Business Context and Reporting Period
This Form 10-Q covers EnerJex Resources, Inc. for the quarter and nine months ended September 30, 2017. The filing does not present AgEagle Aerial Systems, Inc. as the reporting registrant; rather, EnerJex entered into a merger agreement with AgEagle on October 19, 2017. EnerJex was primarily an oil and gas company operating retained Kansas properties during the reported period.
The proposed merger would make AgEagle the surviving operating business, with former AgEagle securityholders expected to own 85% of the combined company on a fully diluted basis. The transaction remained subject to shareholder, listing, financing, asset-disposition, and other closing conditions.
Key Financial Metrics
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Total revenue | $187,297 | $1,102,001 |
| Operating loss | $(419,487) | $(1,508,876) |
| Net income (loss) | $(318,635) | $9,614,452 |
| Net income (loss) attributable to common stockholders | $(1,198,243) | $6,767,128 |
| Basic net income (loss) per share | $(0.12) | $0.72 |
| Cash used in operating activities | Not separately reported | $(515,752) |
Revenue was predominantly from oil. Nine-month oil revenue was $1,082,492, based on production of 25,083 barrels at an average price of $43.03 per barrel. Natural gas revenue was $19,509.
Approximate operating margin was negative 224% for the quarter and negative 137% for the nine-month period. The nine-month net profit was primarily non-operating and non-recurring, including an $11.5 million gain from the loan sale and debt restructuring.
| Balance-sheet metric | September 30, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $15,099 | $128,035 |
| Total current assets | $451,675 | $1,678,967 |
| Total current liabilities | $5,468,276 | $19,754,406 |
| Working capital deficit | $(5,016,601) | $(18,075,439) |
| Total liabilities | $13,101,529 | $26,469,746 |
| Stockholders’ deficit | $(11,038,565) | $(18,477,885) |
Current liabilities included $4.5 million of current long-term debt, a $105,806 note payable, and $709,300 of accrued liabilities. The restated secured note carried a 16% interest rate and was due November 1, 2017, with two possible 90-day extensions for $100,000 each.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 61% to $187,297 from $473,754; nine-month revenue declined 32% to $1.10 million from $1.63 million.
- Oil production fell approximately 44% year over year, primarily because of reduced growth and maintenance capital spending and the conveyance of Colorado, Nebraska, and Texas properties in the May 2017 debt restructuring.
- Higher average oil prices partly offset lower volumes: $43.03 per barrel versus $35.19 in the prior-year nine-month period.
- Direct operating costs declined 47% year to date to $1.01 million, while total expenses declined 77% to $2.61 million. The comparison benefited substantially from the absence of the $7.44 million oil and gas impairment recorded in 2016.
- The company recorded an $11.50 million gain from the loan sale agreement and restructuring, compared with no comparable gain in 2016. This gain drove the nine-month net income of $9.61 million.
- Cash used in operations improved from $1.29 million in the prior-year nine-month period to $515,752, but cash declined to only $15,099 at September 30, 2017.
- Common shares outstanding increased to 10,321,397 from 8,423,936 at December 31, 2016, including 1.3 million shares issued upon conversion of Series B preferred stock and 597,461 anti-dilution shares.
Guidance, Outlook, Risks, and Unusual Items
Management provided no quantitative operating or financial guidance. Its principal strategy was to complete the AgEagle merger, obtain financing, dispose of the Kansas oil and gas assets, and eliminate or extinguish existing liabilities. If the merger failed, management stated it would continue operating as an oil and gas company, although it acknowledged that existing cash was insufficient to satisfy all outstanding liabilities.
- The financial statements include a substantial doubt qualification regarding the company’s ability to continue as a going concern for the following twelve months.
- The merger required additional funding of up to $4 million in new working capital and the elimination of existing liabilities. Failure to raise funding or satisfy closing conditions could prevent completion.
- The company was not in compliance with an NYSE American stockholders’ equity requirement and was required to submit a compliance plan. Failure to regain compliance could result in delisting and reduced trading liquidity.
- Series A preferred dividends accrued to $6.04 million at September 30, 2017. The proposed merger contemplated paying accrued dividends in additional preferred shares, eliminating future accruals after September 30, 2017, and converting Series A preferred stock into common stock, subject to holder approval.
- Subsequent to quarter-end, Alpha Capital exercised warrants for 1,000,000 shares on October 23, 2017 and 771,428 shares on November 6, 2017, each at $0.30 per share.
- Legal proceedings involved alleged improper property sales and unpaid royalties in Texas and an alleged land-rental contract breach in Kansas. Management recorded no reserves and stated that it intended to defend both matters.
- The company had a $50,000 irrevocable letter of credit in favor of the Texas Railroad Commission and asset retirement obligations of $1.59 million.
Facts Investors Should Verify
- Whether the AgEagle merger closed, including shareholder approvals, financing, asset dispositions, debt extinguishment, and the resulting ownership and capital structure.
- How the company funded obligations due under the $4.5 million secured note and the $105,806 Pass Creek note, which had not been paid at September 30, 2017.
- Whether the company obtained sufficient liquidity to address its $5.02 million working capital deficit and going concern uncertainty.
- The final treatment and conversion of the $6.04 million accrued Series A preferred dividend balance and the associated dilution.
- The NYSE American compliance plan, continued listing status, and any subsequent delisting or relisting actions.
- The extent to which reported nine-month profitability depended on the non-recurring $11.5 million debt-restructuring gain rather than operating cash generation.