Nostra Terra Oil & Gas Annual Report 2015

Plain-text annual report

ANNUAL REPORT AND ACCOUNTS 2015 Contents 1 Highlights 2 Company information 3 Chairman’s Report 4 Chief Executive Officer’s Report 5 Strategic Report 6 Directors’ Report 9 Corporate Governance Report 10 Board of Directors 11 Independent Auditors’ Report 13 Consolidated Income Statement 14 Consolidated Statement of Comprehensive Income 15 Consolidated Statement of Changes in Equity 16 Company Statement of Changes in Equity 17 Consolidated Statement of Financial Position 18 Company Statement of Financial Position 19 Consolidated Statement of Cash Flows 20 Note to the Consolidated Statement of Cash Flows 21 Company Statement of Cash Flows 22 Note to the Company Statement of Cash Flows 23 Notes to the Financial Statements 48 Notes www.ntog.co.uk 1 Highlights • Revenue for the period of £594,000 • Acquired a 25% interest in the East (2014: £1,267,000) • Gross profit for the period of £385,000 before depletion, depreciation and amortisation (2014: £997,000) • 81% increase in net production to Ghazalat concession in Egypt operated by North Petroleum International Company (NPIC) • Approval of Exploration Unit for Paw Paw prospect 64,063 BOE (29,678 US, 34,385 Egypt) compared to 2014: 35,380, primarily due to expansion into Egypt • Obtained a three year extension of the $25 million lending facility until 31 January 2019 • Ewen Ainsworth joined the board as Chairman • Farm-in to Paw Paw prospect with Koch Exploration where NTOG will operate 2,440 net acres in Wyoming Post Balance Sheet Highlights • Joint venture between Nostra Terra (NTOG) and Independent Resources (IRG) announced a breach in the joint venture agreement by North Petroleum International Company (NPIC) • Raised £350,000 via a placing of new shares • Proposal to acquire 60% interest in producing assets in the Permian basin in New Mexico • Reorganisation of its share capital • Cost cutting initiative complete achieving a 40% reduction in overheads • Sale of Chisholm Trail prospect for $2.1 million Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20152 Company Information Directors Ewen Ainsworth (Non-Executive Chairman) Matt Lofgran (Chief Executive Officer) Stephen Oakes (Non-Executive Director) Secretary International Registrars Limited Registered office Finsgate 5-7 Cranwood Street London EC1V 9EE Registered number 05338258 (England and Wales) Auditor Jeffreys Henry LLP Finsgate 5-7 Cranwood Street London EC1V 9EE Nominated adviser and broker Strand Hanson Limited 26 Mount Row London W1K 3SQ Broker Cornhill Capital Limited 4th Floor, 18 St. Swithin’s Lane London EC1V 9EE Solicitors Ronaldsons LLP 55 Gower Street London WC1E 6HQ Bankers National Westminster Bank plc PO Box 712 94 Moorgate London EC2M 6XT Registrars Share Registrars Ltd The Courtyard 17 West Street Farnham Surrey GU9 7DR Website www.ntog.co.uk Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20153 Chairman’s Report The oil industry continues to wrestle with the persistently lower oil price environment. The bear market has hurt the entire sector and led to a re-evaluation of strategy by many companies. At Nostra Terra we have taken steps to act early in response to such challenging conditions, seeking to restructure and reposition the business. This has involved making some difficult decisions and we would like to thank our shareholders for their continued support, in particular for voting in favour of the consolidation and capital reorganisation at the recent Extraordinary General Meeting. This was not a proposal we made lightly, but we remain convinced it will be in the long term best interests of the Company. Our strategic goals have been twofold in repositioning Nostra Terra. First we had to ensure the Company survives this extremely difficult period and second our key aim is to deliver significant value to shareholders over the medium term. We remain confident the Company’s renewed strategic focus on the acquisition of distressed assets will yield substantial results. The success of the previous business model was reliant on modern exploration technology such as hydraulic fracturing and much higher oil prices, which allowed the Company to recover investment capital and generate a return. High initial production rates were also an important factor. However, such initial high levels of production declined significantly within a relatively short period, a feature of using hydraulic fracturing in the reservoirs targeted by the Company, which, combined with a rapid decline in the oil price, had an adverse effect on the Company’s revenue stream. The declining oil price also made it uneconomic to drill new wells to offset diminishing production. Our new strategy at Nostra Terra is predicated upon the macro-adjustment within the entire industry, caused by the decline in the price of oil. Our focus is to build a business which at $30/bbl is cash neutral and reliant on more conventional oil with lower decline rates in production. At oil prices above $30/bbl Nostra Terra will then have the internally generated funds to invest in either organic growth within its producing oil field(s) or pursue new investment opportunities. In order to identify suitable opportunities for Nostra Terra we have extended our geographical focus, with the aim of having up to two focus areas outside of the USA. Following a prolonged period of low prices, we have noted a sizeable recent increase in the quantity and caliber of oil & gas assets available for sale at distressed prices. This presents a rare opportunity for Nostra Terra to take advantage of. Now that we have repositioned the business we feel the Company is well placed to deliver its refocussed growth strategy over the coming years. The foundation of our new growth strategy is based on the recently announced cost cutting initiative, which we completed. During mid- 2015 Nostra Terra started to cut back spending in anticipation of further pressure on the oil price during the course of 2016. So far this decision has been vindicated and the Company now benefits from an overall reduction of 40% in overheads at a time when the industry remains subdued. A core component of the cost-cutting initiative has been for the Board to take a voluntary 25% pay cut. In light of ongoing weakness in the oil & gas market, which has caused significant declines in share prices across the sector, the Board strongly felt that this was an appropriate step to take. With Nostra Terra now better positioned to withstand current market conditions, albeit with a lot of work still to be done, the Board remains fully committed to securing new projects for the Company, and to create shareholder value over the medium term. As Nostra Terra delivers its new growth strategy the Company plans to bolster its team with the addition of suitably experienced and astute technical personnel. This will only become necessary as we introduce additional producing assets to the business. I would like to thank the Company’s shareholders for their continued support and the next time I write to you I hope to report meaningful progress on the Company’s strategy and on the appointment of new non-executive and/or executive management personnel. Ewen Ainsworth Chairman 29 June 2016 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20154 Chief Executive Officer’s Report As Ewen has stated in his Chairman’s Report, we are experiencing the worst market in our sector for at least thirty years. Over the last 12 months our share price has suffered as Brent declined from $56.81 at the start of the year, dropping to $27 and closed at $37.50 by the end of the year. In the face of extreme adverse conditions we have worked tirelessly on behalf of Nostra, making a number of tough choices for the long-term good of the company. This has not been easy, but I am pleased to report we are starting to reap the benefits. Overall this has been an extremely busy year for Nostra. As it became clear the industry would have to adapt to a significantly lower oil price environment, we recognized how vital it was to reposition the business. We initiated a cost cutting initiative in mid-2015, achieving an overall reduction of 40% in overheads, as recently announced. We also sought to restructure our board and management team to reflect Nostra’s needs going forward. On a personal note, I’m very happy to have welcomed Ewen as our new Chairman to the team. Since his appointment, Ewen’s input into reformulating Nostra’s strategy has been crucial and I am certain he will play an extremely important role in the Company in the years to come. Rather than simply attempt to weather the storm, we decided to take advantage of a new oil price cycle. This involved adopting a new strategic focus, seeking to acquire producing or lower risk assets at distressed prices, which Nostra could take full operational control of. We expanded our global view, looking to enter into new geographical areas outside of the United States, and sought opportunities that presented large upside potential for relatively small initial consideration. We started our new strategy through identifying an opportunity in Southern Texas with intriguing potential. We acquired a minor interest in two different prospects for a minimal amount of consideration. These had large acreage positions with scope to increase our working interest should results prove up. Ultimately we decided not to proceed with the prospect, but this marked the beginning of Nostra’s new approach. Having acquired the White Buffalo prospect in the Big Horn Basin of Wyoming in late 2014, in 2015 we signed an agreement with Koch Exploration, a subsidiary of Koch Industries, to operate the Paw Paw prospect located in the same basin. The structure of the agreement allowed Nostra Terra the ability to control a prospect with a large potential reserve. While no consideration was paid for this we have worked to create an Exploration Unit over the prospective leases along with permitting for the initial well. We were able to extend the agreements into 2016 where Nostra Terra will seek partners to participate in the prospect. During the second half of 2015 we expanded into Egypt by acquiring a 25% interest in the East Ghazalat concession in the Western Desert of Egypt. The seller agreed to finance a large portion of the acquisition leaving Nostra with a $500,000 equity investment to close the acquisition of this producing asset. Nostra and its other minority partner are currently in dispute with the operator over costs but are working with the operator to reduce operating costs in order to improve the economics on existing wells. There’s scope for further upside in development and exploration wells including the discoveries in the North Dabaa. On the financial side of the business conditions have been tough. We doubled production into the turn of 2015 and increased it by 81% by the end of the year. Revenue decreased to £594,000 primarily due to the drop of oil prices and natural production declines in wells, achieving a gross profit for the period before depletion, depreciation and amortization costs of £385,000. Our expectation had been this would put the company on a much firmer financial footing, but the sharp decline in the price of oil undid much of the good work we had completed previously. Despite this, at the end of 2015 Nostra was granted a 3-year extension to its $25 million Credit Facility with Texas Capital Bank with drawdown subject to production. This was particularly encouraging, given the number of companies whose business models failed over the period through being unable to secure refinancing terms on lending facilities. Moving into 2016 we continue to generate revenue from our existing assets, in particular Chisholm Trail, Bale Creek, and Verde. Multiple wells exist on each prospect thus creating a portfolio where the Company isn’t risked on a single well or operator. As some of these fields develop further we will look to reinvest capital in fields at an earlier stage in the cycle where further upside exists. As announced on 29 June 2016, Nostra decided to sell an interest in a Chisholm Trail prospect for $2.1 million providing the opportunity to redeploy funds to assets where we have a larger interest and more control over the pace of growth. I would like to finish by offering a personal message of thanks to our shareholders. This has been an extremely difficult period for the company. As the largest private holder of shares in Nostra I’ve suffered the effects of the falling share price alongside shareholders. However, we do live to fight another day. My fellow directors and I have made a number of extremely difficult decisions for the long term good of the company and I am confident we will turn the business around as conditions improve in the market. Our new strategy is both ambitious and built on a solid foundation and I look forward to providing more positive updates as we deliver on our objectives. Matt Lofgran Chief Operating Officer 29 June 2016 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20155 and well completion technologies, there are environmental and economic risks, as there are in any hydrocarbon region. Further information relating to risk can be found at note 20 to these accounts. On behalf of the board: M B Lofgran Director 29 June 2016 Strategic Report The directors now present their Strategic Report with the financial statements of Nostra Terra Oil and Gas Company plc (“the company”) and its subsidiaries (collectively “the group”) for the year ended 31 December 2015. Principal activity The group’s principal activity is the exploitation of hydrocarbon resources focusing at present in the US mid- continent and Egypt. Review of business, future developments, trading outlook and future strategy The results for the year and financial position of the company and the group are shown in the financial statements on pages 13 to 22, and are noted in the Chairman’s Report on page 3 and the Chief Executive Officer’s Review on page 4. Key performance indicators At this stage in the company’s development, the directors regularly monitor key performance indicators associated with managing liquid resources, namely: cash flows and bank balances; general administrative expenses, which are tightly controlled; and the level of production. The directors also monitor the increase in net production which in 2015 rose to 64,063 BOE (29,678 US, 34,385 Egypt) compared to 2014: 35,380 as noted on page 4. Key risks and uncertainties The key risk in exploration and production is the technical risk of not finding hydrocarbons when an exploration well is drilled. While the US mid-continent is a proven hydrocarbon region and is seeing resurgence through the application of new drilling Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20156 Directors’ Report The directors present their report with the financial statements of Nostra Terra Oil and Gas Company plc (“the company”) and its subsidiaries (collectively “the group”) for the year ended 31 December 2015. Directors The following directors have held office since 1 January 2015: M B Lofgran, S V Oakes , A M Blennerhassett (resigned June 2015) The following directors have held office since 24 June 2015: K E Ainsworth Kristian Ewen Ainsworth will retire at the company’s forthcoming Annual General Meeting under the company’s Articles of Association and, being eligible, offers himself for re-election. The directors’ remuneration for the year is summarised as follows: K E Ainsworth A M Blennerhassett M B Lofgran S V Oakes A B McCall Salaries £ – – 127,608 – 98,160 225,768 Fees £ 8,333 – – 24,000 – 32,333 Share-based compensation £ 3,887 – 7,033 1,758 7,033 19,711 The directors’ remuneration for the year ended 31 December 2014 is summarised as follows: A M Blennerhassett M B Lofgran S V Oakes A B McCall Salaries £ – 118,404 – 109,296 227,700 Fees £ – – 24,000 – 24,000 Share-based compensation £ – 8,035 2,009 8,035 18,079 Total £ 12,220 – 134,641 25,758 105,193 277,812 Total £ – 126,439 26,009 117,331 269,779 There were no benefit-in-kind payments during the year. More detail on the Share options issued to Directors’ during the year are disclosed within the share based payment note together with the outstanding options and warrants at the year end, please refer to note 22. At 31 December 2015, the directors’ beneficial interests in the company’s issued share capital were as follows: K E Ainsworth M B Lofgran S V Oakes No of ordinary shares of 0.1p each 180,000 4,375,976 283,333 31.12.15 31.12.14 Percentage of issued share capital 0.22 5.32 0.34 No of ordinary shares of 0.1p each – 4,375,976 283,333 Percentage of issued share capital – 7.88 0.51 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 7 Remuneration Committee and policy The Remuneration Committee takes into account both group and individual performance, market value and sector conditions in determining directors’ remuneration. The group’s policy is to pay only minimum salaries compared with peer companies in the oil and gas sector, until the group has established a good position with acreage, assets, income and cash at hand. All current salaries are without pension benefits. Substantial shareholders As reported in note 25, on 31 May 2016 the company effected a capital reorganisation. Shareholdings held by directors at the year end, quoted above, shown as at the dates as noted have been adjusted to reflect this reorganisation. The holdings below are quoted post reorganisation and reflect the effect of the resulting share reorganisation. As at 16 June 2016, the company was aware of the following interests in its issued share capital: JIM Nominees Limited TD Direct Investing Nominees (Europe) Limited Barclayshare Nominees Limited HSDL Nominees Limited Kayne Anderson Energy Fund M B Lofgran HSBC Client Holdings Nominee (UK) Limited Investor Nominees Limited Hargreaves Lansdown (Nominees) Limited No of ordinary shares of 0.1p each 9,429,885 8,511,276 8,371,768 7,669,346 5,642,867 4,375.976 3,746,541 3,338,511 2,524,713 Percentage of issued share capital 11.47 10.35 10.18 9.33 6.86 5.32 4.56 4.06 3.07 Results and dividends The loss for the year was £1,842,000, which has been allocated against reserves. No dividends will be distributed for the year ended 31 December 2015. Political and charitable contributions The group made no political or charitable contributions during the year. Events after the reporting period Refer to note 26 for details. Publication of accounts on company website The company publishes financial statements on its website. The directors are responsible for the website’s maintenance and integrity, and their responsibility also extends to the financial statements contained therein. Indemnity of officers The group may purchase and maintain, for any director or officer, insurance against any liability. The group maintains appropriate insurance cover against legal action bought against its directors and officers. Financial instruments The group does not have formal policies on interest rate risk or foreign currency risk. The group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than pounds sterling (£). The group maintains a natural hedge that minimises its foreign exchange exposure by matching foreign currency income with foreign currency costs. For the time being, the group does not consider it necessary to enter into foreign exchange contracts to manage its foreign currency risk, given the nature of its business. Listing The company’s ordinary shares have traded on London’s Alternative Investment Market since 20 July 2007. Northland Capital Partners Limited was the company’s nominated advisor and Hume Capital Securities plc was the company’s sole broker until 31 March 2016. On 31 March 2015, the company announced the appointment of Sanlam Securities UK Limited as nominated advisor and broker. On 4 March 2016, the company announced the appointment of Cornhill Capital Limited as broker. On 15 March 2016, the company announced the appointment of Strand Hanson Limited as nominated advisor and broker. The closing mid-market price at 31 December 2015, adjusted for the capital reorganisation, was 4.24p (2014: 11.68p). Going concern The Directors believe that based on the forecasts and projections they have prepared, the resources available will be sufficient for the Company and its subsidiaries to continue as a going concern for the foreseeable future when taking into account proceeds generated from production, potential asset sale(s), farm-out(s) of its oil interests and/or equity placing and/or financing facility as described more fully in note1 of the accounts. The Directors have concluded that this combination of circumstances should they not materialise represents uncertainty upon the Company’s ability to continue as a going concern. Nevertheless after making enquiries, and considering the uncertainties described above, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 8 Directors’ Report continued Statement of directors’ responsibilities in respect of the Strategic Report, the Directors’ Report and the Financial Statements The directors are responsible for preparing the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted for use in the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the company and the group and of the profit or loss of the group for that year. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business; and • follow IFRS as adopted by the European Union. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and the group and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Statement as to disclosure of information to auditors So far as the directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the group’s auditors are unaware, and each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the group’s auditors are aware of that information. Auditors In accordance with Section 485 of the Companies Act 2006, a resolution that Jeffreys Henry LLP be reappointed as auditors of the company will be put to the Annual General Meeting. On behalf of the board: M B Lofgran Director 29 June 2016 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 20159 Corporate Governance Report The board has sought to comply with a number of the provisions of the Code in so far as it considers them to be appropriate for a company of their size and nature. They make no statement of compliance with the Code overall and do not ‘explain’ in detail any aspect of the Code with which they do not comply.’ The directors recognise the importance of sound corporate governance, commensurate with the group’s size and shareholders’ interests. As the group grows, policies and procedures that reflect the FRC’s UK Corporate Governance Code will be developed. So far as is practicable and appropriate, the directors will take steps to comply with the UK Corporate Governance Code. The Board of Directors The board comprises two executive directors and two non- executive directors. It meets at least four times a year, as issues arise which require board attention. The board has a formal schedule of matters specially referred to it for decision. The directors are responsible for: • management structure and appointments; • consideration of strategy and policy; • approval of major capital investments and transactions; and • significant financing matters. The board has Audit, Remuneration and Nomination Committees, the roles and responsibilities of which are discussed below. Audit Committee The Audit Committee comprises Ewen Ainsworth as Chairman, and S V Oakes. Both have considerable and relevant financial experience. The Audit Committee has terms of reference agreed by the board and meets at least twice a year. The committee provides an opportunity for reporting by the company’s auditors, and is responsible for: • monitoring, in discussion with the auditors, the integrity of the financial statements and announcements of the company; • reviewing the company’s internal financial controls and risk management systems; and • reviewing and monitoring the external auditor’s independence, and the objectivity and effectiveness of the audit process, taking into consideration relevant UK and other professional and regulatory requirements. The Audit Committee is also responsible for making recommendations to the board to be put to shareholders for their approval in general meeting in relation to the appointment, reappointment and removal of the external auditors and to approve the external auditors’ remuneration and terms of engagement. Other responsibilities include considering annually whether there is a need for an internal audit function and making a recommendation to the board, and reviewing arrangements by which the group’s staff will be able to raise concerns about possible improprieties in matters of financial reporting or other matters related to the group. Remuneration and Nomination Committees The Remuneration and Nomination Committees, which meet at least twice a year, consist of Ewen Ainsworth as Chairman and S V Oakes. Based on the terms of reference approved by the board, the Remuneration Committee is responsible for: • determining and agreeing with the board the framework or broad policy for the remuneration of the Chief Executive Officer, the Chairman and other members it is designated to consider; • setting the remuneration for all executive directors, the Chairman and the Company Secretary; • recommending and monitoring the level and structure of remuneration for senior management; • determining targets for any performance-related pay schemes operated by the group; • determining the policy and scope of pension arrangements for each executive director; and • ensuring that contractual terms on termination and any payments made are fair to the individual and the company. The Remuneration Committee determines the terms and conditions of service of executive directors. This includes agreeing the policy for authorising claims for expenses from the Chief Executive Officer and the Chairman and, within the terms of the agreed policy, recommending the total individual remuneration package of each executive director including, where appropriate, bonuses, incentive payments and share options. The Nomination Committee is responsible for ensuring all director appointments are considered by the Committee before their formal recommendation to the board for approval. Relations with shareholders Communications with shareholders are very important and are given a priority. The company maintains a website, www.ntog.co.uk, to inter alia improve information flow to shareholders and potential investors. It contains inter alia information about the company’s activities, and annual and interim reports. Shareholders are welcome to make enquiries on any matters relating to the business and to their shareholdings. The company encourages shareholders to attend the Annual Meeting, at which they will be given the opportunity to put questions to the chairman and other members of the board. Internal financial control The board is responsible for establishing and maintaining the company’s system of internal controls and for reviewing their effectiveness. They are designed to safeguard the company’s assets and to ensure the reliability of the financial information for both internal use and external publication. The controls that include inter alia financial, operational and compliance matters and management are reviewed on an ongoing basis. A system of internal control can provide only reasonable, and not absolute, assurance that material financial irregularities will be detected or that risk of failure to achieve business objectives is eliminated. The board has considered the need for an internal audit function but because of the size and nature of its operations does not consider it necessary at this time. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 10 Board of Directors EWEN AINSWORTH Non-Executive Chairman MATT LOFGRAN Chief Executive Officer STEPHEN VAUGHAN OAKES Non-Executive Director Stephen Oakes (60) has over 35 years’ experience in financial markets and is a Fellow of the Securities Institute. He is a former Chief Executive Officer, HSBC Investment Management. Since 2003, he has worked with a number of smaller AIM and Plus Markets-quoted companies. Ewen Ainsworth (54) is a chartered management accountant and a fellow of the Institute of Petroleum who brings wide industry experience to his new role. He has worked in the industry for 27 years at various stages of the oil and gas life cycle from exploration to appraisal/development, production and de-commissioning. Starting his career in the late 1980’s at Conoco, Mr Ainsworth’s career has included Financial Controller, Financial Director and CFO roles across various public and private companies, including six years as Financial Director of Gulf Keystone Petroleum Limited until 2014. He is currently CFO of CAP Energy Plc. In his career he has been involved in companies with assets and operations across the UK, Europe, Russia, Azerbaijan, Iraq and North and West Africa. Matt Lofgran (40) has wide experience of business development in the energy, real estate and communications sectors. Prior to becoming CEO of Nostra Terra in July 2009, he was with Robson Energy, LLC, latterly as Vice President of International Business Development. In this capacity, he launched the oil and gas, field services and coal divisions, and was responsible for extending Robson Energy’s activities into Mexico. Mr Lofgran holds a Bachelor of Business Management degree from the University of Phoenix and a Global MBA from Thunderbird School of Global Management. Mr Lofgran is also a Director of Elephant Oil Limited and Atlas Oil & Gas Limited. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201511 Independent Auditors’ Report The shareholders Nostra Terra Oil and Gas Company plc We have audited the group and parent company financial statements of Nostra Terra Oil and Gas Company plc for the year ended 31 December 2015, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and parent company statements of financial position, the consolidated and parent company statements of cash flow, consolidated and company statements of changes in equity and related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition we read all financial and non-financial information in the Chairman’s statement, Chief Executive’s review, Strategic report, Directors’ report and Corporate Governance report to identify material inconsistencies with the audited financial statements, and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Basis for qualified opinion on financial statements The scope of our work was limited as a result of the following matter. As disclosed in Notes 13 and 26 a dispute has arisen in relation to the operation of the joint venture arrangements relating to the group’s 50 per cent working interest in the East Ghazalat production licence, held through Independent Resources (Egypt) Limited, and in which the group holds a 50 per cent interest (the ‘Joint Venture’). After the reporting period the Joint Venture was served with notice of default in relation to cash calls raised by North Petroleum International S.A. (“North Petroleum”) the operator of East Ghazalat. The Joint Venture has rebutted the claims from North Petroleum but the current breakdown in relations has meant that operator North Petroleum has been unwilling to furnish financial information to allow a proper determination of licence costs and an audit of licence revenues to be completed. In addition, the quantum of a vendor loan note of $2.5 million issued by the Joint Venture as partial consideration for the transaction remains subject to final determination in accordance with the sale and purchase agreement. As a consequence of the lack of access to primary accounting records we have been unable to obtain sufficient appropriate audit evidence in relation to the group and company financial statements concerning: • the carrying value of £189,619 of the group’s investments in equity-accounted joint ventures as at 31 December 2015; • the initial cost of £346,604 of the company’s investments in equity accounted joint ventures as at 31 December 2015; • the quantum of the loan note principal of $2.5 million and interest accrued theron by the Joint Venture at 31 December 2015; and • the group’s share of any profit or loss attributable to the group’s underlying interests in the East Ghazalat licence for the period from 1 July 2015 to 31 December 2015. Qualified opinion on financial statements In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements: • the financial statements give a true and fair view, of the state of the group’s and parent company’s affairs as at 31 December 2015 and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRS’s as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been properly prepared in accordance with the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201512 Independent Auditors’ Report continued Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent company, or returns adequate for audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. David Warren BA FCA SENIOR STATUTORY AUDITOR For and on behalf of Jeffreys Henry LLP, Statutory Auditor Finsgate 5-7 Cranwood Street London EC1V 9EE United Kingdom 29 June 2016 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 Consolidated Income Statement for the year ended 31 December 2015 Revenue Cost of sales Production costs Exploration and appraisal Depletion, depreciation, amortisation Total cost of sales GROSS PROFIT/(LOSS) Share based payment Administrative expenses Share of results of joint venture OPERATING LOSS Finance expense LOSS BEFORE TAX Tax (expense) recovery LOSS FOR THE YEAR Attributable to: Owners of the company Earnings per share expressed in pence per share: Continued operations Basic and diluted (pence) 13 2014 £000 1,267 (268) (2) (1,396) (1,666) (399) (19) (318) – (736) (107) 2015 £000 594 (209) – (1,700) (1,909) (1,315) (27) (689) (157) (2,188) (122) (2,310) (843) – – (2,310) (843) (2,310) (843) Notes 13 5 4 6 8 (0.069) (0.029) Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 14 Consolidated Statement of Comprehensive Income for the year ended 31 December 2015 Loss for the year Other comprehensive income: Currency translation differences 2015 £000 (2,310) 111 2014 £000 (843) (249) Total comprehensive income for the year (2,199) (1,092) Total comprehensive income attributable to: Owners of the company (2,199) (1,092) Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 15 Consolidated Statement of Changes in Equity for the year ended 31 December 2015 Share capital £000 Share premium £000 Share options reserve £000 Translation reserves Retained losses Total £000 £000 £000 As at 1 January 2014 2,776 9,991 119 74 (9,299) 3,661 Shares issued Share issue costs Foreign exchange translation Loss after tax for the year Share based payments 584 – – – – 1,166 (97) – – – – – – – 19 – – (249) – – – – – (843) – 1,750 (97) (249) (843) 19 As at 31 December 2014 3,360 11,060 138 (175) (10,142) 4,241 Shares issued Share issue costs Foreign exchange translation Loss after tax for the year Share based payments – – – – – – – – – – – – – – 27 – – 111 – – – – – (2,310) – – – 111 (2,310) 27 As at 31 December 2015 3,360 11,060 165 (64) (12,452) 2,069 Share capital is the amount subscribed for shares at nominal value. Retained loss represents the cumulative losses of the group attributable to owners of the company. Share premium represents the excess of the amount subscribed for share capital over the nominal value of those shares net of share issue expenses. Share issue expenses in the year comprise costs incurred in respect of the issue of new shares on the London Stock Exchange’s AIM market. Translation reserves arise on consolidation of the translation of the subsidiary’s balance sheet at the closing rate of exchange and its income statement at the average rate. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 16 Company Statement of Changes in Equity for the year ended 31 December 2015 Share capital £000 Share premium £000 Share options reserve £000 Retained losses Total £000 £000 As at 1 January 2014 2,776 9,991 119 (8,870) 4,016 Shares issued Share issue costs Loss after tax for the year Share based payments 584 – – – 1,166 (97) – – – – – 19 – – (1,058) – 1,750 (97) (1,058) 19 As at 31 December 2014 3,360 11,060 138 (9,928) 4,630 Shares issued Share issue costs Loss after tax for the year Share based payments – – – – – – – – – – – 27 – – (1,650) – – – (1,650) 27 As at 31 December 2015 3,360 11,060 165 (11,578) 3,007 Share capital is the amount subscribed for shares at nominal value. Retained loss represents the cumulative losses of the company attributable to owners of the company. Share premium represents the excess of the amount subscribed for share capital over the nominal value of those shares net of share issue expenses. Share issue expenses in the year comprise costs incurred in respect of the issue of new shares. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 Consolidated Statement of Financial Position 31 December 2015 ASSETS NON-CURRENT ASSETS Goodwill Other intangibles Property, plant and equipment – oil and gas assets Investment in joint venture CURRENT ASSETS Trade and other receivables Other debtors Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables Borrowings NET CURRENT ASSETS NON-CURRENT LIABILITIES Borrowings NET ASSETS EQUITY AND RESERVES Called up share capital Share premium Translation reserves Share option reserve Retained losses Notes 9 10 11 13 14 15 16 17 17 18 19 19 23 19 17 2014 £000 – 4,283 521 – 4,804 491 – 861 1,352 293 1,010 1,303 49 612 4,241 2015 £000 – 3,127 464 190 3,781 171 5 144 320 373 1,308 1,681 (1,361) 351 2,069 3,360 11,060 (64) 165 (12,452) 2,069 3,360 11,060 (175) 138 (10,142) 4,241 The financial statements were approved and authorised for issue by the Board of Directors on 29 June 2016 and were signed on its behalf by: M B Lofgran Director Company registered number: 05338258 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 18 Company Statement of Financial Position 31 December 2015 ASSETS NON-CURRENT ASSETS Fixed asset investments Investment in joint venture CURRENT ASSETS Trade and other receivables Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables NET CURRENT ASSETS NET ASSETS EQUITY AND RESERVES Called up share capital Share premium Share option reserve Retained losses Notes 12 14 15 16 18 19 23 19 2015 £000 2,836 190 3,026 14 69 83 102 102 (24) 3,007 3,360 11,060 165 (11,578) 3,007 2014 £000 4,124 – 4,124 19 552 571 65 65 506 4,630 3,360 11,060 138 (9,928) 4,630 The financial statements were approved and authorised for issue by the Board of Directors on 29 June 2016 and were signed on its behalf by: M B Lofgran Director Company registered number: 05338258 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 Consolidated Statement of Cash Flows for the year ended 31 December 2015 Notes 1 Cash flows from operating activities Cash generated/(consumed) by operations Interest paid Cash generated/(consumed) by operations Cash flows from investing activities Purchase of intangibles – new oil properties Sale/(purchases) of plant and equipment Proceeds from sale of assets Purchase of equity in joint venture investment Net cash from investing activities Cash flows from financing activities Proceeds on issue of shares New borrowing Repayment of borrowings Net cash from financing activities Effect of exchange rate changes on cash and cash equivalents Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year 14 Cash and cash equivalents at the end of the year 2015 £000 57 (115) (58) (276) (25) – (347) (648) – 1,156 (1,162) (6) (5) (717) 861 144 Represented by: Cash at bank 14 144 19 2014 £000 222 (163) 59 (2,527) (245) 295 – (2,477) 1,653 2,221 (966) 2,908 – 490 371 861 861 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 20 Note to the Consolidated Statement of Cash Flows for the year ended 31 December 2015 1. RECONCILIATION OF OPERATING LOSS TO NET CASH GENERATED FROM OPERATIONS Loss for the year Adjustments for: Depreciation of property, plant, and equipment Amortisation of intangibles Well impairment Share of results of joint venture Loss on disposal of assets Share based payment Foreign exchange loss/(gains) non-cash items Operating cash flows before movements in working capital (Decrease)/increase in finance charge provision (Increase)/decrease in receivables (Decrease)/increase in payables (Increase)/decrease in deposits and prepayments Cash generated/(consumed) by operations 2015 £000 (2,188) 103 1,026 571 157 – 27 – (304) (15) 310 34 32 57 2014 £000 (736) 127 577 – – 691 19 (521) 57 56 52 (43) – 222 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 Company Statement of Cash Flows for the year ended 31 December 2015 Cash generated/(consumed) by operations Net cash from operating activities Cash flows from investing activities Interest received Net cash from investing activities Cash flows from financing activities Inter group loan (advances) Issue of new shares Net cash from financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Represented by: Cash at bank Notes 1 14 14 2015 £000 (161) (161) – – (322) – (322) (483) 552 69 69 21 2014 £000 733 733 – – (1,864) 1,653 (211) 522 30 552 552 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 22 Note to the Company Statement of Cash Flows for the year ended 31 December 2015 1. RECONCILIATION OF OPERATING LOSS TO NET CASH GENERATED FROM OPERATIONS Loss for the year Adjustments for: Impairment of cost of investments Share of results of joint venture Share based payment Foreign exchange loss/(gain) non-cash items Operating cash flows before movements in working capital (Increase)/decrease in receivables (Decrease)/increase in payables Cash generated (consumed) by operations Notes 2015 £000 (1,650) 1,277 (157) 27 300 (203) 5 37 (161) 2014 £000 (1,058) 1,289 – 478 19 728 (13) 18 733 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 23 Notes to the Financial Statements for the year ended 31 December 2015 GENERAL INFORMATION Nostra Terra Oil and Gas Company plc (Nostra Terra) is a company incorporated in England and Wales and quoted on the AIM market of the London Stock Exchange. The address of the registered office is disclosed on the company information page of this annual report. The principal activity of the group is described in the directors’ report. 1. ACCOUNTING POLICIES Going concern The financial statements have been prepared on the assumption that the group is a going concern. When assessing the foreseeable future, the directors have looked at a period of 12 months from the date of approval of this report. The group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer’s report and Directors report. In addition, note 19 to the financial statements includes the group’s objectives, policies and processes for managing its capital; its financial risk management objectives; and its exposures to credit risk and liquidity risk. The group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the group should be able to operate within the level of its current cash resources. In addition, the group has entered into a US$25 million credit facility (current borrowing base US$1.1 million and anticipated to increase) in 2015, a £5 million financing agreement (expandable to £10 million), and a US$1 million promissory note (expandable to US$3 million) with Yorkville Advisors. After making enquiries, the directors have a reasonable expectation that the company and group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. New and amended standards adopted by the company There are no IFRS or IFRIC interpretations that are effective for the first time in this financial period that would be expected to have a material impact on the group. Standards, interpretations and amendments to published standards that are not yet effective The following new and amended IFRSs have been adopted during the year. • Annual Improvements to IFRS 2011-2013 Cycle • IFRIC interpretation 21 Levies There were no material changes in the financial statements as a result of adopting new or revised accounting standards during the year. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201524 Notes to the Financial Statements for the year ended 31 December 2015 1. ACCOUNTING POLICIES continued The following new and amended IFRSs have been adopted during the year. • Annual Improvements to IFRS 2011-2013 Cycle • IFRIC interpretation 21 Levies There were no material changes in the financial statements as a result of adopting new or revised accounting standards during the year. The Group has not yet adopted certain new standards, amendments and interpretations to existing standards, which have been published but are not yet effective. The new pronouncements are listed below: • IFRS 9 Financial Instruments (IASB effective 1 January 2018; not yet adopted by EU) • IFRS 14 Regulatory Deferral Accounts (IASB effective 1 January 2016; not yet adopted by EU) • IFRS 15 Revenue from Contracts with Customers including amendments and clarifications (IASB effective 1 January 2018; not yet adopted by EU) • IFRS 16 Leases (IASB effective 1 January 2019; not yet adopted by EU) • Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception (IASB effective date 1 January 2016; not yet adopted by EU) • Amendments to IFRS 10 and 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (IASB effective 1 January 2016; not yet adopted by EU) • Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (IASB effective 1 January 2017; not yet adopted by EU) • Amendments to IAS 7 Disclosure Initiative (IASB effective 1 January 2017; not yet adopted by EU). • Amendments to IAS 27: Equity Method in Separate Financial Statements (effective 1 January 2016) • Amendments to IAS 1 Disclosure Initiative (effective 1 January 2016) • Annual Improvements to IFRS’s: 2012 - 2014 Cycle (effective 1 January 2016) • Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation (effective 1 January 2016) • Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations (effective 1 January 2016) • Amendments to IAS 16 and 41: Bearer Plants (effective 1 January 2016) • Amendments to IAS 19: Defined Benefit Plans: Employee Contributions (effective 1 February 2015) • Annual Improvements to IFRS’s: 2010 - 2012 Cycle (effective 1 February 2015) The directors anticipate that the adoption of these standards and interpretations in future periods will have no material effect on the financial statements of the group. Basis of consolidation Where the company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial statements present the results of the company and its subsidiaries (“the group”) as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full. The consolidated financial statements incorporate the results of business combinations using the purchase method. In the statement of financial position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date control ceases. Subsidiaries The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201525 Associates An associate undertaking (“associate”) is an enterprise over whose financial and operating policies the group has the power to exercise significant influence and which is neither a subsidiary nor a joint venture of the group. The equity method of accounting for associates is adopted in the group financial statements, such that they include the group’s share of operating profit or loss, exceptional items, interest, taxation and net assets of associates (“the equity method”). In applying the equity method, account is taken of the group’s share of accumulated retained earnings and movements in reserves from the effective date on which an enterprise becomes an associate and up to the effective date of disposal. The share of associated retained earnings and reserves is generally determined from the associate’s latest interim or final financial statements. Where the group’s share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at nil. Additional losses are only recognised to the extent that the group has incurred obligations or made payments outside the course of ordinary business on behalf of the associate. Joint Venture Investment in entities which constitute a joint venture in accordance with the definition in International Accounting Standard no. 28 Investments in Associates are accounted for using the equity method, with the group’s share of profits or losses being adjusted against the original cost of the investment on an annual basis. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The group allocates goodwill to each business segment in each country in which it operates. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Property, plant and equipment Tangible non-current assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life: Plant and machinery – over 7 years The assets’ residual values and useful economic lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable value. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other (losses) or gains in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 26 Notes to the Financial Statements for the year ended 31 December 2015 1. ACCOUNTING POLICIES continued Investments Investments are stated at cost less provision for any impairment value. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of hydrocarbons and services in the ordinary course of the group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the group. Revenue is recognised when the oil and gas produced is despatched and received by the customers. Functional currency translation (i) Functional and presentation currency Items included in the financial statements of the group are measured using the currency of the primary economic environment in which the entity operates (the functional currency), which is mainly United States Dollars (US$). The financial statements are presented in Pounds Sterling (£), which is the group’s presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the presentational currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (iii) Group companies The results and financial position of all group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (a) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (b) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case (c) income and expenses are translated at the rate on the dates of the transactions); and (d) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differed from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The entity’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Operating leases Rental leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201527 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the year of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transactions costs, except as described below. Subsequent to initial recognition, non- derivative financial instruments are measured as described below. A financial instrument is recognised when the group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the group’s contractual rights to the cash flows from the financial assets expire or if the group transfers the financial assets to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e. the date that the group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the group’s obligations specified in the contract expire or are discharged or cancelled. Fair values The carrying amounts of the financial assets and liabilities such as cash and cash equivalents, receivables and payables of the group at the balance sheet date approximated their fair values, due to the relatively short-term nature of these financial instruments. The company provides financial guarantees to licensed banks for credit facilities extended to a subsidiary company. The fair value of such financial guarantees is not expected to be significantly different as the probability of the subsidiary company defaulting on the credit lines is remote. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201528 Notes to the Financial Statements for the year ended 31 December 2015 1. ACCOUNTING POLICIES continued Share-based compensation The fair value of the employee and suppliers services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting year is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. The fair value of share-based payments recognised in the statement of comprehensive income is measured by use of the Black Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted; based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The share price volatility percentage factor used in the calculation is based on management’s best estimate of future share price behaviour and is selected based on past experience, future expectations and benchmarks against peer companies in the industry. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Oil and gas assets The group applies the successful efforts method of accounting for oil and gas assets and has adopted IFRS 6 Exploration for and evaluation of mineral resources. Exploration and evaluation (“E&E”) assets Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or specific exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed. Pre-licence costs Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred. Exploration and evaluation (“E&E”) costs Costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, together with the directly related costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets. Tangible assets used in E&E activities (such as the group’s drilling rigs, seismic equipment and other property, plant and equipment used by the company’s exploration function) are classified as property, plant and equipment. However, to the extent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset. Such intangible costs include directly attributable overheads, including the depreciation of property, plant and equipment utilised in E&E activities, together with the cost of other materials consumed during the exploration and evaluation phases. E&E costs are not amortised prior to the conclusion of appraisal activities. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201529 Treatment of E&E assets at conclusion of appraisal activities Intangible E&E assets relating to each exploration licence/prospect are carried forward until the existence (or otherwise) of commercial reserves has been determined, subject to certain limitations including review for indications of impairment. If commercial reserves are discovered the carrying value, after any impairment loss of the relevant E&E assets, is then reclassified as development and production assets. If, however, commercial reserves are not found, the capitalised costs are charged to expense after conclusion of appraisal activities. Development and production assets Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads and the cost of recognising provisions for future restoration and decommissioning. Depletion, amortisation and impairment of oil and gas assets All expenditure carried within each field is amortised from the commencement of production on a unit of production basis, which is the ratio of oil and gas production in the period to the estimated quantities of commercial reserves at the end of the period plus the production in the period, on a field-by-field basis. Costs used in the unit of production calculation comprise the net book value of capitalised costs plus the estimated future field development costs to access the related commercial reserves. Changes in the estimates of commercial reserves or future field development costs are dealt with prospectively. Where there has been a change in economic conditions that indicates a possible impairment in an oil and gas asset, the recoverability of the net book value relating to that field is assessed by comparison with the estimated discounted future cash flows based on management’s expectations of future oil and gas prices and future costs. Any impairment identified is charged to the income statement as additional depletion and amortisation. Where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income statement, net of any depreciation that would have been charged since the impairment. Commercial reserves Commercial reserves are proven and probable oil and gas reserves, which are defined as the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. Critical accounting estimates and judgments The preparation of consolidated financial statements requires the group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: a) Impairment of investments Costs of investments are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates for each cash generating unit. Impairment of property, plant and equipment Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates. b) c) Recoverability of exploration and evaluation costs E&E assets are assessed for impairment when circumstances suggest that the carrying amount may exceed its recoverable value. This assessment involves judgment as to (i) the likely future commerciality of the asset and when such commerciality should be determined, and (ii) future revenues and costs pertaining to the asset in question, and the discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. d) Share-based payments Note 1 sets out the group’s accounting policy on share-based payments, specifically in relation to the share options and warrants that the company has granted. The key assumptions underlying the fair value of such share-based payments are discussed in note 22. The fair value amounts used by the group have been derived by external consultants using standard recognised valuation techniques. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201530 Notes to the Financial Statements for the year ended 31 December 2015 2. SEGMENTAL ANALYSIS In the opinion of the directors, the group has one class of business, being the exploitation of hydrocarbon resources. The group’s primary reporting format is determined by geographical segment according to the location of the hydrocarbon assets. The group’s reportable segments under IFRS 8 in the year are as follows: United Kingdom being the head office. US Mid-Continent properties at year end included the following: (i) Texas: 1% working interest in the Vintage Hills Prospect Unit located within the Giddings Field; 3% working interest in the Nesbitt Prospect Unit located within the Woodlawn Field; (ii) Colorado: 16.25% working interest in the Verde Prospect Unit; (iii) Oklahoma: 30% working interest in the Bale Creek Prospect Unit; (iv) Oklahoma: 20% interest (varied working interest) in the Chisholm Trail Project. (v) Wyoming: 100% working interest in the White Buffalo Prospect Egypt properties at year end included the following: (i) Egypt: 25% interest in the East Ghazalat concession The chief operating decision maker’s internal report is based on the location of the oil properties as disclosed below. Segment results – 2015 Revenue Operating loss before depreciation, amortisation share-based payment charges and restructuring costs: Depreciation of tangibles Amortisation of intangibles Well impairment Share of results of joint venture Share based payment Operating loss Realised exchange (loss)/gain Tax Gain (loss) before taxation Segment assets Property, plant and equipment Intangible assets Cash and cash equivalents Other assets US mid- continent 2015 £000 594 (181) (103) (1,026) (571) – – (1,881) – (122) (2,003) 464 3,127 75 352 4,018 Head office 2015 £000 – (123) – – – (157) (27) (307) – – (307) – – 69 14 83 Total 2015 £000 594 (304) (103) (1,026) (571) (157) (27) (2,188) – (122) (2,310) 464 3,127 144 523 4,101 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 3. EMPLOYEES AND DIRECTORS Directors’ fees Directors’ remuneration Social security costs 2015 £000 32 226 13 271 The average monthly number of employees (including directors) during the year was as follows: Directors 2015 Number 4 4 31 2014 £000 24 228 15 267 2014 Number 4 4 Directors’ remuneration Other than the directors, the group had no other employees. Total remuneration paid to directors during the year was as listed above. The highest paid director’s emoluments and other benefits for the years ended 31 December 2015 is as listed below: M B Lofgran 4. FINANCE INCOME/EXPENSE For the years ended 31 December: On bank balance On other receivables Finance Expense 2015 £000 129 2015 £000 – – (122) (122) 2014 £000 126 2014 £000 – – (107) (107) Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 32 Notes to the Financial Statements for the year ended 31 December 2015 5. OPERATING LOSS FOR THE YEAR The operating loss for the years ended 31 December is stated after charging/(crediting): Auditors’ remuneration (company £21,000 – 2014: £21,000) Depreciation of property, plant and equipment Amortisation of intangibles Foreign exchange differences Loss on the disposal of exploration and evaluation and oil and gas assets 2015 £000 21 103 1,026 – – The analysis of administrative expenses in the consolidated income statement by nature of expense: Directors’ remuneration Social security costs Directors’ fees Travelling and entertaining Accountancy fees Legal and professional fees Auditors’ remuneration Foreign exchange differences Other expenses 2015 £000 226 13 32 55 55 214 21 (6) 78 689 2014 £000 21 127 577 480 691 2014 £000 228 15 24 74 149 180 21 (480) 107 318 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 INCOME TAX EXPENSE 6. The tax charge on the loss for the year was as follows: Current tax: Corporation tax Overseas corporation tax/(recovery) Total Loss before tax 33 2014 £000 – – – 2014 £000 (843) 2015 £000 – – – 2015 £000 (2,310) Loss on ordinary activities before taxation multiplied by standard rate of UK corporation tax of 20% (2014: 20%) Effects of: Non-deductible expenses Other tax adjustments Foreign tax Current tax charge (462) (167) – 462 – 462 – – 167 – 167 – At 31 December 2015 the group had excess management expenses to carry forward of £1,308,750 (2014: £1,108,870) and trading losses of £2,158,000 (2014: £2,158,000). The deferred tax asset at 20% (2014: 20%) on these tax losses of £693,000 (2014: £653,000) has not been recognised due to the uncertainty of recovery. 7. LOSS OF PARENT COMPANY As permitted by Section 408 of the Companies Act 2006, the income statement of the parent company is not presented as part of these financial statements. The parent company’s loss for the financial year was £1,654,865 (2014: £1,058,124). Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 34 Notes to the Financial Statements for the year ended 31 December 2015 8. EARNINGS PER SHARE The calculation of earnings per ordinary share is based on earnings after tax and the weighted average number of ordinary shares in issue during the year. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The group had two classes of dilutive potential ordinary shares, being those share options granted to employees and suppliers where the exercise price is less than the average market price of the group’s ordinary shares during the year, and warrants granted to directors and one former adviser. Details of the adjusted earnings per share are set out below: EPS – loss Loss attributable to ordinary shareholders (£000) Weighted average number of shares Continued operations: Basic and diluted EPS – loss (pence) 2015 2014 (2,310) 3,359,587,276 (843) 2,922,053,277 (0.069) (0.029) The diluted loss per share is the same as the basic loss per share as the loss for the year has an antidilutive effect. Gross profit before depreciation, depletion and amortisation EPS on gross profit before depletion, depreciation and amortisation (pence) Reconciliation from gross loss to gross profit before depletion, depreciation and amortisation Gross (loss)/profit Add back: Depletion, depreciation and amortisation Gross profit before depreciation, depletion and amortisation 2015 £000 385 0.011 2015 £000 (1,315) 1,700 385 2014 £000 997 0.034 2014 £000 (399) 1,396 997 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 9. GOODWILL Group COST At 1 January 2014 Additions At 31 December 2014 Additions At 31 December 2015 PROVISION At 1 January 2014 Charge for the year At 31 December 2014 Charge for the year At 31 December 2015 CARRYING VALUE At 31 December 2015 At 31 December 2014 Goodwill arose on the acquisition of Nostra Terra (Overseas) Limited in 2007 and was fully impaired in 2009. 35 £000 4,211 – 4,211 – 4,211 4,211 – 4,211 – 4,211 – – Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 36 Notes to the Financial Statements for the year ended 31 December 2015 10. OTHER INTANGIBLES Group Licence £000 Exploration and evaluation assets £000 Development and production assets £000 COST At 1 January 2014 Additions Disposals Transfer to development and production assets Currency At 31 December 2014 Additions Disposals Transfer to property, plant and equipment Currency At 31 December 2015 PROVISION At 1 January 2014 Transfer to development and production assets Charge for the year Impairment Currency At 31 December 2014 Charge for the year Impairment Disposals Currency At 31 December 2015 302 12 – – 20 334 3 – – 17 354 – – – – – – – – – – – 498 947 (68) (209) 73 1,241 188 – – 61 1,490 – – – – – – – – – – – CARRYING VALUE At 31 December 2015 At 31 December 2014 354 334 1,490 1,241 3,028 1,568 (918) 209 251 4,138 80 – – 197 4,415 890 577 – (118) 81 1,430 1,026 571 – 105 3,132 1,283 2,708 Total £000 3,828 2,527 (986) – 344 5,713 271 – – 275 6,259 890 577 – (118) 81 1,430 1,026 571 – 105 3,132 3,127 4,283 The group assesses at each reporting date whether there is an indication that the intangible assets may be impaired, by considering the net present value of discounted cash flows forecasts. If an indication exists an impairment review is carried out by reference to available engineering information. At the year end, the directors are of the opinion that an impairment of £571,000 (2014: £nil) should be provided. Amortisation, impairment charges and any profit or loss on disposal of the capitalised intangible costs is included within cost of sales in the consolidated income statement. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 37 Plant & equipment – oil and gas assets £000 670 245 (247) 44 712 25 – 33 770 (181) (127) 129 (12) (191) (103) – (12) (306) 464 521 11. PROPERTY, PLANT AND EQUIPMENT Group COST At 1 January 2014 Additions Dispositions Currency At 31 December 2014 Additions Dispositions Currency At 31 December 2015 PROVISION At 1 January 2014 Charge for the year Disposals Currency At 31 December 2014 Charge for the year Disposals Currency At 31 December 2015 CARRYING VALUE At 31 December 2015 At 31 December 2014 Depreciation charges are included within cost of sales in the Consolidated Income Statement. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 38 Notes to the Financial Statements for the year ended 31 December 2015 12. FIXED ASSET INVESTMENTS Company Investment in subsidiary Loan to subsidiaries COST At 1 January 2014 Additions At 31 December 2014 Additions Reduction At 31 December 2015 PROVISION At 1 January 2014 Charge for the year At 31 December 2014 Charge for the year At 31 December 2015 CARRYING VALUE At 31 December 2015 At 31 December 2014 £000 4,409 – 4,409 – – 4,409 (4,409) – (4,409) – (4,409) – – £000 6,361 1,386 7,747 – (16) 7,731 (2,334) (1,289) (3,623) (1,277) (4,900) 2,831 4,124 Loans to participating interests £000 – – – 5 – 5 – – – – – 5 – Total £000 10,770 1,386 12,156 5 (16) 12,145 (6,743) (1,289) (7,032) (1,277) (9,309) 2,836 4,124 In the opinion of the directors, the aggregate value of the company’s investment in subsidiary undertakings is not less than the amount included in the balance sheet. See note 9 for details on impairment. The details of the subsidiaries are as set out below: Shareholding Country of Nature of Business Nostra Terra (Overseas) Limited (“NTOL”) 100% 100% New Horizon Energy 1 LLC (“NHE”) 100% Goldhawk Oil & Gas, LLC (“Goldhawk”) 100% Churchill Operating, LLC (“Churchill”) Incorporation Cyprus USA USA USA Oil and gas exploration in Ukraine (Dormant) Oil and gas exploration in USA Oil and gas exploration in USA Oil and gas exploration in USA Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 13. INVESTMENT IN JOINT VENTURE COST At 1 January 2015 Additions in year Impairment At 31 December 2015 Share of post-tax losses of equity accounted joint ventures CARRYING VALUE At 31 December 2015 39 £000 – 347 – 347 (157) 190 The group has a 50 per cent interest in Independent Resources (Egypt) Limited a company incorporated in England & Wales, whose purpose is to invest in the oil and gas exploration and production activities in the Arab Republic of Egypt. The other shareholder in Independent Resources (Egypt) Limited (the “Joint Venture”) is Independent Resources Group plc (“IRG”) a UK resident company whose shares are traded on the AIM market of the London Stock Exchange. In October 2015 the Joint Venture acquired a 50 per cent. working interest in the East Ghazalat production licence located in the Western Desert, Egypt from TransGlobe Energy Corporation through the acquisition of the entire share capital of Trans Globe (GOS) Inc. a wholly-owned subsidiary of TransGlobe Energy Corporation (“TransGlobe). In December 2015, the name of the acquired company was changed to Sahara Resources (GOS) Inc. The total consideration for the transaction was $3.5 million of which $2.5 million has been deferred as a vendor loan repayable by the Joint Venture on 30 September 2017. The loan note accrues interest at 10 per cent annum payable semi- annually. Nostra Terra and Independent Resources plc are joint and severally liable for the repayment of the loan note. The final loan note principal and semi-annual interest payable to Trans Globe thereon remain subject to final determination in accordance with completion working capital adjustment provisions in the sale and purchase agreement. At 31 December 2015 the loan note principal has been recorded based on Trans Globe’s initial assessment of working capital at completion and interest on this estimated loan note principal has been accrued up to 31 December 2015. The US dollar denominated loan liability all to TransGlobe has been retranslated at prevailing year-end exchange rates. As a non-monetary long-term asset, the consideration for acquiring the share capital of Trans Globe GOS Inc. has been recorded at the prevailing exchange rate at the time of completion of the acquisition but has not been retranslated at the prevailing year-end exchange rate. In January 2016 the Joint Venture was served with notice of default in relation to cash calls raised by North Petroleum International S.A. (“North Petroleum”) the operator of East Ghazalat. The Joint Venture has rebutted the claims from North Petroleum but the current breakdown in relations has meant that operator North Petroleum has been unwilling to furnish financial information to allow a proper determination of licence costs and an audit of licence revenues to be completed. In light of this lack of access to primary accounting records the results of the Joint Venture for the year ended 31 December 2015 reflect the investment in Sahara Resources GOS Inc. at historical cost and the loan note consideration payable to Trans Globe and the accrued costs of completing the related acquisition but do not consolidate any share of profits or losses attributable to Sahara Resources GOS Inc. underlying interests in the East Ghazalat licence for the period since 1 July 2015, the effective date of the transaction. The current liabilities of the Joint Venture at 31 December 2015 primarily reflects amounts due to Independent Resources plc in respect of costs incurred by it to third parties in relation to the acquisition by the Joint Venture of Sahara Resources GOS Inc. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 40 Notes to the Financial Statements for the year ended 31 December 2015 13. INVESTMENT IN JOINT VENTURE continued Summarised financial information in relation to the joint venture is presented below: As at 31 December Current assets Non-current assets Current liabilities Non-current liabilities Included in the above amounts are: Cash and cash equivalents Current financial liabilities (excluding trade payables) Non-current financial liabilities (excluding trade payables) Net assets (100%) Group share of net assets (50%) Year ended 31 December Revenues Total comprehensive loss (100%) Group share of total comprehensive loss (50%) Included in the above amounts are: Depreciation and amortisation Interest income Interest expense Income tax expense 14. TRADE AND OTHER RECEIVABLES Current: Prepayments and other receivables Other taxes and receivables 31 December 2015 £ 31 December 2014 £ 1 2,303,201 (266,124) (2,286,990) – (266,124) (2,286,990) (249,912) (124,956) – (313,969) (156,985) – – 36,277 – 1 – – – – – – – – – – – – – – – 2015 £000 157 14 171 Group Company 2014 £000 472 19 491 2015 £000 – 14 14 2014 £000 – 19 19 The directors consider that the carrying amount of other receivables approximates their fair value. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 15. CASH AND CASH EQUIVALENTS Bank current accounts 16. TRADE AND OTHER PAYABLES Current: Trade payables Accruals and deferred income Decommissioning liability Other taxes payables 2015 £000 144 2015 £000 230 105 29 9 373 Group Company 2014 £000 861 2015 £000 69 Group Company 2014 £000 185 74 24 10 293 2015 £000 – 102 – – 102 41 2014 £000 552 2014 £000 – 65 – – 65 Trade payables and accruals principally comprise amounts outstanding for trade purchases and on-going expenses. The directors consider that the carrying amount of trade and other payables approximates their fair value. 17. FINANCIAL LIABILITIES – BORROWINGS Maturity of the borrowings is as follows: Current: Repayable within one year: Loan notes Repayable after one year: Loan notes 2015 £000 1,308 351 1,659 Group 2014 £000 1,010 612 1,622 Company 2015 £000 2014 £000 – – – – – – The group has entered into a US$25 million credit facility (current borrowing base US$1.2 million) with Texas Capital Bank, a £5 million financing agreement (expandable to £10 million), and a US$1 million promissory note (expandable to US$3 million) with Yorkville Advisors. 18. CALLED UP SHARE CAPITAL Authorised: Number: Class: 3,360 million (2014 – 3,360 million) Ordinary Allotted, called up and fully paid: Number: 3,359,578,276 / 3,359,578,276 Class: Ordinary Nominal value: 0.1p Nominal value: 0.1p 2015 £000 3,360 2015 £000 3,360 2014 £000 3,360 2014 £000 3,360 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 42 Notes to the Financial Statements for the year ended 31 December 2015 19. RESERVES Group At 1 January 2014 Shares issued in the year Share issue cost Loss for the year Foreign exchange translation At 31 December 2014 Shares issued in the year Share issue cost Loss for the year Foreign exchange translation At 31 December 2015 Company At 1 January 2014 Shares issued in the year Share issue cost Loss for the year At 31 December 2014 Shares issued in the year Share issue cost Loss for the year At 31 December 2015 Translation reserve £000 74 – – – (249) (175) – – – 111 (64) Retained losses £000 (9,299) – – (843) – (10,142) – – (2,310) – (12,452) Retained losses £000 (8,870) – – (1,058) (9,928) – – (1,650) (11,578) Share premium £000 9,991 1,166 (97) – – 11,060 – – – – 11,060 Share premium £000 9,991 1,166 (97) – 11,060 – – – 11,060 Total £000 766 1,166 (97) (843) (249) 743 – – (2,310) 111 (1,456) Total £000 1,121 1,166 (97) (1,058) 1,132 – – (1,650) (518) Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 43 20. RISK AND SENSITIVITY ANALYSIS The group’s activities expose it to a variety of financial risks: interest rate risk, liquidity risk, foreign currency risk, capital risk and credit risk. The group’s activities also expose it to non-financial risks: market, legal and environment risk. The group’s overall risk management programme focuses on unpredictability and seeks to minimise the potential adverse effects on the group’s financial performance. The board, on a regular basis, reviews key risks and, where appropriate, actions are taken to mitigate the key risks identified. Capital risk The group’s objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Market risk The group also faces risks in conducting operations in US mid-continent, which include but are not limited to: • Fluctuations in the global economy could disrupt the group’s ability to operate its business in the US Mid-Continent and could discourage foreign and local investment and spending, which could adversely affect its production. Environmental risks The group faces environmental risks in conducting operations in the US Mid-Continent which include but are not limited to: • If the group is found not to be in compliance with applicable laws or regulations, it could be exposed to additional costs, which might hinder the group’s ability to operate its business. Credit risk The group’s principal financial assets are bank balances and cash, trade and other receivables. The group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Foreign currency risk The group does not have formal policies on interest rate risk or foreign currency risk. The group reports its results in Pounds Sterling. A significant share of the exploration and development costs and the local operating costs are in United States Dollars. Any change in the relative exchange rates between Pounds Sterling and United States Dollars could positively or negatively affect the group’s results. The group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Pounds Sterling. The group maintains a natural hedge that minimises the foreign exchange exposure by matching foreign currency income with foreign currency costs. The group does not consider it necessary to enter into foreign exchange contracts in managing its foreign exchange risk resulting from cash flows from transactions denominated in foreign currency, given the nature of the business for the time being. The foreign exchange rate affecting the group is as follows: Group Income statement Balance sheet United States Dollars (US$) 2015 £ 0.6544 2014 £ 0.6072 2015 £ 0.6741 2014 £ 0.6437 Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 44 Notes to the Financial Statements for the year ended 31 December 2015 20. RISK AND SENSITIVITY ANALYSIS continued Volatility of crude oil prices A material part of the group’s revenue will be derived from the sale of oil that it expects to produce. A substantial or extended decline in prices for crude oil and refined products could adversely affect the group’s revenues, cash flows, profitability and ability to finance its planned capital expenditure. The movement of crude oil prices is shown below: Per barrel – US$ Per barrel – £ 2015 37.19 25.07 2014 59.29 38.16 Liquidity risk The group expects to fund its exploration and development programme, as well as its administrative and operating expenses throughout 2015, principally using existing working capital and expected proceeds from the sale of future crude oil production. The group had a bank balance of approximately £232,000 at 31 December 2015. 21. FINANCIAL COMMITMENTS Operating lease commitments There are no significant operating lease obligations at the year end. Capital commitments The group had no material capital commitments at the year end. 22. RELATED PARTY TRANSACTIONS Group No related party transactions. Company During the year, the company advanced loans to its subsidiaries. The details of the transactions and the amount owed by the subsidiaries at the year-end were: New Horizon Energy 1 LLC Goldhawk Oil & Gas, LLC Churchill Operating, LLC Nostra Terra (Overseas) Limited Independent Resources (Egypt) Ltd Totals Balance 2015 £000 7,413 860 – 7 5 8,285 Loan advance/ repayment £000 538 – – – 5 543 Balance 2014 £000 6,880 860 – 7 – 7,747 Loan advance/ repayment £000 1,341 45 – – – 1,386 The intercompany loans are unsecured and interest-free. During the year fees amounting to £16,667 were paid to Discovery Energy Limited (a company controlled by Kristian Ewen Ainsworth) for the services of Kristian Ewen Ainsworth. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 45 23. SHARE-BASED PAYMENTS The group has a share-ownership compensation scheme for senior executives of the group whereby senior executives may be granted options to purchase ordinary shares in company. The group has previously issued warrants to senior executives as a welcome incentive and additionally during the year issued warrants as detailed below to third parties as consideration for their services. A share based payment charge of £nil (2014: £19,097) was expensed during the year. The details of options and warrants are as follows: Date of Grant At 31.12.14 Granted Exercised Forfeits At 31.12.15 Exercise Exercise/vesting date To From price Warrants 22/06/2010 28/07/2014 24/06/2015 Options 25/01/2012 19/07/2012 29/10/2014 10,000,000 10,000,000 – – – 50,000,000 38,000,000 120,000,000 – – – 90,000,000 – – – – – – (10,000,000) – – – 10,000,000 50,000,000 – (100,000,000) – 38,000,000 20,000,000 90,000,000 0.52 0.29 0.18 0.41 0.47 0.40 22/06/2010 28/07/2014 24/06/2015 21/06/2015 28/09/2019 24/06/2020 25/01/2012 19/07/2012 29/10/2014 25/01/2017 19/07/2017 28/10/2024 The total options and warrants outstanding at 31 December 2015 and 31 December 2014 are as follows: Total at 31.12.15 208,000,000 Total at 31.12.14 168,000,000 The numbers of options outstanding to the directors at the year end were as follows: Director M B Lofgran S V Oakes Totals Other – third party Warrants Options Total 2015 – – – – 2014 – – 10,000,000 10,000,000 2015 – – – – 2014 – – 2015 54,000,000 16,000,000 2014 54,000,000 16,000,000 – 148,000,000 158,000,000 – – 10,000,000 Options and warrants issued during the year: On 28 July 2014, 10,000,000 warrants were issued to a supplier for services provided, exercisable at 0.29p per share on or before 27 July 2019. The warrants will vest once the services have been provided. On 29 October 2014, 90,000,000 options were issued to the group’s directors, exercisable at 0.4p per share on or before 28/10/2014. 33,750,000 of the options vested on the date of grant, 22,500,00 of the options vest on the later of the 12 month anniversary of the date hereof and the date the first well is spudded on the White Buffalo Project and the final 33,750,000 options vest on the later of the 12 month anniversary of the date hereof and the date that the mid-market price per share as listed on AIM closes above 1 pence for 10 consecutive trading days. On 23 June 2015 a total of 50,000,000 warrants were issued to Kristian Ewen Ainsworth (16,666,666 options issued) and to Discovery Energy Limited, a company controlled by Kristian Ewen Ainsworth (33,333,334 options issued) exercisable at 0.1754p on or before 23 June 2020. Half of all warrants issued in this round vest 12 months from the issue date, with the remaining half vesting 24 months from the issue date. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 46 Notes to the Financial Statements for the year ended 31 December 2015 23. SHARE-BASED PAYMENTS continued The estimated fair value of the warrants issued during the year was calculated by applying the Black-Scholes option pricing model. Expected volatility was originally stated at 30%. This has been revised to 50% because the volatility over the past year has been used rather than the past 5 years. The directors consider this is more appropriate due to a significant share price drop in 2008 which is attributable to a one-off event where work stopped during the opening of a well in Ukraine. The assumptions used in the calculation were as follows: Share price at grant date Exercise price Option life in years Risk free rate Expected volatility Expected dividend yield Fair value of option/warrant 23 June 2015 0.16p 0.18p 5 years 1% 50% 0% 0.07p 28 October 2014 0.265p 0.40p 3.5 years 1.5% 50% 0% 0.045p 28 July 2014 0.31p 0.29p 3.5 years 1.5% 50% 0% 0.024p 22 June 2010 0.47p 0.52p 5 years 3.5% 10% 0% 0p 24. CONTINGENT LIABILITIES AND GUARANTEES The group has no contingent liabilities in respect of legal claims arising from the ordinary course of business and it is not anticipated that any material liabilities will arise from contingent liabilities other than those provided for. 25. ULTIMATE CONTROLLING PARTY The company is quoted on the AIM market of the London Stock Exchange. At the date of the annual report there was no one controlling party. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015 47 26. EVENTS AFTER THE REPORTING PERIOD On 25 January 2016, Nostra Terra and Independent Resources plc (IRG), together joint venture (JV), announced that North Petroleum International Company (NPIC) was in substantial breach of the joint operating agreement between JV and NPIC which governs the East Ghazalat Concession in Egypt. The JV has prepared and served a full and detailed Dispute Notice as required by the joint operating agreement. The agreement provides for arbitration in London under UK Law if the dispute cannot be resolved. On 4 March 2016, Nostra Terra issued 350,000,000 new ordinary shares at 0.10 pence per share. The issuance raised gross proceeds of £350,000 and Nostra Terra intends to use the net proceeds to strengthen its balance sheet, while seeking additional acquisitions. On 31 May 2016 in General Meeting the company passed resolutions to effect a capital reorganization. The Capital Reorganisation comprises a sub-division of shares that created two classes of shares: subdivided shares with a nominal value of 0.002p (“Subdivided Shares”) and deferred shares with a nominal value of 0.098p (“Deferred Shares”) (the “Subdivision”) followed by a consolidation of every 50 Subdivided Shares into one new ordinary share of 0.1 pence (“Consolidated Share”) (the “Consolidation”). Subject to the provisions of the Companies Act 2006, the Deferred Shares may then be cancelled by the Company; or may be bought back by the Company for £1 and then cancelled as permitted under the amended articles. The Deferred Shares are not be quoted and are required to be issued in order for the aggregate par value of the shares, once sub-divided and consolidated, to remain at 0.1p. At the same time an additional 9 shares were issued so that the total number of shares in issue were 4,110,347,700 at the time of the Subdivision and Consolidation ensuring the number of shares in issue was exactly divisible by 50. On 29 June 2016 the Company announced the acceptance of an offer for its 20 per cent interest in the prospect operated by Ward Petroleum Corporation in the Chisholm Trail, Oklahoma, for approximately US$ 2.1 million net. The sale is anticipated to close no later than 17 August 2016. Nostra Terra Oil and Gas Company plc Annual Report and Accounts 201548 Notes Nostra Terra Oil and Gas Company plc Annual Report and Accounts 2015Nostra Terra Oil and Gas Company plc Finsgate 5-7 Cranwood Street London EC1V 9EE www.ntog.co.uk

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