Mahalo Energy generated funds from continuing operations of CAD2.4 million on related sales of CAD9.6 million and recorded a net loss from continuing operations of CAD0.1 million during the three months ended March 31, 2009. This compares with funds from continuing operations of CAD3.1 million, related sales of CAD7.8 million and a net loss from continuing operations of CAD0.4 million in first quarter 2008.
Operational
The first quarter of 2009 saw no activity on Mahalo’s oil and gas properties. Expenditures were kept to an absolute minimum to conserve cash. Production from Mahalo’s US operations averaged 2,214 boe per day representing a decrease of about 106 boe per day from fourth quarter 2008 due to a combination of natural decline and suspension of certain routine maintenance procedures. The company has not drilled a well since October 2008 and production is now stabilizing after relatively higher initial declines in the period following first production. The company’s Canadian production is lower than the prior quarter due to a combination of property sales in fourth quarter 2008 and natural declines.
Default status with lenders, strategic alternatives process and going concern issues
The company continues to be in breach of certain covenants under its bank credit facility, including failure to pay certain amounts when due. The Lenders have advised Mahalo Energy that until resolved, future loans would be made in the sole discretion of the Lenders. To date, the Lenders have not exercised their default-related rights or demanded repayment of the loan.
The company is continuing to work with GMP Securities L.P. in seeking strategic alternatives. Although several proposals have resulted from the process, no proposal has been satisfactory to Mahalo Energy or its lenders and there is no reasonable expectation that an acceptable proposal will be received. In the opinion of management, there can be no assurance that the process will result in any change in the company’s current operations, that the company will pursue any particular transaction or that any transaction will be concluded.
At March 31, 2009, the company had a working capital deficiency of CAD84.4 million, an accumulated deficit of CAD122.2 million. As anticipated in the company’s MD&A for the year ended December 31, 2008, the company incurred further defaults as a result of being unable to repay a %5 million short-term advance which was due and payable on March 31, 2009 and pay a $10 million loan facility fee. The loan facility fee was levied under the terms of a November 28, 2008 credit facility amendment and resulted from the company’s failure to achieve certain restructuring and/or refinancing initiatives by March 31, 2009.
If the Lenders were to call the debt, the company would require an alternate credit facility and/or additional capital to discharge its obligations and continue its activities. Under current conditions, there can be no assurance that the company has sufficient assets or will be able to raise sufficient capital to make a full repayment to its Lenders if such an event were to occur. In addition, any financial restructuring plan ultimately agreed on by Mahalo Energy and its Lenders may involve bankruptcy or similar filings by Mahalo Energy and/or its subsidiary, Mahalo Energy (USA) Inc. The outcome of these matters is dependent on factors outside of the company’s control and cannot be predicted at this time. These conditions raise substantial doubt about the company’s ability to continue as a going concern.
