Mercom Oil Sands PLC : Half Yearly Report

Mercom Oil Sands Plc

("Mercom" or "the Company")

Interim Results for the six months to 30 September 2013

Chairman's Statement

I am pleased to present my Chairman's statement for Mercom Oil Sands plc ("the Company") for the period ending 30th September 2013.

In the Annual Report for the Financial Year ending 31st March 2013, I reported that the CEO and the Board had decided to review the Company's strategy, including the Farm-in Agreement which had been reached with Nordic Petroleum ASA ("Nordic") to acquire a 50% share of the Chard Oil Sands Reserve. I also reported that the Board had concluded that the merits of the transaction had been overtaken by subsequent events, and that the Company had sought to negotiate a revision to the terms of the Farm in Agreement. Ultimately the negotiations with Nordic broke down, and the matter became the subject of an agreed arbitration procedure in Canada.

While this matter was being resolved it was difficult to assess the long term strategic options available to the Company, so on 24th May 2013 the Company held a General Meeting to secure shareholder support for a new strategy, which was duly approved. The new strategy is to create shareholder value through the investment of its cash assets in the natural resources and energy sectors, with a focus on oil and gas.  The Board of Mercom believes this will generate better returns while bank deposit rates remain low and its Farm-in Agreement with Nordic is being resolved.  However in the six months to the end of September the Board was focussed on the arbitration issue, and no strategic investments have yet been made. The Interim Accounts accordingly show that the Company had cash reserves of   £1.31m at the end of September, after corporate expenses of £133,819 hadbeen incurredin the first half year.

After the Interim Accounts for the period were closed, the Company announced that it has reached an out of court settlement with regard to its dispute over the Farm-in Agreement relating to the Chard Oil Sands leases in Canada.  The Company agreed to pay CAD$275,000, together with the issue of 12,954,545 new Ordinary Shares in Mercom, to Nordic in full and final settlement of the dispute. Also after the accounts were closed, the Company announced that it had issued 200,000,000 new Ordinary Shares ("New Shares"). The New Shares have been issued at 0.3p per OrdinaryShare, raising an additional £600,000 of equity.

The Directors have begun the process of identifying investment opportunities which match the new approved strategy, and of evaluating the potential profitability and risks associated with those discovered so far. The General Meeting and the Resolutions approved by the shareholders, and the resolution of the Nordic arbitration have created clarity.  The Board to now ready to move forward with renewed confidence. 

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Dr Patrick Cross

Chairman

19 December 2013

MERCOM OIL SANDS PLC

MERCOM OIL SANDS PLC

MERCOM OIL SANDS PLC

MERCOM OIL SANDS PLC

1.   BASIS OF PRESENTATION                                                                                                                                                      

Basis of presentation and statement of compliance

These interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the period ended 31 March 2013.  These interim financial statements were authorised for issue by the Company's Board of Directors on 16 December 2013.

The Comparative figures for the period ended 31 March 2013 are from the date of incorporation of the Company being 15 February 2012.

Basis of consolidation

The Group financial statements include the financial statements of the Company and its subsidiary undertaking Mercom Oil Sands Canada Inc., a company incorporated in Canada. The results of subsidiary undertakings sold or acquired are included in the Consolidated Statement of Comprehensive Income up to, or from the date control passes. Intra group sales and profits are eliminated fully on consolidation.

Functional currency

The presentational and functional currency of the Group and Company is U.K Sterling.

Significant accounting estimates and judgments

The preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these judgments and estimates. The financial statements include judgments and estimates which, by their nature, are uncertain. The impacts of such judgments and estimates are pervasive throughout the financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognised in the period in which the estimate is revised and the revision affects both current and future periods.

Significant assumptions about the future and other sources of judgments and estimates that management has made at the statement of financial position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:

·     Management's position that there are no income tax considerations required within these audited financial statements; and

·     The carrying value of trade and other receivables.

Going concern

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to a going concern, which assume that the Company will be able to realise its assets and discharge its liabilities in the normal course of operations. The Company has no current source of operating revenues and its capacity to operate as a going concern in the near-term will likely depend on its ability to continue raising equity or debt financing. There can be no assurance that the Company will be able to continue to raise funds in which case the Company may be unable to meet its obligations. Should the Company be unable to realise on its assets and discharge its liabilities in the normal course of business, the net realisable value of its assets may be materially less than the amounts recorded in the Consolidated and Company Statements of Financial Position. The financial statements do not include adjustments to amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations.

2.SIGNIFICANT ACCOUNTING POLICIES                                                                                                                              

Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the period ended 31 March 2013. The following changes in accounting policies are also expected to be reflected in the Group's consolidated financial statements as at and for the year ending 31 March 2014.

Changes in accounting policies

The following new standards, amendments to standards or interpretations were mandatory for the Group for the first time for the financial period beginning 1 April 2013, but are not currently considered to be relevant to the Group (although they may affect the accounting for future transactions and events):

·      IFRS 10, 'Consolidated Financial Statements', effective from 1 January 2013. This standard builds on existing principles by identifying the concept of control as the determining factor in which an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in determining control where this is difficult to assess.

·      IFRS 11, 'Joint arrangements', effective from 1 January 2013. This standard establishes principles for financial reporting by parties to a joint arrangement.

·      IFRS 12, 'Disclosure of interests in other entities', effective from 1 January 2013. This standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off balance sheet vehicles.

·      IFRS 13, 'Fair value measurement', effective from 1 January 2013. This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP.

·      IAS 1, 'Other Comprehensive Income', effective from 1 January 2013. The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently. The amendments do not address which items are presented in other comprehensive income.

·      IAS 19 (Revised), 'Employee Benefits' effective from 1 January 2013. These amendments are intended to provide a clearer indication of an entity's obligations resulting from the provision of defined benefit pension plan and how those obligations will affect its financial position, financial performance and cash flow.

·      IAS 27 (Revised), 'Separate Financial Statements' (Revised), effective from 1 January 2013  has the objective of setting standards to be applied in accounting for investments in subsidiaries, joint ventures, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

·      IAS 28 (Revised), 'Associates and Joint Ventures' (Revised), effective from 1 January 2013 prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

·      Amendment to IAS 32, 'Offsetting Financial Assets and Liabilities', effective from 1 January 2013 clarifies that the tax effect of a distribution to holders of equity instruments should be accounted for in accordance with IAS 32.

2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial period beginning 1 April 2013 and have not been early adopted:

·      IFRS 9, 'Financial instruments', issued in November 2009 and effective from 1 January 2015. IFRS 9 represents the first phase of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. It sets out the classification and measurement criteria for financial assets and liabilities and requires all financial assets, including assets currently classified under IAS 39 as available for sale, to be measured at fair value through profit and loss unless the assets can be classified as held at amortised cost. Qualifying equity investments held at fair value may have their fair value changes taken through other comprehensive income by election.

3.  CAPITAL AND FINANCIAL RISK MANAGEMENT                                                                                                             

The capital of the Group consists of shareholders' equity. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to pursue the development of its mineral properties and to maintain optimal returns to shareholders and benefits for other stakeholders.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust its capital structure, the Group may attempt to issue new shares or debt, dispose of assets, or adjust the amount of cash and cash equivalents.

The properties in which the Group currently has an interest are in the exploration and evaluation stage; as such the Group is dependent on external financing to fund its activities. In order to carry out the planned exploration and pay for administrative costs, the Group will spend its existing working capital and raise additional amounts as needed. The Group will continue to assess new properties and seek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so.

Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Group, is reasonable. There were no changes in the Group's approach to capital management during the period ended 30 September 2013. The Group is not subject to externally imposed capital requirements.

Credit risk

All the Group's cash and cash equivalents are held with well-known and established financial institutions. As such, management considers credit risk related to these financial assets to be minimal. The Group's maximum credit risk exposure is limited to the carrying value of its cash and subscriptions receivable. At 30 September 2013, the Group had no material amounts deemed to be uncollectible.

Commodity price risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in oil and natural gas commodity prices. The nature of the Group's operations will result in exposure to fluctuations in commodity prices. The Group is currently in its development stage and as such the exposure to fluctuations in commodity prices is not actively managed. In the future, the Group may use commodity price contracts to manage exposure to fluctuations in pricing.

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Group does not have a material exposure to this risk as there are no outstanding debt facilities.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they come due. The Group ensures, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, without incurring unacceptable losses or harm to the Group's reputation.

The Group utilises authorisation for expenditures to further manage capital expenditures and attempts to match its payment cycle with available cash resources.

Foreign currency risk

The Group is exposed to foreign currency fluctuations on its cash which is denominated in U.K. Sterling and Canadian Dollars.

4.  SEGMENTAL REPORTING                                                                                                                                                          

5.  INVESTMENTS                                                                                                                                                                               

6.  EXPLORATION AND EVALUATION ASSETS                                                                                                                       

7.TRADE AND OTHER RECEIVABLES                                                                                                                                       

8.  TRADE AND OTHER PAYABLES           

9.  RELATED PARTY TRANSACTIONS AND BALANCES                                                                                                      

10. SHARE CAPITAL                                                                                                                                                                       

The fair value of the warrants issued during the period ended 31 March 2013, was estimated at £62,000 using the Black-Scholes option pricing model with the following assumptions:

Risk free interest rate                                                                                                                                                            1.08 %

Expected dividend yield                                                                                                                                                              nil

Expected volatility                                                                                                                                                                  100 %

Expected life                                                                                                                                                                          3 years

10. SHARE CAPITAL (continued)                                                                                                                                                  

Option pricing models require the input of subjective assumptions regarding the expected volatility. Volatility is difficult to ascertain given that the company is still in the development stage, therefore it has been set at 100%. Changes in assumptions can materially affect the estimate of fair value, and therefore, the use of the Black-Scholes option pricing model, as required by IFRS, may not provide a realistic measure of the fair value of the Company's warrants at the date of issue.

There were no warrants issued in the six month period ended 30 September 2013.

On 24 May 2013 the Directors, by Special Resolution, were authorised to implement, at a future date to be approved by the Board, the reorganisation of the Company's share capital as follows:

a)     the consolidation of the Company's share capital so that every 50 Ordinary shares of £0.001 in the issued share capital of the Company be consolidated into one Ordinary share of £0.05 (New Ordinary share).  Each New Ordinary share would have the same rights and would be subject to the same restrictions as an existing Ordinary share.

b)    following the consolidation in a) the sub division of each New Ordinary share into one Ordinary share of £0.001 and one Deferred share of £0.049.

c)     the rights and restrictions of the New Ordinary and Deferred shares are set out in the Articles of Association adopted.

11.  LOSS PER ORDINARY SHARE                                                                                                                                             

Basic loss per share is calculated by dividing the loss attributable to equity holders of the Group by the weighted average number of Ordinary shares in issue during the period.

Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume the conversion of all dilutive potential ordinary shares at the start of the period. The Group's dilutive potential ordinary shares arise from warrants. In respect of the warrants a calculation is performed 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 the outstanding warrants. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the warrants.

There were no potentially dilutive warrants as the exercise price exceeded the average market price of the Ordinary shares during the period. Any potentially dilutive Ordinary shares would have been anti-dilutive because the Group was loss-making.

12.EVENTS AFTER THE REPORTING DATE                                                                                                                             

On 18 October 2013, Mercom announced that application was made for the admission to AIM of 200,000,000 new Ordinary Shares ("New Shares"). The New Shares were issued at 0.3p per OrdinaryShare to raise £600,000.  Admission of the New Shares is occurred on 24 October 2013. The New Shares ranked pari passu with the existing Ordinary Shares in the Company.

On 28 November 2013, Mercom, reached an out of court settlement with Nordic Petroleum ASA with regard to its dispute over the Farm-in Agreement relating to the Chard Oil Sands leases in Canada (note 6).Mercom agreed to pay CAD$275,000, together with the issue of 12,954,545 new Ordinary Shares in Mercom, to Nordic Petroleum ASA in full and final settlement of the dispute.

On 28 November 2013, in conjunction with an advisory agreement, Mercom paid a fee of CAD$50,000, to be satisfied by the issue of 5,600,000 new Ordinary Shares in Mercom at 0.5p per share.

13. ULTIMATE CONTROLLING PARTY                                                                                                                                      

In the opinion of the Directors there is no ultimate controlling party.