Ageagle Aerial Systems Inc. quarterly report, Q1 FY2015

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Filing Context

The submitted Form 10-Q is for EnerJex Resources, Inc., not Ageagle Aerial Systems Inc. It covers the unaudited three months ended March 31, 2015, with comparisons to March 31, 2014 and December 31, 2014. EnerJex operated domestic onshore oil and natural gas properties in Kansas, Colorado, Nebraska and Texas.

Financial Performance and Position

  • Revenue: $1.50 million, down from $3.85 million. Oil revenue was $1.38 million versus $3.61 million; natural gas revenue was $117,195 versus $242,398.
  • Net loss: $17.35 million, compared with net income of $103,634. Net loss attributable to common stockholders was $17.76 million, or $2.28 per diluted share, versus a loss of $295,813, or $0.04 per share.
  • Major unusual charge: A $16.40 million pre-tax impairment of oil and gas properties was recorded under the full-cost ceiling test.
  • Operating loss: $17.92 million, compared with operating income of $883,033.
  • Cash flow: Operating cash flow was negative $545,386 versus negative $65,848. Investing cash flow was negative $115,528, and financing cash flow was positive $2.79 million.
  • Cash: $2.93 million at March 31, 2015, up from $805,524 at December 31, 2014, primarily due to equity issuances and borrowings.
  • Working capital: $6.29 million, up from $3.27 million at year-end 2014.
  • Debt: Long-term debt was $23.50 million, including $23.5 million outstanding under a senior secured credit facility with a $40 million borrowing base at March 31, 2015. The facility bore interest at 3.3% and matured October 3, 2018.
  • Assets and equity: Total assets were $61.00 million versus $76.06 million at year-end; stockholders’ equity was $31.00 million versus $46.00 million.
  • Production and pricing: Oil production declined to 33,095 barrels from 39,665 barrels, while natural gas production increased to 64,301 Mcf from 57,141 Mcf. Average oil price fell to $41.72 per barrel from $91.08, and average natural gas price fell to $1.82 per Mcf from $4.24.

Material Changes Versus Prior Period

  • Total revenue declined approximately 61%, primarily because of lower oil and natural gas prices and lower oil production.
  • Direct operating costs declined 17% to $1.27 million, and direct lifting costs decreased to $28.93 per Boe from $31.14.
  • General expenses increased to $1.01 million from $676,279, including higher salaries, professional fees and administrative expenses.
  • Oil and gas properties decreased to $47.30 million from $64.26 million, principally because of the $16.40 million impairment.
  • Common shares outstanding increased to 8,406,661 from 7,643,114 following equity issuances.
  • The company issued common stock, Series B convertible preferred stock and warrants in March 2015, generating approximately $2.71 million of financing cash flow.

Outlook, Risks and Unusual Items

  • Management stated that declining oil prices, lower reserves and a corresponding reduction in borrowing capacity would make it more difficult to fund 2015 operations and capital programs using historical financing sources.
  • On April 29, 2015, after quarter-end, lenders reduced the borrowing base from $40 million to $22.6 million, required portions of future security-sale or investment-distribution proceeds to repay debt, and waived or consented to certain covenant matters.
  • On May 13, 2015, the company sold 183,433 Series A preferred shares for approximately $2.3 million gross proceeds, intended for general corporate purposes, dividends, capital expenditures, working capital and debt repayment.
  • Management warned that additional oil and gas property write-downs could occur if commodity prices remain depressed or proved reserves are reduced.
  • Commodity price volatility, hedging limitations, reserve estimates, debt covenant compliance, borrowing-base reductions, access to capital, regulatory matters and operating conditions were identified as significant risks.
  • The company held crude oil derivative contracts with a reported fair value of $4.19 million. These contracts reduce exposure to price declines but limit the benefit of higher prices and cover only part of production.
  • Asset retirement obligations were $2.97 million, and the company had a $50,000 irrevocable letter of credit for the Texas Railroad Commission.
  • Management stated that disclosure controls were effective and that no material legal proceedings or defaults upon senior securities were reported.

Investor Verification Priorities

  1. Verify the issuer identity: the filing text identifies EnerJex Resources, Inc., while the request identifies Ageagle Aerial Systems Inc.
  2. Review the April 29, 2015 credit amendment and the reduction of the borrowing base to $22.6 million.
  3. Assess liquidity after the borrowing-base reduction, including operating cash burn, debt repayment requirements and subsequent equity financing.
  4. Evaluate the assumptions supporting the $16.4 million impairment, including oil and gas prices, reserve estimates and the full-cost ceiling test.
  5. Review the dilution and potential overhang from Series B preferred stock, conversion rights and warrants for 1,771,428 common shares.
  6. Confirm subsequent distributions from the Oakridge investment and the intended use of the May 2015 preferred-stock proceeds.