More annual reports from Pennpetro Energy Plc:
2023 Report10166359 (England and Wales) PENNPETRO ENERGY PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 PENNPETRO ENERGY PLC Annual Report & Financial Statements For the year ended 31 December 2019 CONTENTS Company Information Chairman’s Statement Executive Director’s Statement Operations Report Financial Report Strategic Report Directors’ Report Directors’ Information Statement of Directors’ Responsibilities Corporate Governance Report Directors’ Remuneration Report Audit Committee Report Report of the Independent Auditor Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statements of Changes in Equity Company Statements of Changes in Equity Consolidated Statements of Cash Flows Company Statements of Cash Flows Notes to the Financial Statements 1 Page 2 3 4 7 9 10 15 18 20 21 23 26 28 33 34 35 36 37 38 39 40 PENNPETRO ENERGY PLC Annual Report & Financial Statements For the year ended 31 December 2019 COMPANY INFORMATION Directors Secretary Keith Edelman (Non-Executive Chairman) Olof Nils Rapp (Senior Non-Executive Director) Thomas Evans (Executive Director) Philip Nash (Non-Executive Director) David Middleburgh (MA Law Trinity Hall Cambridge) FHF Corporate Finance Limited Technical Advisor Eur. Ing. Dr. Michael Smith, FIMMM, C.Eng. Registered Office Legal Advisors 1/88 Whitfield Street London W1T 4EZ UK Legal Advisers Birketts LLP 22 Station Road Suite 975 Cambridge CB1 2JD UK US Legal Advisers Walne Law, PLLC 4900 Woodway Houston, Texas TX 77056 USA Fladgate LLP 16 Great Queen Street London WC2B 5DG UK Porter Hedges LLP 1000 Main Street, 36th Fl. Houston, Texas TX 77002 USA CMS Cameron McKenna Nabarro Olswang LLP Cannon Place 78 Cannon Street London EC4N 6AF UK Crowe U.K. LLP Statutory Auditor St Bride's House 10 Salisbury Square London EC4Y 8EH Computershare Investor Services plc The Pavilions Bridgewater Road Bristol BS13 8AE Instinctif Partners 65 Gresham Street London EC2V 7QN Independent Auditor Registrars Communications Registered Number 10166359 2 PENNPETRO ENERGY PLC CHAIRMAN’S STATEMENT Annual Report & Financial Statements For the year ended 31 December 2019 I am pleased to present the annual results for Pennpetro Energy PLC (“Pennpetro”) for the year ended 31 December 2019. As was reported last year, in line with the Company’s strategy to grow its interests in the petroleum sector in the USA Pennpetro USA Corp., (“Pennpetro USA”) was incorporated as an acquisition vehicle to pursue the opportunities that were being brought to the Company. Pennpetro USA is headquartered in Houston, Texas and has been examining various complimentary asset opportunities, not only in the South Texas area but we also examined assets that BP were looking to release in their Lower 48 sale and in particular the Scoop assets in Oklahoma. Ultimately, we decided not to pursue any of these opportunities. However, with relationships having been developed with excellent oil teams in Houston, we have been concentrating on central upper Gulf Coast with a number of opportunities being presented. Due to rationalisation on holding interests to streamline accounting procedure so as not to have to undergo duplication, Nobel UK’s US-based subsidiaries have been transferred to Pennpetro USA, our direct US subsidiary, which now owns the portfolio of leasehold petroleum mineral interests centred on the City of Gonzales, in southeast Texas, comprising the undeveloped central portion of the Gonzales Oil Field. The petroleum assets include approximately 1,000 leases covering 2,500 acres of land and contain proven oil condensates. The original Competent Persons Report (“CPR”) prepared in advance of the acquisition estimated that, as a result of the acquisition, Pennpetro Group would have a Working Interest in the portfolio of petroleum mineral leases of 2,000 MBBL of oil and 1,000 MMcf of gas. Most recently, Nobel has again increased its working interest in the portfolio of petroleum interests from 75% to 100%, thereby its Working Interest is now over 4,000 MBBL of oil and 2,000 MMcf of gas. The most recent CPR prepared in December 2017, estimated that the Group’s then 50% working interest basis undiscounted Net Revenue Interest in the Gonzales petroleum leases amounted to $62 million; with the recent increase to a 100% Working Interest and further undiscounted Net Revenue Interest, this has now increased to over $120 million. Moving on to our oil assets, our US-operating teams concentrated on the development of the Buda formation which was encountered during the drilling of our initial well, and as previously advised, was significant in providing drill proven reserves over our lease holdings. During 2019, our US operations encountered electricity delivery issues due to redevelopment work required for the City of Gonzales electrical grid system. This resulted in delays and several stop- starts to our operations. We successfully replaced damaged jet pumping units and ancillary power units and resumed pumping from the well in the latter part of 2019. In April 2020, the Covid-19 pandemic caused us to put our operations in Gonzales on hold. We continue to monitor the situation in Gonzales and whilst there is still a degree of uncertainty, with recent coronavirus issues, we plan to re-enter the completed horizontal 3,300-foot lateral extension portion of the initial well COG#1, with a focus on pumping from reservoirs in the Austin Chalk formation. Our aims for the second half of 2020 are to recommence operations, move into commercial production and also plan for a second horizontal well. In addition, the Company recognising the global impact of environmental concerns, has instigated due diligence with regard to expanding its experiences and core competencies within the fossil environment and petroleum drilling to specific green energy initiatives securitised with US intellectual property filings to be expanded internationally. We remain confident in our petroleum assets, our US operations and the Board, to continue to build upon what has been a very busy year for the Group. Keith Edelman Non-Executive Director, Chairman 30 June 2020 3 PENNPETRO ENERGY PLC EXECUTIVE DIRECTOR’S STATEMENT Annual Report & Financial Statements For the year ended 31 December 2019 Pennpetro’s intention is to become an active independent North American development production company. The key elements of Pennpetro’s strategy for achieving this goal are: • The creation of value through production development success and operational strengths, commencing with the Group's City of Gonzales Lease (“COGLA”) assets. • Focusing on commercialisation and monetisation of oil and gas discoveries, and potentially utilising cash flows from initial projects to fund the acquisition or development of future projects. • Active asset portfolio management. • Positioning the Company as a competent partner of choice to maximise opportunities and value throughout the E&P lifecycle. • Asset acquisitions of producing hydrocarbons and suitable green energy technologies. Our focus during 2019 was to continue to develop our proven reserve base at our licences in Gonzalez. According to the Group's Competent Person's Report ("CPR"), prepared in December 2017, Pennpetro had a Working Interest in 2,000 Mbbl of oil and 1,000 MMcf of gas across its Gonzalez leases. Most recently, Nobel has increased its working interest in the portfolio of petroleum interests from 75% to 100%, thereby its Working Interest is now over 4,000 MBBL of oil and 2,000 MMcf of gas resulting in a substantive uplift in our valuation metric. The low oil price environment since mid-2014 presented the opportunity to acquire leases in our core areas of focus, most notably the prolific Austin Chalk and Eagleford Shale in South Texas. To this, we have been able to add additional reserves from the Buda Formation from the drilling of an initial horizontal well, which as prior reported we have now completed with the operator having advised the Texas Railroad Commission, the local authority, that the well is designated as a discovery and commercial unit. Commercial quantities of test hydrocarbons have been sold from this well. The submersible jet pumping unit to the well required significant remedial work as the unit supplied by the vendor was found to have certain issues with regard to the deliverability’s of electrical input through the provided electrical circuit boards resulting in operational impairment. This work unfortunately caused significant delays to the Buda oil recovery operations, as the well was required to be suspended on a number of occasions. Having regard that the Buda oil formation water resulting from prior extensive flooding would need some time to be pumped out and regain pressure thereby recommencing hydrocarbon deliverability from that reservoir, it was decided that as the Buda operations had achieved the important positive result of confirming that this reservoir was now drill confirmed to be active over the acreage and a confirmed secondary recovery reserve, that it was time to clean out and re-enter our initial objective, the Austin Chalk formation which we had drilled out to 3,300 feet horizontally and which had tested positive for both oil and gas recovery. The Austin Chalk formation was drilled out at approximately 7,200 feet sub-surface, whereas the Buda was intersected at 8,500 feet sub-surface. This will require that we case-off the lower Buda formation until needed to deplete in the future and initiate a work-over rig operation to re-enter and clean out the horizontally drilled formation leg to initiate hydrocarbon recovery from this proven oil interval. 4 PENNPETRO ENERGY PLC EXECUTIVE DIRECTOR’S STATEMENT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 The wells we are drilling and plan to drill are economic at oil prices sub US$30/bbl; record production rates have been reported as the horizontal laterals are extended and the amount of pay in each well has increased; drilling and completion costs have been significantly reduced; and initial decline rates during the first 12-18 months of production are lower than those in other US plays. Over the last two years, we have taken advantage of depressed market conditions to increase our exposure to these areas. West Texas Intermediate (“WTI”) averaged US$56.99/bbl during 2019, $7 per barrel lower than in 2018. The value of WTI as at 29 June 2020 was US$39.64/bbl. (source: Bloomberg Markets). Operations In terms of our operations, our focus has been on completing our initial horizontal well and organizing the permitting of our second targeted horizontal well situated to the north of COG#1-H. Our operator has filed formal completion certificates with the Texas Railroad Commission confirming that the COG#1-H well is being completed as a producer. As prior stated we will begin Austin Chalk oil operations once the process of pump water removal from the lower reservoirs is completed – an operation which we have now decided to complete with the lower formation to be cased-off and to re-enter and take to hydrocarbon production the upper Austin Chalk. Financially, the Company used 2019 to further lay the foundations for future revenue generation. During late 2019, there was a sustained pull-back in the price of WTI occasioned by directives lead by the President of the USA; throughout 2019, increases in U.S. petroleum production put downward pressure on crude oil prices. In addition, the production increases likely limited the effect on prices from the attack on Saudi Arabia, production cut announcements from the Organization of the Petroleum Exporting Countries (OPEC), and U.S. sanctions on Iran and Venezuela that limited crude oil exports from those countries. Outside the United States, crude oil production from major producers such as Saudi Arabia, Venezuela, and Iran declined in 2019. EIA expects that total OPEC crude oil production averaged 29.8 million b/d in 2019, a decline from the 2018 average of 32.0 million b/d. U.S. crude oil imports from OPEC countries were at their lowest level in several decades. To continue limiting excess crude oil supply, on December 7, 2019, OPEC+ (OPEC plus 10 other nations such as Russia, Mexico, and Kazakhstan) announced they were deepening the production cuts originally announced in December 2018. 5 PENNPETRO ENERGY PLC EXECUTIVE DIRECTOR’S STATEMENT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 During early 2020 the oil price was severally antagonised by the emergence of the Covid-19 world- wide pandemic, leading to the most unsettled oil environment for many years. However, recently due to both the US shale industry being severally impacted by the oil price and re-emergence of a combined consensus at OPEC, there has been a re-emergence of price stability. In this stabilised oil price environment, Pennpetro has emerged from the oil vicissitudes as a low-cost, asset-backed US onshore oil and gas business. Subject to oil prices, market conditions and sentiment, I remain confident that we can deliver our strategy by not only acquiring leases in active and producing US onshore plays and proving up the reserves by drilling new wells, but also by our new strategic acquisition focus on producing assets and directive into green energy initiatives. This platform is one that has, at its core, the active management of all types of risk associated with the oil and gas industry. Broadly speaking development risk is managed by focusing on proven formations; execution risk is managed by participating in drilling activities with solid experienced industry personnel, which we have in Houston who have an extensive history in South Texas petroleum activities, as well as our operations offsetting those of major industry players, such as EOG Resources, Inc., a multi-billion dollar Goliath; individual well risk is managed by building a diversified portfolio of leases and wells; meanwhile oil price risk is managed by focusing on areas that require relatively low oil prices to breakeven and ensuring our cost base, capital commitments and financing costs remain low, manageable and flexible. Our asset acquisition strategies target only producing assets and applying proven horizontal technologies to conventional reserves from a firm productive foundation. This initiative is being driven through our Houston technical office with a number of asset opportunities having been investigated, and now with the new era post Covid-19 upon us, we expect further new opportunities. Pennpetro’s Board currently comprises four Directors, who collectively have extensive international experience and a proven track record in investment, corporate finance and business acquisition, operation and development and are well placed to implement the Company's business objectives and strategy highly active plays. We believe the Company’s Board and US management team is strong in terms of having the right mix of industry expertise covering all key areas of the business, including lease acquisition, geology, engineering, and finance. Outlook In line with our strategy, all our operations are in highly active plays where the economics of drilling and producing remain attractive at sub-US$30 oil prices. This highlights the success we have had in taking advantage of the prior industry downturn to accelerate the positioning of our South Texas leasehold position in favour of the Austin Chalk and Eagleford Shale. With a strategic foothold in these prolific, low cost plays established and a proven management team in place, we will look to further expand our position in this US onshore sweet spot, as and when management considers it most advantageous to do so. For 2020, our main objectives are to build upon the initiative that commenced with the completion of our initial well, COG#1-H, and to further acquire additional land leases and to progress the permitting and horizontal development of our second objective well. I look forward to providing updates on our progress in the year ahead. Finally, I would like to thank the Board, management team and all our advisers for their hard work over the last twelve months and also to our shareholders for their continued support. Thomas Evans Executive Director 30 June 2020 6 PENNPETRO ENERGY PLC OPERATIONS REPORT Annual Report & Financial Statements For the year ended 31 December 2019 Summary Nobel Petroleum USA, Inc., has operational teams on the ground working from its offices in the City of Gonzales. During the period, one new horizontal well in which the Group has an interest commenced completion activity. The Group is planning to initiate an encompassing 3D seismic survey in 2020 with Dawson Geophysical Company to complement its comprehensive well logs geological analysis, together with an enhanced programme of additional new petroleum leasing contiguous to the area, with proposed planning to provide a further number of permitted drilling locations by year end. In addition, the Company’s recently formed corporate entity, Pennpetro USA Corp, Inc., through its highly regarded Houston based technical teams, has begun to examine a number of asset opportunities encompassing producing hydrocarbons with offsetting strategic leasehold interests capable of both additional infill and expansionary drilling locations, which has been amplified by the new era deigned by the global Covid-19 virus pandemic. SOUTH TEXAS The Company, through its indirect wholly-owned subsidiary, Nobel Petroleum USA, Inc., holds interests in acreage within active oil and gas plays within the County of Gonzales, State of Texas: The Austin Chalk, and Eagleford Shale horizontal development and vertical development of the Buda formation. Nobel Petroleum USA, Inc. has observed an increase in the value of its interests within its project acreage, due in part to uplifting its active equity interests and increased consolidation of its acreage positions. Austin Chalk The play covers an extensive area with over a million acres yet to be developed and runs all the way from the Pearsale Field south of Gonzales to the giant Giddings Oil Field, the largest oilfield found in Texas in the past 50 years to the north of Gonzales, and further north onto the North Rayou Jack Field. Recently, this play has extended into western Louisiana with a number of major players including EOR Resources and Marathon acquiring strong acreage positions. The Austin Chalk overlays the oil rich Eagleford Shale, with both formations capable of interacting with each other, and is a low permeability fractured reservoir that has been the target for horizontal drilling since the mid-1980s and consists of interbedded chalks, volcanic ash and marls. It is located at drill depths from 7,000 to 8,000 feet. It can be a liquids-rich play, yielding high volumes of oil and condensate. Initial production rates can range over 1,000 bopd with ultimate reserves exceeding 500 MBO per well. • EOG Resources Inc., continued to delineate the South Texas Austin Chalk, completing wells in Gonzales County, with lateral completions out to 5,500 feet gross production of 1,815 bopd / 2,485 boed. Eagleford Shale The Eagle Ford continues to prove itself as a world-class crude oil formation having produced in excess of 2.9 billion barrels of crude oil and condensate. This play is classified as a petroleum system in that it is a self-sourced reservoir with seals. Migration of Eagleford hydrocarbons was primarily along bedding planes during the expulsion phase. Absent of traps, hydrocarbons migrated up-dip or north where vertical natural fractures were encountered. These natural fractures were associated with the regional fault trends. Here, the hydrocarbons migrated into the extensively fractured Austin Chalk. Initial production rates with laterals can exceed 1,000 bopd. • According to EOG Resources Inc., its South Texas Eagle Ford remained one of the most active area of the company during 2019. 7 PENNPETRO ENERGY PLC OPERATIONS REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Buda Formation The Buda is a biomicritic limestone lying below the Eagleford Shale and above the Del Rio Shale. There has been an increase in the focus on, and the development of, the Buda formation by a number of US operators in South Texas, with a number of horizontal wells having been completed. As previously identified, while the Buda has always been acknowledged as a resource play in South Texas, it sits at the bottom of our drilling prognosis, as it can be drilled as a separate vertical completion and added to our overall horizontal programme. Furthermore, its unit spacing can be brought significantly down to 40 acres, thereby fulfilling a separate in-fill operation alongside our horizontal drilling focus. Thomas Evans Executive Director 30 June 2020 8 PENNPETRO ENERGY PLC FINANCIAL REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The financial results for the group for the year ended 31 December 2019 are presented below: The financial results for the year ended 31 December 2019 show a loss after tax of $1,668,410 (2018: loss $788,630). The majority of the cost contributing to the Group’s loss for the year included legal and professional fees, directors’ emoluments and interest charges, which were in line with the Board’s expectations. The Group’s borrowings at 31 December 2019 were $6,078,992 (2018: $5,863,863) and included a loan balance outstanding of $2,417,946 which was converted into shares at a price of £0.50 per share after the year end. In addition, post year-end the repayment date for the loan facility with Petroquest Energy Limited was extended a further year to 31 December 2021. The Group had cash balances at 31 December 2019 of $8,384 (2018: $Nil) and short-term investments of $60,001 (2018: $166,367). The year on year decrease in cash and short-term investments was primarily a result of cash used in operating activities and development expenditure. As at 31 December 2019, the Group had $1.1m (2018 $1.1m) still available to draw under its loan facility of $5m with Petroquest Energy Limited. On 15 February 2019, the Company issued 1,433,702 ordinary shares at a price of £0.55 per share, raising gross proceeds of £788,536. In addition, the Group had a receivables balance at 31 December 2019 of $356,928 (2018: $523,482). The year on year decrease principally related to the reclassification of amounts owed by former participants to Intangible Drilling assets, following their exits from the Gonzales Project. Additions of $85,566 were capitalised in property, plant and equipment during 2019 on the Petroleum mineral leases. As at 31 December 2019, total property, plant and equipment held by the Group was $1,362,734 (2018: $1,279,914). Following additions of $184,963, cumulative Drilling-related expenditure which has been capitalised in intangible assets was $4,166,737 at 31 December 2019 (2018: $3,842,241). The increase in capitalised Drilling-related expenditure included $139,533 of expenditure that was re- categorised from receivables, as a result of the former participants’ departure from the Gonzales Project. Philip Nash Non-Executive Director 30 June 2020 9 PENNPETRO ENERGY PLC STRATEGIC REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Directors present their strategic report on the group for the year ended 31 December 2019. Principal Activities On 17 May 2017, the Company successfully completed the acquisition of Nobel Petroleum UK Limited which resulted in Pennpetro becoming the holding company for an oil and gas development Group, with assets in Texas, US. The principal activity of the Group is onshore oil and gas exploration and production in the United States of America. Pennpetro Energy Plc acts as a holding company and provides direction and other services to its subsidiary. A simple reorganisation took place within the Group on 1 May 2019, which resulted in Nobel Petroleum UK Limited transferring its equity interests in Nobel USA Inc. and Nobel Petroleum LLC to Pennpetro USA Corp., the Company’s wholly-owned US based subsidiary. Pennpetro USA Corp., holds 100% of the US operational subsidiary Nobel Petroleum USA, Inc. (“Nobel USA”), an independent oil and gas production company based in the City of Gonzales, Gonzales County, Texas, USA. Nobel USA took over the activities of Nobel Petroleum LLC, the Company’s other subsidiary entity in December 2017 pursuant to a seamless internal reorganisation of operational activities and taxation advice. Nobel USA’s core area of business is in the Austin Chalk and Eagleford Shale oil and gas horizontal formations together with the lower oil and gas reservoir, the Buda Formation in South Texas, United States. The review of business and future developments is included in the Executive Directors’ Statement and the Operations Report. A review of the financial performance and position is included in the Financial Report. A summary of the operations conducted by the Group is detailed in both the Executive Directors’ Statement and the Operations Report. Strategic Approach The Board’s strategic intent is to maximise shareholder value through the continuing investment into new wells and leases in proven US onshore formations and participating alongside established operators in multiple wells, while further reducing costs, where applicable. The Company provides shareholders with exposure to the high growth associated with the producing oil and gas sector. This is achieved with a low overhead base. Key Performance Indicators The Board monitors the overall performance of the Group by reference to certain key milestones. The Group considers its financial KPI’s to include: Key performance indicators Net cash flows from operating activities Cash and short-term investments Headroom on loan facilities 2019 $ (758,974) 68,385 1.1mil 2018 $ (1,051,030) 166,367 1.1mil Due to the Covid-19 pandemic, we closed our operations in Gonzales in March 2020. As at the date of these financial statements, the lockdown regime has started to be relaxed in Texas and our expectations for the remainder of 2020 are that we recommence operations at our initial well COG#1-H, with a focus on the Austin Chalk reservoir and then to commence commercial production. 10 PENNPETRO ENERGY PLC STRATEGIC REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Participation in well drilling programmes are monitored on an individual project basis in terms of revenue and cost per barrel of oil or Mcf (one thousand cubic feet) of gas, together with the anticipated payback period on each project. Board diversity Although the Board consisted of four male Directors, the Board supports diversity in the boardroom. Aside from the Directors, there are no employees in the Company. The Board will pursue an equal opportunity policy and seek to employ those persons most suitable to delivering value for the Company. Social, community and human rights issues This report does not contain information on such matters. Corporate responsibility The Group operates a management system that embodies Environmental, Health, Safety and Social Responsibility principles. A number of objectives have been set by the Board to address these principles and the Executive director is responsible for demonstrating to the Board that these principles are adhered to in its US Oil and Gas operation. The policy of the Board of Pennpetro is to be fully accountable for the necessary practices, procedures and means being in place so as to ensure that each objective is demonstrated and that continuous improvement practices are operating to ensure that the required practices, procedures and means are being monitored, refined and optimised as necessary. The objectives of the Environment, Health, Safety and Social Responsibility Policy include: • The Group shall manage all operations in a manner that protects the environment and the health and safety of employees, third parties and the community. • Risk identification, assessment and prioritisation can reduce risk and mitigate hazards to employees, third parties, the community and the environment. Management of risk is a continuous process. • The use of internationally recognised standards, procedures and specifications for design, construction and commissioning activities are essential for achieving operational excellence. • The minimisation of environmental risks and liabilities are integral parts of the Group’s operations. • Third parties who provide materials and services or operate facilities on the Group’s behalf have an impact on Environmental, Health and Safety and Social Responsibility excellence. It is essential that third-party services are provided in a manner consistent with the Group’s Policy. • Preparedness and planning for emergencies are essential to ensuring that all necessary actions are taken if an incident occurs, to protect employees, third parties, the public, the environment, the assets and brand of Pennpetro. • Open and honest communication with the communities, authorities and stakeholders with which the Group operates builds confidence and trust in the integrity of Pennpetro. 11 PENNPETRO ENERGY PLC STRATEGIC REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Corporate responsibility (continued) • The Group has determined that the greenhouse gas emissions from the operations of the Company and its subsidiaries are sufficiently low that it does not have responsibility to produce the disclosures required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. The reason for this is that there was only limited activity from its US based operating subsidiary during 2019, which experienced severe delays to the commencement of production at its initial well, COG#1. This was as a consequence of adverse weather conditions flooding the well and repeated electric delivery issues to the operating site. Whilst the Directors had anticipated production to steadily build over the course of 2020, the Covid-19 pandemic caused the operations in Gonzales to be put on hold. The Directors aim is to recommence operations in the latter half of 2020. During 2019, the Group closely monitored the drilling, completion and production operations of its COG#1-H well and there have been no breaches of any applicable Acts recorded against the Group during the reporting period. Section 172 statement Section 172 of the Companies Act 2006 requires Directors to take into consideration the interests of stakeholders and other matters in their decision making. The Directors continue to have regard to the interests of the Company’s employees and other stakeholders, the impact of its activities on the community, the environment and the Company’s reputation for good business conduct, when making decisions. In this context, acting in good faith and fairly, the Directors consider what is most likely to promote the success of the Company for its members in the long term. We explain in this annual report, and referenced herein, how the Board engages with stakeholders. Promotion of the Company for the benefit of the members as a whole The Director’s believe they have acted in the way most likely to promote the success of the Company for the benefit of its members as a whole, as required by s172 of the Companies Act 2006. The requirements of s172 are for the Directors to: · · · · · · Consider the likely consequences of any decision in the long term, Act fairly between the members of the Company, Maintain a reputation for high standards of business conduct, Consider the interests of the Company’s employees, Foster the Company’s relationships with suppliers, customers and others, and Consider the impact of the Company’s operations on the community and the environment. The Company is quoted on the London Stock Exchange and its members will be fully aware, through detailed announcements, shareholder meetings and financial communications, of the Board’s broad and specific intentions and the rationale for its decisions. When selecting investments, issues such as the impact on the community and the environment have actively been taken into consideration. The Company pays its employees and creditors promptly and keeps its costs to a minimum to protect shareholders funds. 12 PENNPETRO ENERGY PLC STRATEGIC REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Promotion of the Company for the benefit of the members as a whole (continued) The application of the s172 requirements can be demonstrated in relation to the some of the key decisions made during 2019: The Board took the opportunity during 2019 to increase the Group’s interest in its principal asset in Gonzales Texas, taking its Working interest in a portfolio of mineral leases to 100%. The most recent CPR prepared in December 2017, estimated that the Group’s then 50% Working Interest basis undiscounted Net Revenue Interest in the Gonzales petroleum leases amounted to $62 million; with the recent increase to a 100% Working interest and further undiscounted Net Revenue Interest, this has now increased to over $120 million. The Company recognising the global impact of environmental concerns, instigated due diligence with regard to expanding its experiences and core competencies within the fossil environment and petroleum drilling to specific green energy initiatives securitised with US intellectual property filings to be expanded internationally. Risks and Uncertainties The Group’s activities expose it to a variety of risks and uncertainties. Market risk The Group operates in an international market for hydrocarbons and is exposed to risk arising from variations in the demand for and price of the hydrocarbons. Oil and gas prices historically have fluctuated widely and are affected by numerous factors over which the Group does not have any control, including world production levels, international economic trends, currency exchange fluctuations, inflation, speculative activity, consumption patterns and global or regional political events. The Group will consider hedging against the risks of fluctuating oil prices and currency exchange once the initial well is in commercial production. Non-operator risk On non-operated interests, the Group, in most instances, will depend on operators to initiate and supervise the drilling and operation of such wells. As such the Group cannot always accurately predict the timing of the cash flows associated with the drilling of these wells. If the Group is unable or unwilling to comply with its payment obligations, it would seek to negotiate a farm-out with some sort of back-in upon pay-out or sell down a portion of its leasehold interests and participate with a smaller interest. This could reduce the Group’s future revenues and earnings. The Group holds a 100% Working Interest in the Gonzales asset and makes financial, operational and strategic decisions about the development and management of this asset, with input from its advisers. Environmental risk The Group’s operations are subject to environmental regulation in all the jurisdictions in which it operates. The Group is unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would adversely affect the Group’s operations. There can be no assurance that such new environmental legislation once implemented will not oblige the Group to incur significant expenses and undertake significant investments. The Group identifies, assesses and prioritises environmental risks on an ongoing basis, as part of its management system. 13 PENNPETRO ENERGY PLC STRATEGIC REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Risks and Uncertainties (continued) Oil and gas exploration and production risks Whilst Nobel Petroleum USA, Inc., a Group subsidiary, took over the operatorship during 2019 with the formal approval of the regulator, the Texas Railroad Commission, and is the Working Interest owner, the previous operator is still fully engaged under sub-contractual terms. This allows the Group to fully integrate its operational teams in Houston. Although it does not engage in exploration activities, per se, it might engage in some limited exploration activity if it was in an area offsetting producing assets and the Company decided such activity was worthwhile on a minimised risk basis to enhance its lease profile. There are significant risks and hazards inherent in the exploration and production of oil and gas, including environmental hazards, industrial incidents, labour disputes, fire, drought, flooding and other acts of God. The occurrence of any of these hazards can delay or interrupt production and increase production costs. The Group operates a management system that embodies Environmental, Health, Safety and Social Responsibility principles in order to mitigate these hazards. There is no guarantee that oil and/or gas will be discovered in any of the Group’s existing or future licences/permitted acreage or that commercial quantities of oil and/or gas can be recovered. Licences and title The leases in which the Group has or is seeking to have an interest will be subject to termination after the primary term of such leases unless there is current production of oil and/or gas in commercial quantities. If a lease is not extended after the primary term, the Group may lose the opportunity to develop and discover any hydrocarbon resources on that lease area. The Group retains the services of a team of experienced land managers who monitor and report on the Group’s portfolio of leases to the Executive director on an ongoing basis. In taking an assignment of an oil and/or gas lease, the Group would, in accordance with industry practice, rely on the warranty provisions. Covid-19 Pandemic The impact of Covid-19 resulted in the temporary closure of our operation in Gonzales in March 2020. Whilst our intention is to recommence operations in the second half of 2020, we cannot be certain whether further lockdowns will be imposed as a result of another outbreak of Covid-19, which could result in operations being suspended in Gonzales again. This report was approved by the Board on 30 June 2020 and signed on its behalf: Keith Edelman Non-Executive Director, Chairman 30 June 2020 14 PENNPETRO ENERGY PLC DIRECTORS’ REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Directors present their Annual Report and the audited Financial Statements for the year ended 31 December 2019. The Company’s ordinary shares are listed on the London Stock Exchange, on the Official List pursuant to Chapter 14 of the Listing Rules, which sets out the requirements for Standard Listings. Organisation Review The Board is responsible for providing strategic direction for the Group. This incorporates setting out objectives, management policies and performance criteria. The Board assesses its performance against these on a monthly basis. Composition of the Board at 31 December 2019 was one Executive Director and three Non- Executive Directors. The Board believes that the present composition provides an appropriate mix to conduct the Group’s affairs. The Board is responsible for monitoring risks and uncertainties faced by the Group. These risks and uncertainties are detailed in the Strategic Report and note 3 to the financial statements. Directors and Directors’ interests The Directors who held office during the year to the date of approval of these financial statements, together with their beneficial interests in the ordinary shares of the Company, are shown below. 31 December 2019 31 December 2018 Ordinary Ordinary Share options (number) shares (number) Share options (number) shares (number) Keith Edelman Olof Rapp Philip Nash 1,000,000 425,000 1,000,000 425,000 2,000,000 425,000 2,000,000 425,000 - 425,000 - 425,000 Thomas Evans (1) 5,000,000 425,000 5,000,000 425,000 (1) Thomas Martin Evans shares are held by FHF Securities (A’Asia) Limited. The Directors who held office at 31 December 2019 are summarised as follows: Name of Director Position Keith Edelman Thomas Evans Philip Nash Olof Rapp Chairman, Non-Executive Director Executive Director Finance Director and Non-Executive Director Senior Non-Executive Director Directors’ Remuneration The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of the Directors on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high-quality Board and senior executive team. The Directors’ remuneration and policies for appointment or replacement of directors are disclosed in the Directors’ Remuneration Report. Dividends The Directors do not recommend the payment of a dividend (2018: $Nil). 15 PENNPETRO ENERGY PLC DIRECTORS’ REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Share capital and major shareholdings The issued share capital of the Company as at 31 December 2019 comprised 72,333,702 1p ordinary shares (2018: 70,900,000). The Company has only one class of share capital formed of ordinary shares. All shares forming part of the ordinary share capital have the same rights and each carry one vote. As at 10 June 2020 the Company had been notified of the following interests in the Company’s ordinary share capital: Number of shares Percentage (%) York Energy Group Limited International Immobiliare Ltd FHF Securities (A’Asia) Limited RB Nominees Limited Nobel Petroleum Ireland Limited Nomura PB Nominees Limited FHF Corporate Finance Limited Invictorium Limited Mrs. B. Shaw Mrs. P. Evans 19,000,000 16,300,000 5,000,000 4,118,404 3,400,000 3,378,000 3,300,000 3,200,000 3,200,000 3,100,000 24.85 21.32 6.54 5.39 4.45 4.42 4.32 4.19 4.19 4.06 To the best of the Directors’ knowledge, no shareholder directly or indirectly, exercises or could exercise control over the Company. Going Concern The Group’s business activities, together with the factors likely to affect its future development and performance are set out in the Executive Director’s Statement. In addition, notes 3 and 24 to the financial statements disclose the Group’s and Company’s objectives, policies and processes for managing financial risks and capital. As a result of the Covid-19 pandemic, the Group temporarily closed down its operations in Gonzales and significantly reduced its operating costs. The ongoing COVID-19 pandemic means there is still some uncertainty around the potential timing of when the Company and Group will be able to recommence operations. Additional finance will be needed in the short term to recommence the Company’s US operations and to finance planned capital expenditure. The Directors are actively pursuing a number of funding options and have also received confirmation from Petroquest Energy Limited that $1.1m is still available to draw under its loan facility of $5m. The Directors are currently considering the longer-term finance options available to the Group and Company given the repayment date of the Petroquest Energy Limited loan notes is in December 2021. The Directors recognise that the impact of COVID-19 on the equity and debt markets may make the availability of such funding more uncertain. 16 PENNPETRO ENERGY PLC DIRECTORS’ REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Going Concern (continued) The Group has prepared cashflow forecasts for 12 months from the date of signing the financial statements. The Directors have considered these forecasts and have a reasonable expectation that the Company and Group has adequate resources to continue in operational existence through to 30 June 2021 as projected. This is subject to material adverse unforeseen events that may occur, including but not limited to oil and gas prices and further hinderances to operations as a result of the Covid-19 pandemic. Whilst the Directors continue to consider it appropriate to prepare the Group and Company financial statements on a going concern basis the above constitutes a material uncertainty that shareholders should be aware of. Events after the Reporting Period The loan entered into by Nobel Petroleum LLC on 7 November 2017 is due for repayment by 31 October 2020. On 14 January 2020, settlement was agreed by the issue of shares in Pennpetro Energy plc as follows: • £2,000,000 to be converted into 4,000,000 ordinary shares at £0.50 per share. • £50,202 in outstanding interest to be converted into 118,404 ordinary shares at £0.50 per share. Provision of Information to Auditor So far as each of the Directors is aware at the time this report is approved: • there is no relevant audit information of which the Company's auditor is unaware; and • the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. Independent Auditor The auditor, Crowe U.K. LLP will be proposed for reappointment in accordance with section 485 of the Companies Act 2006. Crowe U.K. LLP has signified its willingness to continue in office as auditor. This report was approved by the board on 30 June 2020 and signed on its behalf: Keith Edelman Non-Executive Director, Chairman 30 June 2020 17 PENNPETRO ENERGY PLC DIRECTORS’ INFORMATION Annual Report & Financial Statements For the year ended 31 December 2019 Keith Graeme Edelman, Non-Executive Chairman Keith Edelman graduated from UMIST (University of Manchester Institute Science and Technology) in 1971 with a BSc (Hons) in Management Sciences. He worked for Rank Xerox, IBM and Fiat before joining Bank of America in 1978. Starting as Planning Manager, EMEA Division and then Finance Director, UK and Nordic Region, he eventually became Managing Director of Bank of America Finance. In 1983 he joined Grand Metropolitan as a UK Strategic Director/Director of Finance, Foods Division. In 1985 he joined the Ladbroke Group as Corporate Planning Director and completed a number of major acquisitions and disposals for that group these included the acquisitions of Hilton International, Texas Homecare Plc, Thomson T Line Plc and Gable House Properties Plc and disposals of many leisure businesses including Ladbroke Holidays, Seenews, the 20% stake in Central TV, Laskys to name but a few. Following the acquisition of Hilton International he became Chairman of Texas Homecare, a chain of DIY stores. In 1991 he left to become Managing Director of Carlton Communications and in 1993 Group Chief Executive of Storehouse plc, which included Mothercare and BHS. He also held a number of executive and non-executive appointments, including Eurotunnel (Audit & Remuneration Committees 1994–2004), Haberdashers' Aske's School (Governor 1994–2005), where he was a pupil from prep school through A Levels, Include (Director (Charity) 1997 – 2001), Glenmorangie (Chairman 2002–2005), Qualceram Shires plc (Director 2005 to 2009) and Arnotts Holdings (2009-2010). Currently he is Chairman of Revolution Bars Group Plc, Chairman of Bullion by Post Limited, a Director of the London Legacy Development Corporation and E20 LLP, Non- Executive Director of Altitude Group PLC and senior Independent Director of Headlam Group plc. In 2000 he joined Arsenal Football Club as Managing Director, bringing his financial and business experience to the Club. Mr. Edelman was responsible for all commercial and administrative activities at the club. In a period of increased commercialisation of football, he completed the first strategic partnership the Club entered into since its formation, selling a 10 percent stake to Granada Media for £77 million. He oversaw the club's re-branding and crest redesign to create copyright protection and was subsequently involved in a sponsorship deal with Nike, valued at £130 million over 10 years. He was instrumental in the club's development of its new stadium and he arranged all the funding raising over £380 million of banking facilities. He refinanced these projects finance borrowings with a credit wrapped AAA rated bond and in so doing established Arsenal as the very first club to achieve an investment grade rating from the world’s rating agencies. He also completed one of the largest football sponsorship deals with Emirates Airlines for over £100 million, including naming rights to the Emirates Stadium. He opened the stadium in August 2006 both on time and on budget and set up all the operational aspects of the stadium that has made Emirates so successful. He oversaw the development of Highbury Square and pre-sold over 90% of all units and brought the project in on time and on budget. In 2007 Keith became club President of the Arsenal Ladies team. He has always been pragmatic about the club's future and did not rule out the club eventually going public or the major shareholders eventually deciding to sell their stakes. He resigned as a Director at Arsenal Holdings plc on 1 May 2008 and continued until May 2009 as a consultant. 18 PENNPETRO ENERGY PLC DIRECTORS’ INFORMATION (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Thomas Martin Evans, Executive Officer Thomas Evans started his career as a financial executive with Extel Financial Ltd, moving to equity sales at Barclays de Zoete Wedd Ltd and RBC Dominion Securities Limited, director CIBC World Markets Limited prior to founding Bishopsgate Capital Management Ltd in 2000 dealing in institutional fund management which was merged with Athanor Capital Partners Ltd assuming the role of Chief Investment Officer, expanding all the combined entities FSA regulated permitted businesses. Established TME Consulting creating UCITS compliant umbrella structure to be marketed to both retail and wholesale clients. CEO and founder of the Caplain group created to acquiring stockbroking and wealth management entities and Aerarius PCC Ltd (Guernsey) fund structure for European investment strategies. Financial Services Authority (UK) Ltd previously approved for the following control functions – CF1 Director, CF3 Chief Executive, CF8 Appointment & Oversight, CF27 Investment Management. Olof Nils Anders Rapp, Senior Non-Executive Director Olof Rapp has vast international experience in the aerospace and automotive sector and has held leading managerial positions with Rolls- Royce International, Volvo Truck Corporation and VistaJet International in South America, Middle East and Asia. His last position at Rolls Royce was as Regional Director, Malaysia, with overall responsibility for Rolls-Royce Plc’s business in Malaysia and Brunei (Aviation, Marine, Nuclear and Oil & Gas) and represented the company at the highest level. His last position at Volvo was Managing Director of Volvo Malaysia, where he led a successful restructuring of the company. Olof serves as a Board Director in Quest Green Energy limited, Resources Bonds 11 limited, Serunai Commerce Sdn Bhd, and SRI Capital Holdings Sdn Bhd and is a Senior Advisor to Partners in Performance Pty Ltd. He is also Vice President of the Malaysian Swedish Business Association. He was born in Gothenburg, Sweden, and studied International Business at IHM Business School. Philip Tudor Nash, Non-Executive Director Philip Nash qualified as a Chartered Accountant in 1997 and went on to join Hambros Bank, holding a number of finance positions in its Insurance arm, including Group Financial Controller of Cunningham Lindsey, a leading loss adjusting group. In 2001 he joined Arsenal Football Club as Stadium Project Director, reporting to the CEO. He was involved in all aspects of the successful Emirates Stadium Project including raising finance, financial control, project management and commercial activities. In 2008 Philip joined Liverpool Football Club as CFO and played a significant role in the transformation of the club. He was involved in the sale of the club to Fenway Sports Group in 2010. He strengthened the club’s finance and technology functions, improved governance and lead on a variety of major projects including the appraisal of the Anfield Stadium redevelopment. Philip currently works as an independent business consultant, working across a variety of SME’s. Philip holds a Psychology degree from the University of Reading and is a member of the ICAEW. 19 PENNPETRO ENERGY PLC STATEMENT OF DIRECTORS’ RESPONSIBILITIES Annual Report & Financial Statements For the year ended 31 December 2019 The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group and Parent Company Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing these Financial Statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether the applicable IFRS’s as adopted by the European Union have been followed; subject to any material departures disclosed and explained in the Financial Statements; and • prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and 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 Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The maintenance and integrity of the website is the responsibility of the Directors. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the information contained in the Financial Statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of the Financial Statements and other information included in annual reports may differ from legislation in other jurisdictions. The Company is compliant with the London Stock Exchange regarding the Company’s website. 20 PENNPETRO ENERGY PLC CORPORATE GOVERNANCE REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Company recognises the importance of, and is committed to, high standards of corporate governance. Corporate Governance Practices Pennpetro Energy plc has a standard listing on the London Stock Exchange and is thus not required to comply with the requirements of the U.K. Corporate Governance Code (“the Code”) as issued by the Financial Reporting Council. The disclosures below are required by the UKLA’s Disclosure and Transparency Rule 7. The Board is committed to ensuring the highest standards of corporate governance, and voluntarily complies with, subject to a small number of exceptions listed below, the supporting principles and provisions set out in the Code. The following describes the ways in which the Company does not comply with the detailed provisions of the Code and the Board’s rationale thereon: • given the size of the Board and the Company’s current limited operational status, certain provisions of the Corporate Governance Code (in particular the provisions relating to the composition of the Board and the division of responsibilities between the Chairman and chief executive and executive compensation), are not being complied with by the Company as the Board does not consider these provisions to be appropriate for the Company; • the Board as a whole will review audit, remuneration and risk matters, on the basis of adopted terms of reference governing the matters to be reviewed and the frequency with which such matters are considered. The Board as a whole will also take responsibility for the appointment of auditors and payment of their audit fee, monitor and review the integrity of the Company’s financial statements and take responsibility for any formal announcements on the Company’s financial performance; • the Board as a whole will be responsible for the appointment of executive and non-executive Directors. The Company does not currently believe it is necessary to have a separate nominations committee at this time. The requirement for a nominations committee will be considered on an ongoing basis; • the Board believes in the benefits of diversity, including the need for diversity in order to effectively represent shareholders’ interests. This diversity is not restricted to gender but also includes geographic location, nationality, skills, age, educational and professional background. The board’s policy remains that selection should be based on the best person for the role; • the Board as a whole will consider the Board’s size, structure and composition and the scale and structure of the Directors’ fees, taking into account the interests of Shareholders and the performance of the Company; • the Board does not comply with the provision of the Corporate Governance Code that at least half of the Board, excluding the Chairman, should comprise non-executive directors determined by the Board to be sufficiently independent; • the Company has in place procedures ensuring compliance with the new Market Abuse Regulation and the Board will be responsible for taking all proper and reasonable steps to ensure compliance with the Market Abuse Regulation by the Directors; and • the Company will not seek Shareholder approval at a general meeting in respect of any further acquisitions it may make, unless it is required to do so for the purposes of facilitating the financing arrangements or for other legal or regulatory reasons. 21 PENNPETRO ENERGY PLC CORPORATE GOVERNANCE REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 The Board of Directors As at 31 December 2019, the Board of Directors comprised four members: one Executive Director and three Non-Executive Directors. The Executive Director has a wealth of experience analytically covering the oil and gas industry. Similarly, the Non-Executive Directors together have extensive corporate and financial experience. The Company has a policy of appraising Board performance annually and had adopted an internal policy of regular face to face meetings in which all Board members discuss any issues as and when they arise in relation to the Board or any individual member’s performance. Board Meetings The Board ordinarily meets on a bi-monthly basis and as and when further required, providing effective leadership and overall management of the Group’s affairs by reference to those matters reserved for its decision. This includes the approval of the budget and business plan, major capital expenditure, acquisitions and disposals, risk management policies and the approval of the financial statements. Formal agendas, papers and reports are sent to the Directors, in a timely manner, prior to the Board meetings. Keith Edelman Thomas Evans Olof Rapp Philip Nash Number held and entitled to attend 6 6 6 6 Number attended 6 6 6 2 Internal Controls The Board recognises the importance of both financial and non-financial controls and has reviewed the Group's control environment and any related shortfalls during the year. Since the Group was established, the Directors are satisfied that, given the current size and activities of the Group, adequate internal controls have been implemented. Whilst they are aware that no system can provide absolute assurance against material misstatement or loss, in light of the current activity and proposed future developments of the Group, continuing reviews of internal controls will be undertaken to ensure that they are adequate and effective. Relations with Shareholders The Board is committed to providing effective communication with the shareholders of the Company. Significant developments are disseminated through stock exchange announcements and regular updates on the Company website. The Board views the Annual General Meeting as a forum for communication between the Group and its shareholders and encourages their participation in its agenda. Keith Edelman Non-Executive Director, Chairman 30 June 2020 22 PENNPETRO ENERGY PLC DIRECTORS’ REMUNERATION REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Company’s Remuneration Committee comprises two Non-Executive Directors: Keith Edelman (Chairman) and Olof Rapp. Pennpetro’s Remuneration Committee operates within the terms of reference approved by the Board. In the year to 31 December 2019, the two members of the Remuneration Committee have met once. The items included in this report are unaudited unless otherwise stated. Committee’s main responsibilities • The Remuneration Committee considers the remuneration policy, employment terms and remuneration of the Executive Director; • The Remuneration Committee’s role is advisory in nature and it makes recommendations to the Board on the overall remuneration package for the Executive Director in order to attract, retain and motivate high quality executives capable of achieving the Company’s objectives; • The Remuneration Committee also reviews proposals for any share option plans and other incentive plans, makes recommendations for the grant of awards under such plans as well as approving the terms of any performance-related pay schemes; • The Board’s policy is to remunerate the Company’s executives fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel; and • The Remuneration Committee, when considering the remuneration packages of the Company’s executives, will review the policies of comparable companies in the industry. Directors’ remuneration (audited) Fees and benefits of £521,478 were payable to Directors who held office during the year ended 31 December 2019 (2018: $ 228,097). Director Thomas Evans has received a loan of £10,000 which was outstanding as at 31 December 2019. The loan is repayable within 12 months. Keith Edelman Olof Rapp Philip Nash Thomas Evans Keith Edelman Olof Rapp Philip Nash Thomas Evans Salary $ 44,694 38,308 38,308 38,308 159,618 Valuation of options $ 90,465 90,465 90,465 90,465 361,860 Salary $ 47,026 40,306 40,306 40,306 167,944 Valuation of options $ 15,039 15,038 15,038 15,038 60,153 Taxable benefits $ - - - - - Taxable benefits $ - - - - - Other receipts received $ - - - - - Other receipts received $ - - - - - Pension benefits $ - - - - - Pension benefits $ - - - - - 2019 Total $ 135,159 128,773 128,773 128,773 521,478 2018 Total $ 62,065 55,344 55,344 55,344 228,097 23 PENNPETRO ENERGY PLC DIRECTORS’ REMUNERATION REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Director's remuneration is disclosed in full in the above table and is not linked to performance. Keith Edelman receives £5,000 for his services as Executive Chairman. All Directors’ service contracts are kept available for inspection at the Company’s registered office. All shares and interests held by the Directors are disclosed in the Directors’ report. None of the share options vested in the year. Details of the share-based payments are included in note 19. Total pension entitlements (audited) The Company currently does not have any pension plans for any of the Directors and does not pay pension amounts in relation to their remuneration. The Company has not paid out any excess retirement benefits to any Directors or past Directors. Payments to past directors (audited) The Company has not paid any compensation to past Directors. Payments for loss of office (audited) No payments were made for loss of office during the year. Directors interests in share warrants (audited) None of the Directors had interests in share warrants. Directors’ and Officers’ indemnity insurance The Company has made qualifying third-party indemnity provisions for the benefit of its Directors and Officers. These were made during the previous period and remain in force at the date of this report. Consideration of shareholder views The Remuneration Committee considers shareholder feedback received and guidance from shareholder bodies. This feedback, plus any additional feedback received from time to time, is considered as part of the Company’s periodic reviews of its policy on remuneration. Statement of policy on Directors’ remuneration The Company’s policy is to maintain levels of remuneration so as to attract, motivate, and retain Directors and Senior Executives of the highest calibre who can contribute their experience to deliver industry leading performance with the Company’s operations. Currently Director’s remuneration is not subject to specific performance targets. In future periods, the Company may implement a remuneration policy so that a meaningful proportion of Executive remuneration is structured so as to link rewards to corporate and individual performance, align their interests with those of shareholders and to incentivise them to perform at the highest levels. The Remuneration Committee considers remuneration policy and the employment terms and remuneration of the Directors and makes recommendations to the Board of Directors on the overall remuneration packages for Directors. No Director takes part in any decision directly affecting their own remuneration. 24 PENNPETRO ENERGY PLC DIRECTORS’ REMUNERATION REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 Policy for new appointments Base salary levels will take into account market data for the relevant role, internal relativities, the individual’s experience and their current base salary. Where an individual is recruited at below market norms, they may be re-aligned over time (e.g. two to three years), subject to performance in the role. Benefits will generally be in accordance with the approved policy. For external and internal appointments, the Committee may agree that the Company will meet certain relocation and/or incidental expenses as appropriate. Policy on payment for loss of office Payment for loss of office would be determined by the Remuneration Committee, taking into account contractual obligations. Other matters The Company does not currently have any annual or long-term incentive schemes in place for any of the Directors and as such there are no disclosures in this respect. Keith Edelman Non-Executive Director, Chairman 30 June 2020 25 PENNPETRO ENERGY PLC AUDIT COMMITTEE REPORT Annual Report & Financial Statements For the year ended 31 December 2019 The Audit Committee comprises two Non-Executive Directors, Olof Rapp and Philip Nash. It oversees the Company’s financial reporting and internal controls and provides a formal reporting link with the external auditors. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly report remains with the Board. Main Responsibilities The Audit Committee acts as a preparatory body for discharging the Board’s responsibilities in a wide range of financial matters by: • monitoring the integrity of the financial statements and formal announcements relating to • the Company’s financial performance; reviewing significant financial reporting issues, accounting policies and disclosures in financial reports, which are considered to be in accordance with the key audit matters identified by the external auditors; • overseeing that an effective system of internal control and risk management systems are maintained; • ensuring that an effective whistle-blowing, anti-fraud and bribery procedures are in place; • overseeing the Board’s relationship with the external auditor and, where appropriate, the selection of new external auditors; • approving non-audit services provided by accounting firms; and • ensuring compliance with legal requirements, accounting standards and the Listing Rules and the Disclosure and Transparency Rules. Governance The Code requires that at least one member of the Audit Committee has recent and relevant financial experience. Philip Nash, who was appointed to the Audit Committee in 2017 has been a qualified Chartered Accountant with extensive experience of high-level finance roles. As a result, the Board is satisfied that the Audit Committee has recent and relevant financial experience. Members of the Audit Committee are appointed by the Board and whilst shareholders, the Company believes they are considered to be independent in both character and judgement. The Company’s external auditor is Crowe U.K. LLP, and the Audit Committee will closely monitor the level of audit services they provide to the Company. The Audit Committee believes that the Company does not require an internal audit function due to the current size of the organisation and its operations. Meetings In the year to 31 December 2019 the two members of the Audit Committee have met twice. The key work undertaken by the Audit Committee is as follows; interview of external auditors and recommendation to the Board; review of audit planning and update on relevant accounting developments; • • • consideration and approval of the risk management framework, appropriateness of key performance indicators; • consideration and review of full-year results; • • review of the effectiveness of the Audit Committee; and review of internal controls. 26 PENNPETRO ENERGY PLC AUDIT COMMITTEE REPORT (continued) Annual Report & Financial Statements For the year ended 31 December 2019 The Code states that the Audit Committee should have primary responsibility for making a recommendation on the appointment, reappointment or removal of the external auditor. External auditor The Audit Committee appointed Crowe U.K. LLP as auditors to the Company, commencing with the first audit of the year ended 31 December 2018. The external auditor has unrestricted access to the Audit Committee Chairman. The Committee is satisfied that Crowe U.K. LLP has adequate policies and safeguards in place to ensure that auditor objectivity and independence are maintained. The external auditors report to the Audit Committee annually on their independence from the Company. In accordance with professional standards, the partner responsible for the audit is changed every five years. The current auditor, Crowe U.K. LLP were first appointed by the Company in 2019 following a tender process and therefore the current partner is due to rotate off the engagement after completing the December 2022 audit. Having assessed the performance objectivity and independence of the auditors, the Committee will be recommending the reappointment of Crowe U.K. LLP as auditors to the Company at the 2020 Annual General Meeting. Philip Nash Non-Executive Director 30 June 2020 27 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC Opinion We have audited the financial statements of Pennpetro Energy Plc (the “Company” and its subsidiaries (the “Group”) for the year ended 31 December 2019 which comprise the consolidated statements of comprehensive income, the consolidated and parent company statements of financial position, the consolidated and parent company statements of changes in equity, the consolidated and parent company statements of cashflows, and notes to the financial statements, including a summary of significant accounting policies. 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. In our opinion: • • • • the financial statements give a true and fair view of the state of the group’s and company’s affairs as at 31 December 2019 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 International Financial Reports Standards as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty relating to going concern On forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 2.4 to the financial statements concerning the group and company’s ability to continue as a going concern. The financial statements have been prepared on the going concern basis, which depends on the group and company’s ability to raise further financing to cover both its ongoing working capital requirements and to settle the outstanding borrowings when they fall due. These conditions, along with other matters explained in note 2.4 to the financial statements, indicate the existence of a material uncertainty which may cast a significant doubt about the group and company’s ability to continue as a going concern. The financial statements do not include adjustments that would result if the group and company were unable to continue as a going concern Overview of our audit approach Materiality In planning and performing our audit we applied the concept of materiality. An item is considered material if it could reasonably be expected to change the economic decisions of a user of the financial statements. We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified. Based on our professional judgement, we determined overall materiality for the financial statements as a whole to be $120,000, based on 2% of total assets (2018: $115,000). We use a different level of materiality (‘performance materiality’) to determine the extent of our testing for the audit of the financial statements. Performance materiality is set based on the audit materiality as adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit area having regard to the internal control environment. 28 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC (continued) Where considered appropriate performance materiality may be reduced to a lower level, such as, for related party transactions and directors’ remuneration. We agreed with the Audit Committee to report to it all identified errors in excess of $3,600 (2018: $3,000). Errors below that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative grounds. Overview of the scope of our audit The Company and Group finance function is based in the United Kingdom and a full scope audit was carried out thereon from our office, and with discussions with management as required and information being requested from the US where appropriate. This provided us with sufficient evidence for our opinion on the Group and Company financial statements. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the material uncertainty relating to going concern section, we have determined the matter described below to be the key audit matter to be communicated in our audit report. This is not a complete list of all risks identified by our audit. Key audit matter Valuation of producing properties and capitalised drilled costs and equipment The group’s primary focus is onshore oil and gas exploration and production in Texas, USA. As at 31 December 2019 assets totalling $5.6m were recognised comprising Petroleum Leases within property, plant and equipment of $1.4m and Drilling Costs within intangible assets of $4.2m. We considered the risk that these assets are impaired. How the scope of our audit addressed the key audit matter We reviewed management’s assessment which concluded that there are no facts or circumstances that suggest the recoverable amount of the asset does not exceed the carrying amount. In considering this assessment we reviewed the following sources of evidence: • The primary lease agreements in place supporting the company’s right of extraction; • The competent persons report that formed the basis of the valuation; • Discussing plans and management and budgets; and intentions with supporting reviewing • Assessing oil price assumptions used when assessing the commercial potential and likely recoverable amount. We are satisfied that there are no indicators of impairment in respect of the drilling costs and that the estimated recoverable amount in respect of the petroleum leases is in excess of the carrying value. 29 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC (continued) Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole. They were not designed to enable us to express an opinion on these matters individually and we express no such opinion. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. identify such material If we We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion based on the work undertaken in the course of our audit • • the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements and the part of the directors’ remuneration report to be audited 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. 30 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC (continued) Responsibilities of the directors for the financial statements As explained more fully in the directors’ responsibilities statement set out on page 20, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. We designed our audit approach to be capable of detecting irregularities, including fraud. In particular: • We gained an understanding of the legal and regulatory framework applicable to the Group and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. • We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment. Our tests included, but were not limited to: review of the financial statement disclosures to underlying supporting documentation and enquiries of management. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters which we are required to address We were appointed by the Board on 25 March 2019. Our total uninterrupted period of engagement is two years, covering the year ended 31 December 2018 – 2019. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the company and we remain independent of the group and the parent company in conducting our audit. Our audit opinion is consistent with the additional report to the audit committee. 31 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC (continued) Use of our report This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Matthew Stallabrass Senior Statutory Auditor For and on behalf of Crowe U.K. LLP Statutory Auditor London 30 June 2020 32 PENNPETRO ENERGY PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2019 Continuing Operations Administrative expenses Operating Loss Finance income Finance costs Loss before Tax Income tax Note Year ended 31 December 2019 $ Year ended 31 December 2018 $ 6 9 9 (1,143,330) (595,074) (1,143,330) (595,074) 944 (526,024) 273,126 (466,682) (1,668,410) (788,630) 10 - - Loss for the year attributable to owners of the parent (1,668,410) (788,630) Other Comprehensive Income: Items that may be reclassified subsequently to profit or loss Currency translation differences 69,310 (27,579) Other Comprehensive Income for the Year 69,310 (27,579) Total Comprehensive Income for the Year attributable to the owners of the parent (1,599,100) (816,209) Loss per share attributable to the owners of the parent during the year Basic (cents per share) 11 (2.31) (1.11) Diluted (cents per share) (2.31) (1.11) The notes on pages 40 to 66 form part of these financial statements. 33 PENNPETRO ENERGY PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2019 ASSETS Non–Current Assets Property, plant and equipment Intangible assets Total Non-Current Assets Current Assets Trade and other receivables Short term investments Cash and cash equivalents Total Current Assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Attributable to Owners of Parent Share capital Share premium Convertible reserve Reorganisation reserve Foreign exchange reserve Share based payment reserve Retained losses Total Equity Non-Current Liabilities Borrowings Total Non-Current Liabilities Current Liabilities Borrowings Trade and other payables Total Current Liabilities Note 31 December 2019 $ 31 December 2018 $ 12 13 15 16 17 18 18 19 20 20 21 1,362,734 4,241,831 5,604,565 1,279,914 4,007,448 5,287,362 356,928 60,001 8,384 425,313 523,482 166,367 - 689,849 6,029,878 5,977,211 926,711 1,538,636 6,021,575 (6,578,229) 61,449 438,641 (2,723,778) (314,995) 908,404 625,504 6,021,575 (6,578,229) (7,861) 60,153 (1,055,368) (25,822) - - 5,863,863 5,863,863 6,078,992 265,881 6,344,873 - 139,170 139,170 TOTAL EQUITY AND LIABILITIES 6,029,878 5,977,211 These financial statements were approved by the Board of Directors on 30 June 2020 and signed on its behalf by: Keith Edelman Non-Executive Director, Chairman Company registration number: 10166359 The notes on pages 40 to 66 form part of these financial statements. 34 PENNPETRO ENERGY PLC COMPANY STATEMENT OF FINANCIAL POSITION As at 31 December 2019 ASSETS Non–Current Assets Investments in subsidiaries Property, plant and equipment Total Non–Current Assets Current Assets Trade and other receivables Short term investments Cash and cash equivalents Total Current Assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Attributable to Shareholders Share capital Share premium Convertible reserve Foreign exchange reserve Share based payment reserve Retained losses Total Equity Current Liabilities Trade and other payables Total Current Liabilities Note 31 December 2019 $ 31 December 2018 $ 14 12 15 16 17 18 18 19 21 6,899,108 994 6,900,102 6,622,720 3,163 6,625,883 229,736 60,001 - 289,737 12,736 166,367 - 179,103 7,189,839 6,804,986 926,711 1,538,636 6,021,575 319,749 438,641 (2,303,188) 6,942,124 908,404 625,504 6,021,575 45,228 60,153 (1,344,363) 6,316,501 247,715 247,715 488,485 488,485 TOTAL EQUITY AND LIABILITIES 7,189,839 6,804,986 The Company has elected to take the exemption under Section 408 of the Companies Act 2006 from presenting the parent company Statement of Comprehensive Income. The loss for the parent company for the year was $958,825 (2018: $629,966). These financial statements were approved by the Board of Directors on 30 June 2020 and were signed on its behalf by: Keith Edelman Non-Executive Director, Chairman Company registration number: 10166359 The notes on pages 40 to 66 form part of these financial statements. 35 PENNPETRO ENERGY PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019 Group Attributable to the owners of the parent Share Capital Share Premium Convertible Reserve Reorganisation Reserve $ $ $ $ Foreign Exchange Reserve $ Share Based Payments Reserve $ Retained Losses $ Total Equity $ Balance at 1 January 2018 908,404 625,504 6,021,575 (6,578,229) 19,718 Loss for the year Foreign currency translation differences Total comprehensive loss for the year Share based payments - - - - - - - - - - - - - - - - - (27,579) (27,579) - - - - (266,738) 730,234 (788,630) (788,630) - (27,579) (788,630) (816,209) - 60,153 - 60,153 Balance at 31 December 2018 908,404 625,504 6,021,575 (6,578,229) (7,861) 60,153 (1,055,368) (25,822) Loss for the year Foreign currency translation differences Total comprehensive loss for the year Shares issued Cost of shares issued Share based payments - - - - - - 18,307 - - 988,599 (75,467) - - - - - - - - - - - - - - 69,310 69,310 - - - - - - (1,668,410) (1,668,410) - 69,310 (1,668,410) (1,599,100) - - 378,488 - - - 1,006,906 (75,467) 378,488 Balance at 31 December 2019 926,711 1,538,636 6,021,575 (6,578,229) 61,449 438,641 (2,723,778) (314,995) The notes on pages 40 to 66 form part of these financial statements. 36 PENNPETRO ENERGY PLC COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019 Company Share Capital $ Share Premium Convertible Reserve $ $ Share Based Payments Reserve $ Foreign Exchange Reserve $ Retained Losses $ Total Equity $ Balance at 1 January 2018 908,404 625,504 6,021,575 Loss for the year Other comprehensive income Total comprehensive loss for the year Share based payments - - - - - - - - - - - - Balance at 31 December 2018 908,404 625,504 6,021,575 Loss for the year Other Comprehensive Income Total comprehensive loss for the year Shares issued Share issue costs Share based payments - - - 18,307 - - - - - 988,599 (75,467) - - - - - - - - - - - 60,153 60,153 - - - - - 378,488 417,578 (714,397) 7,258,664 - (372,350) (372,350) - (629,966) - (629,966) (372,350) (629,966) (1,002,316) - 60,153 45,228 (1,344,363) 6,316,501 - 274,521 274,521 - - - (958,825) - (958,825) 274,521 (958,825) (684,304) - - - 1,006,906 (75,467) 378,488 Balance at 31 December 2019 926,711 1,538,636 6,021,575 438,641 319,749 (2,303,188) 6,942,124 The notes on pages 40 to 66 form part of these financial statements. 37 PENNPETRO ENERGY PLC CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2019 Cash Flows from Operating Activities Loss before tax Depreciation Amortisation Foreign exchange gain Unrealised foreign exchange Finance income Finance costs Share base payment charge Changes to working capital Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Cash used in operations Interest paid Net Cash used in Operating Activities Cash Flows from Investing Activities Increase in Development expenditure Purchases of property, plant and equipment Disposal of short-term investments Interest received Net Cash (used in)/ generated from Investing Activities Cash Flows from Financing Activities Proceeds from issue of ordinary shares Issue costs Proceeds from/ (repayments of) borrowings Net Cash generated from/ (used in) Financing Activities Net Increase/(Decrease) in Cash and Cash Equivalents Cash and cash equivalents at the beginning of the year Net increase/ (decrease) in cash and cash equivalents Cash and Cash Equivalents at the End of the Year The notes on pages 40 to 66 form part of these financial statements. Year ended 31 December 2019 $ Year ended 31 December 2018 $ (1,668,410) 2,792 90,113 287 - (944) 526,024 361,860 (688,278) 27,021 78,605 (582,652) (176,322) (758,974) (184,963) (85,566) 106,366 82 (164,081) 1,006,906 (75,467) - 931,439 (788,630) 2,907 99,575 - (183,110) (273,126) 466,682 60,153 (615,549) (169,050) (70,937) (855,536) (195,494) (1,051,030) (750,473) (56,382) 1,906,932 31 1,100,108 - - (71,151) (71,151) 8,384 (22,073) - 8,384 8,384 22,073 (22,073) - 38 PENNPETRO ENERGY PLC COMPANY STATEMENT OF CASH FLOWS For the year ended 31 December 2019 Cash Flows from Operating Activities Loss before tax Depreciation Share based payments Foreign exchange gain/loss Unrealised foreign exchange Finance income Finance costs Changes to working capital Increase in trade and other receivables Decrease in trade and other payables Cash (used in) operations Interest paid Net Cash generated used in Operating Activities Cash Flows from Investing Activities Disposal of short-term investments Interest received Net Cash used in Investing Activities Cash Flows from Financing Activities Proceeds from issue of ordinary shares Issue costs Net Cash generated from Financing Activities Net movement in Cash and Cash Equivalents Cash and cash equivalents at the beginning of the year Exchange gain on cash and cash equivalents Net Decrease in cash and cash equivalents Cash and Cash Equivalents at the End of the Year The notes on pages 40 to 66 form part of these financial statements. Year ended 31 December 2019 $ Year ended 31 December 2018 $ (958,825) 2,215 361,860 13,568 1,147 (82) - (580,117) (217,000) (240,771) (1,037,888) - (629,966) 2,329 60,153 - 32,238 (31) 839 (534,438) (394,803) (98,532) (1,027,773) (839) (1,037,888) (1,028,612) 106,367 82 106,449 1,006,906 (75,467) 931,439 - - - - - 1,028,581 31 1,028,612 - - - - - - - - 39 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 1. GENERAL INFORMATION Pennpetro Energy plc (the “Company”) is a public limited company which is listed on the standard market of the London Stock Exchange and incorporated and domiciled in England and Wales. Its registered office address is First Floor, 88 Whitfield Street, London, W1T 4EZ. The consolidated financial statements of the Company consist of the following companies (together “the Group”): Pennpetro Energy plc Pennpetro USA Corp Nobel Petroleum USA Inc Nobel Petroleum LLC Nobel Petroleum UK Limited UK registered company US registered company US registered company US registered company UK registered company The Group is an oil and gas developer with assets in Texas, United States. The Company’s US-based subsidiaries own a portfolio of leasehold petroleum mineral interests centred on the City of Gonzalez, in southeast Texas, comprising the undeveloped central portion of the Gonzales Oil Field. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation These consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations (IFRS IC) as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. 2.2 Basis of consolidation The Group financial statements consolidate the financial statements of the Company and all its subsidiaries (the “Group”). Subsidiaries include all entities over which the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control commences until the date that control ceases. Intra-group balances and any unrealised gains and losses on income or expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 40 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Basis of consolidation (continued) Acquisition On 17 May 2017 Pennpetro Energy plc (“Pennpetro”) acquired 100% of the issued capital of Nobel Petroleum UK Limited (“Nobel UK”) in a share for share exchange with the shareholders of Nobel UK’s parent company at that time, Nobel Petroleum Ireland Limited (“Nobel Ireland”). Due to the relative size of the companies, Nobel Ireland’s shareholders became the majority shareholders in the enlarged share capital. Pennpetro’s shares were later listed on the London Stock Exchange in December 2017. The transaction fell outside the scope of IFRS 3 (“Business Combinations”) and as such has been treated as a reverse merger and accounted for as a share-based payment transaction which should be accounted for in accordance with IFRS 2. On the basis of the guidance in paragraph B21 of IFRS 3, the reverse merger has been treated as a continuation of the Nobel Group into the Pennpetro Group. The consideration included the issue of new share capital and the issue of a convertible bond. Pennpetro was incorporated with the intention of obtaining a listing on the LSE shortly after completing a reverse merger with Nobel UK by way of a share swap with Nobel UK’s parent company Nobel Ireland. Nobel Ireland’s shareholders retained a majority interest in the listed Pennpetro after the transaction. 2.3 Business combinations The acquisition of the other subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting is used to account for business combinations. 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, and the equity interests issued. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. Acquisition related costs are expensed as incurred. Where necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies. 2.4 Going concern The Group’s business activities, together with the factors likely to affect its future development and performance are set out in the Executive Director’s Statement. In addition, notes 3 and 24 to the financial statements disclose the Group’s and Company’s objectives, policies and processes for managing financial risks and capital. As a result of the Covid-19 pandemic, the Group temporarily closed down its operations in Gonzales and significantly reduced its operating costs. The ongoing COVID-19 pandemic means there is still some uncertainty around the potential timing of when the Company and Group will be able to recommence operations. Additional finance will be needed in the short term to recommence the Company’s US operations and to finance planned capital expenditure. The Directors are actively pursuing a number of funding options and have also received confirmation from Petroquest Energy Limited that $1.1m is still available to draw under its loan facility of $5m. The Directors are currently considering the longer-term finance options available to the Group and Company given the repayment date of the Petroquest Energy Limited loan notes is in December 2021. The Directors recognise that the impact of COVID-19 on the equity and debt markets may make the availability of such funding more uncertain. The Group has prepared cashflow forecasts for 12 months from the date of signing the financial statements. The Directors have considered these forecasts and have a reasonable expectation that the Company and Group has adequate resources to continue in operational existence through to 30 June 2021 as projected. 41 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Going concern (continued) This is subject to material adverse unforeseen events that may occur, including but not limited to oil and gas prices and further hinderances to operations as a result of the Covid-19 pandemic. Whilst the Directors continue to consider it appropriate to prepare the Group and Company financial statements on a going concern basis the above constitutes a material uncertainty that shareholders should be aware of. 2.5 New standards, amendments and interpretations adopted by the Group and Company The Group and Company have applied the following new and amended standards for the first time for its annual reporting period commencing 1 January 2019: • IFRS 16 Leases • Annual improvements to IFRS Standards 2015-2017 Cycle • Interpretation 23 ‘Uncertainty over Income Tax Treatments’ These new and amended standards have not had a material effect on the Group and Company financial statements. 2.6 New standards, amendments and interpretations not yet adopted There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group or Company. 2.7 Investments in subsidiaries Investments in subsidiaries are accounted for at cost less impairment. 2.8 Foreign Currency Translation • Functional and presentation currency Items included in each of the financial statements of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The functional currency of the UK parent entity and Nobel UK Limited is pound sterling and the functional currency of the US subsidiaries is US dollars. The financial statements are presented in US Dollars, rounded to the nearest dollar, which is the Group’s and Company’s presentation currency. • Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where such items are re-measured. 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 Statement Of Comprehensive Income. 42 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) • Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each Statement of Financial Position presented are translated • at the closing rate at the date of that Statement of Financial Position; income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income. 2.8 Foreign Currency Translation (continued) On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of monetary items receivable from foreign subsidiaries for which settlement is neither planned nor likely to occur in the foreseeable future are taken to other comprehensive income. When a foreign operation is sold, such exchange differences are recognised in the Statement of Comprehensive Income as part of the gain or loss on sale. 2.9 Property, plant and equipment Following evaluation of successful exploration of wells, if commercial reserves are established and the technical feasibility of extraction demonstrated, and once a project is sanctioned for commercial development, then the related capitalised exploration costs are transferred into a single field cost centre within ‘producing properties’ within property, plant and equipment after testing for impairment. The net book values of ‘producing properties’ are depreciated on a unit of production basis at a rate calculated by reference to proven and probable reserves and incorporating the estimated future cost of developing and extracting those reserves once production has commenced. The Petroleum (Mineral lease) expenditure to date is over land that has already had historical vertical drilled wells and has proven oil reserves. All these costs were therefore immediately capitalised within property, plant and equipment. All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons has been demonstrated, are capitalised within ‘drilling costs and equipment’ on a well by well basis. Subsequent expenditure is capitalised only where it either enhances the economic benefits of the development/producing asset or replaces part of the existing development/producing asset. Any costs remaining associated with the part replaced are expensed. All property, plant and equipment other than oil and gas assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. All other repairs and maintenance are charged to the Statement of Comprehensive Income during the financial period in which they are incurred. Depreciation is charged so as to allocate the cost of assets, over their estimated useful lives, on a straight-line basis as follows: Office equipment – 4 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each financial year-end. Gains and losses on disposal are determined by comparing proceeds with carrying amount. These are included in the Statement of Comprehensive Income. 43 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.10 Intangible assets • Development expenditure Expenditure on the drilling of development wells, including service, is capitalised initially within intangible fixed assets and when the well has formally commenced commercial production, then it is transferred to property, plant and equipment and is depreciated from the commencement of production as described in the accounting policy for property, plant and equipment • Drilling costs and Petroleum mineral leases The Group applies the successful efforts method of accounting for oil and gas assets, having regard to the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’. Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately to the Statement of Comprehensive Income. Exploration expenditure incurred in the process of determining exploration targets is capitalised initially within intangible assets as drilling costs. Drilling costs are initially capitalised on a well by well basis until the success or otherwise has been established. Drilling costs are written off on completion of a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercially viable. Drilling costs are subsequently ‘Drilling expenditure’ within property, plant and equipment and depreciated over their estimated useful economic life. All such costs are subject to regular technical, commercial and management review on at least an annual basis to confirm the continued intent to develop or otherwise extract value from the discovery. Where this is no longer the case, the costs are immediately expensed to the Statement of Comprehensive Income. transferred to 2.11 Impairment of Non-Financial Assets Assets not ready for use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment at each reporting date. 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. 2.12 Financial assets Classification Financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. At initial recognition, the Group measures its financial assets at amortised cost which comprise ‘trade and other receivables’ and ‘cash and cash equivalents’. A financial asset shall be measured at amortised cost if both of the following conditions are met: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. • 44 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.12 Financial assets (continued) Recognition and measurement At initial recognition, an entity shall measure a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset. At initial recognition, an entity shall measure trade receivables at their transaction price if the trade receivables do not contain a significant financing component. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of the ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Derecognition also takes place for certain assets when the Group writes-off balances pertaining to the assets deemed to be uncollectible. Impairment of financial assets IFRS 9 mandates the use of an expected credit loss model to calculate impairment losses rather than an incurred loss model, and therefore it is not necessary for a credit event to have occurred before credit losses are recognised. The new impairment model applies to the Group’s financial assets and loan commitments. The Group recognises lifetime expected credit losses (“ECL”) when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL. No changes to the impairment provisions were made on transition to IFRS 9. The Group is satisfied that the credit risk of its financial assets has not significantly increased and no provision for losses is required. The Group has concluded this on the basis of ongoing monitoring of the credit status of bank counterparties and the long-term operating relationships that the Group has with the other debtor counterparties. 2.13 Short term investments Short term investments include amounts held in bank accounts and deposits by intermediaries that have been approved by the Directors. 2.14 Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and demand deposits with banks. 2.15 Trade and other payables Trade and other payables are initially measured at fair value, net of transaction costs that are directly attributable to the issue of the financial liability and are subsequently measured at amortised cost using the effective interest method if the time value of money is significant. 45 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.16 Borrowings Borrowings are recognised initially at fair value minus transaction costs that are directly attributable to the issue of the financial liability. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Income Statement over the period 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 end of the reporting period. 2.17 Share capital Ordinary shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments as consideration for the acquisition of a business are included in the cost of acquisition. 2.18 Reserves The reverse merger as described in Accounting Policy 2.2; the acquisition has been accounted for as a share-based payment transaction which should be accounted for in accordance with IFRS 2. On the basis of the guidance in para 13A of IFRS 2, the reverse merger has been treated as a continuation of the Nobel Group into the Pennpetro Group. The consideration included the issue of new share capital and the issue of a convertible bond. The total consideration less the share capital in Nobel UK resulted in the creation of the reorganisation reserve. The convertible reserve represents the principal value of a mandatory convertible note issued by Pennpetro Petroleum plc to Nobel Petroleum Ireland Limited in part consideration for the acquisition of Nobel Petroleum UK under an agreement dated 17 May 2017. The translation reserve represents effects of currency translation in the year. 2.19 Taxation The tax expense or credit comprises current and deferred tax. It is calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction, which affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised, or the liability is settled. Deferred tax is charged or credited in the Statement of Comprehensive Income, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 46 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.20 Segment Information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (“CODM”), who is responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The CODM is determined to be the board of Directors. 2.21 Share based payments All services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options/warrants awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Share based payments are ultimately recognised as an expense in the Statement of Comprehensive Income with a corresponding credit to other reserves in equity, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options/warrants expected to vest. Non-market vesting conditions are included in assumptions about the number of options/warrants that are expected to become exercisable. Estimates are subsequently revised, if there is any indication that the number of share options/warrants expected to vest differs from previous estimates. No adjustment is made to the expense or share issue cost recognised in prior periods if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. Where share options are cancelled, this is treated as an acceleration of the vesting period of the options. The amount that otherwise would have been recognised for services received over the remainder of the vesting period is recognised immediately within the Statement of Comprehensive Income. 3. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and cash flow and interest rate risk), credit risk and liquidity risk. Market risk The Group operates in an international market for hydrocarbons and is exposed to risk arising from variations in the demand for and price of the hydrocarbons. Oil and gas prices historically have fluctuated widely and are affected by numerous factors over which the Group has no control, including world production levels, international economic trends, exchange rate fluctuations, speculative activity and global or regional political events. Currency risk The majority of the Group’s purchase transactions and expenditure are denominated in US dollars. The currencies are stable, and any exchange risk is managed by maintaining bank accounts denominated in those currencies. 47 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 3. FINANCIAL RISK MANAGEMENT (continued) Credit risk The Group’s principal financial assets are cash and cash equivalents, other receivables and short-term investments. Credit risk represents the risk of loss the Group would incur if third party operators and counterparties fail to fulfil their credit obligations. The risk is concentrated between a relatively small group of operators given the small number of parties involved in oil and gas exploration and production activities. The Group seeks to mitigate this risk where possible by assessing the credit quality of the participants and by establishing ongoing and long-term relationships. The initial credit risk on cash and cash equivalents and short-term investments is limited because it is the Group’s policy to invest with banks that firstly offer the greatest degree of security in the view of the Group and, secondly the most competitive interest rates. The credit risk for short term investments and cash and cash equivalents is considered negligible since the counterparties are reputable banks. Other receivables include amounts due from parties that have been involved in the Gonzales Project since its inception and continue to have an interest in the Group in their capacity as shareholders in Pennpetro or as lenders to the Group. Other receivables are therefore initially considered low credit risk. Other receivables are considered in default if the entity or party has not settled its payment obligation by the due date set out in the underlying contracts and agreements. A loss allowance is recognised for expected credit losses on all financial assets held at the balance sheet date. Given risk mitigation steps undertaken by the Directors, no provision has been made for losses. The maximum exposure due to credit risk for the Group on financial assets during the year was $425,313 (2018: $689,849). All amounts are expected to be received in full and on time. Liquidity risk Cash flow forecasting is performed in the operating entities of the Group and aggregated by Group Finance. Group Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs, while seeking to maintain sufficient headroom on its undrawn committed borrowing facilities (note 20) at all times, so that the Group does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal Statement of Financial Position ratio targets, and, if applicable, external regulatory or legal requirements (for example, currency restrictions). The table below analyses the Group’s non-derivative financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings, based on the remaining period at the Statement of Financial Position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. 48 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 3. FINANCIAL RISK MANAGEMENT (continued) Liquidity risk (continued) Group At 31 December 2019 Borrowings (undiscounted) Trade and other payables At 31 December 2018 Borrowings (undiscounted) Trade and other payables Less than 1 year $ Between 1 and 2 years $ Between 2 and 3 years $ 6,791,993 265,972 - - 202,247 139,170 6,596,156 - - - - - 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 4.1 Use of estimates and judgements The preparation of Financial Statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described below. 4.2 Critical accounting judgements • Recoverability of non-producing mineral leases and capitalised drilling costs & equipment Management tests annually whether non-producing mineral leases have future economic value in accordance with the accounting policies. This assessment takes into consideration the likely commerciality of the asset, the future revenues and costs pertaining and the discount rates to be applied for the purposes of deriving a recoverable value. In the event that a lease does not represent an economic drilling target and results indicate that there is no additional upside, the mineral lease and drilling costs will be impaired. The Directors have reviewed the estimated value of the licences and have concluded that an impairment charge of $Nil (2018: $Nil) should be recognised. The Directors do not consider that there is a significant risk of material adjustment to the estimated value of the leases given the underlying value of proven reserves and the successful testing, trials and completion of the initial well. 49 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) • Estimated impairment of producing properties and capitalised drilling costs & equipment At 31 December 2019, petroleum mineral leases and capitalised drilling costs & equipment on petroleum properties have a total carrying value of $5,527,900 (2018: $5,117,838), (notes 12 and 13). Management tests annually whether the assets have future economic value in accordance with the accounting policies and has placed reliance on the Competent Persons Report (“CPR”) prepared in December 2017. All of the mineral leases were offered on an initial term of three years with an option to extend them by two years. All of the leases covering the initial permit area do not need renewing whilst there is any production from the permitted area. The recoverable amount of each property has been determined based on a value in use calculation which requires the use of certain estimates and assumptions such as long-term commodity prices (i.e. oil and gas prices), pre-tax discount rates, operating costs, future capital requirements and mineral resource estimates. These estimates and assumptions are subject to risk and uncertainty and therefore a possibility that changes in circumstances will impact the recoverable amount. The following information has been used by the Directors in determining the recoverability of the Company’s Petroleum properties. The Source for this information is the CPR prepared in December 2017. • The Pennpetro Group owns approximately 1,000 leases on 2,500 acres in Gonzales, Texas. • The Group’s Net Working Interests are 4,000 Mbbl of oil and 2,000 MMcf of gas. • Base case oil sold is assumed at $33 per barrel and gas at $3.20 per thousand cubic feet. • WTI Oil initially for two years at $33 then at $45 and gas pricing held constant to depletion in 2031. • The total proved future Net Revenue Interest after costs as at 1 June 2020: Undiscounted $120m (2018: $92m). The Directors are comfortable in relying on the CPR for the following reasons: - The oil sold price used by the Directors in their revised assessment of future Net Revenue of $33, is lower than current and future forecast WTI prices. The WTI price as at 29 June was $39.64 (source: Bloomberg markets) and is forecast to rise to $50 plus over the next 5 years. - Operating costs remain unchanged. - The Group increased its Working Interest to 100% during the year and consequently its Net Revenue Interest increased to 75%. This was as a result of taking legal ownership of the remaining participants interests in the Gonzales Project. - The effect of the increase in the Group’s Net Revenue Interest counteracts the reduction in oil price used by the Directors in calculating the total proved future Net Revenue Interest after costs. Based on the information provided in the CPR, updated for changes in Net Revenue Interest and oil price, the Directors have determined that the Company’s oil properties have not been impaired as at the 31 December 2019. The Directors also do not consider that there is a significant risk of material adjustment to the estimates used to assess impairment of producing properties and capitalised drilling costs & equipment in the next 12 months, but have disclosed this as an area of significant estimation based on the size of the balance. 50 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) Impairment of investments • The Directors have assessed at year end whether there is any indication that the carrying value of the Company’s investment in its subsidiaries has been impaired. The Directors have determined that the value of the assets owned by its subsidiaries, namely the mineral leases, the proven oil and gas reserves and Net Revenue Interests are significantly higher than the Investment carried in the Company’s books. The Directors therefore do not consider any impairment is necessary. The Directors do not consider that there is a significant risk of material downward adjustment to the estimated levels of proven and probable reserves in the next 12 months, but have disclosed this as an area of significant estimation based on the size of the balance. 5. SEGMENTAL INFORMATION The Group operates in two geographical areas, the United Kingdom and the United States of America. Activities in the UK are mainly administrative in nature whilst the activities in the USA relate to exploration and production from oil and gas wells. The reports reviewed by the Board of Directors that are used to make strategic decisions are based on these geographical segments. Year ended 31 December 2019 USA $ Intra-segment balances $ UK $ Operating loss Depreciation & amortisation Capital expenditure Development expenditure Total assets Total liabilities (184,505) (958,825) 90,690 2,215 85,566 184,963 5,921,589 6,278,607 - - 289,737 247,713 - - - - (181,447) (181,447) Year ended 31 December 2018 USA $ Intra-segment balances $ UK $ Operating profit/(loss) Depreciation & amortisation Capital expenditure Development expenditure Total assets Total liabilities 34,085 (629,159) 100,153 2,329 56,382 750,473 5,794,945 5,912,927 - - 580,645 488,485 - - - - (398,379) (398,379) Total $ (1,143,330) 92,905 85,566 184,963 6,029,879 6,344,873 Total $ (595,074) 102,482 56,382 750,473 5,977,211 6,003,033 51 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 5. SEGMENTAL INFORMATION (continued) A reconciliation of the operating loss to loss before taxation is provided as follows: Operating loss for reportable segments (Finance costs net of finance income) Loss before tax Year ended 31 December 2019 $ Year ended 31 December 2018 $ (1,143,330) (525,080) (1,668,410) (595,074) (193,556) (788,630) The amounts provided to the Board of Directors with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and physical location of the asset. Reportable segments’ assets are reconciled to total assets as follows: Year ended 31 December 2019 $ Year ended 31 December 2018 $ Segmental assets for reportable segments Total assets per Statement of Financial Position 6,029,879 6,029,879 5,977,211 5,977,211 Information about major customers/operating partners At 31 December 2019, Nobel USA held a 100% Working Interest, an increase of 25% from 31 December 2018. On 6 August 2019, Pennpetro, had through its US based entities, increased its Working Interest from 75% to 100% in the leasehold petroleum interests which are centred on the City of Gonzales, southwest Texas, comprising the undeveloped central portion of the Gonzales Oil Field. 6. EXPENSES BY NATURE Group Legal, professional and compliance costs Depreciation and amortisation Other costs Total administrative expenses Year ended 31 December 2019 $ Year ended 31 December 2018 $ 458,235 92,905 592,190 1,143,330 388,452 102,482 104,140 595,074 52 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 7. AUDITOR REMUNERATION Services provided by the Company’s auditor and its associates During the year, the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor: Year ended 31 December 2019 $ Year ended 31 December 2018 $ Fees payable to the Company’s auditor for the audit of the parent company and consolidated financial statements 28,450 33,588 8. STAFF COSTS Group and Company Wages and salaries Social security costs Valuation of options Directors’ Emoluments Keith Edelman Olof Rapp Philip Nash Thomas Evans Emoluments Valuation of options Emoluments Valuation of options Emoluments Valuation of options Emoluments Valuation of options 2019 $ 159,617 12,204 361,860 533,681 2019 $ 44,694 90,465 38,308 90,465 38,308 90,465 38,308 90,465 521,478 2018 $ 167,944 12,166 60,153 240,263 2018 $ 47,026 15,039 40,306 15,038 40,306 15,038 40,306 15,038 228,097 The Group does not employ any full-time employees at its US subsidiaries. Instead the Group uses specialist service providers to fulfil its well drilling and land management requirements. The average monthly number of staff, including the Directors, during the financial year was as follows: Directors 2019 4 2018 4 53 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 9. FINANCE INCOME AND FINANCE COSTS Loan adjustment for effective interest and bank interest 2019 $ 944 2018 $ 273,126 Interest expense (526,024) (466,682) 10. INCOME TAX The tax charge for the year is $Nil (2018: $Nil). Factors affecting the tax charge for the period The tax charge for each year is explained below: 2019 $ 2018 $ Loss for the year before taxation (1,668,410) (788,630) UK Loss before tax multiplied by the UK tax rate 19% (2018: 19%) (316,998) (149,840) Tax effect of: Expense not deductible for tax purposes Unutilised tax losses carried forward - 316,998 - 30,901 118,939 - The Group has UK tax losses of approximately $465,058 (2018: $148,060) to carry forward against future profits. The Directors have not recognised a deferred tax asset on the losses to date due to the uncertainty of recovery. 11. EARNINGS PER SHARE The calculation of basic and diluted earnings per share is based on the following loss and number of shares: 2019 2018 Group: Loss attributable to equity holders of the parent ($) 1,668,410 788,630 Weighted average number of shares (number) 72,156,944 70,900,000 Loss per share (cents) (2.31) (1.11) There is no difference between the basic and diluted earnings per share as the effect would be to increase the loss per share. 54 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 12. PROPERTY, PLANT AND EQUIPMENT Group Cost At 1 January 2018 Additions Currency translation At 31 December 2018 Additions Currency translation At 31 December 2019 Accumulated Depreciation At 1 January 2018 Charge for the year Currency translation At 31 December 2018 Charge for the year Currency translation At 31 December 2019 Net Book Amount Petroleum (Mineral Leases) $ Office equipment $ 1,219,215 56,382 - 1,275,597 85,566 - 1,361,163 - - - - - - - 11,683 - (540) 11,143 - 369 11,512 4,251 2,907 (332) 6,826 2,792 323 9,941 Total $ 1,230,898 56,382 (540) 1,286,740 85,566 369 1,372,675 4,251 2,907 (332) 6,826 2,792 323 9,941 At 31 December 2018 1,275,597 4,317 1,279,914 At 31 December 2019 1,361,163 1,571 1,362,734 55 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 12. PROPERTY, PLANT AND EQUIPMENT (continued) Company Cost At 1 January 2018 Additions Currency translation At 31 December 2018 Additions Currency translation At 31 December 2019 Accumulated Depreciation At 1 January 2018 Charge for the period Currency translation At 31 December 2018 Charge for the period Currency translation At 31 December 2019 Net Book Amount At 31 December 2018 At 31 December 2019 Office equipment $ 9,374 - (540) 8,834 - 369 9,203 3,674 2,329 (332) 5,671 2,209 329 8,209 3,163 994 Office equipment depreciation expense of $2,209 (2018: $2,329) has been charged in administrative expenses. 56 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 13. INTANGIBLE ASSETS Group Drilling costs $ Loan arrangement fees $ Cost At 1 January 2018 Additions Add: Reclassification from other receivables At 31 December 2018 Additions Add: Reclassification from other receivables At 31 December 2019 1,908,751 750,473 1,183,017 3,842,241 184,963 139,533 4,166,737 Amortisation At 1 January 2018 Amortisation charge for the year At 31 December 2018 Amortisation charge for the year At 31 December 2019 Net Book Amount - - - - - 270,339 - - 270,339 - - 270,339 5,557 99,575 105,132 90,113 195,245 Total $ 2,179,090 750,473 1,183,017 4,112,580 184,963 139,533 4,437,076 5,557 99,575 105,132 90,113 195,245 At 31 December 2018 3,842,241 165,207 4,007,448 At 31 December 2019 4,166,737 75,094 4,241,831 Amounts due from development participants for drilling costs are disclosed under note 15 trade and other receivables. Drilling costs represents acquired exploration and evaluation assets with an undetermined useful life and are tested annually for impairment. Drilling costs are capitalised on a well by well basis if the results indicate the existence of a commercially viable level of reserves. No amounts are pledged as security for liabilities. On 9 August 2019, Pennpetro announced that it had, through its US based subsidiary entities, increased its Working Interest from 75% to 100% in the leasehold petroleum interests centred on the City of Gonzales, southwest Texas. The interest was acquired from project participants pursuant to contractual obligations within the Joint Operating Agreement, by crediting $0.2million of outstanding receivables and debiting drilling costs intangible assets. Impairment review – Intangible assets The Directors have undertaken a review to assess whether circumstances exist which could indicate the existence of impairment, considering the following indicators: • The Group no longer has title to mineral leases. • A decision has been taken by the Board to discontinue exploration due to the absence of a commercial level of reserves. • Sufficient data exists to indicate that the costs incurred will not be fully recovered from future development and participation. Following their assessment, the Directors recognised that no impairment charge is necessary. Further details regarding consideration of the carrying value is contained in note 4. 57 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 14. INVESTMENTS Investments in subsidiaries Company Shares in group undertakings At 1 January Additions Foreign exchange movements At 31 December 2019 $ 2018 $ 6,622,720 - 276,388 6,899,108 7,027,100 - (404,380) 6,622,720 The Group comprises of the following subsidiaries: Pennpetro USA Corp Registered Office: Nature of business: Class of share: % of equity shares held by Company: Nobel Petroleum USA Inc. Registered Office: Nature of business: Class of share: % of equity shares held by Company: Nobel Petroleum LLC Registered Office: Nature of business: Class of share: % of equity shares held by Company: Nobel Petroleum UK Limited Registered Office: Nature of business: Class of share: % of equity shares held by Company: 8 The Green Ste A, Dover, Delaware 19901, USA Oil and Gas Ordinary shares 100% 198 West 13th Street, Wilmington, Delaware 19801, USA Oil and Gas Ordinary shares 100% via Pennpetro USA Corp 3867 Plaza Tower DR Baton Rouge, Louisiana 70816-4378, USA Oil and Gas Ordinary shares 100% via Pennpetro USA Corp 1/88 Whitfield St. London W1T 4EZ, UK Dormant Ordinary shares (£100) 100% These subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertaking held directly by the parent company does not differ from the proportion of ordinary shares held. 58 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 15. TRADE AND OTHER RECEIVABLES Amounts due from development partners Other receivables Group 2019 $ 2018 $ Company 2019 $ 2018 $ - 192,042 - - 356,928 356,928 331,440 523,482 229,736 229,736 12,736 12,736 The fair value of all receivables is the same as their carrying values stated above. At 31 December 2019, Nobel USA held a 100% Working Interest, an increase of 25% from 31 December 2018. Group The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: UK Pound Sterling US Dollar 2019 $ 13,268 343,660 356,928 2018 $ 12,736 510,746 523,482 The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. With respect to amounts due from Development participants, each participant has provided a lien over its lease interests and a security interest over its interest in well assets. The Group does not hold any collateral as security for other receivables. The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying value of other receivables denominated in UK Pounds by $1,327 (2018: $1,273). The impact of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of other receivables denominated in UK Pounds by $1,327 (2018: $1,273). Company The carrying amounts of the Company’s trade and other receivables are denominated in UK Pound Sterling. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Company does not hold any collateral as security for other receivables. The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying value of other receivables denominated in UK Pounds by $22,974 (2018: $1,273). The impact of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of other receivables denominated in UK Pounds by $22,974 (2018: $1,273). 59 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 16. SHORT-TERM INVESTMENTS Group 2019 $ 2018 $ Company 2019 $ 2018 $ Short-term investments 60,001 166,367 60,001 166,367 Short term investments include $60,001 (2018: $166,367) of cash being held by FHF Corporate Finance Limited on behalf of Pennpetro. The amount is held in Pounds Sterling. Thomas Evans was also a director of FHF Corporate Finance Limited from 1 June 2018 to 13 June 2018. Group The carrying amounts of the Group’s short-term investments are denominated in the following currencies: UK Pound Sterling US Dollar 2019 $ 60,001 - 60,001 2018 $ 166,367 - 166,367 The maximum exposure to credit risk at the reporting date is the carrying value of the short- term investment mentioned above. The Group does not hold any collateral as security. The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying value of short-term investments denominated in UK Pounds by $6,000 (2018: $16,636). The impact of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of short-term investments denominated in UK Pounds by $6,000 (2018: $16,636). Company The carrying amounts of the Company’s short-term investments are denominated in UK Pound Sterling. 17. CASH AND CASH EQUIVALENTS Cash at bank Group 2019 $ 8,384 2018 $ - Company 2019 $ - 2018 $ - At 31 December 2019, the Group held cash of $8,384 (2018: $ Nil) in banks with a Fitch credit rating of A (Stable). 60 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 18. SHARE CAPITAL AND PREMIUM Ordinary shares Share premium Number of shares Value £ Value $ Value £ Value $ Total $ 70,900,000 709,000 908,404 472,400 625,504 1,533,908 - - - - - - 70,900,000 709,000 908,404 472,400 625,504 1,533,908 Group At 1 January 2018 Movement At 31 December 2018 Share issue 1,433,702 14,337 18.307 774,198 988,599 1,006,906 Share issue costs - - - (59,100) (75,467) (75,467) At 31 December 2019 72,333,702 723,337 926,711 1,187,098 1,538,636 2,465,347 Each ordinary share has a nominal value of 1 pence per share. A convertible loan note which was issued by Pennpetro to Nobel Ireland in the Reverse merger of Nobel UK, may be converted into 19 million ordinary shares if certain conditions are met, at a fixed subscription price of 25 pence. 19. SHARE BASED PAYMENTS Share options On 2nd November 2018 the Company granted options under the Pennpetro Energy Plc Option Share Plan with an exercise price of £0.35p per share over, in aggregate, 1,700,000 ordinary shares of £0.01 each to Directors Keith Edelman, Phillip Nash, Tom Evans and Olof Rapp, who will each receive 425,000 options. The share price of the options granted are linked to the price of shares issued on listing. Options are granted at 35p, which is a modest premium to the issue price of the listing share price of 25p. At 1 January 2018 Awarded Forfeited Exercisable at 31 December 2018 Awarded Forfeited Exercisable at 31 December 2019 Weighted average exercise price £ - 0.35 - 0.35 - - 0.35 Number of awards - 1,700,000 - 1,700,000 - - 1,700,000 The options outstanding at 31 December 2019 have a weighted average remaining contractual life of 1.8 years (2018: 2.8 years). At 31 December 2019, the following options were issued to Directors of the Company under the share option incentive scheme: Date of grant Number granted Contractual life Exercise price Estimated fair value 2 November 2018 1,700,000 3 years £0.35 £0.50 None of the share options vested in the year. 61 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 19. SHARE BASED PAYMENTS (continued) The fair value of the options issued during the year was determined using the Black-Scholes the Statement of valuation model. $378,488 (2018: $60,153) was recognised Comprehensive Income in relation to share based payment transactions. in Other significant inputs into the model are: Issue date share price Risk free rate Expected volatility £0.685 0.8% 75% The average volatility has been calculated by using the average volatility for the Company and other similar companies. 20. BORROWINGS Non-current liabilities Corporate borrowings Current liabilities Corporate borrowings Group 2019 $ 2018 $ - 5,863,863 6,078,992 - Company 2019 $ 2018 $ - - - - As at 31 December 2019, the Group had a $5 million Loan Note arrangement with Petroquest Energy Limited, with a maturity date of 31 December 2020. In June 2020, Petroquest Energy Limited agreed to extend the maturity date to 31 December 2021. The annual interest rate is set at 1% below Barclays Bank base rate, which has been less than 0.75% since the loan’s inception and therefore no interest has been charged on the loan. The undiscounted balance drawn against this loan note as at 31 December 2019 was $3,951,706 (2018: $3,951,706). The borrowing facility is secured against certain petroleum leases owned by the Group. The discounted present value of the loan as at 31 December 2019 was $3,387,951 (2018: $3,387,953) and reflects an adjustment for effective interest calculated at 8% per annum over the remaining term of the loan. As at 31 December 2019, Nobel Petroleum USA, Inc. had a Loan Agreement of £1,822,455 (2018: £1,944,025) with Pennpetro Bonds II Limited at an annual interest rate of 8% which is due for repayment on 31 October 2020. The balance outstanding on the loan as at 31 December 2019 was $2,417,945 (2018: $2,475,010). Arrangement costs of $270,339 have been capitalized in Intangible assets and are being charged to the Statement of Comprehensive Income over the life of the Loan. The borrowing facility is secured against certain petroleum leases owned by the Group. An agreement was reached with the lender on 14 January 2020 to settle the loan by the issue of shares in Pennpetro Energy plc as follows: • £2,000,000 to be converted into 4,000,000 ordinary shares at £0.50 per share. • £50,202 in outstanding interest to be converted into 118,404 ordinary shares at £0.50 per share. Pennpetro Bonds II Limited is not in the Pennpetro group. 62 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 20. BORROWINGS (continued) The movement in total borrowings in the year was as follows Group 2019 $ 2018 $ Company 2019 $ 2018 $ At 1 January Advance Interest charge Net repayment Loan term modification adjustment Foreign currency exchange At 31 December 5,863,863 - 271,188 (151,005) 6,092,657 - 271,189 (71,151) 1,906 (273,094) 93,040 6,078,992 (155,738) 5,863,863 - - - - - - - - - - - - - - The fair value of borrowings equals their carrying amount. Borrowings are denominated in US dollars. The net debt position (total borrowings less cash on hand) as at 31 December 2019 is $6,078,992 (2018: $5,863,863). Group The carrying amounts of the Group’s borrowings are denominated in the following currencies: UK Pound Sterling US Dollar 2019 $ 2,416,183 3,662,809 6,078,992 2018 $ 2,475,910 3,387,953 5,863,863 The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying value of borrowings denominated in UK Pounds by $241,618 (2018: $247,591). The impact of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of the borrowings denominated in UK Pounds by $241,618 (2018: $247,591). Company The company does not carry any borrowings. 21. TRADE AND OTHER PAYABLES Group 2019 $ 2018 $ Company 2019 $ 2018 $ Trade and other payables Amounts owed to group undertakings Accrued expenses At 31 December 106,333 91,929 55,803 42,865 - - 35,022 398,379 159,548 265,881 47,241 139,170 156,890 247,715 47,241 488,485 63 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 21. TRADE AND OTHER PAYABLES (continued) Group The carrying amounts of the Group’s trade and other payables are denominated in the following currencies: UK Pound Sterling US Dollar 2019 $ 212,601 53,280 265,881 2018 $ 90,106 49,064 139,170 The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying value of trade and other payables denominated in UK Pounds by $21,260 (2018: $9,010). The impact of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of trade and other payables denominated in UK Pounds by $21,260 (2018: $9,010). Company The carrying amounts of the Company’s trade and other payables are denominated in UK Pound sterling. The carrying amounts of the Company’s US subsidiary companies are denominated in US Dollars. 22. FINANCIAL INSTRUMENTS BY CATEGORY Assets as per Statement of Financial Position Loans and receivables: Trade and other receivables (excluding prepayments) Short-term investments Cash and cash equivalents Liabilities per Statement of Financial Position Financial liabilities at amortised cost: Borrowings Trade and other payables (excluding non-financial liabilities) Group 2019 $ 2018 $ Company 2019 $ 2018 $ 356,928 523,482 229,736 12,736 60,001 8,384 425,313 166,367 - 689,849 60,001 - 289,737 166,367 - 179,103 5,804,132 5,863,863 - - 265,881 91,929 212,693 441,244 6,070,013 5,955,792 212,693 441,244 Certain leases which have been capitalised in Property Plant and Equipment have been pledged as collateral against the loan from Pennpetro Bonds II Limited. No other financial assets are pledged as security. Pennpetro Bonds II Limited is not in the Pennpetro group. 23. TREASURY POLICY The Company and Group operate informal treasury policies which include ongoing assessments of interest rate management and borrowing policy. The Board approves all decisions on treasury policy. The Group has financed its activities by raising funds through borrowings set out in note 20 above. There are no material differences between the book value and fair value of the financial assets. 64 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 24. CAPITAL MANAGEMENT POLICIES The Group and Company set the amount of capital in proportion to its overall financing structure and manage their capital structure and make adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. The Group considers its equity to be its capital. The Group and Company’s capital management objectives are: • • • to ensure compliance with borrowing covenants; to ensure the Group’s and Company’s ability to continue as a going concern; and to provide an adequate return to shareholders. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debts. The Group will continue making interest payments in accordance with financial and non-financial loan covenants. 25. CAPITAL COMMITMENTS As at 31 December 2019 and 2018, the Group had no capital commitments for drilling and equipment costs contracted but not provided for. 26. RELATED PARTY TRANSACTIONS Transactions with Directors An amount of £10,000 that was previously advanced to Thomas Evans remains outstanding as at 31 December 2019 (2018: £10,000). The amount is secured against shares held by him in the Company and is due for repayment within 12 months. No interest has been charged on the advance. Thomas Evans is a Director of Pennpetro Bonds II Limited, which provided a £2m loan facility to the Group during the current reporting period. In his capacity as a Director of Pennpetro Bonds II Limited, Mr. Evans received director’s fees of £Nil (2018: £Nil) from that Company. Pennpetro Bonds II Limited is not in the Pennpetro group. Thomas Evans is a Director of the following companies which are considered as related parties: • Pennpetro Bonds II Limited – the provider of a £2m loan facility to Nobel Petroleum USA, Inc. • FHF Securities (A’Asia) Limited – a shareholder in Pennpetro with a 6.54% shareholding in the Company. • Nobel Petroleum UK Limited which is a 100% subsidiary of Pennpetro. • Nobel Petroleum LLC, which is a 100% directly owned subsidiary of Nobel Petroleum UK Limited. • Nobel Petroleum USA, Inc, which is a 100% owned subsidiary of Nobel Petroleum UK Limited. • Pennpetro USA Corp., which is a 100% owned subsidiary of Pennpetro. Thomas Evans was a director of FHF Corporate Finance Limited from 1 June to 13 June 2018. Details of arrangements with FHF Corporate Finance Limited can be found in note 16. 65 PENNPETRO ENERGY PLC NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 31 December 2019 26. RELATED PARTY TRANSACTIONS (continued) Transactions with Group undertakings During the year ended 31 December 2019, the Company provided funds to its wholly owned subsidiary Pennpetro USA Corp. of $158,430 (2018: $580,826) and provided funds to Nobel Petroleum USA of $390,186 (2018: $194,354). After the foreign exchange gains of $12,281 (2018: $32,282) the total amount due from the Group as at 31 December 2019 was $216,468 (2018 $181,447). At 31 December 2019, the Company was owed $35,021 (2018: $398,379) from the Group. All Group transactions were eliminated on consolidation. 27. ULTIMATE CONTROLLING PARTY As at 31 December 2019, there was no ultimate controlling party. 28. EVENTS AFTER THE REPORTING PERIOD The loan entered into by Nobel Petroleum LLC on 7 November 2017 is due for repayment by 31 October 2020. On 14 January 2020, settlement was agreed by the issue of shares in the Pennpetro Energy plc as follows: • £2,000,000 to be converted into 4,000,000 ordinary shares at £0.50 per share. • £50,202 in outstanding interest to be converted into 118,404 ordinary shares at £0.50 per share. Since the year end, it has become clear that the spread of the COVID-19 coronavirus will have a material impact on many economies globally both through the effects of the virus itself and the measures taken by governments to restrict its spread. Given the emergence and spread of the COVID-19 virus is not considered to provide more information about conditions that existed as at the balance sheet date, this is considered to be a non-adjusting post balance sheet event and so the measurement of assets and liabilities in the accounts have not been adjusted for its potential impact. The Directors have set out the post year end impact on going concern in the relevant section to the Directors Report. 66
Continue reading text version or see original annual report in PDF format above