ADRIATIC OIL PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 SEPTEMBER No.1 GROSVENOR CRESCENT LONDON SW1X 7EF

Transcription

1 ADRIATIC OIL PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 SEPTEMBER 2012 No.1 GROSVENOR CRESCENT LONDON SW1X 7EF

2 CONTENTS Page No. Directors and advisers 3 Chairman s statement 4 Directors report 8 Statement of directors responsibilities 11 Independent auditor s report 12 Group profit and loss account 14 Group balance sheet 15 Company balance sheet 16 Group cash flow statement 17 Notes to the financial statements 18 Adriatic Oil Plc 2

3 DIRECTORS AND ADVISERS DIRECTORS SECRETARY REGISTERED OFFICE AUDITOR CORPORATE ADVISER SOLICITORS BANKERS PR ADVISERS REGISTRARS Jack Wilson Non-Executive Chairman Bruno Müller Chief Executive Officer Jean-Denis Bouvier Non-Executive Director (appointed 17 August 2012) Dipak Patel 11 Old Court House Old Court Place London W8 4PD BSG Valentine Lynton House 7-12 Tavistock Square London W1H 9BQ SVS Securities Plc 21 Wilson Street London EC2M 2SN Moorhead James LLP Kildare House 3 Dorset Rise London EC4Y 8EN NatWest 134 Aldersgate Street London EC1A 4LD Yellow Jersey PR Limited 76 Great Suffolk Street London SE1 0BL Share Registrars Limited Suite E First Floor 9 Lion and Lamb Yard Farnham Surrey GU9 7LL COMPANY NUMBER Adriatic Oil Plc 3

4 CHAIRMAN'S STATEMENT The Board of Adriatic Oil Plc, the ISDX Growth Market quoted international oil and gas exploration company, is pleased to present results for the twelve months to 30 September 2012 (the Period ), which has seen positive developments at the Company and a diversification of its portfolio interests, offering investors an opportunity to be part of a fast moving business run by management with demonstrable track records. HIGHLIGHTS FOR THE PERIOD AND AFTERWARDS: Four successful equity Placings in the Period raising a total of GBP 564,000 gross (2011: GBP 213,050); Purchase of Pelagian Oil Limited; Goodwill written off in the P&L account and the balance sheet; Award of Licensing Option 12/5 and farm-out of the Licensing Option to Fastnet Oil & Gas plc; 25% Farm-In to Seaward Production Licence P1921 in relation to Blocks 12/18 and 12/19c with option to increase to 50%; Jean-Denis Bouvier appointed as a Non-Executive Director; Diversified asset base; and Relatively low operating costs and overheads and no debt. The Company s strategy is to add shareholder value by proving and developing leads and plays in areas which the Company s Board considers to be high potential oil and gas provinces. Current activities are focused on the North Celtic Sea, the UK North Sea and the Adriatic Sea Basin. Adriatic Oil's ordinary shares are quoted on the ISDX Growth Market (operated by ICAP Securities & Derivatives Exchange Limited) under the ticker symbol 'ADOP'. The Company's new website is available at During the period the Company incurred a loss after taxation but before the writing off of goodwill, of GBP 229,954, which would have represented a basic loss of 0.11p per share as compared to a loss after taxation in the previous year of GBP 204,776 and a basic loss per share of 0.29p per share. The Directors however decided as a matter of policy to write off the goodwill in the Group s balance sheet associated with the Company s acquisition of Pelagian Oil Limited, which amounted to GBP 904,412. When this write off of goodwill is included in the profit and loss account, it shows a loss for the year after tax for the Period of GBP 1,134,366, representing a basic loss per share of 0.53 p (in 2011 the loss for the year after tax was GBP 204,776 and the basic loss per share was 0.29p). CORPORATE REVIEW IRELAND North Celtic Sea In October 2011, Adriatic and two partners submitted an application for six exploration blocks in the North Celtic Sea. These part-blocks, 49/18, 49/19, 49/20, 49/23, 49/24 and 49/25 cover an area of 881 square kilometres. In November 2012, the Petroleum Affairs Division of the Irish Department of Communications, Energy and Natural Resources issued licensing option 12/5, Shanagarry (the Licensing Option ), over the six applied exploration blocks to Adriatic (80%) and its two partners (20%). The Licensing Option commences from 1 December 2012 until 31 May Well 49/19-1 was drilled by Marathon Oil Corporation and Enterprise Oil in 1984 and was not fully tested due to operational issues and poor gas economics, as the Kinsale gas field satisfied the Irish domestic market and no gas interconnector existed to the UK at the time. Adriatic Oil Plc 4

5 Immediately after the completion of the Licensing Option grant, Adriatic and its partners farmed out, (subject to government approval), 64.5% of the Licensing Option to Fastnet Oil & Gas plc ( Fastnet ), with Adriatic retaining 15.5% of its original 80% participation in the Licensing Option. Fastnet will become the operator of the Licensing Option and will carry Adriatic through the whole work programme and acquire a minimum of 200 square kilometres of new 3D seismic data over the area. A condition of the Licensing Option is that a detailed specified work programme is to be carried out. The main elements of the work programme include; reprocessing 600 km. of 2D seismic data, analysis of the data for the drill stem tests carried out in the Basal Wealden and Purbeck reservoir sequences and a regional analysis of the working petroleum systems encountered in the 49/19-1 well. The working capital requirement for Fastnet arising in respect of the work programme under the Licensing Option is expected to be approximately GBP 285,000. IRELAND Atlantic Margin, North Porcupine Basin, Licence 1/04 In the second half of the year ended 30 September 2011, Adriatic negotiated the acquisition of a 0.6% Net Profit Bonus ( NPB ) in respect of each hydrocarbon accumulation within the area of the Frontier Exploration Licence 1/ 04 (the Frontier Exploration Licence ) in the North Porcupine prospect Atlantic Margin, in offshore Ireland. The Frontier Exploration Licence, located at the northern limit of the North Porcupine Basin comprises of part blocks 26/27, 26/28, 35/2 and 35/3. As part of this acquisition, Adriatic Oil will be carried through all capital investment in exploration, appraisal, development and production and, will also have no exposure to any operating costs. The Frontier Exploration Licence contains the undeveloped Connemara oil field and two exploration opportunities, the "H" and the "C 1" Prospects. Third party information available to the Directors indicates the following: The Connemara oil field was discovered and partially appraised by BP during In the period , Statoil of Norway acquired new 3D seismic and appraised the North East area of the field by drilling two horizontal wells. These wells have flowed light oil, at rates of up to 6,000 barrels of oil per day ("bopd"). The operator of the Frontier Exploration Licence, San Leon Energy Plc has informed that the current phase of the Frontier Exploration Licence requires a well commitment to move to the next stage of licensing and is looking for interested parties to participate in an exploration programme and to fund part of the exploration well costs. Water depths are up to 400m, with a well target depth of 3,000m. UK NORTH SEA Inner Moray Firth In December 2012, Adriatic announced a 25% Farm-In to the Seaward Production Licence P192, in relation to Blocks 12/18 and 12/19c which are located in the Inner Moray Firth area of the UK's North Sea (the Seaward Production Licence ). Adriatic has also secured an option whereby, for an increased capital commitment, the Company can increase its stake in the Seaward Production Licence to 50%. The Farm-In has been approved by the UK Department of Energy and Climate Change. Blocks 12/18 and 12/19c were originally applied for and secured under licence in the 26th UK Seaward Licensing Round by Elixir Petroleum Limited, the previous 100% interest holder (pre-farm- In) and operator. The work obligations in relation to the Seaward Production Licence involve the purchase of 3D seismic data and a "drill-or-drop" decision is required to be made by early The Seaward Production Licence blocks are contiguous and are located approximately 150km north east of Inverness, approximately 40 km east of Wick in north-east Scotland and in a water depth of approximately 75m. The Seaward Production Licence blocks lie to the north east of the Beatrice oil field, located in Block 11/30a and to the west of the Captain oil field in Block 13/22a. Adriatic Oil Plc 5

6 A regulatory announcement made by Elixir in January 2012 stated that "A single large stratigraphic prospect has been identified in the Middle Jurassic Beatrice Formation on the northern edge of the Smith Bank High. The prospect is predicted to have Beatrice Formation sands as the reservoir, which has been identified as an acoustic impedance anomaly on several 2D seismic lines. No wells to date have targeted the Smith Bank High in the Blocks." Under the terms of the Farm-In Agreement, Adriatic Oil has agreed to pay a cash consideration of GBP 9,000 and to fund the cost of interpreting 3D seismic data, up to a maximum of GBP 60,000. Costs thereafter will be met pro rata to participating interests. Once the relevant 3D seismic data has been interpreted, the Company will be entitled to exercise its option to acquire a further 25% interest. If it is determined that the data needs to be reprocessed then the consideration will comprise an obligation to pay 50% of Elixir Petroleum Limited s then 75% participating share of the reprocessing costs. If the data does not require reprocessing, the consideration will comprise of GBP 100,000 in cash and the grant of a 10% gross overriding royalty on the Company's participating interest. Adriatic has funded the acquisition of 3D seismic data and the interpretation of this data commenced in early January The Board is pleased to assist with the development of the prospect, (which Elixir Petroleum Limited has named the "Sunset" prospect) towards achieving drillready status. ALBANIA application offshore Adriatic, North Rodoni The Board reports to shareholders that discussions with the Ministry of Economy, Trade and Energy, the National Agency of Natural Resources and Albpetrol remain on-going and Adriatic s application process has been delayed due to political reasons and the privatisation of the former state oil company, Albpetrol. Offshore Albania, in the Southern Adriatic, is one of the least explored shelf areas of the western Mediterranean Sea, with only six wells in 12,000 square kilometres. Hydrocarbons are present in four out of six wells drilled in Albanian waters, and have also been found to be present under the waters of Italy and Montenegro. The Aquila oil field under Italian waters of the Southern Adriatic, discovered in 1981 in water depths of 850m but not developed until 1993, has produced 25 million barrels of oil since production started in In two other areas under Italian waters, hydrocarbons have been found: an un-appraised oil accumulation in the Giove area and an un-appraised gas accumulation in the Falco discovery. The Company is aware of increased exploration activity in the Southern Adriatic. PELAGIAN OIL LIMITED In February 2012, Adriatic completed the acquisition of the entire share capital of Pelagian Oil Limited. Pelagian Oil Limited is an oil and gas exploration company with applications for four oil and gas production sharing agreements focused in the Adriatic. The experience and knowledge of Pelagian Oil Limited has helped Adriatic to expand and develop its current exploration assets and has assisted Adriatic in its further expansion. I am pleased to welcome to the Board Jean-Denis Bouvier, who was appointed as Non-Executive Director in August A qualified geologist with a BSc in Geology and a MSc. in Mining Engineering/Geology from the University of Geneva, Jean-Denis has more than 30 years of experience in oil and gas exploration and production. Jean-Denis is the Chief Executive of Petrogas E&P LLC which produces approximately 60,000 barrels of oil per day from fields in the Sultanate of Oman, Egypt and India. Adriatic Oil Plc 6

7 In December 2012, Adriatic appointed Yellow Jersey PR Limited as its financial public relations adviser to handle the Company s communications and media relations. To strengthen its balance sheet, Adriatic raised further equity finance in the year ended 30 September 2012 and after this period. Cash balances currently stand at approximately GBP 450,000 (cash balances as at 28 February 2012 stood at approximately GBP 50,000). OUTLOOK Although the continuing backdrop of the global economy and the small cap arena remains challenging, the Board remains excited about the Company s future prospects. Entering 2013 the management team remains energised and committed to the achievement of the Company s agreed business plan, which projects the achievement of further growth across the Company. As Chairman, I would like to take this opportunity to thank all shareholders and staff for their continued support. Jack Wilson Non-Executive Chairman On behalf of the Board 4 March 2013 Adriatic Oil Plc 7

8 DIRECTORS REPORT The Directors present their report and audited accounts of the Group for the year ended 30 September Activities The Company was first registered as Oil and Gas Support Services Limited on 25 September 2006, the date of its incorporation. The Company was re-registered as a public company on 21 December 2006, and the Company s shares were admitted for trading on PLUS Markets (now known as ISDX Growth Market) on 22 January On 29 January 2009, the Company changed its name to Plus Investors Plc. On 30 March 2010, the Company changed its name to Adriatic Oil Plc. The principal activity of the Group is oil and gas exploration and production. Review of business and future developments The review of the business is covered by the Chairman s Statement. In May 2012 the PLUS market was acquired by ICAP and the market is now known as ISDX. The company is quoted on the ISDX Growth Market. Results for the period and dividends The loss for the period after taxation was 1,134,366 (2011: 204,776) after charging goodwill writeoff of 904,412. The Directors do not recommend the payment of a dividend. Directors The present Directors of the Company are listed on page 3. Jack Wilson and Jean-Denis Bouvier are seeking re-election at the forthcoming Annual General Meeting in accordance with Article 106.ff. of the Company s Articles of Association. The Board has considered and reviewed their re-election prior to the submission for recommendation. The Board believes that the performance of Mr Wilson and Mr Bouvier continues to be effective, that they demonstrates commitment to their role and have a range of business, financial and management skills and experience relevant to the direction and control of the Company. The continuing Director recommends that shareholders vote in favour of the re-election of the Director retiring by rotation. Creditor payment policy The Group does not follow a code or standard on payment practice. Payment terms are normally agreed with individual suppliers at the time of order placement and are honoured, provided that goods or services are supplied within the contractual conditions. At the year end, creditor days were 0 (2011: 0). Adriatic Oil Plc 8

9 Risk Management Principal business risk The Group s principal activity is oil and gas exploration and production. The Directors consider that there are the following material risks associated with the Group s operations: - Geological risks associated with the development of the Group s resources; - Environmental hazards, industrial and mechanical accidents and occupational health hazard The Group might be vulnerable to additional risks. Ability to secure future investment The Company is dependent on being quoted on the ISDX Growth Market to be able to raise funds for working capital purposes. The directors monitor regularly the company's listing status to ensure that it is able to continue to raise funds. Dependence on key personnel Whilst the Group has entered into contractual arrangements with the aim of securing the services of its executive Directors, the retention of their services cannot be guaranteed. Financial Risk The principal financial instruments employed by the Group are cash or cash equivalents and the Directors ensure that the business maintains surplus cash reserves to minimise liquidity risk. Foreign currency risk Although the Group is based in the UK, its currencies of operation are Pound Sterling, Euros, US dollars and Albanian Lek. As a result, the Group s Sterling balance sheet could be affected by the movements of these currencies. The Board considers and reviews these risks on a strategic and day-to-day basis in order to minimise any potential exposure. Internal Control The Board is responsible for maintaining a sound system of internal controls to safeguard shareholders investment and Group s assets. The Directors monitor the operation of internal controls. The objective of the system is to safeguard company s assets, ensure proper accounting records are maintained and that the final information used within the business and for publication is reliable. Any such system of internal control can only provide reasonable, but not absolute assurance against material mis-statement or loss. Internal financial control procedures undertaken by the Board include: Review of monthly financial reports and monitoring performance. Prior approval of all significant expenditure including all major investment decisions. Review and debate of treasury policy. The Board has reviewed the operation and effectiveness of the Group s system of internal control for the financial year and the period up to the date of approval of the financial statements. Corporate governance The Directors intend, in so far as it is practicable and applicable given the Group s size and the constitution of the Board, to comply with the main provisions of the Combined Code on Corporate Governance which is consistent with the recommendations on Corporate Governance of the Quoted Companies Alliance. The Directors intend to comply with Rule 46 of the ISDX Growth Market rules relating to Directors dealings. Adriatic Oil Plc 9

10 Disclosure of information to the auditor Each director of the Company has confirmed that, in fulfilling their duties as a director, they have: Taken all the necessary steps in order to make themselves aware of any information relevant to the audit and to establish that the auditors are aware of that information; and So far as they are aware, there is no relevant audit information of which the auditors have not been made aware. Post balance sheet event See note 21 to the financial statements. Auditor BSG Valentine are deemed to be re-appointed under Section 491(1) of the Companies Act Approved by the Board of Directors and signed on their behalf Bruno Müller Director Date: 4 March 2013 Adriatic Oil Plc 10

11 DIRECTORS RESPONSIBILITIES The Directors are responsible for preparing the Directors 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 financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). 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 Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as the directors are aware: there is no relevant audit information of which the Group 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. The Directors confirm that they have complied with these requirements and, having a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, continue to adopt the going concern basis in preparing the financial statements. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Adriatic Oil Plc 11

12 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF ADRIATIC OIL PLC We have audited the financial statements of Adriatic Oil Plc for the year ended 30 September 2012 which comprise the Group Profit and Loss Account, the Group and Company Balance Sheets, the Group Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company s shareholders, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the company s shareholders 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 shareholders as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Director s Responsibilities Statement set out on page 11, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s and parent Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON FINANCIAL STATEMENTS In our opinion the financial statements: give a true and fair view of the state of the Group s and of the parent Company s affairs as of 30 September 2012 and of the Group s loss for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Adriatic Oil Plc 12

13 INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF ADRIATIC OIL PLC (continued) MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Lynton House DANIEL BURKE 7-12 Tavistock Square (Senior Statutory Auditor) London BSG VALENTINE WC1H 9BQ Chartered Accountants & Statutory Auditor Date: 4 March 2013 Adriatic Oil Plc 13

14 GROUP PROFIT AND LOSS ACCOUNT For the year ended 30 September 2012 Notes Year ended Year ended 30 September 30 September Group turnover Administrative expenses (1,134,366) (204,776) Goodwill on subsidiary acquisition 3 (904,412) - written off Other admin expenses (229,954) (204,776) Operating loss (1,134,366) (204,776) Interest received - - Loss on ordinary activities before taxation (1,134,366) (204,776) Tax on loss on ordinary activities Loss for the financial year (1,134,366) (204,776) Basic and diluted loss per share: 9 (0.53)p (0.29)p All of the activities of the group are classed as continuing. The group has no recognised gains or losses other than the results for the year as set out above. The company has taken advantage of section 408 of the Companies Act 2006 not to publish its own Profit and Loss Account. The notes on pages 18 to 30 form part of these financial statements. Adriatic Oil Plc 14

15 GROUP BALANCE SHEET As at 30 September 2012 Fixed assets Notes Year ended Year ended 30 September 30 September Intangible ,116 30,000 Investments 11 45,395 45,000 Total fixed assets 200,511 75,000 Current assets Debtors 12 6,899 4,226 Cash at bank 364, ,124 Total current assets 371, ,350 Current liabilities Creditors 13 (24,019) (101,856) Net current assets 347,271 38,494 Net assets 547, ,494 Capital and reserves Called up share capital 14 1,458, ,213 Share premium 15 1,075, ,000 Profit & loss account 15 (1,986,086) (851,719) Total shareholders funds 547, ,494 Authorised by the board and signed on its behalf on 4 March Bruno Müller The notes on pages 18 to 30 form part of these financial statements. Adriatic Oil Plc 15

16 COMPANY BALANCE SHEET As at 30 September 2012 Fixed assets Notes Year ended Year ended 30 September 30 September Intangible 10 73,425 30,000 Investments 11 79,854 45,000 Total fixed assets 153,279 75,000 Current assets Debtors 12 38,454 4,226 Cash at bank 343, ,124 Total current assets 381, ,350 Current liabilities Creditors 13 (21,859) (101,856) Net current assets 359,649 38,494 Net assets 512, ,494 Capital and reserves Called up share capital 14 1,458, ,213 Share premium 15 1,075, ,000 Profit & loss account 15 (2,020,940) (851,719) Total shareholders funds 512, ,494 Authorised by the board and signed on its behalf on 4 March Bruno Müller Company Registration Number: The notes on pages 18 to 30 form part of these financial statements. Adriatic Oil Plc 16

17 GROUP CASH FLOW STATEMENT For the year ended 30 September 2012 Notes Year ended Year ended 30 September 30 September Net cash outflow from operating activities 17 (310,515) (158,006) Capital expenditure Payments to acquire intangible fixed assets (1,375) - Cash balances transferred as part of acquisition 57 - _ Net cash outflow from capital expenditure (1,318) - _ Financing Net proceeds on issue of shares 480, ,800 Share premium on issue of equity share capital 60,100 - Net cash inflow from financing 540, ,800 Increase in cash 228, ,794 Cash at start of period 136, Cash at end of period 364, ,124 The notes on pages 18 to 30 form part of these financial statements. Adriatic Oil Plc 17

18 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 September Accounting policies Adriatic Oil Plc is a public limited company incorporated and domiciled in England & Wales. The Company s ordinary shares are quoted on the ISDX Growth Market. The financial statements have been prepared in accordance with applicable accounting standards (UK Generally Accepted Accounting Practice). A summary of the accounting policies adopted are set out below. Basis of accounting The financial statements have been prepared under the historical cost convention and in accordance with the Statement of Recommended Practice on Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities currently in effect. Going concern The financial statements have been prepared on the going concern assertion on the basis that: 1. The Company has received cash investment since the year end of 200,000 (in the form of share capital). 2. The Group is not currently reliant on any external creditors, and has no long term debt. 3. Cash flow forecasts for the Group have been prepared which show positive cash flows. 4. The Group has cash balances of 364,391 at the year end. Based on this the directors are therefore of the opinion that it is appropriate to prepare the financial statements on a going concern basis. Basis of consolidation The consolidated financial statements incorporate the financial statements of the company and all group undertakings. These are adjusted, where appropriate, to conform to group accounting policies. Acquisitions are accounted for under the acquisition method and goodwill on consolidation is capitalised and written off over three years from the year of acquisition. The results of companies acquired or disposed of are included in the profit and loss account after or up to the date that control passes respectively. As a consolidated profit and loss account is published, a separate profit and loss account for the parent company is omitted from the group financial statements by virtue of section 408 of the Companies Act Amortisation Amortisation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows: Goodwill Impairment review this period, over 3 years subsequently The carrying values of intangible fixed assets are reviewed for impairment in periods if events or changes in circumstances indicate the carrying value may not be recoverable. In accordance with the Statement of Recommended Practice on Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities currently in effect, prelicence acquisition costs remain unamortised until the existence or otherwise of commercial reserves is established. Adriatic Oil Plc 18

19 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2012 Fixed assets All fixed assets are initially recorded at cost. Depreciation Depreciation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows: Fixtures, fittings and equipment over 3 years Investments Fixed asset investments are held for long term, and are stated on the balance sheet at their fair value. In the case of quoted investments, fair value is the bid price of the stock at close of business on the balance sheet date. Taxation The tax expense represents the sum of the tax currently payable and any deferred tax. The tax payable, if any, is based on any taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred taxation is provided on a full provision basis on all timing differences, which have arisen but not reversed at the balance sheet date. Deferred tax assets are recognised to the extent that they are recoverable, that is, on the basis of all available evidence it is more likely than not that there will be sufficient taxable profits from which the future reversal of the underlying timing differences can be deducted. Any assets and liabilities recognised have not been discounted. Foreign currencies Company Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated. Group For the purposes of preparing consolidated financial statements, the assets and liabilities of foreign subsidiary undertakings are translated at the exchange rates ruling at the balance sheet date. Profit and loss items are translated at the average exchange rates for the year, unless exchange rates fluctuated significantly in the year, in which case the exchange rates ruling at the dates of the transactions are used. Exchange differences arising are taken to the Group's foreign currency translation reserve. Such exchange differences are recognised in the profit and loss account in the year in which a foreign subsidiary undertaking is disposed of. Adriatic Oil Plc 19

20 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September 2012 Financial instruments Financial assets and financial liabilities are recognised in the Group s balance sheet when the Group becomes party to the contractual provisions of the instrument. An impairment review is made covering all financial assets, except for those measured at fair value through profit or loss, at each balance sheet date to determine whether there is any objective evidence that a financial asset or group of assets is impaired. Equity Called up share capital is recorded on the balance sheet at the nominal value of shares issued. Proceeds received in excess of the nominal value of shares are recorded in the share premium account after deducting any attributable issue costs. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the group provides money or services directly to a debtor with no intention of trading the receivable. Loans and receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method. The impairment loss on loans and receivables is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows of the asset, discounted at the original effective interest rate of the asset. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits with an original maturity of three months or less. Trade and other payables Trade and other payables constitute amounts that become due and payable to suppliers of goods and services and other third parties, and are included on the balance sheet under current liabilities. 2 Segmental reporting For the year ended 30 September 2012, the Group and the Company had no turnover. 3 Operating loss Operating loss for the year includes Impairment charge on investments - (16,104) Interest payable on convertible loan notes 3,843 - Goodwill on subsidiary acquisition written off (904,412) - Exceptional item Goodwill arising on the acquisition of Pelagian Oil Limited amounted to 939,266. Following an impairment review, an amount of 904,412 was written off. This represents a non-cash item. Adriatic Oil Plc 20

21 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Directors fees During the year, the directors charged fees of 76,375 (2011: 84,069) to the Group. 5 Employee information The average number of persons employed by the Group, including executive directors was: Management 2 3 No wages and salaries were paid to employees of the Group during the year. 6 Auditor s remuneration Fees payable to the Group s auditor 12,600 7,328 for audit services Fees payable to the Group s auditor and its associates for other services: Other services relating to taxation Loss attributable to members of the parent company 12,600 7,328 The loss dealt with in the financial statements of the parent company was 1,169,221 ( ,776). 8 Taxation Current tax - - Deferred tax - - Adriatic Oil Plc 21

22 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Taxation (continued) Reconciliation of current tax charge The tax expense in the profit and loss account for the year is lower than the current small companies rate of corporation tax in the UK. The differences are reconciled below: Loss on ordinary activities before tax (1,134,366) (204,776) Tax on loss on ordinary activities at the (226,873) (40,955) standard rate of corporation tax of 20% (2011: 20%) Effects of: Expenses not deductible for taxation 190,684 11,958 Unrelieved/(utilised) tax losses and 36,189 28,997 other deductions Total current tax charge - - The effective tax rate for the period is 0%. The Group has an unrecognised deferred tax asset of 164,502 (2011: 117,250) relating to trading losses not utilised. The deferred tax asset has not been recognised in the financial statements due to uncertainty surrounding the timing of its recoverability. 9 Earnings per share from continuing operations attributable to the equity shareholders Earnings Earnings for the purpose of basic and (1,134,366) (204,776) diluted earnings per share being net (loss)/profit attributable to equity shareholders Number of shares Weighted average number of ordinary 213,852,675 70,532,089 shares for the purposes of basic and diluted earnings per share Earnings per ordinary share: Basic and diluted (0.53)p (0.29)p Adriatic Oil Plc 22

23 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Earnings per share from continuing operations attributable to the equity shareholders (continued) Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The calculation of diluted earnings per share assumes conversion of all potential dilutive ordinary shares, all of which arise from share options or warrants. A calculation is done to determine the number of shares that could have been acquired at fair value, based upon the monetary value of the subscription rights attached to outstanding share options and warrants. Given the Group s reported losses for the year, outstanding share options and warrants are not taken into account when determining the weighted average number of ordinary shares in issue during the year, and therefore the basic and diluted earnings per share are the same. See note 14 for details of outstanding share options and warrants. 10 Intangible fixed assets Group Goodwill Licences Total Cost or valuation At 1 October ,000 30,000 Additions 939,266 90,262 1,029,528 At 30 September , ,262 1,059,528 Amortisation At 1 October Impairment losses (904,412) _ - (904,412) At 30 September 2012 (904,412) _ - (904,412) Net book value At 1 October _ 30,000 _ 30,000 At 30 September ,854 _ 120, ,116 Company Licences Total Cost At 1 October ,000 30,000 Additions 43,425 43,425 At 30 September ,425 73,425 Amortisation At 1 October Charge for the year - - At 30 September Net book value At 1 October 2011 _ 30,000 _ 30,000 At 30 September 2012 _ 73,425 73,425 Adriatic Oil Plc 23

24 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Long term investment Group Listed Unlisted investments investments Total Cost At 1 October ,990-54,990 Additions At 30 September , ,385 Impairment provision At 1 October 2011 (9,990) - (9,990) Movement during the period At 30 September 2012 (9,990) - (9,990) Net book value At 1 October ,000-45,000 At 30 September , ,395 The listed investments relate to 2,250,000 shares in Alpha Prospects Plc, a company quoted on the ISDX Growth Market. The market value of the shares as at the year end equates to the net book value. Company Listed Group investments company Total Cost At 1 October ,990-54,990 Additions - 986, ,505 At 30 September , ,505 1,041,495 Impairment provision At 1 October 2011 (9,990) - (9,990) Movement during the period - (951,651) (951,651) At 30 September 2012 (9,990) (951,651) (961,641) Net book value At 1 October ,000-45,000 At 30 September ,000 34,854 79,854 The listed investments relate to 2,250,000 shares in Alpha Prospects Plc, a company quoted on the ISDX Growth Market. The market value of the shares as at the year end equates to the net book value. Adriatic Oil Plc 24

25 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Long term investment (continued) The following subsidiary has been included in these consolidated financial statements. Country of incorporation Holding Proportion of voting rights and shares held Nature of business Pelagian Oil Limited England Ordinary shares 100% Oil exploration licencing Pelagian Oil Limited was acquired on 15 February The consideration was funded by the issue of 70,107,500 ordinary shares of 0.5 pence each for 1.4 pence per share. Its net assets at 30 September 2012 were 34,854 (30 June 2011: 25,090) and its loss for the period then ended was 12,385 (year to 30 June 2011: 4,835). Analysis of the acquisition of Pelagian Oil Limited Fair value and book value Intangible fixed assets 46,837 Investments 395 Cash 57 Creditors falling due within 1 year (50) 47,239 Goodwill 939, , Debtors Group Company Amounts owed by group undertakings 31,555 Other debtors Prepayments 6,899 3,925 6,899 3,925 6,899 4,225 38,454 4,225 The debtors above include the following amounts falling due after more than one year: Group Company Amounts owed by group undertakings 31,555 Adriatic Oil Plc 25

26 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Creditors Group Company % Convertible Notes 40,000 40,000 Directors loan accounts 1,694 1,694 1,694 1,694 Accruals 22,325 60,162 20,165 60,162 24, ,856 21, ,856 On 22 June 2011, the Company issued convertible loan notes to Jack Wilson, Chairman of the Company. The loan notes were convertible into ordinary shares of 0.5p in the Company, at a conversion price of 1.2p per share, at the discretion of the holder. The exercise period of the loan notes was between 22 June 2011 and 13 June The loan notes were subject to 7% interest per annum. The loan notes were repaid on 13 July Called up share capital Allotted, called up and fully paid: As at 1 October 2011: 121,642,500 ordinary 608, ,063 shares of 0.5p each Issued during the year: 170,111,071 ordinary 850, ,150 shares of 0.5p each As of 30 September ,753,571 ordinary shares of 0.5p each 1,458, ,213 On 29 November 2011, the Company issued 3,003,571 ordinary shares of 0.5 pence each for 1.4 pence per share. On 25 January 2012, the Company issued 4,000,000 ordinary shares of 0.5 pence each for 0.5 pence per share. On 15 February 2012, the Company issued 70,107,500 ordinary shares of 0.5 pence each for 1.4 pence per share. On 30 March 2012, the Company issued 10,000,000 ordinary shares of 0.5 pence each for 0.5 pence per share. On 24 April 2012, the Company issued 25,000,000 ordinary shares of 0.5 pence each for 0.8 pence per share. On 27 August 2012, the Company issued 6,000,000 ordinary shares of 0.5 pence each for 0.65 pence per share. Adriatic Oil Plc 26

27 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Called up share capital (continued) Warrants On 29 November 2011 warrants were issued to subscribe for 1,160,000 ordinary shares of 0.5 pence each. The exercise price is 4 pence and the expiry date is 23 November On 25 April 2012 warrants were issued to subscribe for 14,280,000 ordinary shares of 0.5 pence each. The exercise price is 2.25 pence and the expiry date is 24 April Reserves Group Share premium Profit and account loss account At 1 October ,000 (851,719) Gross proceeds of share allotments 742,000 - Expenses of share allotments (23,900) - Loss for the period - (1,134,367) _ 1,075,100 (1,986,086) Share premium Profit and account loss account At 1 October ,350 (646,943) Gross proceeds of share allotments 8,650 - Expenses of share allotments - - Loss for the period - (204,776) 357,000 (851,719) Company Share premium Profit and account loss account At 1 October ,000 (851,719) Gross proceeds of share allotments 742,000 - Expenses of share allotments (23,900) - Loss for the period - (1,169,221) _ 1,075,100 (2,020,940) Share premium Profit and account loss account At 1 October ,350 (646,943) Gross proceeds of share allotments 8,650 - Expenses of share allotments - - Loss for the period - (204,776) 357,000 (851,719) Adriatic Oil Plc 27

28 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Reconciliation of movements in equity shareholder s funds Loss for the financial period (1,134,367) (204,776) Share issues during the period ,800 Net addition to shareholder s funds 434,288 89,024 Opening shareholder s funds 113,494 24,470 Closing shareholder s funds _ 547, , Cash outflow from operating activities Operating loss (1,134,366) (204,776) Adjustments for: Impairment charges - (16,104) Goodwill on subsidiary acquisition written off 904,412 - Decrease/(increase) in debtors (2,674) (301) (Decrease)/increase in creditors (77,887) 63,175 Net cash outflow from operating activities (310,515) (158,006) 18 Financial instruments and risk profile The Group s financial instruments comprise cash and cash equivalents, investments and items such as trade payables, which arise directly from its operations. The Group does not use derivatives for hedging purposes. Given the size of the Group, the directors have not delegated the responsibility of monitoring financial risk management to a sub-committee of the board. The policies set by the board of directors are implemented by the executive directors. Liquidity risk The Group has a policy to manage liquidity risk by monitoring its cash balances. The Group s core funding comes from the proceeds of share issues. The Group has no external borrowing facilities, and no financial assets have been pledged as collateral for any liabilities or contingent liabilities. Foreign currency risk The Group operates in the UK and Albania and its currencies of operation are Pound Sterling, Euros, US dollars and Albanian Lek. As a result, the Group s Sterling balance sheet could be affected by the movement of these currencies. Credit risk The Group has no formal policy on potential customers as it has no sales. Credit risk on cash balances is limited because the counterparty is a bank with a high credit rating. The maximum credit risk exposure relating to financial assets is represented by the carrying value at the balance sheet date. Adriatic Oil Plc 28

29 NOTES TO THE FINANCIAL STATEMENTS (continued) For the year ended 30 September Financial instruments and risk profile (continued) Interest rate risk The Group has interest bearing assets, which include cash balances earning interest at a variable rate. The directors will revisit the appropriateness of this policy should the Group s operations change in size or nature. The Group has not entered into derivatives transactions or traded in financial instruments during the financial period under review. 19 Capital risk management The Group s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and maintain an optimal capital structure to reduce the cost of capital. The Group defines capital as being share capital plus reserves. The Board of Directors makes judgements concerning the total capital required and whether these requirements can be met by issuing new shares, reducing or increasing debt, paying dividends and returning capital to shareholders. The Group is not subject to any externally imposed capital requirements. 20 Related party transactions During the period Jack Wilson, Chairman of the Company, charged the Company 18,000 (2011: 18,000) in respect of services rendered to the Company. On 25 April 2012 warrants were issued to Jack Wilson to subscribe for 9,350,000 ordinary shares of 0.5 pence each. The exercise price is 2.25 pence and the expiry date is 24 April On 14 December 2012 warrants were issued to Jack Wilson to subscribe for 5,680,000 ordinary shares of 0.5 pence each. The exercise price is 2.20 pence and the expiry date is 13 December During the period Bruno Muller, Chief Executive Officer of the Company, charged the Company 54,000 (2011: 54,100) in respect of services rendered to the Company. In addition he charged the Company 11,524 (2011: 6,000) in respect of the provision of office space and ancillary services. On 25 April 2012 warrants were issued to Bruno Muller to subscribe for 4,930,000 ordinary shares of 0.5 pence each. The exercise price is 2.25 pence and the expiry date is 24 April On 14 December 2012 warrants were issued to Bruno Muller to subscribe for 5,680,000 ordinary shares of 0.5 pence each. The exercise price is 2.20 pence and the expiry date is 13 December During the period Jean-Denis Bouvier, Non-Executive Director of the Company, charged the Company 4,375 (2011: nil) in respect of services rendered to the Company. On 15 February 2012 the Company acquired the entire share capital of Pelagian Oil Limited, a company in which Bruno Muller owned more than 20% of the share capital prior to the acquisition. The consideration was funded by the issue of 70,107,500 ordinary shares of 0.5 pence each for 1.4 pence per share. Adriatic Oil Plc 29