20 May 2021

SOUND ENERGY PLC

("Sound Energy" or the "Company")

FINAL RESULTS

Sound Energy, the Moroccan focused upstream oil and gas company, announces its audited final results for the year ended 31 December 2020.

HIGHLIGHTS

Development of the Tendrara Production Concession

·      Progress made on gas development / monetisation strategy at Tendrara.

·      Advancement of Phase 1 Micro LNG engineering and commercial gas sales contracts

o  Micro LNG Development Heads of Terms signed in June 2020 to partner with Afriquia Gaz, an established gas distributor and marketer

o  10 year Take or Pay Gas Purchase and Financing structure developed with Afriquia Gaz

o  Letter of exclusivity signed with Italfluid in December 2020, an EPC contractor providing Lease to Own structure

·      Phase 2 pipeline development commercial and planning activities undertaken

·      Phase 2 Tendrara TE-5 Horst Development EIA approvals for 120-kilometre 20-inch pipeline and gas treatment plant/compression station received in January 2020 and March 2020 respectively

Exploration

·      Successful renegotiation of the terms of the Anoual exploration permit in July 2020

·      Obtained a two-year extension of the Sidi Moktar exploration permit in October 2020

·      Sound remains largest onshore licence holder in Morocco with significant exploration potential for scalable growth

Corporate

·      Successfully implemented major cost savings with continued focus on disciplined cost and cash management

·      Structural reduction in administrative expenses by 52% compared with 2019

·      Equity placings to raise an aggregate of £4.6 million after costs completed in January 2020 and August 2020 at a weighted average price of c.2.1 pence per ordinary share

·      Post period end successful restructuring of €28.8 million corporate loan notes in April 2021

·      Appointment of SP Angel as Broker in January 2021 and subsequent publication of equity research

ESG

·      Sustainable business model with ESG principles at its core, with gas as a transition fuel providing a key element in Morocco's Energy policy for secure, affordable and sustainable energy replacing imported alternatives

Graham Lyon, Executive Chairman said:

"2020 was a year of transition and stabilisation for the Company. Transition to a development led strategy, monetising our discovered resource and stabilisation in rationalising the Company's cost base.   Our gas development / monetisation strategy is advancing towards realising our objective of generating cash flow from Tendrara's significant 377bcf discovered resource.  As part of the Phase 1 micro LNG development, we are delighted to have been able to attract a market leading partner like Afriquia Gaz in Morocco and Italfluid as our facility provider. Concluding arrangements with each will enable the Micro LNG project to come into being. We thank our loan note holders for having the confidence in management and in our ability to execute on our strategy by providing their support for the successful bond restructuring exercise undertaken in April 2021. We look forward to 2021 with the Company moving into project execution mode.''

Enquiries:

Statement from the Executive Chairman

2020 was a pivotal year for Sound Energy, as it transitioned its leadership team and reset its strategy in moving towards becoming a cash-generating development and production company with significant exploration upside potential from its legacy portfolio position. This work has positioned the Company well for some important milestones in the coming period. The leadership team with the support of the board has a clear focus as we move forward on creating material value for shareholders as we progress all phases of the Tendrara project.

The Company took swift and purposeful action to materially reduce corporate overheads and to reduce costs, as it navigated its way through the significant headwinds brought on by the Covid-19 global pandemic, which challenged the global business environment and was exacerbated in the oil and gas sector by a significant drop in commodities prices, which have since recovered.

The Company announced in July that it had concluded discussions with the previously proposed purchaser relating to a potential partial disposal of its Eastern Morocco portfolio. In furtherance of the refocused strategy, the Company announced in June that it had entered into a Heads of Terms in order to sell the Liquified Natural Gas ("LNG") associated with its Phase 1 development project to the main gas distributor in Morocco, Afriquia Gaz, and get access to partial financing. Post period, the Company successfully restructured its €28.8 million 5% senior secured loan notes to stabilise the platform upon which it can move forward to deliver its strategy. In December, the Company announced another significant step forward towards readiness for a final investment decision ("FID") on the Phase 1 development, when it announced the entry into a period of exclusivity with Italfluid Geoenergy S.r.l. ("Italfluid") for the provision of gas processing and liquefaction equipment through an innovative leasing structure.

In addition, during the period, the Company also received the Environmental Impact Assessment (''EIA'') approval for the Tendrara Gas Export Pipeline and Central Processing Facility (''CPF''), whilst continuing to progress the finalisation of binding terms for the proposed Gas Sales Agreement (''GSA'') with Office National de l'Electricité et de l'Eau Potable (''ONEE'') for the second phase of development of the TE-5 Horst.

Eastern Morocco Partial Disposal

The Company announced in July 2020 that it was no longer in discussions with the previously proposed purchaser in relation to the potential partial disposal of its Eastern Morocco portfolio. However, having announced its phased development strategy for the Tendrara Production Concession, the Company continues to engage with other parties who have expressed interest in participating in the Company's strategy by way of a potential farm-in. Whilst a partial disposal of the Eastern Morocco portfolio is not a strategic priority for the Company, normal business development discussions are ongoing in this regard. There is no certainty that any of these discussions will progress and the Company's current key priority is to deliver a final investment decision on its proposed Phase 1 development of the Tendrara Production Concession during 2021.

Phase 1 Micro LNG Development

In June, the Company was pleased to announce that Heads of Terms had been entered into to permit exclusive discussions to negotiate definitive agreements for both the purchase of LNG to be produced from the TE-5 Horst to the main gas distributor in Morocco, Afriquia Gaz, as well as partial financing for the Phase 1 development by the Moroccan conglomerate. An LNG Gas Sales Agreement is currently being negotiated pursuant to which the joint venture will commit over a 10-year period, to supply an annual contractual quantity of 100 million standard cubic metres of (liquefied) gas from the Phase 1 development, based upon the key commercial terms set out in the Heads of Terms. In December, the Company entered into a letter of exclusivity with Italfluid, an Italian integrated services provider, pursuant to which the parties have agreed to use their reasonable endeavours to negotiate and enter into a binding project contract which will on entry commit Italfluid to design, construct, commission, operate, maintain and let to the Company a micro liquefied natural gas plant (''mLNG Plant'') that can process raw gas and produce LNG.

Phase 2 Tendrara TE-5 Development

The Company continued to make progress in advancing the development of the Tendrara TE-5 discovery including the approval of the EIA mentioned above, along with progression of discussions to obtain pipeline corridor rights. Despite the difficulties imposed by the Covid-19 pandemic, positive discussions with ONEE have continued in order to finalise the fully termed GSA for gas offtake. This will form a key building block to support project sanction of the proposed TE-5 Phase 2 development. 

EIA of the Tendrara Gas Export Pipeline and CPF

In January 2020, the Company announced receipt of the EIA approval from the Moroccan Ministry of Energy, Mines and Environment to build and operate a 120km 20-inch gas pipeline connecting the CPF to the Gazoduc Maghreb Europe pipeline (''GME''). This was followed by the ministerial approval of the EIA for the CPF in March. Approval of the respective EIAs are important steps in the development process of the TE-5 Horst. The EIA incorporates the Micro LNG project activity.

Structural Cost Reductions

The Company continues to manage its cash resources prudently and, accordingly, having paused its operational programme in 2019, the Company continued a structural cost reduction programme aimed at materially reducing the Company's ongoing operating expenditure, including reductions in staff numbers, executive remuneration and other business costs. By the end of the reporting period, the cost reduction initiatives that have been implemented delivered a reduction in general and administrative expenses by 52% compared with the year ended 31 December 2019.

Licensing

The Company announced in July that it had successfully concluded a renegotiation of the terms of its Anoual Exploration Permit in order to realign the Company's committed exploration work programme in Eastern Morocco, so that it dovetails more efficiently with the proposed phasing of our Phase 1 development plan at the Tendrara Production Concession, in a manner that underscores both our confidence in the potential of the basin as a future significant gas-producing province and our ability to deploy capital judiciously across the portfolio. As such, the Initial Period on the licence was extended from August 2020 to December 2021 with the agreement to drill one Triassic exploration well within this period.

At Sidi Moktar, due to further disruption caused by the impact of the Covid-19 pandemic, during which the Company has continually engaged with the regulatory authorities, ONHYM has approved a two-year extension to the initial period of Petroleum Agreement in order for the Company to complete the committed work programme. The length of the initial period will now be four years and six months, ending 6 October 2022. The work programme commitments for the initial period remain unchanged. The lengths of the first and second complimentary periods remain unchanged at three years, and two years and six months respectively.

Corporate

In February, the Company announced the appointment of myself, Graham Lyon, as Executive Chairman. The Company was pleased to subsequently appoint Mohammed Seghiri as Chief Operating Officer in April. Mohammed brings extensive technical and commercial experience, as well as Moroccan knowledge and relationships, which will be utilised in particular to drive forward the Company's phased development strategy in Eastern Morocco. In July, the Company announced further Board strengthening with the appointment of David Blewden as an Independent Non-Executive Director. David brings a wealth of oil and gas specific financial experience, including in relation to debt restructuring, which was a key priority for the Company in 2020 and remained so moving into 2021.

The Company began discussions relating to the restructuring of its €28.8 million 5% senior secured bond and announced in December that, whilst it had received the support of a majority of noteholders for its restructuring proposal issued in October, it had fallen short of the 75% majority required to approve the proposal. Post-period, the Company continued constructive dialogue with noteholders and was pleased to announce in April 2021 that noteholders had approved a revised restructuring proposal which, inter alia, moved the maturity of the loan notes to 31 December 2027, converted EUR 3,479,999 of the notes to 141,176,448 new ordinary shares in the Company and amended the coupon structure (applicable from June 2021) from a 5% cash coupon per annum to a 2% cash coupon per annum together with a deferred 3% per annum coupon payable at maturity. The restructuring of the notes has resulted in the delivery of a stabilised capital structure from which the Company can focus on pursuing its growth aspirations in the near term.

In August, the Company placed 163,529,411 new ordinary shares at a price of 2.125 pence per share to raise £3.2 million after costs. Later in the month, the Company also announced that its former subsidiary, Apennine Energy SPA, had entered into a binding Pre-Sale Agreement with a buyer in respect of the proposed sale of the Badile Land pursuant to which the buyer has agreed, in addition to purchasing the Badile Land in two tranches, to take responsibility for meeting the remaining costs of the restoration of the Badile Land associated with the historical drilling activity on the site. Pursuant to the sale of the land, the net proceeds of the sale (after costs) are to be remitted to Sound Energy under the terms of the disposal of the Company's former subsidiary, Sound Energy Holdings Italy Limited, in 2018. The first of two payments arising from the sale was received, post period, in March 2021.

In August, the Company received a notification from the Moroccan tax authority that, pursuant to an audit of its subsidiary Sound Energy Morocco East Limited, the Moroccan tax administration had reassessed taxes for the period of 2016-2018 and had assessed additional withholding taxes and value-added tax liabilities totalling approximately US$14 million were due pursuant to historical licensing changes, with the tax administration suggesting that this assessment might also result in a revision of the tax bases for previously submitted corporate tax returns, which could lead to additional corporate taxes being assessed. The Company believes that the assessment arises from a misunderstanding of the historical licensing changes and has appealed the assessment.

As at 31 December 2020, the Group had total cash balances of £4.5 million (including approximately £1.3 million held as collateral for a bank guarantee against licence commitments). As at 30 April 2021, the Group's unaudited cash balance was £3.2 million (including approximately £1.3 million held as collateral for a bank guarantee against licence commitments).

Graham Lyon

Executive Chairman

Portfolio Review

Our Portfolio

Sound Energy's basin model for the Eastern Morocco portfolio predicts the presence of sufficient gas charge available to fill the high graded Trias Argilo-Gréseux Inférieur ("TAGI") prospects, generated from source rocks attributed to the regionally significant Palaeozoic succession. The model gives the Company its internal view of the estimated volumes for the exploration potential, expressed as unrisked gross gas originally in place, of a low case of 7 Tcf, a mid case of 20 Tcf, and if all the key elements of the petroleum, system's model are present, an upside case of 34 Tcf.

Eastern Morocco Development and Exploration

Our Eastern Morocco Licences comprising the Tendrara Production Concession, Anoual and Greater Tendrara are positioned in a region containing a continuity of the established petroleum plays of Algerian Triassic Province and Saharan Hercynian Platform. The presence of the key geological elements of the Algerian TAGI gas play are already proven within the licence areas with the underlying Palaeozoic, representing a significant upside opportunity to be explored. These licences cover a surface area of over 23,000 square kilometres, but so far only thirteen wells have been drilled, of which six are either located within or local to the Tendrara Production Concession. Exploration drilling beyond the region of the Production Concession has been limited and the Company maintains a portfolio of features identified from previous operators' studies, plus new targets identified by Sound Energy from the recent geophysical data acquisition, processing and ongoing interpretation studies. These features are internally classified as either prospects, leads or concepts based on their level of technical maturity and represent potential future exploration drilling targets.

In February 2020, the Company announced an innovative concept to advance development of the discovered TE-5 Horst gas field within the Production Concession through a fast-track, cost-efficient, mLNG production scheme. This proposal divided the gas development project into two phases. The proposed mLNG production plan, Phase 1, would be advanced alongside workstreams related to the full field development plan, Phase 2. The mLNG scheme includes the processing and liquification of the gas produced at the field with the resulting LNG being transported to industrial customer sites in Morocco. This mLNG production plan for the TE-5 Horst is viewed by the Company as an attractive route to generating early cash flows from the Production Concession.

In March, the Company confirmed further progress with the development of the Production Concession with the receipt of an approved Environmental Impact Assessment ("EIA") from the Moroccan Ministry of Energy, Mines and Environment related to the building of the proposed gas treatment plant and compression station ("CPF") at the Concession, including the option for gas liquefaction. Inclusion of gas liquefaction within the CPF EIA approval enables the mLNG development planned as Phase 1 of the Concession field development plan, with the full field development of the Concession following as Phase 2.

The Company continued to progress Phase 2, the full field development of the Concession and following discussions with representatives of Morocco's Ministry of Interior and of the Forestry Department obtained rights through a long-term lease agreement for a 50m wide corridor along the entire 120km length of the Tendrara Gas Export Pipeline ("TGEP"), with formal land access approvals received from the Ministry of Interior and the Forestry Department. Approvals relate to land covering 99.9% of the entire length of the 50m-wide TGEP corridor and the remaining land approvals required, covering land required for the three principal blacktop roads and five river crossings along the TGEP route, are to be sought at a later date, after the Final Investment Decision is taken.

In June, the Company announced Heads of Terms were entered into with a Moroccan conglomerate, that controls the main gas distributor in Morocco, Afriquia Gaz, with significant liquified petroleum gas, butane and propane distribution and marketing operations in Morocco, pursuant to which the Company entered into exclusive discussions in order to enter into agreements for both the purchase of LNG to be produced from the TE-5 Horst development, as well as the partial financing of the Phase 1 development.

Under the Heads of Terms, the parties have agreed to use their reasonable endeavours to negotiate and enter into a gas sales agreement pursuant to which the Company, on behalf of the Concession joint venture partners, will commit, over a period of ten years from first gas from the Concession, to produce, process, liquefy and sell to Afriquia Gaz an annual contractual quantity of 100 million standard cubic metres of gas (approximately 4 billion standard cubic feet of gas per year) from the Phase 1 development, and Afriquia Gaz will commit to an annual minimum "take or pay" quantity of 90 million standard cubic meters of gas, priced within a range of US$7-9 per mmBTU with an indexed formula using a combination of the European Title Transfer Facility and United States Henry Hub benchmark indexes.

In July 2020, the Company successfully concluded a renegotiating of the terms of its Anoual licence with ONHYM to align the work programme commitments with the expected phasing of the Company's Tendrara Production Concession LNG development plan. The amended work programme commitments under the Permit included:

•     Initial period of four years and four months from 31 August 2017 (the "Initial Period"): FTG-aerogradiometry and 600km of 2D seismic and one exploration well with Triassic objective.

•     Optional first complimentary period of a further two years and six months (from 31 December 2021): if the results of the drilling of the exploration well drilled in the Initial Period are likely to constitute a commercially exploitable discovery, the Company will acquire 150 square kilometres of 3D seismic or its equivalent in 2D seismic data. If the results of the exploration well drilled in the Initial Period are not likely to constitute a commercially exploitable discovery, the Company will undertake further geological and geophysical studies but will not be required to acquire this additional seismic.

•     Optional second complimentary period of a final two years and six months: a further single exploration well with Triassic objective.

The effective date of the Permit remains the same at 31 August 2017. The commitment to acquire FTG-aerogradiometry and 600km of 2D seismic has already been fulfilled and approved by ONHYM.

In December 2020, the Company announced entry into a letter of exclusivity (the "LoE") with Italfluid, agreeing to use reasonable endeavours to negotiate and enter into a binding project contract with Italfluid to design, construct, commission, operate, maintain and let to the Company a mLNG Plant. Italfluid is an integrated service company that provides certain upstream petroleum services, including the design, construction, commissioning and maintenance of process plants and hydrocarbon processing, including gas liquefaction, to produce liquified natural gas. The mLNG Plant, which will also treat and process raw gas from the Phase 1 development prior to liquefaction, is a substantial part of the surface facilities required to be built and operated as part of the Phase 1 development. The mLNG Plant shall be designed, constructed, commissioned, operated and maintained by Italfluid for the Company in consideration for the Initial Payments and the Daily Rental Payments.

Southern Morocco Exploration

The Sidi Moktar licence is located in the Essaouira Basin, in Southern Morocco. The licence covers a combined area of 4,712km².

The Company views the Sidi Moktar licences as an exciting opportunity to explore high impact prospectivity within the pre-salt Triassic and Palaeozoic plays in the underexplored Essaouira Basin in the West of Morocco. In June 2018, Ministerial approval was received for a new eight-year Sidi Moktar Onshore Petroleum Agreement, consisting of a two years and six months initial period, a first extension period of three years, and a second extension period of two years and six months. Due to disruption caused by the impact of the Covid-19 pandemic, during which the Company undertook regular dialogue with the regulatory authorities, ONHYM approved a 24-month extension to the initial period of the Sidi Moktar Petroleum Agreement in order for the Company to complete the committed work programme. Subject to the issuance of the Joint Arreté signed by the Minister in charge of Energy and Minister in charge of Finance, the length of the initial period will now be four years and six months. The work programme commitments for the initial period remain unchanged. The lengths of the first and second complimentary periods, which would commence upon the successful completion of the recently extended initial period, also remain unchanged.

The Sidi Moktar permit hosts a variety of proven plays.

The licences host 44 vintage wells drilled between the 1950s and the present. Previous exploration has been predominantly focused on the shallower post-salt plays. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoirs in the field are Triassic-aged sands, directly analogous to the deeper exploration plays in the Sidi Moktar licences. The Meskala field and its associated gas processing facility is linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for the domestic and export markets. This pipeline passes across the Sidi Moktar licence.

The discovery of the Meskala field proved the existence of a deeper petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt seal and provides support for evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within this deeper play fairway. We believe that the deeper, pre-salt Triassic and Palaeozoic plays may contain significant prospective resources, in excess of any discovered volumes in the shallower stratigraphy.

Our evaluation of the exploration potential of Sidi Moktar, following an independent technical review, includes a mapped portfolio of 27 Jurassic, Triassic and Palaeozoic leads in a variety of hydrocarbon trap types. In addition, the Sidi Moktar licence also contains discovered resource in Jurassic reservoirs in the Kechoula gas field, which is located close to existing infrastructure and gas demand, including the large-scale Moroccan state-owned OCP phosphate plant.

Sound Energy is developing a work programme to mature the licence with specific focus on the deeper, pre-salt plays. Subject to financing, we aim to acquire the committed, high-quality 2D seismic data in 2021, focused on improving trap imaging. Preparations for this seismic acquisition campaign have commenced with the completion and approval of an EIA in late 2019. This approval, which concerns 25 territorial communes of the province of Essaouira and 11 territorial communes of the province of Chichaoua, is an important step in the local permitting process and enables the Company to continue its preparations for the seismic acquisition campaign. The Company has also undertaken an invitation to tender for acquisition and processing of the 2D seismic survey and received responses from multiple seismic service providers.

This work is planned to culminate in an exploration well, targeting a deep prospect in 2023. The Company continues to seek to progress a farm out process for this permit, offering an opportunity to a technically competent partner to acquire a material position in this large tract of prospective acreage.

Financial Review

We prioritised the restructuring of our €28.8 million corporate loan notes, which was successfully completed following the year end, and on structural cost reduction, which led to a decrease by 52% in administrative expenses to £2.9 million (2019: £6.1 million) during 2020.

Income Statement

The loss for the year before tax from continuing operations was £18.8 million (2019: £16.4 million). Impairment of development assets and exploration costs of £9.8 million (2019: £6.6 million) related to the impairment loss on TE-5 Horst production concession following revision to forecast assumptions, primarily forward Brent price assumptions in line with long-term Brent price forecast as at 31 December 2020. In 2019, the impairment loss of £6.6 million related to TE-10 drilling and well test costs as the well did not achieve a commercial gas flow rate. Administrative costs at £2.9 million were 52% lower than 2019 administration costs of £6.1 million due to a focus on cost reduction.

Foreign exchange losses primarily related to intra-Group loans and euro denominated borrowings. Foreign exchange gains and losses arising from intercompany loans that originated on acquisition of Moroccan licences are recognised in the other comprehensive income section of the statement of comprehensive income.

Cash Flow/Financing

During 2020, equity issuances and warrants exercises raised approximately £4.6 million (2019: £2.2 million) net of issue costs.

Financing costs were £3.3 million (2019: £2.8 million), primarily due to amortised costs of the notes, net of interest capitalised to the development and exploration licences of £0.1 million (2019: £0.5 million). The Company's €28.8 million bond due in June 2021 was successfully restructured subsequent to the year end such that inter alia extended the maturity of the loan notes to 31 December 2027, converted EUR 3,479,999 of the notes to 141,176,448 new ordinary shares in the Company and amended the coupon structure (applicable from June 2021) from a 5% cash coupon per annum to a 2% cash coupon per annum together with a deferred 3% per annum coupon, payable at maturity. Further details on the restructuring are provided in the subsequent events note 9.

The Group spent £1.3 million (2019: £5.7 million) on investing activities during 2020, which consisted of spend on the Group's Morocco licences and capitalised general and administrative expenses.

Balance Sheet

As at 31 December 2020, the carrying amount of property, plant and equipment was £133.4 million (2019: £147.3 million), primarily related to the development and production assets in Morocco with a carried value of £133.2 million (2019: £146.9 million) after taking account of impairment loss, additions and foreign exchange movement.

Additions of £0.9 million intangible assets largely consisted of capitalised general and administrative expenses.

As part of the 2018 Italy divestment agreement, the Company is entitled to receive the proceeds, upon the sale, of land associated with the former Badile onshore exploration permit (''Badile land''). The Company therefore has a carrying amount of approximately £1.0 million (2019: £0.9 million) as interest in Badile land. Subsequent to year end, the Company received approximately £0.2 million following the sale of Badile Area 1 and expects the sale of Badile Area 2 to be completed before the end of 2021.

Other receivables amounting to £1.4 million (2019: £1.5 million), primarily related to receivables from our partners in Morocco licences and recoverable VAT in Morocco.

Trade and other payables amounting to £2.2 million (2019: £2.4 million), primarily related to payables and accruals for the operations in the Group's licences in Morocco, where the Group, as operator, recognises 100% of the liability and receives funds from partners to pay the partners' share. The Company has a carrying amount of £0.5 million (2019: £0.6 million) relating to the obligation for the Badile land remediation in line with the 2018 Italy divestment agreement.

Going Concern

As detailed in note 1, the Company's cash flow forecasts for the next twelve-month period to May 2022, indicated that additional funding will be required to enable the Company meet its obligations. These conditions, along with other matters described in note 1 indicate existence of a material uncertainty on the Company's ability to continue as going concern.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2020

Consolidated Balance Sheet

as at 31 December 2020

Group Statements of Changes in Equity

for the year ended 31 December 2020

Group Statement of Cash Flows

for the year ended 31 December 2020

Note to Statement of Cash Flows

for the year ended 31 December 2020

Non-cash transactions during the year included the issue of 5,805,555 ordinary shares at a price of 1.86 pence per share to an employee of the Company in connection with the termination of an employment contract, and the issue of 863,682 ordinary shares to a former employee under the Company's RSU plan. 1,425,000 ordinary shares were issued at a price of 2 pence per share to a third party in lieu of fees incurred in connection with a placing announced in December 2019. In 2019, 40,915 ordinary shares were issued to a former employee under the Company's RSU plan.

The Group has provided collateral of $1.75 million (2019: $3.35 million) to the Moroccan Ministry of Petroleum to guarantee the Group's minimum work programme obligations. 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. During the year $1.6 million of the $3.35 million collateral outstanding at the end of 2019 was released and became unrestricted.

Notes to the Financial Statements

for the year ended 31 December 2020

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 1st Floor, 4 Pembroke Road, Sevenoaks, Kent, TN13 1XR.

The consolidated financial information contained within this announcement does not constitute statutory accounts for the year ended 31 December 2020 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 2020 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 1st Floor, 4 Pembroke Road, Sevenoaks, TN13 1XR.

(a) Basis of preparation

The financial statements of the Group and its parent Company have been prepared in accordance with:

1.   International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRIC Interpretations; and

2.   those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

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 2020 were authorised for issue by the Board of Directors on 19 May 2021.

Going concern

As at 30 April 2021, the Group's cash balance was £3.2 million (including approximately £1.3 million held as collateral for a bank guarantee against licence commitments). The Company's €28.8 million bond was due for settlement on 21 June 2021 but subsequent to the year-end, the terms and maturity date of the bond were restructured such that (inter alia) the maturity date was extended to 21 December 2027 and the coupon rate amended such that 2% coupon interest is payable in cash and 3% coupon interest deferred to the maturity date. Further details on the restructuring are provided in the subsequent events note 9. The Directors have reviewed the Company's cash flow forecasts for a range of micro-LNG FID timing scenarios and reflecting expected costs. While the micro-LNG project itself is expected to be fully financed through associated commercial arrangements, the Company will require additional funding later this year to cover its obligations.

The COVID-19 pandemic has not had a material impact on the Company's operations but could impact market conditions for longer than the Directors currently expect and therefore delay the Company's ability to raise additional funding.

These conditions indicate the existence of a material uncertainty which may cast significant doubt about the 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 cost control to conserve cash resources and the Directors believe that additional funding will be available in good time from the capital markets when required. Based on the Company's proven success in raising capital and based on feedback from advisors, 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.

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 and the estimation of share-based payment costs.

E&E assets

When considering whether E&E assets are impaired the Group first considers the IFRS 6 indicators set out in note 6. 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 significant declines in the market capitalisation of the Company and whether this indicates existence of an impairment. If those indicators are met a full impairment test is performed.

lmpairment test

When value in use calculations are undertaken, management estimates the expected future cash flows from the asset and chooses a suitable discount rate in order 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 6.

At 31 December 2020, the Company's market capitalisation was £19.0 million, which is below the Group and Company's net asset value of £144.9 million and £135.3 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 are included in note 5, 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 value in use calculation is based on a discounted cash flow model (''DCF model''). The cash flows are derived from latest budgets, expenditure and price data in agreed heads of terms and latest management plans on project phasing. The recoverable amount is sensitive to the discount rate as well as the Brent price assumption that forms part of the indexation for the gas price used in the DCF model. The carrying amount of the development and production assets and parent Company investment in subsidiaries was reduced by a £9.2 million impairment loss during the year. The key assumptions used to determine the recoverable amount of the development and production assets are disclosed in note 5.

Share-based payment

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.

Fair value of warrants and bonds and allocation of issue costs

Significant judgement and estimation is also required in the determination of the fair value of warrants and bonds. The proceeds from the issue of the Company's bonds were used to settle existing liabilities and therefore an element of judgement was required in determining the portion of issues costs to be allocated to the old and new debt.

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. During the year, Morocco tax authority informed the Group that it intended to claim taxes on historical acquisition of licences in Eastern Morocco by the Group. The Group believes that the Morocco tax authority has misunderstood or misinterpreted the underlying transactions and has appealed the assessment. Accordingly, no liability has been recognised in the financial statements but the assessment is considered to be a contingent liability. A disclosure has been made in note 3.

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 source of estimate concern IFRS 9 on intercompany loans at parent Company level but is not considered likely subject to material change in the coming 12 months.

(b) Investments 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 2020, the Group's 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 2020:

The segments assets and liabilities at 31 December 2020 were as follows:

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

Segment results for the year ended 31 December 2019 were as follows:

The segments assets and liabilities at 31 December 2019 are as follows:

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

3 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 uncertainty of utilisation of those assets. Unrecognised tax losses as at 31 December 2020 were estimated to be approximately £8.2 million (2019: £8.9 million).

In August 2020, the Group received a notification from the tax authority in Morocco of its intention to assess Sound Energy Morocco East Limited for additional withholding taxes and VAT liabilities totalling approximately $14 million, and intention to consider a revision of the tax bases for previously submitted corporation tax returns, which could lead to additional corporate taxes being assessed. The Group believes that the assessment arises from a misunderstanding of the underlying transactions and has appealed the assessment. Accordingly, no liability has been recognised in the financial statements but the assessment is considered to be a contingent liability.

Following the Group's appeal, the tax authority has referred the matter to a local tax committee. The local tax committee can take up to 12 months to make a decision.

4 Loss 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 weighted average number of shares that would be issued if dilutive options, RSUs and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated as follows:

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 diluted earnings per share.

5 Property, Plant and Equipment

During the year, the Group's office lease in Morocco was terminated and a new short-term lease entered into at new office premises. Accordingly, the right-of-use assets with carrying amount of £0.3 million and the related accumulated depreciation of £0.2 million was derecognised.

The Company's market capitalisation was £19.0 million as at 31 December 2020, which is below the Group's net assets of £144.9 million and the Company's net assets of £135.3 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 licence and an impairment test was undertaken on the carrying amount of the TE-5 Horst Concession. The Company used a DCF model (''Model'') to calculate the value in use for the Company's share of the TE-5 Horst concession. The model has an NPV of $181.9 million (£133.2 million), which when compared to the carrying amount of the development and production assets of £142.4 million (before impairment) led to recognition of an impairment loss of £9.2 million (£9.8 million less translation exchange adjustment of £0.6 million).

The Model covers the period 2021 to 2045. The input to the Model included a discount rate of 10% and a gas price of $8.25/mmbtu for the first 0.3 bcm gas produced per annum and the price for additional volumes range between $7 to $9 per mmbtu with an indexed formula using a combination of the European Title Transfer Facility and United States Henry Hub benchmark indexes and Brent price range of $50/bbl in 2021 to $67/bbl in 2030, increasing at 2% per annum thereafter consistent with published sources. The base gas prices used are consistent with Head of Terms for the phase 1 development and memorandum of understanding on the gas sales agreement in negotiation with ONEE. The production volumes and production profile was based on the 2018 CPR for TE-5 Horst.

Well costs assumptions used were based on management's past experience, mLNG plant leasing costs were based on agreed Head of Terms with the potential 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 budgets covered the period to 2023 but the model extends to 2045, as that is the period required to produce the gas resources at TE-5 Horst concession and economic cut-off.

A change in the discount rate by 1% has a $21 million (£15.4 million) impact on the NPV and change in the Brent price by $1/bbl has a $0.5 million (£0.4 million) impact on the NPV.

6 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 2020 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 licences that are expected to expire in the near future;

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

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 licences 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 £0.1 million (2019: £0.5 million).

7 Capital and Reserves

Non-cash transactions during the year included the issue of 5,805,555 ordinary shares at a price of 1.86 pence per share to an employee of the Company in connection with the termination of an employment contract and the issue of 863,682 ordinary shares to a former employee under the Company's RSU plan. 1,425,000 ordinary shares were issued at a price of 2 pence per share to a third party in lieu of fees incurred in connection with a placing announced in December 2019.

Share issues

During the year ended 31 December 2020, the Company issued 8,477 shares following warrant exercises at an exercise price of 24 pence per share.

In January 2020, the Company issued 76,425,000 shares following a placing announced in December 2019 at 2 pence per share.

In January 2020, the Company issued 5,805,555 shares at 1.86 pence per share to an employee of the Company in connection with the termination of an employment contract.

In July 2020, the Company issued 863,682 shares following vesting of RSU previously awarded to a former employee of the Company.

In August 2020, the Company issued 163,529,411 shares at a price of 2.125 pence per share following a placing.

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.

8 Loans and Borrowings

The Company had a five year non-amortising secured bonds with an aggregate issue value of €28.8 million (the "bonds") issued in 2016. The bonds are secured over the share capital of Sound Energy Morocco South Limited, had a 5% coupon and were issued at a 32% discount to par value. Alongside the bonds, the Company in 2016 issued 70,312,500 warrants to subscribe for new ordinary shares in the Company at an exercise price of 30 pence per ordinary share and an exercise period of approximately five years from 2016, concurrent with the term of the bonds.

The warrants were recorded within equity at fair value on the date of issuance and the proceeds of the notes net of issue costs were recorded as non-current liability. The effective interest rate is approximately 16.3%. The five year secured bonds had been due in June 2021. Subsequent to year-end the terms and maturity date of the bonds were restructured as detailed in Note 9.

Reconciliation of liabilities arising from financing activities

Reconciliation of finance expense

9 Post Balance Sheet Events

In March 2021, the Company announced that the sale of Badile land area where no restoration works were required (''Area 1'') had been completed and the Company had received €182,535 net of administrative, agency and the legal fees. The sale of Badile land area where restoration work is required (''Area 2'') is expected to be completed later in the year.

In April 2021, the Company announced that the holders of the Company's €28.8 million secured notes (''the Notes'') had approved the Company's proposal for restructuring of the Notes. The revised terms of the Notes are as below:

1)   The Maturity date of the Notes was extended by six years from 21 June 2021 to 21 December 2027;

2)   The outstanding principal amount of the Notes will be partially amortised, at a rate of 5% every six months, commencing on 21 December 2023;

3)   Approximately €3.5 million of the Notes were converted to a total of 141,176,448 new ordinary shares in the Company at a conversion price of 2.125 pence per share;

4)   The Notes shall bear until maturity 2% cash interest paid per annum and 3% deferred interest per annum to be paid at redemption for the period commencing on 21 June 2021;

5)   The Company issued to the Noteholders 99,999,936 warrants to subscribe for new ordinary shares in the Company at an exercise price of 2.75 pence per share; and

6)   The Company will have the right, at any time until 21 December 2024, to redeem the Notes in full for 70% of the principal value then outstanding together with any unpaid interest at the date of redemption.