Filing Overview
Important identity discrepancy: The requested company is Ageagle Aerial Systems Inc., but the supplied Form 10-Q identifies the registrant as EnerJex Resources, Inc. The summary below reflects the supplied filing text.
The filing is a Form 10-Q for the three months ended March 31, 2017, filed May 15, 2017. EnerJex reported as a smaller reporting company and operated as a domestic onshore oil and gas producer focused on Kansas, Colorado, Nebraska and Texas.
Financial Results and Condition
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 |
|---|---|---|
| Total revenue | $629,013 | $555,999 |
| Oil revenue | $609,504 | $533,973 |
| Natural gas revenue | $19,509 | $22,026 |
| Operating loss | $(556,881) | $(5,527,666) |
| Net loss | $(1,236,709) | $(5,691,789) |
| Net loss attributable to common stockholders | $(2,116,316) | $(6,278,193) |
| Basic and diluted loss per share | $(0.25) | $(0.75) |
| Cash used in operating activities | $(206,798) | $(687,955) |
- Direct operating costs were $608,266, or approximately 97% of revenue. The resulting operating margin was approximately negative 88.5% before considering other income and expense.
- Interest expense increased to $679,840 from $329,763.
- No oil and gas impairment was recorded in 2017, compared with a $4,506,933 impairment charge in 2016.
- At March 31, 2017, unrestricted cash was $140,360, restricted cash was $50,032, and total cash reported in the cash-flow statement was $190,392.
- Total current assets were $1.61 million versus current liabilities of $20.50 million, producing negative working capital of $18.89 million.
- Total assets were $7.58 million, total liabilities were $28.15 million, and stockholders’ deficit was $20.57 million.
- Current liabilities included $17.925 million of long-term debt classified as current. An asset retirement obligation totaled approximately $3.37 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $73,014, or approximately 13%, primarily because the average oil price increased to $46.15 per barrel from $31.99. The benefit was partly offset by lower production.
- Oil production declined approximately 21%, to 13,207 barrels from 16,692 barrels. Natural gas production declined to 11,649 Mcf from 13,854 Mcf. Management attributed the reductions primarily to curtailed growth and maintenance capital spending.
- Direct operating costs declined 12% in absolute dollars, but direct lifting costs increased to $40.16 per barrel of oil equivalent from $36.52.
- Professional fees increased to $310,264 from $77,809, while salaries declined to $9,463 from $457,167 following management changes and use of third-party administrative personnel.
- The net loss improved by $4.46 million, largely because the prior-year impairment charge did not recur. The company remained loss-making and cash-flow negative.
- Derivative gains and losses were absent in 2017 because the company’s hedge contracts expired in 2016. The prior period included a $1.09 million derivative loss and $1.25 million of other income related to derivatives.
- Accumulated deficit increased to $89.69 million from $87.58 million at December 31, 2016.
Debt Restructuring, Outlook and Risks
- Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern. Continued operations depend on restructuring, refinancing or securing financing, and achieving profitable operations.
- On February 10, 2017, the secured lenders sold the company’s secured indebtedness to an investor group. Under a related agreement, approximately $17.295 million of secured debt was to be reduced to a $4.5 million restated secured note in exchange for transferring oil and gas assets in Colorado, Texas and Nebraska and the company’s interest in Oakridge Energy. Kansas assets were retained.
- The restructuring closed on May 10, 2017, after the reporting date. The remaining $4.5 million debt bears interest at 16%, is secured by Kansas oil properties, and matures November 1, 2017, subject to two 90-day extensions for $100,000 each. The debt may be prepaid for $3.3 million under the stated conditions.
- The company announced a potential equity financing of up to $500,000 involving Series C convertible preferred stock, including an initial $300,000 investment and an investor option for additional shares. The supplied filing does not clearly state whether the financing had closed by the filing date.
- Effective May 1, 2017, EnerJex agreed to provide general and administrative services to Camber Energy, Inc. for $150,000 per month. A company director was also identified as a co-guarantor of Camber debt.
- Management substantially curtailed capital spending because of commodity-price conditions. Future development plans emphasized Kansas and Colorado properties, but the filing provided no quantitative production or earnings guidance.
- Key risks include volatile oil and gas prices, declining production, limited liquidity, debt repayment and refinancing requirements, reserve and borrowing-base reductions, environmental obligations, regulatory requirements, and the ability to obtain additional capital.
- Reported legal matters included claims involving an alleged improper property sale and unpaid royalties in Texas and an alleged breach of contract concerning Kansas land rentals. Management considered the claims without merit and recorded no loss reserve.
- An irrevocable $50,000 letter of credit was outstanding in favor of the Texas Railroad Commission. The company reported no material environmental remediation reserve.
Investor Verification Priorities
- Verify the registrant identity and ticker because the request names Ageagle Aerial Systems Inc., while the filing names EnerJex Resources, Inc.
- Confirm the May 10, 2017 debt restructuring, the assets transferred, the final outstanding principal, and the company’s ability to repay or extend the 16% Kansas-secured note.
- Determine whether the proposed Series C preferred-stock financing closed and assess its dilution, liquidation preference and conversion terms.
- Reconcile the company’s cash resources with its negative working capital, operating cash burn and near-term debt obligations.
- Assess whether retained Kansas operations can generate sufficient cash flow after the transfer of assets in Colorado, Texas and Nebraska.
- Review the legal proceedings, asset retirement obligation and environmental exposure for potential unrecorded liabilities.