Lekoil Limited Announces Annual Results for the Year Ended 31 December 2021

Source: www.gulfoilandgas.com 6/30/2022, Location: Africa

LEKOIL, the Cayman Islands litigation asset company with an investment in oil & gas assets in Nigeria, announces its final audited results for the year to 31 December 2021 (the "Accounts").

Following publication of the Accounts, the Company will liaise with its Corporate Advisor and Aquis in respect of the suspension of the Company's shares from trading and will update the market as soon as practical.

As announced on 9 June 2022, the Company also announces that Mr. Anthony Hawkins and Mr. Al Tindall will each cease being Directors of the Company as of 30 June 2022.

I hereby present the financial statements for the year to 31 December 2021 for Lekoil Limited and an update on its current position.

2021 was a year of change for the Company, one in which the integrity of the corporate structure established at the Company's foundation and the integrity of those entrusted to implement it, were tested and (in some cases) found wanting.

This Chairman's statement seeks to summarise the events that led to the schism between the Company and Lekoil Nigeria, explain why the Board has acted as it has and provide guidance as to how the Company intends to uphold proper corporate governance in the face of a determined action by Lekoil Nigeria to frustrate the proper operations of the Company. These actions of the Board being focussed towards allowing the Company to recover its investments and protect its shareholders from further value destruction.

Summary of Events during 2021
2020 began with the QIA loan fraud and ended with the shareholder triggered Extraordinary General Meeting ("EGM") in January 2021, at which shareholders were asked to approve the appointment of 3 new directors to the Board. This corporate governance failure and shareholder activism, respectively, were a precursor to the conscious decision by Lekoil Nigeria (in April 2021) to sever itself from the Lekoil Cayman group and for Mr. Akinyanmi, the then CEO of the Company, to align himself with Lekoil Nigeria.

An early manifestation of this split in the Group structure was seen in the efforts by Mr. Akinyanmi and Ms. Aisha Muhammed Oyebode (Non-executive director) to defeat the EGM resolutions, despite clear indications that the Company's shareholders were going to approve the resolutions by large majorities. Indeed, the EGM resolutions were duly passed with large majorities.

In February 2021, the Company received notification from Optimum Petroleum Development Company ("Optimum"), the operator of the OPL 310 Licence, that it has terminated the Cost and Revenue Sharing Agreement ("CRSA") executed for OPL 310.

In March 2021, the Company's then CEO, Mr. Akinyanmi, defaulted on a scheduled instalment payment of a loan that was sanctioned by the Company to himself as CEO, (the "CEO Loan") (despite the CEO Loan repayment date having been extended and rescheduled in December 2020). Mr. Akinyanmi has defaulted on each subsequent scheduled loan repayment.

The appointment of the new directors to the Board in early January 2021 gave the Board a renewed focus on corporate governance but this was met with resistance by the then current management of the Company (led by Mr. Akinyanmi) and by Lekoil Nigeria.

In April 2021, the Company received a notification from Lekoil Nigeria that it would no longer support the consolidated group structure. In particular, it would no longer fund the operations of the Company and would not act on decisions taken at the Company's Board unless Lekoil Nigeria consented to the same. As previously noted by the Company, the Shareholders Agreement between the Company and Lekoil Nigeria, entered in to at IPO/Admission, severely limits the ability of the Company's Board to implement its strategy for the broader group if Lekoil Nigeria does not agree with that strategy.

This action by Lekoil Nigeria led, in April 2021, to the resignation of Mr. Michael Ajukwu (the then Chairman of the Company) who considered that an enhanced governance and oversight regime was not possible due to a fundamental misalignment of objectives amongst the shareholders of Lekoil Nigeria (i.e., between the Company and the management of Lekoil Nigeria). The Company's previous Chairman, Mr. Mark Simmonds, also resigned at this time (having intended to step down at the Company's next annual general meeting).

The importance of the actions of Lekoil Nigeria in April 2021 cannot be understated. It was not a foregone conclusion that Lekoil Nigeria would act in the manner it did. The management of Lekoil Nigeria could have accepted that in receiving the benefit of the consolidated corporate structure (in essence, in benefiting from the Company raising over US$260m in equity capital that was subsequently lent to the Lekoil Nigeria group as inter-company loans) it had a responsibility to accept the oversight of the Company on group operations. Instead, the management of Lekoil Nigeria chose to enforce a corporate structure that avoids any real scrutiny of their activities and ignores the faith put in them by the investors in the Company.

Earlier in April 2021, the Company reluctantly accepted the resignation of Mr. George Maxwell from the Board given his acceptance of a new executive role with another oil & gas company.

As previously foreshadowed, one of the consequences of the actions of Lekoil Nigeria in April 2021 is the need for the Company to present standalone financial reporting. The financial accounts presented in this Annual Report are the first set of standalone financial accounts for the Company. In preparing standalone financial accounts, there is a risk of false comparisons with prior years given that financial statements of prior years' use consolidated financial information. Shareholders and investors should take this into account when comparing the financial report for the year ended 2021 with prior years.

In June 2021, the Company terminated the employment contract of its CEO, Mr. Olalekan Akinyanmi, due to corporate governance breaches. One of those breaches involved Mr. Akinyanmi entering into (in December 2020) a new employment contract with Lekoil Nigeria (this constituted a conflict of interest under his employment contract with the Company).

In June 2021, Ms. Aisha Muhammed-Oyebode resigned as a Non-Executive Director of the Company and Mr Edward During resigned as the CFO of the Company, each continuing to work for Lekoil Nigeria.

In the second half of 2021, the Company had negligible cash resources for its ongoing day to day administrative costs. This was a consequence of the decision by Lekoil Nigeria not to fund the day to day operations of the Company, as it had done in the past. Therefore, in September 2021, the Company entered into a Convertible Facility Agreement ("CFA") with various lenders that allowed it to draw down up to £200,000, primarily to fund legal costs and to cover ongoing operational costs. The CFA was intended to provide bridge finance to the Company whilst it identified the best path to monetize its assets and create shareholder value. It was expected that the repayment of the CFA would come from either a capital raise in Q4 2021 or the recovery of the CEO Loan from Mr. Akinyamni.

In early September 2021, the Company commenced legal proceedings to recover the repayment of the CEO Loan. In late September 2021, Mr. Akinyanmi commenced proceeds in New Jersey claiming, amongst other things, breach of contract in the termination his employment contract.

On 1 October 2021, the Company's shares were suspended from trading due to the late publication of the Company's Annual Report and Accounts for the year ended 31 December 2020 (the "2020 Annual Report"). The 2020 Annual Report was subsequently published on 18 October 2020 but the Company's shares remained suspended until such time as it clarified, for the purposes of the AIM Rules, its relationship with its operating subsidiary (i.e., with Lekoil Nigeria). It became apparent to the Company during Q4 2021 and into 2022 that the actions of Lekoil Nigeria (including releasing RNS's about the operations of the Lekoil Nigeria group without prior notification to the Company) made it very difficult for the Company to maintain its AIM listing. The Company formally wrote to Lekoil Nigeria (in 2021 and 2022) asking for their co-operation so that the Company could comply with its listing rules obligations and advising them that their actions had the potential to jeopardise the continued listing of the Company. Lekoil Nigeria declined to provide the co-operation or provide the assurance required.

In October 2021, the Company implemented a Contractor Shares Arrangement ("CSA"), whereby service providers and directors ("Contractors") who provide goods, services or loans to the Company would be paid in the Company's ordinary shares (the "Contractor Shares") rather than cash.

In November 2021, the Company was pleased to appoint Mr. Olapade Durotoye and Dr. Adeoye Adefulu as Non-Executive Directors of the Company.

In December 2021, the Company held its Annual General Meeting with all resolutions of the AGM being duly passed.

In December 2021, the Company was the recipient of a number of hostile actions by Mr. Akinyanmi and/or Lekoil Nigeria. Those actions continued into 2022 and consist of: (i) an offer to purchase the shares of the Company (December 2021), which the Board recommended that shareholders not accept; (ii) litigation by Mr. Akinyanmi in the Cayman Islands to stop: (a) the issuance of shares pursuant to CFA 1 and the contractor shares scheme (January 2022); and (b) the issuance of shares pursuant to CFA 2 and the option agreement to sell the Mayfair Loan (March 2022); (iii) an offer by Lekoil Nigeria to purchase the OPL 310 Loan (April 2022); (iv) litigation by Lekoil Nigeria in Nigeria to stop the issuance of shares pursuant to CFA 1 and CFA 2 and the sale of the OPL 310 Loan (April 2022). The Company will defend each of these claims.

In the course of the litigation it has become clear that Lekoil Nigeria has been funding the private legal actions of Mr. Akinyanmi, including the defence against the recovery of the CEO Loan amount. The Company will seek to hold the board of Lekoil Nigeria accountable for the use of company funds to fund the private actions of Mr. Akinyanmi.

The financial information that the Company is presenting for the year ended 31 December 2021 ("Annual Accounts") is the Company's first set of standalone accounts, unconsolidated from the Lekoil Nigeria group. Prior to these Annual Accounts, the Company presented consolidated group accounts, including Lekoil Nigeria and its subsidiaries. Further to the announcements made in September 2021, the Company does not currently have day-to-day operational control over, nor access to the day-to-day entity-level financial information relating to Lekoil Nigeria and its subsidiaries. As such, it would be inappropriate to present consolidated accounts as has been done in the past.

Summary of Events during 2022 (year to date)
In January 2022, Mr. Akinyanmi commenced a legal action in the Cayman Islands, challenging the validity of two resolutions which were duly passed at the Company's Annual General Meeting held on 21 December 2021.

In February 2022 the Company entered into a convertible facility agreement with Savannah Energy Investments Limited ("CFA 2" and "Savannah") whereby Savannah would support the Company by providing a £0.9 million loan to the Company. The Company has also signed an Option Agreement with Savannah granting it, subject to approval of the Company's shareholders at an extraordinary general meeting (the "Savannah EGM"), an option to be assigned the intercompany debt owed to the Company by Mayfair Assets & Trusts Limited (the "Mayfair Loan"). A US$1 million payment is payable by Savannah to the Company upon such assignment.

Prior to agreeing the Savannah transaction, the Board was aware that the transaction had received the support of the Company's major institutional shareholders, representing approximately 42% of the Company's then current issued share capital. This shareholder support for the Savannah transaction puts into context the subsequent actions of Mr. Akinyanmi and Lekoil Nigeria in seeking to overturn the Savannah transaction and the CFA transaction.

In early March 2022, the Company was successful in discharging the ex-parte injunction of Mr. Akinyanmi that sought to restrain the issue of shares by the Company. The Company subsequently issued the relevant shares under CFA 1 and CFA 2.

In April 2022, Lekoil Nigeria offered to purchase the Mayfair Loan and to repay the outstanding amount under CFA 2. Neither offer was capable of acceptance by the Company as it would have caused it to be in breach of written legally binding obligations to Savannah. The Company noted at the time of the offer that Lekoil Nigeria had chosen to conduct the negotiation process by way of public announcement rather than private dialogue with the Company and that the offer should not be seen as a serious attempt to provide an alternative to the Company and its shareholders but as an attempt to muddy the waters prior to the Savannah EGM. On 8 April 2022, at the Savannah EGM, our shareholders duly approved the Option Agreement entered into with Savannah and also authorised the Directors to issue a certain number of additional ordinary shares in the Company.

In Q1 2022, the Company continued its English court litigation to recover the CEO Loan from Mr. Akinyanmi, with the outstanding amount being circa US$1.5 million. Unfortunately, the Company was denied jurisdiction to do so by the English court. Similarly, Mr. Akinyanmi was denied jurisdiction in the New Jersey court to bring a claim related to the termination of his employment by the Company. The net result of these litigations is that the Company expects to pursue the recovery of the CEO Loan via a debt recovery procedure in New Jersey and the Company expects Mr. Akinyanmi to commence arbitration in the UK related to the termination of his employment contract.

On 15 March 2022, Lekoil Nigeria suspended its offer to purchase shares in the Company. As at 28 February 2022, Lekoil Nigeria held 11.35% of the then issued share capital of the Company. As at the date hereof, the Company has not received any more recent notifications from Lekoil Nigeria as to its shareholding in the Company.

In early April 2022, Lekoil Nigeria (along with various of its subsidiaries) notified the Company of an ex-parte injunction granted by the Federal Court of Nigeria, Lagos Division, to restrain various actions of the Company. The Company has challenged the jurisdiction of the Nigerian court to make such an order and the matter is proceeding through the courts.

In April 2022, the Company noted that Lekoil Nigeria had announced the spud of the Otakikpo-4 well as part of the Phase 2 development of Otakikpo. The Company received no further information about this from Lekoil Nigeria.

On 18 May 2022, the Company's ordinary shares were admitted to trading on the Access segment of the AQSE Growth Market operated by the Aquis Stock Exchange (AQSE).

The Company noted at the time of the admission to AQSE that the Board is of the view that the Company's primary activity now is the recovery of its investment through litigation against the Lekoil Nigeria group and Mr. Akinyanmi and that this characterisation will allow the Company to fulfil its disclosure obligations to the AQSE market, noting that a successful recovery of the intercompany debts due to the Company will be the primary source of value for shareholders (with minimal value attributable to the day-to-day operational activities of Lekoil Nigeria).

This characterisation of the Company, as a litigation vehicle with minimal value attributable to the shareholding in Lekoil Nigeria, is implicit to and reflected in the financial accounts presented for the year ended 31 December 2021.

On 27 May 2022, the Company held an extraordinary general meeting at which shareholders approved the appointment of Bright Grahame Murray as the Company's auditors.

On 9 June 2022, the Company announced that Mr. Olapade Durotoye was the new Non-Executive Chairman of the Company, that Mr. Guy Oxnard had become the Company's Executive Director and that Mr. Dipo Sofola had been appointed a Non-Executive Director. The Company expects that Mr. Anthony Hawkins and Mr. Al Tindall will step down from the Board effective 30 June 2022.

Financial review
In 2021, the Company commenced a formal review of the various intercompany and related party loan positions (noting that Lekoil Nigeria may no longer qualify as a related party and that the term "intercompany loans" refers to their historic characterisation). As set out in the financial statements for the year ended 31 December 2021, the Company has impaired four of the intercompany loans (as set out in the table below).

As previously stated by the Company, it is aware that Lekoil Nigeria is unlikely to agree on the exact intercompany debt position and the Company emphasises that it expects it will have to commence litigation to recover the intercompany loans and that the recovery of the intercompany loan amounts cannot be guaranteed to be successful either due to a failure to win the relevant litigation and/or an ability to effectively enforce a judgment.

As stated above, the Company attributes minimal value to the day-to-day operational activities of Lekoil Nigeria and, as such, has impaired its valuation of the equity investment in Lekoil Nigeria to nil value.

Asset base
As stated above, the Company's asset base now primarily consists of the intercompany receivables, the amount owing under the CEO Loan and its rights under the Option Agreement.

Corporate Structure and Board and Management update
During 2021, the Company saw a significant change in the composition of the Board, details of which are set out above. Most notably, the Company terminated the employment contract with its then CEO, Mr. Akinyanmi for corporate governance breaches.

In September 2021, the Company provided a corporate and operational update and noted that it was in day-to-day dispute with Lekoil Nigeria about the implementation of the Shareholders Agreement. Those disputes continue to the date hereof, including Lekoil Nigeria rejecting the appointment of the Company's nominees to the board of Lekoil Nigeria. As the Company has stated previously, the Shareholders Agreement limits the Company's control over the day-to-day operations of Lekoil Nigeria and its subsidiaries. Furthermore, pursuant to the Shareholders Agreement, the Company has very little control over when distributions (if any) are paid.

Outlook
The Company faced considerable challenges in 2021, largely bought about by the actions of Lekoil Nigeria, but the Board was committed to running the Company in an ethical, efficient and cost-effective manner. The Company continues to focus on recovering as much value as possible for shareholders from the assets of the Company.

In face of the hostile litigation by Lekoil Nigeria and Mr. Akinyanmi's refusal to repay the CEO loan, the financial position of the Company remains fragile and depends on the receipt of the monies under the Option Agreement, the recovery of the CEO Loan and/or equity funding from shareholders.

Looking forward we will strive to ensuring that the Company is fully financed so it can implement its plan in order to recover as much value as possible for its shareholders from the investments made to date.


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