Conditional disposal of an 80% interest in Congo Subsidiary, Capital Reorganisation, RiverFort Financing and Proposed Notice of General Meeting
· Conditional acquisition by Zenith Energy Limited of 80% of AAOG Congo which holds a 56% interest in the Tilapia Field ("Tilapia") in the Republic of the Congo ("Disposal")
· Consideration of £1 million plus carry for 20% of a $5.5 million work programme
· Zenith to fund upfront cash element of signature bonus for the new licence for Tilapia
· Term sheet received from RiverFort for funding of up to £500,000
· Disposal would see AAOG become a cash shell
The Company has entered into a conditional sale and purchase agreement ("SPA") with Zenith Energy Ltd for the sale of an 80% interest in AAOG's wholly owned subsidiary Anglo African Oil & Gas Congo S.A.U ("AAOG Congo") which holds a 56% interest in Tilapia in the Republic of the Congo ("Disposal").
The consideration for the Disposal is the payment by Zenith of £1 million, of which £500,000 is in cash payable in six equal monthly instalments from the date of completion and £500,000 of Zenith Ordinary Shares to be issued at the VWAP of a Zenith share for a period of 14 trading days prior to completion of the Disposal. In addition, Zenith will fund AAOG's share of a US$5.5 million work programme on Tilapia and will fund the upfront cash element of any signature bonus payable for the new licence negotiated with Congolese Ministry of Hydrocarbons.
The Disposal is conditional, amongst other things, on the approval of shareholders at a General Meeting, notice of which will be posted to Shareholders in due course. The Company will apply the proceeds of the Disposal to finance its day-to-day operations and to conduct due diligence over reverse takeover transactions that present themselves once the Company is an AIM Rule 15 cash shell. The Company has agreed not to sell the Zenith shares for a period of six months from completion and thereafter in an orderly manner. The board will analyse the value of the Zenith shares from time to time with a view to selling at them at the most advantageous time for AAOG shareholders.
It is also proposed that the Company enter into a new facility agreement with RiverFort, from whom it has received a term sheet for a facility to provide up to an initial £500,000 of capital over six months to the Company (the "RiverFort Financing"). The Company continues to negotiate the term sheet with RiverFort but expects that it will be in a position to sign a binding agreement with RiverFort by the end of this year. The entry into the RiverFort Financing would constitute a related party transaction for the purpose of the AIM Rules for Companies by virtue of RiverFort being a substantial shareholder in the Company. A further announcement will be made in due course.
Reasons for the Proposals
As announced on 12 December 2019, the Company is unable to finance the planned work programme on well TLP-103C-ST. The Company is taking steps to substantially reduce the costs within the business and has been reviewing its financing options to enable it to secure the longer-term viability of the Company given the limited cash resources it has available.
The Company has explored the possibility of raising equity capital in the public markets in order to secure sufficient funds to finance the Company and the planned work programme at Tilapia however, the board has been advised that it is highly unlikely to generate the support necessary to raise the required amount of traditional equity financing. The Company has been reviewing several options of non-traditional financing and believe that the Proposals outlined above represent the best option for the Company and its shareholders.
Accordingly, the Board believes that, faced with very limited cash resources in the Company and the inability to raise the requisite capital required to fund the entirety of the ongoing operational costs and liabilities of AAOG and AAOG Congo, and having considered the alternatives in detail with its advisers, the best option for Ordinary Shareholders is the Disposal.
The Disposal results in AAOG retaining a carried interest in AAOG Congo without the requirement to raise additional funds for the current planned work programme and will provide the Company with working capital that will enable it to assess potential reverse takeovers.
However, the timing of the payments under the Disposal means that the Company will not have sufficient cash to allow it to continue as a going concern beyond the beginning of February, assuming receipt of the £150,000 owed by Anglo Tunisian Oil & Gas Limited (of which the Company has received £50,000 to date with the remainder due to be paid by the end of this month) and no unforeseen claims. As such, the Company is proposing to enter into a facility with RiverFort for a redeemable convertible loan note ("Loan Note") (such Loan Note to be subject to, among other things, approval of the Shareholders at the General Meeting) of up to £500,000 with the first tranche of £250,000 available immediately on issue of the Loan Note and the remaining £250,000 being available to the Company in five equal tranches of £50,000 over the following five months. It is also proposed that RiverFort amend the terms of the existing Investor Sharing Agreement to rebase the reference price to more closely reflect the current share price and the proceeds due to the Company from the ESA will be used to repay the Loan Note. This gives the Company the flexibility to enable it to continue financing its day-to-day operations while seeking to identify a reverse takeover target. The board emphasises that, at present, it is managing its creditor position and with the receipt of the RiverFort monies contemplated in the term sheet described above, and subject to completion of the Disposal and receipt of the Consideration, the Company will have sufficient working capital for at least the next six months from the date the RiverFort Financing becomes effective.
If the Disposal and RiverFort Financing do not proceed, the Directors believe that AAOG has sufficient financial resources to fund the business only until the beginning of February. The Directors would therefore have a very limited timeframe in which to take any remedial actions and take measures to raise further funds. For the avoidance of doubt, the Company has been advised that alternative funds will not be available from straight equity or on terms equal to those likely to be agreed with Riverfort. Therefore, if the RiverFort Financing does not proceed and assuming alternative immediate funding is not obtained in the limited timeframe available, the Directors would need to consider whether it is appropriate for AAOG to cease trading and enter into a liquidation process. Accordingly, it is very important that Shareholders vote in favour of the Resolutions and that the Disposal and Riverfort Financing proceed.
Fundamental Change of Business
The effect of the disposal of an 80% interest in AAOG Congo, which is AAOG's only asset, will be subject to shareholder approval at a general meeting as it is deemed a fundamental change of business under the AIM Rules for Companies. The Disposal requires the approval of more than 50% of the ordinary shares voted at the general meeting. Accordingly, the Company will shortly be posting a Notice of General Meeting to its shareholders convening a meeting to be held as soon as possible in January at which shareholder consent will be sought to approve the Disposal and other resolutions that will enable the entry into the RiverFort facility amongst other things.
Background to the Proposals
AAOG Congo holds an interest in 56% of Tilapia in the Republic of the Congo with the remaining 44% interest held by SNPC, the Congolese National Oil Company.
The Company announced on 17 July 2019 that it had completed a financing ("Fundraising") of up to £8.25 million comprising; (i) a placing of ordinary shares in the Company raising £2.56 million and (ii) the entry into an investor-sharing agreement ("ISA") between AAOG, YA II PN, Ltd ("YA II") and RiverFort Global Opportunities PCC Limited ("RiverFort") for a total commitment of up to £5.685 million.
The key elements of the terms of the ISA, which were set out in detail in the announcement of 17 July, are as follows:
· The ISA Shares were immediately issued to YA II and RiverFort for cash and these were the only Ordinary Shares that were issued pursuant to the ISA. In this way, there was certainty as to the dilutive impact of this financing structure.
· YA II and RiverFort received their subscriptions monies back from the Company with the undertaking to repay those to the Company in 12 monthly instalments of £473,767.71 subject to adjustments to this amount based both on the Company's share price performance and the ability of YA II and RiverFort to trade in the Ordinary Shares.
The Company's share price has not performed well since the Fundraising and therefore the monthly instalments received under the ISA have been significantly less than the anticipated £473,767.71.
Receipt of the monies from the Fundraising, alongside continued anticipated monthly receipts of monies owed by SNPC to AAOG Congo for its share of the costs of the work already carried out at Tilapia, were expected to be sufficient to enable the Company to re-enter TLP-103C well at Tilapia, drilled in 2018 and which encountered hydrocarbons in the shallower Mengo horizon and the deeper Djeno horizon.
As announced on 12 December, the Company has not received any payments from SNPC since September and the current debt from SNPC stands at approximately US$5.3 million. In the light of this significant cash shortfall, combined with the lower than anticipated payments under the ISA, the Company has insufficient funds to be able to fund the planned work programme at TLP-103C-ST.
As previously disclosed, the Company has successfully negotiated with the Congolese Ministry of Hydrocarbons the principal terms of a new 25-year licence on Tilapia, with the exception of negotiating the quantum of any signature bonus payable to the Ministry. Irrespective of the final agreed amount, the Company does not have sufficient funds available to it to make any cash payment to the Ministry. The Company had requested that the Ministry offset the cash element of the signature bonus against the debtor amounts owed to it by SNPC, but the Ministry has rejected that approach since it considers SNPC to be a separate entity. The Company continues to spend considerable time and resource trying to unlock the overdue payments from SNPC. It announced on 12 December that it had formally requested the Oil Minister to coordinate a meeting in January with SNPC and AAOG to resolve this highly unsatisfactory situation. There has been no response to this request and the Company considers that it would not be prudent to anticipate the release of any further cash in the short term.
Summary of the Disposal agreement
Against the background as set out above, the Company has today entered into a conditional SPA with Zenith, a Canadian company listed on the standard segment of the Official List of the London Stock Exchange, the TSX Venture Exchange and admitted to trading on the Merkur Market of the Oslo Børs.
Pursuant to the SPA, Zenith has agreed to acquire 80% of the issued share capital of AAOG Congo for a consideration of £1 million, of which £500,000 is to be satisfied in cash to be paid in six equal monthly instalments, with the first instalment due on Completion and the last being six months later, and £500,000 to be satisfied by the issue of ordinary shares in the share capital of Zenith to be issued at the volume weighted average price of a Zenith share for a period of 14 trading days prior to Completion. The Company has agreed that it will not dispose of the Zenith ordinary shares for a period of six months from Completion and thereafter will dispose of the shares in an orderly manner.
In addition, Zenith will fund the Company's share of a US$5.5 million work programme at Tilapia and will fund the amount of any signature bonus required for the reattribution of the Tilapia licence as agreed with the Congolese Ministry of Hydrocarbons, subject to a cap of US$2 million if the signature bonus is payable in a single instalment and otherwise at an amount to be agreed between the Company and Zenith if the signature bonus is payable in multiple instalments.
As at 31 December 2018, AAOG Congo had net audited liabilities, excluding inter-company accounts, of £4.5 million, including trade creditors of £3.9 million and tax creditors of £0.24 million, with net current assets of £1.5 million. Total assets at the same date amounted to £11.9 million, which included £5.9 million owed by SNPC to AAOG Congo. In the year to 31 December 2018, AAOG Congo (at the time called Petro Kouilou SA) made a loss of £4.5 million
As at 30 June 2019, the unaudited balance of the intercompany debt owing to the Company by AAOG Congo was approximately £12.47 million at the GBP/USD exchange rate on that date. As part of the Disposal, AAOG has novated 80% of this debt to Zenith and will retain 20% on its balance sheet.
The SPA contains commercial warranties being given by the Company which are commensurate for a transaction in the nature and size of the Disposal. Zenith is also making warranties concerning itself and its shares to the Company which are commensurate for a transaction of this nature and size. The Company will also be required to sign up to a tax covenant on Completion, pursuant to which the Company shall indemnify Zenith for certain pre-Completion tax liabilities which are not fully provided for in the accounts of AAOG Congo.
The SPA is conditional, amongst other things, on the passing of an ordinary resolution of shareholders in the Company in a General Meeting approving the Disposal and certain regulatory requirements in the Republic of the Congo including consent of the Minister of Hydrocarbons. The Company has also agreed to standard provisions which govern the day-to-day and usual operations of AAOG Congo in the period from signing to Completion and the SPA contains a standard provision that allows Zenith to not complete if there is a material adverse change in the net asset value of AAOG Congo before Completion.
In addition, the Company and Zenith will sign up to a shareholders' agreement on Completion which will govern their future relationship as shareholders of AAOG Congo.
Information on Zenith Energy Ltd
Zenith Energy Ltd. is an international oil and gas production company, incorporated in Canada, dual listed on the London Stock Exchange (ZEN) and the TSX Venture Exchange (ZEE). In addition, the company's common share capital was admitted to trading on the Merkur Market of the Oslo Børs on November 8, 2018 (ZENA:ME).
The primary focus of the company is the development of large onshore oil & gas fields in countries that offer strong asset protection and a business atmosphere conducive to stable and profitable production activities.
Zenith operates the largest onshore oilfield in Azerbaijan through its fully owned subsidiary, Zenith Aran Oil Company Limited. The company's Italian subsidiary operates, or has working interests in, a number of concessions producing electricity, condensate and natural gas.
Zenith's overarching strategy is to identify and rapidly seize opportunities in the onshore oil & gas sector. Specific attention is directed to fields formerly controlled by oil majors and state oil companies. These assets often have significant untapped potential and the capacity to produce sizeable volumes of oil & gas with technological investment and new management supervision.
AIM Rule 15
In accordance with AIM Rule 15, the Disposal constitutes a fundamental change of business of the Company. On Completion, the Company would cease to own, control or conduct all or substantially all, of its existing trading business, activities or assets.
Following completion of the Disposal therefore, the Company will become an AIM Rule 15 cash shell and as such will be required to make an acquisition or acquisitions which constitutes a reverse takeover under AIM Rule 14 (including seeking re-admission as an investing company (as defined under the AIM Rules)) on or before the date falling six months from completion of the Disposal or be re-admitted to trading on AIM as an investing company under the AIM Rules (which requires the raising of at least £6 million) failing which, the Company's Ordinary Shares would then be suspended from trading on AIM pursuant to AIM Rule 40. Admission to trading on AIM would be cancelled six months from the date of suspension should the reason for the suspension not have been rectified.
The RiverFort Financing
As mentioned above, the Company has received a term sheet from RiverFort for a redeemable convertible loan note ("Loan Note") of up to £500,000 with the first tranche of £250,000 available immediately on issue of the Loan Note and the remaining £250,000 being available to the Company in five equal tranches of £50,000 over the following five months. It is also proposed that RiverFort amend the terms of the existing Investor Sharing Agreement to rebase the reference price to more closely reflect the current share price and the proceeds due to the Company from the Investor Sharing Agreement will be used to repay the Loan Note. The Company continues to negotiate the RiverFort Financing and further details will be announced once a binding agreement has been entered into between the Company and RiverFort. The RiverFort Financing will be conditional upon, among other things, the approval of AAOG shareholders at the General Meeting.
Proposed Board Changes
Following the General Meeting, and on the assumption that shareholders vote in favour of the Resolutions proposed, the Company will be an AIM Rule 15 cash shell and as such will have no operating business and will therefore not require the number of directors it currently has. It is proposed therefore that Brian Moritz and Nick Butler resign from the Board at the conclusion of the General Meeting.
Share Capital Reorganisation
For some months the ordinary shares of the Company have been trading at below their par value, which is currently £0.05 each. This makes it impossible for the Company to raise further equity capital as, by law, shares can only be issued at or above their par value. The issuance of new shares to RiverFort pursuant to the RiverFort Financing therefore requires a reorganisation of the Company's share capital, which will be proposed at the General Meeting.
A resolution will be proposed at the General Meeting which will, if passed, have the effect of reducing the nominal value of each ordinary share from £0.05 to £0.001 by subdividing each ordinary share into one new ordinary share of £0.001 ("New Ordinary Share") and one C deferred share of £0.049 ("C Deferred Share"). A further resolution is required to adopt new articles of association of the Company as the rights attaching to the C Deferred Shares will be contained in the Company's articles of association ("New Articles").
The New Ordinary Shares will have attached to them all the rights of the existing ordinary shares and will therefore have the same value as the existing ordinary shares.
As will be set out in the New Articles, the C Deferred Shares will have no right to receive any dividend out of the profits of the Company available for distribution and resolved to be distributed in respect of any financial year or any other income or right to participate therein. On a distribution of assets on a winding-up or other return of capital the holders of the C Deferred Shares shall be entitled to receive the amount paid up on their shares after holders of the New Ordinary Shares have received the amount of £1,000 in respect of each New Ordinary Share held by them respectively. For all practical purposes, the C Deferred Shares will have no value, and the Company will not issue any certificates or other documents of title in respect of them.
Sarah Cope, Non-Executive Chair of AAOG commented "We are very pleased to have reached agreement with Zenith on the terms of the Disposal and we look forward to working with them going forward. Whilst regrettable that AAOG has been unable to fund the work programme as planned, the Board believes that the Disposal is in the best interests of the Company and its Shareholders as we retain an interest in any upside at Tilapia. We are also grateful to RiverFort and its associates for their continued support and indeed the support of all our shareholders through what has been a very difficult time."