Business Context and Reporting Period
Company: EnerJex Resources, Inc. (filing registrant) and AgEagle Aerial Systems, Inc. (target).
Date: October 19, 2017.
Event: EnerJex entered into a definitive Merger Agreement to acquire AgEagle Aerial Systems, Inc., a manufacturer of unmanned aerial vehicles (UAVs) for the precision agriculture industry. Upon closing, EnerJex will change its name to "AgEagle Aerial Resources, Inc." and dispose of its existing oil and gas assets. AgEagle will become a wholly-owned subsidiary of the combined company.
Key Financial Metrics and Capitalization
Merger Consideration and Ownership:
- Post-Merger Ownership: Former AgEagle stockholders are expected to own approximately 85% of the combined company. Current EnerJex stockholders are expected to own approximately 15%.
- Exchange Ratio: AgEagle shares will convert to EnerJex common stock based on an exchange ratio detailed in the Merger Agreement.
- Pro-Forma Capitalization: The filing provides a pro-forma table showing AgEagle shareholders (including Bret Chilcott, Raven Industries, and convertible debt holders) holding the vast majority of shares post-closing.
Debt and Liquidity:
- Existing Liabilities: EnerJex's existing cash resources are insufficient to satisfy outstanding liabilities.
- Financing Requirement: A condition to closing is that EnerJex must raise up to $4 million in new working capital to extinguish existing debt and liabilities.
- Accrued Dividends: As of September 30, 2017, EnerJex's Series A Preferred Stock had accrued $6,039,972 in unpaid dividends, to be satisfied via additional preferred shares or conversion.
AgEagle Financials: The filing references audited financial statements for AgEagle for years ended Dec 31, 2016 and 2015, and unaudited statements for June 30, 2017, as exhibits, but does not summarize specific revenue or profit figures in the text provided.
Material Changes and Transaction Terms
- Asset Disposition: EnerJex intends to dispose of its principal assets (Kansas oil and gas properties) concurrently with the Merger closing.
- Management Change: Existing EnerJex directors and officers will resign immediately following the Effective Time; new directors and officers will be appointed by AgEagle.
- Preferred Stock Amendment: EnerJex seeks to amend Series A Preferred Stock terms to pay accrued dividends in shares, eliminate future dividend rights, and convert remaining shares to common stock at a 10:1 ratio.
- Indemnification: EnerJex agreed to deposit 1,215,278 shares of common stock (issued to current officers/directors in lieu of deferred salary) into escrow to secure indemnification obligations, capped at $350,000.
- Listing Status: EnerJex received notice from NYSE American of non-compliance with stockholders' equity standards ($2.0 million minimum). The company intends to regain compliance via the Merger and associated financing.
Guidance, Outlook, and Risks
Outlook: The combined company aims to leverage AgEagle's UAV technology and its distribution partnership with Raven Industries to expand in the precision agriculture market. AgEagle's growth strategy includes building a global distribution network and pursuing R&D for new products.
Material Risks:
- Financing Failure: The Merger is contingent on raising up to $4 million. Failure to secure this funding could result in the termination of the agreement and potential bankruptcy for EnerJex due to insufficient funds to satisfy liabilities.
- Delisting Risk: If EnerJex fails to submit an acceptable plan to regain NYSE American compliance or fails to consummate the Merger, the stock may be delisted.
- Dilution: Current EnerJex stockholders will face substantial dilution, owning only ~15% of the combined entity.
- Operational Risks: AgEagle faces risks related to FAA regulations, reliance on a single key executive (Bret Chilcott), limited operating history, and the need for substantial additional funding to achieve profitability.
- Valuation Uncertainty: The lack of a public market for AgEagle shares prior to the merger makes determining fair market value difficult.
Investor Verification Checklist
- Verify the status of the $4 million financing required to close the Merger and extinguish EnerJex's liabilities.
- Confirm the outcome of the NYSE American compliance plan regarding stockholders' equity.
- Review the definitive Proxy Statement for details on the Exchange Ratio and specific terms of the Series A Preferred Stock amendment.
- Assess the financial health of AgEagle by reviewing the audited financial statements (Exhibit 99.1) and unaudited statements (Exhibit 99.2) referenced in the filing.
- Monitor the voting results for stockholder approval of the Merger and the issuance of shares in excess of 19.9% of outstanding stock.