INDO opening bell
Last Closing Price$61.5020-Day Average Daily Volume17,946,576
50-Day Simple Moving Average$7.00Shares Outstanding7,447,95
Volume Weighted Average Price$63.50Available Borrow0
Relative Strength Index94.48Borrow Fee Rate0%

News of a potential ban on Russian oil in the U.S. on Monday led to a rally in nearly every small-cap stock remotely related to oil. The darling of the bunch was Indonesia Energy Corporation Ltd. (NYSEAMERICAN: INDO), which is the latest battleground stock of self-styled retail apes. A month ago, it was hovering around $4.30 per share. Yesterday, it closed at $61.50. Here’s why it won’t cruise at that altitude for long.

No matter what happens to the Indonesian Crude Price index, and no matter how many barrels the company pumps from its one producing oil block, INDO won’t generate sufficient cash flow to fund its operations and capital expenditures this year. That’s not just our opinion. It’s what the company shared in the notes to its most recent financial statements, which, like the notes to its previous financial statements, disclose doubts about the company’s ability to continue as a going concern.

Founded in 2018, INDO is a development-stage cash furnace that burned through $2,835,512 in the latter half of 2021. Its operating loss for the six-month period was $2,933,230, which was an improvement from the $3,838,218 it lost in the second half of 2020. The losses will continue as the company ploughs resources into finding sufficient reserves in its non-producing Citarum Block.

Drilling for cash

To accomplish its ambitious plans, INDO will have to raise significant additional financing within the next 12 months. As of Nov. 30, 2021, insiders controlled 79% of the company’s ordinary shares outstanding, and the company had a public float of only 1,547,685 shares. Thus even a modest issuance of less than 1,000,000 shares could significantly dilute shareholders and put downward pressure on the company’s stock price.

In January, shareholders got a taste of the kind of financing INDO will likely come to depend on. The company sold a $7,000,000 private placement of an 18-month convertible note with a conversion price of $6.00 per share and five-year warrants to purchase up to 537,070 ordinary shares at $6.00 per share. Issuing all the underlying shares would more than double INDO’s public float and increase total shares outstanding by 23%.

Terms of the placement favored the buyer over the issuer. The note was sold at a 6% discount to face value, and the conversion price of $6.00 per share is subject to full ratchet anti-dilution adjustments if the company issues additional ordinary shares. The buyer was L1 Capital Global Opportunities Master Fund, Ltd., which is a hedge fund that routinely participates in such private placements.

Legacy of losses

Let’s take a look at what tends to happen when issuers sell shares to L1 Capital. The table below shows 73 private placements in which the hedge fund has participated since 2017. We selected only private placements of stocks that were publicly traded at the time of the sale so that we could compare the adjusted closing price on the date of the share purchase agreement (SPA) with yesterday’s closing price. The average annualized rate of return is -43%. If history is any guide, INDO’s moment as a high flyer will be brief.

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