Ageagle Aerial Systems Inc. annual report, FY2017

Business Context and Reporting Period

The filing is a Form 10-K for EnerJex Resources, Inc., not an AgEagle Aerial Systems, Inc. filing as identified in the request. It covers the fiscal year ended December 31, 2017, with comparative information for 2016. EnerJex operated primarily as a Kansas oil and gas company and had one full-time employee. The company had entered into a proposed merger with AgEagle Aerial Systems, a drone manufacturer, with closing expected by March 31, 2018.

Financial Results and Key Metrics

Metric	2017	2016	Change
Total revenue	$1.329 million	$2.462 million	Down 46%
Loss from operations	$(2.668) million	$(11.139) million	Improved $8.471 million
Net income (loss)	$8.275 million	$(13.176) million	Improved $21.451 million
Net income attributable to common stockholders	$1.148 million	$(16.186) million	Improved $17.334 million
Basic earnings (loss) per share	$0.11	$(1.92)	Improved
Cash flow from operations	$(1.241) million	$(2.099) million	Improved $0.857 million
Cash at year-end	$677,936	$128,035	Increased $549,901
Working capital	$(5.084) million	$(18.075) million	Improved $12.991 million
Total assets	$2.635 million	$7.992 million	Down $5.357 million
Total liabilities	$14.661 million	$26.470 million	Down $11.809 million

Revenue consisted primarily of crude oil sales of $1.309 million and natural gas sales of $19,509. Production costs were $1.364 million, exceeding production revenue, and results from producing activities were negative $162,655 before general and administrative and interest costs. The filing does not provide a consolidated gross margin percentage; based on reported revenue and direct operating costs, direct production margin was approximately negative 2.6%.

The reported $8.275 million net income was driven principally by an $11.500 million gain on the 2017 loan sale and restructuring transaction. Interest expense was $1.250 million. Net income also reflected $3.518 million of preferred dividends, a $3.400 million deemed dividend related to anti-dilution provisions, and a $208,500 beneficial conversion charge.

Capital expenditures were minimal: $4,632 was spent on oil and gas properties and no fixed-asset purchases were reported. The company used $4.632 million of cash in investing activities and received $1.796 million from financing activities.

Debt, Liquidity and Reserves

At December 31, 2017, principal outstanding under the secured credit facility was $4.457 million, with accrued interest of $479,452. The company was not in compliance with certain covenants, and the loan was subject to being called due.
The secured debt carried interest at 16% and was secured by Kansas oil properties. The maturity was extended to March 23, 2018, with a possible further extension to April 30, 2018, subject to an extension fee.
An additional Pass Creek promissory note had principal of $80,805 and accrued interest of $9,616 and was in default. A former executive note had principal of $113,750 and accrued interest of $5,574 and was also in default.
The company had $225,000 of secured convertible notes payable to Alpha Capital Anstalt at 8% interest, due June 30, 2018.
Management and the auditor stated that substantial doubt existed regarding the company’s ability to continue as a going concern. The statements were prepared on a going-concern basis without adjustments that might be required if the company could not continue.
Year-end proved reserves were approximately 455,800 net BOE, all oil, versus 1.588 million BOE in 2016. Approximately 14.7% were proved developed producing and 85.3% were proved undeveloped.
PV10 and the standardized measure of discounted future net cash flows were $1.469 million, compared with $3.437 million in 2016.

Material Changes Versus the Prior Comparable Period

Oil and gas revenue declined 46%, primarily because crude oil production fell to approximately 31,834 barrels from 58,123 barrels and natural gas production fell to 11,649 mcf from 47,554 mcf.
Realized crude oil pricing increased modestly to $41.04 per barrel from $40.75, while natural gas pricing increased to $1.67 per mcf from $1.51.
Lease operating expenses declined to $1.364 million from $2.661 million, but production costs remained above production revenue.
2016 included an $8.033 million impairment charge; no impairment was recorded in 2017.
The company transferred oil and gas assets in Colorado, Texas and Nebraska and Oakridge Energy interests to lenders. Approximately $13.425 million of debt was satisfied, existing debt was substantially reduced, and a gain of $11.500 million was recognized.
Professional fees increased to $1.391 million from $310,471, while salaries declined to $350,863 from $1.724 million following workforce reductions and increased reliance on consultants.
Proved reserves declined by approximately 1.132 million BOE, primarily because of the asset disposition under the loan sale agreement and production.

Guidance, Outlook, Risks and Unusual Items

The primary near-term objective was completion of the AgEagle merger. Former AgEagle stockholders were expected to receive approximately 85% of the combined company on a fully diluted basis, creating substantial dilution and a change of control for existing EnerJex shareholders.
Closing required additional funding, disposal of the company’s remaining assets, extinguishment of liabilities, exchange approval and other customary conditions. Alpha Capital committed to provide at least $4 million of equity capital, subject to conditions, and to convert certain notes into equity.
The company intended to dispose of its Kansas oil and gas properties concurrently with the merger. If the merger failed, management stated that it would refocus on Kansas oil and gas operations, although the filing stated that existing resources were insufficient to satisfy all liabilities.
The company’s auditor identified substantial doubt about going-concern status. Failure to complete the merger or raise funds could lead to enforcement of secured creditors’ rights, loss of Kansas assets, bankruptcy or liquidation.
The company was not in compliance with certain NYSE American continued-listing standards. It had submitted a compliance plan and had received a low-price deficiency letter requiring a reverse split or sustained price improvement.
Disclosure controls and internal control over financial reporting were deemed ineffective, primarily following termination of financial reporting personnel. The company relied on third-party consultants.
Other risks included oil and gas price volatility, reserve estimation uncertainty, environmental and regulatory liabilities, dependence on Kansas properties and a limited number of purchasers, secured debt defaults, dilution from preferred stock and convertible instruments, and potential delisting.
The filing disclosed litigation concerning alleged unlawful property sales and unpaid royalties; management considered the claim without merit and recorded no loss reserve. A separate Kansas contract dispute was settled for $9,000 in the first quarter of 2018.

Investor Verification Checklist

Verify the issuer identity: the supplied filing is for EnerJex Resources, Inc., while the requested company is Ageagle Aerial Systems Inc.
Verify the ultimate status and terms of the AgEagle merger, including closing, asset dispositions, financing, debt extinguishment and post-transaction ownership.
Reconcile the reported 2017 net income to the $11.500 million nonrecurring loan restructuring gain and assess underlying operating losses and cash burn.
Confirm the status of the secured credit facility, defaults, maturity extensions, accrued interest and any foreclosure or bankruptcy actions.
Review subsequent equity conversions, preferred-stock amendments, reverse-split actions and resulting fully diluted share count.
Assess the going-concern qualification, ineffective internal controls and NYSE American listing compliance status.
Validate the substantial decline in proved reserves and PV10 and the feasibility and funding of the approximately $5 million development program for proved undeveloped reserves.