Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter and nine months ended September 30, 2015, filed by EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. The company acquired, developed and produced domestic onshore oil and natural gas properties in Kansas, Colorado, Nebraska and Texas. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | Comparable Prior Period |
|---|---|---|---|
| Total revenue | $1.03 million | $4.11 million | $3.81 million and $11.62 million, respectively |
| Operating income (loss) | $(10.37) million | $(40.44) million | $0.22 million and $1.87 million, respectively |
| Net income (loss) | $(8.95) million | $(39.61) million | $1.79 million and $0.88 million, respectively |
| Net loss attributable to common stockholders | $(9.53) million | $(41.21) million | $1.27 million income and $0.49 million loss, respectively |
| Basic and diluted loss per share | $(1.13) | $(5.02) | $0.17 and $(0.07), respectively |
| Cash flow from operating activities | Not provided for the quarter | $(0.74) million | $2.42 million provided |
Revenue was adversely affected by lower commodity prices and production. Nine-month average oil prices fell to $45.34 per barrel from $91.40, while natural gas prices fell to $1.69 per Mcf from $3.95. Oil production declined to 84,310 barrels from 118,023, and natural gas production declined to 171,275 Mcf from 251,127.
Reported operating margins were significantly negative because of a $9.72 million oil and gas impairment charge in the third quarter and $37.54 million for the nine-month period. Excluding the impairment charge, the filing does not present a separate non-GAAP operating margin.
At September 30, 2015, cash was $3.04 million, restricted cash was $0.19 million, and total current assets were $8.13 million. Current liabilities were $2.52 million, producing reported working capital of $5.62 million. Total assets were $34.40 million versus $76.06 million at December 31, 2014.
Total debt was $19.05 million, consisting of $0.60 million classified as current and $18.45 million classified as long-term. The senior secured credit facility was fully drawn at its $19.05 million borrowing base, bore interest at approximately 4.3%, and matured October 3, 2018. Asset retirement obligations were $3.11 million.
Investing activities provided $4.03 million during the first nine months, primarily from approximately $2.87 million of oil and gas asset-sale proceeds and $1.36 million from liquidation of marketable securities. Financing activities used $0.86 million, including $4.49 million of debt repayments, $1.60 million of preferred dividends and $4.67 million of preferred-stock proceeds. Ending cash, including restricted cash, was $3.23 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined $7.50 million, or approximately 65%, primarily because of lower oil and gas prices and reduced production.
- The company shifted from nine-month net income of $0.88 million to a net loss of $39.61 million, driven primarily by the $37.54 million full-cost ceiling-test impairment.
- Direct operating costs declined 33.4% to $3.31 million, and direct lifting costs declined to $29.31 per barrel of oil equivalent from $31.05.
- Depreciation, depletion and amortization declined to $1.20 million from $2.50 million, partly because the impairment reduced the depletion base.
- Derivative results changed from a $0.02 million gain to a $1.23 million loss for the nine-month period, although other income included approximately $3.00 million of realized derivative-related gains.
- Oil and gas properties declined to $23.21 million from $64.26 million, reflecting impairment and asset dispositions. Total stockholders’ equity declined to $10.32 million from $46.00 million.
- The company sold certain Kansas oil and gas assets for approximately $2.8 million and received a $1.45 million liquidating distribution from Oakridge Energy. It also repaid $0.75 million of long-term debt in connection with the distribution.
- Equity financing increased common shares outstanding to 8,423,936 from 7,643,114 at December 31, 2014. The company also issued Series B convertible preferred stock, warrants and additional Series A preferred stock.
Guidance, Outlook, Risks and Unusual Items
No formal revenue, earnings or production guidance is provided. Management stated that capital spending had been substantially curtailed in the depressed commodity-price environment and that, when market conditions improve, it intended to focus capital on Colorado and Kansas development opportunities.
Management expected to meet near-term cash obligations through monetization of derivative contracts, asset sales and operating cash flow, but acknowledged that declining oil prices, reduced reserves, a lower borrowing base and limited access to historical financing sources could make liquidity more difficult.
- The company recorded recurring full-cost ceiling-test impairments of $16.40 million in the first quarter, $11.42 million in the second quarter and $9.72 million in the third quarter. Management warned that additional write-downs could occur if commodity prices remain depressed or proved reserves are reduced.
- On November 4, 2015, after the reporting date, the company suspended the November monthly dividend on its 10% Series A preferred stock to preserve cash. Unpaid dividends accumulate; after six missed monthly periods, the dividend rate increases to 12% and holders gain specified board representation rights.
- The credit facility was fully drawn at the reported borrowing base. The April and August 2015 amendments included covenant-related waivers, restrictions on the use of asset-sale and securities proceeds, and required debt repayment from specified proceeds.
- Derivative contracts reduce exposure to commodity-price declines but limit the benefit of price increases and expose results to mark-to-market volatility. The September 30 derivative receivable had a fair value of approximately $3.10 million.
- Additional risks include potential defaults under secured debt, commodity-price volatility, reserve uncertainty, regulatory and environmental obligations, asset retirement costs, difficulty obtaining development capital and possible NYSE delisting because the stock price had recently fallen below $1.00.
- The filing reports no material pending legal proceedings, no defaults upon senior securities and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for EnerJex Resources, Inc., while the request identifies Ageagle Aerial Systems Inc.
- Review the full terms, covenant status, borrowing-base calculations and waiver provisions of the senior secured credit facility.
- Assess whether operating cash flow, derivative monetization and asset sales are sufficient to fund obligations and preferred dividends.
- Evaluate the likelihood of additional full-cost ceiling-test impairments under current oil and gas prices.
- Track the suspended Series A preferred dividend, accumulated obligations and potential increase to a 12% dividend rate.
- Assess dilution from Series B convertible preferred stock, common-stock issuance, options and approximately 1.90 million warrants exercisable at $2.75 per share.
- Verify production declines, reserve estimates, asset-sale proceeds and the impact of curtailed capital spending on future operating capacity.