Filing Context
The supplied filing is EnerJex Resources, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016, filed August 15, 2016. The request metadata identifies Ageagle Aerial Systems Inc., but the filing text identifies EnerJex Resources, Inc., an oil and gas company operating primarily in Kansas, Colorado, Nebraska, and Texas.
Financial Results and Position
- Revenue: Second-quarter revenue was $595,680, down 62% from $1.59 million in the prior-year quarter. Six-month revenue was $1.15 million, down 63% from $3.08 million.
- Production: Six-month oil production declined 50% to 30,911 barrels from 61,965 barrels. Natural gas production declined to 27,515 Mcf from 121,073 Mcf.
- Losses: Net loss was $3.46 million for the quarter and $9.15 million for the six months, compared with losses of $13.31 million and $30.67 million, respectively, in the comparable 2015 periods. Net loss attributable to common stockholders was $4.15 million for the quarter and $10.43 million for the six months after preferred dividends.
- Margins and costs: Six-month direct operating costs were $1.35 million, while average production cost was $44.97 per barrel of oil equivalent and average lifting cost was $37.97 per Boe. These costs exceeded the reported average oil sales price of $36.46 per barrel.
- Impairment: The company recorded a $2.14 million oil and gas property impairment charge in the quarter and $6.64 million for the six months, based on the full-cost ceiling test.
- Cash flow: Cash used in operations was $1.20 million for the six months, compared with $1.01 million in the prior-year period. Investing cash use was $93,364 and financing cash use was $551,445.
- Liquidity: Cash and cash equivalents declined to $1.25 million from $3.10 million at December 31, 2015. Current assets were $3.23 million versus current liabilities of $18.94 million, producing a working-capital deficit of $15.71 million.
- Debt: The company had $18.00 million outstanding under its senior secured credit facility, equal to its stated borrowing base. The facility’s interest rate was approximately 5.2% at June 30, 2016, compared with 4.3% at year-end 2015.
- Capital structure: Stockholders’ deficit increased to $12.81 million from $2.53 million at December 31, 2015. Common shares outstanding were 8,423,936.
Material Changes Versus the Prior Comparable Period
- Revenue fell primarily because of lower oil and gas prices and sharply lower production following curtailed growth and maintenance capital spending and the sale of the Cherokee project.
- The average oil price declined 22% to $36.46 per barrel, and the average natural gas price declined 44% to $0.89 per Mcf.
- Direct operating costs declined 45% year to date, and general expenses declined 33%, reflecting reduced activity, staffing, professional fees, and administrative spending. Costs per Boe nevertheless increased because of lower production volumes.
- The net loss improved substantially from 2015 principally because the prior-year impairment charge was much larger; the company still generated negative operating cash flow.
- Oil and gas properties declined to $4.90 million from $11.71 million at December 31, 2015, principally reflecting impairment and reduced asset values.
Guidance, Outlook, Risks, and Unusual Items
- Going concern: Management stated that cash and operating revenues were not sufficient, and could not be projected to cover operating expenses for the next twelve months from the filing date. The filing therefore reported substantial doubt about the company’s ability to continue as a going concern.
- Forbearance and strategic alternatives: The company stopped making required monthly borrowing-base reduction payments beginning April 1, 2016. A forbearance agreement with Texas Capital Bank was extended first through August 31, 2016 and, after quarter-end on July 29, 2016, through October 1, 2016, subject to a $75,000 principal reduction. Management stated it was pursuing strategic alternatives.
- Liquidity outlook: Internal cash forecasts indicated sufficient cash through the end of the first quarter of 2017 only if mandatory principal reductions ceased. Lower-than-forecast commodity prices could prevent the company from meeting obligations.
- Potential remedies: If liquidity deteriorated, management identified possible suspension of interest payments, debt restructuring or refinancing, private financing, and a protected Chapter 11 reorganization.
- Commodity exposure: A deferred premium put covering 5,000 barrels per month from July through December 2016 had a fair value of $150,005. Derivative mark-to-market losses were $2.38 million for the six months.
- Further impairment risk: Additional material write-downs could occur if oil and gas prices remained depressed or proved reserves were reduced.
- Other commitments: The company had a $50,000 irrevocable letter of credit in favor of the Texas Railroad Commission and an asset retirement obligation of $3.20 million.
- Controls: Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor Verification Points
- Verify the issuer identity because the filing text is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc.
- Review the status and subsequent outcome of the Texas Capital Bank forbearance agreement, borrowing-base reductions, and the $18.00 million secured debt.
- Assess the company’s ability to fund operations and obligations given $1.25 million of cash, negative operating cash flow, and a $15.71 million working-capital deficit.
- Reconcile the filing’s going-concern warning with any later restructuring, asset sale, refinancing, bankruptcy, or merger developments.
- Evaluate sensitivity to oil and gas prices, production declines, reserve revisions, derivative valuation changes, and potential additional full-cost ceiling impairments.
- Confirm the impact of preferred dividends and the company’s stockholders’ deficit on common-stock value and potential dilution.