Business context and reporting period
Filing identity: The supplied filing is Ante5, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011, not a filing identified as Sow Good Inc. The company describes its business as acquiring and developing oil and gas interests, primarily in North Dakota’s Bakken and Three Forks formations, while also managing legacy royalty and litigation assets.
Ante5 held approximately 9,600 net mineral acres at quarter-end and had interests in 11 gross producing wells, or approximately 0.45 net wells. The comparative 2010 period began at the company’s April 9, 2010 inception and precedes its oil and gas operations, so it is not a like-for-like operating comparison.
Financial and operating highlights
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Oil and gas sales | $250,590 | $347,530 |
| Operating expenses | $599,522 | $1,022,842 |
| Operating loss | $(348,932) | $(675,312) |
| Net loss | $(415,313) | $(466,237) |
| Net loss per share | $(0.01) | $(0.01) |
Six-month production was 3,740 barrels of oil and 721 Mcf of natural gas, or 3,860 BOE. The company reported average oil prices of $91.98 per barrel and production costs of $4.40 per BOE for the six-month period. Production expenses and taxes together were approximately 16% of oil and gas sales; the filing does not report a conventional gross margin.
At June 30, cash and cash equivalents were $2.24 million, total assets $27.63 million, and total liabilities $6.85 million. Current assets of $2.91 million were below current liabilities of $4.57 million, producing a $1.66 million working-capital deficit. Stockholders’ equity was $20.78 million. The balance sheet lists no borrowing balance, but does not explicitly state the amount drawn, if any, under the new credit facility.
Cash used in operating activities was $651,130 and cash used in investing activities was $5.71 million, primarily for oil and gas properties. Cash declined by $6.34 million from year-end. Six-month capitalized oil and gas property purchases and development costs totaled $14.31 million, including $4.94 million paid with stock and $3.70 million payable after quarter-end.
The company’s initial independent reserve report estimated 214,047 proved BOE and pre-tax PV10 of $6.28 million. PV10 is a non-GAAP measure and is not a fair-value estimate; reserve and valuation estimates are subject to significant uncertainty.
Changes versus the prior comparable period
Revenue began in 2011, so there was no oil and gas revenue in the short 2010 inception-period comparison. For the six months, G&A was $857,986 versus $339,530 in the 2010 inception period; management attributed the increase to staffing and professional support for expansion. Net loss was $466,237 versus $346,633. The comparison is limited by the different operating histories. Cash fell from $8.58 million at December 31, 2010 to $2.24 million at June 30, 2011, while oil and gas properties grew substantially through acquisitions and development.
Outlook, financing, risks, and unusual items
- Management expected operating losses to continue over the next 12 months and did not expect 2011 revenue to exceed investment and operating costs. It planned to fund operations through equity, third-party financing, or bank financing.
- A May 2011 revolving facility provides up to $10 million for drilling, is secured by substantially all company assets, matures May 2, 2014, and carries 19% annual interest. Interest may partly be deferred or paid in shares under specified terms. Each draw requires, among other conditions, cash coverage of at least 12 months of scheduled interest. The filing does not clearly state whether any amount had been drawn by June 30.
- After quarter-end, the company raised approximately $5.6 million net from a July 26 unit offering, issuing 6,142,500 shares and warrants for up to 3,071,250 additional shares. It also acquired 636 net mineral acres in August for $1.41 million.
- Legacy royalty receipts are uncertain: the company estimated a $250,000 current portion of its contingent consideration receivable, but disclosed a dispute with Peerless Media and stated it was not relying on royalty proceeds. The company is also pursuing arbitration against Peerless and an individual, with a hearing scheduled for January 2012, and has a separate Deloitte lawsuit scheduled for trial in March 2012. Outcomes and recoveries are not assured.
- The company recorded a $97,986 indemnification expense in the statement of operations related to pre-spin-off tax matters; the MD&A gives $97,686, an apparent inconsistency. An additional $86,569 related-party tax amount was payable at quarter-end and paid in July. The company’s indemnification obligations for certain legacy liabilities are capped at $2.5 million and generally terminate around April 15, 2012.
- Material risks include volatile commodity prices, drilling and reserve uncertainty, cost overruns, access to capital, possible lease loss, and uncertain royalty collections. Management said disclosure controls were effective and reported that previously identified material weaknesses in documentation and tax accounting had been addressed.
Key facts investors should verify
- Confirm the issuer: the filing names Ante5, Inc., whereas the request metadata names Sow Good Inc.
- Reconcile the filing’s apparent inconsistencies, including indemnification expense ($97,986 versus $97,686) and cash at December 31, 2010 ($8,577,610 on the balance sheet and cash-flow statement versus $8,557,610 in a cash note).
- Check the amount, funding status, covenants, and effective cost of the $10 million facility, as well as dilution exposure from lender and offering warrants.
- Assess liquidity after the July offering against continuing operating losses, planned drilling and acquisition spending, and quarter-end payables.
- Review the independent reserve report’s assumptions and subsequent production, and monitor the Peerless royalty dispute, Deloitte litigation, and legacy indemnification exposure.