Thalassa : AFR 2023

THALASSA

Acknowledgement : Bob Rich, Caroonist, Hedgeye

Annual Report and Accounts

Year to 31 December 2023

CONTENTS

	Page
Highlights	3-8
Chairman's Statement	9
Financial Review	10
Directors' Report	11-14
Corporate Governance Statement	15-19
Independent Auditor's Report on the Financial Statements	20-23
Consolidated Statement of Income	24
Consolidated Statement of Comprehensive Income	25
Consolidated Statement of Financial Position	26
Consolidated Statement of Cash Flows	27
Consolidated Statement of Changes in Equity	28
Notes to the Consolidated Financial Statements	29-46
Directors, Secretary and Advisers	47

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2023 HIGHLIGHTS

Group Results 2023 versus 2022 GBP	GBP
•	Profit /(loss) after tax for the year	(£0.89)m vs (£1.45)m
•	Group Earnings Per Share (basic and diluted)*1	(£0.11) vs (£0.18)
•	Book value per share*2	£1.16 vs £1.30
•	Investment Holdings	£8.0m vs £7.7m
•	Cash	£0.1m vs £1.4m
	*1 based on weighted average number of shares in issue of 7,945,838 (2022: 7,945,838)
	*2 based on actual number of shares in issue as at 31 December 2023 of 7,945,838 (2022: 7,945,838)

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2023 HIGHLIGHTS CONTINUED

2023 Macro-Highlights

• U.S. Stocks rose 26.4% (including dividends), the biggest rally in the US Market Index since 2019.
• Stocks were up 12.1% in the fourth quarter, the index's best quarterly performance since late 2020.
• Since hitting their bear-market low in October 2022, stocks rallied 36%.
• Technology stocks posted a huge year, surging 59.1% for their best performance since 2009. Along with Nvidia which soared 239.0%, chip manufacturer Advanced Micro Devices AMD jumped 128%.
• Communications Services ranked second among stock sectors, gaining 54.5%, led by rallies in Alphabet GOOGL, Meta Platforms META, and Netflix NFLX.
• The so-called "Magnificent Seven" stocks contributed nearly half of the stock market's overall gain.

• Large-growthstocks gained 47.3%, blowing away large- value stocks by 36 percentage points-the second- biggest advantage for growth in 25 years.
• Utilities stocks stumbled, losing 7%-their worst year since 2008-dragged down by higher interest rates.
• Dividend stocks lagged the broader market. The Morningstar US Dividend Composite Index rose 11%.
• Volatility remained very high in bonds, with some parts of the bond market staging a round trip over the year. The yield on the U.S.Treasury 10-year note started and finished 2023 near 3.8%, but during the year rose to a 17-year high near 5%.
• Credit-sensitivecorners of the bond market performed strongly as the economy avoided recession. High-yield bonds gained 13.5%, making for their best year since 2019.

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• In the final months of the year, the market's rally did broaden beyond the Magnificent Seven. However, this small group of stocks was still responsible for 47.8% of the US Market Index's 26.5% gain in 2023.
• On the other side of the fence, 2022's leaders were left in the dust in 2023. The biggest performance differential came among energy stocks.The Morningstar US Energy Index surged 62.5% in 2022, but in 2023, the sector barely held in positive territory as oil prices slid. While many energy stocks had pushed into overvalued territory as a result of the 2022 rally; at the outset of 2024 the sector was broadly seen as undervalued.

2023 Micro-Highlights

• ARL
  •• proof of concept, fully functional Seismic Node completed
  •• completion of upgraded software targeted for Q3/Q4 2024
  •• retention of Investment Bank to assist in growth capital fundraising initiated
  •• discussions with potential Strategic Partners initiated
• Tappit restitution agreement
  •• Chairman has contributed £0.3m YTD 2024, of up to a possible £3m pending of sale of personal property.
• Small gain on hedging achieved in 2023 ~£20K.
• Strategic Business Review initiated with the objective of reducing costs and scaling the business. As part of the Group's cost saving exercise, migration of the Group's accounting software from Oracle NetSuite to Intuit QuickBooks has nearly been completed.
• Chairman waived 2021 consultancy. 2022, 2023, and YTD 2024 consultancy have been accrued but not paid. Equity conversion terms under discussion.

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2023 HIGHLIGHTS CONTINUED

"Well, here's another nice mess you've gotten me into."

Laurel and Hardy, Sons of the desert 1933

Or

The Great Paradox of the US Market!

By Jeremy Grantham

https://www.gmo.com/europe/research-library/the-great-paradox-of-the-u.s.-market_viewpoints

The following thoughts are extracts from Market Watch and GMO, and hopefully reflect Mr Grantham's, and my view of the Market

• U.S. stocks appear expensive after investor mania surrounding artificial-intelligence interrupted the bursting of an initial market bubble that was deflating in 2022.
• "Prices reflect near perfection, yet today's world is particularly imperfect and dangerous," Jeremy Grantham.
• AI, "a new bubble within a bubble like this, even one limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits."
• In January 2022, Grantham warned that the U.S. was nearing the end of a "super bubble" across major asset classes. Both stocks and bonds plunged that year as the Federal Reserve aggressively hiked interest rates in a bid to tame surging inflation. But the launch of ChatGPT in late 2022 paused the deflation of the equities bubble that he saw, according to his note.
• "We paused in December 2022 to admire the AI stocks," he said."Even though, I admit, there is no clear historical analogy to this strange new beast, the best guess is still that this second investment bubble - in AI - will at least temporarily deflate and probably facilitate a more normal ending to the original bubble."
• The U.S. stock market has risen to records this year, with the S&P 500 SPX booking an all-time closing peak on March 7 and the technology-heavy Nasdaq Composite COMP scoring a fresh closing high at the start of this month.The Dow Jones Industrial Average DJIA also notched a record close this year, on Feb. 23.

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Bubbles and AI

• Looking backwards, what happened to our 2021 bubble? The Covid stimulus bubble appeared to be bursting conventionally enough in 2022 - in the first half of 2022 the S&P declined more than any first half since 1939 when Europe was entering World War II. Previously in 2021, the market displayed all the classic signs of a bubble peaking: extreme investor euphoria; a rush to IPO and SPAC; and highly volatile speculative leaders beginning to fall in early 2021, even as blue chips continued to rise enough to carry the whole market to a handsome gain that year - a feature hitherto unique to the late-stage major bubbles of 1929, 1972, 2000, and now 2021. But this historically familiar pattern was rudely interrupted in December 2022 by the launch of ChatGPT and consequent public awareness of a new transformative technology - AI, which seems likely to be every bit as powerful and world-changing as the internet, and quite possibly much more so.
• But every technological revolution like this - going back from the internet to telephones, railroads, or canals - has been accompanied by early massive hype and a stock market bubble as investors focus on the ultimate possibilities of the technology, pricing most of the very long-term potential immediately into current market prices. And many such revolutions are in the end often

as transformative as those early investors could see and sometimes even more so - but only after a substantial period of disappointment during which the initial bubble bursts. Thus, as the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!

• So, it is likely to be with the current AI bubble. But a new bubble within a bubble like this, even one limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits. But even though,
  I admit, there is no clear historical analogy to this strange new beast, the best guess is still that this second investment bubble - in AI - will at least temporarily deflate and probably facilitate a more normal ending to the original bubble, which we paused in December 2022 to admire the AI stocks. It also seems likely that the after-effects of interest rate rises and the ridiculous speculation of 2020-2021 and now (November 2023 through today) will eventually end in a recession.
• The broad U.S. stock market is expensive, with a Shiller price-to-earnings ratio of 34 as of March 1, 2024, which is "the top 1% of history," while total profits are also near record levels.

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2023 HIGHLIGHTS CONTINUED

• "The paradox that worries me here for the U.S. market is that we start from a Shiller P/E and corporate profit margins that are near record levels and therefore predicting near perfection".
• "If margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy - for waiting somewhere in the future is another July 1982 or March 2009, with simultaneous record-low multiples and badly depressed margins."

'Can't get blood out of a stone'

• When the price of an asset doubles, its future return is halved, Grantham said in his latest paper.
• "The simple rule is, you can't get blood out of a stone".
• To Grantham's thinking, the long-term prospects for the U.S. stock market look "poor" as it's generally overpriced and never has seen "a sustained rally starting from a 34 Shiller P/E."
• "The only bull markets that continued up from levels like this were the last 18 months in Japan until 1989, and the U.S. tech bubble of 1998 and 1999, and we know how those ended," he said. "Separately, there has also never been a sustained rally starting from full employment."
• While AI seems likely to be at least "as powerful and world-changing as the internet," tech revolutions tend to see "early massive hype and a stock-market bubble".
• He cited Amazon.com Inc. AMZN as an example of speculation in the late 1990s, noting its stock plunged before the company rebounded into the giant online retailer it is today.
• "As the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!"
• In his paper, the GMO co-founder didn't stop at warning about looming dangers for U.S. stocks should the "AI bubble" burst and finish the job deflating the "original bubble" that had worried him.
• "It also seems likely that the after-effects of interest-rate rises and the ridiculous speculation of 2020-2021 and now (November 2023 through today) will eventually end in a recession," Grantham cautioned.
• On a brighter note, Grantham said there's "a reasonable choice of relatively attractive investments" in the U.S.

equities market, such as "quality" stocks. He also cited resource equities,"climate-related investments," such as solar stocks, and "deep value" as areas of the market to consider.

• "U.S. quality stocks have a long history of slightly underperforming in bull markets and substantially outperforming in bear markets," he said, "although they did unusually well in the recent run-up."

Non-U.S. Equities and Real Estate

• If things are so good, why on earth is the rest of the world so down at heel, with very average economic strength and average profitability and with both getting weaker? The UK and Japan are both in technical recessions; the EU, especially Germany, also looks weak; and China, which has done a lot of the heavy lifting in global growth for the last few decades, is pretty much a basket case for a while (although getting very cheap in its stock market). Global residential real estate looks particularly tricky also, although it often takes a very long time for prices to catch up or down with mortgage costs. Can any young couple in the developed world today buy a new home comparable to those bought at the same age by their parents? Peak prices as a multiple of family income multiplied by an old-fashioned looking mortgage rate (now 6.8% in the U.S.) makes for a very tough affordability calculation. And as for office space, forget about it. With the double problem of higher rates and Covid-inducedwork-from-home, no one is confident of anything, no one will build anything new, and all sit holding their breath as appraisals start to come down and bank loans to commercial property look increasingly dicey. And in China, extreme overbuilding threatens both housing and commercial real estate.
• Throw in a couple of wars that refuse quick endings and rising possibilities of expanded military confrontations with Russia and China, and you can see why the rest of the world is sober and much more reasonably priced than the U.S. (Understanding U.S. optimism is much more difficult.) To be more precise, I would say that in contrast to extreme overpricing of U.S. equities, those overseas are a little overpriced, offering uninspired but positive returns. The positive exceptions to this general, moderate overpricing are at the value or low- growth end of emerging market equities and non-U.S. developed equities (including Japan), which are not only much cheaper than the high-growth varieties but are selling in a range from fair price to actually cheaper than normal.

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CHAIRMAN'S STATEMENT

Holdings

2023 results reflect limited movement in the carrying value of Company's unquoted Holdings, in particular Autonomous Robotics (ARL).

In contrast, there have been large movements in the Company's quoted Holdings, in particular:

• Newmark Security plc (NWT LN)

In 2023, NWT's shares performed well, rising 127.2% from 33p/share to close 2023 at 75p/share.

THAL own's 9.98% of NWT, which we believe has significant growth potential, particularly in the USA. NWT's fiscal year- end is 30 April, such that 2024 results should be announced towards the end of September 2024. The Company had a soft first half, revenues declined 2%, but has indicated that several new Human Capital Management (HCM) 'access control' contracts should drive revenue growth in the second half of the year. At the prevailing market price of 83.5p/share, the Company's market capitalisation is ~£7.8m, plus debt of ~£5.6m, giving an EV of ~£13.4m.

Based on trailing twelve-month numbers the stock does not look undervalued. However, looking out over the next few years, we see the potential for sustainable annual revenue growth of ~10%, and EBITDA margins rising from 6%/8% back towards 10% to 15%, or £3m to £4.5m, on £30m of revenue by 2028. Based on our estimates, the Company should be able to pay down debt at a rate of £0.5m per annum, or roughly £2m over the next 4 years. Whilst the EV/EBITDA multiple on 2023 EBITDA of £1.1m is 12.2x, we believe that this reflects investor anticipation for improved results, and that a more conservative EV/EBITDA multiple of 8x our £3m to £4.5m 2028 EBITDA estimate is more appropriate, which in turn would result in an EV of £24m to £36m, or an Equity value of £20.4m to £32.4m, or a share price target of £2.125/ share to £3.75/share (9.6m shares outstanding). Based on our estimates, we anticipate a potential 154.5% to 349.1% increase in the upside value of NWT's shares over the next 4 years, or a potential compound annual return of between 26.3% and 45.6%, from the prevailing market price of 83.5p/ share.

• Autonomous Robotics Ltd. (ARL)

resulting data sets concluded excellent performance of the ARL design.

The mechanical design of the Flying Node was also modified to optimise the seismic sensor performance and an updated battery system was also developed.This resulted in the build and test of a MK2 version of the Flying Node which was used for the trials.

The software team also progressed the development of the in-house node control and navigation software. Initial in water testing of the software will start in the 2nd quarter of 2024.

As also mentioned in the Summary above, a formal process to unlock the latent potential value of ARL is now under way and we look forward to reporting further during the coming months.

Outlook

AI is clearly the latest dot.com game in town. Nvidia (NVDA US) in particular, is growing revenues and profits exponentially. NVDA is the proverbial bucket and spade supplier in this latest gold rush. However, how the buyers of their sophisticated chips will translate their substantial Capex into increased profits remains to be seen.

AI is already impacting the way companies operate, and individuals transfer and use information; whether the outcome will ultimately be positive for companies and consumers remains, in our opinion, to be seen?

Add geo-political risk and the potential for increased economic tension between China, the US, and Europe and suddenly the stock market outlook clouds.

Duncan Soukup

Chairman

29 April 2024

As reported last year, the Flying Node bespoke seismic sensor development project, supported by Net Zero Technology Centre (NZTC) and two major Energy Companies, was completed in 2022. Extensive field testing and analysis of the seismic data was performed which culminated in an offshore trial at Fort William in Scotland. During this trial, the Flying Node seismic sensor was benchmark tested against industry standard ocean bottom nodes and comparison of the

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FINANCIAL REVIEW

GROUP RESULTS

Continuing Operations

Total Revenue from continuing operations for the year to 31 December 2023 was £0.25m (2022: £0.30m) related to rental income in Switzerland.

Cost of Sales on continuing operations were £(0.01)m (2022: £(0.10)m), resulting in a Gross Profit of £0.24m

(2022: Gross Profit £0.20m).

Administrative Expenses on continuing operations before exceptional costs were £0.9m (2022: £0.5m) and Depreciation £0.3m compared to £0.3m in 2022.

Operating Loss was therefore £0.9m (2022: loss £0.6m).

Net Financial Income/(Expense) of £0.3m included net foreign exchange income, net interest expense and net income from financial investments including fair value adjustments (2022: income £0.2m).

Other Gains/(Losses) were gain £0.02m (2022: loss of £(0.9)m).

Share of Losses of Associated Entities was £0.31m (2022: £0.24).

Loss Before Tax on continuing operations was £1.0m (2022: £1.5m).

Tax on continuing operations for the period was a credit of £0.07m relating a R&D tax credit (2022: credit £0.05m).

Loss for the year from Continuing Operations was therefore £0.89m (2022: £1.45m).

Profit/(Loss) for the year

This resulted in a Group loss for the year of £0.89m (2022: profit £1.45m).

Net Assets at 31 December 2023 amounted to £9.2m (2022: £10.3m) resulting in net assets per share of £1.16 based on 7,945,838 shares in issue versus £1.30 in 2022 including cash of £0.1m equivalent to £0.004 per share (2022: £1.4m and £0.15 per share).

Net Cash Flow from operations amounted to an outflow of £0.4m as compared to £0.4m inflow in 2022.

Net Cash from Investing Activities, amounted to an outflow of £0.5m (2022 outflow £0.7m) relating to continuing operations in the purchase of available for sale investments.

Net Cash Outflow from Financing Activities amounted to £0.2m (2022: outflow £4.3m).

Net Decrease in Cash and Cash Equivalents was £1.0m resulting in Cash and Cash Equivalents at 31 December 2023 of £0.1m (2022: £4.6m).

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