SOU Sound Energy Plc

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

For the year ended 31 December 2023

Notes to Statement of Cash Flows

Non-cash transactions during the period included the issue of 99,999,994 ordinary shares, following partial conversion of the convertible bond. 11,404,221 ordinary shares were issued to third parties in settlement of approximately £0.2 million due for services provided and 3,015,790 ordinary shares were issued following the exercise of nil cost options by a member of staff. The Group has provided collateral of $1.75 million (2022: $2.5 million) to the Moroccan Ministry of Petroleum to guarantee the Group's minimum work programme obligations for the Anoual, and Sidi Mokhtar permits. The cash is held in a bank account under the control of the Company and, as the Group expects the funds to be released as soon as the commitment is fulfilled, on this basis, the amount remains included within cash and cash equivalents.

Notes to the Financial Statements for the year ended 31 December 2023

1. Accounting Policies

Sound Energy plc is a public limited Company registered and domiciled in England and Wales under the Companies Act 2006. The Company's registered office is 20 St Dunstan's Hill, London EC3R 8HL.

The consolidated financial information contained within this announcement does not constitute statutory accounts for the year ended 31 December 2023 within the meaning of Section 434 of the Companies Act 2006 but is derived from those audited accounts. The auditors reported on those accounts and their report was unqualified and did not contain any statement under section 498(2) or section 498(3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2023 will be delivered to the Registrar of Companies in due course. The annual report and statutory accounts will be sent to shareholders and will be made available to the public on the Company's website: www.soundenergyplc.com or, upon request, copies may be obtained from the Company Secretary at the registered office of Sound Energy plc 20 St Dunstan's Hill, London, EC3R 8HL.

(a)  Basis of preparation

The financial statements of the Group and its parent Company have been prepared in accordance with UK-adopted International Accounting Standards.

The consolidated financial statements have been prepared under the historical cost convention, except to the extent that the following policies require fair value adjustments. The Group and its parent Company's financial statements are presented in sterling (£) and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these consolidated financial statements and by all Group entities, unless otherwise stated. All amounts classified as current are expected to be settled/recovered in less than 12 months unless otherwise stated in the notes to these financial statements. The Group and its parent Company's financial statements for the year ended 31 December 2023 were authorised for issue by the Board of Directors on 23 April 2024.

Going concern

As at 31 March 2024, the Group's cash balance was £2.5 million (including approximately £0.8 million held as collateral for a bank guarantee against permit commitments). The Directors have reviewed the Company's cash flow forecasts for the next 12-month period to April 2025. The Company's forecasts and projections indicate that, to fulfil its other obligations, primarily the Company's exploration permits commitments, the Company will require additional funding. The Company commenced its Phase 1 of the Concession upon taking FID on the micro-LNG project, and has continued to actively monitor the project schedule, costs and financing. The Company is progressing towards a final investment decision for Phase 2, pipeline led development of the Concession and received a conditional offer for partial financing of the Phase 2 development and continue to work to satisfy the conditions precedents and other elements necessary for the taking of Phase 2 FID.

The need for additional financing indicates the existence of a material uncertainty, which may cast significant doubt about the Group and Company's ability to continue as a going concern. These financial statements do not include adjustments that would be required if the Company was unable to continue as a going concern. The Company continues to exercise rigorous cost control to conserve cash resources, and the Directors believe that there are several corporate funding options available to the Company, including a farm-down on some of the Company's permits, and various debt funding options. Furthermore, based upon the Company's proven track record in raising capital in the London equity market, and based on feedback from ongoing financing discussions, the Directors have a reasonable expectation that the Company and the Group will be able to secure the funding required to continue in operational existence for the foreseeable future, and have made a judgement that the Group will continue to realise its assets and discharge its liabilities in the normal course of business. Accordingly, the Directors have adopted the going concern basis in preparing the consolidated financial statements.

Use of estimates and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Estimation and assumptions

The key sources of estimation uncertainty, that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year, are the impairment of intangible exploration and evaluation ("E&E") assets, impairment of development and production assets, investments, warrants, and the estimation of share-based payment costs.

E&E, development and production assets

When considering whether E&E assets are impaired, the Group first considers the IFRS 6 indicators set out in note 7. The making of this assessment involves judgement concerning the Group's future plans and current technical and legal assessments. In considering whether development and production assets are impaired, the Group considers various impairment indicators and whether any of these indicates existence of an impairment. If those indicators are met, a full impairment test is performed.

Impairment test

When value in use calculations are undertaken, management estimates the expected future cash flows from the asset and chooses a suitable discount rate to calculate the present value of those cash flows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in the treatment of E&E assets above. Further details are given in note 7.

At 31 December 2023, the Company's market capitalisation was £14.0 million, which is below the Group and Company's net asset value of £166.8 million and £156.8 million, respectively. Management considers this to be a possible indication of impairment of the Group and Company's assets. A significant portion of the Group's net assets is the carrying value of the development and producing assets and disclosures relating to management's assessment of impairment for these assets and the investment in subsidiaries are included in note 6, on the basis that the recoverability of the investment in subsidiaries in the Company balance sheet is linked to the value of the development and producing assets as, ultimately, the cash flows these generate will determine the subsidiaries' ability to pay returns to the Company.

Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm's length, for similar assets or observable market prices less incremental costs of disposing of the asset. The fair value is estimated using a discounted cash flow model ('DCF model''). The cash flows are derived from the latest budgets, expenditure and price data in signed gas sales agreements (for contracted gas sales volumes), market based price data (for uncontracted gas sales volumes), project contract or agreed heads of terms, and the latest management plans on project phasing. The recoverable amount is sensitive to the discount rate and gas price assumption as well as the Brent price assumption that impacts condensate sales pricing in the DCF model. The impairment test indicated that there was sufficient headroom and therefore no impairment charge was recognized as at 31 December 2023. The key assumptions used to determine the recoverable amount of the development and production assets are disclosed in note 6.

Share-based payments

The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen, and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the continuing participation of key employees (note 10).

Fair value of warrants

Significant judgement and estimation is also required in the determination of the fair value of warrants.

Fair value of convertible bonds

The calculation of fair value on convertible bonds requires estimation of the discount rate to use when discounting outstanding principal and interest amounts at each reporting date. The discount rate is a significant input into the discounted cashflow model used by the Company to estimate the fair value of the convertible bonds.

Taxation

The Group seeks professional tax and legal advice to make a judgement on application of tax rules on underlying transactions within the Group or with third parties. Tax treatment adopted by the Group may be challenged by tax authorities.  The Group had tax cases where Morocco Tax Authority had claimed taxes relating to the Group historical permits transfers and intragroup transactions. During 2023, a settlement on the tax cases was agreed upon as disclosed in note 4.

Intercompany loans

The Company has funded its subsidiaries through non-interest bearing loans payable on demand. Given that the Company has no intention to call in the loans in the foreseeable future, the loans are classified as non-current investments. Other sources of estimate concern IFRS 9 on intercompany loans at parent Company level.

(b)  Investment in subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Such power, generally but not exclusively, accompanies a shareholding of more than one-half of the voting rights. The Group uses the purchase method of accounting for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Costs of acquisition are expensed during the period they are incurred.

(c)  Foreign currency translation

The functional currency of the Company is GBP sterling. The Group also has subsidiaries whose functional currencies are US dollar.

Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement.

On consolidation, the assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the year unless this is not a reasonable approximation of the rates on the transaction dates. The resulting exchange differences are recognised in other comprehensive income and held in a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that foreign operation is recognised in the income statement.

2. Segment information

The Group categorises its operations into three business segments based on corporate, exploration and appraisal, and development and production.

In the year ended 31 December 2023, the Group's development, exploration and appraisal activities were primarily carried out in Morocco.

The Group's reportable segments are based on internal reports about components of the Group, which are regularly reviewed and used by the Board of Directors, being the Chief Operating Decision Maker ("CODM"), for strategic decision making and resource allocation, in order to allocate resources to the segment and to assess its performance.

Details regarding each of the operations of each reportable segments are included in the following tables.

Segment results for the year ended 31 December 2023:

The segments assets and liabilities at 31 December 2023 is as follows:

The geographical split of non-current assets is as follows:

Segment results for the year ended 31 December 2022 were as follows:

The segments assets and liabilities at 31 December 2022 were as follows:

The geographical split of non-current assets were as follows:

4. Taxation

(a) Analysis of the tax charge for the year:

(b) Reconciliation of tax charge

Deferred tax assets have not been recognised in respect of tax losses available due to the uncertainty of the utilisation of those assets. Unrecognised tax losses as at 31 December 2023 were estimated to be approximately £14.8 million (2022: £8.8 million).

The Group had tax cases where Morocco Tax Authority had claimed taxes relating to the Group historical permits transfers and intragroup transactions. In May 2023, the Company entered into a settlement agreement with Morocco Tax Authority on a phased payment schedule back ended over 6 years. The amount paid on entry into the settlement agreement was approximately £126k (after taking account of exchange rate movements). The discounted non-current liability amounted to approximately £1.6 million as at 31 December 2023.

The table below sets out the current and non-current tax liability and the movement during the year.

5. (Loss)/profit per share

The calculation of basic profit/(loss) per ordinary share is based on the profit/(loss) after tax and on the weighted average number of ordinary shares in issue during the year. The calculation of diluted profit/(loss) per share is based on profit/(loss) after tax on the weighted average number of ordinary shares in issue, plus the weighted average number of shares that would be issued if dilutive options and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated as follows:

Due to loss during the year, the effect of the potential dilutive shares on the earnings per share would have been anti-dilutive and therefore were not included in the calculation of the dilutive earnings per share. In 2022, LTIP options awards and warrants totalling 138.8 million were all anti-dilutive and were not included in the calculation of diluted weighted average number of shares.

6. Property, Plant and Equipment

Change in estimate

The discount rate and forecast gas price are significant estimates used by the Company to determine the recoverable amount when undertaking impairment testing of the Company's Tendrara Production Concession. The Company has taken account of changes in market conditions and certain corporate parameters during the period and accordingly revised the discount rate to 11.25% as at 31 December 2023 from 12.5% at 31 December 2022. The Company at 31 December 2022 used an average of forecast gas price referenced to the Title Transfer Facility (''TTF'') in the Netherlands and the UK National Balancing Point (''NBP'') for pricing the forecasted uncontracted gas sales volumes for impairment testing. At 31 December 2023 the Company has used average TTF prices only since future gas sales contracts the Company is likely to enter into are expected to be priced in reference to TTF and in addition, the Company received an indicative non-binding gas pricing term sheet referenced to TTF. For the impairment testing, the average TTF gas price projections, from leading independent industry consultants, used for the period to 2032 (and increasing at 2% inflationary rate thereafter) was 14.39 US$/MMBtu. The average TTF and NBP gas price projections for the period to 2032 was 14.45 US$/MMBtu.

The Company's market capitalisation was £14.0 million as at 31 December 2023, which is below the Group's net assets of £166.8 million and the Company's net assets of £156.8 million. An impairment indicator therefore exists. The Company is pursuing a micro-LNG development (phase 1) followed by full field development (phase 2) of its TE-5 Horst concession at the Group's Tendrara permit and an impairment test was undertaken on the carrying amount of the Tendrara Production Concession. The Company used a DCF model ('Model'') to calculate the recoverable amount for the Company's share of the Tendrara Production Concession. The Model has an NPV of $214.3 million (£168.3 million) which when compared to the carrying amount of the development expenditure of £157.8 million indicated that no impairment was required.

The Model covers the period 2024 to 2049. The input to the Model included a discount rate of 11.25% and phase 1 gas price of $8.0 per mmbtu rising to the phase 1 gas price ceiling of $8.346 per mmbtu, indexed using a combination of the TTF and United States Henry Hub benchmark indexes. Phase 2 gas price used is a fixed price for the first 10 years for annual volume of 0.3 bcm and the price for uncontracted volumes referenced to an average forecast price of TTF and NBP with price range of US$12.10 per mmBTU in 2024 and $14.68 per mmBTU in 2033, increasing at 2% per annum thereafter, consistent with published sources. The base gas prices used are consistent with LNG GSA for the Phase 1 development and Phase 2 gas price is based on GSA signed with ONEE for the first ten years. The production volumes data was based on the 2018 CPR for Tendrara TE-5 Horst.

The well cost assumptions used were based on management's past experience; mLNG plant leasing costs were based on contract with the micro-LNG plant contractor; and pipeline related costs were based on Head of Terms entered into with a consortium of partners that had offered to provide a build, own, operate and transfer (''BOOT'') solution for the Phase 2 of the development. The Company's latest forecast covered the period to 2027, but the model extends to 2049, as that is the period required to produce the gas resources at Tendrara Production Concession and the economic cut-off. A change in the discount rate by 1% has a $23.2 million (£18.3 million) impact on the NPV and change in average TTF and NBP forecast gas price by $1/bbl has a $11.4 million (£9.0 million) impact on the NPV.

7. Intangibles

Exploration and evaluation assets

Details regarding the geography of the Group's E&E assets is contained in note 2. The Directors assess for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. In making this assessment, the Directors have regard to the facts and circumstances noted in IFRS 6 paragraph 20. In performing their assessment of each of these factors, at 31 December 2023, the Directors have:

a.    reviewed the time period that the Group has the right to explore the area and noted no instances of expiration, or permits that are expected to expire in the near future and not be renewed;

b.   determined that further E&E expenditure is either budgeted or planned for all permits;

c.    not decided to discontinue exploration activity due to there being a lack of quantifiable mineral resource; and

d.   not identified any instances where sufficient data exists to indicate that there are permits where the E&E spend is unlikely to be recovered from successful development or sale.

On the basis of the above assessment, the Directors are not aware of any facts or circumstances that would suggest the carrying amount of the E&E asset may exceed its recoverable amount. During the year, the Group had capitalised interest costs of approximately £0.3 million (2022: £0.1 million).

8. Prepayments

 Non-current prepayment of £5.1 million (2022: £4.3 million) and current prepayment of £1.3 million (2022; nil) relates to activities of the Company's Phase 1 mLNG Project in the Concession. Non-current prepayment of £5.1 million (2022: £4.3 million) and current prepayment of £1.3 million (2022; nil) relates to activities of the Company's Phase 1 mLNG Project in the Concession.

9. Capital and Reserves

The share issues described below were all non-cash transactions.

Share issues

In June 2023, the Company issued 11,404,221 shares to third parties in settlement of services provided to the Company amounting to approximately £0.2 million.

In July 2023, the Company issued 3,015,790 shares following the exercise of nil cost options by a member of staff.

In August 2023, the Company issued 22,222,221 shares following a partial conversion amounting to £500,000 by the holders of the Company's £2.5 million convertible bonds (''the convertible bonds'').

In September 2023, the Company issued 22,222,221 shares following a partial conversion amounting to £500,000 by the holders of the convertible bonds.

In October 2023, the Company issued 22,222,221 shares following a partial conversion amounting to £500,000 by the holders of the convertible bonds.

In November 2023, the Company issued 22,222,221 shares following a partial conversion amounting to £500,000 by the holders of the convertible bonds.

In December 2023, the Company issued 11,111,110 shares following a partial conversion amounting to £250,000 by the holders of the convertible bonds.

Reserves

In 2018, the Company sought, and was granted, a court order approving a capital reduction following the cancellation of the share premium account. This resulted in the transfer of £277.7 million to distributable reserves.

10. Share based payments

LTIP Awards

In 2022, the Company adopted a new long term incentive plan (the ''LTIP''), designed to reward, incentivise and retain the Company's Executives and senior management to deliver sustainable growth for shareholders.

The maximum number of awards that may be issued under the LTIP from time to time will be limited to 3% of the Company's issued share capital on the date of grant of awards, and, together, with all other options issued by the Company under any employee share scheme from time to time, will not exceed an aggregate of 15% of the Company's issued ordinary share capital in a rolling ten year period. Awards granted under the LTIP will, generally, be subject to a three-year vesting period from the date of grant, the number of awards, ultimately, vesting dependent on the grantee's continued service and on additional performance conditions set by the Remuneration Committee.

The Company issued 48,875,515 options to subscribe for new ordinary shares under the LTIP, out of which 31,769,085 options were allocated to qualifying Executives and senior management and the balance of 17,106,430 was retained for future allocations. The LTIP awards are exercisable at 2.4 pence per share and expire ten years after the grant.

The fair value of LTIP awards granted was estimated at the date of grant using a Black-Scholes model, taking account of the terms and conditions upon which, the awards were granted.

The expected life of the LTIP award is based on the maximum award period and is not necessarily indicative of exercise patterns that may occur. Expected volatility was determined by reference to the historical volatility of the Company's share price over a five-year period. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The valuation assumed an expected life of ten years and used the following additional assumptions for the LTIP awards granted during the year:

(i) Share price on grant date: n/a (2022: 2.53 pence)

(ii) Average risk free interest rate: n/a (2022: 1.79%)

(iii) Expected volatility: n/a (2022: 99.11%)

(iv) Assumed forfeitures: n/a (2022: 0%)

(v) Expected dividends: n/a (2022: nil)

No other features of the LTIP awards were incorporated into the measurement of fair value. The fair value of the LTIP award granted was n/a (2022:  2.26 pence). The remaining contractual life of the LTIP awards outstanding at 31 December 2023 is 8.3 years. If all the 31,769,085 LTIP awards were exercisable immediately, new ordinary shares equal to approximately 1.6% (2022: 1.7%) of the shares currently in issue, would be created.

Share options

All previously outstanding share options expired in 2022.

All RSU awards vested or expired in 2022.

The weighted average share price at the date of vesting of the RSU awards was n/a (2022: 2.5 pence).

Warrants

As at 31 December 2023, the Company had the following outstanding warrants to subscribe to the Company's ordinary shares.

11. Loans and borrowings

The Company has €25.32 million secured bonds (the "Bonds"). The Bonds mature on 21 December 2027. The outstanding principal amount of the Bonds was initially expected to partially repaid at a rate of 5% every six months, commencing on 21 December 2023, but this requirement was removed in early December 2023. Until maturity, the Bonds bear 2% cash interest paid per annum and a 3% deferred interest per annum to be paid at redemption. The Company has the right, at any time until 21 December 2024, to redeem the Bonds in full for 70% of the principal value then outstanding together with any unpaid interest at the date of redemption. The Company issued to the Bondholders 99,999,936 warrants to subscribe for new ordinary shares in the Company at an exercise price of 2.75 pence per share. The warrants expire on 21 December 2027. The Bonds are secured on the issued share capital of Sound Energy Morocco South Limited. After taking account of the terms of the Bonds, the effective interest is approximately 6.5%.

The Company has drawn down $12.0 million from the Company's $18.0 million 6% secured loan note facility with Afriquia Gaz maturing in December 2033 (the ''Loan''). The drawn down principal bears 6% interest per annum payable quarterly, but deferred and capitalised semi-annually, until the second anniversary of the issue of Notice to Proceed. Thereafter, principal and deferred interest will be repayable, annually, in equal installments commencing December 2028. The Loan is secured on the issued share capital of Sound Energy Meridja Limited. The weighted effective interest on the drawdowns made is approximately 6.2%.

In June 2023, the Company issued £2.5 million convertible bonds from a senior unsecured convertible bond facility of up to £4.0 million. The £2.5 million Convertible bonds have a fixed conversion price of 2.25 pence per ordinary share. The term of the Convertible bonds is 5 years from drawdown date, with interest of 15% per annum payable bi-annually in cash or capitalised to the principal, at the Company's election.

Other key terms of the Convertible bonds (''Bonds'') are:

1)     Issue price and redemption price on maturity is 100% of par value;

2)   Early redemption/change of control: callable in cash by the Company at any time after drawdown or in the event of a change of control of the Company at 110% of par value together with all unpaid interest. If the Bonds are redeemed by the Company, the maximum amount of future interest payable by the Company in respect of any early redemption occurring on or prior to the second anniversary will be 15% of the Bonds and after second anniversary, 10% of the Bonds;

3)   Convertible into the Company's ordinary shares at the fixed conversion price. Upon conversion, interest shall be rolled up and paid as if the Bonds were held to the redemption date, with such interest convertible at the lower of the applicable fixed conversion price and the average of the 5 daily value weighted average price calculations selected by the holder out of the 15 trading days prior to the conversion date;

4)   The Company issued to Bonds holders 33,333,333 warrants to subscribe for new ordinary shares in the Company at an exercise price of 2.25 pence per ordinary share with a term of 3 years.

During the year, the Company issued 99,999,994 new shares following the conversion of £2,250,000 of the Bonds.  The carrying amount of the Bonds is stated at fair value and is measured using the discounted cashflow method. A discount rate of 17.7% was used to discount the outstanding principal and capitalised interest over the outstanding term of the bonds.

Reconciliation of liabilities arising from financing activities

Reconciliation of finance expense

12. Post Balance Sheet events

In March 2014, the Company announced that receipt of conversion notices to issue 30 million new ordinary shares (''Conversion Shares'') at a conversion price of 1 pence per share under the terms of an existing Convertible Loan Note Agreement (the ''Convertible Loan Note''). The Convertible Loan Note has a remaining principal outstanding of £250,000 and the issue of the Conversion Shares reduces the interest owing on the converted portion of the Convertible Loan Notes by £300,000 to £1,387,500. The Conversion Shares were admitted to trading on AIM in April 2024.