Filing Overview
The submitted Form 10-Q is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the three and nine months ended September 30, 2016, with comparative periods in 2015. EnerJex was a domestic onshore oil and gas producer focused on Kansas, Colorado, and Texas. The financial statements are unaudited.
Financial Performance and Position
| Metric | Three Months Ended Sept. 30, 2016 | Three Months Ended Sept. 30, 2015 | Nine Months Ended Sept. 30, 2016 | Nine Months Ended Sept. 30, 2015 |
|---|---|---|---|---|
| Total revenue | $473,754 | $1,029,390 | $1,625,433 | $4,112,712 |
| Operating loss | $(1,424,301) | $(10,367,489) | $(9,709,601) | $(40,438,385) |
| Net loss | $(1,694,404) | $(8,945,820) | $(10,849,132) | $(39,611,727) |
| Net loss attributable to common stockholders | $(2,554,465) | $(9,532,224) | $(12,979,736) | $(41,214,533) |
| Basic and diluted loss per share | $(0.30) | $(1.13) | $(1.54) | $(5.02) |
- Revenue declined 54.0% in the quarter and 60.5% for the nine-month period. The filing attributes the decline primarily to lower production, reduced capital spending, asset sales, depletion, and lower commodity prices.
- Approximate operating margins were negative 300.6% for the quarter and negative 597.3% for the nine months. These percentages are calculated from reported revenue and operating loss.
- Oil production declined to 14,015 barrels in the quarter and 44,961 barrels for the nine months, from 22,346 and 84,310 barrels, respectively, in the comparable 2015 periods.
- Natural gas production declined to 11,493 Mcf in the quarter and 39,692 Mcf for the nine months, from 50,202 and 171,275 Mcf, respectively.
- Cash and cash equivalents were $862,968 at September 30, 2016, compared with $3.10 million at December 31, 2015.
- Current assets were $2.53 million and current liabilities were $19.08 million, resulting in a working-capital deficit of $16.55 million, compared with positive working capital of $2.95 million at year-end 2015.
- Total assets declined to $9.56 million from $21.83 million, while stockholders’ deficit increased to $15.30 million from $2.53 million.
- The company used $1.29 million in operating activities and $260,068 in investing activities during the first nine months. Financing activities used $686,660, producing a $2.24 million net decrease in cash.
- Direct operating costs per barrel of oil equivalent increased to $35.73 for the quarter and $37.16 for the nine months, from $27.99 and $29.31, respectively.
Material Changes Versus Prior Comparable Period
- Revenue fell substantially because oil and gas volumes and realized prices declined. Average oil prices fell to $32.45 per barrel in the quarter and $35.19 for the nine months, from $42.23 and $45.34, respectively.
- Natural gas prices declined to $1.65 per Mcf in the quarter and $1.09 for the nine months, from $1.71 and $1.69, respectively.
- Operating losses improved primarily because 2015 included significantly larger impairment charges. The company recorded $800,000 of oil and gas impairment in the quarter and $7.44 million for the nine months, compared with $9.72 million and $37.54 million in 2015.
- Professional fees, salaries, and general expenses declined due to reduced consulting, legal, investor-relations, personnel, travel, and other spending. Direct operating costs declined in absolute dollars but increased on a per-unit basis.
- Interest expense increased to $1.00 million for the nine months from $937,638, reflecting higher interest rates partly offset by lower borrowings.
- The company reported derivative losses of $68,459 for the quarter and $2.45 million for the nine months, compared with a $941,076 gain and a $1.23 million loss, respectively, in the prior-year periods.
Debt, Liquidity, Outlook, and Risks
- The senior secured credit facility had a $17.925 million borrowing base, all of which was borrowed at September 30, 2016. The stated interest rate was approximately 5.5%, compared with 4.3% at December 31, 2015; the contractual maturity was October 3, 2018.
- The company stopped making mandatory borrowing-base reduction payments beginning April 1, 2016. Several forbearance agreements extended the standstill period through October 1, 2016.
- After the forbearance expired, the company did not obtain an extension and discontinued interest payments on the bank debt. As of the November 14, 2016 filing date, management stated that the company was in default.
- Management was evaluating private restructuring, amendment, refinancing, asset-sale, and other strategic alternatives. If an agreement could not be reached, the debt could become immediately due and payable, and the company stated that it lacked sufficient liquidity to repay it.
- The filing identifies substantial doubt about the company’s ability to continue as a going concern. Management stated that existing cash and revenue were insufficient and could not be projected to cover operating expenses for the twelve months following the filing date.
- The company disclosed that a Chapter 11 bankruptcy filing could become necessary if debt restructuring or refinancing efforts failed.
- Capital spending was substantially curtailed. Management indicated that, if commodity markets improved, it intended to focus spending on Colorado and Kansas drilling, reactivation, and recompletion opportunities.
- Additional impairment charges could result if oil and gas prices remained depressed or proved reserves were reduced. The September 30 ceiling test used a WTI price of $41.97 per barrel and a Henry Hub gas price of $2.39 per Mcf.
- The company had a $3.26 million asset-retirement obligation and a $50,000 irrevocable letter of credit issued in favor of the Texas Railroad Commission.
Most Important Facts to Verify
- Confirm the filing identity: the supplied document names EnerJex Resources, Inc., while the request identifies Ageagle Aerial Systems Inc.
- Verify the status and amount of the senior secured debt, including any acceleration, waiver, restructuring, refinancing, or bankruptcy developments after November 14, 2016.
- Assess whether the going-concern uncertainty was resolved and whether subsequent filings reported a Chapter 11 proceeding or other restructuring.
- Review subsequent commodity prices, reserve reports, production trends, and potential additional full-cost ceiling-test impairments.
- Confirm cash availability, operating cash burn, asset-sale proceeds, and the company’s ability to fund operations and asset-retirement obligations.
- Review subsequent filings for changes in preferred-stock dividends, dilution, warrants, and ownership of the 8,423,936 common shares outstanding at November 14, 2016.