Business Context and Reporting Period
The supplied filing is an unaudited Form 10-Q for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the three and six months ended June 30, 2014, with comparative periods ended June 30, 2013. EnerJex is an onshore oil and natural gas acquisition, development, exploration and production company operating in Kansas, Colorado, Nebraska and Texas. The filing was signed August 13, 2014.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $3.95 million, versus $2.20 million | $7.80 million, versus $4.53 million |
| Income from operations | $0.76 million, versus $0.40 million | $1.64 million, versus $0.77 million |
| Net income (loss) | $(1.01) million, versus $0.72 million | $(0.90) million, versus $0.74 million |
| Net loss attributable to common stockholders | $(1.01) million, versus $0.52 million income | $(1.30) million, versus $0.34 million income |
| Basic and diluted loss per share | $(0.14), versus $0.11 income | $(0.18), versus $0.08 income |
| Operating margin | Approximately 19.2% | Approximately 21.0% |
- Oil revenue increased to $7.19 million for the first six months from $4.53 million, primarily due to higher production from the Black Raven acquisition and modestly higher oil prices.
- Natural gas revenue was $0.62 million for the first six months of 2014, compared with none in the prior-year period, reflecting production from Black Raven assets.
- Six-month oil production increased to 77,546 barrels from 50,394 barrels; natural gas production was 147,463 Mcf compared with none in the prior-year period.
- Six-month average oil sales price increased to $92.68 per barrel from $89.97. Average lifting costs declined to $29.80 per Boe from $30.44.
- Six-month direct operating costs increased 98% to $3.04 million, while direct operating cost per Boe declined to $29.80 from $30.44. DD&A increased to $1.60 million from $0.86 million.
- Cash provided by operating activities was $0.99 million for the first six months, compared with $0.36 million in 2013.
- Investing cash outflows were $1.71 million, including $2.66 million of additions to oil and gas properties, partly offset by $0.99 million of asset-sale proceeds.
- Financing cash flow was approximately $0.05 million, after $14.02 million of debt repayments, $1.50 million of borrowings, $13.40 million of preferred-stock proceeds and $0.86 million of preferred dividends.
- Cash declined to $0.64 million at June 30, 2014, from $1.08 million at December 31, 2013. Working-capital deficit improved to $0.90 million from $1.10 million.
- Total assets were $69.32 million. Total liabilities were $27.99 million, including $19.03 million of long-term debt, $2.36 million of derivative liabilities and a $2.79 million asset-retirement obligation.
Material Changes Versus the Prior Comparable Period
- Revenue rose 79% for the quarter and 72% for the six-month period, driven by the Black Raven acquisition, increased production and new natural gas sales.
- Operating income more than doubled for the first six months, but higher operating costs, DD&A, interest expense and derivative losses produced a net loss.
- The six-month derivative result changed from a $0.17 million gain to a $1.81 million loss, principally because of completed contracts and higher WTI prices. Derivative liabilities totaled $2.36 million at June 30.
- Interest expense increased to $0.74 million from $0.26 million, reflecting increased borrowings and related financing costs.
- Long-term debt declined from $31.55 million at December 31, 2013 to $19.03 million at June 30, 2014, largely following the preferred-stock financing.
- On May 30, 2014, the company completed a 1-for-15 reverse common-stock split. Existing Series A preferred stock was exchanged for common stock and restructured preferred stock.
- On June 20, 2014, EnerJex completed an offering of 639,157 shares of 10% Series A cumulative perpetual preferred stock at $23.75 per share, generating gross proceeds of approximately $15.2 million.
- Common stock and the preferred stock began trading on the NYSE MKT on June 17, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management intended to continue reactivating and recompleting wells in the Adena Field during the remainder of 2014 and expected initial oil production from a D-Sand waterflood pilot in August 2014.
- Management reported three successful Mississippian Project wells awaiting completion and planned additional drilling.
- In the Niobrara Project, management planned to drill 17 wells during the fourth quarter and initiate production by year-end, subject to execution and other risks.
- Management expected a borrowing-base review in the second half of 2014 and believed production increases and asset maturation could support an increased borrowing base. The facility had a $38 million borrowing base, $19 million borrowed at June 30, 2014, a 3.3% interest rate and an October 3, 2015 maturity.
- June and July production testing at J-Sand wells caused inefficient run times and temporarily reduced production volumes. The company expected testing to be completed in early August 2014.
- Key risks include oil and gas price volatility, hedging losses and limitations on price upside, reserve and property valuation uncertainty, potential debt covenant or secured-obligation defaults, access to development capital, regulatory approvals, weather and operational disruptions, and rising borrowing or compliance costs.
- The company reported no impairment from its quarterly full-cost ceiling test and no material off-balance-sheet arrangements.
- Asset-retirement obligations increased to $2.79 million, reflecting accretion and other changes in estimated well-abandonment liabilities.
- A legal action related to a 2008 stock offering was partially settled for $0.50 million paid to EnerJex in January 2014 and dismissal of a $0.49 million counterclaim. EnerJex appealed portions of the court’s rulings in June 2014; the outcome and any further recovery were uncertain.
- After quarter-end, the company paid approximately $0.21 million in dividends on its Series A preferred stock on July 31, 2014.
Investor Verification Checklist
- Confirm that the filing belongs to EnerJex Resources, Inc. and reconcile this with the requested company name, Ageagle Aerial Systems Inc.
- Review the terms, dividend obligations, liquidation preference and future redemption restrictions of the 10% Series A preferred stock.
- Verify the borrowing-base calculation, debt covenants, collateral requirements and October 2015 credit-facility maturity.
- Assess the fair value and expected cash impact of the $2.36 million derivative liability and the company’s remaining hedged production.
- Evaluate whether projected drilling, well reactivation and Niobrara production targets were achieved after June 30, 2014.
- Review liquidity in light of $0.64 million of cash, a $0.90 million working-capital deficit, ongoing capital expenditures and preferred dividends.
- Follow the pending appeal and any potential recovery or additional legal costs related to the 2008 stock-offering litigation.