Business Context and Reporting Period
The provided 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, 2013, with comparisons to June 30, 2012, and balance-sheet comparisons to December 31, 2012. EnerJex acquires, develops and produces domestic onshore oil properties, primarily in Eastern Kansas and South Texas.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Oil revenue | $2.20 million | $4.53 million |
| Operating income | $396,740 | $765,795 |
| Net income | $716,585 | $736,621 |
| Net income per diluted share | $0.01 | $0.01 |
| Operating margin | Approximately 18.1% | Approximately 16.9% |
| Net margin | Approximately 32.6% | Approximately 16.2% |
| Net oil production | 23,857 barrels | 50,394 barrels |
| Average oil sales price | $92.08 per barrel | $89.97 per barrel |
For the six months, operating cash flow was $356,526. Investing cash flow was negative $2.63 million, including $3.04 million of additions to oil properties. Financing cash flow was $1.73 million, primarily reflecting $2.50 million of borrowings, $400,000 of note repayments and $367,650 of preferred-stock dividends. Cash declined to $231,329 from $767,494 at December 31, 2012.
At June 30, 2013, total assets were $38.10 million, including $34.96 million of oil properties. Total liabilities were $16.05 million. Long-term debt was $11.00 million, current note payable was $425,000, and derivative liabilities totaled approximately $1.21 million. Current assets were $2.85 million versus current liabilities of $3.30 million, resulting in a working-capital deficit of $446,815.
Material Changes Versus the Prior Comparable Period
- Six-month oil revenue increased $581,980, or approximately 14.7%, primarily because production increased; average oil prices declined from $92.02 to $89.97 per barrel.
- Six-month net production increased to 50,394 barrels from 42,949 barrels, approximately 17.3%.
- Six-month operating income increased to $765,795 from $404,920, despite a $221,105 increase in total expenses.
- Six-month net income declined to $736,621 from $1.98 million. The principal reason was a substantially smaller derivative gain: $167,818 versus $1.69 million in the prior-year period.
- Interest expense increased to $255,373 from $137,607 because of increased borrowings.
- Salaries increased to $431,989 from $243,380 following the addition of five employees. Professional fees and administrative expenses declined.
- Oil-property additions decreased to $3.04 million from $4.55 million, while the company drilled 11 new oil wells and 10 secondary-recovery wells in its Mississippian Project and 13 oil wells and eight secondary-recovery wells in its Cherokee Project during the first half of 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected operations and the 2013 capital program to be funded through operating cash flow and additional borrowings under the Texas Capital Bank credit facility.
- The borrowing base was increased to $19.5 million on April 16, 2013; $11.0 million was outstanding at June 30, 2013. Management expected an additional borrowing-base review in the third quarter and anticipated a possible increase based on production and well maturity.
- The senior secured credit facility matures October 3, 2015. Borrowings bear variable interest based on specified base-rate or Eurodollar-rate formulas and margins.
- Commodity swaps and collars reduced exposure to oil-price volatility but also limited the benefit of higher prices. The derivative portfolio had a net fair-value liability of $1.21 million at June 30, 2013.
- The company had an irrevocable $50,000 letter of credit supporting Texas Railroad Commission requirements.
- Management identified risks including oil-price volatility, reserve-estimate changes, borrowing-base reductions, potential defaults under secured debt, access to development capital, regulatory requirements, weather, operating execution and the ability to acquire leases economically.
- After quarter-end, EnerJex entered into a merger agreement with Black Raven Energy, Inc. Black Raven shareholders were expected to own approximately 37% of EnerJex after closing, subject to stockholder, registration and other conditions. Termination fees could reach $1.0 million for EnerJex or $2.0 million for Black Raven.
- The company changed its independent registered public accounting firm after June 30, 2013. The filing also discloses a litigation claim by EnerJex seeking approximately $50 million in damages and a $492,134 counterclaim from defendants, which was reflected in accounts payable.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the issuer identity: the supplied filing is for EnerJex Resources, Inc., whereas the request identifies Ageagle Aerial Systems Inc.
- Assess liquidity given cash of only $231,329, a $446,815 working-capital deficit and reliance on operating cash flow and secured borrowing.
- Review credit-facility covenants, borrowing-base availability, variable interest rates and the October 2015 maturity.
- Separate recurring operating performance from derivative mark-to-market gains, which materially affected reported net income.
- Evaluate reserve estimates, full-cost ceiling-test sensitivity and the impact of oil prices on asset values and borrowing capacity.
- Confirm the status and economic consequences of the proposed Black Raven merger, including dilution, required approvals and termination fees.
- Review the pending litigation, counterclaim and the basis for the company’s asserted damages.