Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter ended June 30, 2015, filed August 14, 2015. The filing identifies the registrant as EnerJex Resources, Inc., not Ageagle Aerial Systems Inc.; investors should verify the company and filing association. EnerJex was an onshore oil and natural gas exploration, development and production company operating primarily in Kansas, Colorado, Nebraska and Texas. The financial statements are unaudited and cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $1.585 million | $3.949 million | $3.083 million | $7.804 million |
| Operating income (loss) | $(12.149) million | $0.758 million | $(30.071) million | $1.641 million |
| Net income (loss) | $(13.311) million | $(1.007) million | $(30.666) million | $(0.903) million |
| Net loss attributable to common stockholders | $(13.858) million | $(1.007) million | $(31.682) million | $(1.303) million |
| Loss per common share | $(1.65) | $(0.14) | $(3.91) | $(0.18) |
- Revenue was composed primarily of oil sales. Six-month oil revenue declined to $2.879 million from $7.187 million, while natural gas revenue declined to $0.204 million from $0.617 million.
- The six-month operating loss included a $27.823 million impairment charge on oil and gas properties, including $11.422 million recorded in the second quarter.
- Six-month direct operating costs decreased 19.5% to $2.448 million, but direct lifting costs remained approximately $29.81 per barrel of oil equivalent, compared with $29.80 in the prior-year period.
- Six-month interest expense declined to $0.631 million from $0.738 million because of lower average borrowings.
- Six-month derivative losses were $2.176 million, partly offset by $2.211 million of other income, primarily associated with realized derivative gains.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $(1.009) million for the six months ended June 30, 2015, compared with $0.992 million provided in the prior-year period.
- Investing cash flow was $(0.109) million, including $0.135 million of additions to oil and gas properties.
- Financing cash flow was $2.169 million, including $4.683 million of preferred-stock proceeds, $0.500 million of borrowings, $2.062 million of debt repayments and $1.016 million of preferred dividends paid.
- Cash increased from $0.806 million at December 31, 2014 to $1.857 million at June 30, 2015, consisting of $1.077 million of cash and $0.779 million of restricted cash.
- Working capital increased to $4.122 million from $3.272 million. Current assets were $7.940 million and current liabilities were $3.817 million.
- Total debt was approximately $21.479 million at June 30, 2015, comprising $1.379 million of current debt and $20.100 million of long-term debt. The senior secured credit facility was fully drawn at its $21.5 million borrowing base, carried an interest rate of approximately 4.3%, and matured October 3, 2018.
- Asset retirement obligations increased to $3.046 million from $2.906 million at year-end 2014.
Material Changes Versus the Prior Comparable Period
- Six-month revenue decreased 60.5%, driven by a 50% decline in average oil prices to $46.46 per barrel and a 60% decline in average natural gas prices to $1.69 per Mcf. Oil production declined to 61,965 barrels from 77,546 barrels, and natural gas production declined to 121,073 Mcf from 147,463 Mcf.
- Net loss increased to $30.666 million from $0.903 million, primarily because of the $27.823 million property impairment and lower commodity revenue.
- Oil and gas properties, net, declined to $35.622 million from $64.263 million, primarily reflecting the impairment charge.
- Total assets declined to $46.748 million from $76.058 million, while stockholders’ equity declined to $19.785 million from $46.001 million.
- Common shares outstanding increased to 8,424,161 from 7,643,114 at December 31, 2014. The company also issued Series B convertible preferred stock, Series A preferred stock, options and warrants during the period.
Guidance, Outlook, Risks and Unusual Items
- Management intended to focus capital spending on Colorado and Kansas properties, including drilling, reactivation and recompletion opportunities, but provided no quantitative production or financial guidance.
- Management stated that lower oil prices, reduced reserves and a reduced borrowing base would make it more difficult to fund operations and capital needs through historical sources of liquidity.
- Near-term obligations were expected to be funded through derivative monetization, asset sales and operating cash flow. The filing does not provide a clear assessment that these sources will be sufficient under all conditions.
- The full-cost ceiling test used a trailing twelve-month average oil price of $61.95 per barrel and natural gas price of $2.48 per MMBtu at June 30, 2015. Management warned that additional material impairments could result if commodity prices remain depressed or proved reserves are reduced.
- Commodity derivatives covered portions of production and reduced price exposure but also limited the benefit of higher oil prices. The June 30, 2015 derivative receivable was approximately $2.550 million.
- The April 2015 credit agreement amendment included lender waivers and additional requirements to apply certain future securities or asset-sale proceeds to debt repayment. The company had borrowed the full $21.5 million borrowing base.
- Subsequent events included a $1.451 million Oakridge Energy liquidation distribution, repayment of $0.750 million of debt, and an approximately $2.8 million sale of Kansas oil and gas assets. The August 2015 credit amendment required at least $1.5 million of the asset-sale proceeds to repay debt and permitted approximately $1.3 million to be reinvested.
- Management identified risks including commodity-price volatility, reserve and borrowing-base reductions, debt covenant compliance or default, access to additional capital, regulatory requirements, operating conditions and the effectiveness of hedging strategies.
- Management reported that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Key Facts for Investors to Verify
- Confirm whether this EnerJex Resources filing is correctly associated with the requested Ageagle Aerial Systems Inc. company.
- Assess liquidity given negative operating cash flow, full utilization of the $21.5 million borrowing base and management’s warning regarding funding constraints.
- Review the sustainability of asset values and reserves following the $27.823 million full-cost impairment and the possibility of additional impairments.
- Reconcile the effects of the preferred-stock and convertible preferred-stock issuances, warrants and other potential dilution.
- Verify the closing terms and debt application of the subsequent Kansas asset sale and Oakridge distribution.
- Evaluate exposure to oil and natural gas prices, derivative settlements and the restrictions imposed by the credit agreement.