Carbon Energy : Half Year Accounts

Directors' Report 3

Auditor's Independence Declaration 10

Consolidated Statement of Profit and Loss and Other Comprehensive Income 11

Consolidated Statement of Financial Position 12

Consolidated Statement of Changes in Equity 13

Consolidated Cash Flow Statement 14

Notes to the Consolidated Financial Statements 15

Directors' Declaration 25

Independent Auditors' Report 26

Carbon Energy is currently Subject to Deed of Company Arrangement.

The Directors present their report together with the consolidated financial statements of the Company and its controlled entities (Consolidated Group), for the half-year ended 31 December 2016, made in accordance with a resolution of the Board.

In order to comply with the provisions of the Corporations Act 2001, the Directors' Report as follows:

The names of Directors of the Company who held office during and since the end of the half-year are:

The principal activities of the Consolidated Group during the period were:

• To successfully prove its proprietary underground coal gasification (UCG) technology, keyseam;

• To establish keyseam as the UCG technology of choice for UCG projects worldwide;

• To successfully progress the JinHong Joint Venture in China (CNX 30%, with Kam Lung Investment Development Corporation); and

• To prove keyseam's environmental credentials as part of responding to the findings of the Independent Scientific Panel (ISP) in its report on UCG issued by the Queensland Government.

  There were no significant changes in those activities during the period.

  CONSOLIDATED RESULT

  The loss after tax of the Consolidated Group for the half-year ended 31 December 2016 was

  $36,932,631 (2015: loss $2,319,489).

  REVIEW OF OPERATIONS

  The following review is to assist readers to better understand the financial performance of the consolidated group's operations which are based around its current demonstration site, technical services and business development opportunities.

  OVERVIEW

  During the half year:

  • theConsolidated Group made important progress towards achieving its strategic objectives as outlined in the 2016 Annual Report, specifically setting up the foundation for further international licencing opportunities and projects in China, through the establishment of the JinHong Joint Venture; and

  • theConsolidated Group made progress towards the re-financing of its Convertible Note Facility Agreement with the Pacific Road Group. Unfortunately the re-financing was not able to proceed towards execution of final agreements, due to irregularities identified during the documentation process. As a result of this, and given the Consolidated Group's cash and liability position, the Directors appointed Ferrier Hodgson as Administrators to Carbon Energy

    Limited and a number of subsidiary companies on 22 November 2016.

    KEY ACTIVITIES

    The key activities during the period were:

  • In July 2016 the Company placed $400,000 of its remaining shortfall from the March 2016 rights issue;

  • On 25 July 2016, the Queensland Chief Scientist confirmed Carbon Energy had successfully completed the Independent Scientific Panel Process and that its keyseam technology met the key recommendations of the government appointed Independent Scientific Panel (ISP) into underground coal gasification, stating "it is clear that Carbon Energy has contributed to the collective understanding of UCG and the conditions under which the operation is likely to be both safe and successful.";

  • The Company received a $1.4 million Research and Development Tax incentive cash rebate (as expected) on 16 August 2016;

  • The JinHong Joint Venture in China was capitalised in late September 2016 after receiving the initial required $10 million milestone payment under the JV agreement;

  • The Company released 123,845,128 shares from escrow, pursuant to a voluntary escrow deed entered into between the Company and Kam Lung Investment Development Company (Kam Lung), Carbon Energy's cornerstone investor. These shares were issued as part of a private placement to Kam Lung that was completed in September 2015;

  • A Terms Sheet agreement was signed with Ascot Energy Limited to license keyseam for a proposed 30MW power generation project in Indonesia, subject to completion of a number of conditions around project selection and financing (by Ascot Energy);

  • Kerry Parker was appointed as the Company's Managing Director and Chief Executive Officer and he commenced on 1 September 2016;

  • Other Board changes over the period included Chairman, Dr Chris Rawlings retiring from the Board (as announced on 27 October 2016) and Non-Executive Director, Louis Rozman resigning from the Board 10 October 2016;

  • On 25 October 2016, the Company announced the key terms of the refinancing of its $10 million convertible note facility and recapitalisation through an underwritten rights issue of $5 million, both with the support of its major shareholder, Kam Lung Investment Development Corporation. Unfortunately, during the process of the finalisation of required documents to effect the refinancing, efforts as between the parties came to a standstill regarding legal considerations and the transactions as contemplated were unable to be finalised;