Business Context and Reporting Period
The submitted Form 10-Q identifies the registrant as EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the three months ended March 31, 2016, with comparative information for the three months ended March 31, 2015. EnerJex acquired, developed and produced onshore oil properties in Kansas, Colorado, Nebraska and Texas.
The company substantially curtailed capital spending in response to depressed commodity prices and was evaluating mergers, acquisitions, joint ventures, asset sales and financing alternatives.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $556,000 | $1.498 million | Down 62.9% |
| Oil revenue | $534,000 | $1.381 million | Down $847,000 |
| Natural gas revenue | $22,000 | $117,000 | Down $95,000 |
| Loss from operations | $(5.528) million | $(17.922) million | Improved $12.394 million |
| Net loss | $(5.692) million | $(17.355) million | Improved $11.663 million |
| Net loss attributable to common stockholders | $(6.278) million | $(17.762) million | Improved $11.483 million |
| Basic and diluted loss per share | $(0.75) | $(2.28) | Improved |
| Cash flow from operations | $(688,000) | $(545,000) | More cash used |
| Cash at period end | $2.030 million | $2.934 million | Down $904,000 year over year |
Operating expenses were $6.084 million, including a $4.507 million impairment charge on oil and gas properties. Direct operating costs were $694,000, depreciation, depletion and amortization was $164,000, and general expenses were $719,000.
Based on reported revenue and net loss, the approximate operating margin was (994%) and the net margin was (1,024%). These margins were heavily affected by the impairment charge and the company’s low production levels.
At March 31, 2016, current assets were $5.260 million versus current liabilities of $19.802 million, producing negative working capital of $14.541 million. Cash and cash equivalents were $2.030 million, while the company had a $1.446 million derivative receivable and $211,000 of marketable securities.
Total debt was $18.205 million, all classified as current at March 31, 2016. The company had drawn the full $18.200 million borrowing base under its senior secured credit facility. The facility’s interest rate was approximately 5.2%, compared with 4.3% at December 31, 2015, and its contractual maturity was October 3, 2018.
Material Changes Versus the Prior Comparable Period
- Oil production fell approximately 50%, from 33,095 barrels to 16,692 barrels. The average oil sales price declined 23%, from $41.72 to $31.99 per barrel.
- Natural gas production declined from 64,301 Mcf to 13,854 Mcf, while the average sales price decreased from $1.82 to $1.59 per Mcf.
- Total revenue declined 63%, primarily because of lower commodity prices, reduced production and the sale of the Cherokee project in eastern Kansas.
- The impairment charge declined to $4.507 million from $16.401 million in the prior-year quarter, materially reducing the reported net loss.
- Direct operating costs declined 45%, but lifting costs increased to $36.52 per barrel of oil equivalent from $28.93, reflecting reduced production and operating deleverage.
- Cash used in operations increased to $688,000 from $545,000, and cash declined by $1.072 million during the quarter. No equity proceeds or new borrowings were recorded in Q1 2016, compared with $2.714 million of equity proceeds and $500,000 of borrowings in Q1 2015.
- Accumulated deficit increased to $77.670 million from $71.392 million at December 31, 2015, and stockholders’ deficit increased to $8.736 million from $2.534 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that its cash-flow models indicated sufficient cash to meet obligations through the end of the first quarter of 2017 only if it ceased making required monthly principal reductions. If commodity prices were below forecast, the company expected insufficient liquidity and identified possible suspension of interest payments, debt restructuring or refinancing, private financing, and a Chapter 11 reorganization as potential alternatives.
The company informed Texas Capital Bank on April 1, 2016 that it would stop making mandatory monthly borrowing-base reduction payments and missed the April 1 payment. After making a quarterly interest payment on April 6, it entered into a 30-day forbearance agreement on April 7. The bank subsequently extended the forbearance period to May 31, 2016, subject to a $125,000 principal reduction, with a possible automatic extension to June 15, 2016 if specified conditions were met.
The filing states that these circumstances raised substantial doubt about the company’s ability to continue as a going concern. The financial statements did not include adjustments that might result from the outcome of this uncertainty.
The company recognized a $4.507 million full-cost ceiling-test impairment using trailing twelve-month average prices of $45.16 per barrel for West Texas Intermediate oil and $2.40 per Mcf for natural gas. Additional write-downs could occur if commodity prices remained depressed or proved reserves were reduced.
Commodity derivatives generated a $1.086 million unrealized loss in Q1 2016, partly offset by $1.251 million of other income associated with realized derivative gains. The hedges reduced downside exposure but limited the benefit of higher oil prices and covered only a portion of production.
Other significant obligations included a $3.145 million asset retirement obligation, a $50,000 irrevocable letter of credit for the Texas Railroad Commission, and future non-cancellable lease payments disclosed through 2019. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Facts Investors Should Verify
- Confirm the issuer identity: the provided filing is for EnerJex Resources, Inc., while the request metadata names Ageagle Aerial Systems Inc.
- Review the status and subsequent amendments of the Texas Capital Bank forbearance agreement, including required principal reductions and any lender remedies.
- Assess the going-concern uncertainty, available cash, derivative monetization plans, asset-sale prospects and financing alternatives.
- Verify the borrowing-base balance, collateral value, covenant compliance and classification of approximately $18.205 million of debt as current.
- Evaluate the sustainability of production and revenue after the sharp decline in oil and gas volumes and the sale of the Cherokee project.
- Review the full-cost ceiling-test assumptions, reserve estimates and potential for further impairment charges.
- Consider the company’s negative working capital, accumulated deficit, stockholders’ deficit and continuing cash use from operations.