MAST Mast Energy Developments Plc

Note 14: Other financial and derivative liabilities

Convertible loan notes

Convertible loan notes consist of a facility from institutional lenders which reprofiled the outstanding convertible loan notes held during the previous financial year. The interest accrues at 9.5% to 10% per annum based on the terms applied for each advance of the facility. The convertible loan notes have embedded derivative liabilities which were recognised at fair value.

Accrued interest on director's loan

The director's loan consists of interest payable on a director's loan which is to be settled in shares (refer note 15). The interest is accrued at 7% per annum.

Note 15: Related Parties

Related parties of the Group comprise subsidiaries, significant shareholders and the Directors.

Relationships

Board of Directors/ Key Management

Other entities over which Directors/key management or their close family have control or significant influence:

MAST Energy Developments PLC is a shareholder of the following companies and as such are considered related parties:

Balances

Transactions

Kibo Mining (Cyprus) Limited was issued shares in exchange for partial settlement of £468,999 (2022: £1,000,000) of its loan with the MED Group.

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. The transactions during the period between the Company and its subsidiaries included the settlement of expenditure to/from subsidiaries, working capital funding, and settlement of the Company's liabilities through the issue of equity in subsidiaries. The loans from related parties do not have fixed repayment terms and are unsecured.

Note 16: Subsequent events

New Strategic Funding Partner & Funding Agreement

The company has signed a funding agreement ("Funding Agreement") with an initial funding facility up to £4,000,000 with RiverFort Global Opportunities PCC Limited ('RiverFort"). The Funding Agreement was arranged by Fortified Securities and will see RiverFort joining MED as its strategic funding partner to provide and facilitate funding to develop and construct MED's existing c. 30 MW portfolio of assets and new acquisitions to achieve MED's strategic goal of building an enlarged 300 MW portfolio of flexible power assets.

New Capacity Market Contracts

MED applied for and was successful in pre-qualification to bid for new CM contracts for its Pyebridge Site, in addition to the Site's existing CM contracts (see RNS dated 27 February 2023), being a T-1 CM contract and a T-4 CM contract. Following the preparation of a robust CM Auction bid strategy, MED is pleased to announce that pursuant to the recent Capacity Market Auctions and subsequent results, its T-1 bid cleared at £35.79/kW/annum, which equates to an additional c. £183k of income to the Site, and its T-4 bid cleared at £65/kW/annum, which equates to an additional c. £322k of income to the Site. The Site's existing and new CM contracts are all fixed one-year contracts. The plan and intention is to apply for the maximum 15-year term and capacity T-4 CM contract in due course once the Site's planned overhaul work programme as referred to above has been completed, which is expected to provide further enhanced and longer term guaranteed income to the Site.

Termination of Proventure JVA

During the financial year the JVA with Proventure was terminated due to non-performance by the counterparty. MED retains its right to pursue legal action as a result thereof. The directors are currently considering its options in this regard.

Pyebridge and Hindlip Update

The group has successfully completed the initial work programme ahead of schedule at its Pyebridge 9 MW flexible power generation asset ("Pyebridge"), with the site now officially back into operation.

Resultingly, MED was able to schedule and perform the minimum 3x separate generation runs ahead of schedule to meet its Satisfactory Performance Days ("SPD") requirements that are due by the end of April 2024 under its existing T-1 Capacity Market contract (the "CM Contract"). It is expected that Pyebridge will pass its next SPD test, and retain the CM Contract's associated annual gross profit margin income of c. £308,000 which is paid and received monthly in arrears.

Furthermore, initial pre-construction work completed at MED's 7.5 MW Hindlip Lane flexible power generation project ("Hindlip"), and Certificate of Lawful Commencement granted.

Note 17: Commitments and contingencies

The Group does not have identifiable material commitments and contingencies as at the reporting date.

Note 18: Principal risks

The realisation of the various projects is dependent on the successful completion of technical assessments, project development and project implementation and is subject to a number of significant potential risks summarised as follows, and described further below:

•     Funding risk;

•     Regulatory risk;

•     Commodity risk;

•     Development and construction risk;

•     Staffing and key personnel risk; and

•     Information technology risk.

Funding risk

Following the successful conclusion of an Initial Public Offering ('IPO') on 14 April 2021, the Group was able to raise £5.54 million in cash, which was utilised to further advance the various projects of the Group to date. During 2022, the Group raised a further £650 000 for acquisitions and general working capital purposes and availed of a further £100,000 during 2023 under the reprofiled loan with institutional investors agreed in May 2023.

There can be no assurance that such funds will continue to be available on reasonable terms, or at all in future, and that projects will be completed within the anticipated timeframes to supplement cashflows through operational activities. This risk was realised to a significant extent during 2023 where anticipated funding from the Seira and subsequently, Proventure joint venture agreements, did not materialise and has delayed the Company's anticipated timeframes for project completion.

The Group generated revenue of £341,207 for the period ended 31 December 2023 and had net a liability position of £384 509 as at 31 December 2023 (31 December 2022: net assets of £2,116,744)). As at year end, the Group had liquid assets in the form of cash and cash equivalent and other receivables of £252 and £122,649 (year to 31 December 2022: £268,985), respectively.

The Directors have reviewed budgets, projected cash flows and other relevant information, and based on this review and the rationale set out below, they are confident that the Group will have adequate financial resources to continue in operational existence for the foreseeable future.  

The budgets and projected cash flows is reliant on a successful drawdown on a current facility, as well as bringing Pyebridge back into production no later than 30 April 2024 and successful electricity generation thereafter. Unforeseen challenges with either of the aforementioned cause a risk that the Company may not be able to meet its current liabilities without another cash injection. The directors have concluded that the combination of these circumstances represents a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern and that, therefore, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

The Directors continue to review the Group's options to secure additional funding for its general working capital requirements as well as project financing for commercial production-ready sites, alongside its ongoing review of anticipated revenue generation from existing sites, potential acquisition targets and corporate development needs. The Directors are confident that such funding will be available, although there is no guarantee of such funding. In addition, any equity funding may be subject to shareholder approvals and in line with legal and regulatory requirements as appropriate.

As a result, the Directors continue to monitor and manage the Group's cash and overheads carefully in the best interests of its shareholders and believe that the Company and the Group and by successfully implementing the above responses it will remain a going concern for the foreseeable future.

Regulatory risk

The United Kingdom power sector has undergone several considerable regulatory changes over the last few years and is now at a state of transition from large fossil-fuel plants to a more diverse range of power-generation sources, including renewables, small, distributed plants and new nuclear. As a result, there is greater regulatory involvement in the structure of the UK power market than has been the case over the last 20 years. Therefore, there remains a risk that future interventions by Ofgem or Government could have an adverse impact on the underlying assets that the Group manages and/or owns. The Company continually monitors this risk and, where possible, acts proactively to anticipate and mitigate any regulatory changes that may have an adverse impact on the ongoing financial viability of its projects. In order to monitor compliance with evolving UK government energy regulations, the Company subscribes to relevant environmental and energy regulation bodies updates which management reviews and makes recommendations to the Board in terms of mitigation that may be required should it become aware of any pending regulatory changes that may threaten the economic viability of its projects.

Commodity Risk

The assets that the Group manages and owns will receive revenue from the sale of energy onto the wholesale market or to end users at a price linked to the wholesale power market price. Fluctuations in power prices going forward will affect the profitability of the underlying reserve power assets. For example, the significant reduction in wholesale electricity prices from 2022 to 2023 resulted in lower electricity prices received from sales at Pyebridge during the period that it was in operation during 2023.  The Group will also use its skills, capabilities and knowledge of the UK power market in order to optimise these wholesale revenues. The Group's ability to effectively manage price risk and maximise profitability through trading and risk management techniques with the  assistance of its electricity off-taker and trading platform provider, Statkraft, will have a considerable impact on the revenues and returns.

Development and Construction Risk

The Group will continue to develop new project sites that includes obtaining planning permission, securing land (under option to lease or freehold), and obtaining gas and grid connections. The Group will also oversee the construction of these projects where needed.

Risks to project delivery include damage or disruption to suppliers or to relevant manufacturing or distribution capabilities due to weather, natural disaster, fire, pandemic, strikes or other reasons that could impair the Company's ability to deliver projects on time.

Failure to take adequate steps to mitigate the likelihood or potential impact of development and construction setbacks, or to effectively manage such events if they occur, could adversely affect the business or financial results. There are inherent risks that the Group may not ultimately be successful in achieving the full development and construction of every site and sunk costs could be lost. However, the risk is mitigated as the Group targets shovel-ready sites that adhere to specific requirements, coupled with an experienced senior management team.

Staffing and Key Personnel Risks

Personnel are our only truly sustainable source of competitive advantage and competition for key skills is intense, especially around science, technology, engineering and mathematics ('STEM') disciplines. While the Group has good relations with its employees, these relations may be impacted by various factors. The Group may not be successful in attracting, retaining, developing, engaging and inspiring the right people with the right skills to achieve our growth ambitions, which is why staff are encouraged to discuss with management matters of interest and subjects affecting day-to-day operations of the Group.

Information Technology Risks

The Group relies on information technology ('IT') in all aspects of its business. Any significant disruption or failure, caused by external factors, denial of service, computer viruses or human error could result in a service interruption, accident or misappropriation of confidential information. Process failure, security breach or other operational difficulties may also lead to revenue loss or increased costs, fines, penalties or additional insurance requirements. The Group continues to implement more cloud-based systems and processes and improve cyber security protocols and facilities in order to mitigate the risk of data loss or business interruption.

Note 18: Use of Estimates and Judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

In particular, there are significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements.

Estimation uncertainty:

Information about estimates and assumptions that may have the most significant effect on recognition and measurement on assets, liabilities and expenses is provided below:

Impairment assessment of property plant and equipment and intangible assets

In applying IAS 36, impairment assessments are performed whenever events or changes in circumstances indicate that the carrying amount of an asset or CGU may not be recoverable. Estimates are made in determining the recoverable amount of assets which includes the estimation of cash flows and discount rates used. In estimating the cash flows, management bases cash flow projections on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the remaining useful life of the assets. The discount rates used reflect the current market assessment of the time value of money and the risks specific to the assets for which the future cash flow estimates have not been adjusted. Refer to Note 11 of the annual report for detailed sensitivity analysis related to a potential change in the key estimation uncertainties inherent in the impairment assessment.

Useful life of Intangible assets

Amortisation is charged on a systematic basis over the estimated useful lives of the assets after taking into account the estimated residual values of the assets. Useful life is either the period of time over which the asset is expected to be used or the number of production or similar units expected to be obtained from the use of the asset.

Leases - Estimating the incremental borrowing rate

The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group 'would have to pay', which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates.

Useful life of Property, plant and Equipment

The depreciable amounts of assets are allocated on a systematic basis over their useful lives. In determining the depreciable amount, management makes assumptions in respect of the residual value of assets based on the expected estimated amount that the entity would currently obtain from disposing the asset, after deducting the estimated costs of disposal. If an asset is expected to be abandoned, the residual value is estimated at nil. In determining the useful lives of assets, management considers the expected period of use of assets, expected physical wear and tear, legal or similar limits of assets such as rights, condition and location of the asset as well as obsolescence.

Decommissioning and Environmental Rehabilitation Provisions

The Company has set-up a decommissioning provision for the removal of the plant and equipment installed at the Bordersley Site in Liverpool St. Birmingham., the cost of which is based on estimates.

Environmental Rehabilitation Provisions

Estimates are made in determining the present liability of environmental rehabilitation provisions consisting of a restoration provision, decommissioning provision and a residual impact provision. Each of these provisions are based on an estimate of closure costs on reporting date, inflation and discount rates relevant to the calculation and the expected date of closure of operating activities in determining the present value of the total environmental rehabilitation liability.

Critical judgements:

Information about critical judgements that may have the most significant effect on recognition and measurement on assets, liabilities and expenses is provided below:

Going Concern

The Groups current liabilities exceed its current assets as at 31 December 2023, mainly due to the loans from related parties in the amount of £849,253 (31 December 2022: £1,231,535) which contributes significantly to the material uncertainty related to the going concern assumption applied in preparation of the financial statements. Management applies judgement in determining whether or not the Group is able to continue as a going concern for the foreseeable future, in identifying the matters which give rise to the existence of the material uncertainty, and in developing responses thereto in order to address the risk of material uncertainty. Also refer to note 4.

Note 19: Financial instruments - Fair value and Risk Management

The carrying amount of all financial assets and liabilities approximates the fair value. Directors consider the carrying value of financial instruments of a short-term nature, that mature in 12 months or less, to approximate the fair value of such assets or liability classes.

The carrying values of longer-term assets are considered to approximate their fair value as these instruments bear interest at interest rates appropriate to the risk profile of the asset or liability class.

The Group does carries derivative liabilities measured in the statement of financial position at fair value at 31 December 2023.