Grant Thornton Audit Pty Ltd, the auditor of the Company: Audit services - Grant Thornton Audit Pty Ltd Audit or review of the financial statements Preparation of the tax return Due diligence Note 26. Commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years 30 June 2020 30 June 2019 $ $ 39,500 56,000 17,420 4,000 21,420 - - - 60,920 56,000 30 June 2020 30 June 2019 $ $ - - - 67,828 124,223 192,051 Operating lease commitments at 30 June 2019 comprised contracted amounts for office rental under a non-cancellable operating lease expiring within 3 year with an option to extend. The lease had an escalation clause. From 1 July 2019 the Consolidated Entity has recognised right-of-use assets and lease liabilities for this lease. Guarantee The Consolidated Entity has provided guarantees of $28,385 (2019: $27,718) at 30 June 2020 for lease of premises. 45 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 26. Commitments (continued) Exploration Commitments In order to maintain rights of tenure to petroleum exploration tenements, the Consolidated Entity has minimum exploration requirements to fulfil. These requirements are not provided for in the financial statements. If the Consolidated Entity decides to relinquish certain tenements and/or does not meet these obligations, assets recognised in the Statement of financial position may require review in order to determine the appropriateness of carrying values. The commitments for exploration expenditure of approximately $6,300,000 include the minimum expenditure requirements that the Consolidated Entity is required to meet in order to retain its present permit interests over the next fiscal year. These obligations may be subject to renegotiation, may be farmed out or may be relinquished. For Australian exploration permits in the jurisdiction of the Commonwealth of Australia, the first three-years of a work program are referred to as the primary term. The work program is guaranteed and cannot be reduced. Later years (4, 5 and 6) are referred to as the secondary term and the work program for each year becomes guaranteed upon entry to that year. Whilst failure to complete a guaranteed work program does not result in a financial penalty, it is grounds for cancellation of the permit. Further, the default may be considered by the Regulator in relation to future interactions with the defaulting party for a period of 5 years. WA-488-P (Melbana 100%) In 2013, Melbana was awarded WA-488-P for a six year period with a minimum commitment being the three year primary term ending 21 May 2017. Permit Year 1 work program (ending 21 May 2014) was 400km 2D seismic Work program completed Permit Year 2 work program (ending 21 September 2018) was to undertake 330km of 2D seismic broadband reprocessing and additional studies including a stratigraphic interpretation study and an analogue field study. On August 2018, Melbana announced that the Regulator had approved its application for the crediting of the 2018 Beehive 3D Seismic Survey against meeting the Permit Year 4 work commitment to acquire a new 400km2 3D seismic survey. Permit Year 3 work program (ending 21 December 2020) is the drilling of an exploration well. French major Total and Australia's Santos had an option to fully fund the first well in the WA-488-P permit in return for an 80% participating interest in the permit. However, these options expired unexercised during the year and the Consolidated Entity is currently in discussions with several interested parties with a view to participating in the drilling of an exploration well. During the year, the Consolidated Entity's application for a 12 month suspension of the work program conditions in respect of Permit Year 3 (and a corresponding 12 month suspension of the permit term) was granted by the National Offshore Petroleum Titles Administrator. The Consolidated Entity now has until 21 December 2021 to drill an exploration well in WA-488-P. 46 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 26. Commitments (continued) Cuba Block 9 (Melbana 100% interest) In September 2015, Melbana executed the Cuba Block 9 Production Sharing Contract (PSC) with the national oil company Cuba Petróleo Union (CUPET). The exploration period of the Block 9 PSC is split into four sub-periods with withdrawal options at the end of each sub-period. In September 2016, the Company announced that CUPET approved an adjustment to the Block 9 PSC exploration sub- periods such that the first exploration sub-period, which commenced in September 2015 (for an 18 month period) was extended by eight months to November 2017 with a corresponding reduction in the term of future sub-periods. The work program in the first sub-period consisting of evaluating existing exploration data in the block and reprocessing selected 2D seismic data was unchanged and completed in October 2017. In May 2017, CUPET approved a further amendment to the Block 9 PSC exploration work program, deferring the obligation to undertake a 200km 2D seismic survey in the second exploration sub-period starting November 2017 to the third sub- period starting November 2019 and accelerating the obligation to drill an exploration well from the third sub-period to the second sub-period. On 11 August 2017 Melbana announced it had provided official notice to the Cuban regulatory authority of its decision to enter Block 9 second exploration sub-period. In May 2019, the Company applied to CUPET to extend the second exploration sub-period by one year to November 2020 and also to extend the waiver of the requirement to provide a financial guarantee for 50% of the work commitments for this sub-period. The extension was granted in October 2019. As explained in Note 30 to the financial statements, the Company entered into an agreement with Sonangol with respect to Block 9 during the year. As at 30 June 2020, Melbana, as Operator, is advanced in its planning to drill two wells in Block 9. At the date of this report, significant progress has been made on well planning, permitting, contractor engagement and sourcing of inventory to allow commencement of drilling operations. Summary For the current sub-period of Block 9, the remaining committed activity is the drilling of one well. For the current permit year of WA-488-P, the remaining committed activity is the drilling of one well. There are no material commitments or contingencies other than as set out in this note. Note 27. Related party transactions Parent entity Melbana Energy Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 29. Key management personnel Disclosures relating to key management personnel are set out in note 24 and the remuneration report included in the Directors' report. 47 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 27. Related party transactions (continued) Transactions with related parties As noted in note 11 to the financial statements, on 14 February 2020 the Company issued 434,582,340 ordinary shares as purchase consideration (‘consideration shares”) to acquire 27.81% equity interest in Metgasco Limited. Out of the total number of consideration shares being issued, 306,067,632 were issued to M&A Advisory Pty Ltd, an entity in which Mr Andrew Purcell (Executive Chairman of the Company) is a director and a substantial shareholder. On 4 April 2020, the Company sold 50,000 Metgasco Limited shares to M&A Advisory Pty Ltd for a consideration of $1,998 in an off-market transaction. During the previous financial year, the Executive Chairman of the Company, Mr Andrew Purcell, provided a personal guarantee in connection with a loan made by a third party to the Company. As consideration for this personal guarantee, the Company issued 80,000,000 options to Mr Purcell on 13 August 2018, following shareholders' approval at a General Meeting held on 9 August 2018. These options were independently valued by an external expert and the full non-cash valuation of $973,600 was booked as a finance cost and measured in accordance with AASB 2 Share-based Payment. The following transactions occurred with related parties: Payment for goods and services: Payment for consulting services* 30 June 2020 30 June 2019 $ $ - 15,500 * Payments for consulting services represent the payments made to Springhead Petroleum Pty Ltd, an entity associated with Mr Peter Stickland. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties The following balances are outstanding at the reporting date in relation to loans with related parties: Current receivables: Receivables from director Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 28. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income 48 30 June 2020 30 June 2019 $ $ 1,998 - Parent 30 June 2020 30 June 2019 $ $ (2,156,864) (7,338,216) (2,156,864) (7,338,216) Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 28. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Share-based payments reserve Financial assets at fair value through other comprehensive income reserve Accumulated losses Total equity Parent 30 June 2020 30 June 2019 $ $ 1,868,131 3,541,146 10,399,478 8,424,343 1,500,879 572,670 1,553,396 572,670 277,130,250 273,158,138 1,441,162 - (268,904,490) (266,747,627) 1,380,293 (759,971) 8,846,082 7,851,673 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2020 and 30 June 2019. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2020 and 30 June 2019. Capital commitments Refer note 26 to the financial statements for the details of the exploration commitments. The parent entity had no other capital commitments for property, plant and equipment as at 30 June 2020 and 30 June 2019. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Consolidated Entity, as disclosed in note 2, except for the following: ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 29. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name Principal place of business / Country of incorporation Ownership interest 30 June 2020 30 June 2019 % % Methanol Australia Pty Ltd LNG Australia Pty Ltd MEO International Pty Ltd Finniss Offshore Exploration Pty Ltd MEO New Zealand Pty Limited* Melbana Operations Pty Ltd (Australia) Pty Ltd Australia Australia Australia Australia New Zealand Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - * This entity was dormant and had no assets for distribution. The Consolidated Entity is currently is in the process to liquidating this entity. 49 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 30. Interests in farm-out arrangements Name Block 9 Principal place of business / Country of incorporation Republic of Cuba On 23 December 2019, the Consolidated Entity has signed a binding heads of agreement (HOA) with Sonangol E.P. (Sonangol) for it to acquire a 70% Participating Interest in the Block 9 PSC in Cuba. As part of the HOA, on 25 May 2020, the Consolidated Entity entered into a Farm-in Agreement (FIA) with Sonangol. The FIA details the commercial arrangement and responsibilities for the drilling of two exploration wells in Block 9. The FIA defined certain conditions precedent requiring satisfaction before the FIA becomes effective, and at the date of this report all of which have been completed resulting in Melbana’s Ownership interest in Block 9 PSC reducing to 30% post balance date. Farm-outs in the exploration and evaluation phase The Consolidated Entity does not record any expenditure made by the farmee on its accounts. It does not recognise any gains or losses on its exploration and evaluation farm-out arrangements, but redesignates any costs previously capitalised in relation to the whole interest as relating to the partial interest retained. Any cash consideration received directly from the farmee credited against the cost previously capitalised in relation to the whole interest with any excess accounted by the farmor as a gain on disposal. Note 31. Events after the reporting period Subsequent to the end of the financial year, on 17 August 2020, the last unsatisfied Condition Precedent to the Completion of the Farm-in Agreement was resolved when Cuban regulatory approval was received for Sonangol’s 70% Participating Interest in Block 9 PSC. Subsequent to the end of the financial year, on 24 August 2020 the Company announced it had completed updating the Prospective Resource assessment of the Beehive prospect in WA-488-P to incorporate the recently acquired 3D seismic data over the prospect. The presence of the Beehive prospect was validated by the new seismic data set and the best estimate prospective resource increased to 416MMboe, a 7% uplift to the previous independent resource assessment based on the pre-existing 2D seismic dataset. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Consolidated Entity's operations, the results of those operations, or the Consolidated Entity's state of affairs in future financial years. 50 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 32. Reconciliation of loss after income tax to net cash used in operating activities Loss after income tax expense for the year Adjustments for: Depreciation and amortisation Net loss on disposal of property, plant and equipment Share-based payments Foreign exchange differences Share based payment on finance cost Change in operating assets and liabilities: Increase in other receivables Decrease in prepayments Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Net cash used in operating activities Note 33. Earnings per share 30 June 2020 30 June 2019 $ $ (2,157,906) (3,357,696) 61,950 - - (49,099) - 29,116 30,314 82,000 (83,466) 973,600 (1,063) 22,588 50,440 (60,742) (56,940) 13,059 (66,362) (321,621) (2,133,832) (2,757,996) 30 June 2020 30 June 2019 $ $ Loss after income tax attributable to the owners of Melbana Energy Limited (2,157,906) (3,357,696) Weighted average number of ordinary shares used in calculating basic earnings per share 2,044,014,360 1,825,745,057 Weighted average number of ordinary shares used in calculating diluted earnings per share 2,044,014,360 1,825,745,057 Number Number Basic earnings per share Diluted earnings per share Cents Cents (0.11) (0.11) (0.18) (0.18) For financial year ended 30 June 2020 outstanding options and performance rights totalling to 108,500,000 (2019: 186,827,981) are anti-dilutive and are therefore excluded from the calculation of diluted earnings per share. Note 34. Share based payments (options and rights) An employee share plan ("Plan") has been established by the Consolidated Entity and approved by shareholders at a general meeting, whereby the Consolidated Entity may, at the discretion of the Nomination and Remuneration Committee, grant options over ordinary shares in the Company or performance rights over ordinary shares in the Company to certain key management personnel and employees of the Consolidated Entity. The options are issued for nil consideration and are granted in accordance with performance guidelines established by the Nomination and Remuneration Committee. In March 2017, 9,250,000 options were issued to employees pursuant to the Plan. In November 2017 a further 3,000,000 options were issued under the Plan to the then Managing Director and Chief Executive Officer, on the same terms as the previously issued employee options. 51 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 34. Share based payments (options and rights) (continued) In addition to options issued under the Plan, the Consolidated entity may also issue options to service providers as consideration for services provided to the Consolidated Entity. During 2018 financial year, Executive Chairman of the Company, Mr Andrew Purcell, provided a personal guarantee in connection with a loan made by a third party to the Company. As consideration for the provision of the personal guarantee, the Company issued 80,000,000 options to Mr Purcell on 13 August 2018, following shareholders' approval at a General Meeting held on 9 August 2018. The options were independently valued by external expert and the full non-cash valuation of $973,600 was booked as finance cost during 2019 financial year and measured in accordance with AASB 2. The options have an exercise price of $0.022 (2.2 cents) each. Set out below are summaries of options granted under the plan, and to service providers. 30 June 2020 Grant date Expiry date 03/11/2016 28/03/2017 23/11/2017 24/11/2017 09/08/2018 27/09/2018 21/11/2018 03/11/2019 27/09/2020 23/11/2020 27/09/2020 04/08/2020 27/03/2020 27/03/2020 Weighted average exercise price 30 June 2019 Grant date Expiry date 03/11/2016 28/03/2017 23/11/2017 24/11/2017 09/08/2018 27/09/2018 21/11/2018 03/11/2019 27/09/2020 23/11/2020 27/09/2020 04/08/2020 27/03/2020 27/03/2020 Exercise price Balance at the start of the year Granted Balance at the end of the year Forfeited $0.0650 $0.0320 $0.0180 $0.0320 $0.0220 $0.0300 $0.0300 4,000,000 8,250,000 20,000,000 3,000,000 80,000,000 62,939,202 1,875,621 180,064,823 $0.0260 - - - - - - - - - (4,000,000) (2,750,000) - - - (62,939,202) (1,875,621) (71,564,823) - 5,500,000 20,000,000 3,000,000 80,000,000 - - 108,500,000 $0.0320 $0.0220 Exercise price Balance at the start of the year Granted Balance at the end of the year Forfeited $0.0650 $0.0320 $0.0180 $0.0320 $0.0220 $0.0300 $0.0300 4,000,000 9,250,000 20,000,000 3,000,000 - - - 36,250,000 - - - - 80,000,000 62,939,202 1,875,621 144,814,823 - (1,000,000) - - - - - (1,000,000) 4,000,000 8,250,000 20,000,000 3,000,000 80,000,000 62,939,202 1,875,621 180,064,823 Weighted average exercise price $0.0279 $0.0256 $0.0320 $0.0260 Set out below are the options exercisable at the end of the financial year: Grant date Expiry date 03/11/2016 28/03/2017 23/11/2017 24/11/2017 27/09/2018 21/11/2018 03/11/2019 27/09/2020 23/11/2020 27/09/2020 27/03/2020 27/03/2020 30 June 2020 30 June 2019 Number Number - 5,500,000 20,000,000 3,000,000 - - 4,000,000 8,250,000 20,000,000 3,000,000 62,939,202 1,875,621 28,500,000 100,064,823 52 Melbana Energy Limited Notes to the consolidated financial statements 30 June 2020 Note 34. Share based payments (options and rights) (continued) The weighted average share price during the financial year was $0.00829 (2019: $0.0155). The weighted average remaining contractual life of options outstanding at the end of the financial year was 0.25 year (2019: 1 year). Set out below are summaries of performance rights granted under the plan: 30 June 2020 Grant date 10/05/2018 30 June 2019 Grant date 07/12/2015 10/05/2018 Expiry date 30/04/2021 Expiry date 29/11/2018 30/04/2021 Exercise price Balance at the start of the year Balance at the end of the year Exercised $0.0000 6,763,158 6,763,158 (6,763,158) (6,763,158) - - Exercise price Balance at the start of the year Exercised Balance at the end of the year $0.0000 $0.0000 5,333,333 6,763,158 12,096,491 (5,333,333) - (5,333,333) - 6,763,158 6,763,158 Set out below are the performance rights exercisable at the end of the financial year: Grant date Expiry date 11/05/2018 30/04/2021 30 June 2020 30 June 2019 Number Number - - 6,763,158 6,763,158 The weighted average remaining contractual life of performance rights outstanding at 30 June 2020 Nil (2019 1.84 years). 53 Melbana Energy Limited Directors' declaration 30 June 2020 In the Directors' opinion: ● ● ● ● the attached financial statements and notes, and the Remuneration report contained in the accompanying Directors' report, comply with the Corporations Act 2001, Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; the attached financial statements and notes give a true and fair view of the Consolidated Entity's financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors ___________________________ Andrew Purcell Executive Chairman 26 August 2020 54 Independent Auditor’s Report To the Members of Melbana Energy Limited Report on the audit of the financial report Opinion Collins Square, Tower 5 727 Collins Street Melbourne VIC 3008 Correspondence to: GPO Box 4736 Melbourne VIC 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au We have audited the financial report of Melbana Energy Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the year ended on that date; and b complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty related to going concern We draw attention to Note 2 in the financial statements, which indicates that the Group incurred a net loss of $2,157,906 and had net cash outflows from operating and investing activities of $1,635,805 for the year ended 30 June 2020, and as of that date, the Group had cash reserves of $1,752,263 and a net working capital position of $367,256. As stated in Note 2, these events or conditions, along with other matters as set forth in Note 2, indicate that a material uncertainty exists that may cast doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financia l report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, an d in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Th ornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms ar e not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Th ornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 55 Key audit matter How our audit addressed the key audit matter Exploration and evaluation Assets – valuation (Note 15) At 30 June 2020 the carrying value of exploration and evaluation assets was $5,252,593. In accordance with AASB 6 Exploration for and Evaluation of Mineral Resources, the Group is required to assess at each reporting date if there are any triggers for impairment which may suggest the carrying value is in excess of the recoverable value. The process undertaken by management to assess whether there are any impairment triggers in each area of interest involves an element of management judgement. This area is a key audit matter due to the significant judgement involved in determining the existence of impairment triggers. Investment in Metgasco Limited (Note 11) During the period, the Group acquired 27.81% of the ordinary shares in Metgasco Limited. The Group issued 434,582,340 ordinary shares as consideration for the acquired shares. The determination of whether significant influence exists creates a risk due to the inherent subjectivity involved in the determination. AASB 128 Investments in Associates requires investments to be accounted for under the equity method if it is deemed that the investor holds, directly or indirectly, significant influence over the investment. This area is a key audit matter due to the inherent subjectivity involved in the Group making judgements relating to the assessment of significant influence for the investment, and the accounting treatment and presentation thereon. Our procedures included, amongst others: (cid:31) Reviewing management's reconciliation of capitalised exploration and evaluation expenditure and ensuring it agrees to the general ledger; (cid:31) Evaluating the accuracy of capitalised costs by substantively testing a sample of capitalised expenditure for the period, and assessing whether the capitalisation was in line with AASB 6; (cid:31) Performing a detailed review of management's assessment of trigger events prepared in accordance with AASB 6 including tracing projects to statutory registers, exploration licenses and third party confirmations to determine whether a right of tenure existed; (cid:31) Enquiring of management regarding their intentions to carry out exploration and evaluation activity in the relevant exploration areas; (cid:31) Determining whether any data exists to suggest that the carrying value of these exploration and evaluation assets are unlikely to be recovered through development or sale; (cid:31) Assessing the accuracy of impairment recorded for the year as it pertained to explorations interests; and (cid:31) Reviewing the appropriateness of the related disclosures within the financial statements. Our procedures included, amongst others: (cid:31) Obtaining the Group’s assessment of significant influence for the investment; (cid:31) Evaluating the Group’s assessment of significant influence against the specific requirements of AASB 128, including: o Whether the Group has representation on the board of directors or equivalent governing body of the investee; o Whether the Group participates in policy-making processes of the investee; o Whether there are material transactions between the Group and the investee; o Whether there is interchange of managerial personnel between the Group and the investee; o Whether there is provision of essential technical information between the Group and the investee; and o Whether the Group is able to obtain any information from the investee other than that which is publically available; (cid:31) Assessed the asset acquisition in compliance with AASB 9 as fair value through other comprehensive income given the above considerations; and (cid:31) Reviewing the appropriateness of the related disclosures within the financial statements. 56 Information other than the financial report and auditor’s report thereon The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the financial report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from mater ial misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor’s report. Report on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in the Directors’ report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Melbana Energy Limited, for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Grant Thornton Audit Pty Ltd Chartered Accountants T S Jackman Partner – Audit & Assurance Melbourne, 2 August 2020 57 Melbana Energy Limited Shareholder information 30 June 2020 The shareholder information set out below was applicable as at 13 August 2020. Distribution of equity securities Analysis of number of equity security holders by size of holding: Number of holders of options over ordinary shares Total units % Number of holders of ordinary shares Total units % - - - - 6 6 - - - - - 28,500,000 - - - - 100% 432 1,076 1,048 2,629 1,610 122,235 3,732,373 8,404,283 105,851,041 2,198,741,480 0.01% 0.16% 0.36% 4.57% 94.90% 28,500,000 100% 6,795 2,316,851,412 100% - - 4,653 - - 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: M&A Advisory Pty Ltd National Nominees Limited Terrace Management Pty Ltd Tets Pty Ltd Mr Matthew Dean Marshall Mr Jason Meinhardt Twinkle Capital Pty Ltd Five Elements Design Pty Ltd Mr John Oldani Ms Hong Nhung Nguyen North West Six Pty Ltd Mrs Cathy Ann Bender Mr Michael Culling Ms Anita Tsang & Mr Bradley Garth Wright Mrs Danielle Gordon Pedomml Pty Ltd Mrs Susan Jane Stickland Mr David Coghill Mf Medical Pty Ltd Unquoted equity securities Options over ordinary shares 58 Ordinary shares Number held % of total shares issued 368,733,939 98,184,101 68,224,656 47,001,000 40,756,331 35,650,431 32,000,000 29,000,000 26,611,111 25,806,133 23,751,757 20,622,531 19,454,232 19,253,947 19,005,000 17,000,000 16,597,279 15,055,507 13,450,483 936,158,438 15.92 4.24 2.94 2.03 1.76 1.54 1.38 1.25 1.15 1.11 1.03 0.89 0.84 0.83 0.82 0.73 0.72 0.65 0.58 40.41 Number on issue Number of holders 28,500,000 6 Melbana Energy Limited Shareholder information 30 June 2020 The following persons hold 20% or more of unquoted equity securities (options over ordinary shares): Name Class Zenix Nominees Pty Ltd Options over ordinary shares Number held 20,000,000 Substantial holders Substantial holders in the Company, as disclosed in substantial holding notices given to the Company M&A Advisory Pty Ltd Ordinary shares Number held % of total shares issued 368,733,939 15.92 (1) Holder has notified the Company that it manages the relevant shares and therefore has a relevant interest in those shares under section 608(1)(b) or (c) of the Corporations Act Director Nomination The Company will hold its Annual General Meeting of shareholders on 19 November 2020. The Company also advises that in accordance with ASX Listing Rule 14.5 and the Company’s constitution the Closing Date for receipt of nominations for the position of Director is Thursday, 8 October 2020. Any nominations must be received in writing no later than 5.00pm (Melbourne time) on this date at the Company’s Registered Office. Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options and performance rights Options and performance rights do not carry voting rights. There are no other classes of equity securities. Current on-market buy-back There is no current on-market buy-back. 59 Melbana Energy Limited L3, 350 Collins St, Melbourne Victoria 3000 Australia Telephone: +61 (3) 8625 6000 Email: admin@melbana.com ABN 43 066 447 952 melbana.com ANNUAL REPORT 2020 

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