Notes to the Condensed Consolidated Financial Statements

For the Six Months Ended 30 June 2020

Note 1: Basis of preparation of the interim financial statements

The condensed consolidated interim financial statements of Coro Energy plc (the "Group") for the six month period ended 30 June 2020 have been prepared in accordance with Accounting Standard IAS 34 Interim Financial Reporting.

The interim report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 31 December 2019, which was prepared under International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), and any public announcements made by Coro Energy plc during the interim reporting period.

These condensed consolidated interim financial statements do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2019 prepared under IFRS have been filed with the Registrar of Companies. The auditor's report on those financial statements was unqualified and did not contain a statement under Section 498(2) of the Companies Act 2006. These condensed consolidated interim financial statements have not been audited.

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except as set out below.

Basis of preparation - going concern

The interim financial statements have been prepared under the going concern assumption, which presumes that the Group will be able to meet its obligations as they fall due for the foreseeable future.

At 30 June 2020 the Group had cash reserves of $3.3m (excluding cash recorded within assets of the Italian disposal group held for sale). While the Group has significantly reduced UK overheads to an annualised cost of approximately $1.2m, additional cash outflows will be realised in relation to the Duyung project and the next Eurobond coupon, which is due in April 2021. Management have prepared a consolidated cash flow forecast for the period to 31 October 2021 which shows that the Group is likely to face a cash deficit in mid-2021, within the going concern forecast period. Accordingly, the Group will need to raise additional funds during the forecast period in order to remain a going concern. The directors have a reasonable expectation that additional funding will be available in the equity markets when required and therefore the financial statements have been prepared on the going concern basis.

The ability of the Group to secure additional funding is not guaranteed and significant uncertainty has been created by the ongoing COVID-19 pandemic which could impact market conditions for longer than the Directors' currently expect. However, based on the above, the Directors consider it appropriate to continue to adopt the going concern basis of accounting in preparing the interim financial statements for the period ended 30 June 2020, while acknowledging a material uncertainty concerning the success of future fundraising activities. Should the Group be unable to continue trading, adjustments would have to be made to reduce the value of the assets to their recoverable amounts, to provide for further liabilities which might arise and to classify fixed assets as current.

a)   New and amended standards adopted by the group

A number of new or amended standards became applicable for the current reporting period. These new/amended standards do not have a material impact on the Group, and the Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

b)   New accounting policies adopted by the Group

There were no new accounting policies adopted by the Group during the period, nor any amendments to existing accounting policies.

Note 2: Significant changes

The financial position and performance of the Group was particularly affected by the following events and transactions during the six months to 30 June 2020:

−   Suspension of production at the beginning of April from the Sillaro, Bezzecca and Casa Tiberi fields in Italy, due to a significant fall in domestic gas prices following the COVID-19 pandemic and its associated economic damage. This resulted in lower revenues from our Italian operations (presented as discontinued in the income statement). The reduction in revenue was largely offset by the resultant reduction in variable operating costs; 

−   Large foreign exchange loss on the Group's €22.5m Eurobond due to appreciation of the Euro against the British Pound Sterling ("GBP") during the period, resulting in an unrealised loss of $1.3m in the parent company, which uses GBP as its functional currency. This was partly offset by foreign exchange gains due to the appreciation of the United States Dollar ("USD") against GBP, resulting in unrealised gains on cash held in USD by the parent company when translated into its GBP functional currency;

For further discussion of the Group's performance and financial position refer to the Chairman's Statement.

The Group's results are not materially impacted by seasonality.

Note 3: Segment information

The Group's reportable segments as described below are based on the Group's geographic business units. This includes the Group's upstream gas operations in Italy and South East Asia, along with the corporate head office in the United Kingdom. This reflects the way information is presented to the Group's Chief Operating Decision Maker, which is currently the Board of Directors, following the departure of the Chief Executive Officer during the period. Results from the Group's Italian business are classified as a discontinued operation in the income statement, and reflected as such in the table below. Refer to further disclosure in note 11.

Assets and liabilities of the Italian segment are classified as a disposal group held for sale in the Group balance sheet

Note 4: Profit and loss information

a)   General and administrative expenses

General and administrative expenses in the income statement includes the following significant items of expenditure:

b) Finance expense

Note 5: Loss per share

The calculation of basic loss per share from continuing operations was based on the loss attributable to shareholders of $4.9m (30 June 2019: $4.7m) and a weighted average number of ordinary shares outstanding during the half year of 792,641,298 (30 June 2019: 747,462,899).

Basic loss per share from discontinued operations was based on the loss attributable to shareholders from discontinued operations of $1.8m (30 June 2019: $7.7m).

Diluted loss per share from continuing and discontinued operations for the current and comparative periods is equivalent to basic loss per share since the effect of all dilutive potential ordinary shares is anti-dilutive.

Note 6: Property, plant and equipment

Reconciliation of the carrying amount for each class of property, plant and equipment is set out below:

Note 7: Intangible assets

Reconciliation of the carrying amounts for each material class of intangible assets are set out below:

Exploration and evaluation assets relates to the Group's 15% interest in the Duyung PSC. Negative additions arose in the period due to reversal of overaccrued capital expenditures relating to the Duyung drilling campaign undertaken in Q4 2019.

Following this highly successful drilling campaign, Conrad Petroleum Ltd (the "Operator"), engaged Gaffney Cline and Associates ("GCA") to complete an independent resource audit for the Mako Gas Field.

Following completion of their audit, GCA confirmed a significant resource upgrade for the Mako Gas Field compared to their previous resource assessment released in January 2019 (the "2019 GCA Audit"). 2C (contingent) recoverable resource estimates were increased to 495 Bcf (gross), an increase of approximately 79% compared with the 2019 GCA Audit. In the upside case, the 3C (contingent) resources increased by approximately 108% compared with the 2019 GCA Audit, to 817 Bcf (gross).

As a result of the resource upgrade, which was incorporated into our own updated economic modelling for Duyung, no impairment indicators were noted.

Note 8: Borrowings

Borrowings relates to €22.5m three year Eurobonds with attached warrants which were issued to key institutional investors. The bonds were issued in two equal tranches A and B, ranking pari passu, with Tranche A paying an annual 5% cash coupon and Tranche B accruing interest at 5% payable on redemption.

The issue price was 85% of par value, with a 7% commission paid on this subscription price, resulting in net cash proceeds of €17.6m ($19.7m) before other transaction costs of €0.4m ($0.5m).

The bonds mature on 12 April 2022 at 100% of par value plus any accrued and unpaid coupon. Bond subscribers and undewriters were issued with a total of 47,357,500 warrants to subscribe for ten new ordinary shares in the company at an exercise price of 4p per share at any time over the three year term of the bonds. The total fair value of warrants on grant date ($2.0m) was treated as a transaction cost and will be amortised over the life of the bonds. The bonds were initially recognised at fair value and subsequently at amortised cost, with an average effective interest rate of 18.10%.

Note 9: Share capital and share premium

Note 10: Reserves

a)   Other reserves

Share based payments reserve

Dr Nick Cooper was awarded 10,000,000 options when he joined the Board in January 2020 with an exercise price of 4.38p, vesting on the third anniversary of grant date. The options were valued at 0.40p per share under the Black Scholes method. The movement in share based payments reserve in the period included $530k in relation to options granted in 2020 and prior periods (30 June 2018: $694k). This was impacted  by the accelerated vesting of options issued to two former directors who resigned during the period, Dr Cooper and James Menzies. According to Dr Cooper's option deed, his options became immediately exercisable at their original exercise price of 4.38p per share for a period of three months following his resignation on 1 April 2020. The options were not exercised and therefore have lapsed. James Menzies' options were cancelled after he left the Company during the period. This full vest of Dr Cooper's options, and cancellation of Mr Menzies options, resulted in the remaining grant date fair value of both former directors' options being expensed in the income statement in the period. The total amount expensed for Dr Cooper and Mr Menzies' options in the current and prior periods ($593k) was then recycled to accumulated losses.

Functional currency translation reserve

The translation reserve comprises all foreign currency differences arising from translation of the financial position and performance of the parent company and certain subsidiaries which have a functional currency different to the Group's presentation currency of USD. The total gain on foreign exchange recorded in other reserves for the period was $1.04m
(30 June 2019: $175k gain).

Note 11: Discontinued operations

The Group classifies the assets and liabilities of its Italian business as a disposal group held for sale following a decision by the Board of Directors to prioritise full divestment of the Group's Italian operations in the first half of 2019. Given the Italian business represents a separate geographical area of operation for the Group, the Italian results have also been treated as a discontinued operation. In December 2019, the Group entered into a binding, conditional sale and purchase agreement ("SPA") with Zenith Energy Ltd to dispose of the Group's interest in its wholly owned subsidiary, Coro Europe Limited, which in turn owns the entire issued capital of Apennine Energy SpA, the subsidiary holding the Group's portfolio of gas assets in Italy. The necessary Italian regulatory approvals for the disposal were not obtained prior to a long stop date of 31 July 2020 and as such the disposal was mutually terminated by the parties. The Board remains committed to divestment of our Italian portfolio and discussions have been held with other interested parties. The Board remains confident a disposal can be achieved in the next 12 months and accordingly there is no change to the classification of the Italian business as a disposal group held for sale.

The results of the Italian operations for the period are presented below:

The major classes of assets and liabilities of the Italian operations classified as held for sale as at 30 June 2020 are as follows:

Due to the significant fall in gas prices during the period resulting from the COVID-19 pandemic and associated economic damage, an impairment of $341k was recorded on Oil and Gas assets (within Property, plant and equipment "PPE"), which relate to the Bezzecca Cash Generating Unit ("CGU"). No other impairments were noted on oil and gas assets. Under IFRS 5, non-current assets are not depreciated once they are designated as held for sale. As a result, impairments of $176k were recorded on other PPE (office furniture and equipment) and Right-of-Use assets, representing the amount that would have otherwise been depreciated if IFRS 5 accounting was not applied.

A deferred tax expense of $848k arose due to a write down of the Deferred Tax Asset recorded by the Italian segment. This is due to reductions in future forecast taxable profits caused by falling gas prices.

As required by IFRS 5, the entire Italian business has been fair valued at the balance sheet date to determine if any further writedowns are required in addition to the impairments discussed above. Management determined the fair value of the disposal group with reference to a corporate valuation model, prepared using a discounted cash flow methodology, which takes into account the reduction in gas prices since the deal was signed with Zenith Energy in December 2019. This showed a small amount of headroom when comparing the fair value of the Italian business with the carrying value of its net assets.

The net cash flows of the Italian operations were as follows:

Note 12: Interests in other entities

Asia

The Group's wholly owned subsidiary, Coro Energy Duyung (Singapore) Pte Ltd, is the owner of a 15% interest in the Duyung Production Sharing Contract ("PSC"), which contains the Mako gas field. The operator of the Duyung venture is West Natuna Exploration Ltd ("WNEL"). WNEL is a company incorporated in the British Virgin Islands and its principal place of business is Indonesia.

The Duyung PSC partners have entered into a Joint Operating Agreement ("JOA") which governs the arrangement. The Group accounts for its share of assets, liabilities and expenses of the venture in accordance with the IFRSs applicable to the particular assets, liabilities and expenses.

Italy

In June 2019, the Group enterd into an agreement with Petrorep Italiana SpA to acquire its 10% interest in the Cascina Castello production licence, which contains the Bezzecca field and the West Vitalba prospect. The deal had an economic effective date of 1 May 2019, however the necessary regulatory approvals for the acquisition were not obtained before the long stop date of the transaction passed. As a result, Petrorep continues to own 10% of the licence and has retrospectively contributed to its share of Bezzecca's losses from 1 May 2019.

Note 13: Contingencies and commitments

Commitments

The remaining 2020 work program for the Duyung PSC is estimated at $260k net to the Group, of which approximately $180k is capital in nature. The Group has no other capital commitments.

Contingencies

The Group has no contingent assets or liabilities.

Note 14: Related party transactions

During the period, the Company agreed a settlement with former CEO James Menzies. Mr Menzies received a termination/notice payment (inclusive of legal fees) of £132K ($168k). This expense is recorded within employee benefits expense in note 4.

Note 15: Subsequent events

As further outlined in note 11, the SPA entered into with Zenith Energy Ltd to dispose of the Group's interest in its wholly owned subsidiary, Coro Europe Limited, which in turn owns the entire issued capital of Apennine Energy SpA, was terminated by mutual agreement in July 2020.

There are no other material subsequent events.