Deoleo S A : H2 2020 Results

Deoleo, S.A. and subsidiaries

V. EXPLANATORY STATEMENTSNOTESACCOMPANYINGTHEINTERIMFINANCIAL

1.- Summary of significant accounting policies

A. Interim separate financial statements

The accounting criteria used to draw up these interim separate financial statements are those set down in Spain's General Accounting Plan (Spanish GAAP), enacted by means of Royal Decree 1514/2007, which took effect on January 1, 2008.

B. Interim consolidated financial statements

The accounting criteria used to draw up the interim consolidated financial statements are the International Financial Report Standards adopted to date by the European Union (IFRS-EU). Note that those standards were applied in a uniform manner with respect to the consolidated financial statements for the year ended December 31, 2019.

2.- Going concern

The Group's parent, Deoleo, S.A. (the Company or Parent) incurred a significant loss of 70,797 thousand euros in 2019. As a result of that loss, coupled with the losses accumulated in prior years, the Parent's equity stood at a negative 54,326 thousand euros at year-end 2019. Moreover, at December 31, 2019, the Parent presented negative working capital of 31,953 thousand euros as a result, mainly, of the classification of its revolving credit facility, due June 2020, within current liabilities.

As a result, as from July 2019, Deoleo, S.A. met the grounds for dissolution under article 363 of Spain's Corporate Enterprises Act, specifically that of having an equity balance of less than half of share capital (equity was negative in August), requiring that the imbalance be redressed by reducing share capital or increasing equity.

On September 25, 2019, the Group reached an agreement with its main financiers for the restructuring of its syndicated loan; that agreement took effect on September 26, 2019, having duly obtained the required consents from the holders of that debt and materialized in the form of a lock-up agreement. The balance outstanding on the debt to be restructured amounted to 574.9 million euros (unchanged as of June 24, 2020, which is when the restructuring process concluded).

A framework refinancing agreement encompassing the implementation of the restructuring effort was executed on March 13, 2020, signed by the same creditors as signed and/or acceded to the lock-up agreement and the Deoleo Group companies affected by the restructuring. That agreement was legally ratified on March 20, 2020 (the "Refinancing Agreement"). That Agreement regulated, among other matters, the key terms of the restructured debt, the procedure to be followed during the following months to complete it and a binding commitment on the part of the banks to support, facilitate and implement the Group's financial restructuring effort.

The cornerstones of the Refinancing Agreement are:

(i)The injection of equity into Deoleo, S.A. by means of a cash rights issue of 50 million euros (the proceeds have been used to repay some of the Company's existing debt, having first reduced capital to zero to offset losses) (refer to sections VII and VIII of note 11).

(ii) The dissolution and liquidation of Deoleo Preferentes, S.A.U. (a wholly-owned subsidiary of Deoleo, S.A. which issued preferred shares in 2016), in keeping with section 4.7.1.3. of the securities note of the preferred share issue, and the attendant extinction of the preferred shares (refer to section VIII of note 11).

(iii)The corporate restructuring of the Group, by virtue of which Deoleo, S.A. has contributed most of its assets and liabilities to Deoleo Global, S.A.U. (a newly-incorporated Spanish subsidiary that will carry on the business previously conducted by Deoleo, S.A.). The following companies have been layered in between Deoleo, S.A. and Deoleo Global, S.A.U.: (i) a new sub-holding company, Deoleo Holding, S.L.U. (which was initially wholly-owned by Deoleo, S.A. and which, following conversion of the Mandatorily Convertible Loan (a transaction completed on January 19, 2021), is owned 50.996% by Deoleo, S.A. and 49.004% by the holders of the syndicated loan); and (ii) two new holding companies incorporated in the UK, Deoleo UK, Ltd. and Deoleo Financial, Ltd., wholly-owned by Deoleo Holding, S.L.U. and Deoleo UK, Ltd, respectively (note 6).

(iv) The refinancing at Deoleo Holding, S.L.U. of the remaining debt (524.9 million euros)

in the form of two loans: (i) a Mandatorily Convertible Loan (Debt to be Capitalized) in the amount of 282.9 million euros, to be capitalized in the near term, so that the creditors become shareholders; and (ii) a 242 million euro loan, divided into two tranches with different terms and conditions and collateral, which mature in five and six years (refer to section VIII of note 11).

To that end, at the Extraordinary General Meeting held by the Parent on January 17, 2020 the following resolutions were ratified: (i) the reduction of Deoleo S.A.'s share capital to zero and a simultaneous capital increase of up to 50 million euros; (ii) the dissolution and liquidation of Deoleo Preferentes, S.A.U.; and (iii) the de-merger of the majority of the assets and liabilities of Deoleo, S.A., to Deoleo Holding, S.L.U. initially and Deoleo Global, S.A.U. subsequently.

The restructuring effort concluded on June 24, 2020, having duly executed and registered the above transactions, along with other ancillary actions, and finished documenting the contractual aspects needed to execute the resolutions, such that they have taken full effect since that date.

By means of the above restructuring, Deoleo, S.A. has replenished its equity, downsized its borrowings and set up a corporate and financial structure that gives it greater flexibility for meeting its financial commitments, while injecting stability in the short and medium term.

Consequently, the Parent's directors have prepared and authorized the interim separate and consolidated financial statements on a going-concern basis.

3.- Transaction cyclicality or seasonality

The business activities of the various entities comprising the Deoleo Group, taken together, for the current reporting period, are not materially seasonal or cyclical, which means that its recurring operating earnings were generated evenly over the period.

4.- Critical accounting estimates and judgments

The preparation of the consolidated financial statements requires the Company's management to make significant accounting judgments, estimates and assumptions. Those judgments, estimates and assumptions were the same as those applied in the last set of annual consolidated financial statements.

Certain new accounting standards took effect in 2020 and were accordingly considered in preparing these consolidated financial statements; they did not imply any changes in the Group's accounting policies.

The Group intends to apply the new standards, interpretations and amendments issued by the IASB whose application is not mandatory in the European Union when they are effective, to the extent applicable to the Group. Although the Group is still in the process of analyzing theirimpact, based on the analysis performed to date, it estimates that their initial application will not have a significant impact on its interim consolidated financial statements.

COVID-19: Implications of the pandemic on this interim financial report

On March 11, 2020, the World Health Organization escalated the status of the public health crisis triggered by the expansion of the coronavirus (COVID-19) to that of a global pandemic. The speed at which events unfolded, in Spain and abroad, has caused an unprecedented health crisis that has impacted the macroeconomic environment and the Group's business performance. To tackle that situation, among other things, the Spanish government declared a state of emergency and passed a raft of extraordinary urgent measures designed to mitigate the economic and social fallout from COVID-19. The governments of other countries have adopted similar measures.

Visibility as to the duration and scale of the crisis remains limited. Nevertheless, the accompanying interim separate and consolidated financial statements adequately reflect the Group's financial situation and provide the information needed to understand the Group's business performance since it issued its 2019 annual financial statements. Below is a summary of the most significant effects of COVID-19 on the interim separate and consolidated financial statements for 2020:

• • To date there have been no adverse ramifications on the Group's financial position, earnings performance or cash flows.

• • The COVID-19 pandemic has not had significant adverse effects on the Group's direct activities; nor has it given rise to the need to recognize any impairment losses.

• • As disclosed in section III of note 11, the Group has tested its intangible assets and goodwill for impairment; those impairment tests did not indicate the need to recognize any impairment charges at December 31, 2020.

• • With respect to its financial liabilities, the refinancing process outlined in notes 2 and 11 (section VIII) concluded during the first half of 2020, as anticipated.

• • Note, in keeping with IFRS 9, in relation to the estimation of expected credit losses on accounts receivable, that there have been no significant changes in the assumptions and judgments used to analyze the Group's accounts receivable with respect to those used at year-end 2019 (i.e., the analysis performed did not indicate the need to recognize any additional extraordinary losses on account of the pandemic).

• • As for the Group's lease contracts (IFRS 16), there have been no changes in the agreements as a result of the pandemic.

• • Elsewhere, the Group has not rolled out any furlough schemes as a result of COVID-19.

• • Lastly, the Group has verified that the prevailing extraordinary circumstances have not had any impact on the recognition of deferred tax assets or the utilization of tax credits in keeping with IAS 12, the measurement of fair value in keeping with IFRS 13 or the measurement of provisions or onerous contracts in accordance with IAS 37.

5.- Contingent assets and liabilities

Notes 12.5 and 19.2 of the Group's consolidated financial statements for the year ended December 31, 2019 and note 10 of the condensed consolidated interim financial statements for the six months ended June 30, 2020 provide disclosures in respect of the Group's contingent assets and liabilities as of those reporting dates.

The most significant changes in those assets and liabilities in 2020 were as follows:

Warrants

As part of the restructuring work and the associated simultaneous capital reduction and rights issue, the Parent issued warrants, free of charge, to the shareholders with preemptive subscription rights that did not qualify as professional investors and did not expressly renounce the warrants to which they were entitled. Those shareholders received one warrant for every preemptive subscription right assigned to them (i.e., one warrant for every Deoleo share they owned). The total number of warrants issued as a result was 491,298,921.

The warrants are represented via book entries and are not admitted to trading on any secondary market, organized or otherwise.

The warrants will automatically be executed in the event the Group closes a transaction that implies the sale, directly or indirectly, of the business or shares of Deoleo Global, S.A.U. (the "Sale") and will accrue the dividend rights for their holders indicated below insofar as its enterprise value and/or the assets subject to the Sale exceed 575 million euros.

The warrants entitle their holders to the receipt, in the corresponding proportion, of 10% of the lower of (a) the equity value corresponding to 100% of the shares of Deoleo Holding, S.L.U. in the context of the Sale; and (b) the surplus over the 575 million euros benchmark enterprise value and/or Sale assets value. If the enterprise value and/or assets subject to the Sale do not exceed the minimum threshold of 575 million euros, the warrant holders would not be entitled to any payment.

By virtue of the Shareholder Agreement entered into between Deoleo, S.A. and its lender banks, the amount payable to the warrant holders in the event the foregoing conditions are met would be borne by the shareholders of Deoleo Holding, S.L.U. and would take the form of a preferred dividend payable by Deoleo Holding, S.L.U. to Deoleo, S.A., unless the Sale consists of the sale of shares of Deoleo Holding, S.L.U., in which case the payment to the warrant holders would be borne only by the selling shareholders, in the proportion corresponding to each.

The warrants will expire: (i) 10 years from their date of issuance in the event of no Sale; or (ii) if a Sale takes place within 10 years from their issuance: (a) on the date contemplated for the payment of the above-mentioned dividend rights; or (b) on the date on which Deoleo notifies that a Sale has taken place but without triggering the right to any payment.

The Parent's directors have deemed that at December 31, 2020 the information available is insufficient to determine the fair value of this commitment, as its intrinsic value is zero and the probability of a Sale and its possible date cannot be determined. Against that backdrop, they have decided to carry the warrants at zero and to review that judgment on future reporting dates in light of the trends in the different variables that affect their valuation.

Long-Term Bonus Plan

In the context of the restructuring work, the Shareholder Agreement between Deoleo, S.A. and the lender banks agrees the creation of an extraordinary long-term remuneration scheme (the "Long-Term Bonus Plan") for the members of the executive team of the Deoleo Holding Subgroup, including the chief executive officer of the Deoleo Holding Subgroup, with the goal of: (i) compensating them for their efforts to deliver the key strategic objectives of the Deoleo Holding Subgroup defined in the long-term business plan; and (ii) provide them with competitive remuneration tied to the Deoleo Holding Subgroup's strategy with the aim of retaining key management personnel; and (iii) align their interests with those of the shareholders and stakeholders of the Deoleo Holding Subgroup. The Plan took effect on the same day as the Refinancing Agreement, i.e. June 24, 2020.

Under the Long-Term Bonus Plan, the beneficiaries (or their successors, as warranted) are entitled to receive an extraordinary cash bonus to be determined as a function of the increase in the value of Deoleo Holding, S.L.U. whenever a potential Sale takes place, so long as the amount paid for Deoleo Holding, S.L.U. by a third party in any such process (the "Sale Price") is higher than the result of dividing the effective size of the rights issue by 51% (the "Initial Equity Value"). The rights issue amounted to 50,000,000.40 euros, such that the Initial Equity Value amounts to 98,039,216.47 euros.

The remuneration due under the Long-Term Bonus Plan is payable in cash and is conditional upon the beneficiaries remaining in active employment or service with the Deoleo Holding Group on the date on which the Sale closes (except in the special