Business Context and Reporting Period
The provided filing is a Form 10-K for EnerJex Resources, Inc., not Ageagle Aerial Systems, Inc. It covers the fiscal year ended December 31, 2016, with comparative information for 2015. EnerJex was an independent onshore oil and natural gas company operating in Kansas, Colorado, Nebraska and Texas. Its stated strategy was to acquire, develop, explore and produce domestic oil and gas properties.
The company reported 1.6 million BOE of proved reserves at December 31, 2016, including approximately 64.1% natural gas. Kansas assets generated most of the company’s operating revenue and cash flow.
Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $2.46 million | $4.88 million | Down 49.5% |
| Operating loss | $11.14 million | $53.11 million | Improved by $41.97 million |
| Net loss | $13.18 million | $51.92 million | Improved by $38.75 million |
| Net loss attributable to common stockholders | $16.19 million | $53.72 million | Improved by $37.53 million |
| Basic and diluted loss per share | $1.92 | $6.50 | Improved |
| Cash used in operations | $2.10 million | $0.15 million | Use increased |
| Capital expenditures for oil and gas properties | $17,089 | $251,821 | Down substantially |
| Unrestricted cash at year-end | $128,035 | $3.10 million | Down $2.97 million |
| Working capital | Deficit of $18.08 million | $2.95 million positive | Declined $21.03 million |
| Total liabilities | $26.47 million | $24.37 million | Increased $2.10 million |
Crude oil revenue was $2.39 million, down 47%, reflecting a 43% decline in oil production and an 8% decline in realized oil prices to $40.75 per barrel. Natural gas revenue was $71,703, down approximately 80%, as production fell 75% and realized prices declined to $1.51 per Mcf.
Direct operating costs were $2.66 million, exceeding reported production revenue. Production activities generated a negative result of $453,860 before general and administrative and interest expenses. Production cost per BOE increased to $43.79 from $41.96, while direct lifting cost increased to $39.97 per BOE from $33.67.
The company recorded an $8.03 million impairment of oil and gas properties in 2016, compared with $48.93 million in 2015. Interest expense was $1.91 million. The company also reported a $2.53 million loss from mark-to-market derivative contracts and $2.41 million of other income, primarily a realized derivative gain.
Proved reserves declined to 1.59 million BOE from 2.57 million BOE. PV10 declined to $3.44 million from $8.77 million. Approximately 45.5% of 2016 proved reserves were proved undeveloped, 42.3% were proved developed non-producing and 12.2% were proved developed producing.
Material Changes Versus the Prior Comparable Period
- Revenue and production declined materially, primarily because of lower commodity prices and reduced production volumes.
- Operating and net losses improved largely because the 2015 results included a much larger oil and gas impairment charge; the company nevertheless remained unprofitable.
- Liquidity deteriorated sharply. Current assets declined to $1.68 million, while current liabilities increased to $19.75 million, including $17.93 million of secured debt classified as current.
- Cash used in operations increased to $2.10 million, and year-end unrestricted cash fell to $128,035.
- The company reduced oil and gas capital spending to approximately $17,000 and performed no development drilling in 2016.
- Proved reserves and PV10 fell by approximately 38% and 61%, respectively, driven primarily by negative reserve revisions associated with commodity prices.
- The company stopped making mandatory borrowing-base reduction payments in April 2016 and stopped paying interest on its secured debt after October 1, 2016, following the expiration of a forbearance arrangement.
- The Series A preferred-stock dividend was suspended beginning in November 2015 and unpaid dividends accumulated. Preferred dividends recognized in 2016 were $3.01 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that substantial doubt existed regarding the company’s ability to continue as a going concern. The audited financial statements were prepared on a going-concern basis and did not include adjustments that might result if the company could not continue operating.
After year-end, the secured lender sold the credit facility to a successor lender. The proposed restructuring contemplated forgiveness of approximately $17.3 million of secured debt in exchange for transferring the company’s Colorado, Texas and Nebraska oil and gas properties and its Oakridge Energy shares. The company would retain its Kansas assets and issue a $4.5 million secured note bearing 16% interest, with a potential payoff of $3.3 million before the November 1, 2017 maturity date. The transaction required stockholder approval and was expected to close by May 1, 2017.
Management stated that the company could not meet its cash obligations for the following 12 months unless the proposed debt-for-assets transaction closed and additional funding was obtained. If the transaction failed, management indicated that foreclosure and bankruptcy protection were likely possibilities.
The principal risks included volatile oil and gas prices, reserve declines, limited liquidity, default and foreclosure risk, inability to raise capital, dependence on a small number of purchasers, environmental and regulatory liabilities, operating and abandonment costs, potential lease expirations, and limited geographic diversification. The filing also disclosed lawsuits concerning alleged improper property sales, unpaid royalties and a land-rental dispute; no loss reserves were recorded because management considered the claims without merit.
The company’s common stock traded on the NYSE MKT, while its Series A preferred stock was delisted from the NYSE MKT in October 2016 for failure to maintain required market capitalization. The filing also disclosed that preferred dividends had accumulated and that the company did not expect to pay common-stock dividends.
Important Facts an Investor Should Verify
- Confirm the issuer identity: the supplied filing is for EnerJex Resources, Inc., while the request identifies Ageagle Aerial Systems, Inc.
- Verify whether the proposed 2017 loan restructuring closed, whether stockholder approval was obtained and what assets and liabilities remained afterward.
- Reconcile the $17.93 million secured debt balance, default status, proposed $4.5 million restated note and $3.3 million discounted payoff obligation.
- Assess the company’s ability to fund operations, debt service and approximately $4.3 million of estimated development capital for proved undeveloped reserves.
- Review reserve revisions, commodity-price assumptions and the continuing risk of additional full-cost ceiling impairments.
- Determine the status and potential exposure from the disclosed litigation, environmental obligations and $3.31 million asset-retirement obligation.
- Verify accumulated unpaid preferred dividends, potential preferred-stock rights and dilution from outstanding options, warrants and convertible securities.
- Review subsequent filings for bankruptcy, foreclosure, asset transfers, delisting, management changes and any final going-concern conclusion.